Paragon Banking Group
Annual Report 2001

Plain-text annual report

1041_Paragon_R&A_2001 17/1/02 14:40 Page 1 annual report & accounts 2001 The Paragon Group of Companies PLC 1041_Paragon_R&A_2001 17/1/02 14:40 Page 2 company values commitment humour respect integrity professionalism creativity teamwork Contents Financial highlights Chairman’s statement Chief Executive’s review Board of Directors Directors’ report Report of the Board on directors’ remuneration Statement of directors’ responsibilities in relation to financial statements Independent auditors’ report Corporate governance Consolidated profit and loss account Consolidated balance sheet Holding company balance sheet Consolidated cash flow statement Reconciliation of movement in consolidated shareholders’ funds Notes to the accounts Notice of Annual General Meeting 1 2 4 12 14 17 18 19 20 24 25 26 27 27 28 55 1041_Paragon_R&A_2001 17/1/02 14:40 Page 1 financial highlights Profit before taxation Profit after taxation Assets under management Shareholders’ funds Earnings per share - basic - diluted Dividend per ordinary share 2001 £m 40.5 32.3 2,228.4 166.1 2000 £m 35.5 28.5 1,784.4 137.7 1999 £m 33.8 30.3 1,597.7 113.5 1998 £m 25.1 23.9 1,470.6 86.8 1997 £m 21.6 21.6 1,151.1 63.0 2001 2000 1999 1998 1997 28.5p 27.8p 4.2p 25.1p 24.9p 3.8p 26.1p 25.8p 3.4p 22.4p 22.1p 3.0p 23.4p 23.3p 2.7p The basic and diluted earnings per share figures for 1998 and 1997 have been adjusted following the implementation of Financial Reporting Standard 14 – ‘Earnings per share’. The earnings per share in 1997 has been adjusted to reflect the rights issue during 1998. the paragon group of companies plc 1 1041_Paragon_R&A_2001 17/1/02 14:40 Page 2 chairman’s statement The Group has performed strongly during the year ended 30 The Consumer Finance division, which operates in three September 2001, with good growth in the mortgage and principal areas of the consumer finance market, retail finance, consumer lending businesses supplemented by the acquisition personal finance and car finance, also increased advances by of a point of sale retail credit business. Profit before tax has 56% in the year. increased by 14.1% to £40.5 million from £35.5 million and earnings per share, at 28.5p, increased from last year’s level of 25.1p. In view of the continuing growth in profits your Board is pleased to propose, subject to approval at the Annual General Meeting, the payment on 1 February 2002 of an increased final dividend of 2.3p per share which, when added to the interim dividend of 1.9p paid on 31 July, gives a total dividend of 4.2p per share for the year, an increase of 10.5% on last year’s dividend of 3.8p. Paragon Retail Finance, formerly Colonial Finance (UK) Limited, made good progress over the period in what have been difficult market conditions, with business volumes being maintained since the year end. Since the acquisition of Colonial, considerable work has been undertaken to develop a full understanding of the needs of the division’s retailer clients and customising the business proposition to meet these needs. With the business now integrated, we believe it is well positioned to take advantage of the opportunities available within this Progress review and strategy market. Each of our business divisions has developed well despite increasing economic concerns as the year has progressed and over the past year we have deliberately adjusted our lending mix in favour of higher quality lending areas. Thus we have seen strong growth in our buy-to-let lending, which we consider has significant defensive qualities, and also in the more credit-robust areas of consumer lending, such as secured personal loans. Where appropriate elsewhere, we have tightened criteria, removed unprofitable introducers and increased margins to provide the best balance of products for growth of the business going forward. Paragon Mortgages increased advances by 56% from the previous year. The key development in this business during the year was the decision to focus the business entirely on the residential investment sector. Buy-to-let mortgages had already Paragon Personal Finance increased advances by 18% in the year and volumes have been maintained since the year end. Whilst lending was buoyant across the secured and unsecured markets, to take advantage of the higher quality of our secured products, we have during the year promoted these loans in preference to our unsecured product. We aim to grow this business by maintaining our volumes with our established introducers and increasing the volumes introduced by recent broker relationships. The timeshare business, now operating as Paragon Leisure Finance, increased its share of the market for UK buyers of timeshare weeks. During the year the size of the sales team was increased and additional resource was provided to enhance service quality. formed the majority of the new business being written at the Paragon Car Finance increased advances by 38% despite the beginning of the financial year but this was formalised in March difficult market conditions that prevailed throughout the period when all owner-occupied lending ceased. and volumes have continued to be in line with plan since the The outlook for buy-to-let looks positive: increasing rental demand, low returns on equities and low savings rates continue to ensure strong demand for well chosen and managed rented property and, as a leading lender in this market, strong demand for Paragon’s product. year end. Our commitment and ability to provide proactive and flexible vehicle finance solutions have resulted in increasing numbers of dealers and corporate customers now using Paragon Car Finance for their vehicle financing requirements. 2 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:40 Page 3 Outlook New non-executive director Notwithstanding the gloomier economic outlook, trading We were sorry during the year to have to say goodbye to Charles activity remains at high levels, with first mortgages particularly Weiser, who had been a non-executive director since October strong and we see no evidence to date of deteriorating credit 1998 and who resigned following taking up a position in quality across our portfolios. Our cash position is healthy and Australia. I am delighted, however, to welcome Christopher we shall consider actively acquisition opportunities that may Newell, who joined the Board on 1 November and brings to the arise in the current environment. Whilst there may be Board a wealth of experience in the financial services sector. uncertainties ahead, the components for delivering sustained, high quality earnings remain as before, namely, effective underwriting and arrears management and tight control of costs and margins. Your Board believes that Paragon is well placed to meet the challenges that lie ahead. Staff I would like to thank the staff and my fellow directors at Paragon for their hard work over the last year. The success of the Group is entirely attributable to their enthusiasm, professionalism and dedication. jonathan p l perry Executive Chairman 7 December 2001 the paragon group of companies plc 3 1041_Paragon_R&A_2001 17/1/02 14:40 Page 4 chief executive’s review For the year to 30 September 2001 The year to 30 September 2001 was another year of significant Review of operations growth, of profits, business volumes and loans outstanding. It was also a year in which we expanded further our product and distribution base, by the acquisition of Colonial Finance (UK) Limited. We were delighted to report the increased profits of £40.5 million for the year and continue to be encouraged by the robustness of business volumes. First mortgages The first mortgage business has been a particular focus for the Group this year. Paragon Mortgages advanced £381.6 million during the year ended 30 September 2001, an increase of 56.5% from the previous year’s level of £243.8 million. At 30 September 2001, the loan book stood at £1,042.7 million, up Total new lending during the year increased by 56.3% to £797.3 31.9% from £790.8 million at 30 September 2000. It is million from £510.0 million in 2000. Net loan assets grew by 26.5% to £2.15 billion. As a result of the growth in the book, net interest income increased by 16.9% to £72.8 million from £62.3 million. noteworthy that, during August, monthly completions exceeded £40 million for the first time. Furthermore, trading has remained robust since the year end, with application and completion levels remaining high despite a reported slowdown in the wider Other operating income was £15.3 million, compared with £14.0 mortgage market. million for the previous year, the increase mainly reflecting the Paragon Mortgages, now concentrating solely on serving the fees receivable on a higher volume of business. Operating costs were £35.6 million, compared with £30.6 million in the previous year, the increase being largely attributable to the acquisition of Colonial Finance (UK) Limited. Last year we reported that increased operating expenses arising from the integration of the business of Colonial were expected to impact the cost to income ratio. However, tight control over costs has meant that, at 40.4% for the year, the percentage of costs to income is only marginally higher than the 40.1% in 2000. Whilst this is a pleasing result, operating costs will be an area of focus needs of the private residential landlord, has continued to build its business on the basis of a reputation for good service and innovation, maintaining a regular research programme among landlords and intermediaries in order that we may respond effectively to changing needs. A new service launched during the year was Paragon Plus, our landlord internet portal offering tenant referencing, insurance products, legal help and on-line information. Paragon Mortgages also participates actively in the main professional forums within the buy-to-let sector, and is regarded as a leading player in this developing market. over the coming year and we expect to see a downward trend in Arrears on the Paragon Mortgages book remain at very low the cost to income ratio over future years. Provisions for losses were £12.0 million for the year, compared with £10.2 million for the previous year, the increase reflecting the growth in loan assets, in particular consumer finance assets, on the balance sheet. Across all our business areas the loan portfolios continue to perform in line with our expectations. After providing for corporation tax at a charge rate of 20% and providing for the dividend in respect of the year, shareholders’ funds at 30 September 2001 were 20.6% higher at £166.1 million. levels, reflecting the tight credit criteria and high underwriting standards applied and margins on new business have held firm. Paragon Mortgages also earns fees on cases received which do not match our profile, having entered into an arrangement with a third party lender with alternative criteria. For referred cases which subsequently complete, Paragon Mortgages receives an arrangement fee and an ongoing servicing fee. By 30 September 2001 the NHL book had reduced to £306.3 million, from £398.1 million at 30 September 2000. Despite the declining significance of this book it continues to be actively managed and remains profitable. 