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LSL Property Services plc
Registered in England (Company Number 5114014)
Registered Office:
Newcastle House, Albany Court, Newcastle Business Park, Newcastle upon Tyne, NE4 7YB
Telephone 01904 715324
Facsimile 01904 715354
E-mail enquiries@lslps.co.uk
Website www.lslps.co.uk
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Annual Report and Accounts 2007
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Contents
Highlights
Chairman’s Statement
Key Brands
Business Review
Directors’ Profiles
Investor Information
Report of the Directors
Corporate Governance Report
Directors’ Remuneration Report
Corporate Social Responsibility
Auditor’s Report on the Group Financial Statements
Financial Statements & Notes to the Financial Statements
Definitions
This report covers the period from 1 January 2007 to 31 December 2007.
Forward Looking Statements:
This report may contain forward-looking statements with respect to certain plans and current goals and
expectations relating to the future financial condition, business performance and results of LSL.
By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events
and circumstances that are beyond the control of LSL including, amongst other things, UK domestic and global
economic and business conditions, market related risks such as fluctuations in interest rates, inflation, deflation,
the impact of competition, changes in customer preferences, delays in implementing proposals, the timing, impact
and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and
actions of regulatory authorities, the impact of tax or other legislation and other regulations in the UK.
As a result, LSL’s actual future condition, business performance and results may differ materially from the plans,
goals and expectations expressed or implied in these forward-looking statements. Nothing in this Annual Report
should be construed as a profit forecast.
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Highlights
Group
Record Underlying Operating Profit – up 13.0% to £36.5m (2006: £32.3m).
Adjusted Proforma Earnings Per Share up 17.0% to 23.3p per share (2006: 19.8p
per share) (Basic and Diluted Earnings Per Share 15.8p and 15.7p (2006: 23.1p and
23.1p)).
Excellent cashflow generation – net cashflow from operating activities of £29.4m
(2006: £30.3m).
Final dividend of 3.86p per share, giving a total dividend for the year of 6.86p per
share.
Business Diversification
Surveying business significantly expanded during the year by the major contract
gains from C&G and Barclays.
Surveying now represents 72% of Group profits (2006: 65%).
Surveying Performance
Turnover increased by 21.4% to £89.8m.
Underlying Operating Profit up 25.2% to £26.3m (2006: £21.0m).
Integration of the C&G and Barclays contracts has gone smoothly and both are
performing in line with expectations.
Despite difficult market conditions, with mortgage approvals during the final
quarter of 2007 down by 23%, the business has proven to be resilient with e.surv
job numbers down by only 10% in the final quarter of 2007.
Estate Agency Performance
Despite difficult market conditions experienced during the second half of 2007
Underlying Operating Profit up 2.5% to £13.7m (2006: £13.4m).
Cost saving actions already taken in 2007 are expected to generate significant
savings in 2008.
Financial Services Performance
Growth in financial services with the value of mortgage applications up 10% to
£3.31bn (2006: £3.00bn).
Continued investment in financial services growth has resulted in an Underlying
Operating Loss for the year of £0.9m (2006: £0.8m).
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Annual Report and Accounts 2007
1
Chairman’s Statement
We are pleased to report that 2007
has been a record year for LSL, with
Underlying Operating Profit increasing by
13% to £36.5m (2006: £32.3m).
Our surveying business expanded
significantly during the year through major
contract gains from C&G and Barclays
and, as a result, surveying represented
72% (2006: 65%) of the Group’s profits.
The surveying division’s performance
has proven to be resilient during the final
quarter of 2007 due to its flexible operating
model and the contract gains. Underlying
Operating Profit for the year increased by
25.2% to £26.3m (2006: £21.0m).
Despite challenging market conditions in
the second half of 2007, the estate agency
division has performed satisfactorily,
increasing its Underlying Operating
Profit for the year by 2.5% to £13.7m (2006:
£13.4m).
The Group has continued to invest in and
expand its financial services division
resulting in an increase in the volume of
mortgage applications to £3.31bn (2006:
£3.00bn). This investment has resulted in a
loss for the year of £0.9m (2006: £0.8m).
The business is strongly cash generative,
and as a result the board has proposed
a final dividend of 3.86p per share giving
a total dividend for the year of 6.86p per
share (2006: nil).
Financial results
Group revenue has increased by 10.9% to
£219.5m (2006: £198.0m) and the Underlying
Operating Profit by 13% to £36.5m (2006:
£32.3m), reflecting a continued improvement
in Underlying Operating Profit margin from
16.3% to 16.7%.
Exceptional costs of £1.4m were incurred
across the Group in the second half of 2007.
These result from actions taken to reduce
our operating cost base in light of the lower
activity levels as well as integration costs
arising from the Barclays surveying contract.
These actions will generate significant
savings in 2008. Exceptional costs also
include a £0.3m non cash impairment charge
in connection with the conveyancing division.
These exceptional costs are lower than
previously indicated in our pre close trading
statement issued on 3 January 2008.
Net finance costs for the year were £2.7m
(2006: £4.2m) resulting in a profit before
tax (before adjustment to goodwill) and
amortisation of £32.4m. The amortisation
charge for the year of £9.1m includes £3.0m,
which is tax deductible, in respect of the
C&G contract which is being amortised on a
straight line basis over five years in line with
the expected economic benefit.
The profit after tax was £16.4m (2006: £13.4m)
for the year, and the Adjusted Proforma
Earnings Per Share was 23.3p (2006: 19.8p
per share).
The Group is strongly cash generative
reporting a net cash inflow from operating
activities of £29.4m (2006: £30.3m) and a
low level of capital expenditure of £2.4m.
The Group benefits from a strong balance
sheet with net debt as at 31 December 2007
of £48.7m (2006: £34.2m), after incurring the
cash consideration of £30.2m for the C&G
contract. LSL has a £95.0m revolving credit
facility in place.
The Board is proposing a final dividend of
3.86p per share, which gives a total dividend
of 6.86p per share (2006: nil). The dividend
policy reflects the cash-generative nature
of the Group, and its long-term earnings
potential whilst maintaining resources to
continue the Group’s growth, by investment
in the existing businesses as well as in
selective acquisitions. The final dividend
will be paid on 30 April 2008 to those
shareholders on the register on 25 March
2008.
Market
The housing market has been challenging
during the second half of 2007, with housing
transaction volumes for LSL’s two main
estate agency brands down by circa one
third in the second half. The fall in volume
arose following five successive interest rate
rises, which have created affordability issues
and have impacted on consumer confidence.
The introduction of Home Information
Packs (HIPs) also created some short term
dislocation in supply.
Whilst LSL is dependent on the activity levels
in the UK housing market, the operating
model demonstrates some resilience to the
housing market cycle with LSL’s profitability
being biased towards surveying. Surveying
demonstrates more resilience during a
housing market downturn principally due
to the flexibility of the Group’s surveying
panel management model under which an
increasing proportion of jobs are performed
within e.surv rather than outsourced.
Surveying now represents an increased
proportion of the Group’s Underlying
Operating Profit.
2
Annual Report and Accounts 2007
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Chairman’s Statement
Developments
Main Board
LSL has continued to invest for the future,
particularly in both the surveying and the
financial services divisions.
The surveying division has made strong
progress during the year, by gaining two major
contracts with Barclays and C&G. The C&G
contract is an exclusive agreement to provide
panel management services for five years, for
a cash consideration of £30.2m. The contract
started on 1 July 2007 and has contributed
£11.4m to turnover, with an operating profit
and margin of £5.4m and 48% respectively.
This contract will significantly enhance
earnings and profits and in 2008 will reflect a
full year contribution.
On 9 July 2007, we announced a contract
with Barclays to provide exclusive panel
management services for an initial term of
three years. This contract started on 1 August
2007 and has been successfully integrated
into the existing e.surv business. Since the
well publicised issues in the lending market,
some existing client volumes have declined
significantly, reinforcing the importance of the
above contract gains to the division.
The estate agency business has continued
to develop its customer offer. In the current
difficult market conditions, the focus is on
delivering cost efficiencies and expanding
counter cyclical activities, such as lettings
and our recently launched repossessions
business. During 2007, we purchased a
majority shareholding in three small agency
businesses adding 16 new branches to the
Group’s estate agency division.
LSL’s financial services division has increased
the value of its mortgage applications by
10% in 2007 to £3.31bn (2006: £3.00bn). This
has been achieved through an investment in
additional financial services consultants both
in Reeds Rains and Linear, which has resulted
in a loss for the year of £0.9m (2006: £0.8m).
HIPs were introduced in September 2007 for
four bedroomed properties and subsequently
phased into the rest of the market. We have
introduced a number of customer offerings
including an integrated HIP and conveyancing
proposition providing choice to customers
depending on their circumstances.
LSL announced its intention to cease trading
as a provider of conveyancing services on
20 February 2008. It will continue to provide
conveyancing referrals to its panel of law
firms.
The Board of LSL was established prior to
the flotation in November 2006. There were
no changes to the Board during 2007. The
Board, in addition to myself, consists of three
executives and three non executive directors.
Mark Morris was appointed the Senior
Independent Director on 24 October 2007.
People
LSL is a people business and as such we are
reliant on the commitment and enthusiasm
of our employees on whom we depend to
provide the high level of service that we strive
to achieve for our customers.
In January 2008, LSL launched an HMRC
approved Share Incentive Plan (Buy As You
Earn) under which employees, including
executive directors, can purchase shares on
a monthly basis within statutory limits. This
together with the Save As Your Earn Scheme
launched in January 2007 has enabled the
Company to provide its employees with the
opportunity to share in the future success of
LSL.
A number of senior management employees,
including the executive directors currently
own approximately 34% of LSL. The interests
of these senior management employees/
directors are therefore closely aligned with
the interests of other shareholders.
I would like to take this opportunity to
welcome new employees to the Group and
to thank all employees for their continued
dedication and professionalism.
Current Trading & Outlook
Market conditions during the second half
of 2007 were challenging and transaction
volumes softened further in the first eight
weeks of 2008. The Board expects these
challenging market conditions to continue for
some time. Market recovery will be dependent
upon improvements in consumer confidence
and liquidity in the lending markets.
Our estate agency business will be affected
by the lower activity levels in 2008, whereas
the surveying division will be supported by
its flexible operating model and the full year
contribution from 2007 contract gains as
evidenced by recent market share gains by
e.surv.
Furthermore, we have a strong balance sheet
and a track record of business development,
both organically and through acquisition and
are therefore well placed to take advantage
of value creating acquisition opportunities,
which are expected to arise as the year
progresses.
Beyond 2008, the macroeconomic factors
in the residential property market remain
positive and the Board is confident in the long
term growth prospects for the business.
Roger Matthews
27 February 2008
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Annual Report and Accounts 2007
3
Key Brands
Surveying
Estate Agency
e.surv
Your Move
e.surv Chartered Surveyors is one of the
leading firms of Chartered Surveyors in the
UK. It offers a range of residential survey and
valuation services including, in particular,
panel management principally to the
institutional lending market.
Your Move is an estate agency network
and as at 31 December 2007 it included 292
branches across the UK, which is made up
of wholly owned and franchised branches.
Although its core business is residential
property services, it also offers lettings,
mortgage and remortgage services plus
protection products.
Chancellors Associates
Reeds Rains
Chancellors Associates is a national network
of Chartered Surveyors undertaking a wide
variety of survey and valuation work mainly
for private clients.
Barnwoods
Barnwoods Chartered Surveyors is a newly
formed business currently providing a
network of residential surveying services on
an exclusive basis to C&G and the Lloyds TSB
Group.
This well established, recognised regional
estate agency operates a network which at
31 December 2007, included 146 branches
(made up of wholly owned and franchise
branches) across northern England and
Wales backed by a support structure of
mortgage advisors and lettings centres.
LSLi
This business was launched in early 2007
and is the primary vehicle through which
LSL is pursuing its strategy to acquire small
to medium sized independent estate agency
businesses. In 2007, it acquired 3 estate
agency businesses and has a network of 16
branches based in the home counties.
4
Annual Report and Accounts 2007
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Estate Agency
Financial Services
Your Move
Your Move arranges mortgages, remortgages,
life assurance and general insurances for its
estate agency customers.
Reeds Rains
Reeds Rains arranges mortgages,
remortgages, life assurance and general
insurances for its estate agency customers.
Linear
Linear arranges mortgages, remortgages,
life assurance and general insurances for
customers of independent estate agents
and some of the LSL Group and franchised
branches.
Other Brands:
property-careers.com
property-careers.com is a specialist training
provider and energy performance certificate
panel manager.
First Complete
First Complete includes a number of different
businesses, including an auctions business,
a repossessions business and a property
management business. It also sells general
insurance and utility products to customers
via its call centre.
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Annual Report and Accounts 2007
5
Business Review
Introduction
LSL provides a broad range of services to
its two key customer groups, who are
mortgage lenders and private consumers.
The Group provides various property
services to consumers including estate
agency, lettings, valuation, surveying and
advice on mortgage and non-investment
insurance products. The Group also
provides mortgage lenders with surveys
and panel management services, asset
management and property management
services and also refers mortgage
business from its customers to mortgage
lenders.
Key Strengths
LSL has the following key strengths:
It is one of the leading residential
property services groups in the UK.
The surveying division has again
demonstrated its excellent service
provision by securing two major contract
wins from C&G and Barclays during
2007.
LSL has demonstrated some resilience
against the cycles of the housing market
largely due to its surveying division
which represents 72% of the Group’s
profits and due to the flexibility of
e.surv’s panel management model.
The estate agency division has a
network of 454 branches, making it the
third largest estate agency business
in the UK. LSL is well placed to exploit
consolidation opportunities in this
fragmented market.1
The Group has low capital expenditure
(2007: £2.4m) (2006: £2.1m) and strong
cash generation with net cash flow from
operating activities at £29.4m (2006:
£30.3m).
LSL has made a number of successful
acquisitions, including Reeds Rains,
Chancellors Associates, Linear and
Barnwoods.
1 Estate Agency News January 2008
The current executive directors have
been with the Group since 2001 and have
a track record of improving profitability
as a result of organic growth and a
number of successful acquisitions.
Strategy
LSL is well positioned for longer term growth
both organically and through selective
acquisitions.
Our surveying division continues to be
successful in driving market share largely
due to its service reputation which is
demonstrated by the major contract wins from
Barclays and C&G in 2007.
On the acquisition front LSL is well placed to
act as a consolidator in a largely fragmented
market. The acquisitions made through 2005,
2006 and 2007 have overall been successfully
integrated into the Group and are earnings
enhancing. LSL has a range of propositions
to target companies that we believe are
attractive and that leverage both Group
relationships and individual brands. However,
given current market conditions, LSL is
unlikely to make further acquisitions within
the estate agency sector until after the early
part of 2008.
6
Annual Report and Accounts 2007
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Business Review
Surveying Division Business Review
The surveying businesses have performed well in 2007, growing profitability and turnover.
Key Performance Indicators:
Surveying
e.surv
Turnover
Underlying Operating Profit
Margin
Total Number of Jobs Performed
Chancellors Associates & Other Business2
Turnover
Underlying Operating Profit
Margin
Barnwoods3
Turnover
Underlying Operating Profit
Margin
Total Surveying Business
Turnover
Underlying Operating Profit
Margin
2007
£71.8m
£20.3m
28.2%
443,529
£6.6m
£0.6m
9.1%
£11.4m
£5.4m
48.0%
£89.8m
£26.3m
29.3%
2006
% Change
£68.3m
£20.3m
29.7%
433,810
£5.7m
£0.6m
10.5%
£74.0m
£21.0m
28.4%
5.0%
0.0%
2.2%
15.8%
0.0%
21.4%
25.2%
Surveying: Competitive Strengths
The UK’s largest distributor of valuations providing greater operational flexibility than competitors – even in a market downturn.
Robust customer relationships with the leading lending institutions.
Some proven resilience of profits to variable residential property market conditions.
Proven systems that drive operational efficiencies.
Strong customer ethos with quick turn around times for valuations.
Further opportunities to drive synergies for the new surveying contract wins.
2
3
For the purposes of the comparison, the 2006 figures include the Reeds Rains surveying operation.
Barnwoods commenced trading in July 2007 following the contract win from C&G and the transfer of the C&G surveyors into Barnwoods.
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Annual Report and Accounts 2006
7
Surveying Division
LSL operates its surveying division under its brands, e.surv,
Chancellors Associates and Barnwoods and its customers are
primarily mortgage lenders.
As one of the UK’s leading panel managers of valuation services,
LSL’s surveying division is the panel manager for seven of the top
ten UK lenders. During 2007, 443,529 (2006: 433,810) valuations
were carried out by e.surv’s employed surveyors and sub
contractors.
Contract Wins
During 2007 two key contracts were won. C&G’s surveying
business, with a projected annual turnover in excess of £20.0m,
now trading as Barnwoods, and Ekins (the Barclays Bank
surveying business), with a projected annual turnover of in excess
of £10.0m, which was transferred into e.surv.
The surveying contract with C&G is for an initial period of 5 years
and includes exclusive panel management rights whilst the
agreement with Barclays is for an initial period of 3 years.
Lender Relationships
e.surv has panel management arrangements with a significant
number of lenders. A number of these arrangements are exclusive
and involve the servicing and distribution of valuation instructions
to these lenders’ own teams of employed surveyors. e.surv has
strong relationships with these lenders and the relationship is
enhanced by the generation of referrals from LSL’s financial
services operations.
Service Quality
Service quality is a significant factor in maintaining relationships
with lenders and in seeking to win new panel management
contracts. It also differentiates e.surv from its competitors. One
of the key factors that lenders use in assessing service quality
is turnaround time for valuation instructions. e.surv’s turnaround
time is better than many of its competitors, largely as a result
of the flexibility of the panel management model and its use of
sophisticated technology.
Hometrack Data Systems
LSL owns 14.2% of Hometrack, the leading provider of ‘Automated
Valuation Model’ (AVM). This investment was made in 2003 and
provides LSL with an insight into the AVM market and a dividend
was received in 2007 amounting to £0.4m.
8
Annual Report and Accounts 2007
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Estate Agency Division
The estate agency business performed well in a very difficult
market. Overall the division has grown its profits during the year by
2.5% to £13.7m (2006: £13.4m).
Key Performance Indicators:
Estate Agency
Your Move & Reeds Rains
Exchange Fees
Turnover
Underlying Operating Profit
Margin
KPIs
Exchange Units
Average Fee
Expenditure
Other Brands4
Turnover
Underlying Operating Profit
Total Estate Agency
Turnover
Underlying Operating Profit
Margin
2007
2006
% Change
£69.3m
£94.2m
£13.7m
14.5%
31,277
£2,214
£80.5m
£12.9m
£0.0m
£107.1m
£13.7m
12.8%
£76.0m
£100.9m
£14.6m
14.5%
35,255
£2,156
£86.3m
£2.2m
-£1.2m
£103.1m
£13.4m
13.0%
-8.8%
-6.5%
-6.2%
-11.3%
2.7%
-6.7%
486%
–
3.9%
2.5%
4
Other brands include Homefast, property-careers.com, LSLi subsidiaries (David Frost Estate Agents (acquired in July 2007), JNP Estate Agents (acquired in September 2007)
and Intercounty (acquired in February 2007) and First Complete.)
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Annual Report and Accounts 2007
9
COMBInED BRAnCH nETWORK (DECEMBER 2007)
YM – Your Move, RR – Reeds Rains, YMF – Your Move Franchise,
RRF – Reeds Rains Franchise
LSLi – Intercounty + JNP + Frosts
WALES
RR: 5
RRF: 1
CEnTRAL
YM: 37 YMF: 36
RR: 12
RRF: 7
HAMPSHIRE &
SOUTH WEST
YM: 32
YMF: 16
TOTALS
Your Move
Reeds Rains
Intercounty
JNP
Frost
292 Total
146 Total
9 Total
4 Total
3 Total
SCOTLAnD &
nORTH EAST
YM: 35
RR: 26
YMF: 24
RRF: 3
MIDLAnDS
YM: 26
RR: 84
LSLi: 16
YMF: 1
RRF: 8
LOnDOn
YM: 16 YMF: 10
KEnT & SUSSEx
YM: 46 YMF: 13
10
Annual Report and Accounts 2007
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Business Review
Estate Agency – Competitive Strengths &
Growth Opportunities
No 3 in the UK by number of branches5
Improving financial performance in Your Move in spite of
downturn
Technically advanced proprietary browser based IT systems
(Preview and Quicklet)
www.your-move.co.uk – the number 1 UK estate agency
branded website6
Successful franchise model
Increasing level of sales to customers of additional financial
and other property related services
Growing lettings business
5 Estate Agency News, January 2008
6 Hitwise, February 2008
Estate Agency Performance
Difficult market conditions in the second half of 2007 resulted in a
reduction in exchange units within the main estate agency brands,
Your Move and Reeds Rains, of 11%. This was offset by a marginal
increase in fees by 2.7% from £2,156 to £2,214 and by a growth of
penetration into other income streams. The businesses also took
actions to reduce their cost base from £86.3m to £80.5m. Growth
in fee levels, other income streams and cost efficiencies will be a
key focus in 2008.
Estate Agency Revenue
The main drivers of estate agency revenue are:-
Exchange fee income which is linked to housing transaction
prices and commission rates. LSL is focused on increasing
commission rates despite market conditions.
Franchising income, which is generated from initial deposits
on new openings, a monthly service fee of 8% of turnover,
plus charges for IT provision, continues to grow in line with
the increase in the franchise footprint.
Lettings income is generated from providing a range
of services to landlords and tenants. Lettings has been
expanded within Your Move and as at 31 December 2007
lettings services were provided from 340 offices across the
LSL network (figure includes franchised branches). Income
growth was experienced in 2007 and further growth is
expected in 2008.
Additional commission income is generated through the sale
of general insurance, conveyancing services, utilities and
other products and services to clients of the branch network.
HIPs potentially provide a significant future revenue stream.
Service Quality
LSL’s estate agency businesses place strong emphasis on the
quality of service they provide to customers and are founder
members of the Ombudsman for Estate Agents Scheme. All
branch based employees of the estate agency business complete
a specially designed training programme and the quality of service
is monitored on a monthly basis.
Competition
LSL’s major competitors in the estate agency market vary from
national estate agency chains such as Countrywide and Halifax
Estate Agencies to local independent estate agents. It is estimated
that the top five estate agency chains, including LSL, account for
circa 20% of all estate agency branches in the UK, regional chains
account for a further 10%, and independents make up the rest.
property-careers.com
property-careers.com (it changed its registered name from
homeinspectors.co.uk to property-careers.com in March 2007
and continues to use homeinspectors.co.uk as a trading name)
is now regarded as a leading provider of training services to
individuals wishing to become Home Inspectors (trading here
as homeinspectors.co.uk) and more latterly Domestic Energy
Assessors.
