PEL.L Regulatory News (PEL)

Date: 24 June 2015

On behalf of: Paragon Entertainment Limited ("Paragon", the "Company" or the "Group")

Embargoed until 7am

Paragon Entertainment Limited

Final Results Statement

Paragon Entertainment Limited (AIM: PEL), the attractions design, production, fit-out and operations business, is pleased to announce its final results for the year ended 31 December 2014.

Financial Highlights

· Revenue of £7.7 million (2013: £9.5 million)

· Three year average growth rate of 21%

· Gross profit of £1.5 million (2013: £2.2 million)

· EBITDA loss of £0.1 million (2013: profit of £0.8 million)

· Basic EPS loss of 0.52p (2013: loss of 0.53p)

· Normalised EPS loss of 0.13p (2013: earnings of 0.25p)

· Quest Merry Hill has been sold

· EBITDA loss has resulted in banking covenant breach but HSBC confirmed no intention to take action and are engaging constructively

· The audited annual report and accounts published today are prepared on a going concern basis and are unqualified

· The Chief Financial Officer has announced his intention to leave the Group

Operational Highlights

· Major projects completed include Museum of Kazakhstan, IWM First World War Galleries, Harrods and Glasgow Hospital

· Project delays affected performance and profitability

· Strategic relationship with Incorp has supported expansion in Middle East

· Robust activity and improved systems within Paragon's workshops

Commenting on the announcement, Mark Pyrah, CEO of Paragon Entertainment said: 

"Despite facing challenges in 2014, we have successfully retained our market leading position, and completed numerous UK and overseas projects including specialist design and build at the Museum of Kazakhstan, IWM First World War Galleries, Harrods and Glasgow Hospital."

"We are a leader in our industry through our well-known client base and innovative work. This is proving crucial to the growth of our new divisions and underscores our confidence in our strategic five year plan.

"We have produced some amazing work and our pipeline has gone from strength to strength giving us assurance of the sector size for the future and the strategic relationships we have formed during 2014 have given us a robust platform for growth.

"We aim to consolidate our market leading position over the next five years by remaining focused on delivering extraordinary, enriching and exciting attractions experiences. Our confidence is rooted in a team with unparalleled capabilities unique to our industry, coupled with a constructive and co-operative approach to all our business dealings."

"We look forward to continuing our hard work in the year ahead, and driving growth for our shareholders."

- ENDS -

Notes to Editors:

Paragon Entertainment Limited (AIM:PEL) is an award winning provider of attraction services from initial design and production through to the direct operation and development of themed attractions.

It is the holding company for:

§ Paragon Creative Limited, a visitor attraction design, production and fit-out business;

§ Paragon Entertainment (Attractions) Limited, a visitor attraction and licensing company; and

§ The Visitor Attraction Company (TVAC), an attraction consultancy, feasibility and operations company.

The Group's projects have included:

§ The design and build of galleries at the Olympic Museum for the IOC in Lausanne, Switzerland;

§ The design and build of the galleries at The National Museum of Kazakhstan;

§ The design and build of Titanic Belfast;

§ The thematic build of the Wallace and Gromit ride at Blackpool Pleasure Beach;

§ Licensing and distribution installations at Gullivers, Milton Keynes and Art Mall, Ukraine.

The Group listed on AIM in 2011.

Further information can be found at: http://www.paragonent.com/

CHAIRMAN'S STATEMENT

I am pleased to present the final results of Paragon Entertainment Limited. Our vision is unchanged: to use our unique mix of skills and expertise to create, develop and operate world class visitor attraction experiences that enrich and entertain our customers and deliver sustainable growth to our stakeholders.

