Paragon Banking Group Annual Report 2002

FY2002 Annual Report · Paragon Banking Group

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annual report & accounts 2002

The Paragon Group of Companies PLC

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contents

1 financial highlights 2 chairman’s statement 5 chief executive’s review 12 board of directors 14 directors’ report
18 report of the board to the shareholders on directors’ remuneration 19 statement of directors’ responsibilities in relation to financial statements
20 independent auditors’ report 21 corporate governance 26 consolidated profit and loss account 27 consolidated balance sheet
28 holding company balance sheet 29 consolidated cash flow statement 29 statement of total recognised gains and losses
29 reconciliation of movement in consolidated shareholders’ funds 30 notes to the accounts 57 notice of annual general meeting

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ﬁnancial highlights

profit before tax £46.0m

earnings per share 32.1p

dividend per share 5.1p

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99
ASSETS UNDER MANAGEMENT (£M)

PROFIT BEFORE TAX (£M)

SHAREHOLDERS’ FUNDS (£M)

DIVIDEND PER ORDINARY SHARE (p)

Profit before taxation
Profit after taxation
Assets under management
Shareholders’ funds

Earnings per share

- basic
- diluted

Dividend per ordinary share

2002

£m

46.0
36.6
2,616.4
200.8

2002

2001
restated
£m

41.1
32.9
2,228.4
169.0

2001
restated

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

2000

1999

1998

32.1p
31.4p
5.1p

29.0p
28.3p
4.2p

25.1p
24.9p
3.8p

26.1p
25.8p
3.4p

22.4p
22.1p
3.0p

The figures for profit before tax, profit after tax, shareholders’ funds and basic and diluted earnings per share for the year to
30 September 2001 have been restated following the change in accounting policy described in note 1 (q) to the accounts.

The basic and diluted earnings per share figures for 1998 have been adjusted following the implementation of Financial
Reporting Standard 14 – ‘Earnings per share’.

Assets under management includes all assets managed by the Group, including those owned by third parties.

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chairman’s statement

The year ended 30 September 2002 has seen another period
of strong growth for Paragon. Profit before tax has increased by
11.9% to £46.0 million, from £41.1 million (restated from £40.5
million) for the preceding year. Earnings per share has increased
by 10.7% to 32.1p from 29.0p (restated from 28.5p).

In view of the sustained improvement in profitability, your
Board has declared an increased final dividend of 3.0p per share
which, when added to the interim dividend of 2.1p paid on 31
July, gives a total dividend of 5.1p per share for the year, an
increase of 21.4% on last year’s dividend of 4.2p. This increase
is significant and reflects the level of retentions from profits
generated by our businesses. Our intention is to move
progressively towards a dividend cover ratio more in line with
our sector whilst remaining conscious of supporting the growth
aspirations of the Group.

Business review and strategy

During the year we have maintained the more defensive
approach to lending that I outlined in my report last year.
Consequently we have seen strong growth in our buy-to-let,
secured personal loan and car finance businesses.

Paragon Mortgages increased advances by 47.7% to £563.6
million. We continue to focus on the professional buy-to-let
sector, where we believe the market fundamentals remain
favourable, a view supported by our own research data and
evidenced by strong volumes since the year end.

The increased lending activity in the Consumer Finance division
during the year was primarily attributable to growth in secured
personal loan advances up 36.6% to £151.9 million, and in car
finance advances up 17.3% to £162.4 million. By contrast, we
have reduced volumes in our unsecured lending area in order to
rebalance the portfolio towards lower risk products.

Distribution and capital investment

Since the Group recommenced lending activities in 1995, and
dividend payments restarted, considerable balance sheet and
profit growth has been achieved. Each period’s growth target
has required significant capital investment and the maintenance
of that growth year on year has meant that the majority of
distributable reserves have been reinvested in the business.
As a consequence, dividend cover has been high.

Whilst plans for growth across the Group remain deliberately
stretching, the level of retentions from profits generated by our
businesses is now such that it is appropriate to begin increasing
the dividend relative to profit with a view to reducing dividend
cover, to bring it more in line with our sector over time.
Hence, the Board has declared a dividend this year 21.4%
higher than last, significantly ahead of the growth in profits
and earnings per share.

During the course of the year we have also considered a
number of opportunities to invest shareholder funds in
acquisitions, as we remain of the view that profitable additions
to the Group’s activities could be achieved in this way.
Thus far, we have found that price expectations of vendors have
been unrealistic, but this may change as the economic cycle
develops and companies consider divesting non-core activities
to release capital for their own development. We continue to
review opportunities with a measured, value based approach.

Composition of the Board

At the half year we reported the resignation of Bill Hulton from
the Board owing to ill health. Sadly, Bill passed away in June.
Bill brought a keen intelligence and strong commercial acumen
during his nine years at the Board. As a colleague and friend,
he will be missed. Our thoughts are with his family.

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Bill’s passing has necessitated some reorganisation of the Board.
David Hoare has assumed the role of senior non-executive and
head of the remuneration committee. In October, we were
pleased to welcome Gavin Lickley to the Board. Gavin brings to
the Board considerable experience in the financial sector,
further enhancing the breadth and depth of experience within
the team.

Conclusion

The Group has achieved much in the year, with strong lending
growth now coming from a business mix commensurate with the
uncertainties we still face in the UK economy. We see no reason
at present to change this and would expect to maintain our
emphasis on the more defensive, secured sectors of the
business over the coming year. In each of our chosen areas we
see good prospects for further growth. Contrary to its recent
poor press, we are firmly of the view that the prospects for the
buy-to-let market remain good, particularly in the professional
landlord sector.

In addition to organic growth, the review of potential
acquisition targets remains a focus for the Group. Our approach
to any acquisition is to apply a rigorous due diligence process
and any such prospect would need to be a good fit within our
business model and represent value for shareholders.
Further, our expectations for future dividend growth should
ensure that shareholders may look forward to greater income
as the business develops.

Staff

I remain indebted to the staff and my fellow directors at
Paragon for their continuing hard work and professionalism.

JONATHAN P L PERRY
Executive Chairman

16 December 2002

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Paragon Mortgages increased lending by 47.7%

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chief executive’s review

In the year ended 30 September 2002 the Group has achieved
further progress, with profits increasing to £46.0 million for the
year, and strong growth being achieved in business volumes in
our targeted markets.

Total advances during the year were £994.4 million, compared
with £797.3 million during the previous year, an increase of
24.7%. Net loan assets at 30 September 2002 were £2,521.3
million, compared with £2,149.2 million (restated from £2,146.3
million) at 30 September 2001. Net interest income for the year
was £72.9 million, compared with £73.4 million (restated from
£72.8 million) for the previous year, the slight reduction being
primarily the result of a change in the mix of the business as
the Group has concentrated more on defensive products.
This is compensated, correspondingly, by a charge for provisions
for losses which, at £12.9 million compares favourably with the
£12.0 million charge for the previous year, given the 17.3%
increase in the net loan book over the year.

Other operating income increased by 34.6% to £20.6
million from £15.3 million, the increase being largely
attributable to increased commissions related to sales of
insurance products and other fees receivable on an increased
volume of business and to higher fees from referrals of declined
loans to third parties.

Despite the growth in the business, operating costs were
reduced by £1.0 million, to £34.6 million, from £35.6 million
for the previous year. The cost to income ratio, at 37.0% for
the year, compares favourably with 40.1% for the previous year
and reflects the tight cost control exercised throughout the
Group. This has been facilitated by the early results of a
Group-wide process improvement initiative, which is expected
to yield further cost benefits and enhance the cost to income
ratio going forward. We aim to reduce this ratio below 35% in
the medium term.

After providing for corporation tax at a charge rate of 20% and
for the dividend in respect of the year, shareholders’ funds at
30 September 2002 were 18.8% higher at £200.8 million.

FIRST MORTGAGES

The strong growth by Paragon Mortgages reported for
the first half of the year has continued in the second half.
Loans totalling £563.6 million were advanced during the year,
an increase of 47.7% from the previous year’s level of £381.6
million. At 30 September 2002 the loan book stood at £1,413.9
million, up 35.6% from £1,042.7 million at 30 September 2001.

Monthly advances exceeded £50 million in each of the last
three months of the financial year and in October. The volume
of business in the pipeline at 30 September 2002 was
significantly higher than at the previous year end and lending
activity since the year end remains brisk.

Paragon Mortgages has maintained its focus on servicing the
needs of professional property investors, providing a product
range and a service suited to the sector. Increasingly, customers
have a number of properties financed with Paragon and these
customers require a proactive and personal approach that assists
them in building their lettings businesses. In meeting these
needs Paragon has been able to develop a strong brand in this
niche market.

It is noteworthy that Paragon Mortgages has recently taken first
prize in two categories of the prestigious commercial finance
industry gala awards, being acknowledged as the buy-to-let
lender of the year and one of our products, to support
refurbishment of a property prior to let, as the most innovative
new product.

As our results suggest, Paragon's borrowers have been
expanding their property portfolios over the year and, from the
evidence of our survey data, the market fundamentals remain
favourable. This appears at odds with media reports, but may be
a consequence of the greater emphasis of the media on novice
property investors and on high profile metropolitan locations.
Recent survey data indicates that Paragon’s professional
landlords intend to continue to build their portfolios over the
next year by 16% on average.

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Paragon Mortgages focuses on servicing the needs of
professional property investors

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chief executive’s review

FIRST MORTGAGES (continued)

Our focus for this business remains on building a first
mortgage book of very high quality centred on the
professional landlord sector, benefiting from their
experienced selection of tenants, combined with our
security over their properties. The arrears performance of
the book is exemplary with negligible losses. Looking
forward, our view is that the professional landlord sector
will be less prone to volatility in volume levels and arrears
performance than the amateur sector, which is an important
factor in underpinning the level of future earnings from
this portfolio.