4 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:41 Page 5 1041_Paragon_R&A_2001 17/1/02 14:41 Page 6 chief executive’s review For the year to 30 September 2001 Consumer finance We are pleased with the development of the consumer finance businesses which, during the year, have been expanded by the addition of a retail finance operation. Total advances in this division, at £415.7 million (2000: £266.2 million), were 56.2% higher than the previous year, with a book totalling £757.1 million at 30 September 2001. Activity in the division has remained firm since the financial year end with completion levels in line with plan. In addition, a new point of sale initiative has been launched, concentrating on the home improvement market. Retail finance As we explained in our interim statement, the acquisition of Colonial Finance (UK) Limited on 16 October 2000 advanced our plans to develop a point of sale retail finance capability, with its lending focused on the more credit-robust sectors such as furniture and carpets. The period since acquisition has been one of intense activity. The administration of the Colonial personal loans portfolio has been transferred to our experienced in-house team where it has performed well. The business of Colonial has been fully integrated within the Group and the retail loans business has been rebranded under the name Paragon Retail Finance. In addition, the sales team has been restructured and good progress has been made in terms of retailer sign-ups. Despite relatively poor market conditions for instalment credit during the year, new loans of £81.9 million were advanced in the period. With the business now integrated, we believe it is well positioned to take advantage of the opportunities available within this market. mike lister Residential Property Landlord pindi jalal Team Leader Paragon Mortgages Many of our professional landlords have a number of properties financed through Paragon Mortgages. 6 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:43 Page 7 1041_Paragon_R&A_2001 17/1/02 14:43 Page 8 chief executive’s review For the year to 30 September 2001 Personal finance Advances by Paragon Personal Finance were £195.3 million for the year, compared with £165.9 million for the previous year, an increase of 17.7%. Total personal finance loan assets amounted to £507.1 million at 30 September 2001, up 43.9% from the 2000 level of £352.4 million. We explained in our interim statement that we had been promoting our secured loan products in preference to unsecured loans with our finance brokers, to take advantage of the higher quality and more defensive properties inherent in our secured loan portfolio. As a result, secured loan completions rose substantially in the year to £111.2 million from £71.7 million in the previous year, while unsecured completions decreased to £84.1 million from £94.2 million, improving the risk weighting of the personal loan portfolio. During the summer we launched a new internet based application processing system, which has proved to be popular with our brokers and has resulted in an increase in the volume of business submitted. The system will facilitate future product innovations and enables us to offer a first class service to our business suppliers. The timeshare business, now rebranded Paragon Leisure Finance, has continued to increase its lending volumes, although this remains a small business. Consideration is currently being given to diversifying Paragon Leisure Finance into other markets within the leisure industry. Direct lending via affinity schemes has been scaled back as returns have been inadequate and arrangements with affinity partners are being restructured to improve profitability in this area. Car finance Conditions have been difficult in the car finance market throughout the year. Whilst demand for new cars and new car finance has increased recently and residuals have improved, this has not followed through to an increase in demand for used car finance, our primary target market. Despite this challenging environment, the loan book for this business increased to £188.7 million at 30 September 2001 from £128.4 million at the previous year end, an increase of 47%. gordon taylor Broker Relationship Manager Paragon Personal Finance stacey kavanagh Underwriter Paragon Personal Finance Working together to ensure that our intermediaries and customers are provided with the relevant products and service. 8 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:45 Page 9 1041_Paragon_R&A_2001 17/1/02 14:45 Page 10 chief executive’s review For the year to 30 September 2001 Completions, at £138.5 million in the year, were 38.1% higher than in the previous year. During the year Paragon Car Finance has expanded its distribution capability amongst dealerships, promoting a strong service proposition, while maintaining margins and quality of business. These two aspects of loan quality and margin maintenance remain the principal areas of focus for this business. Home improvement finance Paragon Home Improvement Finance was launched on 1 October 2001 and will, during the start up phase, specialise in financing double glazing and conservatories. This new product and distribution is a good fit within the business and will utilise existing resources and organisation. We will report on the progress of this division at the half year. Funding The Group continues to be active in the securitisation market, a source of capital efficient matched funding for all our loan assets. In November 2000 a £195 million securitisation of car and secured personal loans was completed through Paragon Auto and Secured Finance (No. 1) PLC, our first issue to be denominated in euros; in April a £340 million securitisation backed by loans originated by Paragon Mortgages was completed under the name Paragon Mortgages (No. 3) PLC; and in June £251 million of notes were issued by Paragon Personal and Auto Finance (No. 1) PLC, backed by secured and unsecured consumer finance assets (including loans acquired with the purchase of Colonial Finance (UK) Limited) and car finance loans. Work is currently underway to complete a further securitisation of personal finance and car finance loans, to include the refinancing of loans currently securitised by Finance for People (No. 3) PLC. nigel s terrington Chief Executive 7 December 2001 10 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 11 1041_Paragon_R&A_2001 17/1/02 14:46 Page 12 board of directors 1. Jonathan P L Perry 2. Nigel S Terrington 3. Nicholas Keen 4. F William Hulton OBE 5. David A Hoare 6. Professor Andrew D Chambers 7. Michael J R Kelly 8. Christopher D Newell 12 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 13 board of directors 1. Jonathan P L Perry Executive Chairman Age 62 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 a Director of Morgan Grenfell & Co Limited for 15 years. 2. Nigel S Terrington Chief Executive Age 41 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 investment banking. 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. 3. Nicholas Keen Finance Director Age 43 Nicholas Keen joined the Group in May 1991 and became Finance Director in June 1995 having previously held the position of Treasurer. Prior to joining the Group he worked in Corporate Banking, Treasury and Capital Markets. He is Chairman of the Credit Committee. 4. F William Hulton OBE Non-Executive Director Age 63 Director of Botts & Co Limited. 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. 5. David A Hoare Non-Executive Director Age 51 Principal and Director of Talisman Management Limited and Chairman of Virgin Express Holdings PLC and Duncton PLC. He previously held the position of Chief Executive at Laura Ashley and has been a non-executive director of Paragon since May 1994. 6. Professor Andrew D Chambers Non-Executive Director Age 51 Director of Management Audit Limited and emeritus professor at City University London, where he was a Dean of the Business School. He is Chairman of Paragon’s Audit Committee and has been a non-executive director of Paragon since February 1991. He is author or co-author of several current auditing books, and is writing the new Tolley handbook on corporate governance. 7. Michael J R Kelly Non-Executive Director Age 60 Michael Kelly joined the Group in February 1994. He has some 30 years’ 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. He is also the author of an on-line mortgage publication. 8. Christopher D Newell Non-Executive Director Age 41 Christopher Newell has been a director of Altium Capital Limited (formerly Apax Partners & Co. Corporate Finance) since 1990 and Managing Director since 1996. He is also a director of Artemis Investment Management Limited. He joined the Board of Paragon as a non-executive director in November 2001. the paragon group of companies plc 13 1041_Paragon_R&A_2001 17/1/02 14:46 Page 14 directors’ report For the year to 30 September 2001 The directors submit their Report and Accounts for the year In addition, certain directors had interests in the share capital of ended 30 September 2001 which were approved by the Board on the Company by virtue of options granted under the executive 7 December 2001. Principal activity share option schemes, details of which are given in note 21 on page 43. The Company is a holding company co-ordinating the activities Other than grants of options shown in note 21, there have been of its subsidiary companies. The principal activities of the Group no changes in the directors’ interests in the share capital of the continue to be the operation of its consumer finance and first Company since 30 September 2001. mortgage businesses. The directors have no interests in the shares or debentures of the The Chairman’s Statement and the Chief Executive’s Review on Company’s subsidiary companies. pages 2 to 10 contain a review of the Group’s business during the financial year, its current position and future prospects. Results and dividends The results for the year are shown in the Consolidated Profit and Loss Account on page 24. Mr C Weiser resigned from the Board on 9 July 2001 and Mr C D Newell was appointed on 1 November 2001. In accordance with the Articles of Association, Mr J P L Perry, Mr N S Terrington, Mr N Keen and Mr C D Newell will retire and, being eligible, will offer themselves for re-appointment at the The directors recommend a final dividend of 2.3p per share forthcoming Annual General Meeting. None of these directors (2000: 2.1p per share) which, together with the interim dividend has a service contract with the Company requiring more than 12 of 1.9p per share (2000: 1.7p per share) paid on 31 July 2001, months’ notice of termination to be given. None of the directors had, either during or at the end of the year, any material interest in any contract of significance with the Company or its subsidiaries. makes a total of 4.2p per share. After dividends, retained profits of £27.3 million (2000: £24.1 million) have been transferred to reserves. Directors The interests of the directors at the year end, all of whom served throughout the year, in the share capital of the Company, all beneficially held, are shown below. at 30 september 2001 at 30 september 2000 ordinary shares ordinary shares of 10p each of 10p each 278,717 252,437 85,520 23,140 500 34,650 20,000 3,365 59,240 10,000 500 34,650 42,656 - J P L Perry N S Terrington N Keen A D Chambers* D A Hoare* F W Hulton* M J R Kelly* *Non-executive directors. 