Corporate update

We are recognised throughout the world as a leading player in the 'Design & Build' of family attractions and heritage venues and we have a reputation for quality and innovation. Our core subsidiary, Paragon Creative, is a family attractions and heritage 'Design & Build' contractor with lumpy revenue and good margins. Our plan is to grow Creative while using it as the flywheel off which we intend to diversify the Company into two further areas of business, Attractions on the one hand, and Licensing & Distribution on the other. Our primary focus will be on creating 'Design & Build' opportunities, and seeking, where appropriate, to extend the returns through long term partnerships in Attractions and Licensing & Distribution

Financial performance

We embarked on our journey as an AIM-listed company just over three years ago when we were a small York-based family company turning over £4.3 million. In 2013 we achieved turnover of £9.5 million and an EBITDA of £0.8 million. For the year of 2014, after accounting for exceptional items and discontinued operations, we report a turnover of £7.7 million and adjusted EBITDA loss of £0.1 million. The overall loss for 2014 of £1.0 million (2013: £0.9 million) is reported after depreciation, amortisation, impairments and exceptional items.

Despite positive expectations based on a strong 'Design & Build' order book and pipeline at the beginning of 2014, a number of unexpected project delays coincided during the year. We advised the market of this in September 2014 and took firm action

During this period, we took the opportunity to make some significant and sustainable cost savings to the business and focused on sales.

The accounts are prepared on a going concern basis and are unqualified. The reported EBITDA loss has resulted in a breach of the EBITDA coverage covenant with our bankers, HSBC. HSBC have advised us that they do not intend calling in the overdraft or loan facility and continue to work with us constructively. We are nevertheless monitoring this matter closely and are looking at options to improve the Group's long term funding position.

Our average annual revenue growth since listing in 2011 to 2014 has been 21%. Management expects growth to continue sustainably throughout 2015.

Management update

In September 2014 I was appointed as Executive Chairman and Mark Pyrah, our CEO, shifted his focus to sales and marketing to fill the workshops with an ongoing pipeline. This move has been successful: our increased sales and marketing activities have led to strong growth in our 'sales pipeline' and order book under contract, something we regard as a lead indicator of our prospects. Moreover, much of the delayed work has not gone away but will be completed by us in 2015 and beyond.

During the consolidation since September 2014 we streamlined and improved our operational management and conducted a CEO search. Rather than make a hasty decision, we have decided to favour patience in building, recruiting and training our management team. Mark Pyrah will remain interim CEO in the meantime. Richard Arden, our CFO, has decided to leave the business with effect from 31 July 2015 and we thank him for his contribution to Paragon. A suitable replacement will be made in due course and a further announcement will be made when this happens.

Divisional overview

Looking at the three pillars of our business, Creative ('Design & Build') is the cornerstone of our business. In 2014, Creative delivered on a diverse range of UK and international projects, including further fit out work on the Olympic Museum, the Museum of Kazakhstan, IWM First World War Galleries, Al Jaber, Harrods and Glasgow Hospital to name a few. During the year we expanded our Middle East presence heavily and now have representation through our agreement with Incorp Group, a relationship which is now delivering excellent opportunities and projects and making a significant difference to our potential pipeline.

The Attractions business was launched in 2012 with Quest, our own attraction which we opened in Westfield Merry Hill. This first attraction served as a test market for the Group to explore and develop a number of concepts. We have sold Quest Merry Hill due to under performance. This will save the business between £100,000 and £150,000 per annum in operating costs net of revenues and we will be freed up to concentrate our resources and development into other growth areas.

Licensing & Distribution was formally launched in 2014. Our expertise makes us the 'go to' partner for brands and manufacturers seeking to expand into family attractions experiences and our existing strong reputation has accelerated the division's progress. We are pleased to report growing opportunities for growth and expansion. We signed up some new distribution brands during the year and achieved the first sales of Nerf, Hilo and YuKids. We continue to negotiate further licensing and distribution opportunities to increase the portfolio.

Our operational activities are covered in the Report of the Chief Executive Officer.

Our five year plan to the end of 2020

We plan to:

· grow our business profitably so that we can attract the best team, capital and resources.

· improve the quality of our earnings by diversifying into more predictable sources of revenue.

· maintain prudent but productive gearing.

By 2020 we expect to report:

· continued steady growth in Design & Build such that it contributes half of our EBITDA.

