The Paragon Group of Companies PLC
Annual Report & Accounts 2006
Contents
Financial highlights
Chairman’s statement
Chief Executive’s review
Board of Directors
Directors’ report
Corporate social responsibility
Report of the Board to the shareholders on directors’ remuneration
Statement of directors’ responsibilities
Independent auditors’ report
Corporate governance
Contacts
Consolidated income statement
Consolidated balance sheet
Company balance sheet
Consolidated cash flow statement
Company cash flow statement
Statement of recognised income and expenditure
Reconciliation of movements in equity
Notes to the accounts
Appendices to the annual report
Notice of Annual General Meeting
03
04
06
10
12
16
18
30
31
33
37
38
39
40
41
41
42
42
43
100
101
0 The Paragon Group of Companies PLC
Financial highlights
15.3%
Increase in profit before tax on a statutory
basis to £82.8 million (2005: £71.8 million)
and by 15.5% on a proforma basis
(2005 proforma*: £71.7 million)
25.2%
Increase in earnings per share on a statutory
basis to 61.2p (2005: 48.9p) and by 25.4 %
on a proforma basis (2005 proforma*: 48.8p)
34.9%
68.5%
Increase in dividend per share to 17.0p
(2005: 12.6p)
Increase in loan advances to
£3,412.6 million (2005: £2,025.6 million)
82.2%
Increase in buy-to-let loan advances to
£3,038.3 million (2005: £1,667.8 million)
29.1%
Increase in loan assets to £8,426.6 million on a
statutory basis (2005: £6,528.7 million) and by
31.0% on a proforma basis (2005 proforma*:
£6,431.1 million)
Profit before taxation
Profit after taxation
Total loan assets
Shareholders' funds
Earnings per share
- basic
- diluted
Dividend per ordinary share
2006
2005
IFRS Proforma*
£m
£m
82.8
68.8
8,426.6
279.0
71.7
55.7
6,431.1
244.4
2006
2005
IFRS Proforma*
2005
IFRS
Statutory
£m
71.8
55.8
6,528.7
312.8
2005
IFRS
Statutory
2004
UK
GAAP
£m
71.0
54.7
5,950.9
268.4
2004
UK
GAAP
2003
UK
GAAP
£m
51.9
40.3
5,287.1
225.3
2003
UK
GAAP
2002
UK
GAAP
£m
46.0
36.6
2,521.3
200.8
2002
UK
GAAP
61.2p
58.4p
17.0p
48.8p
46.8p
12.6p
48.9p
46.9p
12.6p
48.0p
46.2p
9.6p
35.5p
34.8p
6.3p
32.1p
31.4p
5.1p
Results for the years ended 30 September 2006 and 2005 are presented under International Financial Reporting Standards (IFRS).
Results for the years ended 30 September 2004, 2003 and 2002 are presented in accordance with UK GAAP.
* For references to the proforma basis see appendix II.
The Paragon Group of Companies PLC 3
Chairman’s statement
The year to 30 September 2006 has been another
successful period for the Group, with profits, earnings,
business volumes and loan assets all growing strongly.
The Group has increased its market share within the
buy-to-let sector, further strengthening its position as
a top lender to private sector landlords.
During the year, profit on ordinary activities before
taxation increased by 15.3% on a statutory basis to
£82.8 million from £71.8 million in the previous year
and by 15.5% from £71.7 million on a proforma basis
(appendix II). Earnings per share increased by 25.4%
on a proforma basis to 61.2p (2005: 48.8p) and by 25.2%
on a statutory basis from 48.9p.
Total advances by the Group increased by 68.5% to
£3,412.6 million (2005: £2,025.6 million), of which
£3,038.3 million were buy-to-let advances, an increase of
82.2% over the year. Total loan assets at 30 September
2006 increased by 29.1% to £8,426.6 million from
£6,528.7 million at 30 September 2005 on a statutory basis
and by 31.0% to £6,431.1 million on a proforma basis.
The Board has declared an increased final dividend of
10.1p per share which, when added to the interim dividend
of 6.9p paid on 31 July 2006, gives a total dividend of
17.0p per share for the year, an increase of 34.9% over
last year. Subject to approval at the Annual General
Meeting on 8 February 2007, the dividend will be paid on
12 February 2007, by reference to a record date of
12 January 2007.
Business review and strategy
During the period we have continued the development of
our lending brands, Paragon Mortgages and Mortgage
Trust, offering products to a wider range of residential
property investors across various types of mortgage
intermediaries, mortgage networks and mortgage
packagers as well as direct to borrowers. We have
invested significantly in underwriting and distribution
technology, to facilitate more efficient underwriting and
enhance the quality of service to brokers and borrowers.
The Group remains well placed competitively in
this market.
The consumer credit market has remained weak during
the year and, as a consequence, our focus within the
consumer credit division on cautious lending rather than
volumes continues to be appropriate. As before, we have
restricted our activities to areas with a low incidence of
arrears with an emphasis on secured lending.
