Capital & Regional plc Annual report 2003 C a p i t a l & R e g i o n a l p l c A n n u a l r e p o r t 2 0 0 3 Contents What we do What we have How we performed Chairman’s statement Chief Executive’s review Finance Director’s review 1 2 3 4 5/6 7/9 10/11 Shopping centres 12/13 Retail parks 14/15 Leisure Management, governance and corporate social responsibility Advisers and corporate information 16/17 Directors 18 19/23 Directors’ remuneration report 24/25 Directors’ report 26/28 Corporate governance report Corporate social responsibility 29 Statement of directors’ responsibilities 30 Independent auditors’ report 31 Financial statements Consolidated profit and loss account Note of historical cost profits and losses Consolidated balance sheet Statement of total recognised gains and losses Reconciliation of movements in shareholders’ funds Consolidated cash flow statement Company balance sheet 35 36 37/56 Notes to the accounts 33 34 32 Additional information Fund portfolio information Shareholders’ information Five-year review Glossary of terms 57 58 59 60 Capital & Regional at a glance . . . what we do C&R is a co-investing property asset manager. We manage funds and partnerships in which we hold a significant stake. ● We have assembled specialist management teams operating in the retail and leisure sectors. This enables our equity and management to be leveraged over a large portfolio, and enhances returns to shareholders. Shopping centres Retail parks Leisure The Mall Fund The Junction Fund The Glasgow Fort Swansea Retail Park The X-Leisure Fund Xscape Great Northern Capital & Regional 1 ● ● Capital & Regional at a glance . . . what we have ● Most of our portfolio is held in the form of fund holdings. Group exposure to property by ownership structure Wholly owned 8% Joint ventures 19% Fund 73% Our largest investment is in shopping centres. Group exposure to property by type Shopping centres 47% Other 2% Leisure 17% Retail parks 34% 2 Capital & Regional ● Capital & Regional at a glance . . . how we performed Our NAV per share has grown by an average of 13% over the past ten years. Growth in adjusted fully diluted net asset value (NAV) per share e r a h s r e p e c n e P 600 500 400 300 200 100 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Our dividend per share has grown at an average rate of 20% over the past ten years. Dividend growth 10 e r a h s r e p e c n e P 8 6 4 2 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Capital & Regional 3 ● ● Chairman’s statement I am delighted to be able to introduce an excellent set of results for 2003. Our return on equity for 2003 was 37.6% (2002: 14.6%). This is well above our ten-year average which stands at close to 16%. Management We point to strong management teams in three distinct sectors of the property market: shopping centres, retail parks and urban entertainment complexes. Each has a substantial portfolio to manage, clear benchmarks and targets, and strong strategic guidance resulting from our partnerships with major institutional fund managers. Both the retail and leisure markets which we serve and the capital markets through which we operate, are fast-moving. Our management team has responded vigorously to these dynamics and the Company’s performance results from their efforts. I believe that the expertise they have established will continue to deliver strong returns from our existing portfolios, and the resulting track record will attract new investors to our funds. Directors During 2003 we appointed two new non-executive directors who bring significant experience to our main Board. Hans Mautner is president of the international division of Simon Property Group, a US REIT with a total market capitalisation in excess of $25 billion invested in retail property assets. He has been appointed Chairman of the Remuneration Committee. Paul Stobart is the managing director of Sage UK. He is a chartered accountant and has been appointed Chairman of the Audit Committee. Peter Duffy, who has served nine years as a non-executive director this year, will sadly be retiring at the 2004 AGM. He has provided a major contribution to the Company and will be greatly missed. Dividend The Board is recommending a final dividend of 5p per share bringing the total for the year to 9p (2002: 7p). We plan to continue to increase the dividend in line with sustainable earnings. Tom Chandos Chairman These results are attributable to the strong general performance of the retail property sector during the year, and to the creation of value through proactive asset management. The property management and performance fees we have earned made a significant contribution to the overall result. We manage almost £3 billion of retail and leisure property assets, with nearly £1 billion of equity investment in our funds from third-party institutions. We aim to provide those investors with a combination of proactive property management skills and investment vehicles and capital structures which best meet their needs. 4 Capital & Regional Chief Executive’s review 2004 has started very well. There has been much positive activity within the Group and we are optimistic that we will see another year of strong returns. Our business model The Company has committed itself to its new business model, as a co-investing asset manager, and has now completed nearly two years in this shape. 92% of our assets are now invested through funds or partnerships which we manage under management contracts. Our fund model is proving attractive to institutional investors. Both the Mall and Junction funds have nearly doubled in size during the last two years. Following the acquisition of management contracts for three funds from MWB at the end of January last year, we have now merged those three funds into one to be known as the X-Leisure Fund. This fund has initially a 15-year life with an option to extend for a further five years. Hermes has accepted the role of fund manager and we have been appointed as the property asset manager. Our relationships with Morley (fund manager of both the Mall and Junction Funds) and Hermes are proving valuable. They bring a strategic overview and discipline to the funds, thereby enhancing the funds’ appeal to other investors. We treat our properties as living businesses. We recognise that our success depends upon occupiers trading profitably. The scale of our portfolios is providing our occupiers with the opportunity to upsize or downsize within our portfolio with great flexibility. Property under management 3,000 2,500 ) n o i l l i l m £ ( e u a v y t r e p o r P 2,000 1,500 1,000 500 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Capital & Regional 5 Results Our 2003 results are the first for a full year of our new business model. Financial highlights include: ● Total returns, including revaluation surplus and after tax, were £101.6 million (2002: £37.1 million) providing a return on equity of 37.6% ● Profit before tax was £26.3 million (2002: £2.1 million) ● Earnings per share were 31.4p (2002: 1.3p) ● Adjusted fully diluted NAV per share was 521p (2002: 392p). A 33% increase. Chief Executive’s review Our portfolio In the mid to late 1990s we anticipated a period of low inflation and decided to focus our efforts on properties which were visited by the public and where they left behind money in the tills of our occupiers. By intensively managing these properties both in the physical sense and by making them exciting and interesting places to visit and spend time in, we hoped that our occupiers would take more money and therefore rental values would advance faster than the economy as a whole. This is proving to be so. Currently our equity is invested in 15 shopping centres, 16 retail parks and 18 urban entertainment complexes. Government avoids an over-prescriptive vehicle, there will be a ready appetite from investors not only in the UK, but from all over the world, providing at last significant long-term equity to the quoted property market. If such long-term equity was available, I believe that the Government would find many of its broader objectives met. In particular, it would be easier for the industry to offer flexible leases to occupiers. One of the problems with a market heavily dependent upon debt finance is that the longer the lease, the easier it is to finance. A new supply of equity would help the property industry provide the desired flexibility. Strong teams We are proud of the strength, depth and focus of our management teams. We have three specialised teams focused on shopping centres, retail parks and leisure. Each is self contained with its own marketing, accounting and facilities management capabilities. The central team is responsible for fund development and expansion, new partnerships, group accounting and IT. Market overview During 2003 we saw substantial rises in the value of retail investment properties, driven by increasing institutional allocations and low interest rates. These trends may continue in 2004, as property still offers income returns which exceed interest rates, and the prospect of growth. I cannot recall another time during the past 40 years when the argument for investment has been so strong. Almost 600 people are employed by the Group and at the properties which it manages. The asset management model enables us to demonstrate the productivity of these people. Our Group overhead is covered by our recurring fee income. Performance fees are now substantial and provide a pool for incentivising management. Future prospects 2004 has started very well. There has been much positive activity within the Group and we are optimistic that we will see another year of strong returns. Property investment funds In the Budget on 17 March the Chancellor announced his intention to consult on the creation of a tax transparent property investment fund (PIF). We will follow this process with considerable interest. Martin Barber Chief Executive The Government has issued a consultation document inviting responses from interested parties. C&R, both directly and working through property industry bodies, will be making strong representations on a number of important issues. We will be advocating, in particular, an approach which allows PIFs to operate in a flexible regulatory environment, similar to that enjoyed by REITs in the US. Issues such as gearing, management structure and the level of development activity should, to a large extent, be determined by the market rather than by regulation. Shareholders may remember that C&R floated its US operations on the American market as a REIT in 1993 and I have chaired CenterPoint Properties Trust, as the company is called, since its flotation. Over the ten-year period it has been one of the best performing REITs in America and is now capitalised at over $3 billion. I believe that if the 6 Capital & Regional Finance Director’s review This section of the annual report comments on the build-up of the figures and highlights the reasons for the strong results. Drivers of value The strong returns have been driven by a number of factors: ● Our management and performance fees ● Strong ERV growth in both the Mall and Junction Funds ● Stamp duty savings benefits arising from our properties in disadvantaged areas ● A significant contribution from our joint venture development programme, which includes the Glasgow Fort and the two Xscapes at Milton Keynes and Castleford. Return on principal investments The total return can also be broken down by investment as follows: Fund investments – Mall – Junction – Leisure Joint venture investments Wholly owned investments Loan stock – CULS Assets business total Management fees Performance fees Goodwill amortisation Snozone profit Earnings business total Total Management expenses Taxation Weighted average investment during 2003 £m 102.7 64.5 13.0 33.9 64.0 (24.6) 253.6 16.4 270.0 Total return £m 53.1 24.3 1.0 18.3 8.4 (1.7) Return on equity* invested 51.7% 36.6% 7.9% 53.9% 13.1% 103.5 40.8% 15.7 13.3 (1.2) 0.4 28.3 172.6% 131.7 48.8% (19.5) (10.6) Total return for the year 270.0 101.6 37.6% * Return on equity is calculated on cost at the beginning of the year plus time weighted additions to share capital (excluding share options) less reductions in share capital. The table shows how our equity has been deployed, and the returns on the different elements. For example the Mall Fund achieved a property level return of 21.7% driven by asset management initiatives and some favourable yield shift. Including fund level gearing this increased to 33.5%. Including gearing at Group level the return on net equity invested was 51.7%. The returns on the earnings business are also high. This is partly because the capital invested is low, primarily the goodwill arising on the acquisition of the leisure fund management business, and partly because we do not allocate our management expense between the assets and earnings businesses. Capital & Regional 7 Return on equity We follow our total return on equity figure closely for a number of reasons: ● It includes revaluation surpluses as well as profit and loss account items ● It is easily measured from the STRGL, a primary statement (page 34) ● It is closer than most other measures to reflecting shareholder returns. In 2003 our return on equity was 37.6%. The largest contribution came from the revaluation surplus, but this year accounting profits were also significant. Profit before tax and exceptionals Exceptional items Gains taken through reserves Tax Total return for the year Equity shareholders’ funds Return on equity (see note 31) 2003 £m 26.3 – 85.9 112.2 (10.6) 101.6 270.0 37.6% 2002 £m 10.8 (8.7) 40.2 42.3 (5.2) 37.1 253.1 14.6% Finance Director’s review Profit and loss account The following table breaks down turnover and profit before tax into their component streams: Asset management fees Performance fees Snozone income Rental and other income Group turnover Share of joint ventures and associates Direct property expenses Direct Snozone expenses Amortisation of goodwill Net interest payable – non- and limited-recourse – own borrowings Contribution Management expense Profit on disposals Exceptional items Profit before taxation 2003 £m 15.7 13.3 5.5 4.9 39.4 35.9 (1.3) (5.1) (1.2) (22.5) (7.0) 38.2 (19.5) 7.6 – 26.3 2002 £m 7.3 2.8 4.0 12.1 26.2 27.3 (2.0) (3.8) – (15.0) (10.1) 22.7 (14.3) 2.3 (8.7) 2.1 Asset management fees are earned by Capital & Regional Property Management Limited for managing the funds and partnerships. Performance fees are earned from the Mall and Junction Funds. They represent the manager’s share of the excess return over the benchmark. In both funds the benchmark is the higher of 12% and IPD +1%. The increase over 2002 results from the strong outperformance of the Mall Fund, from which we earned a fee of £11.1 million and the first performance fee from the Junction Fund of £2.2 million. Our 2003 performance has an impact on future years’ performance fees as explained in note 8. Snozone income derives from ticket sales at Milton Keynes and, for the past three months, at Castleford. Its expenses include rent paid to the partnerships and payroll costs of £1.6 million. Rental and other income comes from the Group’s remaining portfolio of wholly owned properties. The corresponding expenses are shown as direct property expenses. Share of joint ventures and associates is our proportionate share of fund operating profit. Although we receive quarterly payments net of interest, under FRS 9 we are required to show this gross and the interest separately. Amortisation of goodwill arises because we paid £15.7 million for the income stream arising from the MWB fund management business. We are amortising this over 12.5 years. Management expense was £19.5 million. The increase of 36% on last year is explained by the acquisition of the MWB asset management business, by the growth of the Mall and Junction portfolios and by increased performance-related payments. Our management expense is now well covered by the £29 million of fee income. Value of property management business Over the past two years the Group has built up a flow of property management income The management contracts extend to ten years for the Junction Fund. The Mall Fund contract was extended to 15 years during 2003, at the request of a new investor. The three leisure fund contracts, which were due to expire in 2005 and 2006, have now been consolidated into one fund with a 15-year life. It is capable of extension for a further five years. Fee income Ongoing fee income Transaction-related fees Performance fees Total fee income 2003 £m 12.0 3.7 13.3 29.0 2002 £m 6.0 1.2 2.8 10.0 The only value attributed to this income stream in the balance sheet is a relatively small amount of goodwill (£15.7 million) arising on the acquisition of the leisure fund management business. The value of the business built up internally is not included. Adjusted net asset value (NAV) per share Adjusted NAV per share on a fully diluted basis has increased from 392p per share to 521p per share. There have been minor adjustments to the way the figure is calculated, as described in note 30. Finance and capital structure Our partnership and property assets are financed in three different ways: ● Quoted equity ● Quoted Cumulative Unsecured Loan Stock (CULS) ● Bank debt. 8 Capital & Regional At current share prices our CULS are convertible into shares at a price of £1.94 per share between 2006 and 2016. At present their 6.75% yield marginally exceeds the dividend yield arising from conversion. For gearing calculations we treat them as equity rather than debt. The bank debt on our balance sheet is secured on our interests in the Mall and Junction Funds, and our remaining directly held properties. At the year end we had drawn only £48 million on our main £100 million facility. On balance sheet gearing (debt/equity) is 29% and the average period to repayment is just over four years. We also monitor our gearing on a “see-through” basis, including our share of the fund debt, and the debt held in joint ventures. In the case of the fund debt, there is no recourse to the Group for the debt whatsoever. It is secured on the properties in the