In addition, property-careers.com also provides panel
management services to HIP suppliers in relation to the supply
of Energy Performance Certificates and the management of
Domestic Energy Assessors, trading as the energy-portal.
First Complete
First Complete is a brand that has been developed to supply
lettings management services (trading as LSL Corporate Client
Department) and an auctions business (trading as Baxtons). Both
of these businesses were launched in 2007, and in January 2008
the business launched a repossession services business and is
currently developing a tenant, landlord and guarantor referencing
service (trading as First Complete Referencing).
LSLi
This business was launched in early 2007 and is the primary
vehicle through which LSL is pursuing its strategy to acquire
small to medium independent estate agency businesses. In 2007,
it acquired the following estate agency businesses and has a
network of 16 branches based in the home counties:
ICIEA Limited, trading as “Intercounty” (acquired in February
2007 – 9 branches)
David Frosts Estate Agents Limited, trading as “Frosts”
(acquired in July 2007 – 3 branches)
JNP (Estate Agents) Limited, trading as “The JNP
Partnership” (acquired in September 2007 – 4 branches)
Annual Report and Accounts 2007
11
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Financial Services Division Business Review
Financial Services — Competitive
Strengths & Growth Opportunities
Growth of 10% in mortgage applications from £3.00bn to
£3.31bn
Strong relationships with a broad panel of lenders.
Further mortgage growth opportunities in Linear as a result
of placing financial consultants in independent agencies.
Linear Financial Services and Linear Mortgage Network (together Linear) are brands placing mortgage advisors in the offices of Group agencies,
franchisees and independent estate agents. The Linear brands will lose money whilst in their growth phase. Overall the business performance is
in line with our plans.
Key Performance Indicators:
Financial Services
Turnover
Underlying Operating Loss
Financial Consultant Numbers
Mortgages applications value
2007
2006
% Change
£22.6m
(£0.9m)
328
£3.31bn
£20.8m
(£0.8m)
312
£3.00bn
8.2%
-13.9%
5.1%
10.0%
12
Annual Report and Accounts 2007
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Financial Services Division Business Review
Financial Services
Performance
The Group has continued to invest in
additional financial consultants during the
year. As at 31 December 2007, LSL had 328
(2006: 312) branch based financial consultants
employed by Your Move, Reeds Rains and
Linear. The financial services business seeks
to enhance the revenue derived from the
estate agency operations through the sale of
mortgages and related protection products.
In return LSL receives a combination
of commissions on product sales and
procuration fees from lenders.
The value of mortgage applications has
increased by 10% to £3.31bn (2006: £3.00bn),
making LSL one of the largest mortgages
intermediaries in the UK.
Regulation
Your Move and First Complete are directly
authorised by the FSA in relation to the
sale of mortgage, pure protection and
general insurance products, while all of
the other estate agency businesses and
Linear are appointed representatives of
Openwork. Reeds Rains is also an appointed
representative of Letsure for the sale of rent
indemnity insurance. LSL’s financial services
business places strong emphasis on the
quality of service it provides to customers and
all advisers complete a specially designed
comprehensive training programme which
is supplemented by effective supervision,
regular monitoring and regular refresher
training sessions. As a result of Reeds Rains’
and Linear’s appointments by Openwork, LSL
through those companies has a small indirect
shareholding of Openwork.
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Annual Report and Accounts 2007
13
Financial Review Business Review
The key drivers of the financial performance of LSL are summarised below.
Taxation
The effective rate of corporation tax including
the deferred tax adjustment to goodwill for the
year is 29.5% (2006: 30.4%).
Adjusted Proforma Earnings
Per Share
The Adjusted Proforma Earnings Per Share
(as defined in the Definitions section) is
23.3p (2006: 19.8p). The directors consider
this provides a better and more consistent
indicator of the Group’s underlying
performance as the Group’s capital structure
changed at flotation in November 2006.
Income statement
Revenue
Revenue increased by 10.9% in the year ended
31 December 2007 to £219.5m (2006: £198.0m).
The increase was supported by a contribution
from Barnwoods of £11.4m and market share
growth within surveying.
Operating Expenses excluding
exceptional costs and
amortisation
Operating expenses increased by 10.3% to
£184.1m (2006: £166.9m). Excluding Barnwoods,
expenses are up 6.7% reflecting the additional
costs from estate agency acquisitions and the
survey and administration headcount growth
within e.surv as a result of the contract win
from Barclays.
Underlying Operating Profit
Underlying Operating Profit was £36.5m (2006:
£32.3m) up by 13.0% on 2006. This results in
a continued improvement in the Underlying
Operating Profit margin from 16.4% to 16.6%.
Exceptional Costs &
Amortisation
Exceptional costs in the year ended 31
December 2007 amounted to £1.4m (2006:
£3.5m). These costs related to redundancy
and closure costs incurred in the last quarter
of 2007 and included the impairment of assets
within our conveyancing business, Homefast.
net Financial Costs
Net financial costs amounted to £2.7m (2006:
£4.2m). Net financial costs for 2007 included
investment income from Hometrack of £0.4m
(2006: nil). The 2006 net financial costs figure
included a one off dividend payment of £1.3m
relating to B shares in issue prior to flotation.
14
Annual Report and Accounts 2007
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International Financial
Reporting Standards (IFRS)
The Financial Statements have been prepared
under IFRS. LSL commenced reporting under
IFRS from 1 January 2005.
S D Embley
Group Chief Executive Officer
D A Fielding
Group Finance Director
Balance Sheet
Capital Expenditure
Total capital expenditure in the year amounted
to £2.4m (2006: £2.1m). The capital expenditure
predominantly comprised investment in IT
development and branch refurbishment.
Financial Structure
As at 31 December 2007 the Net Debt of LSL
was £48.7m (2006: £34.2m). This reflects a one
off payment for the C&G contract of £30.2m,
the purchase of treasury shares of £2.4m
and the acquisition of other subsidiaries
(including deferred consideration, but net of
cash acquired) of £6.7m. LSL has a £95.0m
revolving credit facility in place providing
some flexibility for acquisitions. This gives a
Net Debt to Underlying Operating Profit ratio
of 1.3 to 1 (2006: 1.1 to 1).
Cash Flow
The business is highly cash generative and
has low capital expenditure requirements.
Net cash inflows from operating activities
amounted to £29.4m (2006: £30.3m).
net Assets
The net assets as at 31 December 2007 were
£42.9m (2006: £26.0m).
Treasury & Risk Management
LSL has an active debt management policy
and has purchased an interest rate cap,
which expires in August 2009 and restricts
LIBOR to 6% for £30.0m of debt. LSL does not
hold or issue derivatives or other financial
instruments for trading purposes.
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Annual Report and Accounts 2007
15
Director Profiles
3
5
7
its turnaround from a heavily loss-making
business to the successful business it is
today. His previous experience includes
establishing Norwich Union’s pensions
business in Poland for eighteen months and
in 2000 he was a director of Norwich Union
Wealth Management.
Peter Hales
5
Independent non executive director, aged
64. Peter has been on the Board of LSL since
2005, originally as non executive Chairman.
Peter has 44 years’ experience in the
residential property sector. From 1994 to 2004
Peter worked for Countrywide Surveyors
initially as chief executive and latterly as
chairman. He has also worked in senior
management roles for Nationwide, Anglia, the
Council of Mortgage Lenders and RICS.
Roger Matthews
6
non executive Chairman, aged 53. Roger
was appointed Chairman of the Board on
11 October 2006. Since July 2005 Roger has
been chairman of Land of Leather Holdings
plc and is also a non executive director of
MITIE Group plc. He was formerly chairman of
Sainsbury’s Bank plc, group finance director
of J Sainsbury plc, managing director and
finance director of Compass Group plc and
worked for Grand Metropolitan plc, Cadbury
Schweppes plc and PricewaterhouseCoopers.
Roger is a Chartered Accountant.
Mark Warburton
7
Independent non executive director, aged
57. Mark was appointed as a non executive
director of the Board in October 2006, having
been a non executive director of Reeds Rains
since September 2003 and Your Move since
April 2006. Mark has 27 years’ experience
as a solicitor and wide practical experience
in corporate finance and banking. Mark is
currently general manager, legal counsel
and company secretary to an AIM quoted
company, Cyprotex Plc, a position which
he has held since 2003. From November
1999 to January 2002 Mark was a partner at
Addleshaw Booth & Co. He holds a number
of positions in private companies in property
construction, self storage and sports
equipment businesses.
1
2
4
6
Paul Latham
1
Deputy Group Chief Executive Officer of LSL
and responsible for the Group’s surveying
division, aged 52. Paul was appointed as
Managing Director of e.surv in 2000. At the
time of the management buy-out in 2004, Paul
became the Deputy Chief Executive Officer
of LSL. Paul has overall responsibility for the
performance of the Group’s surveying division.
Since 2000 he has overseen the development
of the surveying divisions into the UK’s largest
distributor of residential valuations. Paul holds
an honours degree from the University of
Reading and is a qualified Chartered Surveyor
and sits on the Royal Institute of Chartered
Surveyors Residential Faculty Board. He is
also recognised by customers as a leading
exponent of technology solutions to provide
real estate valuation advice to financial
institutions.
Dean Fielding
2
Group Finance Director aged 42. Dean has
been with LSL since 1995 when he joined GA
Property Services, the previous name under
which Your Move operated, as a management
accountant in residential sales. In March 2002
Dean became the finance director of Your
Move and e.surv, two of LSL’s subsidiaries.
Dean became Group Finance Director at the
time of the management buy-out in 2004. Dean
16
Annual Report and Accounts 2007
is responsible for the financial strategy and
ensuring that LSL maintains strong systems
and internal controls. Dean is a Chartered
Accountant.
Mark Morris
3
Senior Independent non executive director,
aged 47. Mark was appointed as a non
executive Director of the Board in October
2006 and as the Board’s Senior Independent
Director in October 2007. Mark is a Chartered
Accountant and is currently non executive
director and audit committee chairman at
Maxima Holdings plc. Mark previously worked
at Sytner Group as finance director and
managing director from 1995 to 2005 including
the period during which Sytner was listed
on the London Stock Exchange, and was
responsible for their extensive acquisition
programme. Prior to this Mark spent 12 years
with PricewaterhouseCoopers in audit and
corporate finance.
Simon Embley
4
Group Chief Executive Officer, aged 47. Simon
became the Chief Executive Officer of the
Board at the time of the management buy-
out of e.surv and Your Move from Norwich
Union in 2004. Simon is responsible for the
strategic direction of LSL. From 2001 until the
management buy-out, Simon was managing
director of Your Move, where he oversaw
c97948.indb 16
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Investor Information
Company details
LSL Property Services plc
Registered in England (Company Number 5114014)
Registered Office:
Newcastle House, Albany Court, Newcastle Business Park, Newcastle upon Tyne, NE4 7YB
Telephone 01904 715324
Facsimile 01904 715354
E-mail enquiries@lslps.co.uk
Website www.lslps.co.uk
Share listing
LSL Property Services plc 0.2p ordinary shares are listed on the London Stock Exchange under ISIN GB00BIG5HX72.
Registrar
Capita Registrars
Northern House
Woodsome Park
Fenay Bridge
Huddersfield
HD8 0LA
United Kingdom
Telephone 0871 664 0300 (calls cost 10p per minute plus network extras)
Facsimile 01484 600911
Website www.capitaregistrars.com
Email shareholder.services@capitaregistrars.com
If you move, please do not forget to let the Registrars know your new address.
Provisional calendar of events
Preliminary Results Released
AGM Proxy Form Deadline
AGM
Proposed Dividend Payment Date
(payable to those on register at 25 March 2008)
27 February 2008
2.30pm 21 April 2008
2.30pm 23 April 2008
30 April 2008
The AGM will be held at the offices of Buchanan Communications, 45 Moorfields, London, EC2Y 9AE. The notice to shareholders details the proposed
resolutions.
In accordance with its Articles of Association, LSL publishes shareholder information, including notice of AGMs and the Annual Report and accounts on
its website, www.lslps.co.uk. Reducing the number of communications sent by post not only results in cost savings to LSL, it also reduces the impact that
unnecessary printing and distribution of reports has on the environment.
At the 2007 AGM, a resolution was passed to amend LSL’s Articles of Association to take full advantage of the provisions in the Companies Act 2006 in relation
to electronic communications. In particular, the provisions enable all communications between the shareholders and LSL to be made in electronic form.
Documents will be supplied via LSL’s website to shareholders who have not requested a hard copy, or provided an e-mail address to which documents of
information may be sent. Where a shareholder has consented to receive information via the website, a letter will be sent to the shareholder on release of any
information directing them to the website.
If a shareholder wishes to continue to receive hard copy documents they should contact Capita Registrars (details above).
Annual Report and Accounts 2007
17
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Report of the Directors
Principal Activities
LSL Property Services plc is the holding company for a number of residential property services related businesses. The Group’s principal activities are estate
agency, property management, surveying and financial services.
Business Review & Development
The Chairman’s Statement and the Business Review set out a review of the business including details of LSL’s performance and development.
Annual General Meeting
The AGM will be held at the offices of Buchanan Communications, 45 Moorfields, London, EC2Y 9AE on 23 April starting at 2.30pm.
In addition to the ordinary business of an annual general meeting, the business of the AGM will include resolutions proposing amendments to the Company’s
Articles of Association as a result of the implementation of the Companies Act 2006. Full details are set out in the Notice to AGM.
The notice convening the AGM is in a separate circular to be sent to shareholders. The document also includes a commentary on the business of the AGM
and notes to help shareholders to attend, speak and/or vote at the AGM.
Results & Dividends
The Business Review and Financial Statements set out the results of LSL.
An interim dividend of 3.00p per share was paid on 17 September 2007. The directors are recommending the payment of a final dividend of 3.86p per share. If
approved by the shareholders at the AGM, the final dividend will be paid on 30 April 2008 to those shareholders on the register at the close of business on
25 March 2008. The total dividend paid for the year will be 6.86p per share.
Employees
The Group’s practice is to keep all of our employees informed on matters affecting them, through consultation and information on the general financial and
economic factors affecting the Group’s performance.
The Group has an equal opportunities policy so that all job applicants are treated fairly and without favour or prejudice throughout selection, recruitment,
training, development and promotion.
The Group’s policy on disabled employees is discussed in the Corporate Social Responsibility Statement.
Risks & Uncertainties
The executive directors continually identify, evaluate and manage material risks and uncertainties faced by LSL which could adversely affect the business,
operating results and the financial condition of LSL. These risks are recorded and managed through a risk register, and the principal risks and uncertainties
identified are:
l
l
l
l
l
l
l
l
l
l
The volatility and uncertainty of the UK housing market. In particular transaction volumes which will impact the performance of all key brands.
Loss of key surveying clients or significant reduction in volumes either as a result of adverse market conditions, market consolidation, competition or
inadequate service delivery.
The development of alternative products and services in competition with traditional estate agency and surveying services, such as Automated
Valuation Models and supermarket property web-sites.
Liability for negligent provision of services to customers (e.g. inaccurate surveys).
Failure or interruptions of information technology systems upon which the Group is reliant for operational performance and financial information.
Changes in legislation or regulation may impact on business results and may have an adverse effect on the UK housing market.
The reputation and profitability of LSL could be adversely affected by the actions of one or a limited number of employees or franchisees.
Inappropriate acquisitions or failure to successfully integrate into the Group.
Loss of any licences of permission necessary for the performance of the Group businesses.
HMRC may reduce the tax deductions historically used by LSL, increasing LSL’s tax liability. In addition, HMRC may change its practice or enact
legislation affecting the classification within LSL’s surveying divisions’ self employed surveyors, increasing LSL’s tax liability.
Further information relating to the management of these risks and uncertainties is set out in the Corporate Governance Report.
18
Annual Report and Accounts 2007
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Financial Instruments
The Business Review sets out LSL’s strategies and objectives relating to treasury and risk management. Details of the financial instruments are set out in note
28 of the Accounts.
Directors
The current directors are listed with their biographies in Directors’ Profiles. There were no appointments or resignations of directors between 1 January 2007
and the date of this report.
In accordance with the Articles of Association, Simon Embley, Dean Fielding and Mark Morris will retire at the AGM and, being eligible, intend to stand for
re-election. The biographical details for all directors including Simon Embley, Dean Fielding and Mark Morris are set out on page 16 of this Report. During the
2007 board effectiveness review, the performance of Simon Embley, Dean Fielding and Mark Morris was specifically evaluated and the board confirmed that
it values the experience and commitment to the business demonstrated by each of these individuals.
The Board may appoint an individual to act as a director, but anyone so appointed will retire from office at the next AGM and seek election. LSL may by
ordinary resolution elect or re-elect an individual as a director.
Directors’ Interests
The interests of the current directors in the ordinary shares at the beginning of the financial period, or their date of appointment if later, and at the end of the
financial period are set out below:
NAME
Simon Embley
Dean Fielding
Peter Hales
Paul Latham
Roger Matthews
Mark Morris
Mark Warburton
shares at
01/01/2007
7,587,750
6,070,200
–
6,828,975
49,382
17,283
4,983
% of
Issued
share
capital
7.28%
5.83%
–
6.56%
0.05%
0.02%
0.00%
shares at
31/12/2007
7,884,074
6,111,876
–
6,909,167 7
86,882
27,283
7,438
% of
Issued
share
capital
7.57%
5.87%
–
6.63%7
0.08%
0.03%
0.01%
7 Paul Latham’s holding includes shares acquired by his children during 2007.
In addition to the above, Simon Embley acquired an option to acquire 4,648 ordinary shares in 2010 at a price of £1.74 per share as part of LSL’s Save as You
Earn scheme which started in January 2007.
Details of the executive directors’ service agreements and the non executive directors’ letters of appointment are set out in the Remuneration Report.
There have been no changes in director’s shareholdings between the period ended 31 December 2007 and the date of this report.
No director was materially interested in any contract during the financial period that is or was significant to the business of the Group or any subsidiary
undertaking.
Auditors
Ernst & Young LLP are the external auditors of the Group and their reappointment to this role and the authority for their remuneration to be determined by the
directors will be proposed at the AGM.
Details of LSL’s policy designed to safeguard the independence and objectivity of the external auditor are included in the Corporate Governance section of
this report.
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Annual Report and Accounts 2007
19
Report of the Directors (continued)
Share Capital
LSL 0.2 pence ordinary shares are listed on the London Stock Exchange and are the only class of shares in issue. Each issued share has the same rights
attached to it as every other issued share; the rights of each shareholder include the right to vote at general meetings, to appoint a proxy or proxies, receive
dividends and receive circulars from LSL.
Details of share capital are set out in note 23 of the Accounts. There have been no changes to the share capital during 2007. A renewal of the authority for the
directors to allot unissued ordinary shares and a renewal of their power to dis-apply statutory pre-emption rights will be proposed at the AGM.
Shareholders
As at 25 February 2008, the shareholders set out below have notified LSL of their interest in 3% or more of the issued ordinary shares:
Institutions
BPE General Partner Limited
Barclays Industrial Investment
Morstan Nominees Limited
State Street Nominees Limited
Hanover Nominees Limited
Individuals (excluding executive directors)
Nature of holding
Number of 0.2 pence
ordinary shares
% of issued
shares
Beneficial Owner
Beneficial Owner
Registered Holder
Registered Holder
Registered Holder
9,516,978
5,273,586
19,997,553
11,836,268
3,168,472
9.14%
5.06%
19.20%
11.36%
3.04%
David Newnes
Registered Holder & Beneficial Owner
5,418,171
5.20%
Employee Share Scheme
LSL have appointed Capita Trustees Limited to operate the LSL Property Services plc Employee Share Scheme (Trust) which was established prior to LSL’s
flotation in 2006. The Trust is able to acquire and to hold shares to satisfy options or awards granted under any discretionary share option scheme or long
term incentive arrangement operated by LSL. Details of the shares acquired by the Trust are set out in note 24 of the Accounts.
The Trustees of the Scheme have waived the right to any dividend payment in respect of each share held by the Scheme.
Employee Share Incentive Plan
LSL have appointed Capita Trustees Limited to operate the LSL Property Services plc Employee Share Incentive Plan (Buy as You Earn) (Plan) (Trust) which
was launched in January 2008. The Trust is able to acquire and hold shares on behalf of employees.
Charitable & Political Donations
LSL Group companies in total made charitable donations of £5,647 (2006: £15,691) during the financial period. No political contributions were made during the
financial period.
Creditors & Supplier Payment Policy
LSL’s normal terms are to make payment in accordance with suppliers’ terms of trade or within 30 days from the receipt of services or invoices subject to
satisfactory performance by the supplier. At 31 December 2007, LSL Property Services plc had no trade creditors outstanding. The payment terms of individual
operating subsidiaries are disclosed in their accounts.
Going Concern
After making appropriate enquiries the directors consider that LSL Property Services plc and the Group have adequate resources to continue in operational
existence for the foreseeable future and for this reason have continued to adopt the going concern basis in preparing the Financial Statements.
20
Annual Report and Accounts 2007
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Disclosure of Information to Auditors
Having made enquiries of fellow directors and of the external auditors, each of the current directors confirms that:
l
to the best of his knowledge and belief, there is no information relevant to the preparation of this report of which the external auditors are unaware, and
l
he has taken all the steps a director might reasonably be expected to have taken to be aware of relevant audit information and to establish that the
external auditors are aware of that information.
Directors’ Qualifying Third Party Indemnity Provisions
The Company had qualifying third party indemnity provision for the benefit of the directors in force from the start of the financial period to the date of this
report, subject to the conditions set out in the Companies Act 1985. LSL has put in place ‘Directors & Officers Liability’ insurance to cover for this liability.
Post Balance Sheet Event
LSL announced its intention to cease trading as a provider of conveyancing services on 20 February 2008. It will continue to provide conveyancing referrals to
its panel of law firms.
Additional information for shareholders
The following provides the additional information required for shareholders as a result of the implementation of the Takeovers Directive into UK Law.
Share Capital
At 31 December 2007, LSL’s issued share capital comprised 104,158,950 £0.2p Ordinary Shares. The authorised share capital is 500,000,000 Ordinary Shares of
£0.2p each.
Other than the lock up agreement entered into by senior managers and the directors at admission, LSL is not aware of any agreements between shareholders
that may result in restrictions on the transfer of securities or on voting rights. The lock up agreement (full details of which were set out in the prospectus
issued in November 2006) expires in November 2008.