Paragon Mortgages also earns fees on cases received
which do not match our target customer profile. Under an
agreement with a third party lender, Paragon receives an
arrangement fee and an ongoing servicing fee for referred
cases which subsequently complete. During the year £34.3
million of mortgages were advanced under this arrangement.
We expect this area of business to grow significantly in the
current year.

At 30 September 2002 the NHL closed book had reduced to
£230.5 million, from £306.3 million at 30 September 2001.
The performance of this book has remained satisfactory
over the year.

case study

Stephen Williams has been a customer of
Paragon Mortgages since 2000. He is a Chartered
Surveyor and he has been a full-time landlord
for four years.

Name

stephen williams

Age

Occupation

full-time landlord

Number of Properties

Location

west midlands

•60% of our new business comes from existing customers

•Each applicant and property is assessed on its
individual merits

•Average portfolio of properties per investor is 11

•The performance of the PML portfolio is exemplary with
arrears of less than 0.5%

•The average void period per property is only 2.8 weeks a year

•Centre for Economics and Business Research forecast 40%
growth in the private rented sector over 10 years

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Consumer Finance assets increased to £830.7 million

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chief executive’s review

CONSUMER FINANCE

At 30 September 2002 the consumer finance book stood at
£830.7 million, up from £757.1 million at 30 September 2001.
Aggregate loans of £430.8 million were advanced during the
year, compared with £415.7 million in the previous year, with
the emphasis of the lending being on cars and secured loans.
As previously reported, this has been a deliberate policy to
deliver a higher quality book with greater defensive properties.

Unsecured loan advances were £40.4 million for the year,
compared with £84.1 million for the year ended 30 September
2001. The reduction in volumes was planned and followed the
tightening of credit criteria and the introduction of improved
scorecard technology, designed to target better quality
business. Introducers have remained supportive of Paragon’s
stance and we anticipate a modest increase in volumes in the
next year.

Personal finance

Retail finance

In the year to 30 September 2002 advances of secured loans
were £151.9 million, up 36.6% from the previous year’s level
of £111.2 million. This strong growth performance has
continued into the new financial year with advances in October
the highest for any month since the business was established.
The distribution base has increased in the course of the year,
assisted by the delivery of improved internet-based technology
and enhanced training to introducers, attracting new brokers
and increasing our share of existing brokers’ business.
The secured sector remains buoyant, with introducers increasing
marketing activity and the prospect for this business remains
encouraging.

New loan advances by this division were £76.1 million,
compared with £81.9 million in the previous year, a function of
a disappointingly weak instalment credit market throughout the
year combined with a pruning of the retailer base to remove
business which does not meet our profitability requirements.
During the year we have improved our systems support for the
business, and in the coming months expect to bring all
administration of this book in-house. As well as reducing
administration costs, this will facilitate improved flexibility and
service and provide a sound platform on which to develop this
business. The system will give us an electronic data interchange
(EDI) capability, which we believe will become increasingly
important for information and for applications delivery in the
next financial year.

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Car Finance assets increased by 28.7%

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chief executive’s review

Car finance

This business has performed strongly during the year.
Advances during the year were £162.4 million, compared with
£138.5 million in the previous year, an increase of 17.3% in the
year. The loan book at 30 September 2002 stood at £242.8
million, compared with £188.7 million at 30 September 2001,
an increase of 28.7%.

Development of the distribution channel remains a focus, by
increasing the number of authorised dealers in our distribution
network and by further developing our relationships with large
car dealers and major account connections. To this end, Paragon
Car Finance aims to provide high quality, flexible products to its
customer base, supported by a strong service proposition.

The further development of Paragon Car Finance’s relationships
will be assisted in the coming year by the introduction of EDI
technology for its major partners, speeding up response times
and creating administrative efficiencies.

New initiatives

We previously reported that we were restructuring the
arrangements with our affinity partners to improve the
profitability of these schemes. This has now been completed
and new arrangements are in place. A number of other new
products have been launched during the year, including loans for
home improvements, such as conservatories and double glazing,
and caravan loans. If these pilot exercises prove successful,
we shall complete the roll out of these products over the year.
Our initiatives include the increasing use of internet-based
technology in conjunction with our intermediaries and
business partners to provide enhanced levels of service and
greater efficiency.

NIGEL S TERRINGTON
Chief Executive

16 December 2002

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board of directors

Jonathan P L Perry

Nigel S Terrington

EXECUTIVE CHAIRMAN
AGE 63

CHIEF EXECUTIVE
AGE 43

Nicholas Keen

FINANCE DIRECTOR
AGE 44

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.

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.

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 CFD
Management Committee
of the Finance and Leasing
Association. He was
previously the Chairman
of the Intermediary
Mortgage Lenders
Association and was a
member of the Executive
Committee of the Council
of Mortgage Lenders.

David A Hoare
NON-EXECUTIVE DIRECTOR
AGE 52

Chairman of Virgin Express
Holdings PLC, Duncton PLC
and Target Worldwide
Express Limited and
Principal and Director of
Talisman Management
Limited. He previously held
the position of Chief
Executive at Laura Ashley
and has been a non-
executive director of
Paragon since May 1994.
He is Chairman of the
Paragon Remuneration
Committee.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 13

Professor Andrew D
Chambers
NON-EXECUTIVE DIRECTOR
AGE 59

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, including
the new Tolley Handbook of
Corporate Governance.

Michael J R Kelly
NON-EXECUTIVE DIRECTOR
AGE 61

Christopher D Newell
NON-EXECUTIVE DIRECTOR
AGE 42

Gavin A F Lickley
NON-EXECUTIVE DIRECTOR
AGE 56

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.

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.

Gavin Lickley joined
Paragon as a non-executive
director in October 2002.
He retired from the Board
of the Investment Banking
Division of Deutsche Bank
AG in April 2000, having
previously been Head
of the Banking Division
and Chairman of Morgan
Grenfell & Co Limited.
He is now Chairman of
Inexus Group, a licensed
Independent Gas
Transporter and Chairman
of SAV Credit Limited,
a credit card company.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 14

directors’ report

for the year to 30 september 2002

The directors submit their Report and the Accounts for the year
to 30 September 2002 which were approved by the Board on
16 December 2002.

Principal activity

In addition, certain directors had interests in the share capital of
the Company by virtue of options granted under the executive
share option schemes, details of which are given in note 21 on
page 45.

The Company is a holding company co-ordinating the activities
of its subsidiary companies. The principal activities of the Group
continue to be the operation of its consumer finance and first
mortgage businesses.

There have been no changes in the directors’ interests in the
share capital of the Company since 30 September 2002.

The directors have no interests in the shares or debentures
of the Company’s subsidiary companies.

The Chairman’s Statement and the Chief Executive’s Review on
pages 2 to 11 contain a review of the Group’s business during
the financial year, its current position and future prospects.

Mr F W Hulton resigned from the Board on 13 May 2002
and Mr G A F Lickley was appointed to the Board on
21 October 2002.

In accordance with the Articles of Association, Professor A D
Chambers, Mr M J R Kelly and Mr G A F Lickley will retire and,
being eligible, will offer themselves for re-appointment at the
forthcoming Annual General Meeting. None of these directors
has a service contract with the Company requiring more than
12 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.

Results and dividends

The results for the year are shown in the Consolidated Profit
and Loss Account on page 26.

The directors recommend a final dividend of 3.0p per share
(2001: 2.3p per share) which, together with the interim
dividend of 2.1p per share (2001: 1.9p per share) paid on 31
July 2002, makes a total of 5.1p per share (2001: 4.2p per
share). After dividends, retained profits of £30.6 million (2001
(restated): £27.9 million) have been transferred to reserves.

Directors

The interests of the directors at the year end, in the share
capital of the Company, all beneficially held, are shown below.

at 30 september 2002

ordinary shares
of 10p each

at 30 september 2001
or on appointment
ordinary shares
of 10p each

J P L Perry
N S Terrington
N Keen
A D Chambers*
D A Hoare*
M J R Kelly*
C D Newell*
(appointed 1 November 2001)

* Non-executive directors.

301,549
99,219
36,086
500
34,650
3,365
10,000

278,717
85,520
23,140
500
34,650
3,365
-

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 15

Substantial shareholdings

As at 30 November 2002, 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:

Schroder Investment Management Limited
Insight Investment
Merrill Lynch Investment Managers
Morley Fund Management
Threadneedle Asset Management
Legal & General Investment Management Limited
M & G Investment Management Limited
Barclays Global Investors Limited
The Paragon Group of Companies PLC ESOP scheme
INVESCO UK Limited
Standard Life Investments
AEGON Asset Management

ordinary shares

15,947,841
6,875,789
6,376,858
5,945,693
5,441,555
5,342,966
5,308,228
5,205,769
5,102,714
5,082,897
4,465,479
3,916,184

held

13.5%
5.8%
5.4%
5.0%
4.6%
4.5%
4.5%
4.4%
4.3%
4.3%
3.8%
3.3%

Employees’ involvement

Environmental and Health and Safety policies

The directors recognise the benefit of keeping employees
informed of the progress of the business. Employees have been
provided with regular information on the performance and plans
of the Group, and the financial and economic factors affecting
it, through both information circulars and management
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
system used by the Group is designed to assist employees in
developing their careers within the Group and to identify and
provide appropriate training opportunities.

Employment of disabled persons

Full and fair consideration is given to applications for
employment made by disabled persons having regard to their
particular aptitudes and abilities. The Group has continued its
policy of providing appropriate training and career development
to such persons.