· rapid growth in Attractions and Licensing & Distribution to contribute the other half of our EBITDA, spread between both business units.

Dividend policy

The Board is not recommending a dividend at this stage as the Company currently intends to retain any future earnings to finance the growth of the Company.

Staff and management

We are proud of our Company and 2014 has been a very testing year. It is often in these times that the strength of a business is truly measured. I wish to thank my colleagues for the teamwork, dedication and sacrifice displayed this year - it gives me great confidence for the future.

Mark Taylor

EXECUTIVE CHAIRMAN

CHIEF EXECUTIVE OFFICER'S REPORT

Fasten Your Seatbelts,

The Ride is About to Begin!

This is how I opened our Annual General Meeting in December 2014; it was great to see familiar and new faces of those that are interested in our journey. This bold statement was to capture the essence of where I feel that the company is and little did I know just how relevant this statement was.

Considerable resource and effort has been placed into developing the necessary building blocks on which we can continue to sustain growth, not least in building relationships with valuable brands, corporates and partners that have access and a need to access the leisure and entertainment sector. This sector is growing rapidly.

Our results for 2014 were in line with market expectations for profitability, but were lower than we desired and we decided to sell our Quest attraction in Merry Hill. It would be easy to dwell on our underperformance, but this really does not do justice to the solid developments and achievements made during the year.

Our vision is to use our unique mix of skills and expertise to create, develop and operate world class visitor attractions experiences that enrich and entertain our customers and deliver sustainable growth to our stakeholders.

As a business, we can proudly trace our history back more than quarter of a century to when we revolutionised the way that heritage attractions were presented in the UK, the genesis of what is now one of the leading 'Design & Build' companies in the industry, Paragon Creative.

Review

Our core segments on which we report are the same as our three pillars: Creative, Attractions and Licensing & Distribution, and I am pleased to report a strategic and operational update on the individual divisions, the Group, and an outlook.

Creative ('Design & Build')

The Creative division remains the core component of the Group. We have previously outlined the visibility we have on revenue streams in this area and we have seen third party revenues increase from £6.0 million in 2012 to £9.5 million in 2013; however, due to contract delays at the instance of third parties, our revenues in 2014 dropped to £7.4m.

Our industry reputation for being able to deliver high quality multi-million pound projects has grown; we now have over 60,000 sq.ft. of workshop space with over 100 staff and we are looking to expand this further as we grow.

The past year has seen a number of exciting and high profile projects with work completed on over 20 major projects plus a number of smaller projects. Some of the most notable are the Museum of Kazakhstan, Dynamic Earth in Glasgow, Trainworld in Belgium and Imperial War Museum in London. We continue to see considerable growth in the sector and our pipeline of potential opportunities has increased considerably to in excess of £180 million. We have been successful in our conversion of this pipeline already having confirmed orders of over £15 million to the end of 2016.

Within this division, we have taken a slightly different approach. In May 2014 we entered into an agreement with Incorp Group to allow increased access to the Middle East market and this is already delivering substantial work and opportunities.

The demand for high quality 'Design & Build' within our industry remains very buoyant and we are excited about this core area of the business.

Attractions

Our corporate strategy remains to expand further into the attractions market, leveraging on Paragon Creative's existing track record of delivering attractions to third parties, thereby developing and operating a portfolio of proprietary and licensed branded attractions.

Our first attraction, Quest, located within Westfield Merry Hill shopping centre in Birmingham, opened fully in April 2013. Unfortunately it has underperformed. The low footfall in that location along with the announcement by Intu Properties of imminent major redevelopment presented the opportunity to sell Quest. This has undoubtedly been a drain on our business resources and we look forward to freeing them up.

Licensing & Distribution

Since its inception as a key pillar of the Group, interest in our unique portfolio has been very encouraging.

Licensing & Distribution is now in a good position to take advantage of key third party intellectual property, licences, partnership and distribution agreements.

The Licensing & Distribution division is expected to steadily build a base of long term annuity-based licensees and is targeted to contribute positively to EBITDA in the latter part of 2015.