Ordinary shares
On a show of hands at a general meeting of the Company every holder of ordinary shares present in person and entitled to vote shall have one vote and on
a poll, every member present in person or by proxy and entitled to vote shall have one vote for every ordinary share held. The notice of the AGM, specifies
deadlines for appointing a proxy in relation to resolutions to be passed at general meeting. Where the Chairman of the AGM is appointed as proxy, such proxy
votes are counted and the numbers for, against or withheld in relation to each resolution are announced at the annual general meeting and published on LSL’s
website after the meeting (www.lslps.co.uk).
There are no restrictions on the transfer of ordinary shares in the Company other than:
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certain restrictions which may from time to time apply under applicable laws and regulations (for example, insider trading laws and market requirements
relating to close periods) and;
pursuant to the Listing Rules of the Financial Services Authority whereby certain employees of the Company require the approval of the Company to deal
in the Company’s securities.
LSL’s Articles of Association may only be amended by a special resolution at a general meeting of the shareholders.
Directors of the Company who stand for re-election at the AGM may be reappointed by ordinary resolution of the shareholders. The Board can appoint a
director outside of a general meeting but anyone so appointed must be elected by an ordinary resolution at the next general meeting. Any director who has
held office for more than three years since their last appointment must offer themselves up for re-election at the annual general meeting.
Company share schemes
The LSL Property Services plc Employee Benefit Trust holds 0.19% of the issued share capital of the company in trust for the benefit of employees of the
Group and their dependents. The voting rights in relation to these shares are exercised by the trustees.
Substantial Shareholdings
These details are set out at pages 19 and 20 of this report.
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Annual Report and Accounts 2007
21
Report of the Directors (continued)
Change of control
The Company is not party to any agreements which take effect, alter or terminate upon a change of control of the Company following a takeover bid.
There are no agreements between the Company and its directors or employees providing for compensation for loss of office or employment (whether through
resignation, purported redundancy or otherwise) that occurs because of a takeover bid.
The Group is party to a number of banking agreements which upon a change of control of the Group are terminable by the bank and all outstanding amounts
become immediately due and payable.
Approved by and signed on behalf of the Board of Directors
Sapna Bedi
Company Secretary
27 February 2008
22
Annual Report and Accounts 2007
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Corporate Governance Report
Combined Code
The directors recognise the value and importance of meeting the standards of corporate governance set out in the Combined Code. This part of the report
describes the corporate governance arrangements that are in place.
As at 31 December 2007, LSL complied with the provisions of the Combined Code in all respects. In the 2006 Annual Report and Accounts, the directors
explained that in the period between flotation (November 2006) and the date of the Annual Report and Accounts (February 2007) LSL had complied with the
Combined Code in all respects save for the following and gave a commitment to address these matters in 2007:
(a) board evaluations (principle A6); and
(b)
the appointment of a senior independent director (principle A1).
Mark Morris was appointed as the senior independent director on 24 October 2007 and during the year the directors undertook an evaluation on the
performance of the board. This included an evaluation of the board, the board committees and of individual directors to ensure that the directors remain
individually and collectively effective. The evaluation process involved discussions between each director and the Chairman and meetings of the board and
the non executive directors (including discussions without the Chairman present to appraise his performance). The non executive directors evaluate the
Chairman’s performance, after taking into account the views of the executive directors. No significant issues requiring action arose from these evaluations.
The Board
The Board has seven members and it comprises the Chairman, three executive directors and three independent non executive directors. The directors are
listed with their biographies in Directors’ Profiles. There is a clear division of responsibilities between the Chairman whose key responsibility is the effective
running of the Board, and the Chief Executive, whose key responsibility is the running of the business.
When Roger Matthews was appointed Chairman he was deemed to be independent under the provisions of the Combined Code; his only other significant
commitment was chairman of Land of Leather plc. Since then he has also become a non executive director of MITIE Group plc.
Copies of the executive directors’ service agreements and of the non executive directors’ letters of appointment are available for inspection at the Registered
Office during normal business hours and at each AGM.
Each newly appointed director received an induction on the responsibilities of a listed public company director and/or on LSL’s business. Thereafter, LSL
provides the necessary resources for developing this understanding and knowledge.
During 2007 the board met 11 times and the attendance of each of the directors at these meetings as a director or a committee member are set out below.
During 2008 the board is scheduled to meet 11 times and additional meetings will be held as required.
During 2007 the non executive directors and the Chairman collectively met twice without the executive directors being present and it is the intention that this
will be repeated in 2008.
Director
Roger Matthews
Simon Embley
Paul Latham
Dean Fielding
Mark Morris
Peter Hales
Mark Warburton
Board
Audit
Committee
Remuneration
Committee
Nominations
Committee
11
11
11
11
11
11
11
–
–
–
–
4
4
4
1
–
–
–
4
4
4
2
–
–
–
2
2
2
In accordance with the Articles of Association, Simon Embley, Dean Fielding and Mark Morris will retire at the AGM, and, being eligible, are intending to
stand for re-election at the meeting. At each subsequent AGM, all directors appointed since the previous AGM and circa one-third of the remaining directors,
including any director who has not been elected or re-elected at either of the two preceding AGMs, will retire by rotation and may seek re-election. The
Board can appoint a director outside of a general meeting but anyone so appointed must be elected by an ordinary resolution at the next general meeting.
The Board is primarily responsible for decisions on Group strategy, including approval of strategic plans, annual budgets, interim and full year financial
statements and reports, dividend and accounting policies and all material capital projects, investments and disposals, and the monitoring of financial
performance against budget and forecast. There is a schedule of matters reserved for the Board which will is reviewed regularly.
The Board has adopted principles of good boardroom practice which set out procedures on how directors are given accurate, timely and clear information
and how they can seek and obtain information or advice necessary for them to discharge their duties.
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Annual Report and Accounts 2007
23
Corporate Governance Report (continued)
Board Committees
The Board has delegated specific responsibilities to three standing Committees of the Board: Audit, Nominations and Remuneration. The membership of
these Committees and a summary of their main duties under their terms of reference are set out below. The full terms of reference may be viewed on LSL’s
website (www.lslps.co.uk). It is the intention that the Chairman of each of the Committees will attend the AGM to answer any questions.
Audit Committee
The Audit Committee is chaired by Mark Morris and its other members are Peter Hales and Mark Warburton. It met four times in 2007 and is expected to meet
four times in 2008. LSL’s internal and external auditors, the Chairman, the Chief Executive and the Group Finance Director may attend and speak at meetings of
the Audit Committee. The Board is satisfied that Mark Morris has recent and relevant financial experience as is required by the Combined Code.
The Audit Committee met with the auditors without the executive directors being present twice during 2007.
The duties of the Audit Committee include monitoring the integrity of LSL’s financial statements, reviewing the effectiveness of the internal control and risk
management systems, reviewing procedures for handling any internal allegations, overseeing the internal audit function, overseeing the relationship with the
external auditor, and reviewing the scope and results of audits.
To guard against the objectivity and independence of the external auditors being compromised, the Audit Committee has adopted a policy under which any
service provided by the external auditors must be approved by the Committee or be within a pre-approved category and a pre-approved fee limit.
The policy stipulates restrictions and procedures in relation to the allocation of non audit work to the auditor. These include categories of work which cannot
be allocated to the auditor, and categories of work which may be allocated to the auditor, subject to certain provisions as to materiality, nature of work, or the
approval of the Audit Committee. The Audit Committee is kept informed of the fees paid to the auditor in all capacities.
The split between audit and non audit fees for 2007 appears at note 9 to the Accounts. The non audit fees related to due diligence services on acquisition of
C&G contract, Intercounty and reporting on banking covenants . The amount and nature of non audit fees are considered by the Committee not to affect the
independence or objectivity of the external auditor.
nominations Committee
Roger Matthews is the Chairman of the Nominations Committee and the other members of the Committee are Mark Morris, Peter Hales and Mark Warburton.
The Committee met twice in 2007.
The duties of the Nominations Committee include reviewing the structure, size end composition of the Board, reviewing succession plans for the directors,
and making recommendations to the Board on membership of the Board and of its Committees.
The current non executive directors were appointed by the executive directors as part of the flotation process. The non executive directors were selected for
their mix of legal, financial, surveying and residential property services experience.
Remuneration Committee
The Remuneration Committee is chaired by Peter Hales and its other members are Mark Morris, Mark Warburton and Roger Matthews (since December
2007). During 2007 it met four times. Simon Embley, the CEO, attended all of the meetings in an advisory capacity but he was not present when his
remuneration was discussed. In addition, the Group HR Director assisted the Committee in its deliberations during this period and commenced attending
Committee meetings from December 2007.
The Remuneration Committee has responsibility for determining, within agreed terms of reference, LSL’s policy on the remuneration of senior executives
and specific remuneration packages for executive directors, including pension rights and compensation payments. It is also responsible for making
recommendations for grants of options under the employee share schemes. The Remuneration Report provides details of how the Committee has discharged
these duties.
The remuneration of non executive directors is a matter for the Board. No director or manager may be involved in any decisions as to their own remuneration.
Relations with Shareholders
LSL maintains a dialogue with institutional shareholders through individual meetings with senior management and the views of shareholders expressed
during these meetings are reported to the Board. The main opportunity for non-institutional shareholders to question the directors is at general meetings
and it is the intention of each of the directors to attend the AGM to be held at Buchanan Communications, 45 Moorfields, London EC2Y 9AE on 23 April 2008,
starting at 2.30pm.
Information about LSL may be viewed at any time on LSL’s website (www.lslps.co.uk).
Both the Chairman (Roger Matthews) and the Senior Independent Director (Mark Morris) are available to meet with shareholders to discuss any issues or
concerns. They can be contacted via the Company Secretary’s office (details on page 17).
Model Code
LSL complies with a code of securities dealings in relation to its ordinary shares which is consistent with the Model Code published in the Listing Rules. This
code applies to the directors and relevant employees of LSL.
24
Annual Report and Accounts 2007
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Internal Controls
The Board has overall responsibility for LSL’s system of internal controls and for reviewing its effectiveness. The system of internal control is an ongoing
process designed in accordance with the guidance of the Turnbull Committee on ‘Internal Control’ to identify, evaluate and manage significant risks faced
by LSL. Its aim is to manage, rather than eliminate, the risk of failure to achieve business objectives and can provide only reasonable, and not absolute,
assurance against material misstatement or loss. The internal controls are also in place to safeguard shareholder investment and LSL’s assets.
During 2007 the executive directors have continually identified, evaluated and managed material risks and uncertainties faced by LSL which could have
adversely affected LSL’s business, operating results and financial condition. The effectiveness of the internal control system and risk management process is
kept under review by the Audit Committee and has been reviewed by the Board. The principal risks and uncertainties facing LSL are set out in the Report of
the Directors.
LSL operates a management structure with delegated authority levels and functional reporting lines and accountability. It also operates a budgeting and
financial reporting system which compares actual performance to budget and to the previous year on a monthly basis. In addition, the executive directors
receive daily information on sales activity and weekly information on key result areas. All capital expenditure and other purchases are subject to appropriate
authorisation procedures.
The Group has an internal audit team which regularly submits reports to the Audit Committee and this, together with the internal controls system and risk
management process in place within LSL, allows the Board to monitor financial and operational performance and compliance with controls on a continuing
basis and to identify and respond to business risks as they arise.
Approved by and signed on behalf of the Board of Directors
Sapna Bedi
Company Secretary
27 February 2008
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Annual Report and Accounts 2007
25
Directors’ Remuneration Report
Details of the Remuneration Committee composition and responsibilities are set out in the Corporate Governance Report.
The Remuneration Committee has considered in the financial period matters relating to the remuneration of the Chairman and the directors.
Remuneration Policy
LSL strategy has been designed to create shareholder value and the aim of LSL’s remuneration policy is to attract, retain and motivate directors with the
experience and skills necessary to deliver that strategy and to run LSL successfully.
Directors who held shares at the time of flotation have retained significant interests in LSL’s shares and will derive a proportion of their regular income from
dividends and long–term income through the increase in the price of these shares. For these reasons the interests of these directors are closely aligned with
the interests of the other shareholders.
The payment of basic salaries, other cash and benefits are not related to performance. The payment of bonuses and the exercise of long–term incentives are
related to performance, as set out below.
The remuneration of the Chairman and non executive directors is a matter for the Board. No director may be involved in any decisions as to their own
remuneration.
Fees
The non executive directors’ fees were fixed at the time of flotation and are reviewed periodically by the Board. With effect from 1 January 2008 Mark
Morris’s remuneration was increased from £35,000 to £40,000 in recognition of his role as chair of the Audit Committee and Senior Independent Director. The
remuneration payable to Roger Matthews, Mark Warburton and Peter Hales remains at current levels.
None of the executive directors hold non executive directorships of any other companies other than to represent the minority interests of the Group. No
remuneration is received in relation to this.
Executive Directors’ Salaries
The basic salaries for 2007 of the executive directors are:
Simon Embley
Paul Latham
Dean Fielding
£180,000
£140,000
£125,000
Details of the directors’ emoluments for 2007 are summarised in the table over the page (see Directors’ Emoluments Table). Salaries are reviewed annually
but there is no obligation to make any increase. The basic salaries were not increased at the beginning of 2008 but will be reviewed at the end of the first half
of 2008.
Performance Bonuses
Where bonuses are granted, the Remuneration Committee will set out the maximum amount that may be earned and the performance conditions that must be
achieved before payment is made. These conditions will be relevant, stretching and designed to enhance shareholder value.
The executive directors were awarded bonus payments equivalent to 50% for their basic salary for 2007.
A bonus arrangement has been put in place for the executive directors for 2008. Under the arrangement the maximum bonus payable to each of the executive
directors will be equal to 100% of basic salary over the period. The performance target is based on LSL’s budgeted Underlying Operating Profit after payment
of bonus.
The bonus reduces on a sliding scale down to 0% of basic salary for a performance of 6% below budgeted Underlying Operating Profit. The payment of any
bonus is discretionary and will be awarded by the Remuneration Committee.
Long–term Incentives
A number of senior management employees including the executive directors currently own approximately 34% of LSL, and these employees are subject to
a minimum two–year lock–in commencing on the date of listing (November 2006). LSL has also established a long term incentive plan to ensure that all key
employees are properly incentivised and fully committed to the long term growth of the business. Where options are granted the Remuneration Committee
will determine the individual grants and criteria that must be achieved before options are exercised on a case to case basis. These criteria will be stretching
and challenging. Prior to flotation, three employees received a grant of options under this scheme, which in total amounted to 130,512 options. During 2007,
two further options were granted amounting to a total of 65,103. The 2007 awards are subject to a vesting period of 3 years and are conditional upon LSL
achieving an earnings per share of at least 10% per annum during the three year vesting period.
While a Deferred Bonus Plan was adopted by the Board in November 2006, no awards have been granted under this plan to date.
26
Annual Report and Accounts 2007
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Executive Directors’ Pensions
The executive directors’ pension scheme is a money purchase scheme and the aggregate amount set aside by LSL to provide pension, retirement or similar
benefits in relation to the executive directors in the financial year ended 31 December 2007 was £30,104 (2006: £29,665). This was made up as follows: Simon
Embley £14,250 (2006: £12,648); Dean Fielding £8,854 (2006: £9,300); and Paul Latham £7,000 (2006: £7,717).
Director Appointments
Executive Director Service Arrangements
The executive directors have entered into service agreements with LSL, under which they are to remain employed on an ongoing basis, summaries of which
are set out in the table below.
Continuous
Employment
Since
Notice
Period
(both parties)
Pension
Car Allowance
Holiday
Simon Embley (Group CEO)
Dean Fielding (Group FD)
31.08.1993
01.05.1995
Paul Latham (Group Deputy CEO)
21.11.1987
9 months
6 months
9 months
£14,250
Allowance (£10,000 p/a)
30 days
£8,854
£7,000
Allowance (£8,500 p/a)
30 days
Company Car
30 days
Each of the service agreements allows LSL to place the director on ‘garden leave’ for a maximum period of six months in the event the director has given, or
is given, notice to terminate their employment. Each of the agreements also provides for the relevant executive director to receive medical insurance, life
assurance and permanent health insurance as well as a discretionary bonus (see Performance Bonuses above for details relating to bonus awards). None
of the executive directors is entitled to any benefit on termination of his service agreement other than contractual benefits to be provided during any notice
period.
non Executive Director Appointment Arrangements
non–Executive Director Date of Appointment
Roger Matthews
Peter Hales
Mark Morris
Mark Warburton
11 October 2006
1 February 2005
11 October 2006
11 October 2006
Each of the non executive directors have letters of appointment, which were issued by LSL on appointment and which became effective on admission. The
fees due for such appointments are detailed in the Directors’ Emoluments table overleaf. Under the terms of each letter of appointment the appointment
is for an actual term of three years unless otherwise terminated earlier by, and at the discretion of either party on three months’ notice. In addition, the
appointments may be terminated by LSL for cause. The non executive directors are not entitled to participate in LSL’s executive remuneration programmes or
pension arrangements.
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Annual Report and Accounts 2007
27
Directors’ Remuneration Report (continued)
Directors’ Emoluments table
Details of each director’s remuneration for the year ended 31 December 2007 are as follows
Simon Embley
(Group CEO)
Dean Fielding
(Group Finance Director)
Peter Hales
(Non Executive Director)
Paul Latham
(Deputy CEO)
Roger Matthews
(Chairman)
Mark Morris
(Non Executive Director)
Mark Warburton
(Non Executive Director)
Salary, Fees &
Allowances
Related
Bonuses
Benefits
(excluding
pension)8
2007 Total
2006 Total
£190,000
£117,164
£650
£307, 814
£295,009
£133,500
£62,500
£1,097
£197,097
£215,820
£35,000
–
£4,550
£39,550
£34,906
£140,000
£70,000
£10,813
£220,813
£238,447
£100,000
£35,000
£35,000
–
–
–
–
–
–
£100,000
£16,667
£35,000
£5,833
£35,000
£15,949
8 excludes pension but includes non cash benefits (such as healthcare)
Only the above table forms part of the Financial Statements on which the auditors have expressed their opinion in their report
28
Annual Report and Accounts 2007
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Shareholder Return — 21 november 2006 to 31 December 2007
Total shareholder return – Value (£)
140
120
100
80
60
40
20
0
2
2
2
2
2
2
2
2
2
2
2
2
2
2
1
/
1
1
/
1
1
/
0
1
/
0
1
/
0
1
/
0
1
/
0
1
/
0
1
/
0
1
/
0
1
/
0
1
/
1
1
/
1
1
/
1
1
/
2
2
/
2
1
/
2
2
/
2
3
/
2
4
/
2
5
/
2
6
/
2
7
/
2
8
/
2
9
/
2
0
/
2
1
/
2
2
/
2
0
0
6
0
0
6
0
0
7
0
0
0
7
0
7
0
0
7
0
0
7
0
0
7
0
0
7
0
0
7
0
0
7
0
0
7
0
0
7
0
0
7
LSL Property Services plc
FTSE All Share Index (scaled)
This graph shows the value, by the end of December 2007, of £100 invested in LSL Property Services plc on 21 November 2006 compared with the value of
£100 invested in the FTSE All Share Index. The FTSE All Share Index has been selected as a sufficiently broad market index which is most comparable to LSL.
The mid market price of LSL shares in the financial period ranged from 129.75p to 267.00p
Approved by and signed on behalf of the Board of Directors
Sapna Bedi
Company Secretary
27 February 2008
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Annual Report and Accounts 2007
29
Corporate Social Responsibility
Set out below is LSL’s corporate social responsibility statement, which applies to the LSL Group of companies.
Introduction
Statement
LSL is a leading provider of residential property services in the UK. Principal operations include its surveying division (operating under the brands of e.surv,
Chancellors Associates and Barnwoods), its estate agency division (operating under the brands of Reeds Rains, Your Move, Intercounty, JNP and Frosts), and
its financial services division (which includes Linear Mortgage Network and Linear Financial Services).
LSL provides a broad range of property related services to customers, who are principally mortgage lenders and buyers and sellers of residential property in
the UK.
Aim
This policy aims to set out Corporate Social Responsibility guidelines to advise employees of the policy standards and procedures which are communicated
through contracts of employment, staff handbooks, operating manuals, bulletins, the intranet sites and notice boards as appropriate.
It focuses on actions that the Group can take over and above its legal requirements to address its competitive interests of the wider society and underpins
all other internal policies that the Group adheres to. We actively ensure that we are compliant and proactive in respect of legislation, in accordance with our
employees’, customers’, suppliers’ and other stakeholders’ interests.
Scope
All permanent and temporary employees (regardless of type of contract or terms & conditions) working within the LSL group of Companies.
Employment / Labour
Communication
LSL ensures that employees are kept informed of Group affairs via information distributed by post, e–mail, handbooks or the various intranet sites. Group
employees are encouraged to discuss operational issues with their line management. The Group will promote transparency through business reviews and
the production of Annual Reports. Communication through employees is encouraged as appropriate.
Equal Opportunities
LSL is committed to a policy of equal opportunity in employment which is seen as a vital part in the success and growth of LSL. Every effort is made to select,
recruit, train and promote the best candidates based on suitability for the job, to treat all employees and applicants fairly regardless of race, sex, marital
status, nationality, ethnic origin or disability, and to ensure that no employee suffers harassment or intimidation.
Health, Safety & Welfare at Work
LSL places great importance on the health, safety and welfare of its employees. Policies, group standards and procedures are in place, which aim to identify
and remove any hazardous areas, reduce material risks of fire and accidents or injuries to employees and visitors and, in conjunction with its HR policies,
manage workplace stress levels.
To this end, LSL makes every reasonable effort to provide safe and healthy working conditions in all offices and branches. Similarly, it is the duty of all
employees to exercise responsibility and to do everything to prevent injury to themselves and to others.
LSL’s policy is to provide employment and to make reasonable adjustment to accommodate disabled persons wherever the requirements of the organisation
will allow and if applications for employment are received from suitable individuals. If existing employees become disabled every reasonable effort will be
made to ensure that their employment with LSL can continue on a worthwhile basis with career opportunities available to them.
Environmental issues
LSL takes its responsibility for social, ethical and environmental issues very seriously and recognises the importance of developing and maintaining high standards.
LSL commits itself to all available processes end practices that have the least impact on the environment and seeks to use all of its resources carefully.
Employees are encouraged to conserve all types of energy and to recycle or minimise waste products wherever possible.
Group companies will assess and manage the environmental impact of their operations by taking part in various recycling and energy efficient practices so
that it can be an active participant in the sustainable society.
Social and Community interests (including Social and Ethical issues)
While LSL is accountable to shareholders, it takes into account the interest of all stakeholders including employees, customers and suppliers as well as the
local community, and the environment in which its divisions operate.
