The Paragon Group of Companies PLC annual report & accounts 2000 c o n t e n t s 3 6 9 1 7 2 0 2 3 2 4 2 5 2 9 financial highlights chairman(cid:213)s statement chief executive(cid:213)s review directors(cid:213) report directors(cid:213) remuneration statement of responsibilities auditors(cid:213) report corporate governance the accounts financial highlights 2000 £m 35.5 28.5 1999 £m 33.8 30.3 1998 £m 25.1 23.9 1997 £m 21.6 21.6 1996 £m 18.1 18.1 Profit before taxation Profit after taxation Assets under management 1,784.4 1,597.7 1,470.6 1,151.1 1,214.8 Shareholders(cid:213) funds 137.7 113.5 86.8 63.0 49.0 1,800 1,600 1,400 1,200 1,000 Assets under management - £m 1996 1997 1998 1999 2000 Earnings per share - basic - diluted Dividend per ordinary share 25.1p 24.9p 3.8p 26.1p 22.4p 25.8p 22.1p 3.4p 3.0p 23.4p 23.3p 2.7p 19.7p 19.1p 2.4p The basic and diluted earnings per share figures for 1998 and prior years have been adjusted following the implementation of Financial Reporting Standard 14 - (cid:212)Earnings per share(cid:213). The earnings per share in 1997 and 1996 have been adjusted to reflect the rights issue during 1998. Operating profit - £m Accounts under management - number (cid:213)000 1996 1997 1998 1999 2000 40 35 30 25 20 15 10 55 50 45 40 35 30 25 20 15 10 5 commitment respect humour company values integrity creativity professionalism teamwork commitment To drive the business forward with determination and to do so with effort and enthusiasm humour To ensure we have fun while achieving success company values respect To treat people as individuals and to listen to their views integrity To be ruthlessly honest and open in everything that we do creativity To identify and create new business opportunities and to apply creative and effective solutions to problems teamwork professionalism To maintain the highest standards and to deliver our products and services with care and accuracy To work in harmony in our respective teams and collectively towards the delivery of our overall objectives chairman(cid:213)s statement I am pleased to report that the Group continued its strong growth, both in Progress review and future strategy terms of profitability and in terms of business volumes, during the year My statement this year is intended to emphasise for existing and potential ended 30 September 2000. Operating profit increased by over 13% and shareholders the enormous progress which has been achieved in meeting new lending increased by 22%. Furthermore, after the year end, we the strategy outlined to shareholders in previous statements. acquired Colonial Finance (UK) Limited which not only increases our asset base significantly but, more importantly, gives us access to an important new product and distribution channel through which to expand our consumer finance business. Profit before tax for the year ended 30 September 2000 was £35.5 million Since re-entering the lending markets in 1995, Paragon has created a niche mortgage business attracting proper margins and has generated further loan assets with the addition of consumer finance businesses all supported by Paragon(cid:213)s core skills in underwriting and collections. All of our lending is underpinned by cost-effective funding through securitisation of the assets. (1999: £31.3 million before a £2.5 million profit on sale of property), an Paragon’s plan to create three new business streams, both to replace the underlying increase of 13.4%. After a corporation tax charge of £7 million run-down of NHL’s book and to create a platform for future growth, has (1999: £3.5 million) the profit after tax was £28.5 million (1999: £30.3 been achieved. All of these businesses now contribute to profits and have million). Earnings per share were 25.1p, compared to 26.1p for the strong growth potential. previous year, the reduction from last year being attributable to the increased corporation tax charge and to the impact of the profit on sale of property; excepting these items this figure would have increased by 16%. Paragon Mortgages(cid:213) loan portfolio now totals £790.8 million having grown by 25% in the past year. Arrears are minimal and Paragon’s strong position in the Buy to Let market will ensure continuing growth. These are In view of these strong results the Board is pleased to propose, subject to high quality earnings. approval at the Annual General Meeting, the payment on 2 February 2001 Paragon Personal Finance comprises both unsecured and secured of an increased final dividend of 2.1p per share which, when added to the personal loan businesses, and includes our own organic growth since the interim dividend of 1.7p paid in July 1999, gives a total dividend of 3.8p start up in 1997, the 1998 acquisition of Universal Credit and the post per share for the year, an increase of 11.7% on last year(cid:213)s dividend of 3.4p. balance sheet acquisition of Colonial Finance (UK). Total loan assets at 30 September 2000 equalled £352.4 million, an increase of 38.4% over the together with Paragon(cid:213)s inherent strengths will be reflected before long in previous year. Subsequently, Colonial has added approximately £174 the market value accorded to Paragon. million of balances and an established retail ’point of sale’ business to complement our affinity, broker and timeshare sourcing. We plan for strong growth of the Paragon Personal Finance business. The past year saw strong organic growth, both in terms of business written and in profits, followed in October by an important acquisition which we expect to be earnings enhancing in the current financial year. We have in Paragon Car Finance commenced operations in 1997 and had £128.4 place the spread of business lines and the asset base to deliver continuing million of loans outstanding at 30 September 2000, an increase of 81% in strong growth for shareholders. the year. Again, this business has arrears below the industry average and in a fragmented market has the potential to grow strongly. Overall, Paragon(cid:213)s opportunities increase daily as our strength develops. On the assumption of reasonably benign economic circumstances, which we In contrast, the old NHL book has declined to £398.1 million, representing anticipate, Paragon can accelerate further. We move into the current only 23.8% of total loan assets at 30 September 2000. financial year with considerable optimism. Securitisation continues to provide both a discipline and cost-effective Staff matched funding for all Paragon assets. Overall, funding is in place to I would like to record my thanks to my fellow directors and the staff at provide for our ambitious organic growth plans. Further acquisitions in Paragon for their continuing commitment, professionalism and enthusiasm. the areas of our core skills will be made where value can be added. Paragon(cid:213)s business has been transformed from the old NHL. All of the new businesses now contribute increasingly to profits with the personal finance business taking an increasingly dominant role. Paragon(cid:213)s emphasis will continue to move towards consumer finance both in volume and JONATHAN P L PERRY contribution in the future. Our new businesses are in robust good health EXECUTIVE CHAIRMAN and leading the drive for profits growth. We believe that these factors 7 DECEMBER 2000 Our Vision is to become the UK(cid:213)s most highly regarded specialist provider of finance for people. Jackie Lowe chief executive(cid:213)s review The year to 30 September 2000 has been a period of intense activity in income for 1999 was £11.9 million, the effective increase being 17.6 % each of our businesses and much has been achieved. It was pleasing to on a comparable basis. report the healthy increase in profits to £35.5 million. However, particularly pleasing was the underlying growth in each of the businesses and the progress achieved in laying firm foundations for robust and sustainable growth in the future. Our continuing focus on maximising operating efficiencies has resulted in a reduction in operating expenses from £31 million to £30.6 million, a considerable achievement when set against the significant growth in business volumes. The cost to income ratio of 40% compares with 45% in This growth potential has been further enhanced by the acquisition of 1999. We anticipate that operating expenses may rise in the current year as Colonial Finance (UK) Limited shortly after the balance sheet date. This we integrate the business of Colonial Finance (UK) Limited but we expect brings to us skills and experience in a new area of lending and we welcome the downward trend in the cost to income ratio to continue next year. all the staff of Colonial who have joined the Paragon Group. Financial review During the year, new lending increased by 22% to £510 million from £419.7 million in 1999 resulting in net growth in loan assets of 12.6% to £1.7 billion. Of the new originations, £285.9 million were in the second half of the year and in each of the last three months of the year over £50 million was advanced. The rising interest rate environment resulted in a The provisions charge of £10.2 million was in line with our expectations and compares with £5.8 million in 1999. The increase reflects the increased proportion of our lending book attributable to personal finance, where arrears are generally higher than for first mortgages. Our arrears performance across all of our new business areas continues to compare favourably with our competitors as a result of our careful credit policy. steeply positive yield curve during the year, with a consequent impact on Personal Finance the cost of three-month LIBOR compared to base rates on our variable rate Paragon Personal Finance advanced £165.9 million in new lending during business, and on the apparent competitiveness of fixed rate offerings the year, a growth rate of 73.5% from the level of £95.6 million achieved compared to variable rate alternatives. Despite these negative factors for 1999. At the year end, there were 59,393 accounts under management Paragon(cid:213)s average margins increased during the year, from 4.4% to 4.7% with an aggregate value of £352.4 million. primarily due to the changing mix of the business. The prevailing view is that we have reached the top of the interest rate cycle with the helpful consequence that the yield curve has now flattened. Particularly pleasing has been the growth of volume of the secured personal finance product, which completed £71.7 million in the year, up from £7.3 million in 1999 following its launch in July last year. The volume Other income, at £14 million, was 10% higher than the £12.7 million for of unsecured lending grew to £94.2 million from £88.3 million. Within 1999. However, after excluding net rental income relating to the Group(cid:213)s this, the volume of timeshare lending was disappointing, as a result of a freehold property in Solihull, which was sold in April 1999, other operating generally subdued level of activity in that market. However, there were chief executive(cid:213)s review (continued) signs of a significant improvement towards the end of the financial year, car market. By 30 September 2000, there were 22,118 accounts under on the back of Summer sales activity and the higher volumes have management with a value of £128.4 million. continued beyond the year end. It is clearly evident that it has been a most difficult year for the car market, The interim report noted our intention to move the originations area of the with downward pressure on car prices. The vast majority of our business, unsecured lending business from its location in Victoria to new office space however, relates to hire purchase agreements with individuals and our in Solihull. This move was successfully completed in September without stance on establishing a customer base of high credit quality means the any disruption to our business activities. incidence of repossessions is relatively low. We are particularly pleased at During the year there were high levels of growth in the personal finance the arrears performance on the Paragon Car Finance book, which we markets and we see many interesting opportunities to broaden and expand believe to be better than market average. our activities in this dynamic area of business. Business development has been actively managed by carefully selecting the Following the year end, on 16 October 