funds, held in a limited partnership structure. In the case of joint venture debt, we often give partial guarantees. For example we may guarantee interest shortfalls and cost over-runs in a development joint venture. We also guarantee £20 million of the principal debt secured on the Great Northern retail warehouse. Including our share of fund and joint venture debt, our gearing is 129% and the average repayment period is 3.3 years. Hedging interest rate risk We have significant potential exposures to interest rate movements. Without hedging we would be directly affected by a rise in interest rates because our fixed income stream is used to pay variable interest costs. We could also suffer indirect effects such as a rise in interest rates which could have an adverse effect on property values and consumer spending. We hedge a large proportion of our direct exposure using interest rate swaps or similar derivative instruments. The swaps are typically matched to the periods of the loans. At the year end £71 million of our £111 million on balance sheet bank debt was swapped (64%). On a see-through basis £332 million of £398 million was swapped (83%). Taxation We pay tax on our profits at 30%. The tax on income is mitigated by capital allowances, which are rarely clawed back on disposal. We provide for deferred tax on them in line with accounting standards, but add it back in calculating adjusted fully diluted NAV per share, in line with industry practice. We also pay corporation tax on capital gains at 30% on disposals and deemed disposals. Deemed disposals arise as the funds expand and our share is diluted; although we receive no cash we pay tax on the amount we are “deemed” to have sold to new investors. During 2003 we provided for corporation tax on capital gains of £4.4 million of which £3.7 million is put through reserves. Under current accounting standards we do not provide for deferred tax on unrealised revaluation surpluses. We disclose a contingent tax liability of £32 million which could crystallise if all our property and partnership assets were sold at valuation at the year end. International Accounting Standards International Accounting Standards are due to become mandatory for all listed companies within the European Union in 2005. Our June 2005 interim report will have to conform, although some of the new standards will still be voluntary. Over the next 12 months we will be monitoring closely the development of best practice surrounding the new standards. Whatever the outcome we will endeavour to use the framework provided to explain the business to our shareholders as clearly as possible. William Sunnucks Finance Director Capital & Regional 9 Operating review: Shopping centres We understand that our success depends on our retailers’ success. They are regarded as true business partners. The Mall Fund On 28 February 2002 all C&R’s covered shopping centres were transferred into the Mall Fund. At that time it was a 50/50 joint venture with Morley Fund Management, which transferred some of its clients’ shopping centres into the fund. The Mall Fund invests in shopping centres which meet certain broad criteria: in-town, generally covered, with integral car parking and good public transport links; a minimum size of 150,000 sq ft suggests these centres either dominate their typical core town shopping catchments of 100,000 people, or enjoy an established position within a larger metropolitan catchment. As such, the Malls can be positioned at the heart of their communities. The Mall team C&R’s shopping centres team is dedicated to managing the Mall Fund’s shopping centres. They are managed as businesses and not just as property investments. The emphasis is on responsible local management. This gives us direct lines of communication with our shoppers, our retail partners and local communities. The Mall central team supports this local effort by providing specialisms in leasing, marketing, accounting and HR. It also harvests economies of scale in areas such as utilities and ensures the application of best practice across the business as a whole. This Mall management system allows for the essential consistency of experience necessary for the successful development of the Mall brand in becoming the UK’s leading owner and operator of community shopping centres. The top five Mall tenants are: % of rental income Number of units Arcadia Group Clinton Cards Woolworths Boots Argos 2.7 2.5 2.4 2.2 1.9 20 15 6 9 8 The growth of the Mall Fund The Mall enables investors to benefit from this specialist management, improved diversification and strong income and capital growth. Since inception the fund has almost doubled in size to circa £1.25 billion. Other investors have joined the fund, often injecting their own (or their clients’) covered shopping centres. Notable examples are: ● Prudential Property Managers – Gracechurch Centre, Sutton Coldfield ● ISIS – Castle Mall, Norwich ● Hermes – The Marlands, Southampton. We estimate that there are approximately 225 UK centres that would qualify as Malls. We expect to grow the Mall towards our initial target of 25 centres (£2 billion gross asset value) over the coming years through both cash acquisitions and in-specie injections from current owners. The Mall management style We understand that our success depends on our retailers’ success. They are regarded as true business partners. We operate our centres to make them as accessible, entertaining and popular with the shopping public as possible. Our Mall brand seeks to be at the heart of the community leading the Mall to be a social as well as retail venue. By so doing we plan to increase shopping visits and dwell times yielding the prospect of greater sales for our retailers. Our increasing scale improves our relationships with our multiple retailers. Cross-portfolio negotiations are common. We believe in the benefits of branding. The Mall brand values of “caring, dynamic and easy” lie at the heart of our business: caring because we’re personal and responsible with our business partners and shoppers; dynamic because we create changing, fun and involving environments; and easy because we strive to offer an accessible, stress-free shopping experience. The Mall brand is a developing promotional and media platform, offering national coverage with local relevance. With approximately 140 million shopping visits during 2003, there are emerging commercial opportunities with brand partners who wish to access this constituency. Performance In both years, the fund has substantially outperformed its benchmarks. As a result C&R has earned significant performance fees: Property level return Fund level return Benchmark Performance fees 2003 12 months 2002 10 months 21.7% 33.5% 15.2% £11.1m 14.7% 21.6% 10.6% £2.9m Performance fees are mainly driven by the capital growth, but are paid yearly and deducted from income. The capital growth is attributable to yield shift, stamp duty savings for properties in disadvantaged areas and strong ERV growth. 10 Capital & Regional Below Sara Jones, General Manager at The Mall, Epsom. Centre left Angela Greenlees, Marketing Manager, The Mall, Wood Green. Centre right Marie Yuille models the new cleaning uniform with Elvis at The Mall, Falkirk. Bottom Ken Ford and members of The Mall team. Our Malls Aberdeen Barnsley Bexleyheath Birmingham Chester Edgware Epsom Falkirk Ilford Norwich Romford Southampton Sutton Coldfield Walthamstow Wood Green Size (sq ft) 200,000 170,000 400,000 300,000 225,000 199,000 350,189 190,000 300,000 400,000 320,000 200,000 500,000 280,500 570,000 Capital & Regional 11 Operating review: Retail parks The Junction Fund is now the sixth-largest retail park owner in the UK. The retail park team activities during 2003 included: ● Managing the Junction Fund ● Participating in the Glasgow Fort joint venture development with Pillar Property ● Commencing the development of the Morfa Retail Park Of the four parks acquired by the Junction, one was immediately sold and asset management initiatives have already commenced on the remaining three. The total uplift on this portfolio since acquisition, including the sale, was £20 million. in Swansea ● Selling the Group’s remaining retail parks which were not injected into the Junction Fund. The Junction Fund On 3 January 2002 C&R injected most of its retail parks into the Junction Fund, alongside a similar number of retail parks from clients of Morley Fund Management. Since inception the fund has more than doubled its size from £322 million to £757 million. New investors have participated in the fund, diluting C&R’s interest from 50% to 28.4%. The Junction Fund is now the sixth-largest retail park owner in the UK. The scale of ownership provides the opportunity to carry out cross-portfolio deals with tenants allowing them to expand in some locations and restructure in others. The fund is aiming to become the premier choice for indirect investment exposure to actively managed retail park property in the UK. It is building a UK-wide portfolio of destination retail parks with the following characteristics: ● Minimum size of at least 120,000 sq ft ● At least one “category killer” store such as B&Q or Homebase ● Dominant scheme, or the opportunity to become the dominant scheme, in the catchment area ● Opportunities to add value through asset management. The main Junction tenants are: % of rental income B&Q Comet Carpetright Matalan Homebase JJB 18.0 5.8 4.9 4.4 3.9 3.9 Acquisitions and disposals The Junction portfolio has been actively managed to position itself for future growth. In February 2003 the prime Chartwell Land portfolio, the largest portfolio to come onto the market in recent years, was split between the Junction Fund, Pillar, Hercules Unit Trust and Morley. In September 2003 the Oxford Road Retail Park in Reading was sold for £25.1 million and in November 2003 the Drakehouse Retail Park in Sheffield was sold for £58 million. Significant gains were made on both these properties over their historical cost. Planning permissions and developments During the 1980s and early 1990s the number of retail parks in the UK increased rapidly. More recently planning restrictions have tightened and it is now very difficult to get planning permission for substantial new locations. Despite this, there remains considerable scope for improving and redeveloping the existing Junction portfolio. The business plans have identified the potential to invest over £200 million in its sites. These developments will normally be substantially pre-let, with fixed-price building contracts which reduce the risk borne by the fund. We have achieved notable planning permissions during the year. Our 190,000 sq ft development at Aylesbury has now commenced on site and we anticipate starting on our 130,000 sq ft extension/redevelopment to Hull during the second half of the year. A planning inquiry for our 430,000 sq ft proposal at Oldbury will commence in May this year. Junction retail parks Beckton 1 Bristol 1 Glasgow Hull 1 Ipswich Leeds 1 Leicester 1 Maidstone Oxford Paisley 1 Portsmouth Renfrew Junction Thurrock Joint Venture 1,2 Wembley Worcester 1 Stamp duty disadvantaged area 2 The Junction owns 65% of the Junction Thurrock joint venture Size (sq ft) 190,000 220,000 180,000 200,000 210,000 140,000 170,000 170,000 140,000 180,000 160,000 240,000 440,000 260,000 90,000 12 Capital & Regional Below Andrew Lewis-Pratt and members of the Junction team. Bottom The Pod at Hull. Performance fees are mainly driven by the capital growth, but are paid yearly and deducted from income. The capital growth is attributable to strong ERV growth as a result of asset management initiatives, securing planning consents for development and stamp duty savings for properties in disadvantaged areas. Yield shift calculated on a like-for-like basis was only 0.18%. Glasgow Fort In February 2003 the Auchinlea Partnership acquired this 90-acre site and commenced construction on the first phase of 300,000 sq ft of open A1 retail. This is a 50/50 joint venture between C&R and Pillar Property. Building work on the first phase is due for completion in October 2004. Lettings have been highly satisfactory with approximately 61% of the expected rental value already contracted and terms agreed on a further 8%. Total expected rental income has risen to £10.5 million and total project costs for phase 1 are estimated at £142 million. On 2 April 2004 the Auchinlea Partnership announced the conditional sale of the property to Hercules Unit Trust for £194.7 million. Swansea In July 2003 C&R acquired a site near the Morfa stadium from the Swansea City Council, and transferred planning consent for 105,000 sq ft of open A1 retail. Building work started in September 2003 and is expected to be complete by September 2004. Lettings are progressing well with 75% of the expected rental income of £4.9 million either contracted or terms agreed. Total project costs are anticipated to be £64 million. Capital & Regional 13 Junction developments Existing area Further development Aylesbury 3 Bristol – phase II 4 Hull – phase II 3 Oldbury Paisley – phase II Portsmouth – phase II 94,000 – 80,000 40,000 – – 96,000 180,000 50,000 390,000 95,000 80,000 3 Planning permission already in place 4 Planning permission for 150,000 sq ft already in place Performance In 2003 the Junction Fund outperformed its benchmark and for the first time earned a performance fee. Property level return Fund level return Benchmark Performance fee 2003 2002 17.7% 28.2% 16.6% £2.2m 13.3% 17.8% 17.2% Operating review: Leisure We are committed to proving that retail, leisure, entertainment and attractions can be tied together successfully to bring new, unique and highly appealing destinations and experiences to the public, as well as good results for our investors. C&R’s leisure team has four major responsibilities: ● X-Leisure – managing the three funds acquired from This fund is the largest property leisure fund in the UK. Our aspiration is to grow it to a gross asset value of £1 billion. The team will continue its focus on creating destinations, increasing footfall and extending dwell times, as has proven successful with the Xscape destinations. The intention is to split the leisure park portfolio into two distinct brands – large urban entertainment destinations and more traditional family edge-of-town leisure parks. Each property additionally has a dedicated business plan ensuring very focused management. The marketing initiatives undertaken last year were also recognised at the Leisure Awards where three of the four finalists were X-Leisure campaigns. Xscape Xscape at Milton Keynes has continued to trade well. Footfall exceeded 6 million in 2003, 39% up on the 2001 level. The centre is fully let with leases changing hands at premiums. The second Xscape at Castleford, near Leeds, opened in October 2003 and has exceeded expectations. Record initial trading levels were reported by many of the restaurant operators as well as the bowling operator Bowlplex and the snow slope operation. As at March 2004 82% of the space was let or under offer. Construction of the third Xscape in Braehead, near Glasgow, is due to start in summer 2004. This will be built in partnership with Capital Shopping Centres, the owners of the neighbouring regional shopping centre. Xscape Braehead will be anchored by a 12-screen Odeon cinema, a 170m snow slope and a 24-lane bowling/family entertainment centre. Agreements for lease and terms have already been agreed to take the scheme to 60% pre-let. Snozone Snozone is the operating business which runs the snow slopes within the Xscape destinations and is 100% owned by C&R, employing 230 full- and part-time members of staff. It leases the snow slopes at Milton Keynes and Castleford from the partnerships which own the buildings on arm’s length terms and makes an increasingly significant profit. MWB last year, which have now been combined under one umbrella fund. At December 2003 the total gross asset value managed was £500.5 million. ● Xscape – developer, manager and operator of this sports, leisure and retail destination brand. Following the success of Xscape Milton Keynes the second Xscape at Castleford, Leeds, opened in the autumn. Construction of the third Xscape is due to commence in summer 2004. Further sites are actively being pursued. ● Snozone – operates real snow slopes within the Xscape destinations, as a tenant to the partnerships which own the properties. ● The Great Northern Warehouse, Manchester – this joint venture with AWG is being managed by the leisure team. The X-Leisure Fund On 24 January 2003 C&R took management control of the three X-Leisure funds from Marylebone Warwick Balfour. C&R bought small stakes in the funds, together with the fund management business, for a total of £31 million. The three funds own 16 leisure parks and three health clubs nationwide. The parks are anchored by multiplex cinemas with dedicated car parking as well as typically bowling, health and fitness, restaurants and bars. Leases are institutional in character, and many also enjoy fixed rental uplifts through the lease term. Since acquisition C&R has brought a business focus to the management of these assets and introduced property- specific business plans. A large number of leasing initiatives have been progressed, but significant capital expenditure has been postponed until the three funds are consolidated into one vehicle with an extended life. The current split of assets between three separate funds reduces the manager’s ability to exploit cross-portfolio transactions and economies of scale and leads to conflicts of interest. Umbrella fund An umbrella fund has now been created with a new life of 15 years. C&R currently owns 10.77% of the umbrella fund, the balance being held by eight institutional investors. The property and asset management has been contracted to C&R, and the fund management to Hermes. C&R will be entitled to management fees and to performance fees as in the Mall and Junction Funds. 