For its Employees
Each Group Company will provide standard terms and conditions of employment, and a fair and transparent remuneration policy. It aims to provide healthy
and safe working conditions for all business areas.
It strives for equal opportunities for all present and potential employees and encourages employees to develop skills and progress in their careers.
30
Annual Report and Accounts 2007
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It will not tolerate any sexual, physical or mental harassment of employees and will not discriminate on the grounds of colour, ethnic origin, gender, age,
religion, disability, sexual orientation, political or other opinion.
For its Customers
Each Group Company seeks to be honest and fair in its relationships with its customers providing the standards of product and service that have been
agreed. It takes all reasonable steps to ensure the safety and quality of products or services that it produces.
For its Suppliers
Each Group Company seeks to be honest and fair in its relationships with suppliers and subcontractors and will pay its suppliers and subcontractors in
accordance with agreed terms.
Each Group Company has a policy not to offer, pay or accept bribes or substantial favours and encourages suppliers and subcontractors to abide by the
principles of this policy.
Social Community and environment
Each Group Company aims to be sensitive to the local community’s cultural, social and economic needs and endeavours to protect and preserve the
environment where it operates. From time to time where practicable, make donations and support local and national charities.
For its Shareholders and other suppliers of finance
Each Group Company is financially accountable to its shareholders and communicates to shareholders on all matters that are material to an understanding of
the future.
It aims to protect shareholders’ funds, manage risks and ensure funds are used as agreed at all times.
Management commitment
The directors of LSL together with the management teams of all Group Companies have committed to undertake all steps necessary to conform to the letter
and spirit of this policy and to ensure that all Group employees are aware of its content and their obligations.
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Annual Report and Accounts 2007
31
Statement of directors’ responsibilities in relation to the Group financial statements
The directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable United Kingdom law and
those International Financial Reporting Standards as adopted by the European Union.
The directors are required to prepare Group financial statements for each financial year which present fairly the financial position of the Group and the
financial performance and cash flows of the Group for that period. In preparing those Group financial statements the directors are required to:
l
l
l
select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes In Accounting Estimates and Errors and then apply them
consistently;
present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of
particular transactions, other events and conditions on the Group’s financial position and financial performance; and
l
state that the Group has complied with IFRS, subject to any material departures disclosed and explained in the financial statements.
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group
and enable them to ensure that the Group financial statements comply with the Companies Act 1985 and 2006 (where applicable) and Article 4 of the IAS
Regulations. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
LSL’s financial statements are published on LSL’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination
of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of LSL’s website is the responsibility of the
directors. The directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein.
32
Annual Report and Accounts 2007
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Auditors’ Report on the Group Financial Statements
Independent Auditor’s Report to the Members of LSL Property Services plc
We have audited the group financial statements of LSL Property Services plc for the year ended 31 December 2007 which comprise Group Income Statement,
the Group Balance Sheet, the Group Cash Flow Statement, the Statement of Group Recognised Income and Expense and the related notes 1 to 32. These
group financial statements have been prepared under the accounting policies set out therein.
We have reported separately on the parent company financial statements of LSL Property Services plc for the year ended 31 December 2007 and on the
information in the Directors’ Remuneration Report that is described as having been audited.
This report is made solely to the company’s members, as a body, in 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 auditor’s report and for no other purpose.
To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body,
for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the Annual Report and the group financial statements in accordance with applicable United Kingdom law and
International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors’ Responsibilities.
Our responsibility is to audit the group financial statements in accordance with relevant legal and regulatory requirements and International Standards on
Auditing (UK and Ireland).
We report to you our opinion as to whether the group financial statements give a true and fair view and whether the group financial statements have
been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you whether in our opinion the
information given in the directors’ report is consistent with the financial statements. The information given in the directors’ report includes that specific
information presented in the Chairman’s Statement and Business Review that is cross referred from the Business Review section of the directors’ report.
In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information specified by
law regarding director’s remuneration and other transactions is not disclosed.
We review whether the Corporate Governance Statement reflects the company’s compliance with the nine provisions of the 2006 Combined Code specified
for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the board’s
statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group’s corporate governance procedures or its risk
and control procedures.
We read other information contained in the Annual Report and consider whether it is consistent with the audited group financial statements. The other
information comprises only the Directors’ Report, the unaudited part of the Director’s Remuneration Report, the Chairman’s Statement, Business Review, the
Corporate Governance Report and the Corporate Social Responsibility Statement. We consider the implications for our report if we become aware of any
apparent misstatements or material inconsistencies with the group financial statements. Our responsibilities do not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the amounts and disclosures in the group financial statements. It also includes an assessment of the
significant estimates and judgments made by the directors in the preparation of the group financial statements, and of whether the accounting policies are
appropriate to the group’s circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the group financial statements are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the group financial statements.
Opinion
In our opinion:
•
•
•
the group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the group’s affairs
as at 31 December 2007 and of its profit for the year then ended;
the group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and
the information given in the directors’ report is consistent with the group financial statements.
Ernst & Young LLP
Registered auditor
Leeds
27 February 2008
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Annual Report and Accounts 2007
33
Group income statement for the year ended 31 December 2007
Revenue
Operating expenses:
Employee and subcontractor costs
Share–based payments
Total employee and subcontractor costs
Establishment costs
Depreciation on property, plant and equipment
Other
Rental income
Group operating profit before exceptional costs and amortisation
Amortisation of intangible assets
Exceptional costs
Group operating profit
Dividend income
Finance income
Finance costs
net financial costs
Profit before tax before adjustment to goodwill
Adjustment to goodwill in respect of subsequent recognition of deferred tax asset
Profit before tax
Taxation
Profit for the year
Attributable to:
Equity holders of the parent
Minority interests
Earnings per share expressed in pence per share:
Basic
Diluted
* the details of the reclassification are given in notes 3 and 12.
The accompanying notes are an integral part of these financial statements.
2007
£’000
219,518
120,054
650
120,704
12,364
2,227
48,804
2006
(reclassified)*
£’000
197,996
110,141
13
110,154
12,274
2,706
41,727
(184,099)
(166,861)
1,125
36,544
(9,145)
(1,413)
25,986
373 –
357
(3,429)
(2,699)
23,287
(1,000) –
22,287
(5,867)
16,420
16,420
–
16,420
15.8
15.7
1,218
32,353
(5,452)
(3,514)
23,387
660
(4,824)
(4,164)
19,223
19,223
(5,847)
13,376
13,058
318
13,376
23.1
23.1
Note
3
12
12
15
14
7
4
5
6
14
24
13
24
24
10
10
34
Annual Report and Accounts 2007
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Statement of group recognised income and expense for the year ended 31 December 2007
Total recognised income and expense for the year:
Profit for the year
Available-for-sale investments:
Valuation gains taken to equity
Total recognised income and expense
– Attributable to equity holders of the parent
– Attributable to minority interest
The accompanying notes are an integral part of these financial statements.
Note
2007
£’000
16,420
16
5,500 –
21,920
21,920
–
21,920
2006
£’000
13,376
13,376
13,058
318
13,376
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Annual Report and Accounts 2007
35
Group balance sheet As at 31 December 2007
non–current assets
Goodwill
Other intangible assets
Property, plant and equipment
Financial assets
Other receivables
Total non–current assets
Current assets
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Financial liabilities
Trade and other payables
Current tax liabilities
Provisions for liabilities and charges
Total current liabilities
non–current liabilities
Financial liabilities
Trade and other payables
Deferred tax liability
Provisions for liabilities and charges
net assets
Equity
Share capital
Share premium account
Share–based payment reserve
Investment in treasury shares
Unrealised gain reserve
Retained earnings
Minority interests
Total equity
Note
14
14
15
16
17
17
18
20
19
21
20
19
13
21
23
24
24
24
24
24
24
2007
£’000
69,572
41,562
4,600
5,650
129
121,513
21,458
2,326
23,784
2006
£’000
65,463
17,669
4,321
148
229
87,830
22,187
578
22,765
145,297
110,595
17,350
39,909
4,957
339
62,555
33,640
97 –
1,892
4,175
39,804
42,938
208
5,629
560
(2,669)
5,500 –
33,710
42,938
– –
42,938
5,402
36,915
5,575
130
48,022
29,337
3,424
3,846
36,607
25,966
208
5,629
13
(298)
20,414
25,966
25,966
The financial statements were approved by the Board on 27 February 2008 and were signed on its behalf by:
D A Fielding Director S D Embley Director
The accompanying notes are an integral part of these financial statements.
36
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Group cash flow statement for the year ended 31 December 2007
Note
£’000
£’000
£’000
£’000
2007
2006
22,287
19,223
Cash generated from operating activities
Profit before tax
Adjustments to reconcile profit before tax
to net cash inflows from operating activities
Amortisation
Dividend income
Finance income
Finance costs
Adjustment in relation to deferred tax asset
Group operating profit before amortisation
IPO costs
Depreciation
Impairment of goodwill
Impairment of property, plant and equipment
(Profit)/loss on sale of property, plant and equipment
Share–based payments
Amounts written off available for sale financial assets
Decrease/(increase) in trade and other receivables
Increase in trade and other payables and provisions
Cash generated from operations
Interest paid
Dividends paid on ‘B’ shares prior to listing
Tax paid
net cash from operating activities
Cash flows from investing activities
Purchase of subsidiary undertakings, minority interest
and commercial business
Purchase of intangible assets
Interest received
Dividends received
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
Purchase of available for sale financial assets
net cash expended on investing activities
net cash from operating activities less cash expended
on investing activities
Cash flows from financing activities
Repayment of loans
Proceeds from loans
Purchase of treasury shares
IPO costs
Dividends paid
15
7
7
26
14
15
9,145
(373)
(357)
3,429
1,000
–
2,227
130
207
(30)
650
–
3,184
2,050
2,139
(3,429)
–
(9,662)
(3,806)
(30,192)
357
373
(2,422)
139
(2)
(5,402)
18,785
(2,371)
–
(3,124)
net cash generated/(used) in financing activities
net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
18
The accompanying notes are an integral part of these financial statements.
5,452
(660)
4,824
3,514
2,706
21
13
345
6,599
(4,394)
9,657
(3,272)
(1,320)
(5,852)
(38,449)
660
(2,073)
6,134
(42,075)
33,414
(298)
(3,514)
–
–
12,844
35,131
–
–
7,373
42,504
(13,091)
29,413
–
–
–
(35,553)
(6,140)
–
7,888
1,748
578
2,326
9,616
28,839
11,862
40,701
(10,444)
30,257
(33,728)
(3,471)
(12,473)
(15,944)
16,522
578
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Annual Report and Accounts 2007
37
Notes to the group financial statements (continued)
Notes to the group financial statements
1. Authorisation of financial statements and statement of compliance with IFRSs
The Group financial statements of LSL Property Services plc and its subsidiaries for the year ended 31 December 2007 were authorised for issue
by the board of the directors on 27 February 2008 and the balance sheet was signed on the board’s behalf by S D Embley and D A Fielding. LSL
Property Services plc is a listed company incorporated and domiciled in England & Wales and the Group operates a network of estate agencies,
surveying businesses, conveyancing businesses and other related businesses.
The Group’s financial statements have been prepared on a historical cost basis except for derivative financial instruments and available–for–sale
financial assets that have been measured at fair value. The Group’s financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European Union and as applied in accordance with the provisions of the Companies Act
1985. The principal accounting policies adopted by the Group are set out in note 2.
2. Accounting policies
Basis of preparation of financial information
The consolidated financial statements have been prepared on a historical cost basis, except for, derivative financial instruments and available–
for–sale investments that have been measured at fair value.
The consolidated financial statements have also been prepared in accordance with IFRS as adopted by the European Union as they apply to the
financial statements of the Group for the year ended 31 December 2007 and with those parts of the Companies Act 1985 applicable to companies
reporting under IFRS.
The accounting policies which follow set out those policies which apply in preparing the financial statements for the year ended 31 December
2007. The Group’s financial statements are presented in Sterling and all values are rounded to the nearest thousand pounds (£000) except when
otherwise indicated.
Judgements and estimates
The preparation of financial information in conformity with IFRS as adopted by European Union requires management to make judgements,
estimates and assumptions that affect the application of policies and reporting amounts of assets and liabilities, income and expenses. The
estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in
which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both
current and future periods.
The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk
of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
Impairment of intangible assets
The measurement of intangible assets other than goodwill on a business combination involves estimation of future cash flows and the selection
of a suitable discount rate. The Group determines whether indefinite life intangible assets are impaired on an annual basis and this requires an
estimation of the value in use of the cash generating units to which the intangible assets are allocated. This involves estimation of future cash
flows and choosing a suitable discount rate (see note 14).
Fair value of unquoted equity instruments
The unquoted equity instruments have been valued based on the expected dividend cash flows discounted at current rates applicable for items
with similar terms and risk characteristics. This valuation requires the Group to make estimates about expected future dividend cash flows and
discount rates, and hence they are subject to uncertainty. The fair value of the unquoted equity instruments at 31 December 2007 is given in
note 16.
Basis of consolidation
The Group financial statements incorporate the financial statements of LSL Property Services plc and the entities controlled by the Group (its
subsidiaries) for the year ended 31 December 2007 and 31 December 2006. Control is achieved where the Group has the power to govern the
financial and operating policies of an investee entity so as to obtain benefits from its activities. The financial statements of the subsidiaries are
prepared for the same reporting year as the parent company, using consistent accounting policies.
The acquisition of minority interest is not a business combination and there is no specific accounting prescribed in IFRS for such a transaction.
The Group has elected to adopt the ‘Parent entity extension method’ and the entire difference between the cost of acquisition and the minority
interest acquired is reflected as goodwill.
The cost of business combination includes amounts contingent on future events if the payment is considered probable and can be measured
reliably. Any subsequent adjustments in respect of such contingent consideration (other than due to unwinding of the discount) is adjusted
against the carrying amount of goodwill.
38
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2. Accounting policies (continued)
Basis of consolidation (continued)
The results of the subsidiaries acquired and disposed of during the year are included in the consolidated income statement from the date control
commences until the date that control ceases.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies in line with those used by the
Group.
The purchase method of accounting is used for all acquisitions of subsidiaries.
All intra–group transactions, balances, income and expenses are eliminated on consolidation.
Changes in accounting policies and estimates
New accounting policies
The accounting policies adopted are consistent with those of the previous financial year except as follows:
The Group has adopted the following new and amended IFRS and IFRIC interpretations during the year. Adoption of these revised standards and
interpretations did not have any effect on the financial statements of the Group. They did however give rise to additional disclosures.
l
l
IFRS 7 Financial Instruments: Disclosures
IAS 1 Amendment – Presentation of Financial Statements
IFRS 7 Financial Instruments: Disclosures
This standard requires disclosures that enable users of the financial statements to evaluate the significance of the Group’s financial instruments
and the nature and extent of risks arising from those financial instruments. The new disclosures are included throughout the financial statements.
While there has been no effect on the financial position or results, comparative information has been revised where necessary.
IAS 1 Presentation of Financial Statements
This amendment requires the Group to make new disclosures to enable users of the financial statements to evaluate the Group’s objectives,
policies and processes for managing capital. These new disclosures are shown in note 28.
Change in accounting estimates
During the year, the amortisation period in respect of general insurance renewal commission contracts was revised from between six and
ten years to between six and seven and a half years in line with the expected future economic benefits. This change in estimate resulted in
additional amortisation charge of £143,000 in 2007.
Intangible assets
Goodwill
Business combinations on or after 1 July 2004 are accounted for under IFRS 3 using the purchase method. Any excess of the cost of the business
combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities is recognised in the
balance sheet as goodwill and is not amortised. To the extent that the net fair value of the acquired entity’s identifiable assets, liabilities and
contingent liabilities is greater than the cost of the investment, a gain is recognised immediately in the income statement. Goodwill recognised as
an asset as at 1 July 2004 is recorded at its carrying amount under UK GAAP and is not amortised.
After initial recognition, goodwill is stated at cost less any accumulated impairment losses, with the carrying value being reviewed for
impairment, at least annually and whenever events or changes in circumstances indicate that the carrying value may be impaired. A previously
recognised impairment loss with respect to goodwill is not reversed in later years.
For the purpose of impairment testing, goodwill is allocated to the related cash–generating units monitored by management, usually at business
segment level or statutory company level as the case may be. Where the recoverable amount of the cash–generating unit is less than its carrying
amount, including goodwill, an impairment loss is recognised in the income statement.
The carrying amount of goodwill allocated to a cash–generating unit is taken into account when determining the gain or loss on disposal of the
unit, or of an operation within it.
Other intangible assets
Intangible assets other than goodwill that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses.
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Annual Report and Accounts 2007
39
Notes to the group financial statements (continued)
2. Accounting policies (continued)
Other Intangible assets (continued)
Amortisation
Amortisation is charged to the income statement on a straight line basis over the estimated useful lives of intangible assets unless such lives are
indefinite as follows:
Customer contracts:
Estate agency customer contracts
Surveying customer contracts
Financial services customer contracts
General insurance renewal
commission contracts
– ten years
– between three and five years
– three years
– between six and seven and a half years
Lettings contracts
– fifteen months
Order book:
Estate agency pipeline
Surveying pipeline
Estate agency register
Others:
Franchise agreements
In–house software
– six months
– one week
– twelve months
– ten years
– three years
The carrying value of intangible assets is reviewed for impairment whenever events or changes in circumstances indicate the carrying value may
not be recoverable.
The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at least at each financial year–
end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted
for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates.
Brand names are not amortised as the directors are of the opinion that they have an indefinite useful life. This is based on the expectation of the
directors that there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows to the businesses and the
directors are confident that trademark registration renewals will be filed at the appropriate time and sufficient investment will be made in terms
of marketing and communication to maintain the value inherent in the brand.
The carrying value of intangible assets with indefinite useful life is reviewed for impairment, at least annually and whenever events or changes in
circumstances indicate that the carrying value may be impaired.
Impairment
The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when
annual impairment testing for an asset is required, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable
amount is the higher of an asset’s or cash–generating unit’s fair value less costs to sell and its value in use and is determined for an individual
asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or Groups of assets. Where the
carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In
assessing value in use, the estimated future cash flows are discounted to their present value using a pre–tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the asset. Impairment losses of continuing operations are recognised in
the income statement in those expense categories consistent with the function of the impaired asset.
An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no
longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is
reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was
recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the
carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such
reversal is recognised in profit or loss. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset’s revised
carrying amount, less any residual value, on a systematic basis over its remaining useful life.
40
Annual Report and Accounts 2007
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2. Accounting policies (continued)
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is provided to write off cost
less the estimated residual value of property, plant and equipment by equal annual instalments over their estimated useful economic lives as
follows:
Office equipment, fixtures and fittings – over three to seven years
Computer equipment
Motor vehicles
Leasehold improvements
– over three to four years
– over three to four years
– over the shorter of the lease term or ten years
Dividends
Equity dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when declared
by the directors and paid. In the case of final dividends, this is when approved by the shareholders at the annual general meeting.
Income taxes
Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates
and laws that are enacted or substantively enacted by the balance sheet date.
Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts
in the financial statements, with the following exceptions:
l where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business
combination that at the time of the transaction affects neither accounting nor taxable profit or loss; and
l
l
in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and
deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the
deductible temporary differences, carried forward tax credits or tax losses can be utilised:
Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related
asset is realised or liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date.
The carrying amount of deferred income tax assets is reviewed at each balance sheet date. Deferred income tax assets and liabilities are offset,
only if a legally enforcement right exists to set off current tax assets against current tax liabilities, the deferred income taxes relate to the same
taxation authority and that authority permits the group to make a single net payment.
Income tax is charged or credited directly to equity if it relates to items that are credited or charged to equity. Otherwise income tax is
recognised in the income statement.
Share–based payment transactions
Equity–settled transactions
The equity share option programme allows group employees to acquire shares of the Company. The fair value of the options granted is
recognised as an employee expense with a corresponding increase in equity in case of equity–settled schemes. The fair value is measured at
grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options
granted is measured using the Black Scholes model, taking into account the terms and conditions upon which the options were granted. Non–
market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each balance sheet date so
that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Market vesting
conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is recognised
irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting
condition.
Cash–settled transactions
The Group has issued shares in a subsidiary company to the management of that company with restrictions on transferability. The Group has a
call option on these shares and these shares are considered as a cash–settled share scheme. The liability under the call option is measured at
its fair value. Fair value is established initially at the grant date and at each balance sheet date thereafter until the awards are settled. During
the vesting period a liability is recognised representing the product of the fair value of the award and the portion of the vesting period expired
as at the balance sheet date. From the end of the vesting period until settlement, the liability represents the full fair value of the award as at the
balance sheet date. Changes in the carrying amount of the liability are recognised in profit or loss for the period.
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Annual Report and Accounts 2007
41
Notes to the group financial statements (continued)
2. Accounting policies (continued)
Treasury shares
The Group has an employee share trust (ESOT) for the granting of group shares to executives and senior employees. Shares in the Group held
by the employee share trust are treated as treasury shares and presented in the balance sheet as a deduction from equity. No gain or loss is
recognised in the income statement on the purchase, sale, issue or cancellation of the Group’s own equity instruments. The finance costs and
administration costs relating to the ESOT are charged to the income statement. Dividends earned on shares held in the trust have been waived.
The shares are ignored for the purposes of calculating the Group’s earnings per share.
Leases
Group as a lessee
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases and rentals
payable are charged in the income statement on a straight line basis over the lease term.
Group as a lessor
Assets leased out under operating leases are included in property, plant and equipment and depreciated over their estimated useful lives. Rental
income, including the effect of lease incentives, is recognised on a straight line basis over the lease term.
The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date of whether
the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. A
reassessment is made after inception of the lease only if one of the following applies:
(a) There is a change in contractual terms, other than a renewal or extension of the arrangement;
(b) A renewal option is exercised or extension granted, unless the term of the renewal or extension was initially included in the lease term;
(c) There is a change in the determination of whether fulfilment is dependant on a specified asset; or
(d) There is a substantial change to the asset.
Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the
reassessment for scenarios a), c) or d) and at the date of renewal or extension period for scenario b).
Pensions
The Group operates a defined contribution pension scheme for employees in certain Group companies. The assets of the scheme are invested
and managed independently of the finances of the Group. The pension cost charge represents contributions payable in the year.
Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it
is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by
discounting the expected future cash flows at a pre–tax rate that reflects current market assessments of the time value of money and, when
appropriate, the risks specific to the liability.