Outlook

Despite facing challenges in 2014, we have successfully retained our market leading position, and completed numerous UK and overseas projects including specialist Design & Build at the Museum of Kazakhstan, IWM First World War Galleries, Harrods and Glasgow Hospital. We are a leader in our industry through our well-known client base and innovative work. This is proving crucial to the growth of our new divisions and underscores our confidence in our strategic five year plan.

We have produced some amazing work and our pipeline has gone from strength to strength giving us assurance of the sector size for the future and the strategic relationships we have formed during 2014 have given us a robust platform for growth.

We aim to consolidate our market leading position over the next five years by remaining focused on delivering extraordinary, enriching and exciting attractions experiences. Our confidence is rooted in a team with unparalleled capabilities unique to our industry, coupled with a constructive and co-operative approach to all our business dealings.

Mark Pyrah

CHIEF EXECUTIVE OFFICER

FINANCIAL REVIEW

Results and pro forma comparison with previous period

(1) Pro forma results of the Group are presented being the consolidation of the Paragon Creative group for the 12 month period to 31 August 2011 with those of Paragon Entertainment Limited for the 12 months period to 31 December 2011. These results are unaudited and are provided purely for comparative purposes to enable a better understanding of the performance of the Group.

(2) EBITDA is defined as earnings before depreciation, impairment, amortisation, interest, share based payments, exceptional items and tax.

(3) Underlying operating (loss)/profit is defined as EBITDA less depreciation and amortisation on intangibles not related to acquisition.

Reported results for the year

These financial statements report the financial performance of the Group for the year ended 31 December 2014. The financial performance for the year ended 31 December 2013 is taken from the audited accounts for that year and is re-presented in accordance with IFRS 5 for discontinued groups.

In order to present a more meaningful comparator for the Group's performance, an unaudited pro forma of the results has been constructed which comprises those of the Paragon Creative group for the year to 31 August 2011 which were presented in the AIM Admission Document with those of Paragon Entertainment Limited for the year to 31 December 2011.

Revenue

Revenue decreased 19% to £7.7 million (2013: £9.5 million). The three year average rate of growth of continuing operations has been 21%.

Gross profit

The gross profit of the Group decreased 30% to £1.5 million (2013: £2.2 million).

Gross margins have seen a marginal decline from 22.9% to 19.8%. As the Group engages on numerous bespoke projects, the gross margin can vary considerably with the mix and type of work required. In addition some inefficiencies have been experienced due to the fall in revenues. Elements where Paragon could not add its usual value in design and engineering include either specialist sub-contract works or less specialist works.

Operating expenses

Reported operating expenses for the year were £1.9 million (2013: £2.3 million).

Underlying operating expenses, which are operating expenses before depreciation, impairment, amortisation, share based payments and exceptional items, were £1.6 million (2013: £1.4 million). The increase in expenses reflects an investment to increase in capacity within the York site.

EBITDA and operating profit

The reported EBITDA was a loss of £0.1 million (2013: profit £0.8 million).

The underlying operating loss was £0.2 million (2013: profit of £0.4 million).

The loss per ordinary share for the year was 0.52 pence (2013: loss of 0.53 pence). Normalised loss per share, before charging amortisation, depreciation, charges for share options and exceptional items, was a loss 0.13 pence (2013: earnings of 0.25 pence).

Interest and facilities

The Group incurred an interest charge of £37,000 for the year of which £16,000 was payable against bank loans, bank overdraft and financial leases.

The Group has debt facilities with HSBC which amount to a £0.3 million term loan and a £0.8 million overdraft facility. The Group has also entered into several financial leases and premium credit arrangements.

At the end of December 2014, the Group was not utilising the overdraft facility.

Breach of bank covenant

The Group has a secured bank loan with a carrying amount of £281,000 at 31 December 2014. According to the terms of the agreement, this loan is repayable over the next 7½ years, completing in 2022. However, the loan carries an interest cover covenant stating that at the end of each quarter, the Group's EBITDA must exceed interest by three times. It also carries a tangible net worth covenant.