14 Capital & Regional Below Xscape Castleford grand opening ceremony. Centre Star City – a challenge and an opportunity. Bottom The X-Leisure Exec team. Great Northern On 31 May 2003 C&R took a 50% stake in the Great Northern Warehouse, Manchester. The building had been converted to a high standard and was anchored by an AMC cinema and NCP. However other lettings did not follow and the property remained substantially vacant. C&R’s leisure team has been working with its joint venture partner, AWG, to evaluate the options for leasing the majority of the vacant space. Urban leisure destinations Xscape MK Xscape Castleford Fountain Park, Edinburgh Tower Park Leisure Park, Poole Bentley Bridge Leisure Park, Wolverhampton Lockmeadow Leisure Park, Maidstone Weyside Square Leisure Park, Guildford Boldon Leisure Park, Tyne & Wear, Boldon Stack Leisure Park, Dundee StarCity Entertainment Centre, Birmingham 02 Centre, Swiss Cottage, London Riverside, Norwich Parrs Wood Leisure Park, Manchester Great North Leisure Park, North Finchley, London Fiveways, Birmingham Grants Entertainment Centre, Croydon Eureka Entertainment Centre, Ashford West India Quay, Docklands, London Health clubs Giffnock, Glasgow Cannons, St Albans Cricket Ground, Pentagon, Derby Size (sq ft) 420,000 361,000 230,000 181,000 115,000 143,000 46,000 51,000 153,000 393,000 297,000 198,000 242,000 96,000 185,000 149,000 131,000 130,000 38,000 59,000 49,000 Capital & Regional 15 Directors Tom Chandos Martin Barber William Sunnucks Xavier Pullen Hans Mautner David Cherry Peter Duffy Andrew Lewis-Pratt Paul Stobart PY Gerbeau Kenneth Ford 16 Capital & Regional Tom Chandos Non-executive Chairman, 51 Member of Nomination Committee Tom is a director of Northbridge Management, which is a fund management company specialising in hedge funds and other alternative investments. He is a non-executive director of Global Nature Energy plc and a director of a number of private companies, including Cine-UK Limited and Hudson Sandler Limited. He was appointed as a director of the Company in 1993 and as Chairman in 2000. Martin Barber Chief Executive, 59 Member of Nomination Committee Martin was a founder director of the Company in 1979 and has been involved in commercial property as a developer and investor for over 30 years. Martin is also Chairman of CenterPoint Properties Trust, a real estate investment trust, listed on the New York Stock Exchange and formerly a subsidiary of Capital & Regional. William Sunnucks Finance Director, 47 William was appointed Group Finance Director in October 2002. He has been Finance Director of a number of large companies, including Securum International and English, Welsh and Scottish Railways. He is a chartered accountant and has an MBA from the London Business School. William has responsibility for the Group’s finances, including funding, reporting and financial control. Xavier Pullen Deputy Chief Executive, 52 Xavier was a founder director of the Company in 1979 and has been active in the property industry for over 30 years. Xavier focuses primarily on the supervision of the Group’s fund management business together with the co-ordination of all property matters. Hans Mautner Non-executive, 66 Chairman of Remuneration Committee Hans is President of the International Division of Simon Property Group (SPG), the world’s largest publicly traded retail real estate company. In addition, Hans is Chairman of Simon Global Limited, SPG’s London-based entity. SPG currently carries out its ownership/development in Europe through two separate entities in which it has investments: Gallerie Commerciali Italia and European Retail Enterprises. Hans is Chairman of both these organisations. Through its investment in ERE/Groupe BEG, of which he is also Chairman, SPG is currently active in the ownership/development of shopping centres in Europe. Hans was appointed as a director of the Company in 2003. David Cherry Non-executive, 66 Member of Audit and Remuneration Committees David is the former Senior Partner of Donaldsons, a national firm of commercial chartered surveyors with a significant reputation in retail property. He has wide experience in the UK property market and was head of the organisation for eight years. He was appointed as a director of the Company in 1997. Peter Duffy Non-executive, 67 Member of Audit and Nomination Committees Peter was previously Managing Director of TR Property Investment Trust plc and Chairman of European City Estates N.V. He is a director of Nightingale Square Properties plc. He was appointed as a director of the Company in 1995. Andrew Lewis-Pratt BSc ARICS Managing Director of Retail Parks, 46 Andrew has been a director of Capital & Regional since 1997 and, as Chief Executive of The Junction, is responsible for the fund’s retail park portfolio. Andrew has over 20 years’ experience within the retail and leisure sector. Paul Stobart Non-executive, 46 Chairman of Audit Committee and member of Remuneration Committee After qualifying as a chartered accountant with Price Waterhouse, Paul spent five years in corporate finance with Hill Samuel before joining Interbrand, an international marketing services consultancy, in 1988. He joined Sage in 1996 as Business Development Director, becoming Chief Operating Officer in 2000. In 2001 Paul was appointed a non-executive director of Planet Holdings plc. Paul was appointed as a director of the Company in 2003. PY Gerbeau Managing Director of Leisure, 38 PY was appointed to the Board in 2003, and as Chief Executive of X-Leisure. He has over 15 years’ experience in the leisure industry. PY’s career to date has included Vice President of Park Operations at Disneyland Paris and Chief Executive of the Dome. PY has an MBA from one of France’s leading business schools and teaches on the MBA programme at the London Business School. Kenneth Ford BSc FRICS Managing Director of Shopping Centres, 50 Ken has been a director of Capital & Regional since 1997 and, as Chief Executive of The Mall, is responsible for the fund’s shopping centre portfolio. Ken has been involved in commercial property for 29 years. He founded the Easter Management Group Scotland in 1991 prior to joining Capital & Regional. Capital & Regional 17 Advisers and corporate information Principal lending banks Bank of Scotland plc New Uberior House 11 Earl Grey Street Edinburgh EH3 9BN Royal Bank of Scotland plc 135 Bishopsgate London EC2N 3UR Barclays Bank plc Property Team, Business Banking 54 Lombard Street London EC3V 9EX Principal valuers DTZ Debenham Tie Leung One Curzon Street, London W1A 5PZ King Sturge 7 Stratford Place London W1C 1ST Registered office 10 Lower Grosvenor Place London SW1W OEN Telephone: 020 7932 8000 Facsimile: 020 7802 5600 www.capreg.com Registered number 1399411 Auditors Deloitte & Touche LLP Hill House 1 Little New Street London EC4A 3TR Investment bankers Credit Suisse First Boston 1 Cabot Square, Canary Wharf London E14 4QJ UBS Warburg 1 and 2 Finsbury Avenue London EC2M 2PP Principal legal advisers Olswang 90 High Holborn London WC1V 6XX Berwin Leighton Paisner Adelaide House, London Bridge London EC4R 9HA Nabarro Nathanson Lacon House, 84 Theobalds Road London WC1X 8RW Maclay Murray & Spens 151 St Vincent Street Glasgow G2 5NJ 18 Capital & Regional Directors’ remuneration report Unaudited information Remuneration Committee The Company has a Remuneration Committee appointed by the Incentive schemes The Company has four incentive schemes under which awards currently subsist: The 1988 Share Option Schemes (“the Closed Schemes”) Board, consisting entirely of non-executive directors. At the The 1998 Share Option Schemes (“the 1998 Schemes”) beginning of the year the members were Martin Gruselle (Chairman), The Long Term Incentive Plan (LTIP) Tom Chandos and David Cherry. During the year Hans Mautner The Capital Appreciation Plan (CAP). was appointed Chairman and Paul Stobart became a member. Tom Chandos and Martin Gruselle resigned from the Committee. Shareholder approval for the Closed Schemes expired in May 1998 The Committee is responsible for setting the remuneration policy for the executive directors and senior employees. The Committee No further awards will be made under the 1998 Schemes to and no further options may be granted under those schemes. determines the terms of the service agreements, salaries and participants in the LTIP. discretionary bonus payments, as well as deciding on the awards to be made to all participants in the Long Term Incentive Plan All the present executive directors are participants in the LTIP. and Capital Appreciation Plan. Advice from independent external In addition, other key executives are also participants in the LTIP. advisers is obtained when required. Remuneration policy The Committee, using published data and market research, seeks The terms of the LTIP permit the Committee to make conditional awards of shares annually to key executives with a market value not exceeding 100% of the participants’ basic salary. In 2003, a total of 498,750 shares were conditionally awarded to the executive to ensure that the total remuneration received by the executive directors and other key executives. The conditions of exercise of directors under their contracts is competitive within the property the LTIP are designed to motivate the key executives and retain industry and will motivate them to perform at the highest level. them in the Company’s employment. Details of the awards made in 2003 and a summary of the exercise conditions are set out under In order to align the interests of executive directors with the interests the heading “Long Term Incentive Plan” below. of shareholders, a significant proportion of directors’ remuneration is performance-related through the use of annual bonus and incentive All the present executive directors are participants in the CAP. schemes. Other key executives are also participants in the CAP. The terms of the CAP permit the Committee to make awards annually to key Basic salaries The Committee’s policy is to set the basic salaries of each executive executives which will entitle them to receive payments in aggregate of up to 30% of the performance fees receivable by the Company director at levels which reflect their roles, experience and the from the Mall and Junction Funds. A total of £3.99 million has been practices in the employment market. Annual bonus scheme For 2003 and future years, the Committee will award cash bonuses awarded to the executive directors and other key executives in respect of the performance fees earned in 2003; the individual entitlements for 2003 will be reduced by 80% of the value of the shares awarded under the LTIP – to the extent that the awards vest. to the executive directors based on an assessment of their individual Details of the awards made in respect of 2003, and a summary of achievements during the year. the conditions affecting payment, are set out under the heading “Capital Appreciation Plan” below. Capital & Regional 19 ● ● ● ● Directors’ remuneration report Pension arrangements The Company makes contributions (at differing rates of basic salary) Performance graph The graph below is prepared in accordance with The Directors’ to defined contribution pension schemes of each executive Remuneration Report Regulations 2002 and illustrates the director’s choice except that in the cases of M Barber and X Pullen Company’s performance compared to a broad equity market Index. £48,857 and £46,192 salary in lieu of pension contributions were As the Company is a constituent of the FTSE Real Estate Index, this index is considered to be the appropriate comparator for this purpose. Performance is measured by total shareholder return (share price growth plus dividends paid). Capital & Regional FTSE All Share Index FTSE Real Estate Index 300 250 200 150 100 0 0 1 = 8 9 / 2 1 / 6 2 t a x e d n I R S T 50 25/12/98 25/12/99 25/12/00 25/12/01 31/12/02 31/12/03 paid to them respectively. Other benefits Benefits comprise private medical insurance cover, permanent health insurance cover, critical illness cover and additional salary in lieu of a company car. Service contracts Each of the present executive directors has a service agreement which can be terminated on one year’s notice by either party, except in the case of W Sunnucks who can terminate his service agreement by giving six months’ notice. In the event of early termination of an executive director’s agreement, the Committee determines the amount of compensation (if any) to be paid by reference to the circumstances of the case at the time. It is the Committee’s policy not to reward poor performance and to take account of the executive directors’ duty to mitigate loss. The dates of the executive directors’ agreements are as follows: M Barber X Pullen K Ford A Lewis-Pratt W Sunnucks P Y Gerbeau 28 October 1993 28 October 1993 17 May 1996 20 January 1998 15 October 2002 14 April 2003 Non-executive directors – remuneration Each non-executive director currently receives fees of £27,000 per annum. The Chairman receives additional fees of £63,000 per annum and the Chairman of each of the Audit and Remuneration Committees receives an additional fee of £5,000 per annum. The non-executive directors are not entitled to bonuses, benefits, pension contributions or to participate in any incentive schemes. None has a service agreement and all are appointed for three-year fixed terms. 20 Capital & Regional Audited information Long Term Incentive Plan Shares have been conditionally awarded to the directors under the Long Term Incentive Plan as set out below: As at 31 December 2002 Market Shares price on date of award (p) conditionally awarded in year End of As at qualifying 31December 2003 period M Barber 84,138 – 310.5 31/12/04 – 68,750 394.5 31/12/05 X Pullen 79,459 – 310.5 31/12/04 – 65,000 394.5 31/12/05 W Sunnucks 30,596 – 310.5 31/12/04 – 50,000 394.5 31/12/05 K Ford 76,490 – 310.5 31/12/04 – 62,500 394.5 31/12/05 A Lewis-Pratt 76,490 – 310.5 31/12/04 – 62,500 394.5 31/12/05 P Y Gerbeau 58,132 – 310.5 31/12/04 – 56,250 394.5 31/12/05 84,138 68,750 79,459 65,000 30,596 50,000 76,490 62,500 76,490 62,500 58,132 56,250 In addition, 133,750 shares were awarded to key executives at 394.5p; total conditional awards held by key executives at 31 December 2003 amounted to 251,544 shares. The qualifying (“vesting”) conditions for all awards under the plan can be summarised as follows: and multiplying the result by 100. Adjustments to the amount of equity shareholders’ funds will be made to reflect changes in the amount of the issued share capital, share premium account or capital reserves occurring during the relevant financial year. Capital Appreciation Plan In accordance with the terms of the plan, the directors have been awarded the following interests in the performance fees receivable by the Group in respect of the financial year 2003. The interests awarded will only be paid in full if none of the shares conditionally awarded under the LTIP in 2003 vest in 2006. The value of the initial award will be reduced pro rata to the extent that any part of the performance fees received by the Group in respect of 2003 are clawed back as a result of under-performance of the funds in 2004 or 2005. Consequently, no payments will be made in respect of the 2003 awards until 2006, when this right lapses. Interest awarded in respect of 2003 % Value of initial award in respect of 2003 £ Maximum Maximum offset carried amount forward from of offset previous year Note 2 Note 1 M Barber X Pullen K Ford A Lewis-Pratt W Sunnucks P Y Gerbeau 4.89 4.50 6.00 4.50 2.40 2.49 650,000 600,000 800,000 600,000 320,000 330,000 273,019 235,880 197,250 296,869 212,912 232,668 – – – – – – In addition, 5.22% interests with a value of £695,130 were awarded in respect of 2003 to key executives who were not directors. The same key executives received LTIP awards whose maximum The extent to which shares conditionally awarded in 2003 will vest is gross aggregate offset amounted to £547,855. determined by reference to the level of the Group’s average post-tax return on equity (ROE) for the financial years ended 31 December 2003, 2004 and 2005. None of the shares will vest if the ROE is Note 1 The amount of the offset represents 80% of the LTIP award made in 2003 plus the offset carried forward from 2002; it will be less than 10%; 20% of the shares will vest if the ROE is 10%; 100% reduced pro rata to the extent that the shares conditionally awarded of the shares will vest if the ROE is 18% or above. If ROE falls under the LTIP do not vest in full. between 10% and 18% the percentage of shares will vest at a differential rate. ROE is calculated by dividing the total of profit attributable Note 2 If the finally determined amount of the offset exceeds the value of the CAP award in any one year, the excess will be carried forward to be offset against future awards under the CAP. Where to shareholders and all gains and losses included in the statement participants have offset carried forward from previous years this is of total recognised gains and losses for the relevant year by the aggregated with the maximum offset. amount of the equity shareholders’ funds on the first day of the relevant year, adding the results for the three years, dividing by three Capital & Regional 21 Directors’ remuneration report Directors’ remuneration The remuneration of the directors who served in the year ended 31 December 2003 is analysed below: M Barber X Pullen K Ford A Lewis-Pratt W Sunnucks P Y Gerbeau T Chandos M Gruselle D Cherry P Duffy H Mautner P Stobart Total Salary Discretionary 2003 Pension bonus contributions £000 £000 and fees £000 275 260 250 250 200 161 Other benefits £000 27 21 21 20 19 13 Total £000 599 561 534 533 424 319 2002 Total £000 612 591 549 549 92 – 248 234 225 225 180 145 49* 46** 38 38 25 – 1,396 1,257 196 121 2,970 2,393 90 15 27 27 11 14 184 90 15 27 27 11 14 98 35 25 25 – – 184 183 1,580 1,257 196 121 3,154 2,576 * £48,857 was paid to M Barber as salary in lieu of pension contributions in 2003 (2002: £49,000) ** £46,192 was paid to X Pullen as salary in lieu of pension contributions in 2003 (2002: £18,500) Interests in shares The directors and, where relevant, their connected persons (within the meaning of Section 346 of the Companies Act 1985) were beneficially interested in the ordinary share capital of the Company at the dates shown in the table opposite. There have been no changes to the directors’ interests in shares since 31 December 2003 other than: A Lewis-Pratt exercised 125,000 share options and subsequently sold the shares. X Pullen exercised 154,845 share options. 