2000, we were pleased to announce dealers we work with, rolling out pilot schemes to a number of the larger the acquisition of Colonial Finance (UK) Limited from Commonwealth dealership groups and by maintaining tight control of credit quality. The Bank of Australia Group. This acquisition added some £174 million of net result of these measures has been to sustain the writing of planned loan balances to the Group, together with over 100,000 customers. volumes of business at improved credit quality and with a lower unit cost Colonial has a direct marketing arm, which will provide additional of processing. Considerable headway has also been made in customer distribution to Paragon(cid:213)s existing business activities in this area when fully retention, and in delivering additional sources of income, such as fees from integrated. Additionally, the entry into the retail (cid:212)point of sale(cid:213) finance sales of ancillary insurances and from sub-prime brokerage. Our small market afforded by the transaction is an important step for the Group in contract hire fleet continued to contribute to income over the period; in the growth of the personal finance business. this area of business we have maintained our cautious policy on pricing The discount negotiated to net assets and the financing structure used to new contracts. fund the loan assets acquired has resulted in negligible utilisation of the Despite implementation by the Government of measures aimed at reducing Group(cid:213)s cash resources and we expect the acquisition to be earnings new car pricing, there is little indication that buyers(cid:213) confidence has been enhancing in the current financial year. A plan is now being implemented to integrate the operations of Colonial Finance within the Paragon Group. Car Finance restored. This is mainly attributable to the Government giving a three month deferral for the equalisation of discounts and we believe it to be unlikely that there will be any signs of a significant return of confidence During the year Paragon Car Finance advanced £100.3 million, an increase before the new calendar year. Nevertheless given our strong dealer of 57% from last year(cid:213)s level of £63.8 million. This is an impressive growth distribution base and our products, we are confident about the prospects rate, particularly against the backdrop of very depressed conditions in the for further growth in our business volumes in the coming year. First Mortgages underpin the achievement of the challenging targets we have set ourselves Average year on year property price inflation peaked, according to the for the new financial year. Inter alia, these include the eCommerce Halifax(cid:213)s figures, at 16% in January, falling thereafter, following a landlord portal on which we reported in our interim report, which we combination of monetary and fiscal tightening in the Autumn of 1999 and expect to launch in the near future, together with an extension of our in the Spring of the current year. By late Spring the London market was private rented sector mortgage activity to service the needs of our running out of steam and by the Summer commentators were customers for commercial as well as for residential investment finance. downgrading their predictions for the rate of house price inflation across We believe that conditions in the housing market are likely to support the country. Expectations now are for house prices to continue to increase, demand for rented property in the foreseeable future, which will support but at a slower, more sustainable rate. the growth potential of this business. Through much of the first half of the financial year housing transactions At 30 September, the Paragon Mortgages book was £790.8 million, were on a plateau and there is clear evidence that the market turned down representing 17,377 accounts, an increase in balances of 25% over the year. in the late Spring, contributing to the disappointing business levels At that date, balances on the (cid:212)old book(cid:213) NHL portfolio were £398.1 million, experienced by most lenders in the first quarter. In our specialist sector, the natural redemption rate being 22% for the year. Our continuing the private rented market, demand for our products was also reduced in emphasis on collections activity resulted in cash receipts from NHL the first half of the financial year as the impact of rising interest rates and customers in arrears improving in the year to 103.6% of the amounts rising house prices was felt by landlords. Volumes of business advanced by contractually due, from 96% in 1999. Paragon Mortgages recovered strongly in the second half, however, with eCommerce the result that advances for the year were £243.8 million (1999: £259.8 Our eCommerce team have pursued a number of important initiatives in million), and first half advances of £110 million compared with £133 the course of the year. In addition to the maintenance of our web presence million in the second half. for each of our business lines, we have, amongst other things, taken our As part of the focus on cost efficiency, close attention has been successfully given to improving the conversion ratio from applications to completions without compromising on quality. We are encouraged by the increased volumes of further advances to existing borrowers. Our status as a specialist lender, particularly to the private rented sector, our competitive pricing structure and high standards of customer service have all contributed to the growth of the portfolio and to the low redemption rate. affinity marketing relationships forward with the establishment of a number of co-branded and affinity branded sites through which our products can be sold; improved efficiency and service delivery to our mortgage intermediaries with the launch of BrokerZone, which permits on- line application and processing, and enhancements such as case-tracking to be delivered to the intermediaries(cid:213) offices; and we are shortly to launch a new Internet-delivered front-end system for our personal loan business which will enable wider distribution of our products amongst finance We are currently working on a number of new business initiatives to brokers. In all cases, our approach is to utilise Internet delivery to support High quality service has been increasingly important in winning and retaining customers. Neil Arculus the objectives of our business divisions, rather than as ends in themselves. and staff. Every member of staff, including directors, has taken part in a As mentioned above, we anticipate launching our landlord Internet portal early in the new year. As well as giving access to our lending products, this multimedia evaluation which assesses their aptitude level in customer service and identifies ongoing training needs. will provide on-line delivery of a range of services to landlords to support We have encouraged our staff to take part in the Institute of Customer their letting activities. Funding During the year the Group successfully completed a £185 million Service programme and we currently have 74 staff working towards this professional qualification. There are also some 40 staff being sponsored by the Group to achieve qualifications in their core line of work and securitisation issue, the thirty-third public securitisation by the Group. We undertaking NVQs in Customer Service. have continued to be active in the securitisation market and we recently 58 of our staff have also either qualified, or are currently working towards completed our thirty-fourth, being a £195 million securitisation of car and their qualification, in the Certificate of Mortgage Advice and Practice secured personal loans through a subsidiary company, Paragon Auto and (CeMAP). Secured Finance (No. 1) PLC. This transaction was our first to include a tranche of notes denominated in euros. During the first half of the year we replaced our corporate banking facility with a new five year £140 million facility in order to provide the funding required to support planned asset growth in each of our businesses. Following the acquisition of Colonial Finance (UK), we have increased this facility by a further £20 million to £160 million in order to ensure that we can take advantage of opportunities to grow this business in a similar fashion. In addition, we have increased the capacity of our warehouse funding line, through which we finance all newly originated assets prior to securitisation, by £100 million to £400 million. Together these give us the funding to support our planned asset growth. Customer service We have continued to encourage our staff through our recognition awards programme. 26 staff, nominated by Paragon(cid:213)s customers, have received an OSCA (Outstanding Service to Customers Award) and 284 have received an EME (Exceeding my Expectations Award). Finally, I am very pleased to report that Paragon, following a full external review, has received an extension of its Investors in People accreditation for a further 3 years, underpinning our commitment to providing all our employees with opportunities for development. Our Customer First programme, launched two years ago, maintained our drive to develop customer service excellence across all our business lines. Paragon(cid:213)s in-house training function, the Customer First College, has NIGEL S TERRINGTON CHIEF EXECUTIVE designed over 80 individually tailored training courses for team leaders 7 DECEMBER 2000 Heavy investment in training and software has pushed us to the forefront of the eCommerce sector. Brian Mills internet sites We see the Internet as an important channel for supporting all our customers, whether they are existing or potential customers, car dealers, brokers or affinity partners. All our sites are designed to be intuitive, focusing on content and to be user friendly. The high availability of our Internet sites, and close integration with our internal computer systems, allows us to deliver new services and products. These are as applicable to our existing borrowers as to our potential investors. www.paragon-plus.co.uk Paragon Plus is designed to offer landlords a range of products and services on-line and will be launched early in the new year. The products are based on independent research within our own landlord customer base, which has established the ancillary services landlords typically use, and more importantly, those which our own borrowers would be most inclined to buy from Paragon. The primary benefit to the landlord, along with competitive pricing and the potential to improve margins, is convenience. All the products and services will be available on-line via www.paragon-plus.co.uk, and our most recent research demonstrates that over 90% of our landlord customer base has web access. At the same time, we are fully equipped to handle their enquiries by telephone, fax or post. board of directors Jonathan Perry joined the Group as a non-executive director in June 1991 and was appointed Executive Chairman in January 1992. Between 1997 and 1999 he was Vice-Chairman, Investment Banking Division, HSBC Investment Bank plc. Previously he was with Deutsche Morgan Grenfell for 22 years. Director of Botts and Co Limited and Chairman of the Gartmore Korea Fund plc. From 1990 to 1992 he was Managing Director of Corporate Finance at Hoare Govett Limited. He has been a non-executive director of Paragon since January 1993 and is Chairman of the Paragon Remuneration Committee. Michael Kelly joined the Group in February 1994. He has some 30 years(cid:213) experience in financial services, and was the founder of Mortgage Systems Limited which, before it was sold, was the largest independent mortgage servicing company in the UK managing over £3.5 billion of mortgage assets. Jonathan P L Perry Executive Chairman Age 61 F William Hulton OBE Non-Executive Director Age 62 Michael J R Kelly Non-Executive Director Age 59 Nicholas Keen joined the Gr May 1991 and became Finan Director in June 1995 havin previously held the position Treasurer. Prior to joining t he worked in Corporate Ban Treasury and Capital Marke Chairman of the Credit Com Managing Director of Manag Audit Limited and Professor Audit and Control at The Un of Hull. He is Chairman of P Audit Committee and has be non-executive director of Pa since February 1991. He is a or co-author of ten current auditing books. Nigel