14 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 15 directors’ report For the year to 30 September 2001 Substantial shareholdings As at 30 November 2001, being a date not more than one month before the date of the notice convening the forthcoming Annual General Meeting, 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: ordinary shares % held Schroder Investment Management Limited M & G Investment Management Limited Standard Life Assurance Co Legal & General Investment Management Limited Perpetual Unit Trust Management Limited AEGON Asset Management plc Clerical Medical & General Life Assurance Society JP Morgan Fleming Asset Management Merrill Lynch Investment Management Zurich Scudder Investments (UK) Hermes Pension Management Limited 15,235,793 12,251,838 6,421,952 5,820,591 5,262,897 5,046,184 4,664,093 4,580,833 4,237,854 4,167,009 3,527,224 13.0% 10.4% 5.5% 5.0% 4.5% 4.3% 4.0% 3.9% 3.6% 3.6% 3.0% Employees’ involvement Environmental and Health and Safety policies The directors recognise the benefit of keeping employees The Group has a formal Health and Safety policy which is informed of the progress of the business. Employees have been intended to ensure the maintenance of healthy and safe working provided with regular information on the performance and plans conditions in all the premises occupied by the Group. The Group of the Group, and the financial and economic factors affecting it, also operates responsibly with regard to the environment, with through both information circulars and management extensive use being made of electronic communications in place presentations. The directors encourage the involvement of employees at all levels by the staff appraisal process and through communication between directors, team leaders and teams. The staff appraisal of paper usage, careful control of business travel, recycling of waste paper by external contractors, energy efficiency and the Group’s relationship with the local community all being matters of high priority. system used by the Group is designed to assist employees in Appropriate procedures have been established to monitor, developing their careers within the Group and to identify and maintain and consistently improve the Group’s Health and Safety provide appropriate training opportunities. standards and environmental performance and to ensure Employment of disabled persons Full and fair consideration is given to applications for employment made by disabled persons having regard to their compliance with all necessary legislation. Monitoring is undertaken internally and by external consultants and training is organised for staff from time to time. particular aptitudes and abilities. The Group has continued its Charitable contributions policy of providing appropriate training and career development Contributions to charitable institutions in the United Kingdom to such persons. amounted to £12,903 (2000: £10,786). the paragon group of companies plc 15 1041_Paragon_R&A_2001 17/1/02 14:46 Page 16 directors’ report For the year to 30 September 2001 Close company status resolution 6 So far as the directors are aware, the Company is not a close Under Section 89 of the Companies Act 1985, any shares allotted company for taxation purposes. Creditor payment policy 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 appropriate to the business. Auditors A resolution for the re-appointment of Deloitte & Touche as auditors of the Company is to be proposed at the forthcoming wholly 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’s Annual General Meeting and Resolution 6 seeks to renew it. The resolution authorises the directors to allot shares for cash, other than to existing shareholders in proportion to their holdings, up to an aggregate nominal value of £586,400, representing approximately 5% of the Company’s issued share capital at 30 November 2001. Annual General Meeting. resolution 7 Details of resolutions to be proposed as special business at the Annual General Meeting resolution 5 Section 80 of the Companies Act 1985 states that the directors may not exercise a company’s power to allot its unissued shares unless given authority to do so by resolution of the shareholders in general meeting. This resolution, which is being proposed as a Special Resolution, will enable the Company to purchase, in the market up to a maximum of 11.7 million of the Company’s ordinary shares (approximately 10% of the issued capital at 30 November 2001) for cancellation at a minimum price of 10p per share and a maximum price of not more than 105% of the average middle market quotation for an ordinary share as derived from the London Stock Exchange Daily Official List for the five business The present authority of the directors to allot the unissued days immediately prior to the date of purchase. ordinary share capital of the Company was granted at the previous Annual General Meeting on 1 February 2001 and will expire at the end of the forthcoming Annual General Meeting. Resolution 5 seeks to renew, for a further year, the present authority of the directors to allot ordinary shares up to an aggregate nominal value of £4,404,200 representing The directors would not expect to purchase ordinary shares in the market unless, in the light of market conditions prevailing at the time, they considered that to do so would enhance earnings per share and would be in the best interests of shareholders generally. Any purchases made by the Company will be announced no later than 7:30am on the business day following approximately 37.5% of the Company’s issued capital at 30 the transaction. November 2001 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 Approved by the Board of Directors and signed on behalf conclusion of the following Annual General Meeting. of the Board. 16 the paragon group of companies plc john g gemmell Company Secretary 7 December 2001 1041_Paragon_R&A_2001 17/1/02 14:46 Page 17 report of the board on directors’ remuneration Remuneration Committee on objective research which gives up-to-date information on The Committee consists solely of three non-executive directors: comparable companies. Executive directors’ contracts of service, William Hulton, Professor Andrew Chambers and David Hoare. which include details of remuneration, will be available for The Chairman of the Remuneration Committee is William Hulton. inspection at the Annual General Meeting. None of the directors comprising the Committee have any personal financial interests (other than as shareholders), conflicts of interest arising from cross-directorships or day-to-day involvement in running the business. The Committee consults the Chairman and Chief Executive about its proposals and has access to professional advice from within and outside the Company. The Committee determines the Company’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 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. Dependents of The Company’s policy is to ensure that executive directors are executive directors who are members of the Group Retirement fairly rewarded for their individual performance, having regard to Benefits Plan are eligible for a dependent’s pension and the the importance of retention and motivation. The performance payment of a lump sum in the event of death in service. The measurement of the executive directors and the determination of pension arrangements provide for a pension of 1/37.5 of basic their annual remuneration packages is undertaken by the annual salary (to a maximum of 2/3) for every year of eligible Committee. The remuneration of the non-executive directors is service. Where pension contributions are capped, additional determined by the Board. payments are made to enable further provision. In forming and reviewing remuneration policy the Committee has The changes in pension entitlements arising in the financial year, given full consideration to Section B.1 of the Combined Code on the disclosure of which is required by the Financial Services Corporate Governance. The remuneration packages of the individual directors have been assessed after a review of their individual performances and an assessment of comparable positions in the financial sector. All executive directors are remunerated by 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 Authority, are given in note 5 to the accounts. There have been no changes in the terms of directors’ pension entitlements during the year. There are no unfunded promises or similar arrangements for directors. Share options Executive directors’ 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 the consolidated earnings per share to increase at a rate in excess of the retail price index over a period An executive director’s salary is determined by the Remuneration of three years from the date the option is granted. The exercise Committee at the beginning of each year. In deciding appropriate of options granted under the ESOP Executive Share Option and levels the Committee considers the Group as a whole and relies the paragon group of companies plc 17 1041_Paragon_R&A_2001 17/1/02 14:46 Page 18 report of the board on directors’ remuneration statement of directors’ responsibilities in relation to financial statements Paragon 1999 Sharesave schemes is not dependent upon The directors are required by the Companies Act 1985 to prepare performance criteria. The Paragon 2000 Executive scheme financial statements for each financial year which give a true requires total shareholder return to exceed the average for a and fair view of the state of affairs of the Company and the range of other companies. Group as at the end of the financial year and of the profit or loss The Committee has minuted a decision that the members in for the financial year. Annual General Meeting need not be invited to approve other The directors consider that in preparing the financial statements aspects of the remuneration policy set out in this report. The (on pages 24 to 54), the Company has used appropriate Chairman of the Committee will, however, be available to answer accounting policies, consistently applied and supported by questions on remuneration policy at the Annual General Meeting. reasonable and prudent judgements and estimates, and that all Directors’ contracts All executive directors hold one year rolling contracts and the accounting standards which they consider to be applicable have been followed. Remuneration Committee reviews the terms of these regularly. All The directors have responsibility for ensuring that the Company of the directors seeking re-election at the Annual General keeps accounting records which disclose with reasonable Meeting, other than Mr C D Newell, have a service contract with accuracy the financial position of the Company and which enable the Company. Non-executive directors them to ensure that the financial statements comply with the Companies Act 1985. All non-executive directors have specific terms of engagement The directors