As a result of lower than expected performance, which resulted in the company reporting a small EBITDA loss for the year to December 2014, the company will breach the interest cover covenant upon the publication of these audited financial statements.

The Group has been in discussions with the bank and the bank has notified the Group that it does not intend to take any action in relation to the breach although it reserves its rights under the terms of the agreement. As set out in the Chairman's report, we are looking at ways to improve the Group's long term funding situation.

Taxation

The Group has incurred no taxation in respect of the year to December 2014. The low reported taxable profit coupled with the ability to utilise certain tax losses brought forward has meant that current tax is £nil.

Deferred tax balances have increased with a reduction in relation to tax assets from a utilisation of tax losses being more than offset by the unwinding of the tax liability associated with the intangible assets. A tax credit of £0.1 million is reported.

Discontinued operations

As a result of irrevocable action taken in November 2014 in relation to the surrender of the lease at Merry Hill, the whole operation was due to be wound up in May 2015. The operation sustained a loss of £629,000 for the period (2013: £905,000). Non-current assets with a book value of £121,000 have been reclassified as 'held for sale'.

There are no other assets or liabilities associated with this item. The total amount which has been invested in Merry Hill amounts to £1.3m and the operating losses (before depreciation and impairment) to 31 December 2014 have amounted to £0.6m.

Effective from 15 May 2015, the Group entered into a trade and asset sale agreement of the operations at Merry Hill.

Cash flow and financing

Operating cash flow

The Group sustained an operating cash outflow for the year to 31 December 2014 of £0.4 million (2013: cash inflow of £0.2 million).

Investing activities

The Group has continued to make investments during the year to 31 December 2014 of £0.2 million in property, plant and equipment (2013: £0.5 million).

Cash position

The Group's net cash position at 31 December 2014 was £0.3 million (2013: £0.9 million).

Net assets

As at 31 December 2014, the Group had net current liabilities of £0.5 million (2013: assets of £0.3 million).

However, within this, there is a £0.8 million liability recorded for the payment of deferred consideration on the acquisition of Paragon Creative Limited. In accordance with the terms of the purchase agreements, this amount can be settled in shares or cash at the discretion of the company.

Richard Arden

CHIEF FINANCIAL OFFICER

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2014

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2014

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2014

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2014

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2014

1. Basis of preparation

Financial statements

The full year results for the year ended 31 December 2014 have been extracted from the audited consolidated financial statements. The financial information set out in this preliminary announcement does not constitute statutory accounts but is derived from those accounts. While the financial information in this preliminary announcement has been prepared in accordance with International Financial Reporting Standards ('IFRS'), this announcement does not itself contain sufficient information to comply with IFRS.

The financial information shown in this announcement has been extracted from, and is consistent with, the audited financial statements for the year ended 31 December 2014. The auditors have reported on those accounts and their reports were unqualified and did not draw any attention to any matters by way of emphasis without qualifying their report. The Group has published its Annual Report and Accounts for the year ended 31 December 2014 on its website www.paragonent.com.

Additional performance measures

The Group presents one-off items, underlying EBITDA, adjusted profit before tax and adjusted earnings per share information. These measures are used by the Group for internal performance analysis and incentive compensation arrangements for employees. The terms 'one-off items', 'underlying' and 'adjusted' may not be comparable with similarly titled measures reported by other companies. The term 'EBITDA' refers to operating profit or loss excluding operating one-off items, share-based payment charges, depreciation and amortisation of intangible assets. The term 'underlying operating profits' refers to EBITDA less depreciation. Finally, 'normalised earnings per share' refers to EBITDA less depreciation, net finance costs and attributable tax.

2. Segment reporting

Management currently identifies the Group's four operating segments. These operating segments are monitored by the Group's Chief Operating Decision Maker and used to make strategic decisions on the basis of adjusted segment operating results.

Performance is measured based on EBITDA (as stated before share based payments and exceptional items and head office recharges) as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries.

