ANNUAL REPORT AND ACCOUNTS 2004
The Paragon Group of Companies PLC
Our vision is to become the UK’s
most highly regarded specialist
provider of finance for people.
We assist our customers to achieve
their lifestyle ambitions.
Paragon is the UK’s pre-eminent
lender to professional landlords
and is the 3rd largest buy-to-let
lender in the UK.
contents
03 financial highlights
04 chairman’s statement
06 chief executive’s review
12 board of directors
14 directors’ report
17 corporate social responsibility
19 report of the board to the shareholders on directors’ remuneration
27 statement of directors’ responsibilities in relation to financial statements
28 independent auditors’ report
29 corporate governance
32 contacts
34 consolidated profit and loss account
35 consolidated balance sheet
36 holding company balance sheet
37 consolidated cash flow statement
37 reconciliation of movement in consolidated shareholders’ funds
38 notes to the accounts
73 notice of annual general meeting
FINANCIAL HIGHLIGHTS
36.8%
increase in profit before tax
to £71.0 million
(2003 £51.9 million)
9.6p
dividend for full year
(2003 6.3p)
43.8%
increase in new lending
to £2,124.3 million
(2003 £1,477.4 million)
£5.9billion
net loan assets increased
to £5,950.9 million
(2003 £5,287.1 million)
2004
2003
RESTATED
NOTE 1(r)
2002
2001
2000
£m
£m
£m
£m
£m
Profit before taxation
Profit after taxation
Total loan assets
Shareholders’ funds
71.0
54.7
5,950.9
268.4
51.9
40.3
5,287.1
225.3
46.0
36.6
2,521.3
200.8
41.1
32.9
2,149.2
169.0
35.5
28.5
2,146.3
137.7
2004
2003
2002
2001
2000
Earnings per share
- basic
- diluted
Dividend per ordinary share
48.0p
46.2p
9.6p
35.5p
34.8p
6.3p
32.1p
31.4p
5.1p
29.0p
28.3p
4.2p
25.1p
24.9p
3.8p
Total loan assets includes Loans to Customers shown on the face of the balance sheet and similar assets subject
to non-recourse finance arrangements (note 17).
THE PARAGON GROUP OF COMPANIES PLC 3
CHAIRMAN’S STATEMENT
I am pleased to report that the performance of the Group during
the year ended 30 September 2004 was exceptionally strong,
evidenced by the growth seen in lending volumes and profits.
Profit before tax increased by 36.8% to £71.0 million for the year,
compared with £51.9 million for the previous year and earnings per
share increased by 35.2% to 48.0p from 35.5p. Mortgage Trust
(formerly Britannic Money) which was acquired in June 2003, is
now fully integrated and contributed £15.1 million to profits before
taxation for the year (2003: £1.2 million loss) after a credit of £5.2
million in respect of the amortisation of negative goodwill (2003:
£2.1 million).
Board has declared an increased final dividend of 5.7p per share
which, when added to the interim dividend of 3.9p paid on 2 July,
gives a total dividend of 9.6p per share for the year, an increase of
52.4% over last year. Subject to approval at the Annual General
Meeting on 9 February, the dividend will be paid on 11 February
2005, by reference to a record date of 14 January 2005.
Business review and strategy
In keeping with our previously stated strategy of focusing our
activity primarily on more defensive product areas such as buy-to-
let and secured personal loans, 93.2% of our lending during the
year was secured on residential property. This compares with
87.8% in the previous year. We shall continue to follow this strategy,
maintaining our strong stance on credit quality.
I reported last year on the acquisition of Britannic Money, now
renamed Mortgage Trust, in June 2003. Since the acquisition, the
business has been successfully turned from loss making into profit.
In addition to the re-focusing of new business activity mentioned in
the Chief Executive’s Review, which has improved the profitability of
new advances, a significant operational restructuring has resulted
in substantial cost savings. By combining support functions and
relocating administration activities to our operational centre in
Solihull, staff at Mortgage Trust’s Epsom office have been reduced
from 247 at the time of the acquisition to 86 at 30 September 2004.
In view of these strong results and consistent with our intention to
stocks of unlet property and improving rents. These are all factors
reduce dividend cover progressively towards the sector norm, your
which underpin the credit quality of buy-to-let lending.
Prospects for the private rented sector
Board composition
The succession of interest rate increases by the Monetary Policy
In October 2003, as referred to in my statement last year, we
Committee over the past year appears to have had the desired
appointed two new executive directors, John Heron and Pawan
effect on the housing market. At the same time the need for
Pandya. John Heron is responsible for the Group’s first mortgages
intermediaries and lenders to meet the requirements of the new
division, encompassing Paragon Mortgages and Mortgage Trust,
mortgage regulations from 1 November 2004 has diverted attention
and joined the Group in 1986. He is a member of the Executive
away from business generation. Evidence of slower activity and of
Committee of the Council of Mortgage Lenders.
The acquisition of Mortgage Trust at a significant discount to net
assets has provided a new profit stream for the Group in the core
buy-to-let area of our business activities. The rapid and successful
turnaround of this business has added significant value for
shareholders. Looking forward, we shall continue to seek
acquisition opportunities to supplement organic business flows.
softer prices has been well documented. Less well covered has
been evidence of the consequential improvement in demand for
rented accommodation, with surveys from RICS, ARLA and, indeed,
Paragon Mortgages reporting increasing tenant demand, reducing
It seems likely that we are at or near the peak of the present
interest rate cycle, with a number of economists suggesting that
rates could begin to fall next year. It is, however, too early to say
whether the slowing housing activity will lead to a soft or a hard
landing for house prices and this uncertainty is weighing down
sentiment for housing. Whilst we have seen a strong start to the
new financial year, the impact of this sentiment on buy-to-let
activity over the coming months remains to be seen.
Despite some speculation to the contrary, we have seen no
evidence of buy-to-let investors disposing of their properties in
Pawan Pandya joined the Group in 1988 and was appointed Chief
Staff
Operating Officer in 2002. He is responsible for all loan
The excellent progress we have made during the year would not
administration and processing, collections and Group technology.
have been achieved without the hard work and dedication of our
In September 2004 we were pleased to welcome Bob Dench to the
Board as an independent non-executive director. Bob previously
held various senior positions with Barclays where, following a
number of overseas appointments, he returned to the UK and
served on the boards of Barclays’ Retail Financial Services and
staff and my fellow directors. I thank them all for their efforts.
Private Client businesses. He played a leading role in Barclays’
Jonathan P L Perry
acquisition of Woolwich plc and in recent years was Managing
Director of Barclays’ General Insurance, Life and Mortgage
businesses before leaving the organisation in 2003. Bob is a non-
Chairman
executive director of AXA UK plc and of Clipper Ventures plc.
15 December 2004
Outlook
response to house price uncertainty. Indeed, our experience of buy-
The Group has had an outstanding year. Volumes and profits have
to-let loans having a lower redemption rate than owner-occupied
mortgages has continued. In addition, survey data has confirmed
continued to increase strongly, arrears performance has remained
in accordance with plan and the integration of Mortgage Trust,
the view that the majority of landlords in the buy-to-let market take
which traded profitably during the year, has been completed. The
a long-term view of their investment portfolios.
In the longer term, we remain convinced that the prospects for the
opening pipeline is up year on year and trading activity since the
year end has been in line with our expectations.
private rented sector remain strong, with demographic factors
There is little doubt that the housing market has started to soften
contributing to increasing demand for tenanted accommodation.
and the prospect for house prices has become uncertain. Whilst the
We note that it was during the last significant housing slowdown,
fundamentals remain strong for the landlord, how this uncertainty
in the early 1990s, that the private rented sector saw its largest
will affect landlords’ buying decisions in the short-term is difficult
increase in rental units. Further, recent research by Mintel found
to predict. Should there be a deterioration in market conditions, we
that 3.3 million people are considering purchasing buy-to-let
properties over the next twelve months, whilst 75% of existing
landlords are expecting to rent out more property in the next
are confident that the robustness of our business model, with the
comparatively low loan to value ratio across our buy-to-let portfolio,
the high rental cover and direct landlord obligation, will ensure that
decade. The attractiveness of buy-to-let as an investment may be
this portfolio will outperform other residential mortgage portfolios,
further enhanced when residential property becomes eligible for
in particular owner-occupied residential mortgage portfolios.
inclusion in Self Invested Personal Pension schemes from April 2006.
4 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 5
CHIEF EXECUTIVE’S REVIEW
During the year ended 30 September 2004 the Group advanced
Operating expenses, excluding the impact of the goodwill credit of
strongly, with profit before tax increasing by 36.8% to £71.0 million
£5.2 million were £43.9 million, compared with £37.9 million
for the year, compared with £51.9 million for the previous year.
(excluding the goodwill credit of £2.1 million and exceptional costs
Total advances by the Group during the year were £2,124.3 million,
compared with £1,477.4 million during the previous year, an
increase of 43.8%. Net loan assets at 30 September 2004, inclusive
of those held by the off-balance sheet companies managed by
Mortgage Trust, were £5,950.9 million, compared with £5,287.1
million at 30 September 2003. Of these £5,523.4 million or 92.8%
were secured on residential property, providing a base of high
quality assets.
The modest increase in net interest income to £80.6 million from
£76.5 million reflects both the move away from higher risk assets
towards secured, and thus low risk, lending and the normal lag in
loan rates following the increases in LIBOR during the year which
resulted in a tightening of margins. If interest rates fall, as a
number of economists expect, this effect should reverse.
Other operating income rose to £40.2 million from £31.0 million, an
increase of 29.7%, as a result of commissions and fees earned on
the larger portfolio and on the higher volume of business written
during the year.
of £3.9 million) in the previous year. At 36.3% (2003: 35.3%) the
cost:income ratio increased slightly as a result of the inclusion of
the full costs of Mortgage Trust during the period (note 8).
However, this represents a reduction from the rate of 37.8%
reported at the half year. Cost savings from the introduction of
operational efficiencies earlier in the year impacted favourably on
the cost:income ratio in the second half of the year. Excluding
Mortgage Trust, the cost:income ratio decreased to 32.2% from
33.2% last year.
The charge for provisions for losses of £11.1 million for the year
compares with £15.9 million for the previous year. The reduction
reflects the significant shift in the Group’s lending activities in
recent years towards secured lending, where margins are lower but
the credit profile is better. The relatively low level of charge is also
attributable to the high credit standards required by all lending
divisions and the high quality of underwriting applied.
After providing for corporation tax at a charge rate of 23% and for
the dividend in respect of the year, profits of £43.7 million have
been transferred to shareholders’ funds.
FIRST MORTGAGES
Paragon Mortgages
The performance of the first mortgage business was exceptionally
Paragon Mortgages enjoyed significant growth in its lending during
strong in 2004. Total first mortgage lending by the Group was
the year with loans advanced totalling £1,106.5 million, an increase
£1,674.3 million for the year, an increase of 67.8% over the previous
of 41.6% from the previous year’s £781.3 million. At 30 September
year. The buy-to-let portfolio, including those assets managed by
2004 the loan book of Paragon Mortgages stood at £2,638.1 million,
Mortgage Trust, increased by 34.8% to £4,052.0 million (2003:
an increase of 36.4% from £1,934.3 million at 30 September 2003.
£3,006.7 million), whilst total first mortgage assets, including those
In an increasingly competitive market Paragon Mortgages has
managed by Mortgage Trust, increased by 15.2% to £5,002.9 million
continued to make strong progress by focusing on the specialist
(2003: £4,341.1 million). The credit performance of the buy-to-let
needs of professional landlords.
portfolio remains exemplary, with arrears levels running at a
fraction of market levels for owner-occupied lending. The new
business pipeline at 30 September 2004 was higher than a year
earlier, providing a strong start to completions in the new
financial year.
Mortgage Trust Services plc, a subsidiary company, has been
successful in its application for permission under Part IV of the
Financial Services and Markets Act 2000 to become authorised to
carry on mortgage and/or general insurance business.
Paragon Mortgages has received, for the third year running, the
highly-prized accolade of “Buy-to-Let Lender of the Year” from the
National Association of Commercial Finance Brokers.
6 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 7
CHIEF EXECUTIVE’S REVIEW (Continued)
Mortgage Trust
NHL book
Mortgage Trust advanced £567.8 million (2003 3 months: £216.3
The NHL book reduced to £135.7 million at 30 September 2004,
million) with volumes recovering strongly from the temporary
from £176.7 million at 30 September 2003 and recorded a
reduction which followed the rationalisation of the new business
satisfactory performance over the period.
product range in favour of more profitable buy-to-let products,
the focus now being on the mid-market buy-to-let sector.
At 30 September 2004, Mortgage Trust had loans under
management of £2,229.1 million (2003: £2,230.1 million) of which
£1,450.4 million related to buy-to-let (2003: £1,127.5 million)
and £778.7 million related to owner-occupied mortgages
(2003: £1,102.6 million). The owner-occupied book is being run off.
An attractive feature of Mortgage Trust when we acquired the
business was the quality of its systems infrastructure, as this had
seen considerable investment prior to our acquisition. A major
project is currently underway to migrate the Group’s other
businesses to the Mortgage Trust platform. The first phase of this
project, which will see all first mortgage activities operating on the
new common platform, is expected to be completed in the current
financial year.
8 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 9
CHIEF EXECUTIVE’S REVIEW (Continued)
CONSUMER FINANCE
FUNDING
At 30 September 2004 the Consumer Finance book, comprising
The Group has been active in the securitisation market throughout
secured and unsecured personal loans and sales aid finance stood
the year, increasingly diversifying the investor base by issuing
at £891.3 million, (2003: £888.9 million). Aggregate loan advances
bonds denominated in US dollars and euros, as well as in sterling.
were £450.0 million during the year, compared with £479.8 million
The increased depth of this investor base has contributed to the
in the previous year. The credit performance of our consumer
reduction in coupon over LIBOR seen during the year.
books has been satisfactory and, assuming relatively full
employment, is expected to remain so.