22 Capital & Regional Ordinary shares of 10p each 6.75% convertible subordinated unsecured loan stock 2006/16 31 December 31 December 31 December 31 December 2002 £ 2003 Shares 2002 Shares 2003 £ M Barber X Pullen W Sunnucks K Ford A Lewis-Pratt P Y Gerbeau 2,290,244 2,146,366 917,421 809,545 35,394 23,693 35,394 23,693 9,185 382,001 14,153 – – 381,951 14,153 – – – – – – – – – T Chandos 45,000 45,000 5,000 15,000 P Duffy D Cherry P Stobart H Mautner – 5,580 – – – 4,138 – – – – – – – – – – 3,663,584 3,401,153 64,087 74,087 ● ● Interests in share options M Barber X Pullen K Ford A Lewis-Pratt Exercised 136,878 136,878 13,000 138,747 13,000 138,747 175,000 As at 31 December 2002 136,878 104,263 50,582 50,000 341,723 136,878 104,263 50,582 100,000 50,000 441,723 13,000 138,747 175,000 75,000 50,000 451,747 13,000 138,747 175,000 75,000 50,000 451,747 As at 31 December 2003 Exercise price (p) Market price at date of exercise (p) Earliest exercise date Latest exercise date Exercise condition met – 104,263 50,582 50,000 204,845 – 104,263 50,582 100,000 50,000 304,845 – – 175,000 75,000 50,000 300,000 – – – 75,000 50,000 125,000 168.9 131.4 226.4 211.5 168.9 131.4 226.4 279.5 211.5 226.4 226.4 279.5 191.5 211.5 226.4 226.4 279.5 191.5 211.5 367.5 373.5 326.5 326.5 303.0 303.0 367.5 22/12/96 28/10/97 18/06/00 13/09/03 22/12/03 22/10/04 18/06/04 13/09/10 22/12/96 28/10/97 18/06/00 18/05/01 13/09/03 22/12/03 22/10/04 18/06/04 18/05/08 13/09/10 18/06/00 18/06/00 18/05/01 18/02/02 13/09/03 18/06/07 18/06/04 18/05/08 18/02/07 18/09/10 18/06/00 18/06/00 18/05/01 18/02/02 13/09/03 18/06/07 18/06/04 18/05/08 18/02/07 18/09/10 Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes During the year, the share price ranged from a high of 403p to a low of 249.5p. The share price as at 31 December 2003 was 403p. No share options were granted during 2003 and no further awards will be made under these schemes to participants of the LTIP. Approval This report was approved by the Board of Directors and signed on its behalf by: F Desai Company Secretary 8 April 2004 Capital & Regional 23 Directors’ report The directors present their report together with the audited financial statements for the year ended 31 December 2003. Directors’ interests The directors and, where relevant, their connected persons Results and proposed dividends The consolidated profit and loss account is set out on page 32 and (within the meaning of Section 346 of the Companies Act 1985) are interested in 3,663,584 issued shares representing 5.8% of the issued ordinary share capital of the Company as detailed in the shows a profit on ordinary activities after taxation of £19,381,000. directors’ remuneration report on page 22. The directors recommend the payment of a final dividend of 5.0p per Save as set out in note 34 to the accounts there were no contracts ordinary share on 18 June 2004 to members on the register at the of significance subsisting during or at the end of the year in which close of business on 23 April 2004, which together with an interim a director of the Company was materially interested. dividend of 4.0p per ordinary share, paid in 2003, makes a total of 9.0p for the year. Principal activities, trading review and future developments The principal activity of the Group is that of a co-investing property manager. A review of the activities and prospects of the Group is given in the Chairman’s statement, the Chief Executive’s review, the Finance Director’s review and the Operating review on pages 4 to 15. Share options Details of outstanding options granted to the directors, under the same schemes, are contained in the directors’ remuneration report on page 23. Long Term Incentive Plan (LTIP) and Capital Appreciation Plan (CAP) The Company established the plans on 18 December 2002 for the benefit of the executive directors and key executives. Details of the plans and awards made are contained in the directors’ remuneration Directors The directors of the Company during the year were: M Barber, report on page 21. T Chandos, D Cherry, P Duffy, K Ford, P Y Gerbeau, M Gruselle, A Lewis-Pratt, H Mautner, X Pullen, P Stobart and W Sunnucks. Substantial shareholdings In addition to the interests of the directors, the Company has P Duffy will retire from the Board at the Annual General Meeting. Act 1985, as amended, of the following notifiable interests in its been notified pursuant to Sections 198 to 202 of the Companies issued share capital as at 1 April 2004 (the latest practicable date All directors served throughout the year with the exception of prior to the issue of this report): P Y Gerbeau (appointed on 14 April 2003), H Mautner, P Stobart (both appointed on 24 July 2003) and M Gruselle (resigned on 30 May 2003). In accordance with the Articles of Association, H Mautner and P Stobart, having been appointed after the last Annual General Meeting, will retire by rotation and, being eligible, offer themselves for re-appointment. T Chandos and M Barber will retire from the Board by rotation and will also offer themselves for re-election. The Company maintains insurance for the directors in respect of liabilities arising from the performance of their duties. The Capital Group Companies Inc. Neuberger & Berman, LLC Henderson Global Investors United Nations Pension Fund Isis Asset Management plc UBS Global Asset Management Shares 5,120,000 5,032,956 3,964,458 3,936,120 3,807,437 3,189,605 Legal & General Investment Management 2,770,515 Morley Fund Management Kempen Capital Management ABP Pensions 2,739,978 2,461,900 2,448,712 % 8.10 7.96 6.27 6.23 6.02 5.05 4.38 4.34 3.90 3.87 24 Capital & Regional Charitable donations During the year the Group contributed £3,700 (2002: £6,296) Special business of the Annual General Meeting Authority to allot securities, Section 80 of the Companies Act 1985, to UK charities. requires shareholders’ authority for the directors to allot new shares or convertible securities, other than shares which may be allotted Payment of suppliers The policy of the Company is to settle supplier invoices within the under employee share schemes. Under resolution 9, which is proposed as an ordinary resolution, the directors seek authority terms of trade agreed with individual suppliers. Where no specific to allot shares having a nominal value of £2,037,333 representing terms have been agreed payment is usually made within one month one third of the nominal value of the Company’s issued share of receipt of the goods or service. At the year end the Company had capital. The authority will expire at the conclusion of the Company’s an average of 27 days (2002: 28 days) purchases outstanding. Annual General Meeting in 2005. The directors have no present intention of exercising this authority. Compliance with Combined Code A statement on corporate governance is set out on pages 26 to 28. Stakeholder pensions As a result of the Government’s introduction of stakeholder pensions Pre-emption rights Shares allotted for cash must normally first be offered to shareholders in proportion to their existing shareholdings. Under resolution 10, which is proposed as a special resolution, the directors seek to renew in April 2001, employers must provide their employees with access their annual authority to allot shares for cash as if the pre-emption to a stakeholder pension scheme. The Company has appointed rights contained in Section 89(1) of the Companies Act 1985 did not consultants who have put such a scheme in place and the apply up to a maximum of 5% of the Company’s issued share capital. Company has also nominated a stakeholder pension provider. Employees have had access to join this scheme since May 2001. Authority to purchase own shares At the Annual General Meeting in 2003, the Company was granted Dividend Reinvestment Plan The Company introduced, for the 1999 interim dividend, and for authority to make purchases in the market of its own shares, subject to specified limits. This authority, none of which has yet subsequent dividends, a service whereby shareholders can use their been exercised, expires at the conclusion of the Company’s Annual cash dividends to buy more shares in the Company. The plan was General Meeting for this year and by resolution 11, which is introduced for those shareholders preferring capital appreciation proposed as a special resolution, the Company is seeking to renew rather than income from their shareholding. this authority. The Company may cancel any bought-in shares The timetable for the 2003 final dividend is set out on page 58. Details of the terms and conditions of the Dividend Reinvestment The authority is sought until the conclusion of the 2005 Annual Plan can be obtained by contacting the Company Secretary at the General Meeting, or for 15 months after the date on which the immediately or hold them in treasury. registered office. Post balance sheet events Post balance sheet events are set out in note 35 to the accounts. resolution is passed, whichever is the earlier. Details of the current issued share capital are set out in note 28 to the accounts. The directors will only exercise this authority if they consider that it will result in an increase in asset value per share for the remaining shareholders and that it will be in the best interests of the Company Auditors On 1 August 2003, Deloitte & Touche, the Company’s auditors, to do so. transferred their business to Deloitte & Touche LLP, a limited liability By Order of the Board partnership incorporated under the Limited Liability Partnerships Act 2000. The Company’s consent has been given to treat the appointment of Deloitte & Touche as extending to Deloitte & Touche LLP under the provisions of Section 26(S) of the Companies Act 1989. Deloitte & Touche LLP have expressed their willingness to continue in office and a resolution to re-appoint them will be proposed at the Annual General Meeting. F Desai Company Secretary 8 April 2004 Capital & Regional 25 Corporate governance report The Board of Directors is accountable to the Company’s The Board meets at least quarterly and each member receives shareholders for the management and control of the Company’s up-to-date financial and commercial information in respect of activities and is committed to high standards of corporate the three divisions prior to each meeting, in particular, quarterly governance. This report and the directors’ remuneration report management accounts and schedules of income and outgoings set out on pages 19 to 23 describe how the Company complies (each with comparisons against budget), schedules of acquisitions with the provisions of The Combined Code – Principles of Good and disposals and relevant appraisals (prior Board approval being Governance and Code of Best Practice (“the Combined Code”). required for large transactions) and cash flow forecasts and details of funding availability. Statement of compliance The Company has complied throughout the year ended The directors have delegated certain of their responsibilities 31 December 2003 with the Code provisions set out in Section 1 to committees that operate within specified terms of reference of the Combined Code issued by the Financial Services Authority and authority limits that are reviewed annually or in response to in June 2000. In July 2003 the Financial Reporting Council issued changed circumstances. An Executive Directors’ Committee, a revised Combined Code. This first applies to the Company for whose members include seven executives (one of whom is not the year ending 31 December 2004. The Board is aware of the a main Board director), meets on a weekly basis and deals with requirements of the revised Combined Code and has taken various all major decisions of the Group not requiring full Board approval or actions in light of its guidance. Application of the principles The Board of Directors Details of the directors are set out on pages 16 and 17. The authorisation by other Board committees. The Executive Directors’ Committee is quorate with four directors in attendance; if decisions are not unanimous the matter is referred to the Board for approval. Notes and action points from Executive Directors’ Committee meetings are circulated to the Board. The Audit and Remuneration Company is controlled through the Board of Directors which Committees, which consist solely of non-executive directors, meet comprises the Chairman, six executive and four non-executive at least twice a year. directors, thus providing an appropriate balance of power and authority. All the Company’s non-executive directors act All members of the Board are subject to the re-election provisions of independently of management. The terms and conditions of the Articles which require them to offer themselves for re-election at appointment of non-executive directors are available for inspection least once every three years and, on appointment, at the first Annual at the Company’s registered office. General Meeting (AGM) after appointment. Details of those directors offering themselves for re-appointment are set out in the directors’ There is a clear division of responsibility between the Chairman and report on pages 24 and 25. Peter Duffy was nominated as the Chief Executive. In the Company’s view, the breadth of experience senior independent director as required by the Combined Code for and knowledge of the Chairman and the non-executive directors’ the year ended 31 December 2003. As Peter Duffy retires at the detachment from the day-to-day issues within the Company provide AGM on 11 June 2004, Paul Stobart will be nominated as the senior a sufficiently strong and experienced balance with the executive independent director. members of the Board. The breadth of experience attributed to the non-executive directors, allied to the management information A performance evaluation of the Board was conducted for the provided by the Company, enables them to assess and advise the year ended 31 December 2003. The Chairman’s performance was full Board on the major risks faced by the Company. The Company evaluated by the senior non-executive director, the Chief Executive’s believes that shareholders should regard all its non-executive performance was evaluated by the Chairman, and both the directors as independent. Chairman and Chief Executive together evaluated the performance of the remaining directors. Training is available for new directors and The Board reviews the schedule of matters reserved to it for other directors as necessary. decision at least once a year. Board approval is required for all significant or strategic decisions including major acquisitions, disposals and financing transactions. A procedure for directors to Nomination Committee The committee comprises T Chandos, M Barber and P Duffy. take independent professional advice if necessary has been agreed Following P Duffy’s retirement at the AGM, P Stobart will be by the Board and formally confirmed to all directors. appointed as the new committee member. The Nomination 26 Capital & Regional Committee meets as required to select and recommend to the Nomination Committee Attendance Board suitable candidates for both executive and non-executive appointments to the Board. The Board is given an opportunity to meet the individual concerned prior to any formal decision. During the year, two non-executive directors, Hans Mautner and T Chandos M Barber P Duffy 3 3 3 Paul Stobart, were appointed to the Board following a consultation There were three meetings during the year. process involving external consultants. The directors also appointed P Y Gerbeau to the Board, which was an internal promotion. The terms of reference of the Nomination Committee are available Directors’ remuneration The Remuneration Committee makes recommendations to the for inspection at the Company’s registered office. Board, within existing terms of reference, on remuneration policy Board and committee meetings The number of meetings of the Board and of the Audit, and determines, on behalf of the Board, specific remuneration packages for each executive director. The terms of reference of the Remuneration Committee are available for inspection at the Remuneration and Nomination Committees, and individual Company’s registered office. A proportion of all executive directors’ attendance by directors, is set out below. remuneration consists of cash bonuses (linked to corporate and Board meetings T Chandos M Barber X Pullen W Sunnucks K Ford A Lewis-Pratt P Y Gerbeau (appointed April 2003) M H Gruselle (retired June 2003) P Duffy D Cherry P Stobart (appointed July 2003) H Mautner (appointed July 2003) There were nine meetings during the year. Audit Committee M H Gruselle (retired June 2003) D Cherry P Stobart (appointed July 2003) P Duffy There were five meetings during the year. individual performance achievements) the levels of which are Attendance determined by the Remuneration Committee. All the executive 9 9 9 9 8 8 4 4 8 8 2 2 directors are eligible to participate in the Long Term Incentive Plan (LTIP) and Capital Appreciation Plan (CAP) which were both established on 18 December 2002 following shareholder consultation and approval. The fees of the non-executive directors are reviewed by the Board at regular intervals. The statement of remuneration policy and details of each director’s remuneration are set out in the directors’ remuneration report on pages 19 to 23. Shareholder relations The Company has always encouraged regular dialogue with its institutional shareholders and private investors at the AGM, through corporate functions and property visits. Update meetings are held with institutional shareholders following announcement of preliminary and interim results and as requested throughout the year. Directors are accessible to all shareholders and queries Attendance received verbally or in writing are immediately addressed. 