The Group has a formal Health and Safety policy which is
intended to ensure the maintenance of healthy and safe
working conditions in all the premises occupied by the Group.
The Group also operates responsibly with regard to the
environment, with extensive use of electronic communications
in place 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.

Appropriate procedures have been established to monitor,
maintain and consistently improve the Group’s Health and
Safety standards and environmental performance and to ensure
compliance with all necessary legislation. Monitoring is
undertaken internally and by external consultants and training is
organised for staff from time to time.

Charitable contributions

Contributions to charitable institutions in the United Kingdom
amounted to £17,495 (2001: £12,903).

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 16

directors’ report

for the year to 30 september 2002

Close company status

resolution 6

So far as the directors are aware, the Company is not a close
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
Annual General Meeting.

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.

The present authority of the directors to allot the unissued
ordinary share capital of the Company was granted at the
previous Annual General Meeting on 31 January 2002 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 £4,333,100 representing
approximately 36.7% of the Company’s issued capital at 30
November 2002 and being one third of issued capital plus
shares issuable under option. The directors have no present
intention of exercising this authority, which will expire at the
conclusion of the following Annual General Meeting.

It is recognised that the executives’ interests would be better
aligned with shareholders if they owned a greater proportion
of shares in the Company. This is not necessarily achieved
through the operation of share option schemes in isolation,
and, accordingly, the Company wishes to introduce two new
measures to enhance share ownership amongst the Company’s
key employees.

Firstly, the annual cash bonus plan will be amended so that the
executives will be encouraged to defer up to 50% of their
bonuses. Payment is to be deferred for three years, having first
been invested in the Company’s shares, and will be forfeited if
the individual leaves the Company during those three years.

Secondly, the Company wishes to introduce the Paragon
Performance Share Plan under which shares may be acquired by
executives provided that a demanding performance target has
been met over a three year vesting period and provided that
they remain employed by the Company. The main terms of this
new plan are enclosed with this report, but the key points to
note are:

• Vesting of the awards will be subject to a relative total

shareholder return performance target. This requires the
Company to at least equal the median performance of its
peer group in order for any part of an award to vest.

• Awards will only fully vest provided at least upper quartile

corporate performance is achieved.

• There will be no opportunities to retest performance.

The Remuneration Committee is satisfied that this will
ensure that executives will be better aligned with shareholders’
interests.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 17

resolution 7

Under Section 89 of the Companies Act 1985, any shares
allotted 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 7 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 £590,500, representing approximately 5% of
the Company’s issued share capital at 30 November 2002.

resolution 8

This resolution authorises the Company to purchase, in the
market, up to a maximum of 11,800,000 of the Company’s
ordinary shares (approximately 10% of the issued share capital
at 30 November 2002) 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 days immediately prior to purchase.

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
the transaction.

Approved by the Board of Directors and signed on
behalf of the Board.

John G Gemmell
Company Secretary

16 December 2002

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 18

report of the board to
the shareholders
on directors’ remuneration

Remuneration Committee

Performance bonuses

The Committee consists solely of three non-executive directors:
David Hoare, Gavin Lickley and Christopher Newell.
The Chairman of the Remuneration Committee is David Hoare
following the resignation of William Hulton from the Board of
Directors on 13 May 2002. 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

The Company’s policy is to ensure that executive directors are
fairly rewarded for their individual performance, having regard
to the importance of retention and motivation. The performance
measurement of the executive directors and the determination
of their annual remuneration packages is undertaken by the
Committee. The remuneration of the non-executive directors is
determined by the Board.

In forming and reviewing remuneration policy the Committee
has given full consideration to Section B.1 of the Combined
Code on 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

An executive director’s salary is determined by the
Remuneration Committee at the beginning of each year.
In deciding appropriate levels the Committee considers the
Group as a whole and relies on objective research which gives
up-to-date information on comparable companies. Executive
directors’ contracts of service, which include details of
remuneration, will be available for inspection at the Annual
General Meeting.

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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.
Dependants of executive directors who are members of the
Group Retirement Benefits Plan are eligible for a dependant’s
pension and the payment of a lump sum in the event of death
in service. The pension arrangements provide for a pension of
1/37.5 of basic annual salary (to a maximum of 2/3) for every
year of eligible service. Where pension contributions are capped,
additional payments are made to enable further provision.

The changes in pension entitlements arising in the financial
year, the disclosure of which is required by the Financial
Services Authority, are given in note 4 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 of three years from the date the option is granted.
The exercise of options granted under the ESOP Executive
Share Option and Paragon 1999 Sharesave Schemes is not
dependent upon performance criteria. The Paragon 2000
Executive scheme requires total shareholder return to exceed
the average for a range of other companies.

Acting on the recommendations of the Remuneration
Committee, the Board proposes a new performance share plan,
a summary of the rules of which is being distributed to the
shareholders with this report and to which the approval of the
shareholders will be sought at the Annual General Meeting.

1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 19

report of the board to
the shareholders
on directors’ remuneration

statement of directors’
responsibilities in relation
to financial statements

The directors are required by the Companies Act 1985 to
prepare financial statements for each financial year which give a
true and fair view of the state of affairs of the Company and
the Group as at the end of the financial year and of the profit
or loss for the financial year.

The directors consider that in preparing the financial statements
(on pages 26 to 56), the Company has used appropriate
accounting policies, consistently applied and supported by
reasonable and prudent judgements and estimates, and that all
accounting standards which they consider to be applicable have
been followed.

The directors have responsibility for ensuring that the Company
keeps accounting records which disclose with reasonable
accuracy the financial position of the Company and which
enable them to ensure that the financial statements comply
with the Companies Act 1985.

The directors have general responsibility for taking such steps as
are reasonably open to them to safeguard the assets of the
Group and to prevent and detect fraud and other irregularities.

Directors’ contracts

All executive directors hold one year rolling contracts and the
Remuneration Committee reviews the terms of these regularly.
None of the directors seeking re-election at the Annual General
Meeting has a service contract with the Company.

Non-executive directors

All non-executive directors have specific terms of engagement
and their remuneration is determined by the Board, subject to
the Articles of Association. The fee paid to each non-executive
director in the year was £22,500. The chairmen of the Audit
Committee and Remuneration Committee receive an additional
£2,500 per annum.

Non-executive directors are not eligible to participate in
any of the Company’s share option schemes or to join the
pension scheme.

The Committee has minuted a decision that the shareholders
in Annual General Meeting need not be invited to approve
other aspects of the remuneration policy set out in this report.
The Chairman of the Committee will, however, be available
to answer questions on remuneration policy at the Annual
General Meeting.

The information on directors’ remuneration and share options
contained in notes 4 and 21 forms part of this report.

By order of the Board

John G Gemmell

Company Secretary

16 December 2002

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 20

independent auditors’ report

to the members of the paragon group of companies plc

We have audited the financial statements of The Paragon Group
of Companies PLC for the year ended 30 September 2002 which
comprise the consolidated profit and loss account, the balance
sheets, the consolidated cash flow statement, the statement of
total recognised gains and losses and the related notes 1 to 31
together with the reconciliation of movement in consolidated
shareholders’ funds. These financial statements have been
prepared under the accounting policies set out therein.

Respective responsibilities of directors and auditors

As described in the statement of directors’ responsibility, the
Company’s directors are responsible for the preparation of the
financial statements in accordance with applicable United
Kingdom law and accounting standards. Our responsibility
is to audit the financial statements in accordance with
relevant United Kingdom legal and regulatory requirements,
auditing standards, and the Listing Rules of the Financial
Services Authority.

We report to you our opinion as to whether the financial
statements give a true and fair view and are properly prepared
in accordance with the Companies Act 1985. We also report to
you if, in our opinion, the directors’ report is not consistent with
the financial statements, if the Company has not kept proper
accounting records, if we have not received all the information
and explanations we require for our audit, or if information
specified by law or the Listing Rules regarding directors’
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.

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Basis of audit opinion

We conducted our audit in accordance with United Kingdom
auditing standards issued by the Auditing Practices Board.
An audit includes examination, on a test basis, of evidence
relevant to the amounts and disclosures in the financial
statements. It also includes an assessment of the significant
estimates and judgements made by the directors in the
preparation of the financial statements, and of whether the
accounting policies are appropriate to the circumstances of the
Company and the Group, consistently applied and adequately
disclosed.

We planned and performed our audit so as to obtain all the
information and explanations which we considered necessary in
order to provide us with sufficient evidence to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or other irregularity or
error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial
statements.

Opinion

In our opinion the financial statements give a true and fair view
of the state of affairs of the Company and the Group as at
30 September 2002 and of the profit of the Group for the year
then ended and have been properly prepared in accordance with
the Companies Act 1985.

Deloitte & Touche
Chartered Accountants and Registered Auditors
Birmingham

16 December 2002

1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 21

corporate governance

The Combined Code, which sets out Principles of Good
Corporate Governance and Code provisions, was issued by the
London Stock Exchange in June 1998. Throughout the year the
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 Board of Directors comprises three executive and five non-
executive directors, all of whom bring to the Company a broad
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 David Hoare who has been nominated as
the senior non-executive director. This provides effective
balance and challenge. The Board meets regularly throughout
the year and is responsible for overall Group strategy, for
approving major agreements, transactions and other financing
matters and for monitoring the progress of the Group against
budget. All directors receive sufficient relevant information on
financial, business and corporate issues prior to meetings and
there is a formal schedule of matters reserved for decision by
the Board.

All of the non-executive directors are independent of
management and all 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.

All directors are able to take independent professional advice in
the furtherance of their duties whenever it is considered
appropriate to do so.

The Board also operates through a number of committees
covering certain specific matters, these being:

• The Remuneration Committee, consisting of David Hoare, who
chairs the committee, Gavin Lickley and Christopher Newell.