S Terrington Chief Executive Age 40 Nigel Terrington joined the Group in 1987 and became Chief Executive in June 1995, having held the positions of Treasurer and Finance Director. Prior to Paragon, he worked in merchant and international banks. He is a member of the MSD Management Committee of the Finance and Leasing Association and was previously the Chairman of the Intermediary Mortgage Lenders Association. Principal and Director of Talisman Management Limited and Chairman of Virgin Express Limited. He previously held the position of Chief Executive at Laura Ashley and has been a non-executive director of Paragon since May 1994. Nicholas Keen Finance Director Age 42 David A Hoare Non-Executive Director Age 50 Professor Andrew D Chambers Non-Executive Director Age 50 Chief Executive, RAMS Home Loans Pty Limited, an Australian registered mortgage originator. From 1992 to 1999 he worked for British Airways PLC where from 1995, he was Senior Manager, Financial Services and Business Partners, while afterwards serving as Chief Executive of BA Charles Weiser Non-Executive Director Age 37 Global Financial Services. He has been a non-executive director of Paragon since October 1998. directors(cid:213) report The directors submit their Report and Accounts for the year ended 30 September 2000 which were approved by the Board on At 30 September 2000 Ordinary Shares of 10p each At 30 September 1999 Ordinary Shares of 10p each 7 December 2000. Principal activity The Company is a holding company co-ordinating the activities of its subsidiary companies. The principal activities of the Group continue to be the operation of its personal finance, car finance and residential mortgage businesses. The Chairman(cid:213)s Statement and the Chief Executive(cid:213)s Review on pages 6 to 13 contain a review of the Group(cid:213)s business during the financial year, its current position and future prospects. Results and dividends J P L Perry N S Terrington N Keen A D Chambers* D A Hoare* F W Hulton* M J R Kelly * C Weiser* * Non-executive directors. 252,437 252,437 59,240 10,000 500 34,650 42,656 - 3,846 59,240 10,000 500 34,650 42,656 26,906 3,846 The results for the year are shown in the Consolidated Profit and Loss In addition, certain directors had interests in the share capital of the Account on page 30. Company by virtue of options granted under the executive share option The directors recommend a final dividend of 2.1p per share (1999: 1.9p per schemes, details of which are given in note 20 on page 45. share) which, together with the interim dividend of 1.7p per share (1999: 1.5p per share) paid on 31 July 2000, makes a total of 3.8p per share. After dividends, retained profits of £24.1 million (1999: £26.3 million) have been transferred to reserves. Directors On 21 November 2000, Mr J P L Perry exercised options over 26,280 shares, Mr N S Terrington exercised options over 26,280 shares and Mr N Keen exercised options over 13,140 shares. Other than this, there has been no change in the directors(cid:213) interests in the share capital of the Company since 30 September 2000. The interests of the directors, all of whom served throughout the year, in the share capital of the Company, all beneficially held, are shown in the The directors have no interests in the shares or debentures of the following table. Company(cid:213)s subsidiary companies. directors(cid:213) report (continued) In accordance with the Articles of Association, Mr M J R Kelly and Employees(cid:213) involvement Mr D A Hoare will retire and, being eligible, will offer themselves for The directors recognise the benefit of keeping employees informed of the re-appointment at the forthcoming Annual General Meeting. progress of the business. Employees have been provided with regular Neither of these directors has a service contract with the Company information on the performance and plans of the Group, and the financial requiring more than 12 months(cid:213) notice of termination to be given. and economic factors affecting it, through both information circulars and None of the directors had, either during or at the end of the year, any management presentations. material interest in any contract of significance with the Company or its subsidiaries. Employment of disabled persons Full and fair consideration is given to applications for employment made Substantial shareholdings by disabled persons having regard to their particular aptitudes and As at 30 November 2000, being a date not more than one month before abilities. The Group has continued its policy of providing appropriate the date of the notice convening the forthcoming Annual General Meeting, training and career development to such persons. the Company had been notified of the following interests of more than 3% in the nominal value of the ordinary share capital of the Company: Charitable contributions Contributions to charitable institutions in the United Kingdom amounted Ordinary % Held Shares to £10,786 (1999: £6,504). Schroder Investment Management Limited 21,912,338 18.83 Close company status M & G Investment Management Limited 17,838,281 15.33 Legal & General Investment Management Limited 5,441,900 4.68 Standard Life Assurance Co 4,967,326 4.27 So far as the directors are aware, the Company is not a close company for taxation purposes. Scottish Equitable Asset Management plc 4,650,643 4.00 Creditor payment policy Scudder Threadneedle Investments Limited Hermes Pension Management Limited 3,971,172 3,967,901 The Paragon Group of Companies PLC ESOP scheme 3,848,253 Robert Fleming & Co Limited Phillips & Drew 3,784,974 3,736,850 3.41 3.41 3.31 3.25 3.21 The Company agrees terms and conditions with its suppliers. Payment is then made on the terms agreed, subject to the appropriate terms and conditions being met by the supplier. The trade creditor days figure has not been stated as the measure is not Barclays Global Investors Limited 3,594,625 3.09 appropriate to the business. Auditors Resolution 6 A resolution for the re-appointment of Deloitte & Touche as auditors of the Company is to be proposed at the forthcoming Annual General Meeting. Details of resolutions to be proposed as special business at the Annual General Meeting Resolution 5 Under Section 89 of the Companies Act 1985, any shares allotted wholly or partly in cash must be offered to existing shareholders in proportion to their holdings, but this requirement may be modified by the authority of a special resolution of the shareholders in general meeting. The authority given at the previous Annual General Meeting will expire at the end of this year(cid:213)s Annual General Meeting and Resolution 6 seeks to Section 80 of the Companies Act 1985 states that the directors may not renew it. The resolution authorises the directors to allot shares for cash, exercise a company(cid:213)s power to allot its unissued shares unless given other than to existing shareholders in proportion to their holdings, up to authority to do so by resolution of the shareholders in general meeting. an aggregate nominal value of £581,700, representing 5% of the The present authority of the directors to allot the unissued ordinary share capital of the Company was granted at the previous Annual General Meeting on 17 February 2000 and will expire at the end of the forthcoming Company(cid:213)s issued share capital at 30 November 2000. Annual General Meeting. Resolution 5 seeks to renew, for a further year, APPROVED BY THE BOARD OF DIRECTORSAND the present authority of the directors to allot ordinary shares up to an SIGNEDON BEHALF OFTHE BOARD. aggregate nominal value of £4,473,000 representing 38.4% of the Company(cid:213)s issued capital at 30 November 2000 and being one third of issued capital plus shares issuable under option. The directors have no present intention of exercising this authority, which will expire at the conclusion of the following Annual General Meeting. JOHN G GEMMELL COMPANY SECRETARY 7 DECEMBER 2000 report of the board to the shareholders on directors(cid:213) remuneration Remuneration Committee packages is undertaken by the Committee. The remuneration of the non- The Committee consists solely of four non-executive directors: executive directors is determined by the Board. William Hulton, Professor Andrew Chambers, David Hoare and Charles Weiser. The Chairman of the Remuneration Committee is William Hulton. None of the directors comprising the Committee have any personal In forming and reviewing remuneration policy the Committee has given full consideration to Section B.1 of The Combined Code. financial interests (other than as shareholders), conflicts of interest arising The remuneration packages of the individual directors have been assessed from cross-directorships or day-to-day involvement in running the after a review of their individual performances and an assessment of business. The Committee consults the Chairman and Chief Executive comparable positions in the financial sector. about its proposals and has access to professional advice from within and outside the Company. The Committee determines the Company(cid:213)s policy on executive remuneration and specific compensation packages for each of the executive directors. No director contributes to any discussion about his own remuneration. Remuneration policy All executive directors are remunerated by a means of a combination of salary, performance bonus, pension scheme contributions, benefits in kind and by the award of share options or shadow share options from time to time. Salary An executive director(cid:213)s salary is determined by the Remuneration Committee at the beginning of each year. In deciding appropriate levels the Committee The Company(cid:213)s policy is to ensure that executive directors are fairly considers the Group as a whole and relies on objective research which gives rewarded for their individual performance, having regard to the up-to-date information on comparable companies. Executive directors(cid:213) importance of retention and motivation. The performance measurement of contracts of service, which include details of remuneration, will be available the executive directors and the determination of their annual remuneration for inspection at the Annual General Meeting. Performance bonuses Bonuses are earned under performance related schemes based upon individual performance and that of the Group as a whole. Bonuses are normally paid in October but are accrued in the year to which they relate. Pension contributions During the year, two of the executive directors were members of the Group Retirement Benefits Plan, to which the Company contributes at the same rate as for all members while in respect of one executive director the Company paid monthly contributions into his personal pension scheme. The changes in pension entitlements arising in the financial year, the disclosure of which is required by the UK Listing Authority, are given in note 5 to the accounts. There have been no changes in the terms of directors(cid:213) pension entitlements during the year. There are no unfunded promises or similar arrangements for directors. Share options Executive directors(cid:213) existing share options were granted under the Senior Executive, Executive (ESOP), Paragon 1999 Sharesave and Paragon 2000 Executive Share Option Schemes. The Senior Executive Scheme requires Dependants of executive directors who are members of the Group the consolidated earnings per share to increase at a rate in excess of the Retirement Benefits Plan are eligible for a dependant(cid:213)s pension and the retail price index over a period of three years from the date the option is payment of a lump sum in the event of death in service. The pension granted. The exercise of options granted under the ESOP Executive Share arrangements provide for a pension of 1/37.5 of basic annual salary (to a maximum of 2/3) for every year of eligible service. Where pension contributions are capped, additional payments are made to enable further provision. report of the board to the shareholders on directors(cid:213) remuneration (continued) Option and Paragon 1999 Sharesave schemes are not dependent upon Association. The fee paid to each non-executive director in the year was performance criteria. The Paragon 2000 Executive scheme requires total £20,000. The chairmen of the Audit Committee and Remuneration shareholder