2 5 3 5 Directors are introduced to shareholders at the AGM including the identification of non-executives and committee chairmen. Announcements are made to the London Stock Exchange and the business media concerning business developments to provide wider dissemination of information. Registered shareholders are sent copies of both the annual report and accounts and the interim report. Remuneration Committee Attendance T Chandos M H Gruselle (retired June 2003) P Stobart (appointed July 2003) D Cherry H Mautner (appointed July 2003) There were three meetings during the year. 3 2 1 3 1 Capital & Regional 27 Corporate governance report Accountability and audit Financial reporting The Company’s annual report and accounts includes detailed An Audit Committee which meets with the auditors and deals with any significant internal control matter. In the year under review the Committee met with the auditors on five occasions reviews of the activity in relation to each division, together with and received a paper on the internal controls of the Company. a detailed review of its financial results and financing position. In this way, and as required by the Combined Code, the Board Due to the size of the Group it does not have an internal audit seeks to present a balanced and understandable assessment function and the Company believes that a need for such a function of the Company’s position and prospects. does not currently exist, although this is periodically reviewed. Internal control The Board is responsible for maintaining a sound system of internal Audit Committee The Audit Committee consists of three non-executive directors control to safeguard shareholders’ investment and for reviewing whose details are set out on pages 16 and 17. The role of the Audit its effectiveness. Such a system is designed to manage, but not Committee is to maintain a relationship with the Group’s auditors eliminate, the risk of failure to achieve business objectives. There and review, in depth, the Company’s financial statements, internal are inherent limitations in any control system and, accordingly, even financial control and risk management systems and circulars to the most effective system can provide only reasonable, and not shareholders. The terms of reference of the Audit Committee are absolute, assurance against material misstatement or loss. available for inspection at the Company’s registered office. The Audit Committee is also responsible for reviewing the cost-effectiveness In accordance with the guidance of the Turnbull Committee on and the volume of non-audit services provided to the Group. The internal control, an ongoing process has been established for Company does not impose an automatic ban on the Group’s identifying, evaluating and managing risks faced by the Company. auditor undertaking non-audit work. The Group’s aim is always This process has been in place from the start of the financial year to have any non-audit work involving accountancy firms carried out under review to the date of approval of these financial statements. in a manner that affords value for money. The accounting firm must In November 2003, the directors carried out their review of the not be in a position of conflict in respect of the work in question and effectiveness of the current system of internal control and updated must have the skill, competence and integrity to carry out the work the documentation of controls in place. Such a review is carried in the best interests of the Group. The Audit Committee meets prior out once a year. to Board meetings to consider the interim and annual results and on an ad hoc basis at other times during the year. In 2003, the The risks for each of the divisions in the Group (Mall, Junction, Committee met five times. Xscape/X-Leisure and Corporate) are classified into financial/ administration risks, property risks and operational risks. The key features of the Company’s system of internal control are as follows: Going concern In compliance with the Listing Rules of the Financial Services Control documents for each area of risk which identify the key Authority the directors can report that, based on the Group’s risks, the probability of those risks occurring, their impact if they budgets and financial projections, they have satisfied themselves do occur and the actions being taken to manage those risks to that the business is a going concern. The Board has a reasonable the desired level. expectation that the Company and Group have adequate resources Clearly defined organisational responsibilities and authority limits and facilities to continue in operational existence for the foreseeable throughout the Group. The day-to-day involvement of the future and therefore the accounts are prepared on a going concern executive directors in the running of the business ensures that basis. these responsibilities and limits are adhered to. Financial reporting to the Board including quarterly reports from the Fund Manager of the Mall and Junction Funds and for the Group as a whole, including the preparation of budgets and forecasts, cash management, variance analysis, property, taxation and treasury reports and a report on financing. F Desai Company Secretary 8 April 2004 28 Capital & Regional ● ● ● ● Corporate social responsibility Capital & Regional plc recognises and acknowledges the conduct of its business has an impact on its employees, its partners, its tenants Environmental policy The Company is committed to delivering the highest standards of and suppliers and the community and environment of the property environmental policy implementation in the management of its retail portfolio it manages. The Company’s corporate governance report and leisure property portfolio. The Company consults employees, is set out on pages 26 to 28. The Company’s relationship with its shareholders, suppliers and customers alike to maintain high key stakeholders, its shareholders, is noted on page 27. standards. The Company strives to achieve compliance with current Employees The Company is committed to a policy of equal opportunities for all employees, regardless of their sex, race or disability. The Company legislation, particularly in the areas of energy and its efficient use and impact on the environment, recycling practices, water management and minimisation of use. acknowledges the value of the contribution of its staff. Employees For example, during 2003, the Mall division achieved portfolio-wide are encouraged to develop within the Company and, to facilitate reductions in the consumption of electricity, gas and water compared this, training is encouraged and each employee is regularly to the previous year. In each area, the actual reduction was appraised with a view to maximising his or her potential and achieved by refining measures already in place, for example, contribution. setting Mall lighting to match exact occupancy times and half-hourly electricity monitoring and targeting for all malls. The Mall division The Company places considerable value upon the involvement of its also recycles cardboard/paper generated by retailers, which has employees, at all levels, in its affairs and has continued its practice produced many financial benefits – mainly less waste to landfill sites of keeping them regularly and systematically informed on matters and a return for tonnage in cardboard recycled. The Mall in 2003 of concern affecting them as employees and on the financial recycled over 1,900 tonnes of cardboard. During 2004, the Mall and economic factors affecting the Company’s performance. division will participate in a national environmental benchmarking Consultations with them or their representatives take place on exercise with Upstream for all their malls, to compare performance a regular basis so that their views can be taken into account when with other shopping centre operators. decisions are made which are likely to affect their interests. This is achieved by regular meetings between management and The Company also endeavours to include environmental employees at all levels. considerations in the design and refurbishment of properties, applying and installing wherever practicable current best practice Health and safety in the Group The Company’s aim is to develop a culture throughout its organisation technology. that is committed to the prevention of injuries to, and ill health of, The Company is committed to continuous monitoring and its employees or others that may be affected by its activities. feedback in order to adopt a responsible and positive approach to environmental issues. The Group has a nationally co-ordinated health and safety initiative which is contracted out. Procedures are reviewed at monthly management meetings with centre management by the Retail Development Managers. All properties are adequately insured to cover potential risks and annual risk assessments are carried out by the Group in consultation with the Group contractor and insurers. The Company is committed to providing relevant information and necessary ongoing training to employees in respect of risks to health and safety which may arise out of their activities at the workplace. All employees are offered private medical insurance as well as long-term disability cover. Capital & Regional 29 Statement of directors’ responsibilities In respect of the preparation of financial statements United Kingdom company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and Group as at the end of the financial year and of the profit or loss of the Group for that period. In preparing those financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; ● make judgements and estimates that are reasonable and prudent; and state whether applicable accounting standards have been followed. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for the system of internal control, for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 30 Capital & Regional ● ● Independent auditors’ report to the members of Capital & Regional plc We have audited the financial statements of Capital & Regional plc Services Authority, and we report if it does not. We are not required for the year ended 31 December 2003 which comprise the to consider whether the Board’s statements on internal control consolidated profit and loss account, the note of historical cost profits cover all risks and controls, or form an opinion on the effectiveness and losses, the consolidated balance sheet, the statement of total of the Group’s corporate governance procedures or its risk and recognised gains and losses, the reconciliation of movements in control procedures. shareholders’ funds, the consolidated cash flow, the Company balance sheet and the related notes 1 to 36. These financial statements have We read the directors’ report and the other information contained been prepared under the accounting policies set out therein. We in the annual report for the above year as described in the contents have also audited the information in the part of the directors’ section including the unaudited part of the directors’ remuneration remuneration report that is described as having been audited. report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies This report is made solely to the Company’s members, as a body, in with the financial statements. accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an Basis of audit opinion We conducted our audit in accordance with United Kingdom auditors’ report and for no other purpose. To the fullest extent auditing standards issued by the Auditing Practices Board. An audit permitted by law, we do not accept or assume responsibility to includes examination, on a test basis, of evidence relevant to the anyone other than the Company and the Company’s members amounts and disclosures in the financial statements and the part as a body, for our audit work, for this report, or for the opinions of the directors’ remuneration report described as having been we have formed. Respective responsibilities of directors and auditors As described in the statement of directors’ responsibilities, the audited. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements and of whether the accounting policies are appropriate to the circumstances of the Company and the Group, Company’s directors are responsible for the preparation of the consistently applied and adequately disclosed. financial statements in accordance with applicable United Kingdom law and accounting standards. They are also responsible for the We planned and performed our audit so as to obtain all the preparation of the other information contained in the annual report information and explanations which we considered necessary including the directors’ remuneration report. Our responsibility in order to provide us with sufficient evidence to give reasonable is to audit the financial statements and the part of the directors’ assurance that the financial statements and the part of the directors’ remuneration report described as having been audited in remuneration report described as having been audited are free from accordance with relevant United Kingdom legal and regulatory material misstatement, whether caused by fraud or other irregularity requirements and auditing standards. or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the financial We report to you our opinion as to whether the financial statements statements and the part of the directors’ remuneration report give a true and fair view and whether the financial statements and described as having been audited. the part of the directors’ remuneration report described as having been audited have been properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, Opinion In our opinion: the directors’ report is not consistent with the financial statements, the financial statements give a true and fair view of the state of if the Company has not kept proper accounting records, if we affairs of the Company and the Group as at 31 December 2003 have not received all the information and explanations we require and of the profit of the Group for the year then ended; and for our audit, or if information specified by law regarding directors’ the financial statements and part of the directors’ remuneration remuneration and transactions with the Company and other report described as having been audited have been properly members of the Group is not disclosed. prepared in accordance with the Companies Act 1985. We review whether the corporate governance statement reflects the Deloitte & Touche LLP Company’s compliance with the seven provisions of the Combined Chartered Accountants and Registered Auditors Code specified for our review by the Listing Rules of the Financial London 13 April 2004 Capital & Regional 31 ● ● Consolidated profit and loss account for the year ended 31 December 2003 Turnover: Group income and share of joint ventures’ turnover Less: Share of joint ventures’ turnover Group turnover Cost of sales Gross profit Profit on sale of trading and development properties Exceptional loss on write-off of European development properties Total profit/(loss) on disposal of trading and development properties Administrative expenses Group operating profit Share of operating profit in joint ventures and associates Total operating profit Exceptional costs of a fundamental reorganisation Profit/(loss) on sale of investment properties and investments Profit on sale of investment properties in joint ventures and associates Profit on ordinary activities before interest Interest receivable and similar income Interest payable and similar charges – Group – share of associates – share of joint ventures Profit on ordinary activities before taxation Taxation on profit on ordinary activities Profit on ordinary activities after taxation Equity minority interests Profit attributable to the shareholders of the Company Equity dividends paid and payable Profit/(loss) retained in the year Earnings per share Earnings per share – diluted The results of the Group for the year related entirely to continuing operations. Note of historical cost profits and losses for the year ended 31 December 2003 Notes 2 4 3 19a 4 3 3 5 6 6 6 7 11 13 29 14 14 Year to Period to 31 December 31 December 2002 £000 2003 £000 44,010 (4,554) 39,456 (6,445) 34,998 (8,788) 26,210 (5,763) 33,011 20,447 25 – 25 (20,650) 12,386 35,863 499 (1,522) (1,023) (14,261) 5,163 27,298 48,249 32,461 – 5,242 2,385 55,876 1,142 (7,287) (19,789) (3,595) (7,184) (789) 2,609 27,097 1,043 (10,649) (12,451) (2,967) (30,671) (26,067) 26,347 (6,966) 19,381 – 19,381 (5,602) 2,073 (1,220) 853 (8) 845 (4,333) 13,779 (3,488) 31.4p 27.3p 1.3p 1.2p Year to Period to 31 December 31 December 2002 £000 2003 £000 Reported profit on ordinary activities before taxation Realisation of property revaluation surplus of previous years Realisation of property revaluation surplus of previous years in joint ventures and associates Historical cost profit on ordinary activities before taxation 26,347 7,866 2,256 2,073 46,762 1,111 36,469 49,946 Historical cost profit for period retained after taxation, minority interests and dividends 20,249 40,829 32 Capital & Regional plc Consolidated balance sheet as at 31 December 2003 Fixed assets Intangible assets Property assets Other fixed assets Investment in joint ventures – share of gross assets – share of gross liabilities Investment in associates Current assets Property assets Debtors – amounts falling due after more than one year – amounts falling due within one year Cash at bank and in hand Creditors: Amounts falling due within one year Net current (liabilities)/assets Total assets less current liabilities Creditors: Amounts falling due after more than one year (including convertible debt) Provisions for liabilities and charges Net assets Capital and reserves Called-up share capital Share premium account Revaluation reserve Other reserves Profit and loss account Equity shareholders’ funds Net assets per share Adjusted fully diluted net assets per share Notes 15 16 17 (Restated – see note 1) 31 December 31 December 2002 £000 2003 £000 14,540 51,457 12,282 – 55,475 12,934 78,279 68,409 183,769 (127,277) 77,857 (53,168) 19c 19b 56,492 372,676 24,689 286,367 507,447 379,465 7,941 274 24,202 4,475 7,773 84 27,241 4,159 36,892 (37,232) 39,257 (28,946) (340) 