Inter-segment pricing is determined on an arm's length basis. The information provided to the Board comprises the Statement of Comprehensive Income for each segment, the Statement of Financial Position and the Statement of Cash Flows and other financial and non-financial information used to manage the business on a consolidated basis.

Segment revenues comprise of revenues made to external customers and made between operating segments. The "Head Office" segment comprises the corporate activities which are unrelated to the individual segments and the elimination of inter-segmental transactions.

Segment information for the reporting periods is as follows:

2014

2013

Information about geographical areas:

Major customer

Revenues from the largest customer of the Group's Creative segment represents £2,940,000 (2013: £6,145,000 of the Group's total revenues for the period.

3. Revenue

4. Earnings per share

Earnings per share have been calculated by dividing the loss attributable to shareholders by the weighted average number of ordinary shares in issue during the year. As the Company generated a loss for the year, share options are anti-dilutive.

The calculations of basic and diluted loss per share are:

Weighted average number of ordinary shares in issue:

There are 4.4 million employee EMI options (2013: 5.6 million) and further Management Participation Shares and Marwyn Participation Option which vary in number up to a total of 20% of the fully diluted issued share capital. Neither has been included in the computation of EPS because their exercise is dependent upon the share price and in the latter case the increase in shareholder value, neither of which have been met. The total number of options and overview of the schemes is provided in note 8 of the published Annual Report and Accounts.

The acquisition of Paragon Creative Limited also put in place deferred consideration; with the issue of such being cash or shares at the company's option. The amount is determined after settlement of any liabilities identified in the sale and purchase agreement warranty. The company has yet to finalise settlement of such liabilities or determine if such are to be issued as shares. As such, the number is not included in the diluted EPS.

Normalised earnings per share

Normalised earnings per share has been calculated by dividing the loss attributable to shareholders before amortisation, charges for share options and exceptional items including impairment charge on property, plant and equipment by the weighted average number of ordinary shares in issue during the year. The numbers used in calculating the normalised basic earnings per share are reconciled below:

5. Borrowings

The bank loan and bank overdraft are secured by an unlimited debenture by each of the companies in the Group.

The hire purchase liabilities are secured against the assets that are subject to the specific arrangement.

The bank loan incurs interest at 2.95 percent above the Bank of England base rate.

The maturity of the hire purchase varies from 2015 to 2017. The loan maturity has been classified as due on demand, this is due to the breach of bank covenant detailed below and the requirements under IAS 1 regarding disclosure. The future minimum payments, should the bank not take any action in relation to the breach, are as follows:

Exposure to interest rate changes

The exposure of the Group's borrowings to interest rate changes and contractual re-pricing dates at the end of the reporting periods are as follows:

The carrying amounts and fair value of the non-current borrowings are as follows:

The fair value of current borrowings is broadly equal to their carrying amount, as the impact of discounting is not significant. The fair values are based on cash flows discounted using a rate based on the borrowing rate of 7.5%.

The Group has the following undrawn borrowing facilities:

The facilities expiring within one year are annual rolling facilities subject to a periodic review during each year. The next review date is July 2015.

Breach of loan covenant

The Group has a secured bank loan with a carrying amount of £281,000 at 31 December 2014. According to the terms of the agreement, this loan is repayable as an equal capital and interest payment over the next 7½ years, completing in 2022. However, the loan carries an interest cover covenant stating that at the end of each quarter, the Group's EBITDA must exceed interest by three times. It also carries a tangible net worth covenant.

As a result of lower than expected performance which resulted in the company reporting a small EBITDA loss for the year to December 2014, the company will breach the interest cover covenant upon publication of the audited financial statements.

The Group has been in discussions with the bank and the bank has notified the Group that it does not intend to take any action in relation to the breach although reserves its rights under the terms of the agreement.

Under reporting requirements set out in IAS 1, the whole value of the loan has been classified as due within one year.

6. Cash used in operations

Non-cash transactions

There are no significant non-cash transactions.