return to exceed the average for a range of other companies. Committee receive an additional £2,500. The Committee has minuted a decision that the members in Annual Non-executive directors are not eligible to participate in any of the General Meeting need not be invited to approve other aspects of the Company(cid:213)s share option schemes or to join the pension scheme. Options remuneration policy set out in this report. The Chairman of the Committee over 3,365 shares remain granted to Michael Kelly from his previous will, however, be available to answer questions on remuneration policy at appointment as an executive director. the Annual General Meeting. Directors(cid:213) contracts All executive directors hold one year rolling contracts and the Remuneration Committee reviews the terms of these regularly. None of the directors seeking re-election at the Annual General Meeting has a service contract with the Company. The information on directors(cid:213) remuneration and share options contained in notes 5 and 20 forms part of this report. By order of the Board Non-executive directors JOHN G GEMMELL All non-executive directors have specific terms of engagement and their COMPANY SECRETARY remuneration is determined by the Board, subject to the Articles of 7 DECEMBER 2000 statement of directors(cid:213) responsibilities in relation to financial statements The directors are required by the Companies Act 1985 to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and the Group as at the end of the financial year and of the profit or loss for the financial year. The directors consider that in preparing the financial statements (on pages 30 to 53), the Company has used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates, and that all accounting standards which they consider to be applicable have been followed. The directors have responsibility for ensuring that the Company keeps accounting records which disclose with reasonable accuracy the financial position of the Company and which enable them to ensure that the financial statements comply with the Companies Act 1985. The directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. auditors(cid:213) report To the members of The Paragon Group of We read the other information contained in the Annual Report, including Companies PLC We have audited the financial statements on pages 30 to 53 which have been prepared under the accounting policies set out on pages 34 and 35. Respective responsibilities of directors and auditors The directors are responsible for preparing the Annual Report, including, as described on page 23, the preparation of the financial statements which are required to be prepared in accordance with applicable United Kingdom law and Accounting Standards. Our responsibilities, as independent auditors, are established by statute, the Auditing Practices Board, the UK Listing Authority and by our profession(cid:213)s ethical guidance. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the directors(cid:213) report is not consistent with the financial statements, if 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 the corporate governance statement, and consider whether it is consistent with the audited financial statements. We consider the implication for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Basis of audit opinion We conducted our audit in accordance with United Kingdom Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the circumstances of the Company and the Group, 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 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 presentation of information in the financial statements. specified by law or the Listing Rules regarding directors(cid:213) remuneration Opinion and transactions with the Company and other members of the Group is In our opinion the financial statements give a true and fair view of the not disclosed. We review whether the corporate governance statement on page 27 reflects the Company(cid:213)s compliance with the seven provisions of the Combined Code specified for our review by the UK Listing Authority, and we report if it does not. We are not required to consider whether the Board(cid:213)s state of affairs of the Company and the Group as at 30 September 2000 and of the profit of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985. statements on internal control cover all the risks and controls or form an opinion on the effectiveness of the corporate governance procedures or the Deloitte & Touche Group(cid:213)s risk and control procedures. Chartered Accountants and Registered Auditors Colmore Gate, 2 Colmore Row, Birmingham B3 2BN corporate governance The Combined Code, which sets out Principles of Good Corporate They fulfil a vital role in helping the executive to develop the Company, Governance and Code provisions, was issued by the London Stock are kept fully informed of all relevant operational and strategic issues Exchange in June 1998. The Group has adopted the transitional approach and bring a strongly independent and experienced judgement to bear for internal control aspects of the Combined Code as set out in the letter on these issues. from the London Stock Exchange to listed companies dated 27 September 1999. A statement on how the Company has applied the Principles of Good Corporate Governance and a statement explaining the extent to which the All directors are able to take independent professional advice in the furtherance of their duties whenever it is considered appropriate to do so. provisions in the Code relevant to companies have been complied with The Board also operates through a number of committees covering certain appear below. Directors specific matters, these being: ¥ The Remuneration Committee, consisting of William Hulton, who chairs the committee, Professor Andrew Chambers, David Hoare and The Board of Directors comprises three executive and five non-executive Charles Weiser. directors, all of whom bring to the Company a broad and valuable range of ¥ The Audit Committee, consisting of all the non-executive directors and chaired by Professor Andrew Chambers. The committee meets at least experience. Jonathan Perry has been Executive Chairman since February three times per year. It oversees the monitoring of the adequacy of the 1992 and Nigel Terrington Chief Executive since June 1995. In accordance with the Code, all directors will submit themselves for re-election at least once in every three years. Group(cid:213)s internal controls, accounting policies and financial reporting, monitors the adequacy of the Group(cid:213)s audit arrangements and the relationship between the Company and the auditors and provides a forum through which the Group(cid:213)s external and internal audit functions report to the non-executive directors. There is a clear division of executive responsibilities at the head of the ¥ The Asset and Liability Committee, consisting of the executive Company and strong non-executive representation on the Board, including William Hulton who has been nominated as the senior non-executive directors and chaired by Nigel Terrington, the Chief Executive. It meets regularly and monitors Group interest rate risks, currency risks and treasury counterparty exposures. director. This provides effective balance and challenge. The Board meets ¥ The Credit Committee, consisting of appropriate heads of functions regularly throughout the year and is responsible for overall Group strategy, and chaired by Nicholas Keen, the Finance Director. It meets regularly for approving major agreements, transactions and other financing matters and for monitoring the progress of the Group against budget. There is a formal schedule of matters reserved for decision by the Board. Professor Andrew Chambers, David Hoare, William Hulton and Charles and is responsible for establishing credit policy and monitoring compliance therewith. ¥ The Nomination Committee, consisting of Jonathan Perry, who chairs the committee, and two non-executive directors. The committee is convened as required to nominate candidates for membership of the Board, although ultimate responsibility for appointment rests with Weiser, being the majority of non-executive directors, are independent of the Board. management and all non-executive directors are appointed for fixed terms. All Board committees operate within defined terms of reference. corporate governance (continued) Directors(cid:213) Remuneration Accountability and Audit The Remuneration Committee, reviews the performance of executive Detailed reviews of the performance of the Group(cid:213)s main business lines are directors and members of senior management prior to determining its included within the Chairman(cid:213)s Statement and Chief Executive(cid:213)s Review. recommendations on annual remuneration, performance bonuses and The Board uses these, together with the Directors(cid:213) Report on pages 17 to 19 share options for the Board(cid:213)s determination. to present a balanced and understandable assessment of the Company(cid:213)s The Report of the Board to the Shareholders on Directors(cid:213) Remuneration is position and prospects. on pages 20 to 22. The directors(cid:213) responsibility for the financial statements is described Relations with shareholders on page 23. The Board encourages communication with the Company(cid:213)s institutional and private investors. All shareholders have at least twenty working days(cid:213) notice of the Annual General Meeting at which the directors and committee chairmen are available for questions. The Annual General Meeting provides an opportunity for directors to report to investors on the Group(cid:213)s activities and to answer their questions. Shareholders will have an opportunity to vote separately on each resolution and all proxy votes lodged are counted and the balance for and against each resolution is available for inspection. The Board is of the view that the availability of the results of proxies lodged satisfies the requirement within the Combined Code for an indication of the level of proxies lodged and the balance for and against each resolution. The directors are responsible for the system of internal financial control throughout the Group. Such a system can provide reasonable, but not absolute, assurance that assets are safeguarded against unauthorised use or disposition, that proper accounting records are maintained and that financial information used within the business and for publication is reliable. In assessing what constitutes reasonable assurance, the directors have regard to the relationship between the cost and benefits from particular aspects of the control system. The system of internal financial control includes documented procedures covering accounting, compliance, risk management, personnel matters and operations, clear reporting lines, delegation of authority through a formal The Executive Chairman, Chief Executive and Finance Director have a full structure of mandates, a formalised budgeting, management reporting and programme of meetings with institutional investors during the course of review process, the use of key performance indicators throughout the the year and the Company(cid:213)s web site at www.paragon-group.co.uk provides Group and regular meetings of the Asset and Liability and Credit access to information on the Company and its businesses. Committees and senior management. The system of internal financial control is monitored by management and Compliance Statement by an internal audit function that concentrates on the areas of greater risk The Listing Rules require the Board to report on compliance with the and reports its conclusions regularly to management and the Audit forty-five Code provisions throughout the accounting period. Throughout Committee. The internal audit work plan is approved annually by the Audit the year ended 30 September 2000 the Company has been in compliance Committee, which reviews the effectiveness of the system of internal with the Code provisions set out in Section 1 of the Combined Code of financial control annually and reports its conclusions to the Board. Corporate Governance issued by the UK Listing Authority. The directors confirm that they have reviewed the effectiveness of the The Group has adopted the transitional approach for the internal control Group(cid:213)s system of