Paragon Personal Finance
Secured personal finance advances were £305.4 million during the
year, compared with £298.9 million for the previous year. At the
year end, the secured book totalled £476.0 million (2003: £384.9
million). Volumes for the year were in line with plan and were
achieved in an increasingly competitive environment following a
very strong performance in the second half of the previous year.
Paragon Personal Finance has consolidated its position as a
In October 2003 a £715 million securitisation of mortgage assets
was completed by Paragon Mortgages (No. 6) plc; in January 2004
a £500 million securitisation of Mortgage Trust originated assets
was completed by First Flexible No. 6 plc; in May 2004 a £900
million securitisation of Paragon Mortgages and Mortgage Trust
originations was completed by Paragon Mortgages (No. 7) plc; in
October 2004 a £1.0 billion securitisation, the largest Paragon
transaction to date, of assets originated by Paragon Mortgages and
Mortgage Trust, was completed by Paragon Mortgages (No. 8) plc,
which also carried the lowest coupon of any of our buy-to-let
issues to date; and, in December 2004, a £300 million securitisation
of secured loans was completed by Paragon Secured Finance
leading supplier of loans to the broker market with confidence in
the brand remaining strong. During the period the level of new
(No.1) plc.
unsecured personal loan advances was negligible.
We expect competitive pressures in the secured loans market to
increase over the next year as a result of new entrants to the
market and a cooling of the housing market. Nevertheless,
Paragon Personal Finance will maintain its position on credit
quality and seek further growth through prudent innovation and
improved service through new technology.
During the year we replaced the Group’s corporate banking facility
with a £280 million facility to provide funding to support planned
new business generation. In addition, we have increased the
capacity of our warehouse funding line, through which we finance
all newly originated assets prior to securitisation, from £900 million
to £1.3 billion at 30 September 2004 and to £1.4 billion currently. An
additional warehouse facility of £225 million is used for most of
the originations by Mortgage Trust but in due course the majority of
originations by Mortgage Trust will be consolidated with those by
Sales Aid Finance
the rest of the Group.
During the year ended 30 September 2004, new business of £144.2
million was advanced by this division, compared with £172.3 million
in the previous year. At the year end the Sales Aid Finance book
totalled £208.6 million (2003: £254.6 million).
As we have reported previously, we have limited lending volumes in
our retail and car finance business as a result of less than
adequate returns from some of this business. Following the
removal of unprofitable distribution sources and products, the
The Group has been voted Best Issuer for Investor Reporting in the
2003 Structured Finance International Awards, from over twenty
issuers nominated.
profitability of new business written has risen significantly. We have
Nigel S Terrington
focused on streamlining the car finance distribution channels and
reducing unprofitable business relationships, and have integrated
the front-end administration of the retail finance business to
Chief Executive
improve service levels and reduce costs.
15 December 2004
As a result of these initiatives the profitability of our sales aid
finance businesses has improved. We will strive for further
improvement before increasing the capital devoted to this area.
10 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 11
BOARD OF DIRECTORS
Jonathan P L Perry
CHAIRMAN
age 65
David M M Beever
NON-EXECUTIVE DIRECTOR
age 63
Jonathan Perry joined the Group as a non-executive director in
David Beever joined Paragon as a non-executive director in August
June 1991 and was appointed Chairman in January 1992. He is a
2003. He is Chairman of KPMG Corporate Finance, Vice-Chairman
Chartered Accountant and between 1997 and 1999 was Vice-
of London & Continental Railways Ltd and a non-executive director
Chairman, Investment Banking Division, HSBC Investment Bank
of JJB Sports plc and Volex Group plc. He was previously a
plc. Previously he was a Director of Morgan Grenfell & Co Limited
Vice-Chairman of SG Warburg & Co Ltd. He is the Senior
for 15 years.
Independent Non-Executive Director.
Nigel S Terrington
CHIEF EXECUTIVE
age 45
Robert G Dench
NON-EXECUTIVE DIRECTOR
age 54
Nigel Terrington joined the Group in 1987 and became Chief
Robert Dench joined Paragon as a non-executive director in
Executive in June 1995, having held the positions of Treasurer and
September 2004. He previously held various senior positions within
Finance Director. Prior to Paragon, he worked in investment
Barclays, where, following a number of overseas appointments, he
banking. He is a member of the CFD Management Committee of
returned to the UK and served on the boards of Barclays’ Retail
the Finance and Leasing Association. He was previously the
Financial Services and Private Client businesses. He is also a
Chairman of the Intermediary Mortgage Lenders Association and
non-executive director of AXA UK plc and of Clipper Ventures plc.
was a member of the Executive Committee of the Council of
Mortgage Lenders.
Nicholas Keen
FINANCE DIRECTOR
age 46
Gavin A F Lickley
NON-EXECUTIVE DIRECTOR
age 58
Gavin Lickley joined Paragon as a non-executive director in October
2002. He retired from the Board of the Investment Banking Division
Nicholas Keen joined the Group in May 1991 and became Finance
of Deutsche Bank AG in April 2000, having previously been Head of
Director in June 1995 having previously held the position of
the Banking Division and Chairman of Morgan Grenfell & Co
Treasurer. Prior to joining the Group he worked in Corporate
Limited. He is a Chartered Accountant and is now Chairman of
Banking, Treasury and Capital Markets. He is Chairman of the
Inexus Group, an owner of gas and electricity networks and
Paragon Credit Committee.
Chairman of SAV Credit Limited, a credit card company. He is
Chairman of the Paragon Remuneration Committee.
John A Heron
DIRECTOR OF MORTGAGES
age 45
John Heron joined the Group in January 1986. He was appointed
Christopher D Newell
NON-EXECUTIVE DIRECTOR
age 44
as Marketing Director in 1990 and in 1994 played a pivotal role
Christopher Newell has been a director of Altium Capital Limited
in re-establishing the Group’s mortgage lending operations as
(formerly Apax Partners & Co. Corporate Finance) since 1990. He is
Managing Director of Paragon Mortgages. As Director of
also a director of Artemis Investment Management Limited. He is a
Mortgages, he is responsible for both Paragon Mortgages and
Chartered Accountant and joined the Board of Paragon as a non-
Mortgage Trust. He is a Fellow of the Chartered Institute of
executive director in November 2001. He is Chairman of the
Bankers and a member of the Executive Committee of the Council
Paragon Audit and Compliance Committee.
of Mortgage Lenders.
Pawan Pandya
CHIEF OPERATING OFFICER
age 40
Pawan Pandya joined the Group in December 1988. He was
appointed as Chief Operating Officer in July 2002, responsible for
all operational and IT areas of the Group. Prior to joining Paragon,
he worked in foreign exchange, credit risk management, marketing
and corporate finance.
Jonathan P L Perry
CHAIRMAN
Nigel S Terrington
CHIEF EXECUTIVE
Nicholas Keen
FINANCE DIRECTOR
John A Heron
DIRECTOR OF MORTGAGES
Pawan Pandya
CHIEF OPERATING OFFICER
David M M Beever
NON-EXECUTIVE DIRECTOR
Robert G Dench
NON-EXECUTIVE DIRECTOR
Gavin A F Lickley
NON-EXECUTIVE DIRECTOR
Christopher D Newell
NON-EXECUTIVE DIRECTOR
12 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 13
DIRECTORS’ REPORT
The directors submit their Report and the Accounts for the year
In addition, certain directors had interests in the share capital of
ended 30 September 2004 which were approved by the Board
the Company by virtue of options granted under the Company’s
on 15 December 2004.
Principal activity
The Company is a holding company co-ordinating the activities of
its subsidiary companies. The principal activities of the Group
continue to be the operation of its first mortgage and consumer
finance businesses.
The Chairman’s Statement and the Chief Executive’s Review on
pages 4 to 10 contain a review of the Group’s business during the
financial year, its current position and future prospects.
Results and dividends
executive share option schemes and awards under the Paragon
Performance Share Plan and the Deferred Bonus Scheme, details
of which are given in the Report of the Board to the Shareholders
on Directors’ Remuneration on pages 19 to 26.
On 25 November 2004 Mr R G Dench acquired 20,000 10p Ordinary
Shares in the Company.
On 30 November 2004 the following directors exercised options to
acquire 10p Ordinary Shares in the Company and disposed of the
shares thus acquired;
J P L Perry
80,000 shares
N S Terrington
170,000 shares
N Keen
J A Heron
160,000 shares
185,000 shares
The results for the year are shown in the Consolidated Profit and
Loss Account on page 34.
On 1 December 2004 options under the Paragon 2000 Executive
Share Option Scheme were granted to Mr N S Terrington (109,795
The directors recommend a final dividend of 5.7p per share (2003:
shares), Mr N Keen (82,347 shares), Mr J A Heron (44,205 shares)
3.7p per share) which, together with the interim dividend of 3.9p
and Mr P Pandya (44,205 shares).
per share (2003: 2.6p per share) paid on 30 July 2004, makes a total
of 9.6p per share (2003: 6.3p per share). After dividends, retained
profits of £43.7 million (2003: £32.8 million) have been transferred
to reserves.
Directors
On 2 December 2004 further awards under the Paragon
Performance Share Plan were granted to Mr N S Terrington (54,897
shares), Mr N Keen (41,173 shares), Mr J A Heron (22,102 shares)
and Mr P Pandya (22,102 shares).
Other than the above transactions, there have been no changes in
the directors' interests in the share capital of the Company since
The interests of the directors at the year end in the share capital of
30 September 2004.
the Company, all beneficially held, are shown below.
The directors’ have no interests in the shares or debentures of the
AT 30 SEPTEMBER 2004
ORDINARY SHARES
OF 10P EACH
AT 30 SEPTEMBER 2003
OR ON APPOINTMENT
ORDINARY SHARES
OF 10P EACH
J P L Perry
N S Terrington
N Keen
J A Heron
(appointed 15 October 2003)
P Pandya
(appointed 15 October 2003)
D M M Beever*
R G Dench*
(appointed 29 September 2004)
G A F Lickley*
C D Newell*
* Non-executive directors.
309,579
99,219
44,116
5,600
-
10,000
-
30,000
20,000
309,579
99,219
44,116
5,600
-
-
-
30,000
20,000
Company’s subsidiary companies.
Mr M J R Kelly resigned from the Board on 15 October 2003 and
Mr D A Hoare resigned from the Board on 10 February 2004.
In accordance with the Articles of Association, Mr N Keen, Mr C D
Newell and Mr R G Dench 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.
Substantial shareholdings
As at 30 November 2004, 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
Barclays Global Investors Limited
Morley Fund Management
Merrill Lynch Investment Managers
M & G Investment Management Limited
The Paragon Group of Companies PLC ESOP scheme
Framlington Investment Management
Threadneedle Asset Management Limited
Legal & General Investment Management Limited
Scottish Widows Investment Partnership
ORDINARY SHARES
15,554,836
14,372,521
8,388.975
8,362,588
6,247,884
6,239,021
4,820,000
4,282,386
4,235,579
3,799,357
% HELD
12.97%
11.99%
7.00%
6.98%
5.21%
5.20%
4.02%
3.57%
3.53%
3.17%
Corporate social responsibility
Close company status
The Group presents its policies in relation to corporate social
So far as the directors are aware, the Company is not a close
responsibility and issues such as community involvement, the fair
company for taxation purposes.
and equal treatment of staff, employment of disabled persons,
employee participation, health and safety, commitment to diversity
and the environment in the Corporate Social Responsibility Report
on pages 17 to 18.
Charitable contributions
Contributions to charitable institutions in the United Kingdom
amounted to £11,141 (2003: £11,085). Information on the Group’s
charitable activities is given in the Corporate Social Responsibility
Report on pages 17 to 18.
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.
14 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 15
DIRECTORS’ REPORT (Continued)
CORPORATE SOCIAL RESPONSIBILITY
Auditors
A resolution for the re-appointment of Deloitte & Touche LLP as
the 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 6
The authority given at the previous Annual General Meeting will
The Group believes that the long-term interests of shareholders,
Composition of the workforce, at all levels, is reviewed on an
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 £599,400, representing approximately 5% of the
Company’s issued share capital at 30 November 2004.
RESOLUTION 8
employees and customers are best served by our acting in a
annual basis and employee satisfaction with equality of opportunity
socially responsible manner. As such the Group ensures that a high
is monitored as part of the annual employee feedback surveys.
standard of corporate governance is maintained.
Human Resources policies are kept under regular review to ensure
Training and development
that they are non-discriminatory and promote equality of
opportunity. In particular, recruitment, selection, promotion,
training and development policies and practices are monitored to
During the year the Group’s accreditation under the ‘Investors in
ensure that all employees have the opportunity to train and develop
People’ scheme, which it has held since 1997, was renewed. This
according to their abilities.
demonstrates the Group’s commitment to the training and
Section 80 of the Companies Act 1985 states that the directors may
will enable the Company to purchase, in the market, up to a
Group is designed to assist employees in developing their careers
This resolution, which is being proposed as a Special Resolution,
development of employees. The staff appraisal system used by the
Employees’ involvement
not exercise a company’s power to allot its unissued shares unless
maximum of 11.9 million of the Company’s ordinary shares
within the Group and to identify and provide appropriate training
The directors recognise the benefit of keeping employees informed
given authority to do so by resolution of the shareholders in general
(approximately 10% of the issued share capital at 30 November
opportunities. The Group’s corporate training and development
of the progress of the business. During the year the Group has
meeting.
2004) for cancellation at a minimum price of 10p per share and a
strategy focuses on providing opportunities to develop all of its staff
instituted a Staff Forum, attended by elected staff representatives
maximum price of not more than 105% of the average middle
and is central to achievement of the Group’s business objectives.
from each area of the business. This exists primarily to facilitate
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 10 February 2004 and will expire at the end of
the forthcoming Annual General Meeting. Resolution 6 seeks to
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.
renew, for a further year, the present authority of the directors to
The directors would not expect to purchase ordinary shares in the
allot ordinary shares up to an aggregate nominal value of
market unless, in the light of market conditions prevailing at the
£4,264,200 representing approximately 35.6% of the Company’s
time, they considered that to do so would enhance earnings per
issued capital at 30 November 2004 and being one third of issued
share and would be in the best interests of shareholders generally.
capital plus shares issuable under option. The directors have no
Any purchases made by the Company will be announced no later
present intention of exercising this authority, which will expire at
than 7.30 a.m. on the business day following the transaction.
the conclusion of the following Annual General Meeting.