have general responsibility for taking such steps as and their remuneration is determined by the Board, subject to are reasonably open to them to safeguard the assets of the the Articles of Association. The fee paid to each non-executive Group and to prevent and detect fraud and other irregularities. director in the year was £21,250. The chairmen of the Audit Committee and Remuneration Committee receive an additional £2,500. Non-executive directors are not eligible to participate in any of the Company’s share option schemes or to join the pension scheme. Options over 3,365 shares exercised by Michael Kelly during the year were granted during his previous appointment as an executive director. Mr Kelly has no remaining options over shares in the Company. The information on directors’ remuneration and share options contained in notes 5 and 21 forms part of this report. By order of the Board john g gemmell Company Secretary 7 December 2001 18 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 19 independent auditors’ report To the members of The Paragon Group of Companies PLC We have audited the financial statements of The Paragon Basis of audit opinion Group of Companies PLC for the year ended 30 September 2001 We conducted our audit in accordance with United Kingdom which comprise the consolidated profit and loss account, the auditing standards issued by the Auditing Practices Board. An balance sheets, the consolidated cash flow statement and the audit includes examination, on a test basis, of evidence relevant related notes 1 to 31 together with the reconciliation of to the amounts and disclosures in the financial statements. It movement in consolidated shareholders’ funds. These financial also includes an assessment of the significant estimates and statements have been prepared under the accounting policies judgements made by the directors in the preparation of the set out therein. Respective responsibilities of directors and auditors As described in the statement of directors’ responsibility, 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. Company’s directors are responsible for the preparation of the We planned and performed our audit so as to obtain all the financial statements in accordance with applicable United information and explanations which we considered necessary in Kingdom law and accounting standards. Our responsibility is to order to provide us with sufficient evidence to give reasonable audit the financial statements in accordance with relevant United assurance that the financial statements are free from material Kingdom legal and regulatory requirements, auditing standards, misstatement, whether caused by fraud or other irregularity or and the Listing Rules of the Financial Services Authority. error. In forming our opinion we also evaluated the overall We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in adequacy of the presentation of information in the financial statements. accordance with the Companies Act 1985. We also report to you Opinion if, in our opinion, the directors’ report is not consistent with the In our opinion the financial statements give a true and fair view financial statements, if the Company has not kept proper of the state of affairs of the Company and the Group as at 30 accounting records, if we have not received all the information September 2001 and of the profit of the Group for the year then and explanations we require for our audit, or if information ended and have been properly prepared in accordance with the specified by law or the Listing Rules regarding directors’ Companies Act 1985. remuneration and transactions with the Company and other members of the Group is not disclosed. We review whether the corporate governance statement reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read the directors’ report and the other information contained in the annual report for the above year as described in the contents section and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Deloitte & Touche Chartered Accountants and Registered Auditors Colmore Gate 2 Colmore Row Birmingham B3 2BN 7 December 2001 the paragon group of companies plc 19 1041_Paragon_R&A_2001 17/1/02 14:46 Page 20 corporate governance The Combined Code, which sets out Principles of Good • The Remuneration Committee, consisting of William Hulton, Corporate Governance and Code provisions, was issued by the who chairs the committee, Professor Andrew Chambers and London Stock Exchange in June 1998. Throughout the year the David Hoare. Group has been in compliance with the Code provisions set out in section 1 of the Combined Code on Corporate Governance. A statement on how the Company has applied the Principles of Good Corporate Governance and a statement explaining the extent to which the provisions in the Code relevant to companies have been complied with appear below. Directors • The Audit Committee, consisting of all the non-executive directors and chaired by Professor Andrew Chambers. The committee meets at least three times per year. It oversees the monitoring of the adequacy of the Group’s internal controls, accounting policies and financial reporting, monitors the adequacy of the Group’s audit arrangements and the relationship between the Company and the auditors and provides a forum The Board of Directors comprises three executive and five non- through which the Group’s external and internal audit functions executive directors, all of whom bring to the Company a broad report to the non-executive directors. and valuable range of experience. Jonathan Perry has been Executive Chairman since February 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. There is a clear division of executive responsibilities at the head of the Company and strong non-executive representation on the Board, including William Hulton who has been nominated as the senior non-executive director. This provides effective balance and • The Asset and Liability Committee, consisting of the 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. • The Credit Committee, consisting of appropriate heads of functions and chaired by Nicholas Keen, the Finance Director. It meets regularly and is responsible for establishing credit policy and monitoring compliance therewith. challenge. The Board meets regularly throughout the year and is • The Nomination Committee, consisting of Jonathan Perry, who responsible for overall Group strategy, for approving major chairs the committee, and two non-executive directors. The agreements, transactions and other financing matters and for committee is convened as required to nominate candidates for monitoring the progress of the Group against budget. There is a membership of the Board, although ultimate responsibility for formal schedule of matters reserved for decision by the Board. appointment rests with the Board. All non-executive directors are independent of management and All Board committees operate within defined terms of reference. are appointed for fixed terms. They fulfil a vital role in helping the executive to develop the Company, are kept fully informed of all relevant operational and strategic issues and bring a strongly independent and experienced judgement to bear on these issues. Directors’ remuneration The Remuneration Committee reviews the performance of executive directors and members of senior management prior to determining its recommendations on annual remuneration, All directors are able to take independent professional advice in performance bonuses and share options for the Board’s the furtherance of their duties whenever it is considered determination. appropriate to do so. The Board also operates through a number of committees covering certain specific matters, these being: The Report of the Board to the Shareholders on Directors’ Remuneration is on pages 17 and 18. Relations with shareholders The Board encourages communication with the Company’s institutional and private investors. All shareholders have at least twenty working days’ notice of the Annual General Meeting at 20 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 21 corporate governance which the directors and committee chairmen are available for relationship between the cost and benefits from particular questions. The Annual General Meeting provides an opportunity aspects of the control system. for directors to report to investors on the Group’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 Executive Chairman, Chief Executive and Finance Director have a full programme of meetings with institutional investors during the course of the year and the Company’s web site at www.paragon-group.co.uk provides access to information on the Company and its businesses. Accountability and audit The system of internal control includes documented procedures covering accounting, compliance, risk management, personnel matters and operations, clear reporting lines, delegation of authority through a formal structure of mandates, a formalised budgeting, management reporting and review process, the use of key performance indicators throughout the Group and regular meetings of the Asset and Liability and Credit Committees and senior management. The Board receives regular reports setting out key performance and risk indicators. In addition the Board operates a formal risk management process, from which the key risks facing the business are identified. The process results in reports to the Board on how these risks are being managed. The Board meets regularly with the heads of functions to review the operation of Detailed reviews of the performance of the Group’s main internal controls in relation to the risks associated with their business lines are included within the Chairman’s Statement and specific areas. Chief Executive’s Review. The Board uses these, together with the Directors’ Report on pages 14 to 16 to present a balanced and understandable assessment of the Company’s position and prospects. The system of internal control is monitored by management and by an internal audit function that concentrates on the areas of greater risk and reports its conclusions regularly to management and the Audit Committee. The internal audit work plan is The directors’ responsibility for the financial statements is approved annually by the Audit Committee, which reviews the described on page 18. effectiveness of the system of internal control annually and An ongoing process for identifying, evaluating and managing the reports its conclusions to the Board. significant risks faced by the Group, which is regularly reviewed by Going concern basis the Board, was in place for the year ended 30 September 2001 and After making enquiries, the directors have a reasonable to the date of approval of these financial statements. The directors expectation that the Group and the Company have adequate confirm that they have reviewed the effectiveness of the Group’s resources to continue in operational existence for the foreseeable system of internal control for this period and that these procedures future. For this reason, they continue to adopt the going concern accord with the guidance ‘Internal Controls: Guidance for Directors basis in preparing the accounts. on the Combined Code’. Compliance Statement