Financial instruments
Financial assets and financial liabilities are recognised in the Group’s Balance Sheet when the Group becomes a party to the contractual
provisions of the instrument. When financial assets are recognised initially, they are measured at fair value, being the transaction price plus, in
the case of financial assets not at fair value through profit or loss, directly attributable transaction costs. Financial assets are de–recognised
when the Group no longer has the rights to cash flows, the risks and rewards of ownership or control of the asset. Financial liabilities are
de–recognised when the obligation under the liability is discharged, cancelled or expires. All regular way purchases and sales of financial assets
are recognised on the trade date, being the date that the Group commits to purchase or sell the asset. Regular way transactions require delivery
of assets within the timeframe generally established by regulation or convention in the market place. The subsequent measurement of financial
assets depends on their classification.
The Group’s accounting policy for each category of financial instruments is as follows:
Available–for–sale financial assets
Available–for–sale financial assets are those non–derivative financial assets that are designated as such or are not classified as held to
maturity, loan and receivables or fair value through profit or loss. After initial recognition available–for–sale financial assets are measured at
fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is
determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the income statement. Where a
reliable indicator of fair value cannot be obtained the assets are valued at cost.
42
Annual Report and Accounts 2007
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Notes to the group financial statements (continued)
2. Accounting policies (continued)
Financial instruments (continued)
Cash and short term deposits
Cash and short term deposits in the balance sheet comprise cash at bank and in hand and short term deposits with an original maturity period of
three months or less.
For the purposes of the consolidated cash flow statement, cash and short term deposits consist of cash and short term deposits net of
outstanding bank overdrafts.
Trade receivables
Trade receivables do not carry any interest and are stated at their original invoiced value as reduced by appropriate allowances for estimated
irrecoverable amounts.
Trade receivables generally have four to seven day payment terms in the estate agency business and thirty days in the surveying business.
Provision is made when there is objective evidence that the Group will not be able to recover balances in full. Balances are written off when the
probability of recovery is assessed as being remote.
Trade payables
Trade payables do not carry any interest and are stated at their original invoice value.
Interest bearing loans and borrowings
All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. After initial recognition, interest–bearing
loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses arising on repurchase,
settlement or otherwise cancellation of liabilities are recognised respectively in investment income and finance costs.
Finance costs comprise interest payable on borrowings calculated at the effective interest rate method and recognised on an accruals basis,
together with dividends paid to financial institutions which were linked to borrowing costs.
Borrowing costs are recognised as an expense when incurred.
Derivative financial instruments
The Group uses derivative financial instruments such as interest rate caps to hedge its risks associated with interest rate fluctuations. Such
derivative financial instruments are stated at fair value. The fair value of interest rate swap contracts is determined by reference to market
values for similar instruments. The Group has not adopted hedge accounting for its derivative financial instruments. Any gains or losses arising
from changes in the fair value of derivatives are taken to the income statement.
Impairment of financial assets
Available–for–sale financial assets
If an available–for–sale financial asset is impaired, an amount comprising the difference between its cost (net of any principal payment and
amortisation) and its fair value is transferred from equity to the income statement. Reversals of impairment losses in respect of equity instruments
classified as available–for–sale are not recognised in the income statement.
Assets carried at cost
If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value
cannot be reliably measured, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of
estimated future cash flows discounted at the current market rate of return for a similar financial asset.
Assets carried at amortised cost
In relation to trade receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or
significant financial difficulties of the debtor) that the Group will not be able to collect all of the amounts due under the original terms of the
invoice. The carrying amount of the receivable is reduced through use of an allowance account. Impaired debts are derecognised when they are
assessed as uncollectible.
Classification of shares as debt or equity
When shares are issued, any component that creates a financial liability of the Company or Group is presented as a liability in the balance sheet;
measured initially at fair value net of transaction costs and thereafter at amortised cost until extinguished on conversion or redemption. The
corresponding dividends relating to the liability component are charged as interest expense in the income statement. The initial fair value of the
liability component is determined using a market rate for an equivalent liability without a conversion feature.
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Annual Report and Accounts 2007
43
Notes to the group financial statements (continued)
2. Accounting policies (continued)
Classification of shares as debt or equity (continued)
The remainder of the proceeds on issue is allocated to the equity component and included in shareholders’ equity, net of transaction costs.
The carrying amount of the equity component is not remeasured in subsequent years. Transaction costs are apportioned between the liability
and equity components of the shares based on the allocation of proceeds to the liability and equity components when the instruments are first
recognised.
Revenue recognition
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably
measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, VAT and other sales taxes or duty.
The following criteria must also be met before revenue is recognised:
Rendering of services
Revenue from the exchange fees in the estate agency business is recognised by reference to the legal exchange date of the housing transaction.
Revenue from the supply of surveying services is recognised upon the completion of the professional survey by the surveyor.
Financial services income
Revenue from mortgage procuration fees is recognised by reference to the completion date of the mortgage on the housing transaction. Revenue
from policy sales is recognised by reference to the date that the policy is accepted by the insurer.
Interest income
Revenue is recognised as interest accrues (using the effective interest method – that is the rate that exactly discounts estimated future cash
receipts through the expected life of the financial instrument to the net carrying amount of the financial asset).
Rental income
Rental income including the effect of lease incentives from sub–let properties is recognised on a straight line basis over the lease term.
Dividends
Revenue is recognised when the Group’s right to receive the payment is established.
Exceptional items
The Group presents as exceptional items on the face of the income statement, those material items of income and expense which, because of
the nature and expected infrequency of the events giving rise to them, merit separate presentation to allow shareholders to understand better
the elements of financial performance in the year, so as to facilitate comparison with prior periods and to assess better trends in financial
performance.
44
Annual Report and Accounts 2007
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2. Accounting policies (continued)
new standards and interpretations not applied
The IASB and IFRIC have issued the following standards and interpretations which are not effective at the balance sheet date or have an
effective date after the date of these financial statements:
International Accounting Standards (IAS / IFRSs)
IFRS 2
IFRS 3
IFRS 8
IAS 1
IAS 23
IAS 27
Amendment to IFRS 2 – Vesting Conditions and Cancellations
Business Combinations (revised January 2008)
Operating Segments
Presentation of Financial Statements (revised September 2007)
Borrowing Costs (revised March 2007)
Consolidated & Separate Financial Statements (revised January 2008)
International Financial Reporting Interpretations Committee (IFRIC)
New interpretations
IFRS 2 – Group and Treasury Share Transactions
IFRIC 11
IFRIC 12 Service Concession Arrangements
IFRIC 13 Customer Loyalty Programmes
IFRIC 14
IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction
Effective date*
1 January 2009
1 July 2009
1 January 2009
1 January 2009
1 January 2009
1 July 2009
Effective date*
1 March 2008
1 January 2008
1 July 2008
1 January 2008
*The effective dates stated here are those given in the original IASB/IFRIC standards and interpretations. As the Group has elected to prepare
their financial statements in accordance with IFRS as adopted by the European Union, the application of new standards and interpretations will
be subject to their having been endorsed for use in the EU via the EU Endorsement mechanism. In the majority of cases this will result in an
effective date consistent with that given in the original standard or interpretation but the need for endorsement restricts the Group’s discretion to
early adopt standards.
Whilst the revised IAS 1 will have no impact on the measurement of the Group’s results or net assets, it is likely to result in certain changes in the
presentation of the Group’s financial statements from 2009 onwards.
IFRS 8 requires disclosure based on information presented to the board. Whilst this is now expected to change the business segments about
which information is given, the secondary segment information will be replaced by group–wide analysis of revenues and non–current assets by
major geographical area. We do not expect to have customers that individually account for more than 10% of total revenues.
The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group’s financial
statements, other than additional disclosures, in the period of initial application.
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Annual Report and Accounts 2007
45
Notes to the group financial statements (continued)
3. Revenue
Revenue represents the amounts derived from the provision of services which fall within the Group’s ordinary activities, stated net of value
added tax. The revenue and pre–tax income is attributable to the continuing activity of estate agency and related activities and the provision of
surveying and valuation services on residential property. The majority of the revenue arises in the United Kingdom.
Revenue disclosed in the income statement is analysed as follows:
Revenue from services
Revenue
Rental income
Dividend income
Finance revenue
Total revenue
2007
£’000
219,518
219,518
1,125
373 –
357
221,373
2006
(reclassified)
£’000
197,996
197,996
1,218
660
199,874
The Group has restated 2006 revenue by £545,000 to include other lettings income as these are in the nature of revenue rather than other
operating income.
4. Segment reporting
The primary segment reporting format is determined to be business segments as the Group’s risks and rates of return are affected predominantly
by differences in the products and services provided. Secondary segment information (geographic segment) has not been reported separately as
the majority of the revenue and expense arises in the United Kingdom and all assets are situated in the United Kingdom.
The estate agency segment provides services related to housing transactions via a network of high street branches.
The surveying and valuation segment provides a professional survey service of domestic properties to various lending corporations.
The financial services segment sells mortgages for a number of lenders and sells life assurance and critical illness policies, etc for a number of
insurance companies via the estate agency branch and Linear network.
Estate
agency and
related
activities
£’000
Surveying
and
valuation
services
£’000
Financial
services
£’000
Unallocated
£’000
Total
£’000
107,110
89,866
22,542
–
219,518
13,708
26,312
(870)
(2,606)
36,544
10,373
20,149
(1,995)
(2,541)
25,986
373
357
(3,429)
23,287
(1,000)*
22,287
(5,867)
16,420
Year ended 31 December 2007
Income statement information
Segmental revenue
Segmental result:
– before exceptional costs and
amortisation of intangible assets
– after exceptional costs and
amortisation of intangible assets
Dividend income
Finance income
Finance costs
Profit before tax before adjustment to goodwill
Adjustment to goodwill in respect of subsequent
recognition of deferred asset
Profit before tax
Taxation
Profit for the year
* This relates to the estate agency and related activities segment.
46
Annual Report and Accounts 2007
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4. Segment reporting (continued)
Year ended 31 December 2007
Balance sheet information
Segment assets
Segment liabilities
net assets/(liabilities)
Other segment items
Capital expenditure
Acquisition of property, plant and
equipment on acquisition of subsidiaries
Acquisition of intangible asset*
Intangibles assets identified as part
of IFRS 3 purchase price allocation
Depreciation
Amortisation of intangible assets
Professional indemnity claim provision
Onerous leases provision
Adjustment to goodwill in respect of
subsequent recognition of deferred tax
Share based payment
Impairment of trade receivables
Impairment of other receivables
Impairment of property, plant
and equipment
Impairment of goodwill
Estate
agency and
related
activities
£’000
Surveying
and
valuation
services
£’000
Financial
services
£’000
Unallocated
£’000
65,162
(18,547)
46,615
1,401
390
–
2,836
(1,670)
(2,325)
–
(566)
(1,000)
(275)
(364)
(8)
(207)
(130)
53,024
(21,888)
31,136
835
3
30,192
2
(477)
(5,717)
(2,391)
–
–
(291)
(495)
–
–
–
17,223
(5,254)
11,969
176
7
–
8
(80)
(1,103)
–
–
–
(84)
–
–
–
–
9,888
(56,670)
(46,782)
10
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£’000
145,297
(102,359)
42,938
2,422
400
30,192
2,846
(2,227)
(9,145)
(2,391)
(566)
(1,000)
(650)
(859)
(8)
(207)
(130)
* Acquisition of intangible asset relates to the consideration paid to Cheltenham & Gloucester for the purchase of an exclusive agreement to
provide panel management services for five years.
Year ended 31 December 2006 (reclassified)
Income statement information
Segmental revenue
Segmental result:
– before exceptional costs and
amortisation of intangible assets
– after exceptional costs and
amortisation of intangible assets
Finance income
Finance costs
Profit before tax
Taxation
Profit for the year
Estate
agency and
related
activities
£’000
Surveying
and
valuation
services
£’000
Financial
services
£’000
Unallocated
£’000
Total
£’000
103,118
74,041
20,837
–
197,996
13,372
21,008
(764)
(1,263)
32,353
11,669
18,261
(1,766)
(4,777)
23,387
660
(4,824)
19,223
(5,847)
13,376
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Annual Report and Accounts 2007
47
Notes to the group financial statements (continued)
4. Segment reporting (continued)
Year ended 31 December 2006
Estate
agency
and
related
activities
£’000
Surveying
and
valuation
services
£’000
Financial
services
£’000
Unallocated
£’000
Balance sheet information
Segment assets
Segment liabilities
net assets/(liabilities)
Other segment items
Capital expenditure
Acquisition of property, plant and equipment on
acquisition of subsidiaries
Intangible assets identified as part of IFRS 3 purchase
price allocation
Depreciation
Amortisation of intangible assets
Professional indemnity claim provision
Onerous leases provision
Share–based payment
Impairment of trade receivables
Impairment of other receivables
Impairment of available–for–sale financial assets
62,372
(16,175)
46,197
1,657
–
–
(2,175)
(1,703)
–
(629)
–
(37)
(62)
(345)
28,552
(19,625)
8,927
306
27
153
(454)
(2,747)
(1,882)
–
–
(20)
–
–
16,800
(4,267)
12,533
110
16
162
(77)
(1,002)
–
–
–
–
–
–
5. Finance income
Interest receivable on funds invested
Interest receivable – other
6. Finance costs
Bank interest:
Commercial loan
Other loans
Dividend paid on ‘B’ shares prior to listing
Interest on other loans includes the write off of unamortised loan arrangement fees of £nil (2006: £780,000).
2,871
(44,562)
(41,691)
–
–
–
–
–
–
–
(13)
–
–
–
2007
£’000
357
–
357
2007
£’000
–
3,429
–
3,429
Total
£’000
110,595
(84,629)
25,966
2,073
43
315
(2,706)
(5,452)
(1,882)
(629)
(13)
(57)
(62)
(345)
2006
£’000
644
16
660
2006
£’000
36
3,468
1,320
4,824
48
Annual Report and Accounts 2007
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7. Exceptional costs
IPO costs
Establishment costs
Onerous leases provision due to branch closures
Employee costs
Redundancy costs due to branch closures
Other
Impairment of property, plant and equipment
Impairment of goodwill
2006
£’000
3,514
2007
£’000
–
501 –
575 –
207 –
130 –
1,413
3,514
Homefast Property Lawyers Limited (‘Homefast’) has continued to incur operating losses during the year and an impairment review was
conducted in accordance with the accounting policy. As a result of this impairment review the entire net book value of property, plant and
equipment of £207,000 and carrying value of goodwill relating to Homefast of £130,000 were impaired. There is no further value associated to any
non–current assets in this business.
8. Profit before tax
Profit before tax is stated after charging/(crediting):
Auditors’ remuneration (note 9)
Operating lease rentals:
Land and buildings
Plant and machinery
(Profit)/loss on disposal of property, plant and equipment
Impairment of available for sale financial assets
9. Auditors’ remuneration
The remuneration of the auditors is further analysed as follows:
Audit of the financial statements †
Other fees to auditors:
– local statutory audits for subsidiaries
– other services supplied pursuant to legislation
– corporate finance services
– other services
† £49,000 (2006: £42,000) of this relates to the Company and £19,000 relates to an under accrual of prior year audit fees.
2007
£’000
314
8,493
2,529
(30)
–
2007
£’000
68
134
29
80 –
3
314
2006
£’000
688
8,170
1,858
21
345
2006
£’000
42
83
468
95
688
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Annual Report and Accounts 2007
49
Notes to the group financial statements (continued)
10. Earnings per share
Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the parent by the
weighted average number of ordinary shares outstanding during the year.
Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of the parent by the weighted
average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the
conversion of all the dilutive potential ordinary shares into ordinary shares.
Profit
after tax
£’000
16,420
–
16,420
Weighted
average
number
of shares
103,647,347
609,076
104,256,423
2007
Per share
amount
Pence
15.8
–
15.7
Profit
after tax
£’000
13,058
–
13,058
Weighted
average
number
of shares
56,622,461
14,303
56,636,764
2006
Per Share
Amount
Pence
23.1
–
23.1
Basic EPS
Effect of dilutive share options
Diluted EPS
There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of
completion of these financial statements.
The Directors consider that the adjusted earnings shown below give a better and more consistent indication of the Group’s underlying
performance:
Profit after tax
Adjusted after tax for:
Exceptional costs
Amortisation
Dividend on ‘B’ ordinary shares
Share–based payment
Adjusted profit after tax
11. Dividends paid and proposed
Declared and paid during the year:
Equity dividends on ordinary shares:
Interim dividend for 2007: 3 pence (2006: nil)
Proposed for approval at AGM (not recognised as a liability as at 31 December):
Equity dividends on ordinary shares:
Final dividend for 2007: 3.86 pence per share (2006: nil)
12. Directors and employees
Remuneration of directors
Directors’ emoluments (Short–term benefits)
Contributions to money purchase pensions schemes (Post employment benefits)
2007
£‘000
16,420
989
6,401
–
455 9
2006
£’000
13,058
2,460
3,816
1,320
24,265
20,663
2007
£’000
3,124 –
3,976 –
2007
£’000
935
30
965
2006
£’000
2006
£’000
812
30
842
Consultancy fees and expenses of £2,418 (2006: £21,773) were also paid by the Group during the year.
The number of directors who were members of Group money purchase pension schemes during the year totalled 3 (2006: 3).
The remuneration of the highest paid director amounted to £307,814 (2006: £295,009) excluding pension costs. Group contributions to money
purchase pension schemes for that director amounted to £14,250 (2006: £12,648) in the year.
Directors’ contributions to pension schemes were matched by the Group up to a maximum of 10% of pensionable earnings until the end of
July 2007. From August 2007 the Group’s contributions reverted to 5% of pensionable salaries where members contribute, and the cost of the
death–in–service benefits.
50
Annual Report and Accounts 2007
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12. Directors and employees (continued)
Employee numbers and costs
The Group employs staff in its branches and head offices. Aggregate payroll costs of these employees were:
Wages and salaries
Social security costs
Pension costs
Share–based payment expense (see below)
Total employee costs
Subcontractor costs
Total employee and subcontractor costs
2007
£’000
95,729
9,836
1,932
650
108,147
12,557
120,704
2006
(reclassified)
£’000
88,983
9,465
1,492
13
99,953
10,201
110,154
The subcontractor costs were classified as part of other operating expenses during the previous year. This has been reclassified as these costs
relate to outsourced surveying.
The monthly staff numbers (including directors) during the year averaged 3,380 (2006: 3,351).
Estate agency and related activities
Surveying and valuation services
Financial services
2007
£’000
2,046
925
409
3,380
2006
£’000
2,193
813
345
3,351
All staff are employed in the provision of estate agency and related activities, the provision of surveying and valuation services on residential
property and the provision of financial services.
Share–based payments
Long Term Incentive Plan
The Group operates a Long Term Incentive Scheme (an equity–settled share–based remuneration scheme) for certain employees. Under the Long
Term Incentive Scheme, the options vest if the individual remains an employee of the Group after a three year period, unless the individual has
left under certain ‘good leaver’ terms in which case the options may vest earlier and providing the performance conditions are met.
Outstanding at 1 January
Granted during the year
Outstanding at 31 December
2007
2006
Weighted
average
exercise
price
£
–
–
–
Weighted
average
exercise
price
£
–
–
–
number
130,512
65,103
195,615
Number
–
130,512
130,512
There were no options exercisable at the end of the year (2006: none).
The weighted average fair value of options granted during the year was £2.13 (2006: £1.85) and the weighted average remaining contractual life
was 2.19 years (2006 : 2.96 years).
c97948.indb 51
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Annual Report and Accounts 2007
51
Notes to the group financial statements (continued)
12. Directors and employees (continued)
Share–based payments (continued)
Save–As–You–Earn scheme
In December 2006, the Group announced an employee ‘Save–as–you–earn’ scheme effective from January 2007. This scheme is open to all
qualifying employees and provide for an exercise price equal to the daily average market price on the date of grant less 20%. The options will
vest if the employee remains in service for the full duration of the option scheme (three years). There are no cash settlement alternatives.
Outstanding at 1 January
Granted during the year
Outstanding at 31 December
2007
2006
Weighted
average
exercise
price
£
–
1.74
1.74
Weighted
average
exercise
price
£
–
–
–
number
–
2,131,034
2,131,034
Number
–
–
–
The weighted average of the fair value of the options was £0.63 and the weighted average remaining contractual life was 2.01 years (2006 : not
applicable).
There were no options exercisable at the end of the year (2006: none).
Equity–settled
The following information is relevant in the determination of the fair value of shares awarded during the year under the equity–settled share–
based remuneration scheme operated by the Group.
Option pricing model used
Weighted average share price at grant date (£)
Exercise price (£)
Expected life of options (years)
Expected volatility
Expected dividend growth rate
Risk free interest rate
2007
SAYE
Black
Scholes
2.35
1.74
3 years
11
3.68%
5.5%
LTIPs
Black
Scholes
2.38
nil
3 years
11
3.68%
5.5%
2006
LTIPs
Black
Scholes
2.17
nil
3 years
35
3%
5%
Total cost recognised for equity settled transactions is £547,000 (2006: £13,000). Of this £5,000 (2006: £2,000) relates to employees of the Company.
The volatility assumption, measured at the standard deviation of expected share price returns, is based on statistical analysis of competitor
ratios.
The dividend yield assumption is based on the fact that the shares awarded are not eligible to receive dividends until the end of the vesting
period.
Cash–settled
During the year, the Group issued shares in a subsidiary undertaking to certain employees of that subsidiary. The shares transferred are subject
to restrictions on transferability if the concerned employees are not in continuous employment in the Group. The Group also has a ‘call option’ on
these shares and the exercise price for the call option is based on future profitability of the subsidiary. The Group has accounted for this share
transfer as a cash–settled share–based payment due to the nature of the transaction and recognised a share–based payment charge of £103,000
(2006: £nil) using a discount factor rate of 7 per cent. None of this cost relates to the Company.