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.
Approved by the Board of Directors and signed on behalf of
the Board.
John G Gemmell
Company Secretary
15 December 2004
Equality and diversity
The Group is committed to providing a working environment in
which employees feel valued and respected and are able to
contribute to the success of the business, and to employing a
workforce that recognises the diversity of customers. Employees
are requested to co-operate with the Group’s efforts to ensure the
policy is implemented in full.
The Group’s aim is that its employees should be able to work in an
environment free from discrimination, harassment and bullying and
communication and dissemination of information throughout the
Group and provides a means by which the employees can be
consulted on matters affecting them.
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 Company operates a Sharesave share option scheme and a
profit sharing scheme, both of which enable employees to benefit
from the performance of the business.
that employees, job applicants, customers, retailers, business
The directors encourage the involvement of employees at all levels
introducers and suppliers should be treated fairly regardless of:
by the staff appraisal process and through communication between
• race, colour, nationality, ethnic origins or community background
directors, team leaders and teams.
• gender, sexual orientation, marital or family status
• religious or political beliefs or affiliations
• disability, impairment or age
• real or suspected infection with HIV/AIDS
• membership or non-membership of a trade union
and that they should not be disadvantaged by conditions or
requirements that are unjust or unfair.
16 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 17
CORPORATE SOCIAL RESPONSIBILITY (Continued)
REPORT OF THE BOARD TO THE SHAREHOLDERS
ON DIRECTORS’ REMUNERATION
Environmental policy
Health and safety
The Group complies with all applicable laws and regulations
The office environment is managed so as to comply with the
relating to the environment and operates a Green Charter,
requirements of the Health and Safety at Work Act 1974, Workplace
implemented by:
• Ensuring all buildings occupied by the Group are managed
efficiently by the facilities team and building surveyors,
for example:
- using low energy lightbulbs where appropriate
Health, Safety and Welfare Regulations 1992, COSHH Regulations
1988, Disability Discrimination Act 1995, Fire Precautions
(Workplace) Regulations 1997 and the Control of Asbestos at Work
Regulations 2002.
Appropriate procedures have been established to monitor and
maintain the Group’s Health and Safety standards. Monitoring is
- maintaining building temperatures within CIBSE guidelines
undertaken internally and by external consultants and training is
- using light controls to reduce lighting in unoccupied areas
organised for staff from time to time.
- ensuring energy audits are carried out as part of
condition surveys
Charitable contributions
• Providing facilities and negotiating contracts to enable staff to
The Group contributes to registered charities serving the local
re-cycle used products such as waste paper, toner cartridges, etc.
communities in which it operates. In addition to the charitable
• Controlling business travel and providing opportunities for staff
to travel to work in various ways, including installing cycle racks
and showers (where possible).
• Displaying a Paragon Green Charter at all sites to encourage
staff to be environmentally friendly at all times.
contributions shown in the directors’ report the Group made
contributions of £68,406 to the Foundation for Credit Counselling.
The Group supports the efforts of the Paragon Charity Committee,
which is made up of volunteer employees and which organises a
variety of fundraising activities throughout the year. All employees
have the opportunity to nominate a charity and a vote is carried out
to select the beneficiary of the year’s events.
This report has been prepared in accordance with the Directors’
Remuneration Report Regulations 2002. The report also meets the
relevant requirements of the Listing Rules of the Financial Services
Authority and describes how the Board has applied the Principles
of Good Governance relating to directors’ remuneration. As
required by the Regulations, a resolution to approve the report will
be proposed at the Annual General Meeting of the Company.
Certain parts of this report are required to be audited. Where
disclosures are subject to audit, they have been marked as such.
UNAUDITED INFORMATION
Remuneration committee
The Committee consists of three non-executive directors: Gavin
Lickley, David Beever and Christopher Newell.
The Chairman of the Remuneration Committee is Gavin Lickley.
None of the directors comprising the Committee has any personal
financial interest (other than as a shareholder), conflict of interest
arising from cross-directorships or day-to-day involvement in
running the business.
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. The Committee also reviews the level and
structure of remuneration of senior management.
In determining the directors’ remuneration for the year, the
Committee consulted Mr J P L Perry (Chairman), Mr N S Terrington
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 are 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 and
comparably sized FTSE 350 companies from all sectors.
All executive directors are remunerated by a combination of fixed
and performance related elements. Fixed remuneration consists of
salary, pension scheme contributions and benefits in kind.
Performance related remuneration consists of participation in the
annual bonus plan and the award of share options and of shares
under the performance share plan from time to time. The
performance related elements of remuneration are intended to
provide a significant proportion of the directors' potential total
remuneration.
Salary
(Chief Executive) and Mr D A Hoare (former non-executive director
An executive director’s salary is determined by the Committee at
and former Chairman of the Committee) about its proposals. The
the beginning of each year. In deciding appropriate levels the
Committee also appointed New Bridge Street Consultants LLP to
Committee considers remuneration levels within the Group as a
provide advice on structuring directors’ remuneration packages.
whole and relies on objective research which gives up-to-date
New Bridge Street Consultants LLP advised the Company on
information on comparable companies. Directors’ contracts of
various sundry remuneration matters during the year.
service, which include details of remuneration, will be available for
inspection at the Annual General Meeting.
18 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 19
REPORT OF THE BOARD TO THE SHAREHOLDERS
ON DIRECTORS’ REMUNERATION (Continued)
Performance bonuses
Share options and other share awards
Bonuses up to a normal maximum of 125% of salary in cash can be
The Company’s policy is to grant options to directors under the
earned under performance related schemes, based upon individual
Paragon 2000 Executive Share Option Scheme at the discretion of
performance and that of the Group as a whole, at the discretion of
the Remuneration Committee, taking into account individual
the Remuneration Committee. Bonuses are normally paid in
performance, up to a maximum of twice annual remuneration in
November but are accrued in the year to which they relate.
any financial year. For options to be exercisable, the scheme
Directors have the option to receive up to one quarter of their cash
bonus in the form of shares, such shares being deemed to be
acquired at the average price during the last five dealing days in the
September preceding the award. Directors are encouraged to take
up this option by a supplementary award of an equal number of
additional shares. The shares comprising both the basic and the
supplementary award vest after three years.
In respect of the year under review, the Remuneration Committee
set the maximum cash bonus awards at 135% of salary, this level
being marginally in excess of the normal limit of 125%. This
variation from policy was regarded as appropriate to recognise and
reward the significant advance achieved in Group profits and the
highly successful integration of Mortgage Trust.
Pension contributions
During the year, four 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
Mr J P L Perry 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
requires the Company's total shareholder return (TSR) over at
least three years to be higher than at least half of the TSRs for the
following companies selected from the FTSE All Share Banks and
Speciality and Other Finance sectors; Abbey National (included up
to 12 November 2004), Alliance & Leicester, Cattles, Hitachi Credit
UK, London Scottish Bank, Northern Rock, Provident Financial and
HBOS, these being a range of companies which, in the opinion of
the Remuneration Committee, are engaged in businesses similar
to the business of the Group.
The Paragon Performance Share Plan was approved by
shareholders at the Annual General Meeting on 11 February 2003.
The maximum award is twice salary in any financial year. When
aggregated with option grants under the Paragon 2000 Executive
Share Option Scheme the maximum award will be over shares
with a value of twice remuneration in any financial year. Under the
plan the vesting of awards is subject to a relative TSR target. The
Company’s TSR over the three year period following grant will be
compared to that of the constituents of the FTSE All Share Banks
and Speciality and Other Finance sectors. No part of an award
shall vest for a below median performance. 25% of the award shall
vest for a median performance. Awards will only fully vest for an
upper quartile performance, and between these two points awards
will vest on a straight line basis. The awards will lapse to the
extent that the performance condition has not been satisfied on
the third anniversary.
every year of eligible service. Where pension contributions are
TSR has been selected as the performance measure for these
capped, additional payments are made to enable further provision.
awards because the Remuneration Committee believes it is the
The executive directors contribute 5% of eligible salary as
clearest measure that aligns the interests of executives with those
participants in the Plan.
The changes in pension entitlements arising in the financial year,
the disclosure of which is required by the Financial Services
Authority, are given on page 23. 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.
of other shareholders. The Company's TSR performance and that
of the peer companies is independently calculated by New Bridge
Street Consultants LLP before being reviewed and confirmed by the
Remuneration Committee.
Executive directors are also entitled to receive options under the
Paragon 1999 Sharesave Scheme, on the same terms as
other employees.
Directors’ contracts
All executive directors hold one year rolling contracts in line with
current market practice and the Remuneration Committee reviews
Performance graph
The following graph shows the Company’s performance, measured
by TSR, compared with the performance of the FTSE All Share
Speciality and Other Finance sector index, also measured by TSR.
The Speciality and Other Finance sector has been selected for this
comparison because it is the index that contains the largest
number of companies in the comparator group used by the
Company to determine the vesting of awards under the
Performance Share Plan for executive directors.
5 YEAR RETURN INDEX FOR THE FTSE ALL SHARE SPECIALITY
AND OTHER FINANCE SECTOR AS AT 30 SEPTEMBER 2004
200
180
160
140
120
100
80
60
40
20
0
the terms of these contracts regularly.
The current contracts are dated as follows: -
J P L Perry
1 March 2004
N S Terrington
1 September 1990
(amended 16 February 1993)
N Keen
J A Heron
6 February 1996
1 September 1990
P Pandya
1 October 1994
(amended 14 January and 8 February 1993)
In the event of early termination, the directors’ contracts provide for
the payment of salary in lieu of notice.
Of the directors seeking re-election at the Annual General Meeting,
Mr N Keen 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. From 1 February 2004 all non-executive
directors have been paid an annual base fee of £25,000 plus £2,000
for membership of each committee, £5,000 for Remuneration
1999
2000
2001
2002
2003
2004
Committee and Audit and Compliance Committee chairmanship
The Paragon Group of Companies PLC
FTSE All share speciality and other finance sector
This graph shows the value, by 30 September 2004, of £100
invested in The Paragon Group of Companies PLC on 30 September
1999, compared with £100 invested in the FTSE Speciality and
Other Finance index. The other points plotted are the values at the
intervening financial year ends.
(inclusive of membership) and £3,000 for the senior independent
director. Prior to 1 February non-executive directors received
£25,000 per annum plus an additional fee of £5,000 for the
chairmen of the Remuneration and Audit committees.
Current terms of engagement apply for the following periods:
C D Newell
G A F Lickley
1 November 2004 to 1 November 2007
21 October 2002 to 21 October 2005
D M M Beever
8 August 2003 to 8 August 2006
R G Dench
29 September 2004 to 29 September 2007
Non-executive directors are not eligible to participate in any of the
Company’s incentive or pension schemes.
The Chairman of the Remuneration Committee will be available
to answer questions on remuneration policy at the Annual
General Meeting.
20 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 21
REPORT OF THE BOARD TO THE SHAREHOLDERS
ON DIRECTORS’ REMUNERATION (Continued)
AUDITED INFORMATION
Directors’ emoluments
The emoluments of directors holding office during the year were:
Executive
J P L Perry
N S Terrington
N Keen
J A Heron
P Pandya
Non-executive
A D Chambers
D M M Beever
R G Dench
D A Hoare
M J R Kelly
G A F Lickley
C D Newell
2004
2003
SALARY
AND FEES
£000
BENEFITS
IN KIND
£000
ANNUAL
BONUS
£000
LOSS OF
OFFICE
£000
2004
TOTAL
£000
2003
TOTAL
£000
181
278
212
136
144
-
31
-
9
1
31
33
1,056
730
5
1
6
12
6
-
-
-
-
-
-
-
30
12
122
270
202
105
105
-
-
-
-
-
-
-
804
542
-
-
-
-
-
-
-
-
25
25
-
-
50
25
308
549
420
253
255
-
31
-
34
26
31
33
1,940
1,309
322
483
359
-
-
45
4
-
25
23
23
25
1,309
Benefits in kind comprise private health cover, fuel benefit, life assurance and company car provision.
Mr J P L Perry is the Chairman and Mr N S Terrington is the highest paid director.
Directors’ pensions
The total amount charged to the profit and loss account of the Group in respect of pension provision for directors was £197,000 (2003: £155,000).
Mr N S Terrington, Mr N Keen, Mr J A Heron and Mr P Pandya were members of the Group defined benefit pension scheme during the year.
The amounts shown below describe their entitlement in accordance with paragraph 12.43A(c) of the Listing Rules.
INCREASE IN ACCRUED
PENSION DURING YEAR
EXCLUDING ANY
INCREASE FOR INFLATION
£000
TRANSFER VALUE OF
INCREASE
LESS DIRECTORS’
CONTRIBUTIONS
£000
11
3
7
4
81
27
53
22
ACCUMULATED TOTAL
ACCRUED PENSION AT
30 SEPTEMBER 2004
£000
94
45
53
41
ACCUMULATED TOTAL
ACCRUED PENSION AT
30 SEPTEMBER 2003
OR AT APPOINTMENT
£000
80
41
45
35
N S Terrington
N Keen
J A Heron
P Pandya
The pension entitlement shown is that which would be paid annually on retirement based on services to 30 September 2004. 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.
The following disclosures describe the pension benefits earned in the year in accordance with Schedule 7(A) of the Companies Act 1985.
AGE
DIRECTORS’
AT CONTRIBUTIONS
IN THE
YEAR
YEAR
END
INCREASE
IN
ACCRUED
PENSION
IN THE YEAR
N S Terrington
N Keen
J A Heron
P Pandya
£000
£000
13
5
7
7
14
5
8
5
44
46
45
39
TOTAL
ACCRUED
PENSION AT
YEAR END
ACCUMULATED TRANSFER VALUE
OF ACCRUED
BENEFITS AT
30 SEPTEMBER
2003 OR ON
APPOINTMENT
£000
£000
94
45
53
41
611
339
362
218
TRANSFER
VALUE OF
ACCRUED
BENEFITS AT
30 SEPTEMBER
2004
£000
781
411
456
268
DIFFERENCE
IN TRANSFER
VALUES
LESS
CONTRIBUTIONS
£000
157
67
88
44
The pension entitlement shown is that which would be paid annually on retirement based on services to 30 September 2004. The
contributions shown are those paid or payable by the directors under the terms of the plan. 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.