The directors are responsible for the system of internal control The Listing Rules require the Board to report on compliance with throughout the Group and for reviewing its effectiveness. Such a the forty-five Code provisions throughout the accounting period. system is designed to manage rather than eliminate the risk of Throughout the year ended 30 September 2001 the Company failure to achieve business objectives, and can provide has been in compliance with the Code provisions set out in reasonable, but not absolute, assurance against material Section 1 of the Combined Code of Corporate Governance issued misstatement or loss and that assets are safeguarded against by the Financial Services Authority. unauthorised use or disposition. In assessing what constitutes reasonable assurance, the directors have regard to the the paragon group of companies plc 21 1041_Paragon_R&A_2001 17/1/02 14:46 Page 22 the 1041_Paragon_R&A_2001 17/1/02 14:46 Page 23 accounts 1041_Paragon_R&A_2001 17/1/02 14:46 Page 24 consolidated profit and loss account For the year to 30 September 2001 Interest receivable Interest payable and similar charges net interest income Other operating income total operating income Operating expenses Provisions for losses operating profit being 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 3 4 7 8 10 11 11 2001 £m 229.7 (156.9) 72.8 15.3 88.1 (35.6) (12.0) 40.5 (8.2) 32.3 (5.0) 27.3 2000 £m 186.4 (124.1) 62.3 14.0 76.3 (30.6) (10.2) 35.5 (7.0) 28.5 (4.4) 24.1 28.5p 27.8p 25.1p 24.9p 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. There is no material difference between the results as stated above and those determined on the historical cost basis. 24 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 25 consolidated balance sheet 30 September 2001 notes £m 2001 £m 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’ funds Called-up share capital Share premium account Merger reserve Profit and loss account provisions for liabilities and charges creditors Amounts falling due within one year Amounts falling due after more than one year 12 13 14 16 17 19 20 20 20 22 23 23 3.2 2,146.3 4.8 8.9 7.9 125.5 106.0 63.5 (70.2) 161.1 37.6 2,196.6 Approved by the Board of Directors on 7 December 2001 Signed on behalf of the Board of Directors n s terrington Chief Executive n keen Finance Director 2000 restated £m £m 3.6 1,697.2 4.8 2,154.3 1,705.6 11.5 8.9 50.2 95.1 62.5 (70.2) 133.8 30.5 1,699.4 165.7 1,871.3 11.6 126.1 137.7 3.7 1,729.9 1,871.3 248.3 2,402.6 11.7 154.4 166.1 2.3 2,234.2 2,402.6 the paragon group of companies plc 25 1041_Paragon_R&A_2001 17/1/02 14:46 Page 26 holding company balance sheet 30 September 2001 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’ funds Called-up share capital Share premium account Revaluation reserve Profit and loss account creditors Amounts falling due within one year notes £m 4.8 121.2 78.6 0.1 63.5 1.8 89.1 14 15 17 19 20 20 20 23 2001 £m 126.0 78.7 204.7 11.7 154.4 166.1 38.6 204.7 £m 4.8 60.8 76.8 0.1 62.5 1.6 62.0 2000 £m 65.6 76.9 142.5 11.6 126.1 137.7 4.8 142.5 Approved by the Board of Directors on 7 December 2001 Signed on behalf of the Board of Directors n s terrington Chief Executive n keen Finance Director 26 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 27 consolidated cash flow statement For the year to 30 September 2001 Net cash inflow from operating activities Taxation Capital expenditure and financial investment Acquisitions and disposals Equity dividends paid Management of liquid resources Financing increase/(decrease) in cash in the year Notes 25 26(a) 26(b) 28 26(c) reconciliation of movement in consolidated shareholders’ funds For the year to 30 September 2001 Profit attributable to shareholders Dividend Exercise of share options Net movement in shareholders’ funds Opening shareholders’ funds Closing shareholders’ funds 2001 £m 80.5 (5.7) (322.4) 0.3 (4.7) (252.0) (51.1) 339.2 36.1 2001 £m 32.3 (5.0) 1.1 28.4 137.7 166.1 2000 restated £m 58.0 (1.3) (226.2) - (4.2) (173.7) (9.9) 171.5 (12.1) 2000 £m 28.5 (4.4) 0.1 24.2 113.5 137.7 the paragon group of companies plc 27 1041_Paragon_R&A_2001 17/1/02 14:46 Page 28 notes to the accounts For the year to 30 September 2001 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 fixed asset investments. b. Basis of consolidation The consolidated accounts deal with the accounts of the Company and its subsidiaries made up to 30 September 2001. The results of the business acquired during the year are dealt with in the consolidated accounts from the date of acquisition. 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 Furniture, fixtures and office equipment Motor vehicles over the life of the lease 25% per annum 15% per annum 25% per annum e. Loans to customers Loans are stated at cost less provision for diminution in value. The amount provided is an estimate of the amount needed to reduce the carrying value of the asset to its expected recoverable amount and is based on the application of formulae which take into account the nature of each portfolio, borrower payment profile and expected losses. Cashbacks and discounts are amortised over the redemption fee periods of the related mortgages. f. Fixed assets - investments The Company’s investments in subsidiary companies are valued by the directors at the Company’s share of the book value of their underlying net tangible assets. The Company’s investments in its own shares are stated at the lower of cost or recoverable amount. 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 – ‘Reporting the Substance of Transactions’, 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. 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. 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 – ‘Provisions, contingent liabilities and contingent assets’. 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. 28 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 29 notes to the accounts For the year to 30 September 2001 r. Brokers’ commissions Brokers’ commissions payable on mortgage loans are charged to the profit and loss account when they are incurred. Brokers’ commissions payable on other loans are amortised on a straight- line basis over the period of the loans to which they relate. The balances being amortised are included within ‘Loans to Customers’. These balances were previously included within ‘Prepayments and accrued income’ but it is felt that the change represents a more appropriate classification. The comparative figures have been restated to reflect this change. The financial effect of this change on the consolidated balance sheet is to increase the balance of ‘Loans to Customers’ at 30 September 2000 by £27.5m and to reduce the balance of ‘Prepayments and accrued income’ by the same amount. The effect on the consolidated cash flow statement is to increase the amount reported as ‘Net cash inflow from operating activities’ by £25.6m and to increase ‘Net increase in loans to customers’ by the same amount. This change has no impact on the profit either for the year or the preceding year. n. Financial instruments Derivative instruments utilised by the Group comprise currency swap, 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’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’s principal activities and the gross profit is therefore included in other operating income. The turnover is shown in note 4. 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. The Group has adopted the transitional disclosure requirements of Financial Reporting Standard 17 – ‘Retirement Benefits’. 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. the paragon group of companies plc 29 1041_Paragon_R&A_2001 17/1/02 14:46 Page 30 notes to the accounts For the year to 30 September 2001 2. Acquisition and goodwill The entire issued share capital of Colonial Finance (UK) Limited was acquired on 16 October 2000 for a total acquisition cost of £3.3m. This acquisition has been accounted for by the acquisition method of accounting. No goodwill arises as a result of this acquisition. The losses after taxation of Colonial Finance (UK) Limited prior to acquisition were as follows: results prior to acquisition 1 January 2000 to date of acquisition Preceding financial year ended 31 December 1999 loss after tax £m (9.5) (1.3) The following table explains the adjustments made to the book value of the major categories of assets and liabilities to arrive at the fair values included in the consolidated financial statements at the date of acquisition. The cash flow effects of the acquisition are given in note 29. book amount revaluation £m 173.1 1.9 3.6 (162.4) 16.2 Loans to customers Other debtors Cash at bank and in hand Creditors and provisions Goodwill Acquisition cost Cash consideration Costs of acquisition Acquisition cost alignment of accounting policies £m fair value to the group £m £m (12.9) - - - (12.9) - - - - - 160.2 1.9 3.6 (162.4) 3.3 - 3.3 2.6 0.7 3.3 Goodwill Goodwill capitalised in 2001 under the accounting policy stated in note 1 amounted to £nil (2000: £nil). The cumulative amount of goodwill on acquisitions written off to reserves as a matter of accounting policy prior to the implementation of Financial Reporting Standard 10 – ‘Goodwill and Intangible Assets’ is £56.4m (2000: £56.4m). The results for the businesses of Colonial Finance (UK) Limited have not been separately disclosed on the face of the profit and loss account or within the notes to the cash flow statement because, as a result of the integration of these businesses within the continuing operations of the Group, it is not practicable to disclose their post acquisition results. 30 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 31 notes to the accounts For the year to 30 September 2001 3. Interest payable and similar charges On asset backed loan notes On bank loans and overdrafts Amortisation of brokers’ commissions payable 4. Other operating income Other operating income includes the gross profit of the Group’s vehicle contract hire business as follows: Turnover Cost of sales Gross profit Included within other operating income is income from property leases of £2.0m (2000: £1.2m). 5. Directors’ remuneration The remuneration packages in respect of directors holding office during the year were: salary and fees benefits in kind annual bonus £000 £000 £000 pension contributions £000 executive J P L Perry N S Terrington N Keen non-executive A D Chambers D A Hoare F W Hulton M J R Kelly C Weiser 2001 2000 162 231 177 24 21 24 21 16 676 659 5 12 4 - - - - - 21 17 75 205 160 - - - - - 440 310 35 21 78 - - - - - 134 129 Mr J P L Perry is the Chairman and Mr N S Terrington is the highest paid director. 