52
Annual Report and Accounts 2007
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13. Taxation
(a) Tax on profit
Tax charged in the income statement comprises:
UK corporation tax
– current year
– tax overprovided in prior year
– utilisation of tax losses
Deferred tax:
Origination and reversal of temporary differences
Total deferred tax
Total tax charge in the income statement
(b) Factors affecting tax charge for the year
2007
£’000
9,494
(285)
(1,000) –
8,209
(2,342)
(2,342)
5,867
2006
£’000
8,918
(142)
8,776
(2,929)
(2,929)
5,847
The tax assessed in the profit and loss account is lower (2006: higher) than the standard UK corporation tax rate, because of the following factors:
Profit on ordinary activities before tax
Profit on ordinary activities multiplied by rate of corporation tax rate in the UK of 30%
Disallowable expenses
Recognition of deferred tax asset on temporary differences previously not recognised
Reduction in deferred taxes resulting from reduction in tax rate
Other
Utilisation of tax losses on which deferred tax asset was not recognised previously
Prior period adjustments – current tax
Total taxation charge
(c) Factors that may affect future tax charges (unrecognised)
Property, plant and equipment temporary differences
Other temporary differences
Losses
2007
£’000
22,287
6,686
780
(48)
(228) –
(38)
7,152
(1,000) –
(285)
5,867
2007
£’000
39
304
482
825
2006
£’000
19,223
5,767
1,564
(1,296)
(46)
5,989
(142)
5,847
2006
£’000
36
240
546
822
The deferred tax assets in respect of property, plant and equipment temporary differences, other temporary differences and losses may be
recoverable in the future and this is dependent on one of the subsidiary companies generating taxable profits sufficient to allow the utilisation
of these amounts. These deferred tax assets can not be offset against profits elsewhere in the Group as they relate to losses brought forward
which can only be offset in the same company. There is no time limit for utilisation of the above tax losses and other temporary differences.
c97948.indb 53
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Annual Report and Accounts 2007
53
Notes to the group financial statements (continued)
13. Taxation (continued)
(d) Deferred tax
An analysis of the movements in deferred tax is as follows:
Deferred tax liability at 1 January
Deferred tax liability on recognition of separately identifiable intangible assets on acquisition of subsidiaries
Deferred tax credit in income statement for the year (note 13a)
Deferred tax liability at 31 December
Analysed as:
Depreciation in excess of capital allowances
Deferred tax liability on separately identifiable intangible
assets on business combination
Deferred tax on share options
Other short–term temporary differences
Deferred tax credit in income statement relates to the following:
Amortisation of intangible assets recognised on business combinations
Depreciation in excess of capital allowance
Deferred tax on share options
Reduction in deferred taxes resulting from reduction in tax rate
Other temporary differences
2007
£’000
3,424
810
(2,342)
1,892
2007
£’000
(840)
4,070
(189) –
(1,149)
1,892
2007
£’000
1,641
(237)
189 –
228 –
521
2,342
2006
£’000
6,258
95
(2,929)
3,424
2006
£’000
(1,154)
5,251
(673)
3,424
2006
£’000
1,645
992
292
2,929
At 31 December 2007, there was no recognised deferred tax liability (2006: nil) for taxes that would be payable on the unremitted earnings of the
Group’s subsidiaries.
14. Intangible assets
Goodwill
Cost
At 1 January
Acquisition of subsidiary undertakings
Acquisition of surveying business
Acquisition of minority interest in existing subsidiaries
Adjustment in respect of subsequent recognition of deferred tax asset
Impairment of goodwill (note 7)
At 31 December
2007
£’000
65,463
5,239
–
–
(1,000) –
(130) –
69,572
2006
£’000
22,333
727
1,810
40,593
65,463
An impairment review was undertaken of the goodwill and it was concluded that an impairment loss of £130,000 should be recognised to write
down the goodwill in Homefast Property Lawyers Limited (note 7).
54
Annual Report and Accounts 2007
c97948.indb 54
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14. Intangible assets (continued)
Goodwill (continued)
The adjustment to goodwill of £1,000,000 relates to recognition of a deferred tax asset on tax losses which have been realised during the
year. However, a deferred tax asset related to these tax losses was not recognised at the time of accounting for the business combination, in
accordance with IFRS 3 Business Combinations.
Carrying amount of goodwill by operating unit
Estate agency unit
Surveying unit
Financial services unit
2007
£’000
60,199
8,487
886
69,572
Impairment of goodwill and other intangibles with indefinite useful lives
The carrying amount of goodwill by operating unit is given above. The carrying amount of brand by operating unit is as follows:
Estate agency unit
Surveying unit
Financial services unit
2007
£’000
4,232
1,434
38
5,704
2006
£’000
56,095
8,487
881
65,463
2006
£’000
3,751
1,434
38
5,223
Goodwill acquired through business combinations and brands has been allocated for impairment testing purposes to three cash–generating units
as follows:
l
l
l
Estate agency cash–generating unit;
Surveying cash–generating unit; and
Financial services unit.
These represent the lowest level within the Group at which goodwill is monitored for internal management purposes.
Estate agency cash – generating unit
The recoverable amount of the Estate Agency unit has been determined based on a value in use calculation using cash flow projections based on
financial budgets approved by the board covering a three–year period. The discount rate applied to cash flow projections is 12% (2006: 15%) and
cash flows beyond the 3–year budget are extrapolated using a 2% (2006: 2%) growth rate. This is based on the directors’ opinion that the Estate
Agency unit’s market share can be increased by 2% (including inflation).
Surveying cash – generating unit
The recoverable amount of the Surveying unit is also determined on a value in use basis using cash flow projections based on financial budgets
approved by the board covering a three–year period. The discount rate applied to the cash flow projections is 10% (2006: 12.3%). The growth rate
used to extrapolate the cash flows of the Surveying unit beyond the three–year period is 1.5%. This is based on the directors’ opinion that the
Surveying unit’s market share can not be increased and therefore the growth rate is an inflationary increase only.
Financial services cash – generating unit
The recoverable amount of the Financial Services unit has been determined based on a value in use calculation using cash flow projections
based on financial budgets approved by the board covering a three–year period. The discount rate applied to cash flow projections is 12% (2006:
15%) and cash flows beyond the 3–year budget are extrapolated using a 2% growth rate. This is based on the directors’ opinion that the Financial
Services unit’s market share can be increased by 2%.
c97948.indb 55
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Annual Report and Accounts 2007
55
Notes to the group financial statements (continued)
14. Intangible assets (continued)
Key assumptions used in value in use calculations
The calculation of value in use for both estate agency, surveying and financial services units is most sensitive to the following assumptions:
l
l
gross margin
discount rates
l market share
l
growth rate used to extrapolate cash flows beyond the budget period
Gross margins are based on average values achieved in the three years preceding the start of the budget period. These are increased over
the budget period for anticipated efficiency improvements. A factor of 2% per annum was applied for estate agency, 1.5% per annum for the
surveying unit and 2% per annum for the financial services unit. This is based on the opinion of the directors.
Discount rates reflect management’s estimate of return on capital employed (ROCE) required in each business. This is the benchmark used by
management to assess operating performance and to evaluate future capital investment proposals. The rates applied in the estate agency,
surveying and financial services unit budgets are based on the spread between current ROCE and base interest rates, adjusted by the forward
interest rates at the end of the budget period.
Market share assumptions are important because, as well as using industry data for growth rates (as noted below) management assess how the
unit’s relative position to its competitors might change over the budget period. Management expects the Group’s share of the surveying market to
be stable over the budget period and expect a marginal growth in the estate agency and financial services units.
Growth rate estimates are based on management estimates. Management is confident that the growth rate would be achieved based on past
experience.
The results of the impairment tests confirmed that there had been an impairment of £130,000 in respect of the carrying amount of goodwill held on
the balance sheet regarding Homefast Property Lawyers Limited (included in the ‘estate agency’ cash generating unit).
Sensitivity to changes in assumptions
With regard to the assessment of value in use for each of the above units, management believes that no reasonably possible change in any of the
above key assumptions would cause the carrying value of the unit to exceed its recoverable amount.
Other intangible assets
As at 31 December 2007:
General
Cost
At 1 January 2007
Additions
Arising on acquisition
of subsidiaries
At 31 December 2007
Aggregate amortisation
and impairment
At 1 January 2007
Charge for the year
At 31 December 2007
Carrying amount
At 31 December 2007
Brand
names
£’000
Customer
Contracts
£’000
Insurance
Renewals
£’000
Lettings
Contracts
£’000
5,223
–
481
5,704
–
–
–
14,582
30,192
–
44,774
6,956
5,918
12,874
5,612
–
–
5,612
1,289
888
2,177
1,450
–
594
2,044
1,450
581
2,031
Order
Book
£’000
3,435
–
1,771
5,206
3,435
1,574
5,009
5,704
31,900
3,435
13
197
Other*
£’000
1,127
–
–
1,127
630
184
814
313
Total
£’000
31,429
30,192
2,846
64,467
13,760
9,145
22,905
41,562
56
Annual Report and Accounts 2007
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14. Intangible assets (continued)
Other intangible assets (continued)
As at 31 December 2006:
General
Cost
At 1 January 2006
Arising on acquisition
of subsidiaries
At 31 December 2006
Aggregate amortisation
and impairment
At 1 January 2006
Charge for the year
At 31 December 2006
Carrying amount
At 31 December 2006
At 31 December 2005
Brand
names
£’000
Customer
Contracts
£’000
Insurance
Renewals
£’000
Lettings
Contracts
£’000
5,032
191
5,223
–
–
–
5,223
5,032
14,458
124
14,582
4,073
2,883
6,956
7,626
10,385
5,612
–
5,612
544
745
1,289
4,323
5,068
1,450
–
1,450
1,086
364
1,450
–
364
* Others relate to in–house software and franchise agreements.
The brand value relates to the following:
Order
Book
£’000
3,435
–
3,435
2,251
1,184
3,435
–
1,184
Other*
£’000
1,127
–
1,127
354
276
630
497
773
Total
£’000
31,114
315
31,429
8,308
5,452
13,760
17,669
22,806
l
l
l
l
l
l
l
your–move.co.uk, a network of estate agencies and to esurv, a surveying company which were acquired by the Group in 2004,
Reeds Rains, a network of estate agencies which were acquired by the Group in October 2005,
Linear Financial Services, a financial services intermediary company which was acquired by the Group in July 2006,
Chancellors Associates, a surveying business which was acquired by the Group in July 2006,
ICIEA, a network of estate agencies which were acquired by the Group in February 2007,
David Frosts Estate Agents, a network of estate agencies which were acquired by the Group in July 2007, and
JNP Estate Agents, a network of estate agencies which were acquired by the Group in September 2007.
The businesses are run as separate reporting units within the Group. There have been no fundamental changes to the manner in which the
businesses have been run since their acquisition and therefore the results of the businesses are considered to be derived from the brand names
nationally.
All amortisation charges have been treated as an expense in the income statement. Brand names are not amortised as the directors are of the
opinion that they have an indefinite useful life. This is based on the expectation of the directors that there is no foreseeable limit to the period
over which the asset is expected to generate net cash inflows to the businesses and the directors are confident that trademark registration
renewals will be filed at the appropriate time and sufficient investment will be made in terms of marketing and communication to maintain the
value inherent in the brand.
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Annual Report and Accounts 2007
57
Notes to the group financial statements (continued)
15. Property, plant and equipment
As at 31 December 2007
Cost
At 1 January 2007
Additions
Acquired on acquisitions of subsidiaries
Disposals
At 31 December 2007
Depreciation and impairment
At 1 January 2007
Charge for the year
Impairment (note 7)
Disposals
At 31 December 2007
Carrying amount
At 31 December 2007
As at 31 December 2006
Cost
At 1 January 2006
Additions
Acquired on acquisitions of subsidiaries
Disposals
At 31 December 2006
Depreciation
At 1 January 2006
Charge for the year
Disposals
At 31 December 2006
Carrying amount
At 31 December 2006
At 31 December 2005
Leasehold
improvements
£’000
Motor
vehicles
£’000
3,624
51
25
–
3,700
3,243
158
138
–
3,539
161
137
27
157
(145)
176
121
19
–
(131)
9
167
Fixture,
fittings and
computer
equipment
£’000
12,542
2,344
218
(1,577)
13,527
8,618
2,050
69
(1,482)
9,255
Total
£’000
16,303
2,422
400
(1,722)
17,403
11,982
2,227
207
(1,613)
12,803
4,272
4,600
Leasehold
improvements
£’000
Motor
vehicles
£’000
Fixture,
fittings and
computer
equipment
£’000
3,595
45
–
(16)
3,624
2,872
386
(15)
3,243
381
723
425
–
–
(288)
137
306
75
(260)
121
16
119
15,023
2,028
43
(4,552)
12,542
10,784
2,245
(4,411)
8,618
3,924
4,239
Total
£’000
19,043
2,073
43
(4,856)
16,303
13,962
2,706
(4,686)
11,982
4,321
5,081
58
Annual Report and Accounts 2007
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16. Financial assets
Available–for–sale financial assets
Unquoted shares carried at cost
Impairment
Unquoted shares carried at fair value
Carrying value
2007
£’000
495
(345)
150
5,500 –
5,650
2006
£’000
493
(345)
148
148
Unquoted shares carried at cost
The financial assets are in unlisted equity instruments and these are carried at cost as the market value cannot be reliably measured.
Unquoted shares carried at fair value
In 2003, the Group acquired 84 ‘A’ ordinary share of £0.01 each in Hometrack Data Systems Limited for a consideration of £1. This amounted to
a 14.19% shareholding in that company. In 2006, the financial asset was carried at cost as the fair value could not be reliably measured. In 2007,
the value of the unlisted equity shares in Hometrack Data Systems Limited has been estimated on the basis of the present value of the expected
future dividend to perpetuity and assumed earnings growth of 3% per annum and a discount rate of 12%. The Directors consider this is the best
proxy of current value. Management has estimated that the potential effect of using reasonably possible alternatives for expected future dividend
would not result in a significant change in the above valuation.
Management have reviewed the carrying amount of the financial assets for impairment at 31 December 2007 by reference to the present value of
future cash flows and concluded that there have been no further impairment required (2006: £345,000).
17. Trade and other receivables
Current
Trade receivables
Other receivables
Prepayments
non–current
Other receivables
Prepayments
2007
£’000
15,341
27
6,090
21,458
88
41
129
2006
£’000
18,011
27
4,149
22,187
83
146
229
Trade receivables are non–interest bearing and are generally on 0–90 days’ terms.
As at 31 December 2007, trade receivables at nominal value of £1,715,000 (2006: £878,000) were impaired and fully provided for. Movements in the
provision for impairment of receivables were as follows:
At 1 January
On acquisition of subsidiaries
Charge for the year
Amounts written off
Unused amounts reversed
At 31 December
2007
£’000
878
67 –
859
(71)
(18)
1,715
2006
£’000
762
57
120
(61)
878
Annual Report and Accounts 2007
59
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Notes to the group financial statements (continued)
17. Trade and other receivables (continued)
As at 31 December, the analysis of trade receivables that were past due but not impaired is as follows:
2007
2006
18. Cash and cash equivalents
Short–term deposits
Neither
past due
nor impaired
£’000
9,856
12,760
Total
£’000
15,341
18,011
Past due but not impaired
0–90 days
£’000
>90 days
£’000
5,188
4,940
2007
£’000
2,326
297
311
2006
£’000
578
Cash at bank earns interest at floating rates based on daily bank overnight deposit rates. Short–term deposits are made for varying periods of
between one day and three days depending on the immediate cash requirements of the Group, and earn interest at the respective short–term
deposit rates. The fair value of cash and cash equivalents is £2.3m (2006: £0.6m). At 31 December 2007, the Group had available £47.8m of undrawn
committed borrowing liabilities in respect of which all conditions precedent had been met (2006: £46.7m).
19. Trade and other payables
Current
Trade payables
Other taxes and social security payable
Other payables
Accruals
non–current
Accruals
Terms and conditions of the above financial liabilities:
l
l
Trade payables are non–interest bearing and are normally settled on 30–day terms.
Other payables are mainly non–interest bearing and have an average term of three months.
2006
£’000
5,856
6,591
566
23,902
36,915
2007
£’000
8,919
7,452
523
23,015
39,909
97 –
60
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c97948.indb 60
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20. Financial liabilities
Current
Secured bank loans – Revolving credit facility
Secured bank loans – B notes
Unsecured bank loan
Unsecured loan notes
Other secured loan payable to a director of a subsidiary
Other unsecured loan
non–current
Secured bank loans – Revolving credit facility
Unsecured bank loan
Unsecured loan notes payable in 2009
Other unsecured loan
Cash–settled payment
Contingent consideration
2007
£’000
16,948
–
36
100 –
75 –
191
17,350
30,501
46
997 –
222
103 –
1,771 –
33,640
2006
£’000
4,874
472
34
22
5,402
28,540
82
715
29,337
Secured bank loans – Revolving credit facility
The secured bank loans totalling £47.4m (2006: £33.4m) are secured by a debenture over the Group’s assets excluding the following subsidiaries,
Lending Solutions Limited, First Complete Limited and its subsidiaries, property–careers.com Limited, Chancellors Associates Limited and LSLi
Limited and its subsidiaries.
The secured bank loans relate to the revolving credit facility. The utilisation of this revolving credit facility may vary each month as long as
this does not exceed the maximum £95m facility. The banking facility expires in July 2009 but can be extended at that date until July 2011. The
revolving credit facility is repayable when funds permit.
Interest payable on the revolving credit facility amounted to £2.9m (2006 £1.2m). The interest rate applicable to the facility is LIBOR plus a margin
rate of 0.65%. The margin rate is linked to the leverage ratio of the Group and the margin rate is reviewed at six monthly intervals.
Secured bank loans – B Notes
In 2006, the loan was guaranteed by the Group’s bankers, Barclays Bank plc. This was fully repaid in 2007.
Unsecured bank loan
An unsecured bank loan of £82,000 (2006: £116,000) is outstanding to Barclays Bank plc by a group company. This is repayable over five years
ending in June 2010 and incurs interest at a fixed rate of 10% per annum.
Unsecured loan notes
Unsecured loan notes of £1,097,000 (2006: £nil) are outstanding in respect of consideration relating to acquisitions by a group company during the
year. £100,000 is repayable on 2008 and the remainder in 2009, with a fixed rate of 5% per annum.
Other secured loan
A secured loan of £75,000 (2006: £nil) is outstanding to a director of a subsidiary by a group company. This is repayable by 31 December 2008 and
incurs interest at a variable rate of 2% above the current bank base rate. This loan is guaranteed by a debenture secured over the assets of a
subsidiary company.
Other unsecured loan
An unsecured loan of £413,000 (2006: £601,000) is outstanding to a customer by a group company. This is repayable when funds permit and incurs
interest at the current bank base rate.
In 2006, an unsecured loan of £136,000 was outstanding to a director of a subsidiary company by the subsidiary company. This was repayable
when funds permit and incurs interest at a fixed rate of 6.5%.
c97948.indb 61
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Annual Report and Accounts 2007
61
Notes to the group financial statements (continued)
20. Financial liabilities (continued)
Cash–settled share–based payment
An explanation is given in detail in note 12.
Contingent consideration
£2,267,437 of contingent consideration is payable to third parties in relation to the acquisition of its subsidiaries during the year. This is payable
between three and five years after the acquisition dates. The consideration was recorded at a fair value of £1,771,236 on acquisition using a
discount rate of 7 per cent (note 26), since it is considered, that payment is probable and can be measured reliably.
21. Provisions for liabilities and charges
Professional
indemnity
claim
provision
£’000
3,237
(881)
(822)
2,391
3,925
–
3,925
3,925
2007
Onerous
leases
£’000
739
(106)
(610)
566
589
339
250
589
Professional
indemnity
claim
provision
£’000
2,647
(697)
(595)
1,882
3,237
–
3,237
3,237
Total
£’000
3,976
(987)
(1,432)
2,957
4,514
339
4,175
4,514
2006
Onerous
leases
£’000
260
(91)
(59)
629
739
130
609
739
Total
£’000
2,907
(788)
(654)
2,511
3,976
130
3,846
3,976
Balance at 1 January
Amount utilised
Amount released
Provided in financial year
Balance at 31 December
Current
non–current
The professional indemnity claim provision relates to ongoing normal legal claims and is the directors’ best estimate of the likely outcome of such
claims. The provision will be utilised as individual claims are settled. It is not possible to estimate the payout within one year and therefore all the
provision has been classified as non–current.
The provision for lease obligations relates to obligations under leases on vacant properties. The provision is expected to be fully utilised by
November 2014.
22. Obligations under leases
Operating leases
The Group had annual commitments in respect of non–cancellable operating leases for which no provision has been made in these financial
statements. Future minimum rentals payable under these operating leases are as follows:
No later than one year
After one year but not more than
five years
After five years
Land
and
Building
£’000
7,001
20,847
15,431
43,279
2007
Plant
and
machinery
£’000
2,186
2,236
–
4,422
Land
and
Building
£’000
7,139
19,715
15,388
42,242
2006
Plant
and
machinery
£’000
2,010
2,533
2
4,545
Total
£’000
9,187
23,083
15,431
47,701
Total
£’000
9,149
22,248
15,390
46,787
62
Annual Report and Accounts 2007
c97948.indb 62
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22. Obligations under leases (continued)
Operating leases (continued)
The Group had annual commited revenue in respect of non–cancellable operating leases for which no accrual has been made in these financial
statements. Future minimum rentals receivable under non–cancellable operating leases are as follows:
Not later than one year
After one year but not more than five years
After five years
23. Share capital
Authorised:
Ordinary shares of 0.2p each
Issued and fully paid:
At 1 January
‘B’ Ordinary shares converted prior to listing
Share split
Issue of shares
At 31 December
2007
Land
and
Buildings
£’000
622
1,803
903
3,328
2007
2006
Shares
£’000
Shares
500,000,000
1,000
500,000,000
104,158,950
–
–
–
104,158,950
208
–
–
–
208
1,000,000
1,000,000
100,065,742
2,093,208
104,158,950
2006
Land
and
Buildings
£’000
355
587
539
1,481
£’000
1,000
100
100
–
8
208
At 1 January 2005, the issued and fully paid share capital of £1,000,000 was made up of 1,000,000 ‘A’ ordinary shares.
On 25 July 2006, the Company issued 5,000 ‘A’ ordinary shares of 10p each and 5,000 ‘B’ ordinary shares of 10p each in exchange for the minority
interest (8.33%) in a subsidiary company, Lending Solutions Holdings Limited.
On 25 July 2006, the Company issued 32,158 ‘A’ ordinary shares of 10p each in exchange for a 6.49% shareholding in a subsidiary company, Reeds
Rains Limited.
On 31 October 2006, the ordinary shares of 10p each were subdivided into one class of 0.2p shares.
In 2006, the 1,000,000 ‘B’ ordinary shares, which were classified as debt in 2005 had been reclassified as share capital as they were converted
into ordinary shares prior to listing and were not entitled to any further cumulative dividend.