The transfer value has been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11 ‘Retirement Benefit
Schemes – Transfer Values’ published by the Institute of Actuaries and the Faculty of Actuaries.
The transfer values disclosed above do not represent a sum paid or payable to the individual director. Instead they represent a potential
liability of the pension scheme.
During the year the Group made contributions of £81,000 (2003: £74,000) in respect of further pension provision for Mr N Keen. Contributions
of £40,000 (2003: £39,000) in respect of Mr J P L Perry were paid into his personal pension scheme.
22 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 23
REPORT OF THE BOARD TO THE SHAREHOLDERS
ON DIRECTORS’ REMUNERATION (Continued)
Share option schemes
Details of individual options held by the directors at 30 September 2003 and 30 September 2004 are:
Paragon Performance Share Plan
Awards under this plan comprise a right to acquire shares in the Company for nil or nominal payment and will vest on the third anniversary of
their granting to the extent that the applicable performance criteria have been satisfied. All awards to date are subject to the performance
DATE FROM
WHICH
EXERCISABLE
EXPIRY DATE
OPTION
PRICE
J P L PERRY N S TERRINGTON
N KEEN
J A HERON
P PANDYA
criteria outlined in the policy section of this report.
NUMBER
NUMBER
NUMBER
NUMBER
NUMBER
are:
Details of individual entitlements of the directors under the Paragon Performance Share Plan at 30 September 2003 and 30 September 2004
Options held at 30 September 2003 or at date of appointment:
13/03/1998*
31/03/2001*
31/03/2001
11/01/2002*
17/02/2003†
26/05/2003
01/08/2005
27/11/2004†
29/07/2005†
14/03/2006†
01/08/2006
13/03/2005
31/03/2008
31/03/2005
11/01/2009
17/02/2010
26/05/2007
01/02/2006
27/11/2011
29/07/2012
14/03/2013
01/02/2007
97.33p
218.00p
218.00p
147.50p
147.00p
148.50p
120.64p
248.00p
186.50p
186.50p
183.04p
417,646
120,000
80,000
-
100,000
200,000
-
170,000
20,000
122,368
5,053
-
255,000
170,000
300,000
100,000
200,000
13,987
300,000
60,000
191,053
-
-
240,000
160,000
-
-
-
-
250,000
60,000
138,947
5,053
-
48,000
32,000
80,000
30,000
60,000
-
60,000
80,000
65,789
5,053
-
-
-
-
-
-
-
60,000
80,000
68,421
-
DATE FROM
WHICH
EXERCISABLE
EXPIRY DATE
MARKET
PRICE AT
AWARD DATE
J P L PERRY N S TERRINGTON
N KEEN
J A HERON
P PANDYA
NUMBER
NUMBER
NUMBER
NUMBER
NUMBER
Awards outstanding at 30 September 2003 or at date of appointment:
13/03/2006
02/07/2006
13/09/2006
02/01/2007
186.50p
291.00p
61,184
40,790
95,526
63,684
69,474
46,316
32,895
21,930
34,211
22,807
Awards made in the year:
18/12/2006
22/06/2007
18/06/2007
22/12/2007
338.90p
350.25p
31,250
28,036
51,953
46,610
39,063
35,045
21,875
19,625
21,875
19,625
101,974
159,210
115,790
54,825
57,018
1,235,067
1,590,040
854,000
460,842
208,421
At 30 September 2004
161,260
257,773
189,898
96,325
98,518
Options granted in the year:
08/12/2006†
08/12/2013
339.00p
58,997
98,083
73,746
41,298
41,298
Options exercised in the year:
On 23/02/04
13/03/1998*
13/03/2005
97.33p
(417,646)
On 09/07/04
11/01/2002*
17/02/2003†
26/05/2003
11/01/2009
17/02/2010
26/05/2007
147.50p
147.00p
148.50p
-
-
-
-
-
-
-
-
-
-
-
-
(80,000)
(30,000)
(15,000)
-
-
-
-
At 30 September 2004
876,418
1,688,123
927,746
377,140
249,719
* 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 total shareholder return for at least
half of a specified group of comparator companies.
Aggregate gains before taxation made by directors on the exercise of share options during the year were £1,467,000 (2003: £1,293,000).
At 30 September 2004 The Paragon Group of Companies PLC share price was 341.0p (2003: 334.0p) and the range during the year then
ended was 295.0p to 400.0p (2003: 159.5p to 344.5p). The share price on 23 February 2004 was 396.0p and on 9 July 2004 323.0p.
24 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 25
REPORT OF THE BOARD TO THE SHAREHOLDERS ON
DIRECTORS’ REMUNERATION (Continued)
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RELATION
TO FINANCIAL STATEMENTS
Deferred Bonus Scheme
Details of individual entitlements of the directors under the Deferred Bonus Scheme at 30 September 2003 and 30 September 2004 are:
The directors are required by the Companies Act 1985 to prepare
The directors have responsibility for ensuring that the Company
financial statements for each financial year which give a true and
keeps accounting records which disclose with reasonable accuracy
fair view of the state of affairs of the Company and the Group as at
the financial position of the Company and which enable them to
AWARD DATE
TRANSFER
DATE
MARKET
PRICE AT
AWARD DATE
J P L PERRY N S TERRINGTON
N KEEN
J A HERON
P PANDYA
the end of the financial year and of the profit or loss for the
ensure that the financial statements comply with the Companies
financial year.
Act 1985.
NUMBER
NUMBER
NUMBER
NUMBER
NUMBER
The directors consider that in preparing the financial statements
The directors have general responsibility for taking such steps as
Awards outstanding at 30 September 2003 or at date of appointment:
-
-
-
-
-
Awards made in the year:
27/02/2004
01/10/2006
387.60p
29,940
45,284
32,934
13,473
16,467
At 30 September 2004
29,940
45,284
32,934
13,473
16,467
Under the Deferred Bonus Scheme the shares awarded will be transferred to the scheme participants as soon as is reasonably practicable
after the transfer date.
Under the Deferred Bonus Scheme, the following awards are due to be granted in respect of bonuses for the year ended 30 September 2004:
(on pages 34 to 72), the Company has used appropriate accounting
are reasonably open to them to safeguard the assets of the Group
policies, consistently applied and supported by reasonable and
and to prevent and detect fraud and other irregularities.
prudent judgements and estimates, and that all accounting
standards which they consider to be applicable have been followed.
J P L Perry
14,113 shares
N S Terrington
52,694 shares
N Keen
J A Heron
P Pandya
39,490 shares
20,528 shares
20,528 shares
Signed on behalf of the Board of Directors
Gavin A F Lickley
Chairman of the Remuneration Committee
15 December 2004
26 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 27
INDEPENDENT AUDITORS’ REPORT
TO THE MEMBERS OF THE PARAGON GROUP OF COMPANIES PLC
CORPORATE GOVERNANCE
We have audited the financial statements of The Paragon Group of
We read the directors’ report and the other information contained
The Combined Code, which sets out Principles of Good Corporate
All directors are able to take independent professional advice in the
Companies PLC for the year ended 30 September 2004 which
in the annual report for the above year as described in the contents
Governance and Code provisions, was issued by the London Stock
furtherance of their duties whenever it is considered appropriate to
comprise the consolidated profit and loss account, the balance
section including the unaudited part of the directors’ remuneration
sheets, the consolidated cash flow statement and the related notes
report and consider the implications for our report if we become
1 to 38 together with the reconciliation of movement in
aware of any apparent misstatements or material inconsistencies
consolidated shareholders’ funds. These financial statements have
with the financial statements.
been prepared under the accounting policies set out therein. We
have also audited the information in the part of directors’
remuneration report that is described as having been audited.
This report is made solely to the Company’s members, as a body, in
accordance with section 235 of the Companies Act 1985. Our audit
work has been undertaken so that we might state to the Company’s
members those matters we are required to state to them in an
auditors’ report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company’s members as
a body, for our audit work, for this report, or for the opinions we
have formed.
Respective responsibilities of
directors and auditors
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 and the part of
the directors’ remuneration report described as having been
audited. It also includes an assessment of the significant estimates
and judgements made by the directors in the preparation of the
financial statements, and of whether the accounting policies are
appropriate to the circumstances of the Company and the Group,
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
As described in the statement of directors’ responsibility, the
assurance that the financial statements and the part of the
Company’s directors are responsible for the preparation of the
directors’ remuneration report described as having been audited
financial statements in accordance with applicable United Kingdom
are free from material misstatement, whether caused by fraud or
law and accounting standards. They are also responsible for the
other irregularity or error. In forming our opinion we also evaluated
preparation of the other information contained in the annual report
the overall adequacy of the presentation of information in the
including the directors’ remuneration report. Our responsibility is to
financial statements.
audit the financial statements and the part of the directors’
remuneration report described as having been audited in
accordance with relevant United Kingdom legal and regulatory
requirements and auditing standards.
Opinion
In our opinion;
We report to you our opinion as to whether the financial statements
• the financial statements give a true and fair view of the state
give a true and fair view and whether the financial statements and
of affairs of the Company and the Group as at 30 September
the part of the directors’ remuneration report described as having
2004 and of the profit of the Group for the year then ended; and
been audited have been 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 of the
Financial Services Authority and we report if it does not. We are not
required to consider whether the Board’s statements on internal
control cover all risks and controls, or form an opinion on the
effectiveness of the Group’s corporate governance procedures or its
risk and control procedures.
• the financial statements and the part of the directors’
remuneration report described as having been audited have
been properly prepared in accordance with the Companies
Act 1985.
Deloitte & Touche LLP
Chartered Accountants and Registered Auditors
Birmingham
15 December 2004
Exchange in June 1998. Throughout the year the Company has
do so.
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
The Board also operates through a number of committees covering
certain specific matters, these being:
• The Remuneration Committee, consisting of Gavin Lickley, who
chairs the committee, David Beever and Christopher Newell.
with appear below.
• The Audit and Compliance Committee, consisting of Christopher
The Board notes the publication in July 2003 of the revised
Combined Code issued by the Financial Reporting Council, which
applies to listed companies for periods commencing on or after
1 November 2003 (“the revised Combined Code”). The Company
will report formally on its compliance with the revised Combined
Code, as required under the Listing Rules, next year. However, the
Board has reviewed the main and supporting principles and
provisions set out in the revised Combined Code and is taking steps
to ensure that it will be in a position to meet its requirements.
Directors
Newell, who chairs the committee, David Beever and Gavin
Lickley. The committee meets at least three times per year. It
monitors the integrity of the Group’s financial reporting, reviews
the Group’s internal control and risk management systems,
monitors and reviews the effectiveness of the Group’s internal
audit function, monitors the relationship between the Group and
the external auditors and provides a forum through which the
Group’s external and internal audit functions report to the non-
executive directors. The committee is also responsible for
ensuring that the system and controls for regulatory compliance
are effective.
• The Nomination Committee, consisting of Jonathan Perry, who
The Board of Directors comprises the Chairman, four executive and
chairs the committee, Nigel Terrington and two non-executive
four non-executive directors, all of whom bring to the Company a
directors, David Beever and Christopher Newell. The committee
broad and valuable range of experience. Jonathan Perry has been
is convened as required to nominate candidates for membership
Chairman since February 1992 and Nigel Terrington Chief
of the Board, although ultimate responsibility for appointment
Executive since June 1995. In accordance with the Code, all
rests with the Board.
directors will submit themselves for re-election at least once in
every three years. The names of the directors in office at the date of
this report and their biographical details are set out on pages 12
and 13.
The division of responsibilities between the Chairman and Chief
Executive is clearly established, set out in writing and agreed by the
Board. There is a strong non-executive representation on the
Board, including David Beever who has been nominated as the
senior independent non-executive director. This provides effective
balance and challenge. The Board meets regularly throughout the
• The Asset and Liability Committee, consisting of appropriate
heads of functions 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 senior
executives and chaired by Nicholas Keen, the Finance Director.
It meets regularly and is responsible for establishing credit
policy and monitoring compliance therewith.
All Board committees operate within defined terms of reference.
year and is responsible for overall Group strategy, for approving
The composition of the Board and its committees is kept under
major agreements, transactions and other financing matters and
review, with the aim of ensuring that there is an appropriate
for monitoring the progress of the Group against budget. All
balance of power and authority between executive and non-
directors receive sufficient relevant information on financial,
executive directors and that the directors collectively possess the
business and corporate issues prior to meetings and there is a
skills and experience necessary to direct the Company and the
formal schedule of matters reserved for decision by the Board.
Group’s business activities.
All the non-executive directors are independent of management
and all are appointed for fixed terms. They are kept fully informed
of all relevant operational and strategic issues and bring a strongly
independent and experienced judgement to bear on these issues.
28 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 29
CORPORATE GOVERNANCE (Continued)
There is an established process for external appointments through
the Nomination Committee. Ultimately, the appointment of any new
director is a matter for the Board. Executive director appointments
are based on merit and business need. Non-executive
appointments are based upon the candidates’ profiles matching
those drawn up by the Nomination Committee. In all cases the
Board approves the appointment only after careful consideration.
The Board, individual directors and Board committees are
appraised annually. The performance of the Chief Executive is
appraised by the Chairman. The performance of the Finance
Director and the other executive directors is appraised by the Chief
Executive in conjunction with the Chairman. The results of these
appraisals are presented to the Remuneration Committee for
consideration and determination of remuneration.
The Board utilises the services of an external consultant to
facilitate a Board evaluation. All Board directors are required to
complete a detailed questionnaire on the performance of the Board
and Board committees and the Board subsequently discusses the
results of the evaluation.
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 is held in London during business
hours and 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 announced.
The Chairman, Chief Executive and Finance Director have a full
programme of meetings with institutional investors during the
course of the year and the Company’s web site at www.paragon-
group.co.uk provides access to information on the Company and its
businesses.