internal financial control for the year to 30 September aspects of the Combined Code as set out in the letter from the London 2000 and to the date of these financial statements. Stock Exchange dated 27 September 1999. Going concern basis The board confirms that at 30 September 2000 it had established the After making enquiries, the directors have a reasonable expectation that procedures necessary to implement the guidance (cid:212)Internal Controls: the Group and the Company have adequate resources to continue in Guidance for Directors on the Combined Code(cid:213). operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. the accounts consolidated profit and loss account for the year to 30 September 2000 Interest receivable Interest payable and similar charges Net interest income Other operating income Total operating income Operating expenses Provisions for losses Operating profit Profit on sale of fixed assets Profit on ordinary activities before taxation Tax charge on profit on ordinary activities Profit on ordinary activities after taxation for the financial year Equity dividend Retained profit Earnings per share - basic - diluted Notes 2 3 4 7 8 10 11 11 There have been no recognised gains or losses other than the profit for the current and preceding years. The results for the current and preceding years relate entirely to continuing operations. note of historical cost profits and losses for the year to 30 September 2000 Profit on ordinary activities before taxation Realisation of property revaluation gains of previous years Historical cost profit on ordinary activities before taxation Historical cost profit for the year after taxation and dividends 2000 £m 186.4 (124.1) 62.3 14.0 76.3 (30.6) (10.2) 35.5 - 35.5 (7.0) 28.5 (4.4) 24.1 1999 £m 167.6 (112.2) 55.4 12.7 68.1 (31.0) (5.8) 31.3 2.5 33.8 (3.5) 30.3 (4.0) 26.3 25.1p 24.9p 26.1p 25.8p 2000 £m 35.5 - 35.5 24.1 1999 £m 33.8 3.9 37.7 30.2 consolidated balance sheet at 30 September 2000 2000 1999 (restated) Notes £m £m £m £m 12 13 14 16 17 18 19 21 22 22 3.6 1,669.7 4.8 11.5 36.4 50.2 95.1 11.6 126.1 30.5 1,699.4 3.6 1,482.5 2.8 1,678.1 1,488.9 14.5 22.8 44.1 103.1 11.6 101.9 27.0 1,528.7 193.2 1,871.3 137.7 3.7 1,729.9 1,871.3 184.5 1,673.4 113.5 4.2 1,555.7 1,673.4 Assets employed Fixed assets Tangible assets Loans to customers Investment in own shares Current assets Stocks Debtors falling due within one year Investments Cash at bank and in hand Financed by Equity shareholders(cid:213) funds Called up share capital Reserves Provisions for liabilities and charges Creditors Amounts falling due within one year Amounts falling due after more than one year Approved by the Board of Directors on 7 December 2000 Signed on behalf of the Board of Directors N S TERRINGTON CHIEF EXECUTIVE N KEEN FINANCE DIRECTOR holding company balance sheet at 30 September 2000 Assets employed Fixed assets Investment in own shares Investment in subsidiary companies Current assets Debtors falling due within one year Cash at bank and in hand Financed by Equity shareholders(cid:213) funds Called up share capital Reserves Creditors Amounts falling due within one year Amounts falling due after more than one year Approved by the Board of Directors on 7 December 2000 Signed on behalf of the Board of Directors N S T ERRINGTON CHIEF EXECUTIVE N KEEN FINANCE DIRECTOR Notes £m £m £m £m 2000 1999 14 15 17 18 19 22 22 4.8 60.8 76.8 0.1 11.6 126.1 4.8 - 2.8 29.7 107.0 0.1 11.6 101.9 6.1 20.0 65.6 76.9 142.5 137.7 4.8 142.5 32.5 107.1 139.6 113.5 26.1 139.6 consolidated cash flow statement for the year to 30 September 2000 Net cash inflow from operating activities Taxation Capital expenditure and financial investment Equity dividends paid Management of liquid resources Financing (Decrease)/increase in cash in the year Notes 24 25(a) 27 25(b) reconciliation of movement in consolidated shareholders(cid:213) funds for the year to 30 September 2000 Profit attributable to shareholders Dividend Exercise of share options Net movement in shareholders(cid:213) funds Opening shareholders(cid:213) funds Closing shareholders(cid:213) funds 2000 £m 32.4 (1.3) (200.6) (4.2) (173.7) (9.9) 171.5 (12.1) 2000 £m 28.5 (4.4) 0.1 24.2 113.5 137.7 1999 £m 33.2 (1.3) (90.4) (3.8) (62.3) 23.7 45.2 6.6 1999 £m 30.3 (4.0) 0.4 26.7 86.8 113.5 notes to the accounts for the year to 30 September 2000 1. Accounting policies The financial statements have been prepared in accordance with applicable accounting standards. The particular policies adopted are described below. (a) Accounting convention The accounts are prepared under the historical cost convention, as adjusted for the revaluation of certain fixed assets. (b) Basis of consolidation The consolidated accounts deal with the accounts of the Company and its subsidiaries made up to 30 September 2000. (c) Tangible fixed assets Tangible fixed assets are stated at cost less accumulated depreciation. (d) Depreciation Depreciation is provided on cost in equal annual instalments over the lives of the assets. The rates of depreciation are as follows: Short leasehold premises Computer equipment over the life of the lease 25% per annum Furniture, fixtures and office equipment 15% per annum Motor vehicles 25% per annum (e) Loans to customers Loans are stated at cost less provision for diminution in value after taking into account the existence of insurances, guarantees and indemnities. Cashbacks and discounts are amortised over the redemption fee periods of the related mortgages. (f) Fixed assets - investments The Company(cid:213)s investments in subsidiary companies are valued by the directors at the Company(cid:213)s share of the book value of their underlying net tangible assets. The Company(cid:213)s investments in its own shares are stated at the lower of cost or net realisable value. (g) Stocks Obligations to purchase vehicles from lessors at pre-arranged prices at the end of the lease term are included in stock at the prices to be paid, in accordance with Financial Reporting Standard 5 — (cid:212)Reporting the Substance of Transactions(cid:213), less any provisions to reduce the prices to net realisable value. Other stocks are stated at the lower of cost and net realisable value. (h) Current asset investments Balances shown as current asset investments in the balance sheet comprise short term deposits with banks with maturities of not more than 90 days and more than 7 days. These balances were previously classified as Cash at bank and in hand but are now shown separately in the interests of clearer disclosure. Comparative figures have, therefore, been restated. (i) Cash at bank Balances classified as cash in the balance sheet comprise demand deposits and short term deposits with banks with maturities of not more than 7 days. Previously this balance included amounts now classified as current asset investments (see (h) above) and the comparative figures have, therefore, been restated. (j) Goodwill Goodwill arising from the purchase of subsidiary undertakings, representing the excess of the fair value of the purchase consideration over the fair value of the net assets acquired, has previously been written off on acquisition against Group reserves, as a matter of accounting policy. Such amounts would be charged or credited to the profit and loss account on any future disposal of the business to which they relate. (k) Deferred taxation Deferred taxation is provided on timing differences, arising from the different treatment of items of income and expenditure for accounting and taxation purposes, which are expected to reverse in the future, calculated at the rates at which it is expected that tax will arise. (l) Provisions Provisions, being identified liabilities of uncertain timing or amount, are separately disclosed in the balance sheet in accordance with Financial Reporting Standard 12 — (cid:212)Provisions, contingent liabilities and contingent assets(cid:213). (m) Funding costs Initial costs incurred in arranging funding facilities are amortised over the period of the facility. Unamortised initial costs are deducted from the associated liability. Profits on the early repurchase of loan notes are included within interest payable and similar charges. (n) Financial instruments Derivative instruments utilised by the Group comprise interest rate swap, interest rate cap and forward interest rate agreements. The Group does not enter into speculative derivative contracts. All such instruments are used for hedging purposes to alter the risk profile of the existing underlying exposure of the Group in line with the Group(cid:213)s risk management policies. Amounts payable or receivable in respect of interest rate swaps are recognised as adjustments to interest expense over the period of the contracts. (o) Other operating income The turnover and gross profit of Paragon Vehicle Contracts Limited are not derived from the Group(cid:213)s principal activities and the gross profit is therefore included in other operating income. The turnover is shown in note 3. (p) Pension costs The expected cost of providing pensions within the funded defined benefit scheme, as calculated periodically by professionally qualified actuaries using the projected unit method, is charged to the profit and loss account so as to spread the cost over the service lives of employees in the scheme. The assets of the scheme are held separately from those of the Group in an independently administered fund. (q) Leases Rental income and costs under operating leases are credited / charged to the profit and loss account over the period of the leases. Income from hire purchase contracts is accounted for on the actuarial basis. Hire purchase receivables are included within loans to customers at the total amount receivable less interest not yet accrued and provision for doubtful debt. (r) Brokers(cid:213) commissions Brokers(cid:213) commissions payable on mortgage loans are charged to the profit and loss account when they are incurred. Brokers(cid:213) commissions payable on other loans are amortised on a straight-line basis over the period of the loans to which they relate. 2. Interest payable and similar charges On asset backed loan notes On bank loans and overdrafts Amortisation of brokers(cid:213) commissions payable 2000 £m 92.1 19.3 12.7 124.1 1999 £m 84.8 17.8 9.6 112.2 notes to the accounts (continued) 3. Other operating income Other operating income includes the gross profit of the Group(cid:213)s vehicle contract hire business as follows: Turnover Cost of sales Gross profit 2000 £m 9.4 (8.6) 0.8 1999 £m 10.2 (9.0) 1.2 Included within other operating income is income from property leases of £1.2m (1999: £1.6m). 4. Profit on sale of fixed assets Profit on sale of fixed assets in the year ended 30 September 1999 represents the profit on disposal of the Group(cid:213)s freehold property, which was transferred from long leasehold during that year. The revaluation reserve of £3.9m was crystallised on the sale and transferred to distributable reserves. No tax charge arose on the disposal due to the utilisation of capital losses brought forward. 5. Directors(cid:213) remuneration The remuneration packages in respect of directors holding office during the year were: Executive J P L Perry N S Terrington N Keen M J R Kelly Non-executive D F Banks Professor A D Chambers D A Hoare F W Hulton M J R Kelly C Weiser 2000 1999 Salary and fees £000 Benefits in kind £000 Annual bonus £000 Pension contributions £000 161 222 172 - - 22 20 22 20 20 659 677 2 12 3 - - - - - - - 17 23 50 150 110 - - - - - - - 310 325 32 21 76 - - - - - - - 129 106 2000 Total £000 245 405 361 - - 22 20 22 20 20 1,115 1,131 1999 Total £000 199 414 374 50 2 22 20 22 10 18 1,131 Mr J P L Perry is the Chairman and Mr N S Terrington is the highest paid director. Directors(cid:213) pensions Mr N S Terrington and Mr N Keen were members of the Group defined benefit pension scheme during the year, from which their pension entitlement was as follows: N S Terrington N Keen Increase in accrued pension during year excluding any increase for inflation £ 5,964 3,117 Transfer value of increase Accumulated total accrued pension at 30 September 2000 Accumulated total accrued pension at 30 September 1999 £ 43,073 34,128 £ 53,537 28,560 £ 52,954 25,167 The pension entitlement shown is that which would be paid annually on retirement based on services to 30 September 2000.The transfer value has been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11 less directors(cid:213) contributions. Members of the Plan have the option to pay Additional Voluntary Contributions; neither the contributions nor the resulting benefits are included in the above table. Also included in pension contributions is £68,000 (1999: £65,000) paid in respect of further pension provision for Mr N Keen. Contributions in respect of Mr J P L Perry were paid into his personal pension scheme. 