2001 £m 107.3 29.5 20.1 156.9 2001 £m 10.8 (10.3) 0.5 2001 total £000 277 469 419 24 21 24 21 16 1,271 1,115 2000 £m 92.1 19.3 12.7 124.1 2000 £m 9.4 (8.6) 0.8 2000 total £000 245 405 361 22 20 22 20 20 1,115 the paragon group of companies plc 31 1041_Paragon_R&A_2001 17/1/02 14:46 Page 32 notes to the accounts For the year to 30 September 2001 5. Directors’ remuneration (continued) Directors’ 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: increase in accrued pension during year excluding any increase for inflation £000 N S Terrington N Keen 5 3 transfer value of increase £000 26 23 accumulated total accrued pension at 30 September 2001 £000 accumulated total accrued pension at 30 September 2000 £000 66 33 59 29 The pension entitlement shown is that which would be paid annually on retirement based on services to 30 September 2001. The transfer value has been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11 less directors’ contributions. Members of the scheme 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 £70,000 (2000: £68,000) 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 622 (2000: 623). Staff costs incurred during the year in respect of these employees were: Wages and salaries Social Security costs Other pension costs Details of the Group Pension Scheme are given in note 18. 7. Profit on ordinary activities before taxation Profit on ordinary activities before taxation is after charging: Depreciation Hire of plant and machinery Property rents payable 2001 £m 14.6 1.1 0.8 16.5 2001 £m 1.2 0.4 3.8 2000 £m 14.2 1.1 0.8 16.1 2000 £m 1.3 0.6 3.4 The audit fee for the Group was £0.3m (2000: £0.3m). Other fees paid to the auditors in respect of securitisation, corporate finance and taxation matters were £0.4m (2000: £0.3m). The Company’s audit fee was £19,700 (2000: £16,400). The profit for the year is derived from a single operation and all lending takes place within the UK. 32 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 33 notes to the accounts For the year to 30 September 2001 8. Tax charge on profit on ordinary activities uk corporation tax at 30% (2000: 30%) Current tax Write-back of Advance Corporation Tax Deferred tax (note 22) prior year adjustments Current tax Tax charge on profit on ordinary activities 2001 £m 12.5 (3.2) (0.3) 9.0 (0.8) 8.2 2000 £m 9.1 (2.8) 0.7 7.0 - 7.0 The taxation charge has been reduced by £3.2m (2000: £3.6m) in respect of movements in partially provided deferred tax assets including unrelieved Advance Corporation Tax. There are losses carried forward to offset against future income of appropriate Group companies of £1.5m (2000: £3.0m). In addition the Group has capital losses in excess of £65m (2000: £65m) 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’s profit after tax for the financial year amounted to £32.1m (2000: £27.2m). 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. Equity dividend equity dividend on ordinary shares Interim paid Proposed final 2001 per share 2000 per share 1.9p 2.3p 4.2p 1.7p 2.1p 3.8p 2001 £m 2.2 2.8 5.0 2000 £m 2.0 2.4 4.4 the paragon group of companies plc 33 1041_Paragon_R&A_2001 17/1/02 14:46 Page 34 notes to the accounts For the year to 30 September 2001 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 12. Tangible fixed assets cost At 1 October 2000 Additions Disposals At 30 September 2001 accumulated depreciation At 1 October 2000 Charge for the year On disposals At 30 September 2001 net book value At 30 September 2001 At 30 September 2000 34 the paragon group of companies plc 2001 2000 £32,300,000 £28,500,000 113,389,521 113,308,398 2,822,408 1,260,602 116,211,929 114,569,000 28.5p 27.8p short leasehold premises £m plant and machinery £m 1.4 0.1 - 1.5 0.7 0.1 - 0.8 0.7 0.7 9.2 0.9 (0.9) 9.2 6.3 1.1 (0.7) 6.7 2.5 2.9 25.1p 24.9p total £m 10.6 1.0 (0.9) 10.7 7.0 1.2 (0.7) 7.5 3.2 3.6 1041_Paragon_R&A_2001 17/1/02 14:46 Page 35 notes to the accounts For the year to 30 September 2001 13. Loans to customers cost At 1 October 2000 Additions Amortisation of commissions Other debits Repayments and redemptions At 30 September 2001 2001 £m 2000 restated £m 1,697.2 978.3 (20.1) 204.6 (713.7) 2,146.3 1,497.2 534.9 (12.7) 177.0 (499.2) 1,697.2 Included in loans to customers are £188.7m (2000: £128.3m) of hire purchase receivables. The aggregate rentals receivable during the year in respect of hire purchase contracts were £23.8m (2000: £15.1m). The cost of assets acquired by the Group for the purposes of letting under hire purchase contracts amounted to £136.4m (2000: £99.3m). 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 2001 £m 4.8 2000 £m 4.8 All of the shares are held in trust for the benefit of employees exercising their options under the Company’s share option schemes. The trustee’s costs are included in the operating expenses of the Company. At 30 September 2001, the trust held 2,808,886 shares (2000: 3,848,253) with a nominal value of £280,889 (2000: £384,825) and a market value of £6,235,727 (2000: £5,810,862). Options were outstanding against 2,684,546 of these shares at 30 September 2001. The dividends on these shares have not been waived. the paragon group of companies plc 35 1041_Paragon_R&A_2001 17/1/02 14:46 Page 36 notes to the accounts For the year to 30 September 2001 15. Investment in subsidiary companies shares in group companies At 1 October 2000 Additions during the year Revaluation (Charged)/credited to the profit and loss account Credited to the revaluation reserve loans to group companies At 1 October 2000 Additions during the year Repayments during the year Revaluation Credited/(charged) to the profit and loss account At 30 September 2001 2001 £m 60.8 62.8 (2.6) 0.2 121.2 - - (7.7) 7.7 - 121.2 Comparable amounts determined according to the historic cost convention are: Cost Provision At 30 September 2001 At 30 September 2000 shares in group companies £m loans to group companies £m 238.8 (119.4) 119.4 59.2 40.5 (40.5) - - 2000 £m 19.7 0.1 39.7 1.3 60.8 10.0 21.3 (10.0) (21.3) - 60.8 total £m 279.3 (159.9) 119.4 59.2 36 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 37 notes to the accounts For the year to 30 September 2001 Principal operating subsidiaries comprise direct subsidiaries of the paragon group of companies plc 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 (No. 3) PLC Paragon Mortgages SA Paragon Mortgages (No. 2) SA Paragon Mortgages (No. 3) SA Paragon Mortgages (No. 4) SA Paragon Auto and Secured Finance (No. 1) PLC Paragon Personal and Auto Finance (No. 1) PLC subsidiary of paragon mortgages limited Paragon Second Funding Limited holding principal activity 100% 100% 100% 100% 100% 100% 100% 100% 100% 74% 100% 100% 100% 100% 74% 74% 100% 100% 100% 100% 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 Residential mortgages Loan and vehicle finance Loan and vehicle finance 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, Paragon Mortgages (No. 3) SA and Paragon Mortgages (No. 4) 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. the paragon group of companies plc 37 1041_Paragon_R&A_2001 17/1/02 14:46 Page 38 notes to the accounts For the year to 30 September 2001 16. Stocks Residual purchase obligations Vehicles on extended hire or held for resale 17. Debtors amounts falling due within one year Amounts owed by Group companies Tax debtors Other debtors Prepayments and accrued income 2001 £m 8.0 0.9 8.9 2000 £m 10.9 0.6 11.5 the group 2001 the group 2000 restated the company 2001 the company 2000 £m - 2.1 4.8 1.0 7.9 £m - 2.5 5.2 1.2 8.9 £m 78.0 0.1 - 0.5 78.6 £m 71.6 0.1 - 5.1 76.8 38 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 39 notes to the accounts For the year to 30 September 2001 18. Pensions During the year Financial Reporting Standard 17 – ‘Retirement Benefits’ (‘FRS 17’) began to come into force. This standard will require assets or liabilities arising from the Group’s defined benefit pension scheme to be evaluated and accounted for in the primary financial statements on a new basis with effect from the Group’s financial year ending 30 September 2003. As a transitional measure, the standard requires that the pension asset or liability calculated on the new basis is disclosed by way of memorandum in the notes to the accounts. These disclosures are given at (a) below. The Standard provides that the asset or liability recognised in the accounts at 30 September 2001 should continue to be calculated according to Statement of Standard Accounting Practice 24 – ‘Accounting for Pension Costs’ (‘SSAP 24’). Disclosures relating to this calculation are given at (b) below. The pension scheme asset calculated in accordance with SSAP 24 and recognised in the balance sheet of the Group at 30 September 2001 was £0.1m (2000: £0.1m) and the liability at that date calculated in accordance with FRS 17 was £0.9m. The difference of £1.0m relates to the differing bases of calculation. a. Disclosures made in accordance with FRS 17 The Group operates a defined benefit pension scheme in the UK. A full actuarial valuation was carried out at 31 March 2001 and updated to 30 September 2001 by a qualified independent actuary. The major assumptions used by the actuary were: Rate of increase in salaries Rate of increase in deferred pensions in excess of GMP which receives statutory revaluation Rate of increase in pensions in payment in excess of GMP which receives statutory increases Discount rate Inflation assumption The assets in the Plan at 30 September 2001 and the expected rate of return were: Equities Bonds Other Total market value of assets Present value of scheme liabilities Deficit in the scheme Related deferred tax Net pension liability 30 september 2001 3.5% p.a. 2.5% p.a. 2.5% p.a. 6.0% p.a. 2.5% p.a. long term rate of return expected 8.0% 5.0% 4.0% value £m 11.6 1.4 0.2 13.2 (14.5) (1.3) 0.4 (0.9) the paragon group of companies plc 39 1041_Paragon_R&A_2001 17/1/02 14:46 Page 40 notes to the accounts For the year to 30 September 2001 18. Pensions (continued) The Group’s contribution to the scheme is shown in note 6. The agreed rate of employer contributions is currently 9.5% of gross salaries for participating employees. If the treatment which will be required by FRS 17 had been adopted in the preparation of the financial statements for the year ended 30 September 2001, the balance which would have been shown in the reserves of the Group in respect of the profit and loss account would have been analysed as follows. Profit and loss account excluding pension liability Pension liability Profit and loss account after adjustment for pension liability 2001 £m 161.0 (0.9) 160.1 b. Disclosures made in accordance with SSAP 24 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% higher than the annual increase in salaries. The valuation revealed that the actuarial value of assets was sufficient to cover 100% of the benefits that had accrued to members after allowing for future increases in earnings. 40 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 41 notes to the accounts For the year to 30 September 2001 19. Called-up share capital authorised: 175,000,000 (2000: 175,000,000) ordinary shares of 10p each allotted and paid-up: 117,296,274 (2000: 116,347,335) ordinary shares of 10p each 2001 £m 17.5 11.7 2000 £m 17.5 11.6 During the year 912,146 ordinary shares (£91,215 par value) were issued for £994,900, 33,370 (£3,337 par value) ordinary shares were issued for £29,119 and a further 3,423 (£342 par value) were issued for £5,356. These issues were made under the executive and employee share option schemes and the Sharesave scheme, respectively. 