Accountability and audit
The non-executive directors meet at least annually to review the
Detailed reviews of the performance of the Group’s main business
performance of the Chairman.
Directors’ remuneration
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 16 to present a balanced and
understandable assessment of the Company’s position and
The Remuneration Committee reviews the performance of
prospects.
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 19 to 26.
The directors’ responsibility for the financial statements is
described on page 27.
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 2004 and
to the date of these financial statements. The directors 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 provide reasonable,
but not absolute, assurance against the risk of 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.
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 has a programme of
regular presentations from senior management to enable the
Board 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 and Compliance Committee. The internal audit work plan is
approved annually by the Audit and Compliance 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 2004 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.
30 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 31
CONTACTS
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 LLP
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
Hoare Govett Limited
250 Bishopsgate
London EC2M 4AA
UBS Limited
1 Finsbury Avenue
London EC2M 2PP
THE ACCOUNTS
32 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 33
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR TO 30 SEPTEMBER 2004
CONSOLIDATED BALANCE SHEET
30 SEPTEMBER 2004
2004
2003
Notes
£m
£m
£m
£m
2004
Notes
£m
£m
2003
RESTATED NOTE 1(r)
£m
£m
Interest receivable
Interest payable and similar charges
Net interest income
Other operating income
Total operating income
Operating expenses
Exceptional reorganisation costs
Other operating expenses
Amortisation of negative goodwill
Total 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
3
4
5
7
9
11
13
14
14
412.0
(331.4)
80.6
40.2
120.8
-
(43.9)
5.2
(3.9)
(37.9)
2.1
(38.7)
(11.1)
71.0
(16.3)
54.7
(11.0)
43.7
48.0p
46.2p
272.0
(195.5)
76.5
31.0
107.5
(39.7)
(15.9)
51.9
(11.6)
40.3
(7.5)
32.8
35.5p
34.8p
There have been no recognised gains or losses other than the profit for the current and preceding years.
The results for the current and preceding years relate entirely to continuing operations.
There is no material difference between the results as stated above and those determined on the historical cost basis.
Assets employed
Fixed assets
Intangible assets
Negative goodwill
Tangible assets
Investments
Assets subject to non-recourse finance
Non-recourse finance
Loans to customers
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
Share capital and reserves
Own shares
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 15 December 2004.
Signed on behalf of the Board of Directors
N S Terrington
Chief Executive
N Keen
Finance Director
15
16
17
17
18
21
22
23
24
24
24
25
27
29
29
1,557.7
(1,520.3)
37.4
4,492.5
3.4
8.8
230.5
172.0
68.8
(70.2)
270.1
(14.0)
3.4
(18.8)
4.2
2,361.6
(2,285.3)
76.3
3,051.3
4,529.9
4,519.3
3,127.6
3,113.0
3.8
9.4
144.8
150.5
414.7
4,934.0
308.5
3,421.5
12.0
11.9
67.6
(70.2)
225.8
268.7
280.7
(12.3)
268.4
5.6
223.2
235.1
(9.8)
225.3
7.6
66.4
4,593.6
128.0
3,060.6
4,660.0
4,934.0
3,188.6
3,421.5
34 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 35
HOLDING COMPANY BALANCE SHEET
30 SEPTEMBER 2004
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR TO 30 SEPTEMBER 2004
2004
Notes
£m
£m
2003
RESTATED NOTE 1(r)
£m
£m
19
22
23
24
24
24
25
29
426.5
342.1
51.4
0.6
92.7
4.0
52.0
478.5
96.7
438.8
12.0
11.9
68.8
51.3
162.6
67.6
36.1
138.3
282.7
294.7
(12.3)
282.4
196.1
478.5
242.0
253.9
(9.8)
244.1
194.7
438.8
Assets employed
Fixed assets
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
Share capital and reserves
Own shares
Creditors
Amounts falling due within one year
Approved by the Board of Directors on 15 December 2004.
Signed on behalf of the Board of Directors
N S Terrington
Chief Executive
N Keen
Finance Director
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
31
32(a)
32(b)
34
32(c)
RECONCILIATION OF MOVEMENT IN
CONSOLIDATED SHAREHOLDERS’ FUNDS
FOR THE YEAR TO 30 SEPTEMBER 2004
Profit attributable to shareholders
Dividend
Purchase of own shares by ESOP Trust
Exercise of options through ESOP Trust
Exercise of other share options
Charge for long term incentive plan
Net movement in shareholders’ funds
Opening shareholders’ funds
As previously reported
Prior period adjustment
As restated
Closing shareholders’ funds
2004
£m
129.3
(14.6)
(685.8)
-
(8.6)
(579.7)
(85.7)
686.5
21.1
2003
RESTATED NOTE 1(r)
£m
108.2
(14.4)
(626.2)
(26.7)
(6.6)
(565.7)
(27.5)
612.6
19.4
2004
2003
£m
£m
RESTATED NOTE 1(r)
£m
£m
54.7
(11.0)
(2.9)
0.4
1.0
0.9
43.1
225.3
268.4
40.3
(7.5)
(2.2)
1.2
1.3
0.2
33.3
192.0
225.3
200.8
(8.8)
234.9
(9.6)
36 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 37
NOTES TO THE ACCOUNTS
FOR THE YEAR TO 30 SEPTEMBER 2004
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 2004. 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) Negative Goodwill Negative goodwill arising from the
purchase of subsidiary undertakings, representing the
excess of the fair values of acquired assets over the fair
value of the purchase consideration, is held on the
balance sheet and credited to the profit and loss
account over the period expected to be benefited by the
acquisition, within other operating expenses.
(d) Tangible fixed assets Tangible fixed assets are stated at
cost less accumulated depreciation.
(e) 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
over the life of the lease
Computer equipment
25% per annum
Furniture, fixtures and office equipment 15% per annum
Motor vehicles
25% per annum
(f) 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.
(g) Assets subject to non-recourse finance Certain
mortgage loans originated by subsidiary companies had
previously been sold to special purpose vehicle
companies on a non-recourse basis. The outstanding
amount of these loans is disclosed on the face of the
balance sheet, with the non-recourse finance deducted
from them in accordance with Financial Reporting
Standard 5 – ‘Reporting the Substance of Transactions’.
(h) Fixed assets - investments The Company’s investments
in subsidiary companies are valued by the Directors at
the Company’s share of the book value of their
underlying net tangible assets.
(i) 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.
(j) 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.
(k) 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.
(l) 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.
(m)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.
(n) 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.
(o) 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.
(p) 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 5.
(q) 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 charge to the profit and loss account for providing
pensions under defined contribution pension schemes
is equal to the contributions payable to such schemes
for the year.
The Group has adopted the transitional disclosure
requirements of Financial Reporting Standard 17 –
‘Retirement Benefits’.
(r) Own shares The balance sheets as at 30 September
2003 have been restated to reflect the implementation
of UITF Abstract 38 – ‘Accounting for ESOP Trusts’
which requires that shares held by the trustee of the
Group’s share option schemes are shown on the
balance sheet as a deduction in arriving at Equity
Shareholders’ Funds, rather than as investment in
own shares within fixed assets. The impact on the cash
flow statement is the reclassification of share purchases
from capital expenditure to financing and the inclusion
of cash balances held by the ESOP Trust as cash rather
than being included as investment in own shares. There
is no impact on the consolidated profit and loss account.
Own shares are stated at cost.
(s) Long term incentive plan The cost of shares to be
issued under the terms of the Paragon Performance
Share Plan is charged to the profit and loss account
over the period between the date of grant and the
vesting date.
(t) 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 debts.
(u) Brokers’ commissions Brokers’ commissions payable
on mortgage loans are amortised over an appropriate
period. Unamortised commission balances are included
within ‘Loans to Customers’.
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’.
38 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 39
NOTES TO THE ACCOUNTS (Continued)
FOR THE YEAR TO 30 SEPTEMBER 2004
2. ACQUISITION AND GOODWILL
The fair value of the net assets acquired on the purchase of Britannic Money plc on 30 June 2003 has been revised
from £40.8m to £41.2m due to the reversal of provisions at that date which were not subsequently required.
Therefore negative goodwill arising on the acquisition is now calculated to be £21.3m (note 15).
3. INTEREST RECEIVABLE
Interest on loans to customers
Interest on assets subject to non-recourse finance
Other interest receivable
4. INTEREST PAYABLE AND SIMILAR CHARGES
On asset backed loan notes
On bank loans and overdrafts
On non-recourse finance
Amortisation of brokers’ commissions payable
On loans to customers
On assets subject to non-recourse finance
2004
£m
297.6
92.1
22.3
412.0
2004
£m
165.9
49.0
79.3
33.2
4.0
331.4
5. 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
2004
£m
5.0
(4.6)
0.4
Included within other operating income is income from property leases of £1.8m (2003: £1.8m).
2003
£m
234.1
28.4
9.5
272.0
2003
£m
105.2
33.1
23.8
31.7
1.7
195.5
2003
£m
7.4
(6.9)
0.5
6. EMPLOYEES
The average number of persons (including directors) employed by the Group during the year was 730 (2003: 665).
Staff costs incurred during the year in respect of these employees were:
Wages and salaries
Social Security costs
Other pension costs
2004
£m
17.2
2.0
1.1
20.3
Details of the pension schemes operated by the Group are given in note 28.
7. EXCEPTIONAL REORGANISATION COSTS
These were the redundancy costs which were expected to be incurred implementing the announced integration of the
acquired business of Mortgage Trust Limited and its subsidiaries with the remainder of the Group’s operations.
8. COST/INCOME RATIO
Cost / income ratio is derived as follows:
Operating expenses
Less Reorganisation costs
Amortisation of negative goodwill
Total operating income
Cost / income ratio
9. PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
Profit on ordinary activities before taxation is after charging / (crediting):
Depreciation
Amortisation of negative goodwill
Hire of plant and machinery
Property rents payable
2003
£m
21.1
1.4
1.2
23.7
2003
£m
(39.7)
3.9
(2.1)
(37.9)
÷
107.5
2004
£m
(38.7)
-
(5.2)
(43.9)
÷
120.8
36.3%
35.3%
2004
£m
1.6
(5.2)
0.1
5.2
2003
£m
1.9
(2.1)
0.1
4.2
40 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 41
NOTES TO THE ACCOUNTS (Continued)
FOR THE YEAR TO 30 SEPTEMBER 2004
10. FEES PAID TO AUDITORS
Audit fees
Paid to Group auditors
Paid to other auditors
Total audit fees for Group
Company audit fee
A more detailed analysis of fees paid to the Group auditors and their associates is given below:
2004
£000
2003
£000
328
170
498
21
321
45
366
20
Audit services
Statutory audit - UK
Statutory audit - Overseas
Audit-related regulatory reporting
Further assurance services
Securitisation services
‘Due diligence’ services
Other services
Tax services
Compliance services
Advisory services
2004
£000
2004
2003
£000
2003
311
17
12
340
90
5
15
110
117
88
205
655
47%
3%
2%
52%
14%
1%
2%
17%
18%
13%
31%
100%
308
13
9
330
53
107
-
160
100
201
301
791
39%
2%
1%
42%
7%
13%
-
20%
13%
25%
38%
100%
11. TAX CHARGE ON PROFIT ON ORDINARY ACTIVITIES
(A) ANALYSIS OF CHARGE IN THE YEAR
Current tax
UK Corporation Tax on profits of the period
Adjustment in respect of prior periods
Write-back of Advance Corporation Tax (ACT)
Total current tax
Deferred tax (note 27)
Origination and reversal of timing differences
Recognition of asset not previously recognised
Adjustment in respect of prior periods
Total deferred tax
Tax charge on profit on ordinary activities
2004
£m
16.5
(0.3)
(0.7)
15.5
3.1
(2.4)
0.1
0.8
16.3
2003
£m
13.3
(2.6)
(0.4)
10.3
1.2
(1.0)
1.1
1.3
11.6
(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% (2003: 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% (2003: 30%)
Effects of:
Reversal of timing differences
Permanent differences
ACT credit
Prior year credit
Current tax charge for the year
2004
£m
71.0
21.3
(3.1)
(1.7)
(0.7)
(0.3)
15.5
2003
£m
51.9
15.5
(1.2)
(1.0)
(0.4)
(2.6)
10.3
(C) FACTORS THAT MAY AFFECT FUTURE TAX CHARGES
The Group will not be taxable on the amortisation of the negative goodwill arising on the acquisition of Mortgage Trust Limited
in future periods. In addition the Group currently has £0.3m of ACT (2003: £0.7m) which has not been recognised together with
approximately £22.0m of tax losses (2003: £30.0m) 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 (2003: £40.0m) which are available to offset against future capital
gains of the Group.
42 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 43
NOTES TO THE ACCOUNTS (Continued)
FOR THE YEAR TO 30 SEPTEMBER 2004
12. PROFIT ATTRIBUTABLE TO MEMBERS OF THE PARAGON GROUP OF COMPANIES PLC
15. INTANGIBLE FIXED ASSETS
The holding company’s profit after tax for the financial year amounted to £34.7m (2003: £49.5m). 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.