6. Employees The average number of persons (including directors) employed by the Group during the year was 623 (1999: 619). Staff costs incurred during the year in respect of these employees were: Wages and salaries Social Security costs Other pension costs 2000 £m 14.2 1.1 0.8 16.1 1999 £m 13.3 1.0 0.8 15.1 The most recent actuarial valuation of the Group Pension Scheme was completed as at 1 April 1998 using the projected unit method, at which date the market value of the assets was £9.7m. The principal assumption used in the latest valuation was that the annual return on investment would be 2.0 per cent higher than the annual increase in salaries. The valuation revealed that the actuarial value of assets was sufficient to cover 100 per cent of the benefits that had accrued to members after allowing for future increases in earnings. notes to the accounts (continued) 7. Profit on ordinary activities before taxation Profit on ordinary activities before taxation is after charging: Depreciation Auditors(cid:213) remuneration (Group) - audit services - non audit services Hire of plant and machinery Property rents payable The Company(cid:213)s audit fee was £16,400 (1999: £18,900). 8. Tax charge on profit on ordinary activites UK Corporation Tax at 30% (1999: 30.5%) Current Tax Write-back of Advance Corporation Tax Deferred tax (note 21) Prior year adjustments Current tax Tax charge on profit on ordinary activities 2000 £m 1.3 0.3 0.3 0.6 3.4 2000 £m (9.1) 2.8 (0.7) (7.0) - (7.0) 1999 £m 1.6 0.3 0.4 0.3 2.1 1999 £m - 1.4 (5.0) (3.6) 0.1 (3.5) The taxation charge has been reduced by £3.6m (1999: £5.9m) in respect of movements in partially provided deferred tax assets including unrelieved Advance Corporation Tax. The tax charge in 1999 was further reduced by £0.8m as the profit on disposal of fixed assets has been offset against capital losses brought forward in Group companies. There are losses carried forward to offset against future income of appropriate Group companies of £3.0m (1999: £1.0m). In addition the Group has capital losses in excess of £65.0m (1999: £65.0m) which are available to offset against future capital gains of the Group. 9. Profit attributable to members of The Paragon Group of Companies PLC The holding company(cid:213)s profit after tax for the financial year amounted to £27.2m (1999: profit of £30.2m). A separate profit and loss account has not been prepared for the holding company under the provisions of Section 230 of the Companies Act 1985. 10. Dividend Equity dividend on ordinary shares Interim paid Proposed final 11. Earnings per share Earnings per ordinary share is calculated as follows: Profit for the year Basic weighted average number of ordinary shares ranking for dividend during the year Dilutive effect of the weighted average number of share options in issue during the year Diluted weighted average number of ordinary shares ranking for dividend during the year Earnings per ordinary share - basic - diluted 2000 Per share 1999 Per share 1.7p 2.1p 3.8p 1.5p 1.9p 3.4p 2000 £m 2.0 2.4 4.4 1999 £m 1.7 2.3 4.0 2000 £28,500,000 113,308,398 1,260,602 114,569,000 25.1p 24.9p 1999 £30,300,000 115,955,548 1,066,720 117,022,268 26.1p 25.8p notes to the accounts (continued) 12. Tangible fixed assets Cost At 1 October 1999 Additions Disposals At 30 September 2000 Accumulated depreciation At 30 September 1999 Charge for the year On disposals At 30 September 2000 Net book value At 30 September 2000 At 30 September 1999 13. Loans to customers Cost At 1 October 1999 Additions Other debits Repayments and redemptions At 30 September 2000 Short leasehold premises £m Plant and machinery £m 1.1 0.3 - 1.4 0.7 - - 0.7 0.7 0.4 8.7 1.4 (0.9) 9.2 5.5 1.3 (0.5) 6.3 2.9 3.2 2000 £m 1,482.5 509.4 177.0 (499.2) 1,669.7 Total £m 9.8 1.7 (0.9) 10.6 6.2 1.3 (0.5) 7.0 3.6 3.6 1999 £m 1,379.2 415.0 156.6 (468.3) 1,482.5 Included in loans to customers are £128.3m (1999: £72.9m) of hire purchase receivables. The aggregate rentals receivable during the year in respect of hire purchase contracts were £15.1m (1999: £8.2m). The cost of assets acquired by the Group for the purposes of letting under hire purchase contracts amounted to £99.3m (1999: £67.6m). Other debits includes primarily interest receivable on loans outstanding and movements on provisions against these loans. 14. Investment in own shares Shares held by the trustee of the share option schemes 2000 £m 4.8 1999 £m 2.8 All of the shares are held in trust for the benefit of employees exercising their options under the Company(cid:213)s share option schemes. The trustee(cid:213)s costs are included in the operating expenses of the Company. At 30 September 2000, the trust held 3,848,253 shares (1999: 2,585,277) with a nominal value of £384,825 (1999: £258,528) and a market value of £5,810,862 (1999: £5,429,082). Options were outstanding against 3,733,913 of these shares at 30 September 2000. The dividends on these shares have not been waived. 15. Investments in subsidiary companies Shares in Group companies At 1 October 1999 Additions during the year Revaluation Credited to the profit and loss account Credited to the revaluation reserve Loans to Group companies At 1 October 1999 Additions during the year Repayments during the year Revaluation (Charged)/credited to the profit and loss account At 30 September 2000 2000 £m 19.7 0.1 39.7 1.3 60.8 10.0 21.3 (10.0) (21.3) - 60.8 1999 £m 1.7 10.2 7.7 0.1 19.7 2.1 10.0 (5.0) 2.9 10.0 29.7 notes to the accounts (continued) 15. Investments in subsidiary companies (continued) Principal operating subsidiaries comprise Direct subsidiaries of The Paragon Group of Companies PLC Holding Principal Activity Paragon Finance PLC Homer Finance (No. 3) PLC Paragon Mortgages Limited Homeloans (No. 1) PLC Homeloans (No. 2) PLC Homeloans (No. 3) PLC Finance for People (No. 1) PLC Finance for People (No. 2) PLC Finance for People (No. 3) PLC Finance for People (No. 4) PLC Paragon Vehicle Contracts Limited Paragon Car Finance Limited Paragon Dealer Finance Limited Paragon Personal Finance Limited Paragon Mortgages (No. 1) PLC Paragon Mortgages (No. 2) PLC Paragon Mortgages SA Paragon Mortgages (No. 2) SA Paragon Mortgages (No. 3) SA Subsidiary of Paragon Mortgages Limited Paragon Second Funding Limited 100% 100% 100% 100% 100% 100% 100% 100% 100% 74% 100% 100% 100% 100% 74% 74% 100% 100% 100% 100% Residential mortgages and asset administration Residential mortgages Residential mortgages Residential mortgages Residential mortgages Residential mortgages Residential mortgages Residential mortgages Unsecured and car loans Residential mortgages Vehicle fleet management Vehicle finance Vehicle finance Unsecured lending Residential mortgages Residential mortgages Residential mortgages Residential mortgages Residential mortgages Residential mortgages and loan and vehicle finance The issued share capital of all subsidiaries consists of ordinary share capital, except that Finance for People (No. 4) PLC, Paragon Mortgages (No. 1) PLC and Paragon Mortgages (No. 2) PLC have additional preference share capital held by the Group. The financial year end of all of the above companies is 30 September. They are registered and operate in England and Wales, except for Paragon Mortgages SA, Paragon Mortgages (No. 2) SA and Paragon Mortgages (No. 3) SA which are registered and operate in Luxembourg. The minority interests in Finance for People (No. 4) PLC, Paragon Mortgages (No. 1) PLC and Paragon Mortgages (No. 2) PLC are not material. 16. Stocks Residual purchase obligations Vehicles on extended hire or held for resale 2000 £m 10.9 0.6 11.5 1999 £m 12.1 2.4 14.5 17. Debtors The Group The Company Amounts falling due within one year Amounts owed by Group companies Tax debtors Other debtors Prepayments and accrued income 18. Called-up share capital Authorised: 175,000,000 (1999: 150,000,000) ordinary shares of 10p each Allotted and paid-up: 116,347,335 (1999: 116,206,294) ordinary shares of 10p each 2000 £m - 2.5 5.2 28.7 36.4 1999 £m - 1.8 5.5 15.5 22.8 2000 £m 71.6 0.1 - 5.1 76.8 2000 £m 17.5 11.6 1999 £m 104.3 0.1 0.2 2.4 107.0 1999 £m 15.0 11.6 During the year the authorised share capital of the company was increased by £2.5m by the creation of 25,000,000 new ordinary shares of 10p each. During the year 130,613 ordinary shares (£ 13,061 par value) were issued for £127,126 and a further 10,428 (£ 1,043 par value) were issued for £9,099. These issues were made under the executive and employee share option schemes, respectively. 19. Reserves (a) The Group Balance at 1 October 1999 Share options exercised Retained profit for the year Balance at 30 September 2000 Share premium account £m Merger reserve £m Profit and loss account £m 62.4 0.1 - 62.5 (70.2) - - (70.2) 109.7 - 24.1 133.8 Total £m 101.9 0.1 24.1 126.1 The cumulative amount of goodwill on acquisitions written off to reserves is £56.4m (1999: £56.4m). This balance has been offset against the profit and loss account to ensure compliance with Financial Reporting Standard 10 — (cid:212)Goodwill and Intangible Assets(cid:213). (b) The Company Balance at 1 October 1999 Revaluation of investments in subsidiaries Share options exercised Retained profit for the year Balance at 30 September 2000 Share premium account Revaluation reserve Profit and loss account £m 62.4 - 0.1 - 62.5 £m 0.3 1.3 - - 1.6 £m 39.2 - - 22.8 62.0 Total £m 101.9 1.3 0.1 22.8 126.1 notes to the accounts (continued) 20. Share option schemes Options are outstanding under the executive share option and the all employee share option schemes to purchase 9,682,270 (1999: 7,764,738) ordinary shares of 10p each as follows: Number 3,130 62,570 5,192 37,040 1,231,035 50,056 306,330 32,296 49,553 38,866 1,225,290 104,280 125,136 20,856 1,143,000 722,000 250,000 1,420,000 100,854 34,680 100,000 595,000 1,240,000 522,649 262,457 Period exercisable 07/12/1996 to 07/12/2000 07/12/1996 to 07/12/2000 02/02/1997 to 02/02/2001 02/02/1997 to 02/02/2001 13/03/1998 to 13/03/2005 31/03/1998 to 31/03/2005 14/06/1998 to 14/06/2005 04/07/1998 to 04/07/2005 06/02/1999 to 06/02/2003 21/06/1999 to 21/06/2003 02/12/1999 to 02/12/2003 12/06/2000 to 12/06/2004 16/06/2000 to 16/06/2004 16/06/2000 to 16/06/2004 31/03/2001 to 31/03/2008 31/03/2001 to 31/03/2005 30/09/2001 to 30/09/2008 11/01/2002 to 11/01/2009 23/03/2002 to 22/09/2002 23/03/2004 to 22/09/2004 27/09/2002 to 27/09/2006 17/02/2003 to 17/02/2010 26/05/2003 to 26/05/2007 21/06/2003 to 20/12/2003 21/06/2005 to 20/12/2005 Price 86.30p 69.52p 196.57p 139.84p 97.33p 87.26p 103.56p 97.33p 100.68p 103.08p 105.48p 162.05p 160.62p 105.48p 218.00p 218.00p 162.50p 147.50p 164.40p 164.40p 209.50p 147.50p 148.50p 120.64p 120.64p A number of the above options were granted to former employees whose rights terminate at the later of twelve months following redundancy or forty-two months after the issue of the options. 