20. Reserves a. The Group Balance at 1 October 2000 Share options exercised Retained profit for the year Balance at 30 September 2001 share premium account £m merger reserve £m profit and loss account £m 62.5 1.0 - 63.5 (70.2) - - (70.2) 133.8 - 27.3 161.1 The cumulative amount of goodwill on acquisitions written off to reserves is £56.4m (2000: £56.4m). This balance has been offset against the profit and loss account to ensure compliance with Financial Reporting Standard 10 – ‘Goodwill and Intangible Assets’. b. The Company Balance at 1 October 2000 Revaluation of investments in subsidiaries Share options exercised Retained profit for the year Balance at 30 September 2001 share premium account £m revaluation reserve £m profit and loss account £m 62.5 - 1.0 - 63.5 1.6 0.2 - - 1.8 62.0 - - 27.1 89.1 total £m 126.1 1.0 27.3 154.4 total £m 126.1 0.2 1.0 27.1 154.4 the paragon group of companies plc 41 1041_Paragon_R&A_2001 17/1/02 14:46 Page 42 notes to the accounts For the year to 30 September 2001 21. Share option schemes Options are outstanding under the executive share option and the all employee share option schemes to purchase 7,526,593 (2000: 9,682,270) ordinary shares of 10p each as follows: number 733,399 16,686 32,296 38,866 625,680 1,035,000 650,000 250,000 1,360,000 74,931 29,345 100,000 595,000 1,240,000 457,198 258,192 30,000 period exercisable 13/03/1998 to 13/03/2005 31/03/1998 to 31/03/2005 04/07/1998 to 04/07/2005 21/06/1999 to 21/06/2003 02/12/1999 to 02/12/2003 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 26/02/2004 to 26/02/2008 price 97.33p 87.26p 97.33p 103.08p 105.48p 218.00p 218.00p 162.50p 147.50p 164.40p 164.40p 209.50p 147.50p 148.50p 120.64p 120.64p 221.50p 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. 42 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 43 notes to the accounts For the year to 30 September 2001 Details of individual options held by the directors at 30 September 2000 and 30 September 2001: 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 2000: 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* 17/02/2003† 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 17/02/2010 26/05/2007 20/12/2003 20/12/2005 options exercised in the year: 07/12/1996 07/12/1996 02/02/1997 13/03/1998* 14/06/1998* 02/12/1999 07/12/2000 07/12/2000 02/02/2001 13/03/2005 14/06/2005 02/12/2003 69.52p 86.30p 196.57p 97.33p 103.56p 105.48p 218.00p 218.00p 147.50p 147.50p 148.50p 120.64p 120.64p 69.52p 86.30p 196.57p 97.33p 103.56p 105.48p 25,028 1,252 - 417,646 - 260,700 120,000 80,000 - 100,000 200,000 8,030 - 25,028 1,252 - 261,226 104,280 260,700 255,000 170,000 300,000 100,000 200,000 - 13,987 12,514 ,626 - 130,613 202,050 234,630 240,000 160,000 250,000 100,000 200,000 16,060 - 1,212,656 1,691,473 1,546,493 (25,028) (1,252) -- -- -- -- (25,028) (1,252) -- (261,226) (104,280) (260,700) (12,514) ,(626) -- (130,613) (202,050) (234,630) At 30 September 2001 1,186,376 1,038,987 966,060 - - 3,365 - - - - - - - - - - 3,365 - - (3,365) - - - - At 30 September 2001 The Paragon Group of Companies PLC share price was 222p and the range during the year then ended was 130p to 285p. Aggregate gains before taxation made by directors on the exercise of share options were £1,870,000 including gains of £976,000 made by Mr N S Terrington. No share options were exercised by any director in the year ended 30 September 2000. After the year end Mr J P L Perry was granted options over 170,000 shares, Mr N S Terrington was granted options over 300,000 shares and Mr N Keen was granted options over 250,000 shares. All of these options are exercisable between 27 November 2004 and 27 November 2011, at an exercise price of 248p per share. * 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. † The exercise of these options is conditional upon the Company’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’ remuneration on page 17. the paragon group of companies plc 43 1041_Paragon_R&A_2001 17/1/02 14:46 Page 44 notes to the accounts For the year to 30 September 2001 22. Provisions for liabilities and charges a. The Group Provision at 1 October 2000 Current year credit Utilised in the year Provision at 30 September 2001 deferred taxation £m other provisions £m 2.1 (0.3) - 1.8 1.6 - (1.1) 0.5 total £m 3.7 (0.3) (1.1) 2.3 The other provisions include committed future lease costs for properties no longer occupied by the Group. 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: 2001 potential liability £m 1.8 2001 provided £m 1.8 2000 potential liability £m 2.1 2000 provided £m 2.1 Other timing differences b. The Company There is no potential liability for deferred tax in the holding company either at 30 September 2001 or 30 September 2000. 23. 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 2001 £m the group 2000 £m the company 2001 £m the company 2000 £m - - 2.7 8.5 26.4 37.6 1,839.6 353.1 3.9 2,196.6 1.0 - 2.4 5.7 21.4 30.5 1,294.8 397.4 7.2 1,699.4 - 35.7 2.7 - 0.2 38.6 - - - - - 2.3 2.4 - 0.1 4.8 - - - - A maturity analysis of the above borrowings and further details of asset backed loan notes and bank loans are given in note 24. 44 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 45 notes to the accounts For the year to 30 September 2001 24. Financial instruments The Group’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. maturity profile of the Group’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 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’s operations. It is, and has been throughout the year under review, the Group’s policy that no trading in financial instruments shall be undertaken. The principal risks arising from the Group’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’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’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’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’s assets are principally financed by asset backed loan notes issued through the securitisation process. Securitisation substantially reduces the Group’s liquidity risk by matching the The asset backed loan notes are secured on portfolios comprising variable and fixed rate mortgages or personal, retail 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 notes denominated in sterling at various rates between 0.13% and 2.25% above the London Interbank Offered Rate (‘LIBOR’) for three month sterling products. Interest is payable on notes denominated in euros at 0.34% above the Euro Interbank Offered Rate (‘EURIBOR’) for three month euro products. During the year Group companies issued £340.0m (2000: £185.0m) of mortgage backed floating rate notes at par and £446.0m (2000: £nil) of asset backed floating rate notes at par. 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 2001 is £12.2m (2000: £12.1m) in respect of such loans. Assets are typically securitised within twelve months of origination. Until that point new loans are funded using a £400.0m (2000: £300.0m) committed sterling facility provided to Paragon Second Funding Limited by a consortium of banks. £181.9m (2000: £270.8m) 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. This facility remains available for further drawings until 26 January 2002 and although the facility expires in 2044 it is likely that substantial repayments will be made within the next five years. the paragon group of companies plc 45 1041_Paragon_R&A_2001 17/1/02 14:46 Page 46 notes to the accounts For the year to 30 September 2001 24. Financial instruments (continued) In addition to these borrowings the Group has a committed corporate syndicated sterling bank facility of £160.0m (2000: £140.0m), used to provide working capital for the Group. Included in bank loans are drawings of £158.9m (2000: £114.5m) made by Paragon Finance PLC under this facility. This facility reduces by installments 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. 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 2001 and 30 September 2000 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 2001 £m 218.0 - - 218.0 2000 £m - 29.0 24.0 53.0 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 2001 is £156.3m subject to such restrictions (2000: £132.8m). 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’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’s financial liabilities at 30 September 2001 and 30 September 2000: over drafts £m bank asset loans backed loan notes £m £m other 2001 over total drafts bank loans £m £m £m £m asset backed loan notes £m other 2000 total £m £m 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 than two years, but not more than five years In more than five years - - - - - 46 the paragon group of companies plc - - - - 37.6 37.6 1.0 2.3 2.3 158.9 194.2 1,839.6 - 1.6 - 160.5 2,033.8 - - - - 29.5 30.5 4.3 4.3 126.6 270.8 1,294.8 - 2.9 - 129.5 1,565.6 - - - 353.1 1,839.6 41.5 2,234.2 1.0 397.4 1,294.8 36.7 1,729.9 1041_Paragon_R&A_2001 17/1/02 14:46 Page 47 notes to the accounts For the year to 30 September 2001 Interest rate risk In part, the Group’s interest rate hedging objectives are achieved The Group’s policy is to maintain floating rate liabilities and by the controlled mismatching of the dates on which instruments match these with floating rate assets, hedging fixed rate assets mature, redeem or have their interest rates reset. The table by the use of interest rate swap or cap agreements. overleaf summarises these repricing mismatches. For the purposes 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’s variable rate loan assets are determined by reference to, inter alia, the Group’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’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. 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. the paragon group of companies plc 47 1041_Paragon_R&A_2001 17/1/02 14:46 Page 48 notes to the accounts For the year to 30 September 2001 24. Financial instruments continued 3 months or less £m 106.0 125.5 1,183.5 - - 1,415.0 - (353.1) (1,839.6) - - (2,192.7) 975.7 198.0 198.0 at 30 September 2001 Cash at bank and in hand Investments Loans to customers Investment in own shares Other assets Total assets Provisions Bank loans and overdrafts Asset backed loan notes Other liabilities Shareholders’ funds Total liabilities and shareholders’ funds Off balance sheet items Interest rate repricing gap Cumulative gap more than 3 months more than 6 months but not more but not more than 1 year than 6 months £m £m more than 1 year but not more than 5 years £m more than non interest bearing 5 years total £m £m £m - - 65.6 - - 65.6 - - - - - - - - 115.3 - - 115.3 - - - - - - - - 575.1 - - 575.1 - - - - - - - - 167.2 - - 167.2 - - - - - - - - 39.6 4.8 20.0 64.4 (2.3) - - (41.5) (166.1) 106.0 125.5 2,146.3 4.8 20.0 2,402.6 (2.3) (353.1) (1,839.6) (41.5) (166.1) (209.9) (2,402.6) (64.8) (114.7) (565.3) (230.9) - 0.8 198.8 0.6 199.4 9.8 209.2 (63.7) (145.5) 145.5 - - - - 48 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 49 notes to the accounts For the year to 30 September 2001 3 months or less £m 95.1 50.2 999.4 - - 1,144.7 - (398.4) (1,294.8) - - (1,693.2) at 30 september 2000 restated Cash at bank and in hand Investments Loans to customers Investment in own shares Other assets Total assets Provisions Bank loans and overdrafts Asset backed loan notes Other liabilities Shareholders’ funds Total liabilities and shareholders’ funds more than 3 months more than 6 months but not more but not more than 1 year than 