• 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 through which the Group’s external and
internal audit functions report to the non-executive directors.

• 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.

• The Nomination Committee, consisting of Jonathan Perry,

who chairs the committee, and two non-executive directors.
The committee is convened as required to nominate
candidates for membership of the Board, although ultimate
responsibility for appointment rests with the Board.

All Board committees operate within defined terms of reference.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 22

corporate governance

The directors’ responsibility for the financial statements is
described on page 19.

An on-going process for identifying, evaluating and managing
the significant risks faced by the Group, which is regularly
reviewed by the Board, was in place for the year ended
30 September 2002 and to the date of these financial
statements. The Board confirm that they have reviewed the
effectiveness of the Group’s system of internal control for
this period and that these procedures accord with the
guidance ‘Internal Controls: Guidance for Directors on the
Combined Code’.

The directors are responsible for the system of internal control
throughout the Group and for reviewing its effectiveness.
Such a system is designed to manage rather than eliminate the
risk of failure to achieve business objectives, and can only
provide reasonable, but not absolute, assurance against material
misstatement or loss and that assets are safeguarded against
unauthorised use or disposition. In assessing what constitutes
reasonable assurance, the directors have regard to the
relationship between the cost and benefits from particular
aspects of the control system.

The system of internal 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.

Directors’ remuneration

The Remuneration Committee reviews the performance of
executive directors and members of senior management prior to
determining its recommendations on annual remuneration,
performance bonuses and share options for the Board’s
determination.

The Report of the Board to the Shareholders on Directors’
Remuneration is on pages 18 and 19.

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
which the directors and committee chairmen are available for
questions. The Annual General Meeting provides an opportunity
for directors to report to investors on the Group’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

Detailed reviews of the performance of the Group’s main
business lines are included within the Chairman’s Statement
and Chief Executive’s Review. The Board uses these, together
with the Directors’ Report on pages 14 to 17 to present a
balanced and understandable assessment of the Company’s
position and prospects.

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corporate governance

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
internal controls in relation to the risks associated with their
specific areas.

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
approved annually by the Audit Committee, which reviews the
effectiveness of the system of internal control annually and
reports its conclusions to the Board.

Going concern basis

After making enquiries, the directors have a reasonable
expectation that the Group and the Company have adequate
resources to continue in operational existence for the
foreseeable future. For this reason, they continue to adopt the
going concern basis in preparing the accounts.

Compliance Statement

The Listing Rules require the Board to report on compliance
with the forty-five Code provisions throughout the accounting
period. Throughout the year ended 30 September 2002 the
Company has been in compliance with the Code provisions set
out in Section 1 of the Combined Code of Corporate
Governance issued by the Financial Services Authority.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 24

1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 25

the accounts

1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 26

consolidated profit and loss account

for the year to 30 september 2002

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

6
7

2002

£m

230.0
(157.1)

72.9
20.6

93.5
(34.6)
(12.9)

46.0
(9.4)

36.6
(6.0)

30.6

2001
restated
£m

229.7
(156.3)

73.4
15.3

88.7
(35.6)
(12.0)

41.1
(8.2)

32.9
(5.0)

27.9

10
10

32.1p
31.4p

29.0p
28.3p

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.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 27

consolidated balance sheet

30 september 2002

notes

£m

2002

2001
restated

11
12
13

16
17

19
20
20
20

23
23

3.4
2,521.3
9.3

5.3
7.7
117.3
129.8

65.5
(70.2)
193.7

43.7
2,549.0

3.2
2,149.2
4.8

2,534.0

2,157.2

8.9
7.9
125.5
106.0

260.1

2,794.1

248.3

2,405.5

11.8

11.7

63.5
(70.2)
164.0

37.6
2,196.6

157.3

169.0
2.3

2,234.2

2,405.5

189.0

200.8
0.6

2,592.7

2,794.1

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

Approved by the Board of Directors on 16 December 2002.
Signed on behalf of the Board of Directors

N S Terrington
Chief Executive

N Keen
Finance Director

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 28

holding company balance sheet

30 september 2002

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

2002

2001
restated

notes

£m

9.3
216.4

79.8
0.1

65.5
26.5
97.0

13
14

19
20
20
20

4.8
124.1

225.7

128.9

78.6
0.1

79.9

305.6

78.7

207.6

11.8

11.7

63.5
4.7
89.1

189.0

200.8

104.8

305.6

157.3

169.0

38.6

207.6

Approved by the Board of Directors on 16 December 2002.
Signed on behalf of the Board of Directors

N S Terrington
Chief Executive

N Keen
Finance Director

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 29

consolidated cash flow statement

for the year to 30 september 2002

Net cash inflow from operating activities
Taxation
Capital expenditure and financial investment
Acquisitions and disposals
Equity dividends paid

Management of liquid resources
Financing

INCREASE IN CASH IN THE YEAR

notes

26(a)
26(b)

28
26(c)

2002

£m

92.9
(7.8)
(419.2)
-
(5.1)

(339.2)
8.2
354.8

2001
restated
£m

80.5
(5.7)
(322.4)
0.3
(4.7)

(252.0)
(51.1)
339.2

23.8

36.1

statement of total recognised gains and losses

for the year to 30 september 2002

Profit attributable to shareholders

Total recognised gains and losses relating to the year
Prior period adjustment

Total gains and losses recognised since the last annual report

2002

£m

36.6

36.6
2.9

39.5

2001
restated
£m

32.9

32.9
-

32.9

reconciliation of movement in consolidated shareholders’ funds

for the year to 30 september 2002

Profit attributable to shareholders
Dividend
Exercise of share options

NET MOVEMENT IN SHAREHOLDERS’ FUNDS

Opening shareholders’ funds
As previously reported
Prior period adjustment

As restated

CLOSING SHAREHOLDERS’ FUNDS

2002

£m

166.1
2.9

£m

36.6
(6.0)
1.2

31.8

169.0

200.8

2001
restated

£m

32.9
(5.0)
1.1

29.0

137.7
2.3

140.0

169.0

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 30

notes to the accounts

for the year to 30 september 2002

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 2002.
The results of businesses acquired are dealt with in the
consolidated accounts from the date of acquisition.

As required by Financial Reporting Standard 5 - ‘Reporting the
Substance of Transactions’, quasi-subsidiary undertakings are
dealt with in the consolidated accounts on the same basis as
true subsidiaries, described above.

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.

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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 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.

1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 31

notes to the accounts

for the year to 30 september 2002

1. ACCOUNTING POLICIES (CONTINUED)

k. Deferred taxation
Deferred taxation is provided in full on timing differences that
result in an obligation at the balance sheet date to pay more
tax, or a right to pay less tax, at a future date, at rates expected
to apply when they crystallise based on current tax rates and
law. Timing differences arise from the inclusion of items of
income and expenditure in taxation computations in periods
different from those in which they are included in financial
statements. Deferred tax assets are recognised to the extent
that it is regarded as more likely than not that they will be
recovered. Deferred tax assets and liabilities are not discounted.

During the period Financial Reporting Standard 19 -
‘Accounting for Deferred Tax’ came in to force. The application
of the new standard has not resulted in any change to the
Group’s deferred tax liability for the current or previous periods.

l. 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.

m. Financial instruments
Derivative instruments utilised by the Group comprise currency
swap, interest rate swap, interest rate cap and forward interest
rate agreements. 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. The Group does not enter into
speculative derivative contracts.

n. 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 3.

o. 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’.

p. 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.

q. Brokers’ commissions
Brokers’ commissions payable on mortgage loans are now
amortised over the penalty period of the related loan,
instead of being treated as an expense at the point of
completion of the loan, as was the case in previous periods.
It is considered that this treatment is more appropriate as it is
more consistent with the treatment of broker commissions paid
on other types of loan, and with practice within the industry.
The balance sheet at 30 September 2001 has been adjusted
to include the unamortised commission balances within
‘Loans to Customers’ and the profit and loss account and
cash flow statement for the year then ended have been
adjusted to reflect the change in treatment. The effect of this
adjustment is to increase the balance of loans to customers at
30 September 2001 by £2.9m, and to increase the profit
for the year to 30 September 2001 by £0.6m. The effect of the
change on the result for the year to 30 September 2002 is not
considered to be material.

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’.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 32

notes to the accounts

for the year to 30 september 2002

2. INTEREST PAYABLE AND SIMILAR CHARGES

On asset backed loan notes
On bank loans and overdrafts
Amortisation of brokers’ commissions payable

3. 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 £1.9m (2001: £2.0m).

4. DIRECTORS’ REMUNERATION
The remuneration packages in respect of directors holding office during the year were:

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 D Newell
C Weiser

2002

2001

SALARY

BENEFITS

ANNUAL

PENSION

AND FEES
£000

IN KIND
£000

BONUS
£000

CONTRIBUTIONS
£000

162
235
180

25
23
15
22
21
-

683

676

5
16
5

-
-
-
-
-
-

75
205
160

-
-
-
-
-
-

440

39
25
83

-
-
-
-
-
-

147

134

Mr J P L Perry is the Chairman and Mr N S Terrington is the highest paid director.

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2001
restated
£m

107.3
29.5
19.5

156.3

2001
£m

10.8
(10.3)

0.5

2001

TOTAL
£000

277
469
419

24
21
24
21
-
16

1,271

2002

£m

104.1
24.7
28.3

157.1

2002
£m

10.9
(10.5)

0.4

2002
total
£000

281
481
428

25
23
15
22
21
-

1,296

1,271

1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 33

notes to the accounts

for the year to 30 september 2002

4. 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

6
3

transfer value
of increase

£000

29
21

accumulated total
accrued pension at
30 september 2002
£000

accumulated total
accrued pension at
30 september 2001
£000

73
37

66
33

The pension entitlement shown is that which would be paid annually on retirement based on services to 30 September 2002. 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 £72,000 (2001: £70,000) 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.