20. Share option schemes (continued) Details of individual options held by the directors at 30 September 1999 and 30 September 2000: Date from which exercisable Expiry date Option price J P L Perry N S Terrington N Keen M J R Kelly Options held at 30 September 1999: 07/12/1996 07/12/1996 02/02/1997 13/03/1998* 14/06/1998* 02/12/1999 31/03/2001* 31/03/2001 11/01/2002* 23/03/2002 23/03/2004 Options lapsed in the year: 23/03/2002 23/03/2004 Options granted in the year: 17/02/2003(cid:160) 26/05/2003 21/06/2003 21/06/2005 07/12/2000 07/12/2000 02/02/2001 13/03/2005 14/06/2005 02/12/2003 31/03/2008 31/03/2005 11/01/2009 22/09/2002 22/09/2004 69.52p 86.30p 196.57p 97.33p 103.56p 105.48p 218.00p 218.00p 147.50p 164.40p 164.40p 25,028 1,252 - 417,646 - 260,700 120,000 80,000 - 5,892 - 25,028 1,252 - 261,226 104,280 260,700 255,000 170,000 300,000 - 10,264 12,514 626 - 130,613 202,050 234,630 240,000 160,000 250,000 11,784 - - - 3,365 - - - - - - - - 910,518 1,387,750 1,242,217 3,365 22/09/2002 22/09/2004 164.40p 164.40p 5,892 - - 10,264 11,784 - - - 904,626 1,377,486 1,230,433 3,365 17/02/2010 26/05/2007 20/12/2003 20/12/2005 147.50p 148.50p 120.64p 120.64p 100,000 200,000 8,030 - 100,000 200,000 - 13,987 100,000 200,000 16,060 - - - - - At 30 September 2000 1,212,656 1,691,473 1,546,493 3,365 At 30 September 2000 The Paragon Group of Companies PLC share price was 151.0p and the range during the year then ended was 121.5p to 223.5p. * The exercise of these options is conditional upon earnings per share increasing at a rate in excess of the retail price index over the three preceding financial years. The initial earnings per share is adjustable, in certain circumstances, subject to Inland Revenue approval. (cid:160) The exercise of these options is conditional upon the Company(cid:213)s total shareholder return exceeding the average of that of a specified group of comparator companies. Options are granted to directors and senior employees from time to time, on the basis of performance and at the discretion of the Remuneration Committee. Further details of the share option schemes are given in the Report of the Board to the shareholders on directors(cid:213) remuneration on page 20. notes to the accounts (continued) 21. Provisions for liabilities and charges (a) The Group Provision at 1 October 1999 Current year charge/(credit) Utilised in the year Provision at 30 September 2000 Deferred taxation £m Other provisions £m 1.4 0.7 - 2.1 2.8 (0.6) (0.6) 1.6 Total £m 4.2 0.1 (0.6) 3.7 The other provisions include committed future lease costs for properties no longer occupied by the Group and costs associated with the relocation of the operations of the personal finance business to the Group(cid:213)s head office. These provisions are expected to be utilised within five years. The potential liability for deferred taxation and the amounts for which provision has been made are: Other timing differences (b) The Company 2000 1999 Potential liability £m 2.1 Provided £m 2.1 Potential liability £m 1.4 Provided £m 1.4 There is no potential liability for deferred tax in the holding company either at 30 September 2000 or 30 September 1999. 22. Creditors Amounts falling due within one year Bank loans and overdrafts Amounts owed to Group companies Proposed dividend Corporation tax Accruals Amounts falling due after more than one year Asset backed loan notes Bank loans Accruals The Group The Company 2000 £m 1.0 - 2.4 5.7 21.4 30.5 1,294.8 397.4 7.2 1,699.4 1999 £m 0.7 - 2.2 - 24.1 27.0 1,310.9 209.9 7.9 1,528.7 2000 £m - 2.3 2.4 - 0.1 4.8 - - - - 1999 £m - 2.1 2.2 - 1.8 6.1 - 20.0 - 20.0 A maturity analysis of the above borrowings and further details of asset backed loan notes and bank loans are given in note 23. 23. Financial instruments The Group(cid:213)s operations are financed principally by floating rate, asset-backed loan notes and, to a lesser extent, by a mixture of share capital, retained earnings and bank borrowings. The Group issues financial instruments to finance its lending operations and uses derivative financial instruments to hedge interest rate risk arising from fixed rate lending. In addition, various financial instruments, for example debtors, prepayments and accruals, arise directly from the Group(cid:213)s operations. It is, and has been throughout the year under review, the Group(cid:213)s policy that no trading in financial instruments shall be undertaken. The principal risks arising from the Group(cid:213)s financial instruments are credit risk, liquidity risk and interest rate risk. The Board operates through the Asset and Liability Committee to review and agree policies for managing each of these risks and they are summarised below. These policies have remained unchanged throughout the year and since the year end and the position disclosed below is materially similar to that existing throughout the year. Credit risk The Group(cid:213)s business objectives rely on maintaining a high-quality customer base and it places strong emphasis on good credit management, both at the time of underwriting a new loan, where strict lending criteria are applied, and in the collections process. First mortgages and secured loans are secured by charges over residential properties in England and Wales, or similar Scottish securities. Car loans are secured by the financed vehicle. Despite this security, in assessing credit risk, an applicant(cid:213)s ability to repay the loan remains the overriding factor in the decision to lend. In order to control credit risk relating to counterparties to the Group(cid:213)s financial instruments, the Asset and Liability Committee determines which counterparties the Group will deal with, establishes limits for each counterparty and monitors compliance with those limits. Liquidity risk The Group(cid:213)s assets are principally financed by asset backed loan notes issued through the securitisation process. Securitisation substantially reduces the Group(cid:213)s liquidity risk by matching the maturity profile of the Group(cid:213)s funding to the profile of the assets to be funded. This is possible as investors in the capital markets will accept maturities of anywhere between one month and forty years. The asset backed loan notes are secured on portfolios comprising variable and fixed rate mortgages or personal and car loans, and are redeemable in part from time to time, but such redemptions are limited to the net capital received from borrowers in respect of the underlying assets. There is no requirement for the Group to make good any shortfall out of general funds. It is likely that a substantial proportion of these notes will be repaid within five years. Interest is payable on the notes at various rates between 0.12% and 1.30% above the London Interbank Offered Rate ((cid:212)LIBOR(cid:213)) for three month sterling products. During the year, Group companies issued £185.0m of mortgage backed floating rate notes at par. During the year the Group has raised subordinated bank loans secured against various of its securitised portfolios. These loans are secured on the assets within the portfolio concerned, but are subordinated to the asset backed loan notes. Interest is payable on these loans at a rate of 1.25% above LIBOR. These loans are repayable out of receipts from borrowers in the same way as the asset backed loan notes. Included within bank loans at 30 September 2000 is £12.1m (1999 : £nil) in respect of such loans. notes to the accounts (continued) 23. Financial instruments (continued) Assets are typically securitised within twelve months of origination. Until that point new loans are funded using a £300.0m (1999: £300.0m) committed sterling facility provided to Paragon Second Funding Limited by a consortium of banks. £270.8m (1999: £127.5m) is included in bank loans in respect of drawings on this facility. This facility is secured on all the assets of Paragon Second Funding Limited, Paragon Car Finance Limited, Paragon Personal Finance Limited and Paragon Dealer Finance Limited. As with the asset backed loan notes, repayments of this facility are restricted to the amount of principal cash realised from the funded assets. Although the facility expires in 2044 it is likely that substantial repayments will be made within the next five years. This facility remains available for further drawings until January 2002. In addition to these borrowings the Group has a committed corporate syndicated sterling bank facility of £140.0m (1999: £96.0m), used to provide working capital for the Group. Included in bank loans are drawings of £114.5m (1999: £62.4m) made by Paragon Finance PLC and drawings of £nil (1999: £20.0m) made by the Company under this facility. The available facility reduces by instalments on 30 September 2003 and every six months thereafter until final repayment which is due on 31 March 2005. The facility is secured on all the assets of the Company and Paragon Finance PLC. The present facility replaced an earlier £96m facility, which was due to expire in 2002, during the year. Interest on the bank facilities is payable at various rates between 0.33% and 1.15% above LIBOR. The undrawn amounts on the two bank facilities at 30 September 2000 and 30 September 1999 are set out below. Undrawn committed facilities for which repayment would fall due: In one year or less In more than one year but not more than two years In more than two years 2000 £m - 29.0 24.0 53.0 1999 £m 12.0 1.0 172.0 185.0 Cash received in respect of loan assets is not immediately available for Group purposes, due to the terms of the Paragon Second Funding Limited facility and the securitisations. Included within Cash at bank and in hand and Investments at 30 September 2000 is £132.8m subject to such restrictions (1999: £132.7m). The securitisation process and the terms of the Paragon Second Funding Limited loan facility effectively remove any liquidity risk from the funding of the Group(cid:213)s loan assets. It remains to ensure that sufficient funding is available to provide capital support for new loans and working capital for the Group. This responsibility rests with the Asset and Liability Committee which sets liquidity policy and uses detailed cash flow projections to ensure that an adequate level of liquidity is available at all times. Set out below is the maturity profile of the Group(cid:213)s financial liabilities at 30 September 2000 and 30 September 1999; Over- drafts Bank loans £m £m Asset backed loan notes £m Other 2000 Total Over- drafts Bank loans Other 1999 Total Asset backed loan notes £m £m £m £m £m £m £m 1.0 - - - - - 126.6 - - - 29.5 4.3 2.9 30.5 4.3 129.5 270.8 1,294.8 - 1,565.6 0.7 - - - - 10.9 71.5 - - - 26.3 3.9 4.0 27.0 14.8 75.5 127.5 1,310.9 - 1,438.4 1.0 397.4 1,294.8 36.7 1,729.9 0.7 209.9 1,310.9 34.2 1,555.7 Financial liabilities falling due In one year or less, or on demand In more than one year, but not more than two years In more then two years but not more than five years In more than five years Interest rate risk The Group(cid:213)s policy is to maintain floating rate liabilities and match these with floating rate assets, hedging fixed rate assets by the use of interest rate swap or cap agreements. The rates of interest payable on the loan facilities and on asset backed loan notes issued in the securitisation process are reset quarterly on the basis of LIBOR. The interest rates charged on the Group(cid:213)s variable rate loan assets are determined by reference to, inter alia, the Group(cid:213)s funding costs and the rates being charged on similar products in the market. Generally this ensures the matching of changes in interest rates on the Group(cid:213)s loan assets and borrowings and any exposure arising on the interest rate resets is relatively short term. Forward rate agreements are used to hedge against any perceived risk of temporary increases in LIBOR rates at month ends. In part, the Group(cid:213)s interest rate hedging objectives are achieved by the controlled mismatching of the dates on which instruments mature, redeem or have their interest rates reset. The table overleaf summarises these repricing mismatches. For the purposes of the table, loan assets, borrowings and derivatives are allocated to time bands by reference to the earlier of the next contractual interest rate repricing date and the maturity dates. For those fixed rate loan assets where the customer has contracted to make regular repayments of both capital and interest, the assets have been allocated across the time bands in the table by reference to the contracted repayments. The analysis takes no account of early terminations which are likely to occur in practice. In determining the amount of hedging required, the Group makes assumptions about the level of regular capital repayments and early terminations of its loan assets. The actual interest rate sensitivity will therefore be determined by reference to subsequent customer and management decisions and is expected to be less sensitive than shown. The table includes short term creditors and debtors. More than 3 months but not more than 6 months £m More than 6 months but not more than 1 year £m notes to the accounts (continued) 23. Financial instruments (continued) At 30 September 2000 Cash at bank and in hand Investments 3 months or less £m 95.1 50.2 Loans to customers 999.4 Investment in own shares - Other assets - Total assets Provisions 1,144.7 - Bank loans and overdrafts (398.4) Asset backed loan notes (1,294.8) Other liabilities Shareholders(cid:213) funds - - Total liabilities (1,693.2) Off balance sheet items Interest rate repricing gap Cumulative gap At 30 September 1999 Cash at bank and in hand (restated) Investments (restated) Loans to customers Investment in own shares Other assets Total assets Provisions 469.6 (78.9) (78.9) 103.1 44.1 934.5 - - 1,081.7 - Bank loans and overdrafts (210.6) Asset backed loan notes (1,310.9) Other liabilities Shareholders(cid:213) funds - - Total liabilities (1,521.5) Off balance sheet items Interest rate repricing gap Cumulative gap 454.2 14.4 14.4 - - 25.6 - - 25.6 - - - - - - (19.1) 6.5 (72.4) - - 15.1 - - 15.1 - - - - - - (16.0) (0.9) 13.5 More than 1 year but not more than 5 years £m - - More than 5 years £m - - - - 94.8 402.4 147.5 - - - - - - 94.8 402.4 147.5 - - - - - - - - - - - - (87.4) 7.4 (65.0) (311.7) 90.7 25.7 - - - - - - - - - - (51.4) 96.1 121.8 - - 49.1 393.6 90.2 - - - - - - 49.1 393.6 90.2 - - - - - - - - - - - - - - - - - - (46.1) 3.0 16.5 (349.5) 44.1 60.6 (42.6) 47.6 108.2 Non interest bearing £m - - - 4.8 51.5 56.3 (3.7) - - (36.7) (137.7) (178.1) - (121.8) - - - - 2.8 40.9 43.7 (4.2) - - (34.2) (113.5) (151.9) - (108.2) - Total £m 95.1 50.2 1,669.7 4.8 51.5 1,871.3 (3.7) (398.4) (1,294.8) (36.7) (137.7) (1,871.3) - - - 103.1 44.1 1,482.5 2.8 40.9 1,673.4 (4.2) (210.6) (1,310.9) (34.2) (113.5) (1,673.4) - - - (cid:212)Off balance sheet items(cid:213) shows the notional principal amount of swap agreements. Included within (cid:212)no more than 3 months(cid:213) are £52.7m (1999: £38.1m) of capped rate mortgages hedged by interest rate cap agreements which reset quarterly. 