On 21 November 2006, the Company issued 2,051,050 ordinary shares of 0.2p each in exchange for the return of warrants.
c97948.indb 63
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Annual Report and Accounts 2007
63
Notes to the group financial statements (continued)
24. Reconciliation of movements in equity
Share
capital
£’000
Share
premium
account
£’000
Share-
based
payment
reserve
£’000
Investment Unrealised
gains
in treasury
reserve
shares
£’000
£’000
Retained
earnings
£’000
At 1 January 2006
Debt reclassification
Issue of shares
Purchase of treasury shares
Acquisition of minority interest
Share–based awards
Profit for the year
At 1 January 2007
Purchase of treasury shares
Share–based payments
Revaluation of available-for-
sale financial assets
Dividend paid
Profit for the year
100
100
8
–
–
–
–
208
–
–
–
–
–
400
–
5,229
–
–
–
–
5,629
–
–
–
–
–
–
–
–
–
–
13
–
13
–
547
–
–
–
–
–
–
(298)
–
–
–
(298)
(2,371)
–
–
–
–
Balance at 31 December 2007
208
5,629
560
(2,669)
–
–
–
–
–
–
–
–
–
–
5,500
–
–
5,500
7,356
–
–
–
–
–
13,058
20,414
–
–
–
(3,124)
16,420
Total
equity
£’000
7,856
100
5,237
(298)
–
13
13,058
25,966
(2,371)
547
5,500
(3,124)
16,420
Minority
interest
£’000
879
–
–
–
(1,197)
–
318
–
–
–
–
–
–
–
Total
£’000
8,735
100
5,237
(298)
(1,197)
13
13,376
25,966
(2,371)
547
5,500
(3,124)
16,420
42,938
33,710
42,938
Share premium
The amount subscribed for share capital in excess of nominal value less any costs attributable to the issue of new shares.
Share–based payment reserve
The share–based payment reserve is used to record the value of equity–settled share–based payment and provided to the employees, as part of
their remuneration. Note 12 gives further details of these plans.
Investment in treasury shares
The Company has an employee share trust (ESOT) for the granting of group shares to executives and senior employees. The Company acquired
147,219 of its own shares via the trust in November 2006. The total amount paid to acquire the shares was £297,920. The market value of the
shares held by ESOT on 25 February 2008 was £157,156 (22 February 2007: £313,000). The nominal value of each share is 0.2p.
The Company also has an employee benefit trust (EBT) for the granting of group shares under the employee SAYE scheme. The Company
acquired 1,000,000 of its own shares via the trust in August 2007. The total amount paid to acquire the shares was £2,370,000. The market value of
the shares held by EBT on 25 February 2008 was £1,067,500. The nominal value of each share is 0.2p.
Unrealised gains reserve
This reserve records fair value changes on available–for–sale financial assets.
25. Pensions costs and commitments
The Group operates defined contribution pension schemes for all its directors and certain employees. The assets of the schemes are held
separately from those of the Group in independently administered funds.
The Group, in 2006, made a contribution of a maximum of 5% of pensionable salaries and the cost of death–in–service benefits, where ‘old’
members of the existing defined contribution scheme, make contributions to the scheme.
The Group’s contributions for ‘new’ members of the defined contribution stakeholder scheme (those members who were part of the Aviva scheme
until the Group left the Aviva group in 2004) were 10% of pensionable salaries until the end of July 2007 where members contribute and the cost
of the death–in–service benefits. From August 2007 the Group’s contributions for these ‘new’ members of the defined contribution stakeholder
scheme reverted to a maximum 5% of pensionable salaries where members contribute, and the cost of the death–in–service benefits.
Total contributions to the defined contribution schemes in the year were £1.9m (2006: £1.5m).
There was an outstanding amount of £358,000 in respect of pensions as at 31 December 2007 (2006: £212,000).
64
Annual Report and Accounts 2007
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26. Acquisitions during the year
Year ended 31 December 2007
During the year the Group acquired the following:
l
l
ICIEA Limited, Intercounty Lettings Limited and ICIEAB Limited (collectively known as ‘ICIEA Limited Group’)†
Zenith Properties Limited†
l Martin Stewart partnership†
l
l
l
l
Vitalhandy Limited and David Frost Estate Agents Limited (collectively known as ‘Vitalhandy Limited Group’)†
JNP Estate Agents Limited, JNP Estate Agents (Princes Risborough) Limited, JNP Residential Lettings Limited (collectively known as
‘JNP Estate Agents Group’)†
JNP Surveyors Limited†
Thornton Hill (Rubery) Limited, Thornton Hill (Redditch) Limited, Thornton Hill (Bromsgrove) Limited and Thornton Hill (Droitwich) Limited
(collectively known as ‘Thornton Hill companies’) ‡
† acquired through LSLi Limited (75% subsidiary)
‡ acquired through your move.co.uk Limited (100% indirect subsidiary)
For acquisitions made by the Group during the year, the date of acquisition and percentage of voting equity instrument acquired are shown as
follows:
ICIEA Limited Group
Zenith Properties Limited
Martin Stewart partnership
Vitalhandy Limited Group
JNP Estate Agents Group
JNP Surveyors Limited
Thornton Hill companies
Acquisition
date
% holding
1 Feb
1 Aug
1 Aug
1 Jul
7 Sep
7 Sep
2 Nov
87.5%
100%
100%
100%
80%
100%
100%
For the above acquisition, where 100% interest had not been acquired, the shares held by the minority interest contain a call option (exercisable
by the Group) and a put option (exercisable by the minority shareholders). These options are considered to give the Group control over the
present access to the benefits of shareholding and hence the business combinations are accounted on the basis that 100% interest has been
acquired in the subsidiaries. The estimated amount payable to the minority shareholders under the put and call option is included in the deferred
consideration (note 20).
The combined effect of all acquisitions had the following effect on the Group’s assets and liabilities:
Intangible assets
Property , plant and equipment
Trade and other receivables
Cash and cash equivalent
Trade and other payables
Corporation tax creditor
Deferred tax liabilities
Goodwill arising acquisition
Discharged by:
Cash
Loan notes (note 20)
Contingent consideration (note 20)
The goodwill of £5,239,000 comprises the value of expected synergies arising from the acquisition.
Book
value
£’000
–
400
1,221
1,590
(1,388)
(834)
(13)
976
Fair value
Adjustments
£’000
2,846
–
–
–
–
–
(797)
2,049
Fair
value
£’000
2,846
400
1,221
1,590
(1,388)
(834)
(810)
3,025
5,239
8,264
5,396
1,097
1,771
8,264
Annual Report and Accounts 2007
65
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Notes to the group financial statements (continued)
26. Acquisitions during the year (continued)
The summarised income statement of all acquisitions for the year ended 31 December 2007 is as follows:
Revenue
Operating profit
Finance income
Finance cost
Profit before tax
Current tax charge
Profit for the year
Total
£’000
9,823
798
26
(3)
821
(262)
559
The combined revenue of all acquisition from their respective date of acquisitions to 31 December 2007 amounted to £6.0m and the combined
profit for that period after tax amounted to £0.6m. If all the entities acquired in 2007 were acquired at the beginning of the year, the combined
Group revenue would have been £223.3m and the combined Group profit after tax would have been £16.2m.
Year ended 31 December 2006
The Group acquired the operations of Linear Financial Services Holdings Limited, Linear Financial Services Limited and Chancellors Associates
Limited during this financial year. The above includes the results of Linear Financial Services Holdings Limited and Linear Financial Services
Limited for six months from 1 July to 31 December 2006 and Chancellors Associates for six months from 1 July to 31 December 2006.
In July 2006 the Group acquired 56% of the share capital of Linear Financial Services Holdings Limited, a mortgage intermediary business for
£6 in cash through a group company. In the year ended 31 December 2006 the Linear Financial Services Group contributed a loss of £13,000 to
consolidated profit after tax.
In July 2006 the Group acquired 100% of the share capital of Chancellors Associates Limited through a group company. Chancellors Associates
Limited then purchased selected assets and liabilities of a surveying business for £1.9m in cash. In the year ended 31 December 2006 the
company contributed a profit of £102,000 to consolidated profit after tax.
In July 2006, the Group acquired the minority interest (8.33%) in a subsidiary company, Lending Solutions Holdings Limited for £34.7m in cash and
the issue of 10,000 shares in the parent company.
In July 2006, the Group acquired a 6.49% shareholding in a subsidiary company, Reeds Rains Limited for £300,000 in cash and the issue of 32,158
shares in the parent company.
In September 2006, the Group acquired the remaining 3.70% shareholding in a subsidiary company, Reeds Rains Limited for £1.5m in cash.
The acquisition of the Linear Financial Services Holdings Limited group had the following effect on the Group’s assets and liabilities:
Intangible assets
Property, plant and equipment
Trade and other receivables
Cash and cash equivalent
Trade and other payables
Financial liabilities
Corporation tax debtor
Deferred tax liability
Goodwill arising acquisition
Cash
The goodwill of £727,000 comprises the value of expected synergies arising from the acquisition.
Book
value
£’000
Fair value
Adjustments
£’000
–
16
92
51
(357)
(655)
12
–
(841)
162
–
–
–
–
–
–
(48)
114
Fair
value
£’000
162
16
92
51
(357)
(655)
12
(48)
(727)
727
–
66
Annual Report and Accounts 2007
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26. Acquisitions during the year (continued)
The summarised income statement for the year ended 31 December 2006 is as follows:
Revenue
Operating loss
Finance income
Finance cost
Loss before tax
Taxation
Loss for the year ended 31 December 2006
Linear
Financial
Services
Group
£’000
1,088
(20)
–
(40)
(60)
18
(42)
The revenue from the date of acquisition on 1 July to 31 December 2006 totalled £612,984 and the loss for that period after tax totalled £12,927.
The acquisition of the surveying business by Chancellors Associates Limited had the following effect on the Group’s assets and liabilities:
Intangible assets
Property , plant and equipment
Deferred tax liability
Net assets
Goodwill arising on acquisition
Discharged by:
Cash
The goodwill of £1,810,000 comprises the value of expected synergies arising from the acquisition.
The summarised income statement for the year ended 31 December 2006 is as follows:
Book
value
£’000
Fair value
Adjustments
£’000
–
27
–
27
153
–
(47)
106
Revenue
Operating profit
Finance income
Finance cost
Profit before tax
Taxation
Profit for the year ended 31 December 2006
Fair
value
£’000
153
27
(47)
133
1,810
1,943
Chancellors
Associates
£’000
3,344
146
–
–
146
(44)
102
The revenue from the date of the acquisition of the surveying business on 1 July to 31 December 2006 totalled £3,344,474 and the profit for that
period after tax totalled £102,162.
The acquisition of the 8.33% shareholding in Lending Solutions Holdings Limited had the following effect on the Group’s assets and liabilities:
Goodwill arising on acquisitions of minority interest
Discharged by:
Cash
Issue of shares at a premium
Fair
value
£’000
36,806
34,700
2,106
36,806
Annual Report and Accounts 2007
67
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Notes to the group financial statements (continued)
26. Acquisitions during the year (continued)
The acquisition of the 10.19% shareholding in Reeds Rains Limited had the following effect on the Group’s assets and liabilities:
Minority interest
Goodwill arising on acquisitions
Discharged by:
Issue of shares at a premium
Costs associated with the acquisition
Cash
Fair
value
£’000
1,197
3,787
4,984
3,127
22
1,835
4,984
If all the entities acquired in 2006 were acquired at the beginning of the year, the combined Group revenue would have been £198.5m and the
combined Group profit after tax would have been £13.3m.
27. Client monies
As at 31 December 2007, client monies held by subsidiaries in approved bank accounts amounted to £17,886,591 (2006: £11,194,793). Neither this
amount, nor the matching liabilities to the clients concerned are included in the Group balance sheet.
28. Financial instruments – risk management
The Group’s principal financial instruments comprise bank loans and other loans. The main purpose of these financial instruments is to raise
finance for the Group’s operations and to fund acquisitions. The Group has various financial assets and liabilities such as trade receivables, cash
and short –term deposits and trade payables, which arise directly from its operations.
The Group enters into derivative transactions, relating to the purchase of interest rate cap products. The purpose is to manage the interest cost
arising from the Group’s operations and its sources of finance.
It is, and has been through out 2007 and 2006 the Group’s policy that trading in derivatives shall not be undertaken, apart from the interest rate
cap products mentioned above.
The Group is exposed through its operations to one or more of the following financial risks:
l
l
l
Cash flow interest rate risk
Liquidity risk, and
Credit risk
Policy for managing these risks is set up by the Board following recommendations from the Group Finance Director. Certain risks are managed
centrally, while others are managed locally following communications from the centre.
The policy for each of the above risks is described in more detail below:
Cash flow interest rate risk
The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long–term debt obligations with floating
interest rates.
It is currently the Group policy that the majority of external Group borrowings are variable interest based. This policy is managed centrally.
Operations are not permitted to borrow from external sources. Where the Group wishes to fix the amount of external variable rate debt, it
considers the use of cap products available to achieve the desired interest rate profile. The Group purchased an interest rate cap in September
2004 to protect itself against fluctuating interest rates on £25.9m of the Group’s borrowings initially (reducing in line with the loan repayments).
The borrowings tied to this cap were repaid in July 2006. This cap restricts the LIBOR to 6% until 30 September 2006 and 6.5% until 30 September
2007. The cap expired on 30 September 2007.
The Group purchased a further interest rate cap in August 2006 to protect itself against fluctuating interest rates on £30m of the Group’s
borrowings initially (reducing in line with the facility). This cap restricts the LIBOR to 6% on £30m of the facility until expiry on 24 August 2009.
As at the date of these financial statements, the cap had come into effect in September 2007 as the prevailing LIBOR rose above the 6% rate.
Although the Group accepts that this policy neither protects the Group entirely from the risk of paying rates in excess of current market rates nor
eliminates fully cash flow risk associated with interest payments, it considers that it achieves an appropriate balance of exposure to these risks.
At 31 December 2007, approximately 6% of the Group’s borrowings are at a fixed rate of interest (2006: 2%).
68
Annual Report and Accounts 2007
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28. Financial instruments – risk management (continued)
The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the
Group’s profit before tax (through the impact on floating rate borrowings). There is no impact on the Group’s equity.
2007
2006
Increase/
decrease
in basis
point
+100
–100
+100
–100
Effect
on profit
before tax
£’000
(531)
531
(549)
549
Liquidity risk
The Group aims to mitigate liquidity risk by managing cash generation by its operations, dividend policy and acquisition strategy. Acquisitions
are carefully selected with authorisation limits operating up to Group board level and cash payback periods applied as part of the investment
appraisal process. In this way the Group aims to maintain a good credit rating to facilitate fund raising.
The Group monitors its risk to a shortage of funds using a recurring liquidity planning tool. This tool considers the maturity of both its financial
investments and financial assets (eg accounts receivables, and other financial assets) and projected cash flows from operations. The Group’s
objective is to maintain a balance between continuity of funding and flexibility for potential acquisitions through the use of its banking facilities.
The table below summarises the maturity profile of the Group’s financial liabilities at 31 December 2007 based on contractual undiscounted
payments:
Year ended 31 December 2007
Interest bearing loans and borrowings
Trade and other payables
Year ended 31 December 2006
Interest bearing loans and borrowings
Trade and other payables
On
demand
£’000
–
–
–
On
demand
£’000
–
–
–
Less than
3 months
£’000
64
39,873
39,937
Less than
3 months
£’000
143
36,915
37,058
3 to 12 months
£’000
1 to 5 years
£’000
> 5 years
£’000
378
15
393
54,094
70
54,164
–
48
48
3 to 12 months
£’000
1 to 5 years
£’000
> 5 years
£’000
8,174
–
8,174
34,708
–
34,708
–
–
–
Total
£’000
54,536
40,006
94,542
Total
£’000
43,025
36,915
79,940
Capital management
The primary objective of the Group’s capital management is to ensure that it maintains appropriate capital structure to support its business
objectives and maximise shareholder value.
In the medium to long term, the Group will strive to maintain a reasonable leverage (ie balance between debt and equity) to help achieve the
Group’s business objectives of growth (through acquisitions and organic growth) and dividend policy. In the short term, the Group does not
have a set leverage ratio to be achieved but the directors monitor the ratio of net debt to operating profit to ensure that the debt funding is not
excessively high.
The Group has a current ratio of net debt to operating profit of 1.3:1 (2006: 1.1:1), net debt of £48.7m (2006: £34.2m) and operating profit before
exceptional costs and amortisation of £36.5m (2006: £32.4m). The business is significantly cash generative with a low capital expenditure
requirement. The stated dividend policy of 30% to 40% of net profit is designed to reflect the cash generative nature of business, but at the same
time provide flexibility for future acquisitions. The Group will manage its future capital requirement in reference to any further acquisitions by
carefully reviewing the net debt to operating profit gearing.
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Annual Report and Accounts 2007
69
Notes to the group financial statements (continued)
28. Financial instruments – risk management (continued)
Liquidity risk (continued)
Interest bearing loans and borrowings
Less: cash and short term deposit
Net debt
2007
£’000
50,990
(2,326)
48,664
2006
£’000
34,739
(578)
34,161
The liquidity risk of each Group entity is managed centrally by the Group treasury function. The Group’s cash requirement is monitored closely.
All surplus cash is held centrally to offset against the Group’s borrowings and reduce the interest payable. The type of cash instrument used
and its maturity date will depend on the Group’s forecast cash requirements. The Group has a revolving credit facility with a major banking
corporation to manage longer term borrowing requirements.
Credit risk
There are no significant concentrations of credit risk within the Group. The Group is exposed to a credit risk in respect of revenue transactions
(i.e. turnover from customers). It is Group policy, implemented locally, to obtain appropriate details of new customers before entering into
contracts. The majority of the estate agency customers use the Group’s services as part of a house sale transaction and consequently the debt is
paid from the proceeds realised from the sale of the house by the vendor’s solicitor before the balance of funds is transferred to the vendor. This
minimises the risk of the debt not being collected. The majority of the surveying customers are large financial institutions and as such the credit
risk is not expected to be significant. The maximum credit risk exposure relating to financial assets is represented by carrying value as at the
balance sheet date.
Interest rate risk profile of financial assets and liabilities
Treasury policy is described in note above. The disclosures below exclude short term receivables and payables which are primarily of a trading
nature and expected to be settled within normal commercial terms.
The interest rate profile of the financial assets and liabilities of the Group as at 31 December 2007 is as follows:
Fixed rate
Unsecured loans
Cash–settled share–based
payment
Interest rate cap
Floating rate
Cash and cash equivalents
Revolving credit facility
Secured loans
Unsecured loans
–
22
Within
1 year
£‘000
2,326
(16,948)
(75)
(191)
Within
1 year
£‘000
1–2 years
£‘000
2–3 years
£‘000
3–4 years
£‘000
4–5 years
£‘000
(136)
(1,033)
(10)
(69)
–
–
–
–
–
(34)
–
–
12
1–2 years
£‘000
2–3 years
£‘000
3–4 years
£‘000
4–5 years
£‘000
–
(17,000)
–
(191)
–
(13,501)
–
(31)
–
–
–
–
–
–
–
–
The effective interest rate and the actual interest rate charged on the loans is as follows:
Revolving credit facility
Other unsecured loans
Unsecured loan notes
Unsecured bank loan
70
Annual Report and Accounts 2007
More than
5 years
£‘000
–
–
–
More than
5 years
£‘000
–
–
–
–
Total
£‘000
(1,179)
(103)
34
Total
£‘000
2,326
(47,449)
(75)
(413)
Effective rate
and actual rate
5.57%
5.30%
5.00%
10.00%
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28. Financial instruments – risk management (continued)
Interest rate risk profile of financial assets and liabilities (continued)
The interest rate profile of the financial assets and liabilities of the Group as at 31 December 2006 is as follows:
Fixed rate
‘B’ Loan notes
Unsecured loans
Interest rate cap
Floating rate
Cash and cash equivalents
Revolving credit facility
Unsecured loans
Within
1 year
£‘000
(472)
(33)
45
Within
1 year
£‘000
578
(4,874)
(23)
1–2 years
£‘000
2–3 years
£‘000
3–4 years
£‘000
4–5 years
£‘000
–
(169)
22
–
(33)
12
–
(17)
–
–
–
–
1–2 years
£‘000
2–3 years
£‘000
3–4 years
£‘000
4–5 years
£‘000
–
(28,540)
(578)
–
–
–
–
–
–
–
–
–
The effective interest rate and the actual interest rate charged on the loans is as follows:
Senior term loan
Secured loan notes
‘B’ loan notes
Revolving credit facility
Unsecured loans
More than
5 years
£‘000
–
–
–
More than
5 years
£‘000
–
–
–
Total
£‘000
(472)
(252)
79
Total
£‘000
578
(33,414)
(601)
Effective rate
Actual rate
7.68%
11.50%
4.04%
5.71%
7.03%
7.20%
10.00%
3.60%
5.71%
7.03%
Fair values of financial assets and financial liabilities
Set out below is a comparison by category of carrying amounts and fair values of all of the Group’s financial instruments that are carried in the
financial statements:
Financial assets
Cash and cash equivalents
Financial liabilities
Interest–bearing loans and borrowings:
Floating rate borrowings
Fixed rate borrowings
Interest rate cap
2007
2006
Book
Value
£’000
Fair
Value
£’000
Book
Value
£’000
2,326
2,326
578
Fair
Value
£’000
578
(47,937)
(3,053)
34
(47,937)
(3,010)
34
(34,016)
(723)
79
(34,016)
(723)
79
The fair values for the majority of the financial instruments have been calculated by discounting the expected future cash flows at interest rates
prevailing for a comparable maturity period for each instrument. The fair values of the interest rate caps are determined by reference to market
values for similar instruments.
29. Related party transactions
Compensation of key management personnel, all of whom are directors of the Company is given in note 12. The details of transactions between
Group companies have not been disclosed as these are eliminated on consolidation.
Consultancy fees and reimbursement of expenses to non–executive directors (net of VAT) during 2007 was £2,418 (2006: £21,773). No amount was
outstanding by the Group as at 31 December 2007 (2006: £nil).
There were no other related party transactions with directors in the year ended 31 December 2007.
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Annual Report and Accounts 2007
71
Notes to the group financial statements (continued)
30. Capital commitments
Capital expenditure contracted for but not provided
2007
£’000
169
2006
£’000
32
31. Post balance sheet event
In December 2007, the Group announced the details of a Buy As You Earn share scheme available to all Group employees, commencing in
January 2008. The scheme allows employees to purchase shares in the Group on a monthly basis.