5. EMPLOYEES
The average number of persons (including directors) employed by the Group during the year was 636 (2001: 622).
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.

2002
£m

15.0
1.1
1.0

17.1

2001
£m

14.6
1.1
0.8

16.5

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 34

notes to the accounts

for the year to 30 september 2002

6. PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
Profit on ordinary activities before taxation is after charging:

Depreciation
Hire of plant and machinery
Property rents payable

2002
£m

1.1
0.2
4.3

2001
£m

1.2
0.4
3.8

The audit fee for the Group was £0.3m (2001: £0.3m). Other fees paid to the auditors were £0.5m (2001: £0.4m). These can be
analysed as £0.1m in respect of securitisations (2001: £0.1m), £0.1m in respect of corporate finance work (2001: £0.1m) and £0.3m in
respect of tax services (2001: £0.2m).

The Company’s audit fee was £20,100 (2001: £19,700).

7. TAX CHARGE ON PROFIT ON ORDINARY ACTIVITIES

a. Analysis of charge in the period

CURRENT TAX

UK Corporation Tax on profits of the period
Prior year adjustments
Write-back of Advance Corporation Tax

Total current tax

DEFERRED TAX (NOTE 22)

Origination and reversal of timing differences

Tax charge on profit on ordinary activities

b. Factors affecting tax charge for the year
The tax assessed for the year is lower than the standard rate of corporation tax in the UK of 30% (2001: 30%).
The differences are explained below.

Profit on ordinary activities before taxation

Profit on ordinary activities multiplied by standard rate of corporation tax in the UK of 30% (2001: 30%)
Effects of;

Utilisation of tax losses brought forward
Reversal of timing differences
ACT credit
Prior year credit

Current tax charge for the period

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2002
£m

15.1
(3.3)
(0.6)

11.2

(1.8)

9.4

2002
£m

46.0

13.8

(0.4)
1.7
(0.6)
(3.3)

11.2

2001
£m

12.5
(0.8)
(3.2)

8.5

(0.3)

8.2

2001
£m

41.1

12.3

-
0.2
(3.2)
(0.8)

8.5

1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 35

notes to the accounts

for the year to 30 september 2002

7. TAX CHARGE ON PROFIT ON ORDINARY ACTIVITIES (CONTINUED)

c. Factors that may affect future tax charges
The Group currently has £1.1m of ACT which has not been recognised together with an unquantifiable amount of tax losses in subsidiary
companies. Future tax charges will be reduced from the standard rate if profits arise in the appropriate subsidiaries.
In addition the Group has capital losses in excess of £40.0m (2001: £65.0m) which are available to offset against future capital gains of
the Group.

8. PROFIT ATTRIBUTABLE TO MEMBERS OF THE PARAGON GROUP OF COMPANIES PLC
The holding company’s profit after tax for the financial year amounted to £14.8m (2001: £32.1m). 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.

9. EQUITY DIVIDEND

Equity dividend on ordinary shares
Interim paid
Proposed final

10. EARNINGS PER SHARE
Earnings per ordinary share is calculated as follows:

Profit for the year

2002
per share

2001
per share

2.1p
3.0p

5.1p

1.9p
2.3p

4.2p

2002
£m

2.5
3.5

6.0

2001
£m

2.2
2.8

5.0

2002

2001
restated

£36,600,000

£32,900,000

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

114,086,058
2,316,894

113,389,521
2,822,408

Diluted weighted average number of ordinary shares ranking for dividend during the year

116,402,952

116,211,929

Earnings per ordinary share

- basic
- diluted

32.1p
31.4p

29.0p
28.3p

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 36

notes to the accounts

for the year to 30 september 2002

11. TANGIBLE FIXED ASSETS

COST

At 1 October 2001
Additions
Disposals

At 30 September 2002

ACCUMULATED DEPRECIATION

At 1 October 2001
Charge for the year
On disposals

At 30 September 2002

NET BOOK VALUE

At 30 September 2002

At 30 September 2001

12. LOANS TO CUSTOMERS

COST

At 1 October 2001
Additions
Amortisation of commissions
Other debits
Repayments and redemptions

At 30 September 2002

short leasehold
premises
£m

plant and
machinery
£m

total

£m

1.5
0.1
-

1.6

0.8
0.1
-

0.9

0.7

9.2
1.5
(1.0)

9.7

6.7
1.0
(0.7)

7.0

2.7

2.5

10.7
1.6
(1.0)

11.3

7.5
1.1
(0.7)

7.9

3.4

3.2

2002

£m

2001
restated
£m

2,149.2
961.9
(28.3)
263.4
(824.9)

1,699.5
978.3
(19.5)
204.6
(713.7)

2,521.3

2,149.2

Included in loans to customers are £314.7m (2001: £270.4m) of hire purchase receivables. The aggregate rentals receivable during the
year in respect of hire purchase contracts were £31.4m (2001: £30.8m). The cost of assets acquired by the Group for the purposes of
letting under hire purchase contracts amounted to £245.6m (2001: £262.3m).

Other debits includes primarily interest receivable on loans outstanding and movements on provisions against these loans.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 37

notes to the accounts

for the year to 30 september 2002

13. INVESTMENT IN OWN SHARES

Shares held by the trustee of the share option schemes

2002
£m

9.3

2001
£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 2002, the trust held 5,102,714 shares
(2001: 2,808,886) with a nominal value of £510,217 (2001: £280,889) and a market value of £8,802,182 (2001: £6,235,727). Options
were outstanding against 4,408,484 of these shares at 30 September 2002. The dividends on these shares have not been waived.

14. INVESTMENT IN SUBSIDIARY COMPANIES

SHARES IN GROUP COMPANIES

At 1 October 2001
Additions during the year
Revaluation

Charged to the profit and loss account
Credited to the revaluation reserve

LOANS TO GROUP COMPANIES

At 1 October 2001
Additions during the year
Repayments during the year
Revaluation

Credited to the profit and loss account

2002

£m

124.1
59.8

(15.2)
21.8

190.5

-
4.6
-

21.3

25.9

2001
restated
£m

63.1
62.8

(2.6)
0.8

124.1

-
-
(7.7)

7.7

At 30 September 2002

216.4

124.1

Comparable amounts determined according to the historic cost convention are:

shares in

loans to
group companies group companies
£m

£m

Cost
Provision

At 30 September 2002

At 30 September 2001

298.6
(149.6)

149.0

119.4

45.1
(19.2)

25.9

total

£m

343.7
(168.8)

174.9

119.4

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 38

notes to the accounts

for the year to 30 september 2002

14. INVESTMENT IN SUBSIDIARY COMPANIES (CONTINUED)
Principal operating subsidiaries comprise

DIRECT SUBSIDIARIES OF THE PARAGON GROUP OF COMPANIES PLC

holding

principal activity

Paragon Finance PLC

Homer Finance (No. 3) PLC

Paragon Mortgages Limited

Homeloans (No. 1) PLC

Homeloans (No. 2) PLC

Homeloans (No. 3) PLC

Homeloans (No. 4) 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 Personal Finance Limited

Paragon Mortgages (No. 1) PLC

Paragon Mortgages (No. 2) PLC

Paragon Mortgages (No. 3) PLC

Paragon Mortgages (No. 4) PLC

Paragon Mortgages SA

Paragon Mortgages (No. 2) SA

Paragon Mortgages (No. 3) SA

Paragon Auto and Secured Finance (No. 1) PLC

Paragon Personal and Auto Finance (No. 1) PLC

Paragon Personal and Auto Finance (No. 2) PLC

SUBSIDIARY OF PARAGON MORTGAGES LIMITED

100%

74%

100%

74%

100%

74%

100%

Residential mortgages and asset administration

Residential mortgages

Unsecured and car loans

Residential mortgages

Vehicle fleet management

Vehicle finance

Unsecured lending

Residential mortgages

Loan and vehicle finance

Paragon Second Funding Limited

100%

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, Paragon Mortgages (No. 2) PLC and Homeloans (No. 4) PLC have additional preference share capital held by
the Group. The financial year end of all of the above companies is 30 September. They are registered and operate in England and Wales,
except for Paragon Mortgages SA, Paragon Mortgages (No. 2) SA and Paragon Mortgages (No. 3) SA which are registered and operate
in Luxembourg.

The minority interests in Finance for People (No. 4) PLC, Paragon Mortgages (No. 1) PLC, Paragon Mortgages (No. 2) PLC and
Homeloans (No. 4) PLC are not material.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 39

notes to the accounts

for the year to 30 september 2002

15. QUASI-SUBSIDIARIES
Realisations (Guernsey) Limited, a company registered and operating in the Bailiwick of Guernsey, in which the controlling interest is
held by a discretionary trust established for charitable purposes, was set up to acquire the controlling interest in Homeloans (Jersey)
Limited from the Group during the year as part of a financing arrangement. Homeloans (Jersey) Limited is a company registered in the
Bailiwick of Jersey and operating in the United Kingdom.

The arrangements for this transaction ensure that, according to the definition set out in Financial Reporting Standard 5 - ‘Reporting the
Substance of Transactions’, the Group gains the benefits arising from the net assets of Realisations (Guernsey) Limited and its subsidiary
and hence they are treated as quasi-subsidiaries of the Group.