10,311 507,107 389,776 (137,780) (117,041) (2,201) (2,397) 367,126 270,338 6,311 165,574 145,245 2,468 47,528 6,175 162,752 74,006 4,069 23,336 367,126 270,338 591p 521p 438p 392p 20 21 21 22 23 24 27 2 28 29 29 29 29 30 30 The financial statements were approved by the Board of Directors and signed on its behalf on 8 April 2004 by: M Barber W Sunnucks Capital & Regional plc 33 Statement of total recognised gains and losses for the year ended 31 December 2003 Year to Period to 31 December 31 December 2002 £000 2003 £000 Notes Profit before tax Movements in revaluation reserve – on investment properties – on other fixed assets – on properties held in joint ventures and associates Gains on deemed disposals Minority interests Total gains before tax Tax shown in profit and loss account Tax on revaluation surplus realised Deferred tax Total tax charge Total recognised gains and losses for the year Return on equity for the year 26,347 1,111 (620) 80,870 4,498 – 2,073 509 (920) 38,302 2,377 (8) 112,206 42,333 (6,966) (3,651) – (1,220) (3,556) (485) (10,617) (5,261) 101,589 37,072 31 37.6% 14.6% The total recognised gains and losses since the last annual report, including the prior year adjustment of £335,000 (see note 1), are £101,924,000. Reconciliation of movements in shareholders’ funds Year to (Restated) Period to 31 December 31 December 2002 £000 2003 £000 Notes 19,381 (5,602) 13,779 2,958 – 82,208 (3,341) 1,184 845 (4,333) (3,488) 868 (50,845) 36,227 (220) 555 96,788 (16,903) 270,003 287,241 1 335 270,338 367,126 270,338 for the year ended 31 December 2003 Profit for the period attributable to shareholders of the Company Equity dividends paid and payable Profit/(loss) retained in the period Share capital and share premium issued in the year (net of expenses) Share capital purchased and cancelled in the year (including expenses) Other recognised gains and losses relating to the year Purchase of own shares LTIP credit in respect of profit and loss charge Net increase in/(reduction to) shareholders’ funds Opening shareholders’ funds as previously reported Prior year adjustment Opening shareholders’ funds as restated Closing shareholders’ funds 34 Capital & Regional plc Consolidated cash flow statement for the year ended 31 December 2003 Net cash inflow from operating activities Dividends received from joint ventures Dividends received from associates Returns on investments and servicing of finance Interest received Interest paid Loan arrangement costs Taxation UK corporation tax paid UK corporation tax recovered Capital expenditure and financial investment Payments for – additions to investment properties – additions to properties held as current assets – additions to other tangible assets – loans to joint ventures Receipts from – sale of investment properties – sale of properties held as current assets – sale of other tangible assets – sale of investments – repayment of loans by joint ventures Acquisitions and disposals and exceptional item Additions to joint ventures and associates Costs of fundamental reorganisation Acquisitions Equity dividends paid Cash (outflow)/inflow before financing Financing Issue of ordinary share capital Share capital purchased and cancelled in the year Purchase of own shares Bank loans received Bank loans repaid Notes 33a Year to (Restated) Period to 31 December 31 December 2002 £000 2003 £000 28,947 350 14,344 2,251 3,355 9,418 14,694 12,773 329 (7,867) (382) 447 (15,158) (374) (7,920) (15,085) 35,721 (61) (6,432) 936 (7,679) 73 ` (5,496) (7,606) 30,225 (7,667) (43,169) (911) (290) – 52,158 641 12 1 – (18,510) (9,544) (280) (850) 645,842 28,122 6 20,203 8,050 8,442 673,039 38,667 665,372 (16,851) (262,203) – (7,016) 15 (31,357) – (48,208) (269,219) (9,541) (4,985) 396,153 (4,623) (14,526) 391,530 2,958 868 – (50,845) (3,338) 79,972 (220) 118,800 (64,750) (464,541) 14,842 (395,938) Increase/(decrease) in cash 33b/c 316 (4,408) Capital & Regional plc 35 Company balance sheet as at 31 December 2003 Fixed assets Other investments Current assets Debtors – amounts falling due after more than one year – amounts falling due within one year Cash at bank and in hand Creditors: Amounts falling due within one year Net current assets Total assets less current liabilities Creditors: Amounts falling due after more than one year (including convertible debt) Net assets Capital and reserves Called-up share capital Share premium account Other reserves Profit and loss account Equity shareholders’ funds Notes 2003 £000 2002 £000 18 126,313 121,596 21 21 13,500 252,088 478 13,500 249,220 348 266,066 236,068 23 (131,865) (116,745) 134,201 146,323 260,514 267,919 24 (34,997) (50,401) 225,517 217,518 28 29 29 29 6,311 6,175 165,634 162,812 4,289 49,283 4,289 44,242 225,517 217,518 The financial statements were approved by the Board of Directors and signed on its behalf on 8 April 2004 by: M Barber W Sunnucks 36 Capital & Regional plc Notes to the accounts for the year ended 31 December 2003 1 Accounting policies Basis of preparation The financial statements have been prepared in accordance with applicable UK accounting standards and, except for the non-depreciation of investment properties referred to below, with the Companies Act 1985. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of properties and investments, using the following principal accounting policies. These have been applied consistently, with the exception of UITF 38,“Accounting for ESOP trusts”, which has been adopted for the first time in these financial statements. The financial statements have been prepared for the year ended 31 December 2003. The comparative figures are for the 53-week period ended 31 December 2002. Basis of consolidation The consolidated financial statements incorporate the financial statements of Capital & Regional plc and its consolidated entities, associated companies and joint ventures for the year ended 31 December 2003. Where necessary, the financial statements of associated companies and joint ventures are adjusted to conform with the Group’s accounting policies. Subsidiaries have been consolidated under the acquisition method of accounting and the results of companies acquired during the period are included from the date of acquisition. Goodwill on consolidation represents the difference between the purchase consideration and the fair value of net assets acquired and is capitalised in the period in which it arises and is amortised over its useful economic life. Goodwill Goodwill, being the difference between the cost of businesses acquired and the fair value of their separable net assets, is included in the balance sheet as an intangible asset and is amortised over its useful economic life. Joint ventures and associates In accordance with FRS 9, “Associates and joint ventures”, joint ventures are included in the accounts under the gross equity method of accounting, and associates under the net equity method. Depreciation Depreciation is provided on all tangible fixed assets, other than investment properties and land, over their expected useful lives: Buildings – over fifty years, on a straight-line basis Fixtures and fittings – over three to five years, on a straight-line basis Motor vehicles – over four years, on a straight-line basis. Investment properties Investment properties are included in the financial statements at valuation less any unamortised tenant incentives. The aggregate surplus or temporary deficit below cost arising from such valuations is transferred to a revaluation reserve. Deficits that are expected to be permanent are charged to the profit and loss account. The Group’s policy is to value investment properties twice a year. On realisation any gain or loss is calculated by reference to the carrying value at the last financial year-end balance sheet date and is included in the profit and loss account. Any balance in the revaluation reserve is transferred to the profit and loss reserve. In accordance with SSAP 19, “Accounting for investment properties”, no depreciation or amortisation is provided in respect of freehold investment properties and leasehold investment properties with over 20 years unexpired. The Companies Act 1985 requires all properties to be depreciated, but that requirement conflicts with the generally accepted principle set out in SSAP 19. Depreciation is only one of many factors reflected in the annual valuation of properties and the amount of depreciation or amortisation, which might otherwise have been charged, cannot be separately identified or quantified. Properties under development Interest and directly attributable internal and external costs incurred during the period of development are capitalised. Interest is capitalised gross before deduction of related tax relief. Interest is calculated on the development expenditure by reference to specific borrowings where relevant. A property ceases to be treated as being under development when substantially all activities that are necessary to get the property ready for use are complete. Refurbishment expenditure Refurbishment expenditure in respect of major works is capitalised. Renovation and refurbishment expenditure of a revenue nature is written off as incurred. Capital & Regional plc 37 Notes to the accounts 1 Accounting policies continued Property transactions Acquisitions and disposals are accounted for at the date of legal completion. Properties are transferred between categories at the estimated market value on the transfer date. Current property assets Properties held with the intention of disposal and properties held for development are valued at the lower of cost and net realisable value. Tenant incentives In accordance with UITF 28, “Operating lease incentives”, rent frees given to tenants are credited to the profit and loss account and amortised over the earlier of either the period of the lease, or to when the rent is adjusted to the prevailing market rate, usually the first rent review. Capital contributions given to tenants are shown as a current asset, and amortised over the earlier of either the period of the lease, or to when the rent is adjusted to the prevailing market rate, usually the first rent review. On the disposal of properties, the balance of the unamortised tenant incentives is charged to the disposal of investment properties. Loan arrangement costs Costs relating to the raising of general corporate loan facilities and loan stock are amortised over the estimated life of the loan and charged to the profit and loss account as part of the interest expense. The bank loans and loan stock are disclosed net of unamortised loan issue costs. Operating leases Annual rentals under operating leases are charged to the profit and loss account as incurred. Deferred taxation Deferred tax is provided in accordance with FRS 19, “Deferred tax”, on all timing differences which have originated but not reversed at the balance sheet date. Deferred tax is measured on a non-discounted basis. On disposal of a property, any provision for deferred tax no longer required will be released to the profit and loss account. Deferred tax is not provided on revaluation gains unless by the balance sheet date there is a binding agreement to sell the assets, and the gain or loss arising on sale has been recognised in the financial statements. Pension costs Pension liabilities, all of which relate to defined contribution schemes, are charged to the profit and loss account in the year in which they accrue. Long Term Incentive Plan (LTIP) For share schemes that contingently award shares at no cost to the participant, a charge is recognised systematically in the profit and loss account over the LTIP performance period based on the directors’ estimate of the extent that the related performance criteria will be met, with a corresponding credit in the profit and loss reserve. Own shares In accordance with UITF 38, own shares held by the Group are shown as a deduction from shareholders’ funds, and included in other reserves. The cost of own shares is transferred from other reserves to the profit and loss reserve systematically over the LTIP performance period. The comparatives have been restated to comply with the requirements of UITF 38. The effects of this restatement on the current and prior years are summarised below. There has been no effect on the 2002 profit and loss account. Year to Period to 31 December 31 December 2002 £000 2003 £000 Balance sheet (Reduction)/increase in net assets (1,821) 335 Performance fees Performance fees relating to the performance period 1 January 2002 to 31 December 2003 have been credited to the profit and loss account for the current year, and will be received on 1 December 2004. 38 Capital & Regional plc 2 Segmental analysis Asset management fees Performance fees Snozone income Rental and other income Group turnover Share of joint ventures’ and associates’ operating profit Direct expenses Amortisation Net interest payable – non and limited recourse – own borrowings (net) Contribution Indirect expenses Profit on disposals (net) Profit before exceptional items Exceptional items Profit before taxation Share of joint ventures and associates £000 Year to Wholly Period to owned 31 December 31 December 2003 2002 £000 £000 properties £000 Asset management £000 Snow slope business £000 15,757 13,292 5,546 29,049 5,546 (5,100) (1,162) 4,861 4,861 (1,345) (2,391) 35,863 (22,545) (4,593) 27,887 446 8,725 1,125 15,757 13,292 5,546 4,861 39,456 35,863 (6,445) (1,162) (22,545) (6,984) 38,183 (19,488) 7,652 26,347 – 7,262 2,781 4,044 12,123 26,210 27,298 (5,763) – (14,956) (10,068) 22,721 (14,261) 2,319 10,779 (8,706) 26,347 2,073 Net assets 25,216 698 331,262 9,950 367,126 270,338 Turnover, profit on ordinary activities before taxation and net assets all arise in the UK with the exception of a loss before taxation in 2002 of £1,522,000 which related to continental Europe (see note 4). 3 Asset sales Net sale proceeds Cost of sales Historical cost profit/(loss) Revaluation surplus Profit/(loss) on disposal Profit on disposal of investment Share of associates and joint ventures (see note 19) Profit/(loss) recognised on sale of assets Fixed assets Current assets Total Year to Period to Period to 31 December 31 December 31 December 31 December 31 December 31 December 2002 £000 2003 £000 2003 £000 2002 £000 2003 £000 2002 £000 Period to Year to Year to 51,205 655,442 (35,840) (618,431) 129 (104) 34,229 (35,252) 51,334 689,671 (35,944) (653,683) 15,365 10,123 5,242 – 5,242 2,385 7,627 37,011 39,061 (2,050) 1,261 (789) 2,609 1,820 25 – 25 – 25 – 25 (1,023) – (1,023) – (1,023) – (1,023) 15,390 10,123 5,267 – 5,267 2,385 7,652 35,988 39,061 (3,073) 1,261 (1,812) 2,609 797 Capital & Regional plc 39 Notes to the accounts 4 Exceptional items Year to Period to 31 December 31 December 2002 £000 2003 £000 Exceptional loss on write-off of European development properties Exceptional costs of a fundamental reorganisation – loan breakage costs – transaction costs – Group reorganisation costs Total exceptional costs Group reorganisation costs included the redundancy costs of seven members of staff. 5 Interest receivable and similar income – – – – – – 1,522 3,949 2,150 1,085 7,184 8,706 Year to Period to 31 December 31 December 2002 £000 2003 £000 135 – 168 304 839 342 132 106 580 463 1,142 1,043 Year to Period to 31 December 31 December 2002 £000 2003 £000 6,479 1,754 8,233 (946) 9,498 1,684 11,182 (533) 7,287 10,649 3,595 19,789 2,967 12,451 30,671 26,067 Bank interest Interest from joint ventures and associates Other interest Share of joint ventures and associates 6 Interest payable and similar charges Bank loans and overdrafts wholly repayable within five years Other loans Capitalised during the year/period Share of joint ventures Share of associates The interest charge includes £257,000 (2002: £378,000) of loan arrangement costs amortised during the year. 40 Capital & Regional plc Year to Period to 31 December 31 December 2002 £000 2003 £000 (7) 425 203 (107) 166 357 96 2003 £000 115 59 174 (6) 482 203 90 148 543 18 2002 £000 83 372 455 7 Profit on ordinary activities before taxation This is arrived at after charging: Profit on disposal of other fixed assets Depreciation – owned assets Amortisation of short leasehold properties Amortisation of negative goodwill Auditors’ remuneration (see below) Operating lease rentals for land and buildings Operating lease rentals for plant and machinery The Group’s auditors also charged the following amounts for the provision of non-audit services during the period: General taxation advice Other In addition, the auditors received fees of £110,000 for due diligence work carried out in respect of the acquisition of the MWB fund management business, which have been included in the cost of that acquisition. The auditors’ remuneration for the Group includes £8,000 (2002: £8,000) in respect of the parent company. Operating lease commitments for land and buildings (all expiring in more than five years) are £266,000 (31 December 2002: £80,000). Operating lease commitments for plant and machinery are £80,000 (31 December 2002: £11,000). 8 Performance fees The Group is entitled to earn performance fees under its management contracts with the Mall and Junction Funds. The fees are dependent upon performance during the previous three-year period. Thus 2003 performance will have an impact on the performance fees earned in 2004 and 2005. Performance fees may be subject to clawback in subsequent years and any clawback would be recognised in the year in which it occurs. 9 Employee information The average number of persons employed by the Group during the year was as follows: Central management Snow slope business Direct property services Average number of employees During 2003 During 2002 111 118 2 231 88 100 4 196 In addition, 268 people were employed at the shopping centres (2002: 134). Their costs are recharged directly to tenants and excluded from the figures above. Capital & Regional plc 41 Notes to the accounts 9 Employee information continued Staff costs (including directors) consist of: Salaries Discretionary bonuses and letting commissions Total salaries Social security costs Other pension costs 10 Directors’ emoluments Year to Period to 31 December 31 December 2002 £000 2003 £000 8,700 3,268 11,968 1,244 154 6,654 2,407 9,061 1,012 197 13,366 10,270 Details of directors’ remuneration by director and details of their interests in the share capital of the Company and details of the Group’s incentive schemes are set out in the directors’ remuneration report on pages 19 to 23. 