On 20 February 2008, the Group announced its intention to cease trading as a provider of conveyancing services. The results for 2007 and 2006 are
shown below:
Revenue
Operating loss
Net current liabilities
Impairment on property, plant and equipment and goodwill
2007
£’000
2,719
(877)
(1,390)
(337) –
2006
£’000
3,132
(648)
(1,031)
32. Principal subsidiary companies
The Group owns directly or indirectly the following issued and fully paid ordinary and preference share capital of its principal subsidiary
undertakings, all of which are incorporated in Great Britain and whose operations are conducted mainly in the United Kingdom:
Proportion
of nominal
value of
shares held
100%
100%
77.5%
96%
100%
100%
65%
56%
100%
75%
87.5%
95%
100%
nature of business
Estate agency and related activities
Surveying and valuation services
Legal conveyancing services
Training services
Financial services
Estate agency and related activities
Mortgage services
Mortgage services
Surveying and valuation services
Holding company
Estate agency and related activities
Surveying and valuation services
Estate agency and related activities
80%
Estate agency and related activities
name of subsidiary company
Holding
your–move.co.uk Limited
e.surv Limited *
Ordinary shares
Ordinary shares
Homefast Property Lawyers Limited
Ordinary shares
Property careers.com Limited
Ordinary shares
(formerly homeinspectors.co.uk Limited)
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary ‘A’ shares
Ordinary ‘B’ shares
Non cumulative
preference redeemable
shares
Ordinary shares
Ordinary ‘B’ shares
Ordinary ‘C’ shares
First Complete Limited
Reeds Rains Limited *
Linear Mortgage Network Limited
Linear Financial Services Limited
Chancellors Associates Limited
LSLi Limited*†
ICIEA Limited†
Barnwoods Limited*†
David Frost Estate Agents Limited†
JNP Estate Agents Limited†
* held directly by the Company
† acquired during 2007
72
Annual Report and Accounts 2007
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Statement of directors’ responsibilities in relation to the parent company
Notes to the group financial statements (continued)
financial statements
The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare
the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards
and applicable law). The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the
profit or loss of the Company for that period.
In preparing those financial statements, the directors are required to:
l
l
l
select suitable accounting policies and then apply them consistently;
make judgements and estimates that are reasonable and prudent; and
state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the
financial statements.
The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of
LSL and enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the
assets of LSL and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
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Annual Report and Accounts 2007
73
Notes to the group financial statements (continued)
Auditors’ Report on the Company Financial Statement
Independent Auditors’ Report to the Members of LSL Property Services plc
We have audited the parent company financial statements of LSL Property Services plc for the year ended 31 December 2007 which comprise
the Company balance sheet and the related notes 1 to 15. These parent company financial statements have been prepared under the accounting
policies set out therein. We have also audited the information in the Directors’ Remuneration Report that is described as having been audited.
We have reported separately on the group financial statements of LSL Property Services plc for the year ended 31 December 2007.
This report is made solely to the company’s members, as a body, in 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 auditors’ report and for
no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the
company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the parent company financial statements
in accordance with applicable United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set
out in the Statement of Directors’ Responsibilities.
Our responsibility is to audit the parent company financial statements and the part of the Directors’ Remuneration Report to be audited in
accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the parent company financial statements give a true and fair view and whether the parent company
financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in accordance with the
Companies Act 1985. We also report to you whether in our opinion the information given in the Parent Company Directors’ Report is consistent
with the financial statements. The information given in the Directors’ Report includes that specific information presented in the Chairman’s
Statement and Business Review that is cross referred from the Business Review section of the directors’ report.
In addition we report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all the information
and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not
disclosed.
We read other information contained in the Annual Report and consider whether it is consistent with the audited parent company financial
statements. The other information comprises only the Directors’ Report, the unaudited part of the Directors’ Remuneration Report, the Chairman’s
Statement, Business Review, the Corporate Governance Report and the Corporate Social Responsibility Statement. We consider the implications
for our report if we become aware of any apparent misstatements or material inconsistencies with the parent company financial statements. Our
responsibilities do not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An
audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent company financial statements and
the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made
by the directors in the preparation of the parent company financial statements, and of whether the accounting policies are appropriate to the
company’s circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us
with sufficient evidence to give reasonable assurance that the parent company financial statements and the part of the Directors’ Remuneration
Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also
evaluated the overall adequacy of the presentation of information in the parent company financial statements and the part of the Directors’
Remuneration Report to be audited.
Opinion
In our opinion:
l
l
l
the parent company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting
Practice, of the state of the company’s affairs as at 31 December 2007;
the parent company financial statements and the part of the Directors’ Remuneration Report to be audited have been properly prepared in
accordance with the Companies Act 1985; and
the information given in the directors’ report is consistent with the parent company financial statements.
Ernst & Young LLP
Registered auditor
Leeds
27 February 2008
74
Annual Report and Accounts 2007
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Parent company balance sheet as at 31 December 2007
Notes to the group financial statements (continued)
Fixed assets
Tangible fixed assets
Investments
Other debtors
Current assets
Debtors
Creditors: amounts falling due within one year
net current liabilities
Total assets less current liabilities
Creditors: amounts falling due after one year
net assets
Capital and reserves
Called up share capital
Share premium account
Share–based payment reserve
Reserve for own shares
Profit and loss account
Equity shareholders’ funds
Note
3
4
5
5
6
7
10
11
11
11
11
2007
£’000
8 –
107,992
13 –
108,013
47,760
50,891
(3,131)
104,882
63,957
40,925
208
5,629
463
(2,669)
37,294
40,925
2006
£’000
105,847
105,847
6,514
23,573
(17,059)
88,788
74,778
14,010
208
5,629
13
(298)
8,458
14,010
The Company has elected to take exemption under Section 230 of the Companies Act 1985 to not present the parent company profit and loss
account.
The profit for the parent company for the year was £31,960,000 (2006: £10,404,737).
The financial statements were approved by the Board on 27 February 2008 and were signed on its behalf by:
D A Fielding
Director
S D Embley
Director
The accompanying notes are an integral part of these financial statements.
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Annual Report and Accounts 2007
75
Notes to the parent company financial statements (continued)
Notes to the parent company financial statements
1. Accounting policies
Basis of preparation of financial statements
The financial statements of the Company have been prepared under the historical cost convention, in accordance with applicable Accounting
standards in the United Kingdom and with those parts of the Companies Act 1985 applicable to companies reporting under UK GAAP.
The accounting policies, which follow set out those policies, which apply in preparing the financial statements for the year, ended 31 December
2007. The Company’s financial statements are presented in Sterling and all values are rounded to the nearest thousand pounds (£000) except
when otherwise indicated.
On 12 October 2006, the Company changed its name from Lending Solutions Limited to LSL Property Services plc and obtained listing of its shares
on the London Stock Exchange on 21 November 2006.
The Company has taken advantage of the exemption in paragraph of 2D of FRS 29 Financial Instruments: Disclosures and has not disclosed
information required by that standard, as the Group’s consolidated financial statements, in which the Company is included, provide equivalent
disclosures for the Group under IFRS 7 Financial Instruments: Disclosures.
Taxation
Current Tax
Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws
that are enacted or substantially enacted by the balance sheet date.
Deferred Tax
Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions
or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date.
Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements that arise for in the
inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements.
A net deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be
regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can
be deducted.
Deferred tax is not recognised when fixed assets are revalued unless by the balance sheet date there is a binding agreement to sell the revalued
assets and the gain or loss expected to arise on sale has been recognised in the financial statements. Neither is deferred tax recognised when
fixed assets are sold and it is more likely than not that the taxable gain will be rolled over, being charged to tax only if and when the replacement
assets are sold.
Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to
reverse, based on tax rates and laws that are enacted or substantially enacted by the balance sheet date. Deferred tax is measured on a
non–discounted basis.
Pensions costs
The Company operates a defined contribution pension scheme for employees of the Company. The assets of the scheme are invested and
managed independently of the finances of the Company. Contributions to the defined contribution scheme are recognised in the profit and loss
account in the period in which they become payable.
Share–based payment transactions
The share option programme allows group employees to acquire shares of the Company. The fair value of the options granted is recognised as
an employee expense with the corresponding increase in equity in the case of equity settled schemes. The fair value is measured at the grant
date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted
is measured using the Black Scholes model, taking into account the terms and conditions upon which the options were granted. Non–market
vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each balance sheet date so that,
ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Market vesting
conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is recognised
irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting
condition.
The financial effect of awards by the Company of options over its equity shares to employees of subsidiary undertakings are recognised by the
company in its individual financial statements. In particular, the Company records an increase in its investment in subsidiaries with a credit to
equity equivalent to the FRS 20 cost in subsidiary undertakings.
76
Annual Report and Accounts 2007
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1. Accounting policies (continued)
Investment in subsidiaries
Investments in subsidiaries are stated at cost and reviewed for impairment if there are any indications that the carrying value may not be
recoverable.
Treasury shares
The Company has an employee share trust (ESOT) for the granting of group shares to executives and senior employees. Shares in the Company
held by the employee share trust are treated as treasury shares and presented in the balance sheet as a deduction from equity. Dividends
earned on shares held in the trust have been waived.
Financial instruments
Financial assets and financial liabilities are recognised in the Company’s Balance Sheet when the Company becomes a party to the contractual
provisions of the instrument. Financial assets are de–recognised when the Company no longer has the rights to cash flows, the risks and rewards
of ownership or control of the asset. Financial liabilities are de–recognised when the obligation under the liability is discharged, cancelled or
expires. All regular way purchases and sales of financial assets are recognised on the trade date, being the date that the Company commits
to purchase or sell the asset. Regular way transactions require delivery of assets within the timeframe generally established by regulation or
convention in the market place. The subsequent measurement of financial assets depends on their classification.
The Company’s accounting policy for each category of financial instruments is as follows:
Interest bearing loans and borrowings
All loans and borrowings are initially recognised at fair value less directly attributable transaction costs. After initial recognition, interest–bearing
loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses arising on repurchase,
settlement or otherwise cancellation of liabilities are recognised respectively in investment income and finance costs.
Finance costs comprise interest payable on borrowings calculated at the effective interest rate method and recognised on an accruals basis,
together with dividends paid.
Borrowing costs are recognised as an expense when incurred.
Derivative financial instruments
The Company uses derivative financial instruments such as interest rate caps to hedge its risks associated with interest rate fluctuations. Such
derivative financial instruments are stated at fair value. The fair value of interest rate swap contracts is determined by reference to market
values for similar instruments.
The directors have taken advantage of FRS29 and have excluded disclosures relating to financial instruments from the financial statements on
the basis that the financial instruments of the Company are included within the consolidated financial statements of the Group.
Classification of shares as debt or equity
When shares are issued, any component that creates a financial liability of the Company is presented as a liability in the balance sheet; measured
initially at fair value net of transaction costs and thereafter at amortised cost until extinguished on conversion or redemption. The corresponding
dividends relating to the liability component are charged as interest expense in the profit and loss. The initial fair value of the liability component
is determined using a market rate for an equivalent liability without a conversion feature.
The remainder of the proceeds on issue is allocated to the equity component and included in shareholders’ equity, net of transaction costs.
The carrying amount of the equity component is not remeasured in subsequent years. Transaction costs are apportioned between the liability
and equity components of the shares based on the allocation of proceeds to the liability and equity components when the instruments are first
recognised.
Tangible fixed assets
Tangible fixed asset is stated at cost less accumulated depreciation and accumulated impairment losses. Such cost includes costs directly
attributable to making the asset capable of operating as intended.
Depreciation is provided on all tangible fixed assets at rates calculated to write off the cost, less estimated residual value of each asset evenly
over its expected useful life as follows:
Fixture, fittings and computer equipment
–
over 5 years
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Annual Report and Accounts 2007
77
Notes to the parent company financial statements (continued)
1. Accounting policies (continued)
Tangible fixed assets (continued)
The carrying values of tangible fixed assets are reviewed for impairment when events or changes in circumstances indicate the carrying value
may not be recoverable.
2. Company profit for the financial year after tax
The Company has not presented its own profit and loss account as permitted by Section 230 of the Companies Act 1985. The profit after tax for the
year was £31,960,000 (2006: £10,404,737).
3. Tangible fixed assets
As at 31 December 2007
Cost
At 1 January 2007
Additions
At 31 December 2007
Depreciation
At 1 January 2007
Charge for the year
At 31 December 2007
Carrying amount
At 31 December 2007
At 31 December 2006
Fixture,
fittings and
computer
equipment
£’000
–
9
9
–
1
1
8
–
4. Investments in group undertakings
Details of the subsidiaries held directly and indirectly by the Company are shown in note 32 to the Group financial statements.
At 1 January
Additions
At 31 December
2007
£’000
105,847
2,145
107,992
2006
£’000
1,068
104,779
105,847
In July 2007, the Company paid £950,000 to subscribe for the entire share capital of Barnwoods Limited.
In August 2007, the Company set up LSLi Limited (a 75% subsidiary) to acquire other estate agency companies. The Company has a ‘put and
call option’ on the remaining 25% of the shares in LSLi Limited. The Company has estimated the payout under the ‘call option’ to be £754,003 and
included the same as a cost of investment. This amount is also included under note 10.
During the year, £441,000 (2006:£11,000) of the share–based payment have been recorded as an increase in the investment in subsidiaries,
representing the financial effects of awards by the Company of options over its equity shares to employees of subsidiary undertakings.
On 25 July 2006, the Company paid £39,752,296 in respect of the acquisition of esurv Limited from Lending Solutions Holdings Limited. The
Company also paid £23,092,713 in respect of the acquisition of Reeds Rains Limited from Lending Solutions Holdings Limited on that date.
On 25 July 2006, the Company issued 10,000 ordinary shares of £0.10 per share at a premium of £210.51 per share, in addition to a cash
consideration of £34,700,000 in exchange for the acquisition of the remaining minority interest of 8.33% in Lending Solutions Holdings Limited. The
Company also paid £300,000 in cash and issued 32,158 ordinary shares of £0.10 per share at a premium of £95.15 per share for an additional 6.48%
shareholding in Reeds Rains Limited.
78
Annual Report and Accounts 2007
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4. Investments in group undertakings (continued)
On 29 September 2006, the Company acquired the remaining minority interest in a subsidiary, Reeds Rains Limited for a consideration of £1.5m.
The investment in Lending Solutions Holdings Limited, Reeds Rains Limited and esurv Limited have been included in the company’s balance sheet
at their cost of acquisition.
5. Debtors
Current
Deferred tax asset (note 8)
Corporation tax debtor
Other debtors
Prepayments
Amounts owed by Group undertakings
non–current
Prepayments
6. Creditors: amounts falling due within one year
Loans (note 9)
Accruals
Amounts owed to group undertakings
7. Creditors: amounts falling due after one year
Loans (note 9)
Contingent consideration
Accruals
8. Deferred tax asset
Deferred tax liability at 1 January
Deferred tax (charge)/credit in income statement for the year
Deferred tax asset at 31 December
Deferred tax asset is in relation to a short term timing difference.
2007
£’000
14
3,642
207
13
43,884
47,760
13 –
2007
£’000
16,948
380
33,563
50,891
2007
£’000
63,106
754 –
97 –
63,957
2007
£’000
48 –
(34)
14
2006
£’000
48
1,582
158
83
4,643
6,514
2006
£’000
5,346
716
17,511
23,573
2006
£’000
74,778
74,778
2006
£’000
48
48
The UK corporation tax rate will decrease from 30% to 28% from 1 April 2008. The deferred tax balance has been adjusted in the current year to
reflect this change.
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Annual Report and Accounts 2007
79
Notes to the parent company financial statements (continued)
9. Loans
Amounts falling due
In one year or less
In more than one year but not more than two years
2007
£’000
16,948
63,106
80,054
2006
£’000
5,346
74,778
80,124
In 2004, the lenders granted the Company the right to exercise a call option to require them to subscribe for an additional £5m in loan notes due
for repayment between 2011 and 2013. This call option was cancelled on 9 January 2006.
A loan of £nil (2006: £0.5m) is also guaranteed by the Company’s bankers, Barclays Bank plc.
Bank loans and loan notes in issue in 2005 were repaid in full in July 2006.
Secured bank loans – Revolving credit facility
The secured bank loans totalling £47.4m (2006: £33.4m) are secured by a debenture over the Group’s assets excluding the following subsidiaries,
Lending Solutions Limited, First Complete Limited and its subsidiaries, property–careers.com Limited, Chancellors Associates Limited and LSLi
Limited and its subsidiaries.
The secured bank loans relate to the revolving credit facility. The utilisation of this revolving credit facility may vary each month as long as this
does not exceed the maximum £95m facility. The banking facility expires in July 2009 but can be extended at that date until July 2011.
Interest payable on the revolving credit facility amounted to £2.9m (2006 £1.2m). The interest rate applicable to the facility is LIBOR plus a margin
rate of 0.65%. The margin rate is linked to the leverage ratio of the Group and the margin rate is reviewed at six monthly intervals.
10. Called up share capital
Authorised
Ordinary shares of 0.2p each
Issued and fully paid:
At 1 January
‘B’ ordinary shares converted prior to listing
Issue of shares
Share split for 10p per share to 0.2p per share
At 31 December
2007
Shares
£’000
2006
Shares
500,000,000
1,000
500,000,000
104,158,950
–
–
–
104,158,950
208
–
–
–
208
1,000,000
1,000,000
2,093,208
100,065,742
104,158,950
£’000
1,000
100
100
8
–
208
At 1 January 2005, the issued and fully paid share capital of £1,000,000 was made up of 1,000,000 ‘A’ ordinary shares.
On 25 July 2006, the Company issued 5,000 ‘A’ ordinary shares of 10p each and 5,000 ‘B’ ordinary shares of 10p each in exchange for the minority
interest (8.33%) in a subsidiary company, Lending Solutions Holdings Limited.
On 25 July 2006, the Company issued 32,158 ‘A’ ordinary shares of 10p each in exchange for a 6.4852% shareholding in a subsidiary company,
Reeds Rains Limited.
On 31 October 2006, the ‘A’ and ‘B’ ordinary shares of 10p each were subdivided into one class of 0.2p shares.
In 2006, the 1,000,000 ‘B’ ordinary shares, which were classified as debt in 2005 had been reclassified as share capital as they were converted
into ordinary shares prior to listing and were not entitled to any further cumulative dividend.
On 21 November 2006, the Company issued 2,051,050 ordinary shares of 0.2p each in exchange for the return of warrants.
80
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Notes to the parent company financial statements (continued)
11. Reconciliation of movements in shareholders’ funds
Share
capital
£’000
Share
premium
account
£’000
Share-
based
payment
reserve
£’000
Reserve for
own shares
£’000
Profit and
loss account
£’000
At 1 January 2006
‘B’ ordinary shares converted
listing prior to listing
Issue of shares
Share–based payments
Purchase of treasury shares
Profit for the year
Balance at 31 December 2006
Share–based payments
Purchase of treasury shares
Dividend paid
Profit for the year
Balance at 31 December 2007
100
100
8
–
–
–
208
–
–
–
–
208
400
–
5,229
–
–
–
5,629
–
–
–
–
5,629
–
–
–
13
–
–
13
450
–
–
–
463
–
–
–
–
(298)
–
(298)
–
(2,371)
–
–
(2,669)
(1,947)
–
–
–
–
10,405
8,458
–
–
(3,124)
31,960
37,294
Share premium
The amount subscribed for share capital in excess of nominal value less any costs attributable to the issue of new shares.
Total
£’000
(1,447)
100
5,237
13
(298)
10,405
14,010
450
(2,371)
(3,124)
31,960
40,925
Share-based payment reserve
This represents the amount provided in the year in respect of share awards. The Company operates a Long Term Incentive Plan and Save As You
Earn scheme for the employees in the Company and the Group. See note 12 of the Group financial statements for detail of the Long Term Incentive
Plan and Save–As–You Earn scheme.
12. Pensions costs and commitments
The Company operates defined contribution pension schemes for all its directors and employees. The assets of the schemes are held separately
from those of the Company in independently administered funds.
The Company’s contributions for ‘old’ members of the existing defined contribution section of the scheme (those members who have always been
in this scheme) throughout 2006, were a maximum of 5% of pensionable salaries where members contribute and the cost of the death–in–service
benefits.
The Company’s contributions for ‘new’ members of the defined contribution stakeholder scheme (those members who were part of the Aviva
scheme until the Company left the Aviva group in 2004) were 10% of pensionable salaries until the end of July 2007 where members contribute
and the cost of the death–in–service benefits. From August 2007 the Company’s contributions for these ‘new’ members of the defined contribution
stakeholder scheme reverted to 5% of pensionable salaries where members contribute, and the cost of the death–in–service benefits.
Total contributions to the defined contribution schemes in the year were £56,038 (2006: £24,591).
There were no outstanding amounts in respect of pensions as at 31 December 2007 (2006: £nil).
13. Related party transactions
The Company has taken advantage of the exemption under FRS8 where disclosure is not required of transactions with subsidiary undertakings
90% or more of whose voting rights are controlled within the Group and where the Company’s own financial statements are presented together
with its consolidated financial statements.
14. Capital commitments
The Company had no capital commitments as at 31 December 2007 (2006: none).
15. Post balance sheet event
Please refer to note 31 of the Group financial statements.
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Annual Report and Accounts 2007
81
Definitions
“Adjusted Proforma Earnings Per Share”
reflects the after tax effects of Underlying Operating Profit (as set
out in note 10 of the Accounts) divided by the number of shares in
issue as at year end.
“AGM”
Annual General Meeting
“Barnwoods”
Barnwoods Limited
“Chancellors Associates”
Chancellors Associates Limited
“Combined Code”
Combined Code on Corporate Governance published by the
Financial Reporting Council in 2006
“EPC”
Energy performance certificate
“e.surv”
e.surv Limited
“First Complete”
First Complete Limited
“Frosts”
David Frost Estate Agents Limited
“HIPs”
Home Information Packs
“Homefast”
Homefast Property Lawyers Ltd
“Intercounty”
ICIEA Limited
“IFRS”
International Financial Reporting Standards
“JNP”
JNP Estate Agents Limited
“Linear”
Linear Mortgage Network and Linear Financial Services
“Linear Financial Services”
Linear Financial Services Limited
“Linear Mortgage Network”
Linear Mortgage Network Limited
“LSLi”
LSLi Limited and its subsidiaries JNP, Intercounty and Frosts.
“LSL” or “Group”
LSL Property Services plc and its subsidiaries
“Net Debt”
is defined as financial liabilities less cash and cash equivalents
“Openwork”
Openwork Holdings Limited
“property-careers.com”
Property-careers.com Limited
“Reeds Rains”
Reeds Rains Limited
“Underlying Operating Profit/Loss”
is before exceptional costs and amortisation
“Your Move”
your-move co uk Limited
82
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L
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LSL Property Services plc
Registered in England (Company Number 5114014)
Registered Office:
Newcastle House, Albany Court, Newcastle Business Park, Newcastle upon Tyne, NE4 7YB
Telephone 01904 715324
Facsimile 01904 715354
E-mail enquiries@lslps.co.uk
Website www.lslps.co.uk
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