13. EQUITY DIVIDEND
Equity dividend on ordinary shares
Interim paid
Proposed final
2004
PER SHARE
2003
PER SHARE
2004
£m
2003
£m
3.9p
5.7p
9.6p
2.6p
3.7p
6.3p
4.5
6.5
11.0
3.1
4.4
7.5
14. EARNINGS PER SHARE
Earnings per ordinary share is calculated as follows:
2004
2003
Profit for the year
£54,700,000
£40,300,000
Basic weighted average number of ordinary shares
ranking for dividend during the year
113,942,576
113,362,439
Dilutive effect of the weighted average number
of share options and incentive plans in issue during the year
4,364,990
2,397,769
Diluted weighted average number of ordinary
shares ranking for dividend during the year
Earnings per ordinary share - basic
- diluted
118,307,566
115,760,208
48.0p
46.2p
35.5p
34.8p
Cost
At 1 October 2003
Adjustment to goodwill (note 2)
At 30 September 2004
Accumulated amortisation
At 1 October 2003
Credit for the year
At 30 September 2004
Net book value
At 30 September 2004
At 30 September 2003
NEGATIVE
GOODWILL
£m
20.9
0.4
21.3
2.1
5.2
7.3
14.0
18.8
44 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 45
NOTES TO THE ACCOUNTS (Continued)
FOR THE YEAR TO 30 SEPTEMBER 2004
16. TANGIBLE FIXED ASSETS
17. ASSETS SUBJECT TO NON-RECOURSE FINANCE
Cost
At 1 October 2003
Additions
Disposals
At 30 September 2004
Accumulated depreciation
At 1 October 2003
Charge for the year
On disposals
At 30 September 2004
Net book value
At 30 September 2004
At 30 September 2003
SHORT
LEASEHOLD
PREMISES
£m
2.6
0.2
(0.1)
2.7
1.2
0.2
-
1.4
1.3
1.4
PLANT AND
MACHINERY
£m
10.1
0.8
(0.6)
10.3
7.3
1.4
(0.5)
8.2
2.1
2.8
TOTAL
£m
12.7
1.0
(0.7)
13.0
8.5
1.6
(0.5)
9.6
3.4
4.2
Prior to its acquisition by the Group certain loans originated by Britannic Money plc (now Mortgage Trust Limited) had been
sold to companies ultimately beneficially owned by charitable trusts, which had raised non-recourse finance to fund these
purchases. The Group is not obliged to support any losses of these companies and does not intend to do so. This is clearly
stated in the terms and conditions under which the finance was raised, which provide that the finance providers will receive
interest and repayment of principal only to the extent that sufficient funds are generated by the mortgage portfolios acquired
by each company.
The priority and amount of claims on the proceeds generated by the assets are determined in accordance with a strict priority
of payments. The Group receives net income from the mortgages after the claims of the finance providers have been satisfied
in full. The finance providers have no recourse to the Group in any form.
The Group has an option to sell further mortgages to certain of these companies over a fixed period of time, subject to these
companies’ ability to finance and insure such assets.
The amounts included within Investments in the Group balance sheet in respect of these companies are:
Loans to customers
Cash at bank and in hand
Assets subject to non-recourse finance
Asset backed bank loans
Asset backed loan notes
Non-recourse finance
At 30 September 2004
2004
£m
1,458.4
99.3
1,557.7
28.4
1,491.9
1,520.3
37.4
2003
£m
2,235.8
125.8
2,361.6
408.3
1,877.0
2,285.3
76.3
In the year ended 30 September 2003 the linked presentation shown above included the Group’s interest in the assets of
Arianty No. 1 PLC. Following changes in the operations of that company, the linked presentation is no longer considered to be
appropriate and the assets and liabilities of that company are fully consolidated.
The companies party to these arrangements are:
Arianty No. 1 plc
First Flexible No. 1 plc
First Flexible No. 2 plc
First Flexible No. 3 plc
First Flexible No. 4 plc
First Flexible No. 5 plc
Mortgage Funding Corporation plc
Mortgage Funding Corporation No. 6 plc
PRINCIPAL ACTIVITY
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
All of the above companies are registered and operate in England and Wales and are accounted for as quasi-subsidiaries in
the consolidated accounts of the Group.
46 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 47
NOTES TO THE ACCOUNTS (Continued)
FOR THE YEAR TO 30 SEPTEMBER 2004
17. ASSETS SUBJECT TO NON-RECOURSE FINANCE (Continued)
The summarised balance sheet before consolidation adjustments of the above companies is as follows:
Assets employed
Fixed assets
Loans to customers
Current assets
Debtors falling due within one year
Cash at bank and in hand
Financed by
Equity shareholders’ funds
Called-up share capital
Profit and loss account
Creditors
Amounts falling due within one year
Amounts falling due after more than one year
2004
£m
1,695.2
0.4
104.6
1,800.2
0.1
0.2
0.3
3.6
1,796.3
1,800.2
2003
£m
2,236.8
1.5
125.8
2,364.1
0.1
0.2
0.3
8.5
2,355.3
2,364.1
The summarised profit and loss account before consolidation adjustments for the period from acquisition to 30 September
2004 for the companies named above is as follows:
Interest receivable
Interest payable
Total operating income
Operating expenses
Provisions for losses
Profit on ordinary activities before taxation
2004
£m
108.8
(90.8)
18.0
(18.0)
0.2
0.2
2003
£m
29.2
(21.3)
7.9
(7.8)
(0.1)
-
Operating expenses includes provision for amounts payable to the Group of £17.8m (2003: £5.2m).
There have been no recognised gains and losses in any of these companies, other than the result for the period.
The summarised cash flows for the above companies, before consolidation adjustments for the period from acquisition until
30 September 2004 are as follows:
Cash inflow / (outflow) from operating activities
Capital expenditure and financial investment
Financing
Decrease in cash in the period
18. LOANS TO CUSTOMERS
Cost
At 1 October 2003
Acquisition
Additions
Refinancing of / (with) non-recourse finance
Amortisation of commissions
Other debits
Repayments and redemptions
At 30 September 2004
2004
£m
0.1
0.5
0.6
(0.6)
-
2004
£m
3,051.3
-
1,759.8
576.9
(33.2)
344.1
(1,206.4)
4,492.5
2003
£m
(0.2)
(80.2)
(80.4)
78.5
(1.9)
2003
£m
2,521.3
26.9
1,427.4
(226.0)
(31.7)
277.2
(943.8)
3,051.3
Included in loans to customers are £218.6m (2003: £267.0m) of hire purchase receivables. The aggregate rentals receivable
during the year in respect of hire purchase contracts were £28.5m (2003: £36.5m). The cost of assets acquired by the Group
for the purposes of letting under hire purchase contracts amounted to £147.5m (2003: £174.8m).
Other debits includes primarily interest receivable on loans outstanding and movements on provisions against these loans.
48 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 49
NOTES TO THE ACCOUNTS (Continued)
FOR THE YEAR TO 30 SEPTEMBER 2004
19. INVESTMENT IN SUBSIDIARY COMPANIES
Shares in Group companies
At 1 October 2003
Additions during the year
Disposals
Revaluation
Credited to the profit and loss account
Credited to the revaluation reserve
Loans to Group companies
At 1 October 2003
Additions during the year
Revaluation
Credited to the profit and loss account
At 30 September 2004
2004
£m
249.0
35.3
(4.0)
17.6
15.2
313.1
93.1
17.7
2.6
113.4
426.5
Comparable amounts determined according to the historic cost convention are:
Cost
Provision
At 30 September 2004
At 30 September 2003
SHARES IN
GROUP
COMPANIES
£m
LOANS TO
GROUP
COMPANIES
£m
366.3
(104.5)
261.8
212.9
113.9
(0.5)
113.4
93.1
2003
£m
190.5
36.4
-
12.5
9.6
249.0
25.9
51.1
16.1
93.1
342.1
TOTAL
£m
480.2
(105.0)
375.2
306.0
Principal operating subsidiaries comprise:
HOLDING
PRINCIPAL ACTIVITY
Direct subsidiaries of
The Paragon Group of Companies PLC
Paragon Finance PLC
Mortgage Trust Limited
Paragon Mortgages Limited
Homeloans (No. 4) 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 (No. 5) PLC
Paragon Mortgages (No. 6) PLC
Paragon Mortgages (No. 7) PLC
Paragon Mortgages (No. 2) SA
Paragon Mortgages (No. 3) SA
Paragon Third Funding Limited
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
Paragon Second Funding Limited
Subsidiaries of Mortgage Trust Limited
Mortgage Trust Services PLC
First Flexible No. 6 PLC
100%
100%
100%
74%
74%
100%
100%
100%
74%
74%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Residential mortgages and asset administration
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Vehicle fleet management
Vehicle finance
Unsecured lending
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential and commercial mortgages
Loan and vehicle finance
Loan and vehicle finance
Loan and vehicle finance
100%
Residential mortgages and loan and vehicle finance
100%
74%
Residential mortgages and asset administration
Residential mortgages
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, Homeloans (No. 4) PLC and First Flexible No. 6 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 (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,
Homeloans (No. 4) PLC and First Flexible No. 6 PLC are not material.
50 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 51
NOTES TO THE ACCOUNTS (Continued)
FOR THE YEAR TO 30 SEPTEMBER 2004
20. 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 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.
Other quasi-subsidiary companies, relating to the funding arrangements of Mortgage Trust, are described in note 17.
21. STOCKS
Residual purchase obligations
Vehicles on extended hire or held for resale
22. DEBTORS
Amounts falling due within one year
Amounts owed by Group companies
Tax debtors
Other debtors
Prepayments and accrued income
23. CALLED-UP SHARE CAPITAL
Authorised:
175,000,000 (2003: 175,000,000) ordinary shares of 10p each
Allotted and paid-up:
119,891,708 (2003: 119,103,284) ordinary shares of 10p each
2004
£m
3.1
0.3
3.4
2003
£m
3.5
0.3
3.8
THE GROUP
THE COMPANY
2004
£m
2003
£m
-
1.2
6.4
1.2
8.8
-
1.1
7.6
0.7
9.4
2004
£m
50.7
-
0.7
-
51.4
2004
£m
2003
£m
92.6
0.1
-
-
92.7
2003
£m
17.5
17.5
12.0
11.9
During the year 761,646 ordinary shares (£76,165 par value) were issued for £1,237,625 and a further 26,778 (£2,678 par
value) were issued for £43,390. These issues were made under the executive share option schemes and the Sharesave
scheme respectively.
24. RESERVES
(A) THE GROUP
Balance at 1 October 2003
As previously reported
Prior period adjustment (note 1(r))
Share options exercised
Charge for long term incentive plan
Retained profit for the year
Balance at 30 September 2004
SHARE
PREMIUM
ACCOUNT
£m
MERGER
RESERVE
PROFIT AND
LOSS ACCOUNT
TOTAL
£m
£m
£m
67.6
-
67.6
1.2
-
-
68.8
(70.2)
-
(70.2)
-
-
-
225.6
0.2
225.8
(0.3)
0.9
43.7
223.0
0.2
223.2
0.9
0.9
43.7
(70.2)
270.1
268.7
The cumulative amount of goodwill on acquisitions written off to reserves is £56.4m (2003: £56.4m). This balance has been
offset against the profit and loss account to ensure compliance with Financial Reporting Standard 10 – ‘Goodwill and
Intangible Assets’.
(B) THE COMPANY
Balance at 1 October 2003
As previously reported
Prior period adjustment (note 1(r))
Revaluation of investments in subsidiaries
Share options exercised
Charge for long term incentive plan
Retained profit for the year
Balance at 30 September 2004
SHARE
PREMIUM
ACCOUNT
£m
REVALUATION
RESERVE
PROFIT AND
LOSS ACCOUNT
TOTAL
£m
£m
£m
67.6
-
67.6
-
1.2
-
-
68.8
36.1
-
36.1
15.2
-
-
-
51.3
138.1
0.2
138.3
-
(0.3)
0.9
23.7
241.8
0.2
242.0
15.2
0.9
0.9
23.7
162.6
282.7
The difference between the reserves of the Group and the reserves of the Company of £14.0m (2003 : £18.8m) represents the
negative goodwill capitalised and being written off on the acquisition of Mortgage Trust Limited.
52 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 53
NOTES TO THE ACCOUNTS (Continued)
FOR THE YEAR TO 30 SEPTEMBER 2004
25. OWN SHARES
Shares held by the trustee of the share option schemes
At 1 October 2003
Shares purchased
Options exercised
At 30 September 2004
2004
£m
9.8
2.9
(0.4)
12.3
2003
RESTATED
NOTE 1(r)
£m
8.8
2.2
(1.2)
9.8
All of the shares are held in trust for the benefit of employees exercising their options under the Company’s share option
schemes and awards under the Paragon Performance Share Plan and Deferred Bonus Scheme. The trustee’s costs are
included in the operating expenses of the Company. At 30 September 2004, the trust held 6,128,230 shares (2003: 5,517,156)
with a nominal value of £612,823 (2003: £551,716) and a market value of £20,897,264 (2003: £18,537,644). Options, or awards
under the Paragon Performance Share Plan or Deferred Bonus Scheme were outstanding against 6,030,042 of these shares at
30 September 2004 (2003: 5,161,626). The dividends on these shares have not been waived.
26. RIGHTS TO THE ALLOTMENT OF SHARES
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 pages 19 to 26.
Options are outstanding under the Executive Share Option and the All Employee Share Option schemes to purchase 7,250,721
(2003: 7,992,859) ordinary shares of 10p each as follows:
NUMBER
PERIOD EXERCISABLE
65,307
819,000
530,000
650,000
100,000
345,000
725,000
224,068
30,000
1,270,000
640,000
620
803,290
429,908
145,638
432,890
40,000
13/03/1998 to 13/03/2005
31/03/2001 to 31/03/2008
31/03/2001 to 31/03/2005
11/01/2002 to 11/01/2009
27/09/2002 to 27/09/2006
17/02/2003 to 17/02/2010
26/05/2003 to 26/05/2007
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
23/12/2005 to 23/12/2012
14/03/2006 to 14/03/2013
01/08/2006 to 01/02/2007
01/08/2008 to 01/02/2009
18/12/2006 to 18/12/2013
01/06/2007 to 01/06/2014
PRICE
97.33p
218.00p
218.00p
147.50p
209.50p
147.00p
148.50p
120.64p
221.50p
248.00p
186.50p
161.50p
186.50p
183.04p
183.04p
339.00p
322.50p
A number of the above options were granted to former employees whose rights terminate at the later of twelve months
following redundancy or forty-two months after the issue of the options.
Conditional entitlements to the allotment of 1,288,612 ordinary shares (2003: 735,410) of 10p each are outstanding under the
Paragon Performance Share Plan. Awards under this plan comprise a right to acquire shares in the Company for nil or
nominal payment and will vest on the third anniversary of their granting to the extent that the applicable performance criteria
have been satisfied.