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

2002
£m

4.5
0.8

5.3

2001
£m

8.0
0.9

8.9

the group

the company

2002
£m

-
1.7
5.1
0.9

7.7

2001
£m

-
2.1
4.8
1.0

7.9

2002
£m

79.7
0.1
-
-

79.8

2001
£m

78.0
0.1
-
0.5

78.6

18. PENSIONS
During the year further provisions of Financial Reporting Standard 17 – ‘Retirement Benefits’ (‘FRS 17’) came 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 2005. This implementation date
was originally to have been 30 September 2003, but the standard was revised by the Accounting Standards Board during the year.

As a transitional measure, the standard requires that various information relating to 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 2002 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
2002 was £0.1m (2001: £0.1m) and the liability at that date calculated in accordance with FRS 17 was £4.4m (2001: £0.9m). The
difference of £4.5m (2001: £1.0m) relates to the differing bases of calculation.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 40

notes to the accounts

for the year to 30 september 2002

18. PENSIONS (CONTINUED)

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 2002 by a qualified independent actuary. The major assumptions used by the actuary were:

30 september 2002

30 september 2001

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

3.3% p.a.

2.3% p.a.

2.3% p.a.
5.4% p.a.
2.3% p.a.

3.5% p.a.

2.5% p.a.

2.5% p.a.
6.0% p.a.
2.5% p.a.

The assets in the Plan at 30 September 2002 and 30 September 2001 and the expected rate of return were:

at 30 september 2002

at 30 september 2001

Equities
Bonds
Other

TOTAL MARKET VALUE OF ASSETS

Present value of scheme liabilities

Deficit in the scheme
Related deferred tax

Net pension liability

long term rate
of return expected

value
£m

long term rate
of return expected

8.0%
5.0%
4.0%

7.5%
4.4%
4.0%

10.1
1.8
0.1

12.0
(18.5)

(6.5)
2.1

(4.4)

The movement in the deficit in the scheme during the year was as follows:

Deficit in the scheme at 1 October 2001
Movement in year

Current service cost
Contributions
Past service costs
Other finance income
Actuarial loss

Deficit in the scheme at 30 September 2002

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value
£m

11.6
1.4
0.2

13.2
(14.5)

(1.3)
0.4

(0.9)

2002
£m

(1.3)

(1.2)
1.0
-
0.1
(5.1)

(6.5)

1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 41

notes to the accounts

for the year to 30 september 2002

18. PENSIONS (CONTINUED)

The Group’s contribution to the scheme is shown in note 5. The agreed rate of employer contributions was increased from 9.5% to
12.5% of gross salaries for participating employees with effect from 1 April 2002.

ANALYSIS OF RESERVES

If the treatment which will be required by FRS 17 had been adopted in the preparation of the financial statements for the year to
30 September 2002, 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

2002

£m

193.6
(4.4)

2001
restated
£m

163.9
(0.9)

189.2

163.0

ANALYSIS OF THE AMOUNT CHARGED TO OPERATING PROFIT

If the treatment which will be required by FRS 17 had been adopted in the preparation of the financial statements for the year to
30 September 2002, the amount which would have been charged to operating profit would have been analysed as follows:

Current service cost
Past service cost

Total operating charge

2002
£m

1.2
-

1.2

ANALYSIS OF THE AMOUNT CREDITED TO OTHER FINANCE INCOME

If the treatment which will be required by FRS 17 had been adopted in the preparation of the financial statements for the year to
30 September 2002, the amount which would have been credited to other finance income would have been analysed as follows:

Expected return of pension scheme assets
Interest on pension scheme liabilities

Net return

2002
£m

1.0
(0.9)

0.1

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 42

notes to the accounts

for the year to 30 september 2002

18. PENSIONS (CONTINUED)

ANALYSIS OF THE AMOUNT RECOGNISED IN THE STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES

If the treatment which will be required by FRS 17 had been adopted in the preparation of the financial statements for the year to
30 September 2002, the actuarial gain which would have been recognised in the statement of total recognised gains and losses would
have been analysed as follows:

Actual return less expected return on pension scheme assets
Experience gains and losses arising on scheme liabilities
Changes in assumptions underlying the present value of the scheme liabilities

Actuarial loss

HISTORY OF EXPERIENCE GAINS AND LOSSES

Difference between the expected and actual return on scheme assets:

Amount (£m)
Percentage of scheme assets

Experience gains and losses on scheme liabilities:

Amount (£m)
Percentage of the present value of scheme liabilities

Total amount recognised in statement of total recognised gains and losses:

Amount (£m)
Percentage of the present value of the scheme liabilities

2002
£m

(3.5)
0.2
(1.8)

(5.1)

2002

(3.5)
(30%)

0.2
1%

(5.1)
28%

b. Disclosures made in accordance with SSAP 24.
The most recent actuarial valuation of the Group Pension Scheme was completed as at 31 March 2001 using the projected unit method,
at which date the market value of the assets was £14.4m. The principal assumptions used in the latest valuation were that the annual
pre-retirement return on investment used would be 6% on accumulated assets, 6.5% on future contributions, while in valuing past
service benefits a return on investment of 5.5% would be used. The annual rate of increase in salaries was assumed to be 3.5%.
The valuation revealed that the actuarial value of assets was sufficient to cover 115% of the statutory minimum liabilities in accordance
with the Pensions Act 1995.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 43

notes to the accounts

for the year to 30 september 2002

19. CALLED-UP SHARE CAPITAL

AUTHORISED:

2002
£M

2001
£m

175,000,000 (2001: 175,000,000) ordinary shares of 10p each

17.5

ALLOTTED AND PAID-UP:

118,114,812 (2001: 117,296,094) ordinary shares of 10p each

11.8

11.7

During the year 732,945 ordinary shares (£73,294 par value) were issued for £1,952,666, 13,557 (£1,356 par value) ordinary shares
were issued for £11,830 and a further 72,216 (£7,222 par value) were issued for £117,076. 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 2001
As previously reported
Prior period adjustment

As restated

Share options exercised
Retained profit for the year

Balance at 30 September 2002

share premium
account
£m

merger
reserve
£m

profit and
loss account
£m

63.5
-

63.5
2.0
-

65.5

(70.2)
-

(70.2)
-
-

(70.2)

161.1
2.9

164.0
(0.9)
30.6

193.7

total

£m

154.4
2.9

157.3
1.1
30.6

189.0

The cumulative amount of goodwill on acquisitions written off to reserves is £56.4m (2001: £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’.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 44

notes to the accounts

for the year to 30 september 2002

20. RESERVES (CONTINUED)

b. The Company

Balance at 1 October 2001
As previously reported
Prior period adjustment

As restated

Revaluation of investments in subsidiaries
Share options exercised
Retained profit for the year

Balance at 30 September 2002

share premium
account
£m

revaluation
reserve
£m

profit and
loss account
£m

63.5
-

63.5
-
2.0
-

65.5

1.8
2.9

4.7
21.8
-
-

26.5

89.1
-

89.1
-
(0.9)
8.8

97.0

total

£m

154.4
2.9

157.3
21.8
1.1
8.8

189.0

21. SHARE OPTION SCHEMES
Options are outstanding under the executive share option and the all employee share option schemes to purchase 8,368,848
(2001: 7,526,593) ordinary shares of 10p each as follows:

period exercisable

option price

13/03/1998 to 13/03/2005
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
11/01/2002 to 11/01/2009
01/05/2002 to 01/11/2002
01/05/2004 to 01/11/2004
27/09/2002 to 27/09/2006
17/02/2003 to 17/02/2010
26/05/2003 to 26/05/2007
01/08/2003 to 01/02/2004
01/08/2005 to 01/02/2006
26/02/2004 to 26/02/2008
27/11/2004 to 27/11/2011
29/07/2005 to 29/07/2012

97.33p
103.08p
105.48p
218.00p
218.00p
147.50p
164.40p
164.40p
209.50p
147.50p
148.50p
120.64p
120.64p
221.50p
248.00p
186.50p

number

588,750
38,866
453,618
939,000
626,000
1,150,000
3,770
27,293
100,000
595,000
1,240,000
418,498
238,053
30,000
1,270,000
650,000

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.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 45

notes to the accounts

for the year to 30 september 2002

21. SHARE OPTION SCHEMES (CONTINUED)
Details of individual options held by the directors at 30 September 2001 and 30 September 2002:

date from which exercisable

expiry date

option price

j p l perry

n s terrington

n keen

Options held at 30 September 2001:
13/03/1998*
02/12/1999
31/03/2001*
31/03/2001
11/01/2002*
17/02/2003†
26/05/2003
01/08/2003
01/08/2005

13/03/2005
02/12/2003
31/03/2008
31/03/2005
11/01/2009
17/02/2010
26/05/2007
01/02/2004
01/02/2006

Options granted in the year:
27/11/2004†
29/07/2005†

27/11/2011
29/07/2012

97.33p
105.48p
218.00p
218.00p
147.50p
147.50p
148.50p
120.64p
120.64p

417,646
260,700
120,000
80,000
-
100,000
200,000
8,030
-

-
-
255,000
170,000
300,000
100,000
200,000
-
13,987

1,186,376

1,038,987

248.00p
186.50p

170,000
20,000

300,000
60,000

Options exercised in the year:
01/08/2003

Options lapsed in the year:
01/08/2003

01/02/2004

120.64p

01/02/2004

120.64p

-
-
240,000
160,000
250,000
100,000
200,000
16,060
-

966,060

250,000
60,000

(2,946)

(5,084)

At 30 September 2002

1,376,376

1,398,987 1,268,030

*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.

At 30 September 2002 The Paragon Group of Companies PLC share price was 172.5p and the range during the year then ended was
165.0p to 287.0p. Aggregate gains before taxation made by directors on the exercise of share options during the course of the year were
£3,000 (2001: £1,870,000) including gains of £nil (2001: £976,000) made by Mr N S Terrington.