23. Financial instruments (continued) The Asset and Liability Committee monitors the interest rate risk exposure on the Group(cid:213)s loan assets and asset backed loan notes and ensures compliance with the requirements of the trustees in respect of the Group(cid:213)s securitisations. All derivative contracts are accounted for as hedges. Changes in the fair value of instruments used as hedges are not recognised in the financial statements until the hedged position matures. Set out below is an analysis of these unrecognised gains and losses. Unrecognised gains and losses on hedges at 1 October 1999 Gains and losses arising in previous years that were recognised in the year Gains and losses arising before 1 October 1999 that were not recognised in the year Gains and losses arising in the year that were not recognised in the year Unrecognised gains and losses on hedges at 30 September 2000 Of which Gains and losses expected to be realised in the year to 2000 Gains 2000 Losses £m 5.5 - 5.5 (3.9) 1.6 £m (1.9) 0.2 (1.7) (2.6) (4.3) 2000 Total net gains/(losses) £m 3.6 0.2 3.8 (6.5) (2.7) 1999 Gains 1999 Losses 1999 Total net gains/(losses) £m £m 0.1 - 0.1 5.4 5.5 £m (7.7) - (7.7) 5.8 (1.9) 30 September 2001 0.6 (1.1) (0.5) 1.2 (0.6) Gains and losses expected to be realised in the year to 30 September 2002 or later 1.0 (3.2) (2.2) 4.3 (1.3) (7.6) - (7.6) 11.2 3.6 0.6 3.0 Currency risk The Group has no material exposure to foreign currency risk. Fair values of financial assets and financial liabilities Fair values have been determined for all derivatives, listed securities and any other financial assets and liabilities for which an active and liquid market exists. The fair values of cash at bank and in hand, bank loans and overdrafts and asset backed loan notes are not materially different from their book values because all the assets mature within three months of the year end and the interest rates charged on financial liabilities reset on a quarterly basis. Set out below is a comparison by category of book values and fair values of the Group(cid:213)s derivative financial instruments as at 30 September 2000 and 30 September 1999. Derivative financial instruments held to manage the interest rate profile Swaps Caps 2000 Book value £m 2000 Fair value £m 1999 Book value £m 1999 Fair value £m - 1.5 (2.3) 1.1 - 1.4 2.3 2.7 The fair values of the interest rate swaps and caps have been determined by reference to prices available from the markets on which these instruments are traded. notes to the accounts (continued) 24. Reconciliation of operating profit to net cash flows from operating activities Operating profit Provision for losses Depreciation Decrease in stock Increase in debtors (Decrease)/increase in creditors Net cash inflow from operating activities 25. Analysis of cash flows for headings netted in the cash flow statement (a) Capital expenditure and financial investment Net increase in loans to customers Expenditure on other fixed assets Proceeds from sale of freehold property (note 4) Proceeds from sales of other fixed assets Acquisition of own shares (b) Financing Exercise of share options Increase in loans from banks and others (note 27) 26. Reconciliation of net cash flow to movement in net debt (Decrease)/increase in cash in year Cash inflow from increase in debt Cash movement from change in liquid resources Movement in net debt in year Net debt at 1 October 1999 Net debt at 30 September 2000 2000 £m 35.5 10.2 1.3 0.8 (12.9) (2.5) 32.4 2000 £m (197.3) (1.7) - 0.4 (2.0) (200.6) 0.1 171.4 171.5 2000 £m (12.1) (171.4) 9.9 (173.6) (1,374.3) (1,547.9) 1999 £m 31.3 5.8 1.6 1.1 (6.9) 0.3 33.2 1999 £m (109.5) (1.6) 20.4 0.3 - (90.4) 0.4 44.8 45.2 1999 £m 6.6 (44.8) (23.7) (61.9) (1,312.4) (1,374.3) 27. Analysis of net debt Cash in hand at bank Overdrafts Debt due after one year Other liquid resources Total At 1 October 1999 £m Cash flows £m At 30 September 2000 £m 82.7 (0.7) (1,520.8) 64.5 (1,374.3) (11.8) (0.3) (12.1) (171.4) 9.9 (173.6) 70.9 (1.0) (1,692.2) 74.4 (1,547.9) Other liquid resources comprise term deposits with UK banks. 28. Events occuring after the balance sheet date On 16 October 2000, the Company acquired the entire share capital of Colonial Finance (UK) Limited, a consumer loan company, from the Commonwealth Bank of Australia. The consideration is to be finalised on the basis of completion accounts, but expected to be in the region of £2.0m. On 23 November 2000, the Group issued £195.0m of asset backed floating rate notes at par. 29. Capital commitments There were no capital commitments (1999: £nil) contracted but not provided for. 30. Financial commitments At 30 September 2000 the Group had commitments to make annual payments under operating leases which expire as follows: Plant and machinery Within one year Between two and five years Land and buildings Between two and five years Over five years 2000 £m 0.1 0.4 0.5 3.5 4.5 1999 £m - 0.4 0.2 3.4 4.0 notice of annual general meeting To all shareholders NOTICE IS HEREBY GIVEN that the twelfth Annual General Meeting of The Paragon Group of Companies PLC will be held at Vintners Place, 68 Upper Thames Street, London, EC4V 3BJ on 1 February 2001 at 10.30 a.m. for the following purposes: As ordinary business 1 To receive and consider the Company(cid:213)s Accounts for the year ended 30 September 2000 and the Reports of the Directors and the Auditors 2 To declare a dividend 3 To re-appoint as directors (a) Mr M J R Kelly (b) Mr D A Hoare* 4 To re-appoint Deloitte & Touche as Auditors and to authorise the directors to fix their remuneration. *Remuneration Committee member As special business To consider and, if thought fit, to pass resolution 5 as an ordinary resolution and resolution 6 as a special resolution: Ordinary Resolution 5 (cid:212)THAT the Board be and it is hereby generally and unconditionally authorised (in substitution for all subsisting authorities to the extent unused) to exercise all powers of the Company to allot relevant securities (within the meaning of Section 80 of the Companies Act 1985) up to an aggregate nominal amount of £4,473,000 PROVIDED THAT this authority shall expire at the conclusion of the next Annual General Meeting of the Company after the passing of this resolution (unless previously revoked or varied by the Company in general meeting) save that the Company may before such expiry make an offer or agreement which would or might require relevant securities to be allotted after such expiry and the Board may allot relevant securities in pursuance of such an offer or agreement as if the authority conferred hereby had not expired.(cid:213) Special Resolution 6 (cid:212)THAT, subject to the passing of the previous resolution, the Board be and it is hereby empowered pursuant to Section 95 of the Companies Act 1985 to allot equity securities (within the meaning of Section 94 of the said Act) for cash pursuant to the authority conferred by the previous resolution as if sub-section (1) of Section 89 of the said Act did not apply to any such allotment, PROVIDED THAT this power shall be limited to: (a) the allotment of equity securities in connection with a rights issue, open offer or any other pre-emptive offer in favour of ordinary shareholders and in favour of all holders of any other class of equity security in accordance with the rights attached to such class where the equity securities respectively attributable to the interests of all such persons on a fixed record date are proportionate (as nearly as may be) to the respective numbers of equity securities held by them or are otherwise allotted in accordance with the rights attaching to such equity securities (subject in either case to such exclusions or other arrangements as the Board may deem necessary or expedient to deal with fractional entitlements or legal or practical problems arising in any overseas territory, the requirements of any regulatory body or any stock exchange in any territory or any other matter whatsoever); and (b) the allotment (otherwise than pursuant to sub-paragraph (a) above) of equity securities up to an aggregate nominal value of £581,700 and shall expire upon the renewal of this power or, if earlier, at the conclusion of the next Annual General Meeting of the Company after the passing of this resolution, save that the Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after such expiry and the Board may allot equity securities in pursuance of such an offer or agreement as if the power conferred hereby had not expired.(cid:213) By order of the Board John G Gemmell Company Secretary Registered and Head Office: St Catherine(cid:213)s Court Herbert Road Solihull West Midlands B91 3QE 7 December 2000 Registered in England No. 2336032 A member entitled to attend and vote at this meeting may appoint a proxy to attend on his behalf and, on a poll, to vote instead of such member. A proxy need not also be a member of the Company. A proxy form is enclosed for use in connection with the meeting. Proxy forms and any power of attorney or other written authority under which they are executed (or an office or notarially certified copy thereof) should be lodged with the Registrar of the Company at the address shown on the reverse of the proxy form not less than forty-eight hours before the time appointed for the holding of the meeting. The appointment of a proxy will not preclude a shareholder from attending and voting at the meeting. The register of directors(cid:213) interests and copies of directors(cid:213) service contracts will be available for inspection during normal business hours on any weekday (Saturday and public holidays excepted) at the Registered Office of the Company from the date of this notice until the date of the Annual General Meeting and at the place of meeting from 10.00a.m. until the conclusion of the meeting. The Report and Accounts have been sent to the Company(cid:213)s shareholders. Biographical details of all directors are provided on page 16. company information Registered and Head Office St Catherine(cid:213)s Court Herbert Road Solihull West Midlands B91 3QE Telephone: 0121 712 2323 London Office 28 King Street London EC2V 8EH Telephone: 020 7710 7474 Internet www.paragon-group.co.uk Auditors Deloitte & Touche Chartered Accountants Colmore Gate 2 Colmore Row Birmingham B3 2BN Solicitors Slaughter and May 35 Basinghall Street London EC2V 5DB Registrars and Transfer Office Computershare Services PLC P.O. Box 82 The Pavilions Bridgwater Road Bristol BS99 7NH Brokers HSBC Investment Bank plc Thames Exchange 10 Queen Street Place London EC4R 1BL Financial Advisors HSBC Investment Bank plc Vintners Place 68 Upper Thames Street London EC4V 3BJ