11 Taxation Current tax UK corporation tax (at 30%) Tax credit in respect of exceptional items Prior year Share of joint ventures Total current tax Deferred tax Origination and reversal of timing differences Total taxation Tax reconciliation Group profit on ordinary activities Tax on profit on ordinary activities at UK corporation tax rate of 30% Effects of – capital allowances – tax losses and other timing differences – benefit of indexation allowances – expenses not deductible for tax purposes – adjustment in respect of prior years Total current tax Year to Period to 31 December 31 December 2002 £000 2003 £000 6,330 – 832 – 580 (1,510) (274) 177 7,162 (1,027) (196) 6,966 2,247 1,220 26,347 2,073 7,904 (984) 605 (937) (258) 832 622 (2,776) (503) – 1,904 (274) 7,162 (1,027) Taxation recognised in the STRGL (see page 34) The tax on revaluation surplus recognised of £3,651,000 is in respect of capital gains on dilution of the Group’s interest in the Mall Fund and gains arising in respect of prior year revaluations realised on disposals to third parties. Factors affecting future tax rate The Group expects to be able to claim capital allowances in future periods in excess of depreciation. No provision has been made for deferred tax on gains recognised on revaluing property to its market value. The total amount unprovided is £31,804,000 (2002: £13,996,000). 42 Capital & Regional plc 12 Profit of the holding company Of the profit for the period attributable to shareholders, a profit of £10,643,000 (2002: £15,410,000) has been dealt within the accounts of the holding company and is made up as follows: Year to Period to 31 December 31 December 2002 £000 2003 £000 Dividends from subsidiaries Net operating costs including interest and tax 13,710 (3,067) 29,556 (14,146) 10,643 15,410 The Company has taken advantage of the exemption provided by Section 230 of the Companies Act 1985 from presenting its own profit and loss account. 13 Equity dividends paid and payable Year to Period to 31 December 31 December 2002 £000 2003 £000 Interim of 4p per share paid on 17 October 2003 (2002: 3p per share) Proposed final of 5p per share payable on 18 June 2004 (2002: 4p per share) 2,505 3,097 5,602 1,863 2,470 4,333 14 Earnings per share Basic Exercise of share options Conversion of Convertible Unsecured Loan Stock Diluted Year to 31 December 2003 Number of shares Earnings per share Earnings £000 19,381 61,758,939 31.4p – 1,062,488 1,218 12,670,912 20,599 75,492,339 27.3p Period to 31 December 2002 Number of shares Earnings per share Earnings £000 Basic Exercise of share options Diluted 845 67,339,312 1.3p – 607,924 845 67,947,236 1.2p The calculation includes the full conversion of the Convertible Subordinated Unsecured Loan Stock where the effect on earnings per share is dilutive. Own shares held are excluded from the weighted average number of shares. Capital & Regional plc 43 Notes to the accounts 15 Intangible assets Purchase of MWB fund management business and interest in Leisure Funds On 24 January 2003, the Group acquired the MWB fund management business for a total consideration of £31,357,000 which included MWB’s 13.29% interest in Leisure Fund I, 5.72% interest in Leisure Fund IIa and 7.09% interest in Leisure Fund IIb. The total cash consideration paid, including acquisition costs, was £31,357,000. The book value and fair value of the assets acquired is shown below. Limited partner interest in Leisure Funds I, IIa and lIb Deferred fees Goodwill Total cash cost of acquisition £000 13,955 1,700 15,702 31,357 The goodwill is being amortised over 12.5 years. The cost of goodwill was £15,702,000, the amortisation charge for the year was £1,162,000 and the carried forward balance is £14,540,000. 16 Property assets Group Cost or valuation: As at 31 December 2002 Unamortised tenant incentives Additions Amortisation of short leasehold properties Disposals Revaluation As at 31 December 2003 The year-end balance is analysed as follows: Historical cost Revaluation surplus A list of the valuers, and the basis of the valuations, are summarised in note 32. The year-end balance for leasehold properties is analysed as follows: Leaseholds with more than 50 years to run Leaseholds with between 20 and 50 years to run Leaseholds with less than 20 years to run Freehold properties £000 Investment properties Leasehold properties £000 Total £000 39,346 16,589 55,935 (166) (294) (460) 39,180 16,295 55,475 – – (37,488) – 41,672 41,672 (203) (9,110) 1,111 (203) (46,362) 1,111 1,692 49,765 51,457 1,430 262 48,915 850 50,345 1,112 2003 £000 45,125 1,300 3,340 49,765 The net book value of property assets includes £800,000 (2002: £206,000) in respect of capitalised interest. As at 31 December 2003 the Group had capital commitments of £19,359,000 (31 December 2002: nil). 44 Capital & Regional plc 17 Other fixed assets Group Cost or valuation As at 31 December 2002 Additions Disposals Revaluation As at 31 December 2003 Depreciation As at 31 December 2002 Provided for year Disposals As at 31 December 2003 Net book values As at 31 December 2003 As at 31 December 2002 Long leasehold land and buildings £000 Fixtures and fittings £000 Motor vehicles £000 Negative goodwill £000 Total £000 12,740 1,827 – – (620) 257 (241) – 12,120 1,843 240 80 – 320 11,800 12,500 1,274 334 (241) 1,367 476 553 32 42 (33) – 41 22 11 (20) 13 28 10 (223) 14,376 – – – 299 (274) (620) (223) 13,781 (94) (107) – 1,442 318 (261) (201) 1,499 (22) 12,282 (129) 12,934 The negative goodwill arose from the acquisition of the minority interest in Easter Capital Investment Holdings Limited. A proportion of the negative goodwill has been credited to the profit and loss account on the disposal of the non-monetary assets acquired. The long leasehold land and buildings represents the Group’s head office, which was independently valued at 31 December 2003. A list of the valuers, and the basis of the valuations, are summarised in note 32. The historical cost of the long leasehold land and buildings is £13,620,000. The lease has more than 50 years remaining. 18 Other investments Valuation As at 31 December 2002 Additions Disposals Write-down in value of investments As at 31 December 2003 A list of principal subsidiaries and joint venture undertakings is given in note 36. 19a Associates and joint ventures Share of operating profit Associates Joint ventures Company shares in subsidiary and joint venture undertakings £000 121,596 5,161 (1) (443) 126,313 Year to Period to 31 December 31 December 2002 £000 2003 £000 32,256 3,607 23,894 3,404 35,863 27,298 Capital & Regional plc 45 Notes to the accounts 19b Investment in associates At the beginning of the year/period Subscription for partnership capital and advances Dividends and capital distributions receivable Share of results (see below) Share of property revaluation surplus (see below) Realised/(unrealised) profit on disposals to associates Unrealised gain from deemed disposal At the end of the year/period Analysis of investment in associates Profit and loss account (100%) Turnover Property expenses Net rental income Fund and property management expenses Performance fees Administrative expenses Share of joint ventures’ operating profit Operating profit Sale of investment properties Net interest payable Profit before and after tax Balance sheet (100%) 2003 £000 286,367 19,012 (15,608) 15,527 62,752 128 4,498 2002 £000 – 250,050 (11,946) 11,993 34,315 (422) 2,377 372,676 286,367 The Mall LP £000 The Junction LP £000 86,662 (12,378) 74,284 (6,083) (15,015) (1,576) – 51,610 – 35,147 (1,684) 33,463 (4,759) (2,916) (1,222) 3,105 27,671 8,158 Total to Total to X-Leisure 31 December 31 December 2002 £000 2003 £000 LPs £000 33,811 (3,483) 30,328 (2,449) – (2,176) – 155,620 (17,545) 138,075 (13,291) (17,931) (4,974) 3,105 25,703 104,984 – 8,158 75,142 (10,127) 65,015 (6,805) (3,708) (2,659) – 51,843 477 (27,537) (19,328) (20,523) (67,388) (26,322) 24,073 16,501 5,180 45,754 25,998 Investment properties and joint ventures 1,240,332 747,786 496,888 2,485,006 1,260,018 Current assets Current liabilities Borrowing due in more than one year Net assets (100%) C&R interest at period end Group share of Turnover Operating profit Sale of investment properties Net interest payable Profit before and after tax Revaluation surplus for the year Investment properties and joint ventures Current assets Current liabilities Borrowing due in more than one year 59,939 (60,520) 67,360 (37,986) 24,388 151,687 (48,712) (147,218) 54,591 (50,592) (542,441) (368,364) (291,281) (1,202,086) (539,848) 697,310 408,796 181,283 1,287,389 724,169 34.77% 28.37% 13.29% 5.72% 7.09% 2,574 1,870 – 50,438 32,256 2,278 34,632 23,894 174 38,052 22,661 – 9,812 7,725 2,278 (12,091) (5,396) (1,520) (19,007) (12,075) 10,570 4,607 41,459 20,611 350 682 15,527 11,993 62,752 34,315 431,276 212,147 20,841 (21,043) 19,110 (10,777) 39,712 1,987 (3,366) 683,135 41,938 (35,186) 505,769 22,804 (21,106) (188,612) (104,505) (23,800) (316,917) (220,678) Associate net assets 242,462 115,975 14,533 372,970 286,789 Unrealised profit on sale of property to associate (294) – – (294) (422) Group share of associate net assets 242,168 115,975 14,533 372,676 286,367 46 Capital & Regional plc 19c Investment in joint ventures At the beginning of the year/period Subscription for partnership capital and advances Dividends and capital distributions receivable Share of results (see below) Share of taxation and minority interests Share of property revaluation surplus (see below) Disposal of investment At the end of the year/period Analysis of investment in joint ventures Xscape Milton Keynes Partnership £000 Xscape Castleford Partnership £000 Auchinlea Partnership £000 Morrison Merlin £000 Others £000 2003 £000 24,689 13,698 (350) 176 161 18,118 2002 £000 29,483 12,153 (3,312) 2,960 (185) 3,987 – (20,397) 56,492 24,689 Total to Total to 31 December 31 December 2002 £000 2003 £000 Profit and loss account (100%) Turnover Property expenses Net rental income Fund and property management expenses Administrative expenses Operating profit/(loss) Sale of investment properties Net interest (payable)/receivable Profit/(loss) before tax Balance sheet (100%) Investment properties Current assets Current liabilities Borrowing due in more than one year Net assets (100%) C&R interest at period end Group share of Turnover Operating profit/(loss) Sale of investment properties Net interest (payable)/receivable Profit/(loss) before tax Revaluation surplus for the year Investment properties Current assets Current liabilities 3,956 (555) 3,401 (100) (14) 3,287 – (3,211) 76 960 (197) 763 (25) (16) 722 – (689) 33 580 (303) 277 – (78) 199 – (972) (773) 3,292 (291) 3,001 – (103) 2,898 – (2,008) 890 – (100) (100) – (30) (130) 214 32 116 8,788 (1,446) 7,342 (125) (241) 6,976 214 (6,848) 17,577 (11,380) 6,197 – 633 6,830 4,871 (5,761) 342 5,940 76,090 59,730 118,050 – – 253,870 133,340 4,269 7,137 1,947 76,591 1,450 91,394 11,317 (2,376) (46,800) 31,183 50.0% 1,978 1,644 – (1,605) 39 786 38,045 2,135 (7,220) (5,716) (46,385) 14,766 66.7% (53,778) (4,405) 61,814 50.0% 640 482 – (459) 23 290 100 – (486) (386) 4,123 13,209 39,840 4,761 (3,818) 59,025 974 (26,889) (2,203) (3,201) (62,500) 10,890 50.0% 1,646 1,449 – (1,004) 445 – – 38,296 (1,423) (31,250) (594) (65,665) – (160,090) (9,099) (77,450) 856 119,509 58,108 50.0% – (68) 107 16 55 – – 725 (167) – 4,554 3,607 107 8,788 3,404 2,435 (3,538) (2,879) 176 18,118 136,910 46,891 (39,517) (87,792) 2,960 3,987 71,828 6,031 (11,169) (42,001) Borrowing due in more than one year (23,400) (30,939) Group share of joint venture net assets 9,560 9,844 30,907 5,623 558 56,492 24,689 A list of valuers and the basis of the valuation are summarised in note 32. The joint ventures all operate in the UK. Capital & Regional’s share of net assets of Xscape Milton Keynes Partnership is less than its 50% interest due to the accumulated preferred return payable on additional non-equity capital provided by joint venture partners. Capital & Regional plc 47 Notes to the accounts 20 Current property assets Properties held for disposal Properties under development 2003 £000 7,765 176 7,941 Group 2002 £000 7,726 47 7,773 The net book value of current property assets includes £384,000 (2002: £295,000) in respect of capitalised interest. 21 Debtors Amounts falling due after more than one year Amounts owed by subsidiaries Prepayments Amounts falling due within one year Trade debtors Amounts owed by subsidiaries Amounts owed by joint ventures Amounts owed by associates Other debtors Tax recoverable Prepayments and accrued income 22 Cash at bank and in hand 2003 £000 – 274 274 1,068 – 218 Group 2002 £000 – 84 84 3,079 – 42 15,136 17,385 329 1,088 6,363 3,228 645 2,862 Company 2003 £000 2002 £000 13,500 13,500 – – 13,500 13,500 – – 233,249 247,437 – – 13 – – – – – 18,826 1,783 24,202 27,241 252,088 249,220 Cash at bank includes £616,000 (2002: £166,000) specifically held as security deposits and retained in rent accounts and not freely available to the Group for day-to-day commercial purposes. 23 Creditors: Amounts falling due within one year 2003 £000 – – 1,983 2,647 1,019 8,828 19,658 3,097 Group Company 2002 £000 3,285 2003 £000 105 2002 £000 94 – 128,501 113,825 1,167 3,322 1,010 2,906 14,786 2,470 13 34 – – – 30 77 – 103 3,109 249 2,470 37,232 28,946 131,865 116,745 Bank loans (secured) Amounts owed to subsidiaries Trade creditors Other creditors Taxation and social security Corporation tax Accruals and deferred income Proposed dividends 48 Capital & Regional plc 24 Creditors: Amounts falling due after more than one year Bank loans (secured) (see note 26) Unamortised issue costs Convertible loan stock (unsecured) (see note 25) Unamortised issue costs Other creditors 25 Convertible Subordinated Unsecured Loan Stock Convertible loan stock Unamortised loan issue costs due after one year Unamortised loan issue costs due within one year Group 2003 £000 2002 £000 Company 2003 £000 2002 £000 110,472 92,000 10,500 26,000 (385) (241) – (4) 110,087 91,759 10,500 25,996 24,642 24,642 24,642 24,642 (145) (237) (145) (237) 24,497 24,405 24,497 24,405 3,196 877 – – 137,780 117,041 34,997 50,401 Group and Company 2003 2002 £000 £000 24,642 24,642 (145) (237) 24,497 24,405 (91) (91) 24,406 24,314 The Convertible Subordinated Unsecured Loan Stock (CULS) may be converted by the holders of the stock into 51.42 (2002: 51.42) ordinary shares per £100 nominal value CULS in any of the years 1997 to 2015 inclusive, representing a conversion price of 194p (2002: 194p) per ordinary share. The Company has the right to redeem at par the CULS in any year from 2006 to 2016. The CULS are unsecured and are subordinated to all other forms of unsecured debt but rank in priority to the holders of the ordinary shares in the Company. The CULS carry interest at an annual rate of 6.75%, payable in arrears on 30 June and 31 December in each year. In accordance with FRS 4, “Financial instruments”, the CULS are shown net of unamortised loan issue costs. Capital & Regional plc 49 Notes to the accounts 26 Financial instruments Details of the Group’s objectives and strategies with regard to financial instruments are set out in the Finance Director’s review. The disclosures set out below exclude short-term debtors and creditors as permitted by FRS 13, “Derivatives and financial instruments”. The Group’s only financial asset is cash of £4,475,000 (2002: £4,159,000). Cash is held at bank and on short-term deposits of up to one week and attracts interest at rates based on LIBOR. The interest rate profile of the Group’s financial liabilities is as follows: CULS Fixed and swapped bank loans Variable rate bank loans 2003 £000 24,642 71,000 39,672 Weighted average interest rate 6.75% 5.23% 5.05% Weighted average period Years Weighted average interest rate Weighted average period Years 2002 £000 12.3 3.5 n/a 24,642 6.75% – – 95,480 5.12% 13.3 – n/a Group borrowings on balance sheet 135,314 5.46% 120,092 5.45% The bank loans are secured on the Group’s interest in The Mall Limited Partnership, The Junction Limited Partnership and on specific properties. Variable-rate loan interest rates are based on three-month LIBOR. A valuation was carried out by JC Rathbone Associates Limited as at 31 December 2003 and 31 December 2002 to calculate the market value of the fixed-rate instruments on a replacement basis. The table below shows the book value and fair value of the Group’s fixed-rate debt instruments, and its share of those in joint ventures and associates. The difference between the interest rate yield curve as at 31 December 2003 and the rate historically committed is the fair value adjustment. CULS Fixed and swapped loans – on balance sheet – Group share of associates – Group share of joint ventures Total interest rate swaps Net of tax at 30% (2002: 30%) The bank loans are repayable as follows: Aggregate amount repayable: Between one and two years Between two and five years Greater than five years Total loans due after more than one year Loans due in one year or less or on demand Total loans Fair value £000 Fair value adjustment 2003 £000 Fair value adjustment 2002 £000 Book value £000 24,642 71,000 250,960 88,250 24,642 69,352 250,443 87,632 434,852 432,069 – 1,648 517 618 2,783 1,948 – – (5,470) (1,107) (6,577) (4,604) 2003 £000 2002 £000 1,500 108,972 – 110,472 200 9,000 34,300 48,700 92,000 3,450 110,672 95,450 Currency profile: All monetary assets and liabilities are denominated in sterling. At 31 December 2003 the Group had undrawn facilities of £52 million (31 December 2002: £43.5 million). 