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 18.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 46

notes to the accounts

for the year to 30 september 2002

22. PROVISIONS FOR LIABILITIES AND CHARGES

a. The Group

Provision at 1 October 2001
Current year charge
Utilised in the year

Provision at 30 September 2002

deferred
taxation
£m

other
provisions
£m

1.8
-
(1.8)

0.5
0.4
(0.3)

0.6

total

£m

2.3
0.4
(2.1)

0.6

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 liability for deferred taxation for which provision has been made is analysed as follows:

Other timing differences

2002
£m

2001
£m

1.8

b. The Company
There is no potential liability for deferred tax in the holding company either at 30 September 2002 or 30 September 2001.

23. CREDITORS

AMOUNTS FALLING DUE WITHIN ONE YEAR

Amounts owed to Group companies
Proposed dividend
Corporation tax
Accruals

AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR

Asset backed loan notes
Bank loans
Accruals

the group

the company

2002
£m

-
3.5
11.5
28.7

43.7

2001
£m

-
2.7
8.5
26.4

37.6

2,084.0
462.3
2.7

1,839.6
353.1
3.9

2,549.0

2,196.6

2002
£m

82.4
3.5
3.7
15.2

104.8

-
-
-

2001
£m

35.7
2.7
-
0.2

38.6

-
-
-

A maturity analysis of the above borrowings and further details of asset backed loan notes and bank loans are given in note 24.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 47

notes to the accounts

for the year to 30 september 2002

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
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 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 0.25%
and 2.75% 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 £720.0m (2001:
£340.0m) of mortgage backed floating rate notes at par and
£244.7m (2001: £446.0m) of asset backed floating rate
notes at par.

During the year an arrangement was made via the quasi
subsidiaries described note 15, whereby the Group received
monies from a UK bank in return for the right to receive certain
future cash flows from a securitised portfolio. The commercial
effect of this transaction is that of a bank loan, secured on the
assets of the portfolio concerned, but subordinated to the asset
backed loan notes. Payments on this facility are made out of
receipts from borrowers in the same way as for the asset backed
loan notes. Included in bank loans at 30 September 2002 is
£15.1m (2001: £nil) in respect of this arrangement.

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.

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
or Northern Irish 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.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 48

notes to the accounts

for the year to 30 september 2002

24. FINANCIAL INSTRUMENTS (CONTINUED)
In previous years the Group had raised subordinated bank loans secured against various of its securitised portfolios. These loans were
secured on the assets within the portfolio concerned, but were subordinated to the asset backed loan notes. Interest was payable on
these loans at a rate of 1.25% above LIBOR. The portfolios concerned were refinanced during the year and the loans repaid.
Included within bank loans at 30 September 2002 is £nil (2001 : £12.2m) in respect of such loans.

Assets are typically securitised within twelve months of origination. Until that point new loans are funded using a £450.0m
(2001: £400.0m) committed sterling facility provided to Paragon Second Funding Limited by a consortium of banks. £332.7m
(2001: £181.9m) 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 and Paragon Personal 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. The present facility replaced
an earlier facility which ceased to be available for further drawings during the year. This new facility remains available for further
drawings until 28 February 2005 and although it expires in 2047 it is likely that substantial repayments will be made within the next
five years.

In addition to these borrowings the Group has a committed corporate syndicated sterling bank facility of £180.0m (2001: £160.0m),
used to provide working capital for the Group. Included in bank loans are drawings of £114.5m (2001: £158.9m) made by Paragon
Finance PLC under this facility. This facility reduces by instalments on 30 September 2003 and every six months thereafter until final
repayment which is due on 31 March 2005. The facility is secured on all the assets of the Company and of 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 2002 and 30 September 2001 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

2002
£m

22.5
42.5
117.0

182.0

2001
£m

218.0
-
-

218.0

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 2002 is
£234.6m subject to such restrictions (2001: £156.3m).

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.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 49

notes to the accounts

for the year to 30 september 2002

24. FINANCIAL INSTRUMENTS (CONTINUED)
Set out below is the maturity profile of the Group’s financial liabilities at 30 September 2002 and 30 September 2001:

bank
loans

£m

25.0

89.5
347.8

asset
backed
loan
notes
£m

2,084.0

other

2002
total

bank
loans

£m

asset
backed
loan
notes
£m

other

2001
total

£m

43.7

1.2

1.5
-

43.7

26.2

91.0
2,431.8

158.9
194.2

1,839.6

37.6

2.3

1.6
-

2.3

160.5
2,033.8

462.3

2,084.0

46.4

2,592.7

353.1

1,839.6

41.5

2,234.2

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

Interest rate risk

The Group’s policy is to maintain floating rate liabilities and match these with floating rate assets, hedging fixed rate assets by the use
of interest rate swap or cap agreements.

The rates of interest payable on the loan facilities and on asset backed loan notes issued in the securitisation process are reset
quarterly on the basis of LIBOR. The interest rates charged on the Group’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.

In part, the Group’s interest rate hedging objectives are achieved by the controlled mismatching of the dates on which instruments
mature, redeem or have their interest rates reset. The table overleaf summarises these repricing mismatches. For the purposes of the
table, loan assets, borrowings and derivatives are allocated to time bands by reference to the earlier of the next contractual interest
rate repricing date and the maturity dates. For those fixed rate loan assets where the customer has contracted to make regular
repayments of both capital and interest, the assets have been allocated across the time bands in the table by reference to the
contracted repayments. The analysis takes no account of early terminations which are likely to occur in practice. In determining the
amount of hedging required, the Group makes assumptions about the level of regular capital repayments and early terminations of
its loan assets. The actual interest rate sensitivity will therefore be determined by reference to subsequent customer and management
decisions and is expected to be less sensitive than shown.

The table includes short term creditors and debtors.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 50

notes to the accounts

for the year to 30 september 2002

24. FINANCIAL INSTRUMENTS (CONTINUED)

3 MONTHS
OR LESS

£m

MORE THAN
3 MONTHS
BUT NOT MORE
THAN 6 MONTHS
£m

MORE THAN
6 MONTHS
BUT NOT MORE
THAN 1 YEAR
£m

MORE THAN
1 YEAR BUT
NOT MORE
THAN 5 YEARS
£m

MORE THAN NON INTEREST
BEARING

5 YEARS

TOTAL

£m

at 30 september 2002

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

129.8
117.3
1,453.8

-
-

1,700.9

-
(462.3)
(2,084.0)

-
-

(2,546.3)

Off balance sheet items

726.0

Interest rate repricing gap

(119.4)

-
-
72.2
-
-

72.2

-
-
-
-
-

(57.3)

14.9

Cumulative gap

(119.4)

(104.5)

-
-
258.0
-
-

258.0

-
-
-
-
-

-
-
528.4
-
-

528.4

-
-
-
-
-

-
-
162.7
-
-

162.7

-
-
-
-
-

-
-
46.2
9.3
16.4

71.9

129.8
117.3
2,521.3
9.3
16.4

2,794.1

(0.6)
-
-
(46.4)
(200.8)

(0.6)
(462.3)
(2,084.0)
(46.4)
(200.8)

(247.8)

(2,794.1)

(170.9)

(447.4)

(50.4)

87.1

(17.4)

81.0

63.6

112.3

175.9

(175.9)

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 51

notes to the accounts

for the year to 30 september 2002

24. FINANCIAL INSTRUMENTS (CONTINUED)

3 MONTHS
OR LESS

£m

MORE THAN
3 MONTHS
BUT NOT MORE
THAN 6 MONTHS
£m

MORE THAN
6 MONTHS
BUT NOT MORE
THAN 1 YEAR
£m

MORE THAN
1 YEAR BUT
NOT MORE
THAN 5 YEARS
£m

MORE THAN NON INTEREST
BEARING

5 YEARS

TOTAL

£m

AT 30 SEPTEMBER 2001 (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

Off balance sheet items

Interest rate repricing gap

Cumulative gap

106.0
125.5
1,183.5

-
-

1,415.0

-
(353.1)
(1,839.6)

-
-

(2,192.7)

975.7

198.0

-
-
65.6
-
-

65.6

-
-
-
-
-

-
-
115.3
-
-

115.3

-
-
-
-
-

-
-
575.1
-
-

575.1

-
-
-
-
-

-
-
167.2
-
-

167.2

-
-
-
-
-

-
-
42.5
4.8
20.0

67.3

(2.3)
-
-
(41.5)
(169.0)

106.0
125.5
2,149.2
4.8
20.0

2,405.5

(2.3)
(353.1)
(1,839.6)
(41.5)
(169.0)

(212.8)

(2,405.5)

(64.8)

(114.7)

(565.3)

(230.9)

0.8

198.8

0.6

199.4

9.8

(63.7)

(145.5)

209.2

145.5

‘Off balance sheet items’ shows the notional principal amount of swap agreements. Included within ‘3 months or less’
are £28.0m (2001: £47.2m) of capped rate mortgages hedged by interest rate cap agreements which reset quarterly.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 52

notes to the accounts

for the year to 30 september 2002

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.

2002
gains

2002
losses

2001
gains

2001
losses

2002
total
net gains/
(losses)
£M

£M

(13.1)

(5.4)

Unrecognised gains and losses

on hedges at 1 October 2001
Gains and losses arising in previous

£M

7.7

years that were recognised in the year

(3.4)

6.9

3.5

Gains and losses arising before 1 October 2001

that were not recognised in the year

4.3

(6.2)

(1.9)

Gains and losses arising in the year

that were not recognised in the year

(3.7)

(19.8)

(23.5)

Unrecognised gains and losses

on hedges at 30 September 2002

0.6

(26.0)

(25.4)

Of which
Gains and losses expected to be realised
in the year to 30 September 2003
Gains and losses expected to be realised

in the year to 30 September 2004 or later

0.1

0.5

(9.2)

(9.1)

(16.8)

(16.3)

2001
total
net gains/
(losses)
£m

(2.7)

0.3

(2.4)

(3.0)

£m

(4.3)

0.3

(4.0)

(9.1)

(13.1)

(5.4)

(4.1)

(9.0)

(1.6)

(3.8)

£m

1.6

6.1

7.7

2.5

5.2

Currency risk

All of the Group’s assets and liabilities are denominated in sterling with the exception of £168.7m (2001: £168.7m) 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.