The Company’s total shareholder return over the three year period will be compared to that of the constituents of the FTSE
All Share ‘Banks’ and ‘Speciality and Other Finance’ sectors. No part of an award shall vest for a below median performance.
25% of the award shall vest for a median performance. An award will only vest fully for an upper quartile performance, and
between these two points awards will vest on a straight line basis. The awards will lapse to the extent that the performance
condition has not been satisfied on the third anniversary.
The conditional entitlements outstanding under this scheme at 30 September 2004 were:
NUMBER
461,644
267,766
291,033
268,169
PERIOD EXERCISABLE
13/03/2006 to 13/09/2006
02/07/2006 to 02/01/2007
18/12/2006 to 18/06/2007
22/06/2007 to 22/12/2007
Conditional entitlements to the allotment of 170,430 ordinary shares (2003: nil) of 10p each are outstanding under the
Deferred Bonus Scheme. Awards under this scheme comprise a right to acquire shares in the Company for nil or nominal
payment and will vest on the third anniversary of their granting.
The conditional entitlements outstanding under this scheme at 30 September 2004 were:
NUMBER
170,430
TRANSFER DATE
01/10/2006
The shares awarded will be transferred to the scheme participants as soon as is reasonably practicable after the transfer date.
54 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 55
NOTES TO THE ACCOUNTS (Continued)
FOR THE YEAR TO 30 SEPTEMBER 2004
27. PROVISIONS FOR LIABILITIES AND CHARGES
28. PENSIONS
(A) THE GROUP
Provision at 1 October 2003
Current year charge
Prior year charge
Utilised in the year
Provision at 30 September 2004
DEFERRED
TAXATION
£m
OTHER
PROVISIONS
£m
1.3
0.7
0.1
-
2.1
6.3
0.6
-
(3.4)
3.5
The other provisions include committed future lease costs for properties no longer occupied by the Group and costs
associated with the decision to relocate certain of the operations of Mortgage Trust to the Group’s head office. 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:
Accelerated capital allowances
Other timing differences
Provision at 30 September 2004
2004
£m
-
2.1
2.1
TOTAL
£m
7.6
1.3
0.1
(3.4)
5.6
2003
£m
(0.2)
1.5
1.3
During the year the transitional provisions of Financial Reporting Standard 17 – ‘Retirement Benefits’ (‘FRS 17’) continue to be
in 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.
As a transitional measure, the standard requires that 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 2004 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.
Disclosures in respect of defined contribution pension schemes under both standards are given at (c) below.
The pension scheme asset calculated in accordance with SSAP 24 and recognised in the balance sheet of the Group at 30
September 2004 was £0.0m (2003: £0.0m) and the liability at that date calculated in accordance with FRS 17 was £10.0m
(2003: £4.4m). The difference of £10.0m (2003: £4.4m) relates to the differing bases of calculation.
(A) DISCLOSURES MADE IN ACCORDANCE WITH FRS 17
The Group operates a defined benefit pension scheme in the UK. A full actuarial valuation was carried out at 31 March 2004
and updated to 30 September 2004 by a qualified independent actuary. The service cost has been calculated using the
Projected Unit method. As a result of the Plan being closed to new entrants, the service cost will increase as the members of
the Plan approach retirement. The major assumptions used by the actuary were (in nominal terms):
30 SEPTEMBER
2004
30 SEPTEMBER
2003
30 SEPTEMBER
2002
In addition there are unprovided deferred tax assets of approximately £13.0m (2003: £18.0m). These are predominantly in the
Mortgage Trust companies acquired in the year ended 30 September 2003 and will only be available to offset against suitable
future profits arising in these companies. The directors consider that there is insufficient evidence that such profits will arise
to justify the recognition of a deferred tax asset in respect of these balances.
(B) THE COMPANY
There is no potential liability for deferred tax in the holding company either at 30 September 2004 or 30 September 2003.
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
2.75% p.a.
2.50% p.a.
2.30% p.a.
2.75% p.a.
2.50% p.a.
2.30% p.a.
5.60% p.a.
5.40% p.a.
5.40% p.a.
2.75% p.a.
2.50% p.a.
2.30% p.a.
Rate of increase in salaries
3.75% p.a.
3.50% p.a.
3.30% p.a.
56 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 57
NOTES TO THE ACCOUNTS (Continued)
FOR THE YEAR TO 30 SEPTEMBER 2004
28. PENSIONS (Continued)
The assets in the Plan at 30 September 2004, 30 September 2003 and 30 September 2002 and the expected rate of return were:
AT 30 SEPTEMBER 2004
LONG
TERM RATE
OF RETURN
EXPECTED
7.5%
4.8%
4.0%
VALUE
£m
15.5
2.7
0.1
18.3
(32.6)
(14.3)
4.3
(10.0)
Equities
Bonds
Other
Total market value of assets
Present value of scheme liabilities
Deficit in the scheme
Related deferred tax
Net pension liability
AT 30 SEPTEMBER 2003
LONG
TERM RATE
OF RETURN
EXPECTED
VALUE
£m
AT 30 SEPTEMBER 2002
LONG
TERM RATE
OF RETURN
EXPECTED
VALUE
£m
7.5%
4.4%
4.0%
7.5%
4.7%
4.0%
13.3
2.2
-
15.5
(22.0)
(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 2003
Movement in year
Current service cost
Contributions
Past service costs
Other finance income
Actuarial (loss) / gain
Deficit in the scheme at 30 September 2004
2004
£m
(6.5)
(1.2)
1.0
-
(0.1)
(7.5)
(14.3)
10.1
1.8
0.1
12.0
(18.5)
(6.5)
2.1
(4.4)
2003
£m
(6.5)
(1.3)
1.1
-
(0.1)
0.3
(6.5)
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
ended 30 September 2004, 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
2004
£m
270.1
(10.0)
260.1
2003
RESTATED
NOTE 1(r)
£m
225.8
(4.4)
221.4
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 ended 30 September 2004, 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
2004
£m
1.2
-
1.2
2003
£m
1.3
-
1.3
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 ended 30 September 2004, the amount which would have been credited to other finance income would have been
analysed as follows:
2004
£m
1.2
(1.3)
(0.1)
2003
£m
0.9
(1.0)
(0.1)
The actuarial loss arising in the year ended 30 September 2004 resulted primarily from the use of updated mortality statistics.
The Group’s contribution to the scheme is shown in note 6. The agreed rate of employer contributions during both years was
12.5% of gross salaries for participating employees.
Expected return on pension scheme assets
Interest on pension scheme liabilities
Net return
58 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 59
NOTES TO THE ACCOUNTS (Continued)
FOR THE YEAR TO 30 SEPTEMBER 2004
28. PENSIONS (Continued)
29. CREDITORS
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
ended 30 September 2004, the actuarial (loss) / 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) / gain
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
2004
£m
0.3
(1.7)
(6.1)
(7.5)
2003
£m
1.3
-
(1.0)
0.3
2004
2003
2002
0.3
1%
(1.7)
(5)%
(7.5)
(23)%
1.3
8%
-
-
0.3
1%
(3.5)
(30)%
0.2
1%
(5.1)
(28)%
(B) DISCLOSURES MADE IN ACCORDANCE WITH SSAP 24
The relevant 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.
(C) DEFINED CONTRIBUTION PENSION SCHEMES
In addition to the Group Pension Scheme, the Group operates a defined contribution (Stakeholder) pension scheme.
Contributions made by the Group to this scheme in the year ended 30 September 2004 were £0.0m (2003: £0.0m). The Group
also makes contributions to the personal defined contribution pension arrangements of certain employees. Contributions
made under these arrangements were £0.0m (2003: £0.1m).
Amounts falling due within one year
Bank loans and overdrafts
Amounts owed to Group companies
Proposed dividend
Corporation tax
Accruals
Amounts falling due after more than one year
Asset backed loan notes
Bank loans
Accruals
THE GROUP
THE COMPANY
2004
£m
1.2
-
6.8
7.7
50.7
66.4
2003
RESTATED
NOTE 1(r)
£m
81.3
-
4.4
6.7
35.6
128.0
3,690.0
901.6
2.0
2,128.6
929.5
2.5
4,593.6
3,060.6
2004
£m
-
180.6
6.8
1.4
7.3
196.1
-
-
-
-
2003
RESTATED
NOTE 1(r)
£m
24.8
146.6
4.4
3.1
15.8
194.7
-
-
-
-
A maturity analysis of the above borrowings and further details of asset backed loan notes and bank loans are given
in note 30.
60 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 61
NOTES TO THE ACCOUNTS (Continued)
FOR THE YEAR TO 30 SEPTEMBER 2004
30. 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 place strong emphasis on good
credit management, both at the time of acquiring or
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 and propensity to repay the loan remain the
overriding factors in the decision to lend.
In order to control credit risk relating to counterparties to
the Group’s financial instruments, the Asset and Liability
Committee determines which counterparties the Group will
deal with, establishes limits for each counterparty and
monitors compliance with those limits.
LIQUIDITY RISK
The Group’s assets are principally financed by asset backed
loan notes issued through the securitisation process.
Securitisation substantially reduces the Group’s liquidity
risk by matching the maturity profile of the Group’s funding
to the profile of the assets to be funded.
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 0.21% and 2.75% above the London Interbank
Offered Rate (‘LIBOR’) for three month sterling
products;
• on notes denominated in euros at various rates between
0.21% and 1.40% above the Euro Interbank Offered Rate
(‘EURIBOR’) for three month euro products; and
• on notes denominated in US dollars at various rates
between 0.21% and 1.40% above the London Interbank
Offered Rate for three month US dollar products (‘Dollar
LIBOR’).
During the year, Group companies issued £2,114.8m (2003:
£250.0m) of mortgage backed floating rate notes at par and
£nil (2003: £nil) of asset backed floating rate notes at par.
Before its acquisition by the Group, Mortgage Trust had also
obtained finance from the securitisation markets as
described in note 17. The sterling notes issued in these
transactions, which form part of ‘Non-Recourse Finance’ in
the Group balance sheet are secured on the underlying
assets and bear interest at various rates between 0.125%
and 1.80% above LIBOR for three month sterling products.
It is likely that a substantial proportion of these notes will
be repaid within five years. The companies which issued
these notes have entered into £215.0m (2003: £215.0m) of
sterling revolving credit facilities to fund, where necessary,
the purchase of mortgage redraws. At 30 September 2004
£nil (2003: £nil) had been drawn down under these facilities.
In connection with the acquisition of Mortgage Trust the
Group entered into a bank loan secured against cashflows
generated by certain of the acquired assets. Interest is
payable on this loan at a rate of 1.35% above LIBOR. This
loan is repayable only out of cash receipts generated by
these assets and there is no further recourse to the Group.
Included within bank loans at 30 September 2004 is £28.8m
(2003 : £45.6m) in respect of this loan.
The Group is party to an arrangement, revised during the
year, made via the quasi-subsidiaries described in note 20,
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
2004 is £7.3m (2003: £1.5m) in respect of this arrangement.
Assets are typically securitised within twelve months of
origination. Until that point new loans are funded by a bank
facility (the ‘Warehouse Facility’). This is currently provided
by a £1,325.0m (2003: £750.0m) committed sterling facility
provided to Paragon Second Funding Limited by a
consortium of banks. £468.5m (2003: £570.5m) is included
in bank loans in respect of drawings on this facility.
This facility is secured on all the assets of Paragon Second
Funding Limited, Paragon Car Finance Limited and Paragon
Personal Finance Limited. This 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.
During the year two other facilities were also used for this
purpose. The £150.0m sterling facility which had been
provided to Paragon Third Funding Limited by a consortium
of banks was cancelled in the year. £42.2m was included in
bank loans at 30 September 2003 in respect of drawings on
this facility. The £225.0m (2003: £450.0m) committed
sterling facility provided to Arianty No. 1 PLC by a
consortium of banks is still in place. £220.0m is included in
bank loans in respect of drawings on this facility. At 30
September 2003 £367.9m was included in non-recourse
finance in respect of drawings on this facility. This facility is
secured on all the assets of Arianty No. 1 PLC. At the year
end the facility remained available for further drawings until
14 November 2004. This was renewed for a further year for
a reduced amount and may be further renewed on an
annual basis. Repayment of the loan is due two years after
it ceases to available for further drawings.
Assets originated by Mortgage Funding Corporation PLC are
funded by a £55.0m (2003: £155.0m) committed sterling
bank facility. £28.5m (2003: £40.4m) is included in non-
recourse finance in respect of drawings on this facility. This
facility is secured on all the assets of that company. This
facility was refinanced in the year and is now is repayable
on 4 August 2006.
As with the asset backed loan notes, repayments of all of
these facilities, before the final repayment date are
restricted to the amount of principal cash realised from the
funded assets.
In addition to these borrowings the Group has a committed
corporate syndicated sterling bank facility of £280.0m (2003:
£175.0m), used to provide working capital for the Group.
Included in bank loans are drawings of £177.0m (2003:
£155.7m) made by Paragon Finance PLC under this facility.
This facility was revised in the year and now falls due for
repayment on 27 February 2008. The facility is secured on
all the assets of the Company and Paragon Finance PLC.
A further bank borrowing of £25.0m was arranged during
the year ended 30 September 2003 in connection with the
acquisition of Mortgage Trust and has now been repaid.
Included in bank loans are drawings of £nil (2003: £24.8m)
made by the Company under this facility.
62 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 63
NOTES TO THE ACCOUNTS (Continued)
FOR THE YEAR TO 30 SEPTEMBER 2004
30. FINANCIAL INSTRUMENTS (Continued)
Interest on the bank facilities is payable at various rates between 0.25% and 0.90% above LIBOR. The undrawn amounts on
these bank facilities at 30 September 2004 and 30 September 2003 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
2004
£m
-
31.5
958.0
989.5
2003
£m
133.6
116.3
82.0
331.9
Cash received in respect of loan assets is not immediately available for Group purposes, due to the terms of the Warehouse
Facilities and the securitisations. Included within ‘Cash at bank and in hand’ and ‘Investments’ at 30 September 2004 is
£378.5m subject to such restrictions (2003: £274.4m).