50 Capital & Regional plc 27 Provision for liabilities and charges Deferred taxation The amounts of deferred taxation provided and unprovided in the accounts are as follows: Tax on capital gains if investment assets were sold at their current valuation Accelerated capital allowances and other timing differences Provided 2003 £000 – 2,201 2,201 Provided Not provided Not provided 2002 £000 2002 £000 2003 £000 – 31,804 13,996 2,397 – – 2,397 31,804 13,996 If a provision was made for deferred taxation that has not been provided it would have an adverse effect on net assets per share of 51p (2002: 23p) and on fully diluted net assets per share of 41p (2002: 18p). 28 Called-up share capital Ordinary shares of 10p each At the beginning of the year/period Issued on exercise of share options Shares purchased and cancelled At end of the year/period Ordinary shares of 10p each 310,000 shares have been issued since the year end. Number of shares issued and fully paid 2003 Number 2002 Number Nominal value of shares issued and fully paid 2003 2002 £000 £000 61,746,441 78,855,975 434,210 – (17,543,744) 1,365,562 63,112,003 61,746,441 6,175 136 – 6,311 7,886 43 (1,754) 6,175 Authorised 2003 2002 150,000,000 150,000,000 The options to subscribe for new ordinary shares of 10p each under the share option schemes that were outstanding at 31 December 2003 are as follows: Period within which options are exercisable: 28 October 1997 to 28 October 2004 21 October 1999 to 21 October 2006 18 June 2000 to 18 June 2004 18 June 2000 to 18 June 2007 15 May 2001 to 15 May 2008 22 May 2001 to 22 May 2008 23 February 2002 to 23 February 2009 22 February 2003 to 22 February 2010 13 September 2003 to 13 September 2010 31 December 2003 Number Subscription price of shares 208,526 10,426 104,200 52,604 549,000 20,940 428,950 70,000 265,000 1,709,646 131.4p 193.2p 226.4p 226.4p 279.5p 286.5p 191.5p 201.5p 211.5p Capital & Regional plc 51 Notes to the accounts 29 Reserves Group Share capital £000 Share premium account £000 Property revaluation reserve £000 Capital redemption reserve £000 As at 31 December 2002 6,175 162,752 74,006 Prior year adjustment – own shares Revised balance as at 31 December 2002 Issue of share capital Revaluation of investment properties and other fixed assets Share of revaluation surplus of joint ventures and associates Tax on revaluation surpluses realised in the year Realisation of surplus on disposal of investment properties and dilution of interest in associates Gain on deemed disposal Credit in respect of LTIP charge Purchase of own shares Amortisation of cost of own shares Profit retained in the year – 6,175 136 – – 162,752 2,822 74,006 – – – – – – – – – – – – – – – – – – – 491 80,870 – (10,122) – – – – – 4,289 – 4,289 – – – – – – – – – – Own shares £000 – (220) (220) Profit and loss account £000 Total £000 22,781 270,003 555 335 23,336 270,338 – – – – – – – (3,341) 1,740 – – – – (3,651) 10,122 4,498 1,184 – (1,740) 13,779 2,958 491 80,870 (3,651) – 4,498 1,184 (3,341) – 13,779 As at 31 December 2003 6,311 165,574 145,245 4,289 (1,821) 47,528 367,126 Company As at 31 December 2002 Issue of share capital Profit retained in the year As at 31 December 2003 6,175 162,812 136 – 2,822 – 6,311 165,634 – – – – 4,289 – – 4,289 – – – – 44,242 217,518 – 5,041 2,958 5,041 49,283 225,517 52 Capital & Regional plc 30 Net assets per share As per the balance sheet Own shares held Net assets per share Conversion of CULS (net of unamortised issue costs) Exercise of share options Capital allowances deferred tax provision Adjusted fully diluted As per the balance sheet Own shares held Net assets per share Conversion of CULS (net of unamortised issue costs) Exercise of share options Capital allowances deferred tax provision Net assets £000 As at 31 December 2003 Number of shares Net assets per share 367,126 63,112,003 (1,024,000) 367,126 62,088,003 591p 24,404 12,670,912 1,709,646 3,767 3,449 398,746 76,468,561 521p As at 31 December 2002 (restated) Net assets £000 Number of shares Net assets per share 270,338 61,746,441 (70,000) 270,338 61,676,441 438p 24,314 12,670,912 3,160,408 6,901 2,538 Adjusted fully diluted 304,091 77,507,761 392p Net assets per share are shareholders’ funds divided by the number of shares held by shareholders at the year end. The shares held by the group’s employee benefits trust (own shares held) are excluded from both net assets and the number of shares. Adjusted fully diluted net assets per share includes the effect of those shares potentially issuable under the CULS or employee share option schemes. it excludes the capital allowances deferred tax provision. 31 Return on equity Total recognised gains and losses Equity shareholders’ funds Return on equity Year to Period to 31 December 31 December 2002 £000 2003 £000 101,589 270,003 37.6% 37,072 253,116 14.6% Return on equity is calculated as total recognised gains and losses divided by opening equity shareholders’ funds, plus time-weighted additions to share capital (excluding share options) less reductions in share capital. Equity shareholders’ funds for 2002 has been adjusted to take account of the shares purchased and cancelled on 26 April 2002. Capital & Regional plc 53 Notes to the accounts 32 Valuations The properties were valued at 31 December 2003, as follows: Group properties Total fixed property assets (as per balance sheet) Other fixed assets Total property assets Properties held by joint ventures Xscape Milton Keynes Partnership Auchinlea Partnership Xscape Castleford Partnership Total property assets held by joint ventures Valuer Basis of valuation £000 DTZ Debenham Tie Leung CB Richard Ellis Limited Directors’ valuation King Sturge Open market value Open market value Open market value Open market value DTZ Debenham Tie Leung Open market value DTZ Debenham Tie Leung Montagu Evans DTZ Debenham Tie Leung Open market value Open market value Open market value 4,640 3,397 220 43,200 51,457 11,800 63,257 77,600 118,050 64,000 259,650 The independent property valuations, as at 31 December 2003, were performed by qualified professional valuers working for DTZ Debenham Tie Leung, Chartered Surveyors; King Sturge, Chartered Surveyors; CB Richard Ellis Limited, Chartered Surveyors; and Montagu Evans, Chartered Surveyors. The properties were valued on the basis of market value, with the exception of 10 Lower Grosvenor Place, London SW1, which was appraised on the basis of existing use value. All valuations were carried out in accordance with the RICS Appraisal and Valuation Standards. 33 Notes to the cash flow statement (a) Net cash inflow from operating activities Year to Period to 31 December 31 December 2002 £000 2003 £000 Group operating profit (Profit)/loss on the sale of the trading and development properties Depreciation of other fixed assets Amortisation of short leasehold properties Amortisation of tenant incentives Amortisation of goodwill Profit on disposal of fixed assets Decrease in trade debtors, other debtors and prepayments Increase/(decrease) in trade creditors, other creditors, taxation and social security and accruals Non-cash movement relating to LTIP charge Net cash inflow from operating activities 12,388 (25) 12,363 425 203 (144) 1,162 (6) 3,144 10,616 1,184 5,163 1,023 6,186 482 203 308 – (6) 8,708 (14,185) 555 28,947 2,251 54 Capital & Regional plc 33 Notes to the cash flow statement continued (b) Reconciliation of net cash flow movement in net debt Increase/(decrease) in cash in the year Cash (outflow)/inflow from increase in debt financing Change in net debt resulting from cash flows Net debt at beginning of the year Net debt at end of the year (c) Analysis of net debt Cash in hand and at bank Debt due within one year Debt due after one year Total 34 Related party transactions Year to Period to 31 December 31 December 2002 £000 2003 £000 316 (4,408) (15,222) 345,740 (14,906) 341,332 (115,933) (457,265) (130,839) (115,933) At 31 December 2002 £000 At Cash 31 December 2003 flows £000 £000 4,159 (3,450) 316 3,250 4,475 (200) (116,642) (18,472) (135,114) (115,933) (14,906) (130,839) The Group’s principal transactions with related parties as defined by FRS 8, “Related party transactions”, are summarised below: Joint ventures and associates During 2003 the Group received management and performance fees totalling £6,454,000 from The Junction Limited Partnership (2002: £2,600,000). As at 31 December 2003 £2,871,000 was outstanding in respect of these fees. During 2003 the Group received management fees from Auchinlea Partnership of £337,000 (2002: £120,000). As at 31 December 2003 there were no fees outstanding. During 2003 the Group received management and performance fees totalling £18,225,000 from The Mall Limited Partnership (2002: £6,900,000). As at 31 December 2003 £11,712,000 was outstanding in respect of these fees. During 2003 the Group received management fees totalling £3,568,000 from the X-Leisure Funds. As at 31 December 2003 £66,000 was outstanding in respect of these fees and deferred fees of £1,681,000 are also outstanding. The Group received management fees from Xscape Milton Keynes Partnership of £185,000 (2002: £186,000) and Xscape Castleford Partnership of £180,000 (2002: £175,000) during 2003. All the above transactions occurred at normal commercial rates. Other related party transactions During 2003 the Group was in two partnership arrangements with funds managed by Pricoa Property Investment Management Limited of which Martin Barber was non-executive chairman until March 2003. During 2003 Cine UK Limited leased five of the Group’s properties on normal commercial terms. Viscount Chandos is a director and shareholder of Cine UK Limited. Martin Barber is a shareholder of Cine UK. Capital & Regional plc 55 Notes to the accounts 35 Post balance sheet events In March 2004 the Auchinlea Partnership, in which the Group has a 50% share, exchanged contracts to sell the leasehold interest in the Glasgow Fort Shopping Park to the Hercules Unit Trust for £194.7 million. 36 Subsidiary joint venture and associated undertakings at 31 December 2003 Principal subsidiaries, associated companies and joint ventures Capital & Regional Property Management Limited Capital & Regional Investments Limited Capital & Regional Shopping Centres Limited Snozone Limited The Mall Limited Partnership The Junction Limited Partnership X-Leisure Fund I X-Leisure Fund IIa X-Leisure Fund IIb The Auchinlea Partnership Xscape Castleford Partnership Xscape Milton Keynes Partnership Morrison Merlin Limited Nature of property business Management Investment and management Investment and management Trading Investment Investment Investment Investment Investment Investment Investment and management Investment and management Trading Group effective share of business 100% 100% 100% 100% 34.77% 28.37% 13.29% 5.72% 7.09% 50% 66.7% 50% 50% The subsidiary and joint ventures companies are incorporated in, and operate in, Great Britain. Investments in joint ventures and associates are dealt with in note 19. The Company has taken advantage of Section 231(5) and (6) of the Companies Act 1985 in not listing all of its subsidiary and joint venture undertakings. All of the above principal subsidiaries and joint ventures have been consolidated in the Group financial statements. All voting rights are in line with effective share of business. 56 Capital & Regional plc Additional information Property under management Investment properties Trading properties Mall Fund Junction Fund X-Leisure Funds Other joint ventures Other properties under management Fund portfolio information at 31 December 2003 Fund Number of core properties Number of tenants Square feet (000) Footnote Mall Fund 15 1,294 4,604 Properties at open market value 1 £1,243m Initial yield Equivalent yield Vacancy rate Net rental income (per annum) Estimated rental value (per annum) Rental increase (ERV) Reversionary Loan to value ratio Underlying valuation change since 31 December 2002 Property level return Geared return Unit price (£1.00 at inception) C&R share 31 December 31 December 2002 £m 2003 £m 52 8 1,243 757 501 332 – 56 8 724 536 – 133 40 2,893 1,497 Junction Fund X-Leisure Funds2 16 226 3,331 £757m 5.03% 6.37% 7.1% £38.4m £47.5m 8.8% 13% 49% 12.2% 17.7% 28.2% 19 181 2,825 £501m 6.48% 7.27% 2.0% £34.2m £37.5m 2.9% 5.56% 63% 1.8% 8.1% 10.9% n/a 6.39% 6.99% 2.5% £82.3m £97.8m 4.9% 7.7% 44% 12.5% 21.7% 33.5% £1.4290 £1.3674 34.77% 28.37% 10.77% 1 Properties at open market value include tenant incentives which are transferred to current assets for accounting purposes. 2 This is the position of the new X-Leisure Fund based on values at 31 December 2003. Capital & Regional plc 57 Shareholders’ information 2004 financial calendar Final dividend record date Annual General Meeting Final dividend payment Interim results Interim dividend 23 April 2004 11 June 2004 18 June 2004 September 2004 October/November 2004 2004 preliminary results announcement March/April 2005 Final dividend 2003 timetable Record date Last day to receive DRIP mandates Dividend warrants posted Payment date/shares purchased Certificates/purchase statements dispatched CREST accounts credited 23 April 2004 4 June 2004 17 June 2004 18 June 2004 1 July 2004 2 July 2004 58 Capital & Regional plc Five-year review for the periods ended 25 December 1999 to 31 December 2003 Number of shares in issue (million) Diluted number of shares in issue (million) Adjusted fully diluted net assets per share Adjusted fully diluted net assets per share growth Capital employed Borrowings Cash at bank Net bank debt Convertible Unsecured Subordinated Loan Stock Net debt Net debt/capital employed* Profit on ordinary activities before taxation Earnings per share Dividend per share 2003 2002 2001 2000 1999 63.112 76.469 521p 32.9% 367,126 110,087 4,475 105,612 24,406 130,018 27.0% 26,347 31.4p 9.0p 61.746 74.347 392p 15.5% 270,338 95,136 4,159 90,977 24,314 115,291 30.9% 2,073 1.3p 7.0p 78.856 91.268 336p (4.1)% 287,241 440,894 8,567 432,327 24,223 456,550 138.8% 11,363 24.0p 6.0p 88.735 101.147 350p (5.4)% 333,889 590,449 6,091 584,358 24,132 608,490 163.2% 98.266 110.678 370p 16.9% 394,089 577,891 7,388 570,503 24,041 594,544 136.4% 14,168 12,838 9.7p 5.5p 9.7p 5.0p * Assuming conversion of the Convertible Unsecured Subordinated Loan Stock to equity Capital & Regional plc 59 Glossary of terms Adjusted fully diluted NAV per share includes the effect of those shares potentially issuable under the CULS or employee share Open market value is an opinion of the best price at which the sale of an interest in the property would complete unconditionally options. It excludes the capital allowances deferred tax provision. for cash consideration on the date of valuation (as determined by the Group’s external valuers). In accordance with usual practice, Capital allowances deferred tax provision In accordance with FRS 19, full provision has been made for deferred tax arising on the Group’s external valuers report valuations net, after the deduction of the prospective purchaser’s costs, including stamp the benefit of capital allowances claimed to date. In the Group’s duty, agent and legal fees. experience liabilities in respect of capital allowances provided are unlikely to crystallise in practice and are therefore excluded when arriving at adjusted fully diluted NAV per share. Passing rent is the gross rent, less any ground rent payable under head leases. Contingent tax liability is the unprovided further taxation which might become payable if the Group’s investments and properties Return on equity is the total return, including revaluation surplus, divided by opening equity plus time-weighted additions to share were sold at their balance sheet values net of any tax losses which capital, excluding share options exercised, less reductions in have not been recognised in the balance sheet. share capital. CULS is the Convertible Subordinated Unsecured Loan Stock. Reversion is the estimated increase in rent at review where the gross rent is below the estimated rental value. Earnings per share (EPS) is the profit on ordinary activities after taxation divided by the weighted average number of shares in issue during the period excluding own shares held. Reversionary yield is the anticipated yield, which the initial yield will rise to once the rent reaches the estimated rental value. Estimated rental value (ERV) is the Group’s external valuers’ opinion as to the open market rent which, on the date of valuation, Total return is the Group’s total recognised gains and losses for the year as set out in the statement of total recognised gains could reasonably be expected to be obtained on a new letting or and losses (STRGL). rent review of a property. Equivalent yield is a weighted average of the initial yield and reversionary yield and represents the return a property will produce Total shareholder return is the growth in price per share plus dividends per share. based upon the timing of the income received. In accordance with usual practice, the equivalent yields (as determined by the Group’s Vacancy rate is the estimated rental value of vacant properties expressed as a percentage of the total estimated rental value of external valuers) assume rent received annually in arrears and on the portfolio, excluding development properties. gross values including prospective purchasers’ cost. Gearing is the Group’s net debt as a percentage of net assets, adjusted for the conversion of the CULS into equity. See-through gearing includes our share of non-recourse net debt in the associates and joint ventures. Initial yield is the annualised net rents generated by the portfolio, expressed as a percentage of the portfolio valuation, excluding development properties. IPD is Investment Property Databank Ltd, a company that produces an independent benchmark of property returns. Net assets per share (NAV) are shareholders’ funds divided by the number of shares held by shareholders at the period end, excluding own shares held. 60 Capital & Regional plc Designed and produced by C&FD. Cover and directors photographed by Robert Wheeler. Printed in England by Cousin. This report is printed using vegetable- based inks on paper which is made from 50% chlorine-free pulp from plantation forests, and from 50% recycled and de-inked fibres. Our printer operates an EcoTrans Recycling System, which recycles the chemicals used within the printing process and makes any waste Ph neutral. C a p i t a l & R e g i o n a l p l c A n n u a l r e p o r t 2 0 0 3