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 53

notes to the accounts

for the year to 30 september 2002

24. FINANCIAL INSTRUMENTS (CONTINUED)

Fair values of financial assets and financial liabilities
Fair values have been determined for all derivatives, listed securities and any other financial assets and liabilities for which an active and
liquid market exists. The fair values of cash at bank and in hand, bank loans and overdrafts and asset backed loan notes are not
materially different from their book values because all the assets mature within three months of the year end and the interest rates
charged on financial liabilities reset on a quarterly basis.

Set out below is a comparison by category of book values and fair values of the Group’s derivative financial instruments as at
30 September 2002 and 30 September 2001.

DERIVATIVE FINANCIAL INSTRUMENTS HELD

TO MANAGE THE INTEREST RATE PROFILE

Swaps
Caps

2002

2001

book value
£m

fair value
£m

book value
£m

fair value
£m

-
2.0

(22.8)
(2.7)

-
2.2

(5.4)
2.2

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
(Increase) / decrease in debtors
Increase in creditors

Net cash inflow from operating activities

2002

£m

46.0
12.9
1.1
28.3
0.3
(0.2)
4.5

92.9

2001
restated
£m

41.1
12.0
1.2
19.5
0.3
2.9
3.5

80.5

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 54

notes to the accounts

for the year to 30 september 2002

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 in cash in year
Cash inflow from increase in debt
Cash movement from change in liquid resources

Change in net debt arising from cash flows
Loans acquired with subsidiary

Movement in net debt in year
Net debt at 1 October 2001

Net debt at 30 September 2002

2002

£m

2001
restated
£m

(413.4)
(1.6)
0.3
(4.5)

(321.6)
(1.0)
0.2
-

(419.2)

(322.4)

-
-

1.2
353.6

354.8

2002
£m

23.8
(353.6)
(8.2)

(338.0)
-

(3.3)
3.6

0.3

1.1
338.1

339.2

2001
£m

36.1
(338.1)
51.1

(250.9)
(162.4)

(338.0)
(1,961.2)

(413.3)
(1,547.9)

(2,299.2)

(1,961.2)

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 55

notes to the accounts

for the year to 30 september 2002

28. ANALYSIS OF NET DEBT

Cash in hand at bank

Debt due after one year

Other liquid resources

Total

Other liquid resources comprise term deposits with UK banks.

29. PURCHASE OF SUBSIDIARY UNDERTAKING

NET ASSETS ACQUIRED:

Loans to customers
Debtors
Cash at bank and in hand
Creditors

Goodwill

SATISFIED BY:

Cash

2001
£m

cash flows
£m

106.0

23.8

2002
£M

129.8

(2,192.7)

(353.6)

(2,546.3)

125.5

(8.2)

117.3

(1,961.2)

(338.0)

(2,299.2)

2001
£m

160.2
1.9
3.6
(162.4)

3.3
-

3.3

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 56

notes to the accounts

for the year to 30 september 2002

30. CAPITAL COMMITMENTS
There were no capital commitments (2001: £nil) contracted but not provided for.

31. FINANCIAL COMMITMENTS
At 30 September 2002 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

2002
£m

2001
£m

0.1
-

0.3
3.9

4.3

0.7
0.1

0.3
3.6

4.7

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 57

notice of annual general meeting

To all shareholders

NOTICE IS HEREBY GIVEN that the fourteenth Annual General
Meeting of The Paragon Group of Companies PLC will be held
at Butchers’ Hall, 87 Bartholomew Close, London EC1A 7EB on
11 February 2003 at 10.30 a.m. for the following purposes:

As ordinary business

1. To receive and consider the Company’s Accounts for the year
ended 30 September 2002 and the Reports of the Directors
and the Auditors

2. To declare a dividend

3. To re-appoint as directors (a) Professor A D Chambers (b) Mr
M J R Kelly and (c) Mr G A F Lickley.

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 resolutions 5 and
6 as ordinary resolutions and resolutions 7 and 8 as
special resolutions:

Ordinary resolutions

5. ‘THAT the Board be and it is hereby generally and
unconditionally authorised (in substitution for all subsisting
authorities to the extent unused) to exercise all powers of
the Company to allot relevant securities (within the meaning
of Section 80 of the Companies Act 1985) up to an
aggregate nominal amount of £4,333,100 PROVIDED THAT
this authority shall expire at the conclusion of the next
Annual General Meeting of the Company after the passing of
this resolution (unless previously revoked or varied by the
Company in general meeting) save that the Company may
before such expiry make an offer or agreement which would
or might require relevant securities to be allotted after such
expiry and the Board may allot relevant securities in
pursuance of such an offer or agreement as if the authority
conferred hereby had not expired.’

6. (a) ‘THAT the rules of the Paragon Performance Share Plan
in the form presented to the meeting be approved and adopted
in the form produced to the meeting and signed by the
Chairman for the purposes of identification; and

(b) THAT the directors of the Company be authorised to
make any modifications as they consider necessary or
expedient for the purposes of implementing and giving
effect to this resolution.’

Special resolutions

7. ‘THAT, subject to the passing of resolution 5, the Board
be and it is hereby empowered pursuant to Section 95 of the
Companies Act 1985 to allot equity securities (within the
meaning of Section 94 of the said Act) for cash pursuant to
the authority conferred by resolution 5 as if sub-section (1) of
Section 89 of the said Act did not apply to any such allotment,
PROVIDED THAT this power shall be limited to;

(a) the allotment of equity securities in connection with a
rights issue, open offer or any other pre-emptive offer in
favour of ordinary shareholders and in favour of all holders
of any other class of equity security in accordance with the
rights attached to such class where the equity securities
respectively attributable to the interests of all such persons
on a fixed record date are proportionate (as nearly as may
be) to the respective numbers of equity securities held by
them or are otherwise allotted in accordance with the rights
attaching to such equity securities (subject in either case to
such exclusions or other arrangements as the Board may
deem necessary or expedient to deal with fractional
entitlements or legal or practical problems arising in any
overseas territory, the requirements of any regulatory body
or any stock exchange in any territory or any other matter
whatsoever); and

(b) the allotment (otherwise than pursuant to sub-paragraph
(a) above) of equity securities up to an aggregate nominal
value of £590,500;

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.’

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 58

notice of annual general meeting

A member entitled to attend and vote at this meeting may
appoint a proxy to attend on his behalf and, on a poll, to vote
instead of such member. A proxy need not also be a member of
the Company. A proxy form is enclosed for use in connection
with the meeting. Proxy forms and any power of attorney or
other written authority under which they are executed (or an
office or notarially certified copy thereof) should be lodged with
the Registrar of the Company at the address shown on the
reverse of the proxy form not less than forty-eight hours before
the time appointed for the holding of the meeting.
The appointment of a proxy will not preclude a shareholder
from attending and voting at the meeting.

The register of directors’ interests and copies of directors’
service contracts will be available for inspection during normal
business hours on any weekday (Saturdays and public holidays
excepted) at the Registered Office of the Company from the
date of this notice until the date of the meeting and at the
place of the meeting from 10.00 a.m. on the date of such
meeting until the conclusion thereof. The Report and
Accounts have been sent to the Company’s shareholders.

Biographical details of all directors are provided on
pages 12 and 13.

8. ‘THAT the Company be and is hereby generally and
unconditionally authorised for the purposes of Section 166
of the Companies Act 1985 (‘the Act’) to make one or more
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 share capital of the Company
(‘Ordinary Shares’) provided that:-

(a) the maximum aggregate number of Ordinary Shares
hereby authorised to be purchased is 11,800,000
(representing approximately 10 per cent of the Company’s
issued ordinary share capital);

(b) the minimum price which may be paid for an Ordinary
Share is 10p;

(c) the maximum price which may be paid for an Ordinary
Share is an amount equal to 105 per cent of the average of
the middle market price shown in the quotations for an
Ordinary Share as derived from the London Stock Exchange
Daily Official List for the five business days immediately
preceding the day on which the Ordinary Share is contracted
to be purchased;

(d) unless previously renewed, varied or revoked, the
authority hereby conferred shall expire at the conclusion of
the next Annual General Meeting of the Company; and

(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
may be executed wholly or partly after the expiry of such
authority, and may make a purchase of Ordinary Shares in
pursuance of any such 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

16 December 2002

Registered in England No. 2336032

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1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 59

registered and head office

St Catherine’s Court
Herbert Road
Solihull
West Midlands B91 3QE
Telephone: 0121 712 2323

london office

Third Floor
30-34 Moorgate
London EC2R 6PQ
Telephone: 020 7786 8474

internet

www.paragon-group.co.uk

auditors

Deloitte & Touche
Chartered Accountants
Four Brindleyplace
Birmingham B1 2HZ

solicitors

Slaughter and May
One Bunhill Row
London EC1Y 8YY

registrars and transfer office

Computershare Investor Services PLC
PO Box 82
The Pavilions
Bridgwater Road
Bristol BS99 7NH

brokers

HSBC Investment Bank plc
Thames Exchange
10 Queen Street Place
London EC4R 1BL

1491_Paragon R&A_a/w 13/1/03 12:55 pm Page 60