‘Cash at Bank and in hand’ also includes £0.5m (2003: £1.3m) held by the Trustees of the Paragon Employee Share Ownership
Plans which may only be used to invest in the shares of the Company, pursuant to the aims of those plans.
The securitisation process and the terms of the Warehouse Facilities effectively remove any liquidity risk from the funding of
the Group’s loan assets. It remains to ensure that sufficient funding is available to provide capital support for new loans and
working capital for the Group. This responsibility rests with the Asset and Liability Committee which sets liquidity policy and
uses detailed cash flow projections to ensure that an adequate level of liquidity is available at all times.
Set out below is the maturity profile of the Group’s financial liabilities at 30 September 2004 and 30 September 2003:
NON-
RECOURSE
FINANCE
£m
BANK
LOANS AND
OVERDRAFTS
£m
ASSET
BACKED
LOAN NOTES
£m
OTHER
£m
2004
TOTAL
£m
NON-
RECOURSE
FINANCE
£m
BANK
LOANS AND
OVERDRAFTS
£m
ASSET
BACKED
LOAN NOTES
£m
OTHER
£m
2003
TOTAL
£m
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.
‘Off balance sheet items’ shows the notional principal amount of swap agreements. Included within ‘3 months or less’ are £nil
(2003: £23.0m) of capped rate mortgages hedged by interest rate cap agreements which reset quarterly.
The table includes short term creditors and debtors.
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
-
1.2
28.5
-
-
397.0
-
-
-
In more than five years 1,491.8
504.6
3,690.0
65.2
66.4
40.4
81.3
1.2
29.7
-
142.1
0.8
-
397.8
367.9
-
5,686.4
1,877.0
787.4
2,128.6
-
-
-
46.7
168.4
1.2
143.3
1.3
-
369.2
4,793.0
1,520.3
902.8
3,690.0
67.2
6,180.3
2,285.3
1,010.8
2,128.6
49.2
5,473.9
64 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 65
NOTES TO THE ACCOUNTS (Continued)
FOR THE YEAR TO 30 SEPTEMBER 2004
30. 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
5 YEARS
NON
INTEREST
BEARING
TOTAL
£m
£m
£m
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
5 YEARS
NON
INTEREST
BEARING
TOTAL
£m
£m
£m
At 30 September 2004
Cash at bank and in hand
Investments
Assets subject to non-recourse
finance
Non-recourse finance
Loans to customers
Negative goodwill
Other assets
172.0
230.5
1,400.2
(1,520.3)
3,214.6
-
-
-
-
86.2
-
157.9
-
-
-
-
53.0
-
340.1
-
-
-
-
13.1
-
611.8
-
-
-
-
-
-
116.6
-
-
-
-
172.0
230.5
5.2
-
51.5
(14.0)
15.6
1,557.7
(1,520.3)
4,492.5
(14.0)
15.6
At 30 September 2003
RESTATED NOTE 1(r)
Cash at bank and in hand
Investments
Assets subject to non-recourse
finance
Non-recourse finance
Loans to customers
Negative goodwill
Other assets
150.5
144.8
1,937.9
(2,285.3)
2,293.6
-
-
-
-
40.2
-
92.9
-
-
-
-
49.7
-
122.1
-
-
-
-
-
-
355.8
-
-
-
-
323.3
-
136.1
-
-
-
-
10.5
-
50.8
(18.8)
17.4
150.5
144.8
2,361.6
(2,285.3)
3,051.3
(18.8)
17.4
Total assets
3,497.0
244.1
393.1
624.9
116.6
58.3
4,934.0
Total assets
2,241.5
133.1
171.8
355.8
459.4
59.9
3,421.5
Provisions
Bank loans and overdrafts
Asset backed loan notes
Other liabilities
Shareholders’ funds
Total liabilities and
shareholders’ funds
-
(902.8)
(3,690.0)
-
-
(4,592.8)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(5.6)
-
-
(67.2)
(268.4)
(5.6)
(902.8)
(3,690.0)
(67.2)
(268.4)
(341.2)
(4,934.0)
Provisions
Bank loans and overdrafts
Asset backed loan notes
Other liabilities
Shareholders’ funds
Total liabilities and
shareholders’ funds
-
(1,010.8)
(2,128.6)
-
-
(3,139.4)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(7.6)
-
-
(49.2)
(225.3)
(7.6)
(1,010.8)
(2,128.6)
(49.2)
(225.3)
(282.1)
(3,421.5)
Off balance sheet items
826.7
(93.3)
(219.7)
(470.2)
(43.5)
-
Interest rate repricing gap
(269.1)
150.8
Cumulative gap
(269.1)
(118.3)
173.4
55.1
154.7
209.8
73.1
(282.9)
282.9
-
-
-
-
Off balance sheet items
873.2
(116.3)
(190.9)
(522.1)
(43.9)
-
Interest rate repricing gap
Cumulative gap
(24.7)
(24.7)
16.8
(7.9)
(19.1)
(166.3)
415.5
(222.2)
(27.0)
(193.3)
222.2
-
-
-
-
66 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 67
NOTES TO THE ACCOUNTS (Continued)
FOR THE YEAR TO 30 SEPTEMBER 2004
30. 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.
2004
GAINS
2004
LOSSES
£m
£m
2004
TOTAL
NET GAINS/
(LOSSES)
£m
2003
GAINS
2003
LOSSES
£m
£m
2003
TOTAL
NET GAINS/
(LOSSES)
£m
Unrecognised gains and losses on
hedges at 1 October 2003
Gains and losses arising in previous
years that were recognised in the year
1.8
(15.8)
(14.0)
(0.6)
2.9
2.3
Gains and losses arising before 1 October 2003
that were not recognised in the year
Gains and losses arising in the year
that were not recognised in the year
Unrecognised gains and losses on
hedges at 30 September 2004
Of which:
Gains and losses expected to be
realised in the year to 30 September 2005
Gains and losses expected to be realised
in the year to 30 September 2006 or later
1.2
4.2
5.4
4.1
1.3
5.4
(12.9)
(11.7)
6.7
10.9
(6.2)
(0.8)
(1.8)
2.3
(4.4)
(3.1)
(6.2)
(0.8)
0.6
-
0.6
1.2
1.8
0.9
0.9
1.8
(26.0)
(25.4)
1.9
1.9
(24.1)
(23.5)
8.3
9.5
(15.8)
(14.0)
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 2004 and 30 September 2003.
Derivative financial instruments held
to manage the interest rate profile
Swaps
Caps
2004
2003
BOOK VALUE
£m
FAIR VALUE
£m
BOOK VALUE
£m
FAIR VALUE
£m
-
1.8
1.8
0.3
0.7
1.0
-
2.1
2.1
(11.9)
(2.1)
(14.0)
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.
(5.6)
(4.7)
FROM OPERATING ACTIVITIES
31. RECONCILIATION OF OPERATING PROFIT TO NET CASH FLOWS
(10.2)
(9.3)
(15.8)
(14.0)
CURRENCY RISK
All of the Group’s assets and liabilities are denominated in sterling with the exception of £871.3m (2003: £168.7m) included
within ‘Asset Backed Loan Notes’, which is denominated in euros and £541.5m (2003: £nil) included within ‘Asset Backed Loan
Notes’ which is denominated in US dollars. 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.
Operating profit
Provisions for losses
Depreciation
Amortisation of brokers’ commissions
Amortisation of negative goodwill
Charge for long term incentive plan
Decrease in stock
Decrease / (increase) in debtors
Increase in creditors
Net cash inflow from operating activities
129.3
108.2
68 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 69
2004
£m
71.0
11.1
1.6
37.2
(5.2)
0.9
-
0.7
12.0
2003
RESTATED
NOTE 1(r)
£m
51.9
15.9
1.9
33.6
(2.1)
0.2
0.5
(0.1)
6.4
NOTES TO THE ACCOUNTS (Continued)
FOR THE YEAR TO 30 SEPTEMBER 2004
32. ANALYSIS OF CASH FLOWS FOR HEADINGS NETTED IN THE CASH FLOW STATEMENT
34. ANALYSIS OF NET DEBT
(A) CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Net decrease / (increase) in assets subject to non-recourse funding
Net increase in loans to customers
Expenditure on other fixed assets
Proceeds from sales of other fixed assets
(B) ACQUISITIONS AND DISPOSALS
Purchase of subsidiary undertaking
Net overdraft acquired with subsidiary
(C) FINANCING
Purchase of shares by ESOP scheme
Exercise of options under ESOP scheme
Exercise of other share options
Increase in loans from banks and others
(Decrease) / increase in non-recourse financing
2004
£m
800.2
(1,485.2)
(1.0)
0.2
(685.8)
-
-
-
(2.9)
0.4
1.0
1,453.0
(765.0)
686.5
33. 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
Non-recourse finance acquired with subsidiary
Loans acquired with subsidiary
Movement in net debt in year
Net debt at 1 October 2003
Net debt at 30 September 2004
2004
£m
21.1
(687.2)
85.7
(580.4)
-
-
(580.4)
(5,130.2)
(5,710.6)
2003
RESTATED
NOTE 1(r)
£m
(78.2)
(546.9)
(1.3)
0.2
(626.2)
(19.9)
(6.8)
(26.7)
(2.2)
1.2
1.3
539.7
72.6
612.6
2003
RESTATED
NOTE 1(r)
£m
19.4
(612.3)
27.5
(565.4)
(2,212.7)
(53.4)
(2,831.5)
(2,298.7)
(5,130.2)
Cash in hand at bank
Overdrafts
Non-recourse finance
Debt due within one year
Debt due after one year
Other liquid resources
Total
Other liquid resources comprise term deposits with UK banks.
35. PURCHASE OF SUBSIDIARY UNDERTAKING
Net assets acquired:
Tangible fixed assets
Assets subject to non-recourse finance
Non-recourse finance
Loans to customers
Debtors
Cash at bank and in hand
Provisions
Bank overdrafts
Other creditors
Negative goodwill
Satisfied by:
Cash
2003
RESTATED
NOTE 1(r)
£m
150.5
(0.8)
149.7
(2,285.3)
(25.6)
(3,113.8)
CASH FLOWS
2004
£m
172.0
(1.2)
170.8
(1,520.3)
-
(4,591.6)
£m
21.5
(0.4)
21.1
765.0
25.6
(1,477.8)
(687.2)
144.8
85.7
230.5
(5,130.2)
(580.4)
(5,710.6)
2003
£m
1.6
2,283.4
(2,212.7)
26.9
2.2
1.3
(0.4)
(8.1)
(53.4)
40.8
(20.9)
19.9
19.9
70 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 71
NOTES TO THE ACCOUNTS (Continued)
FOR THE YEAR TO 30 SEPTEMBER 2004
NOTICE OF ANNUAL GENERAL MEETING
36. CAPITAL COMMITMENTS
TO ALL SHAREHOLDERS
There were no capital commitments (2003: £nil) contracted but not provided for.
37. FINANCIAL COMMITMENTS
At 30 September 2004 the Group had commitments to make annual payments under operating leases which expire as follows:
Plant and machinery
Within one year
Land and buildings
Within one year
Between two and five years
Over five years
The company had no such commitments.
2004
£m
0.1
0.1
0.1
4.9
5.2
2003
£m
-
-
0.1
4.9
5.0
38. EVENTS OCCURING AFTER THE BALANCE SHEET DATE
On 26 October 2004 the Group disposed of the entire share capital of its subsidiary NHL Reversions Limited for a consideration
of £2.0m payable in cash. The results of NHL Reversions for the year are not shown as discontinued activities in the Group
accounts as they are immaterial to the results of the Group.
On 27 October 2004 the Group issued £1,000.0m of Mortgage Backed Floating Rate Notes through a subsidiary company,
Paragon Mortgages (No. 8) PLC, to refinance existing borrowings. The Notes were denominated in sterling and euros.
On 15 December 2004 the Group issued £300.0m of Asset Backed Floating Rate Notes through a subsidiary company, Paragon
Secured Finance (No. 1) PLC, to refinance existing borrowings. The Notes were denominated in sterling.
NOTICE IS HEREBY GIVEN that the sixteenth Annual General Meeting of The Paragon Group of Companies PLC will be held at
Butchers’ Hall, 87 Bartholomew Close, London EC1A 7EB on 9 February 2005 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 2004 and the Reports of the Directors
and the Auditors.
2 To consider and adopt the Report of the Board to the Shareholders on Directors’ Remuneration.
3 To declare a dividend.
4 To re-appoint as directors (a) Mr N Keen and (b) Mr C D Newell (both of whom retire under Article 77); and
(c) Mr R G Dench (who retires under Article 83).
5 To re-appoint Deloitte & Touche LLP as Auditors and to authorise the directors to fix their remuneration.
AS SPECIAL BUSINESS
To consider and, if thought fit, to pass resolution 6 as an ordinary resolution and resolutions 7 and 8 as special resolutions:
Ordinary Resolution
6
‘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 £4,264,200 PROVIDED THAT this authority shall expire
at the conclusion of the next Annual General Meeting of the Company after the passing of this resolution (unless
previously revoked or varied by the Company in general meeting) save that the Company may before such expiry make an
offer or agreement which would or might require relevant 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.’
Special Resolutions
7
‘THAT, subject to the passing of resolution 6, 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 6 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 £599,400,
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.’
72 THE PARAGON GROUP OF COMPANIES PLC
THE PARAGON GROUP OF COMPANIES PLC 73
NOTICE OF ANNUAL GENERAL MEETING (Continued)
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 11,900,000 (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
15 December 2004
Registered in England No. 2336032
A member entitled to attend and vote at this meeting may appoint a proxy to attend on his behalf and, on a poll, to vote instead
of such member. A proxy need not also be a member of the Company. A proxy form is enclosed for use in connection with the
meeting. Proxy forms and any power of attorney or other written authority under which they are executed (or an office or
notarially certified copy thereof) should be lodged with the Registrar of the Company at the address shown on the reverse of
the proxy form not less than forty-eight hours before the time appointed for the holding of the meeting. The appointment of a
proxy will not preclude a shareholder from attending and voting at the meeting.
The register of directors’ 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.
74 THE PARAGON GROUP OF COMPANIES PLC