6 months £m £m more than 1 year but not more than 5 years £m more than non interest bearing 5 years total £m £m £m - - 25.6 - - 25.6 - - - - - - - - 94.8 - - 94.8 - - - - - - - - 402.4 - - 402.4 - - - - - - - - 147.5 - - 147.5 - - - - - - - - 27.5 4.8 24.0 56.3 (3.7) - - (36.7) (137.7) 95.1 50.2 1,697.2 4.8 24.0 1,871.3 (3.7) (398.4) (1,294.8) (36.7) (137.7) (178.1) (1,871.3) Off balance sheet items 469.6 (19.1) (87.4) (311.7) (51.4) - Interest rate repricing gap Cumulative gap (78.9) (78.9) 6.5 7.4 (72.4) (65.0) 90.7 25.7 96.1 121.8 (121.8) - - - - ‘Off balance sheet items’ shows the notional principal amount of swap agreements. Included within ‘no more than 3 months’ are £47.2m (2000: £52.7m) of capped rate mortgages hedged by interest rate cap agreements which reset quarterly. the paragon group of companies plc 49 1041_Paragon_R&A_2001 17/1/02 14:46 Page 50 notes to the accounts For the year to 30 September 2001 24. Financial instruments (continued) The Asset and Liability Committee monitors the interest rate risk exposure on the Group’s loan assets and asset backed loan notes and ensures compliance with the requirements of the trustees in respect of the Group’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 2000 Gains and losses arising in previous years that were recognised in the year Gains and losses arising before 1 October 2000 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 2001 Of which: Gains and losses expected to be realised in the year to 30 September 2002 Gains and losses expected to be realised in the year to 30 September 2003 or later £m 1.6 - 1.6 6.1 7.7 2.5 5.2 2001 gains 2001 losses 2000 gains 2000 losses 2001 total net gains/ (losses) £m £m (4.3) (2.7) 0.3 0.3 (4.0) (2.4) £m 5.5 - 5.5 (9.1) (3.0) (3.9) 2000 total net gains/ (losses) £m 3.6 0.2 3.8 (6.5) £m (1.9) 0.2 (1.7) (2.6) (13.1) (5.4) 1.6 (4.3) (2.7) (4.1) (1.6) (9.0) (3.8) 0.6 1.0 (1.1) (3.2) (0.5) (2.2) Currency risk All of the Group’s assets and liabilities are denominated in sterling with the exception of £168.7m (2000: £nil) included within ‘Asset Backed Loan Notes’, which is denominated in euros. As a condition of the issue of these notes, interest rate and currency swaps were put in place for the duration of the borrowing having the effect of converting the liability to a LIBOR linked floating rate sterling borrowing. As a result 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. 50 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 51 notes to the accounts For the year to 30 September 2001 Set out below is a comparison by category of book values and fair values of the Group’s derivative financial instruments as at 30 September 2001 and 30 September 2000. 2001 book value £m 2001 fair value £m 2000 book value £m 2000 fair value £m derivative financial instruments held to manage the interest rate profile Swaps Caps - 2.2 (5.4) 2.2 - 1.5 (2.3) 1.1 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. 25. Reconciliation of operating profit to net cash flows from operating activities Operating profit Provision for losses Depreciation Amortisation of brokers’ commissions Decrease in stock Decrease in debtors Increase / (decrease) in creditors Net cash inflow from operating activities 2001 £m 40.5 12.0 1.2 20.1 0.3 2.9 3.5 80.5 2000 restated £m 35.5 10.2 1.3 12.7 0.8 - (2.5) 58.0 the paragon group of companies plc 51 1041_Paragon_R&A_2001 17/1/02 14:46 Page 52 notes to the accounts For the year to 30 September 2001 26. 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 sales of other fixed assets Acquisition of own shares (b) acquisitions and disposals Purchase of subsidiary undertaking Net cash acquired with subsidiary (c) financing Exercise of share options Increase in loans from banks and others (note 28) 27. Reconciliation of net cash flow to movement in net debt Increase / (decrease) in cash in year Cash inflow from increase in debt Cash movement from change in liquid resources Loans acquired with subsidiary Movement in net debt in year Net debt at 1 October 2000 Net debt at 30 September 2001 2001 £m (321.6) (1.0) 0.2 - (322.4) (3.3) 3.6 0.3 1.1 338.1 339.2 2001 £m 36.1 (338.1) 51.1 (250.9) (162.4) 2000 restated £m (222.9) (1.7) 0.4 (2.0) (226.2) - - - 0.1 171.4 171.5 2000 £m (12.1) (171.4) 9.9 (173.6) - (413.3) (1,547.9) (173.6) (1,374.3) (1,961.2) (1,547.9) 52 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 53 notes to the accounts For the year to 30 September 2001 28. Analysis of net debt Cash in hand at bank Overdrafts Debt due after one year Other liquid resources Total Other liquid resources comprise term deposits with UK banks. 29. Purchase of subsidiary undertaking acquisitions excluding cash and overdrafts £m 2000 cash flows £m 70.9 (1.0) £m 35.1 1.0 36.1 2001 £m 106.0 - (1,692.2) (338.1) (162.4) (2,192.7) 74.4 51.1 - 125.5 (1,547.9) (250.9) (162.4) (1,961.2) net assets acquired: Loans to customers Debtors Cash at bank and in hand Creditors Goodwill satisfied by: Cash 2001 £m 160.2 1.9 3.6 (162.4) 3.3 - 3.3 3.3 the paragon group of companies plc 53 1041_Paragon_R&A_2001 17/1/02 14:46 Page 54 notes to the accounts For the year to 30 September 2001 30. Capital commitments There were no capital commitments (2000: £nil) contracted but not provided for. 31. Financial commitments At 30 September 2001 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 2001 £m 0.7 0.1 0.3 3.6 4.7 2000 £m 0.1 0.4 0.5 3.5 4.5 54 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 55 notice of annual general meeting To all shareholders notice is hereby given that the thirteenth Annual General the Companies Act 1985 to allot equity securities (within the meaning of Section 94 of the said Act) for cash pursuant to the Meeting of The Paragon Group of Companies PLC will be held authority conferred by the previous resolution as if sub-section at Vintners Place, 68 Upper Thames Street, London, EC4V 3BJ (1) of Section 89 of the said Act did not apply to any such on 31 January 2002 at 10.30 a.m. for the following purposes: allotment, PROVIDED THAT this power shall be limited to: As ordinary business a. the allotment of equity securities in connection with a rights 1. To receive and consider the Company’s Accounts for the year issue, open offer or any other pre-emptive offer in favour of ended 30 September 2001 and the Reports of the Directors ordinary shareholders and in favour of all holders of any other and the Auditors. 2. To declare a dividend. 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 3. To re-appoint as directors (a) Mr J P L Perry (b) Mr N S record date are proportionate (as nearly as may be) to the Terrington (c) Mr N Keen and (d) Mr C D Newell. respective numbers of equity securities held by them or are 4. To re-appoint Deloitte & Touche as Auditors and to authorise the directors to fix their remuneration. As special business To consider and, if thought fit, to pass resolution 5 as an ordinary resolution and resolutions 6 and 7 as special resolutions: Ordinary resolution 5. ‘THAT the Board be and it is hereby generally and 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 unconditionally authorised (in substitution for all subsisting £586,400. 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 £4,404,200 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 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.’ securities to be allotted after such expiry and the Board may 7. ‘THAT the Company be and is hereby generally and allot relevant securities in pursuance of such an offer or unconditionally authorised for the purposes of Section 166 of agreement as if the authority conferred hereby had not the Companies Act 1985 (‘the Act’) to make one or more expired.’ Special Resolutions 6. ‘THAT, subject to the passing of the previous resolution, the Board be and it is hereby empowered pursuant to Section 95 of market purchases (within the meaning of Section 163 (3) of the Act) on the London Stock Exchange PLC of ordinary shares of 10p each in the capital of the Company (‘Ordinary Shares’) provided that:- the paragon group of companies plc 55 1041_Paragon_R&A_2001 17/1/02 14:46 Page 56 notice of annual general meeting a. the maximum aggregate number of Ordinary Shares hereby A member entitled to attend and vote at this meeting may authorised to be purchased is 11,700,000 (representing appoint a proxy to attend on his behalf and, on a poll, to vote approximately 10 per cent of the Company’s issued ordinary instead of such member. A proxy need not also be a member of share capital); b. the minimum price which may be paid for an Ordinary Share is 10p per Ordinary Share; 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 c. the maximum price which may be paid for an Ordinary Share with the Registrar of the Company at the address shown on the is an amount equal to 105 per cent of the average of the middle reverse of the proxy form not less than forty-eight hours before market price shown in the quotations for an Ordinary Share as the time appointed for the holding of the meeting. The derived from the London Stock Exchange Daily Official List for appointment of a proxy will not preclude a shareholder from the five business days immediately preceding the day on which attending and voting at the meeting. the Ordinary Share is contracted to be purchased; The register of directors’ interests and copies of directors’ d. unless previously renewed, varied or revoked, the authority service contracts will be available for inspection during normal hereby conferred shall expire at the conclusion of the next business hours on any weekday (Saturday and public holidays Annual General Meeting of the Company; excepted) at the Registered Office of the Company from the e. the Company may make a contract or contracts to purchase Ordinary Shares under the authority hereby conferred prior to the expiry of such authority which will or maybe executed wholly or partly after the expiry of such authority, and may date of this notice until the date of the Annual General Meeting and at the place of meeting from 10.00 a.m. until the conclusion of the meeting. The Report and Accounts have been sent to the Company’s shareholders. make a purchase of Ordinary Shares in pursuance of any such Biographical details of all directors are provided on page 13. contract or contracts.’ By order of the Board john g gemmell Company Secretary Registered and Head Office: St Catherine’s Court Herbert Road Solihull West Midlands B91 3QE 7 December 2001 Registered in England No. 2336032 56 the paragon group of companies plc 1041_Paragon_R&A_2001 17/1/02 14:46 Page 57 company information Registered and head office Solicitors St Catherine’s Court Herbert Road Solihull West Midlands B91 3QE Telephone: 0121 712 2323 London office 28 King Street London EC2V 8EH Slaughter and May 35 Basinghall Street London EC2V 5DB Registrars and transfer office Computershare Investor Services PLC P.O. Box 82 Telephone: 020 7710 7474 The Pavilions Internet www.paragon-group.co.uk Auditors Deloitte & Touche Chartered Accountants Colmore Gate 2 Colmore Row Birmingham B3 2BN Bridgwater Road Bristol BS99 7NH Brokers HSBC Investment Bank plc Thames Exchange 10 Queen Street Place London EC4R 1BL 

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