Capital management
During the year the Company bought 3,454,000 shares in
the market at a cost of £23.1 million with the result that by
30 September 2006 a total of 5,244,000 shares had been
repurchased since the buy-back programme was
announced in 2005, at a total cost of £31.4 million. On an
annualised basis the share purchases to date will enhance
earnings per share by approximately 3%.
Over the period we have continued to reduce the risk
profile of the Group's loan assets through a disciplined
restructuring of the portfolio from unsecured towards less
capital-demanding secured lending. In addition, the more
capital-demanding closed books have continued to
decline, both from natural run-off and from ongoing
disposals, the latter including the sale during the year of
the majority of the remaining NHL assets. Further asset
sales may be considered as appropriate to supplement the
organic run-down strategy. As a result, the Board
announced during the year that it would increase the
amount set aside to repurchase shares in the market by a
further £20.0 million, within the authority granted by
shareholders at the 2006 Annual General Meeting. Of this,
£8.6 million remains available for investment in the
repurchase programme going forward.
Board changes
In July we announced that I will be retiring from the Board
at the end of the forthcoming Annual General Meeting and
that Bob Dench, a non-executive director since 2004, will
be taking over as Chairman from that time. The Group is
fortunate in having a capable and stable management
team and Bob, with his considerable management
experience in the financial sector, is eminently suitable for
the job. The fourteen years since I became Chairman have
been tremendously fulfilling and meeting the many
challenges we encountered has paved the way for the
success the Group enjoys today.
4 The Paragon Group of Companies PLC
Gavin Lickley, a non-executive director since 2002, retired
from the Board in October 2006. We thank Gavin for his
service and commitment during the years of his
association with the Group.
We were pleased to announce recently that Terry Eccles
will be joining the Board on 1 February 2007 as an
independent non-executive director. Terry is currently
Vice-Chairman of JPMorgan Cazenove and will bring to
the Board considerable experience in the financial sector.
The Nomination Committee is currently considering a
further non-executive appointment.
Outlook
The Group has enjoyed another year of strong growth.
Income generating assets increased by 31.0% on a
proforma basis through the addition of high quality loans,
whilst exposure to the more risky assets in the book was
further reduced. Secured loans now account for 96.8% of
loan assets. A strong cash position has enabled the Group
to make a special contribution to the staff pension
scheme, thus eliminating the deficit reported last year,
and to make considerable progress with the extended
share buy-back programme.
The success of the Group in developing its buy-to-let
mortgage businesses, Paragon Mortgages and Mortgage
Trust, is evident in the increase in Paragon's share of the
buy-to-let market and the strong business flows towards
the end of the year, and beyond, have ensured a sound
start to the current financial year.
As I prepare to leave the Group in February, after fifteen
years of service, I am delighted with progress over this
period. More important, however, is my confidence in
Paragon's future. The Group is financially and
professionally strong with an excellent management team
and a dedicated staff with whom it has been a privilege
to work closely over this period. Paragon's principal
buy-to-let activity is now well understood and most major
banking groups are now active participants in this market.
We are extremely well placed competitively and see
opportunities in this sector for many years to come. Other
promising business streams are reviewed, tested and, as
the Chief Executive's review indicates, implemented where
appropriate.
My successor, Bob Dench, has the qualities and relevant
experience to continue Paragon's successful development.
I wish him and the Paragon team great success in the
future.
Jonathan P L Perry
Chairman
22 November 2006
The Paragon Group of Companies PLC 5
Chief Executive’s review
During the year ended 30 September 2006 the Group
advanced strongly, with profit before tax increasing by
15.3% on a statutory basis to £82.8 million from
£71.8 million in the previous year and by 15.5% from
£71.7 million on a proforma basis (see below).
Total loan assets at 30 September 2006 increased by
29.1% to £8,426.6 million from £6,528.7 million at
30 September 2005 on a statutory basis and by 31.0% to
£6,431.1 million on a proforma basis. Total advances by
the Group increased by 68.5% to £3,412.6 million
(2005: £2,025.6 million), of which £3,038.3 million were
buy-to-let advances, an increase of 82.2% over the year.
CONSOLIDATED INCOME STATEMENT
For the year ended 30 September 2006
Interest receivable
Interest payable and similar charges
Net interest income
Other operating income
Total operating income
Operating expenses
Provisions for losses
Fair value net gains
Operating profit being profit on ordinary
activities before taxation
Tax charge on profit on ordinary activities
Profit on ordinary activities after taxation
Proposed dividend - Rate per share
Basic earnings per share
Diluted earnings per share
In adopting International Financial Reporting Standards
(“IFRS”) for the first time, the Group has not applied
IAS 32 and IAS 39 in compiling the statutory comparative
figures for the year ended 30 September 2005 shown in
this report. In order to aid comparison of the 2006 and
2005 results, additional proforma information has been
provided within this statement, showing the results for
that period as they would have been stated had the Group
applied those provisions of IAS 32 and IAS 39 relating to
accounting for the Group's loan assets. Further
information is given in appendix II. For all references to
proforma disclosures refer to this appendix. A full
statement of the effects of the transition to IFRS was
issued by the Company on 21 February 2006.
2006
£m
2005
Proforma
£m
2005
Statutory
£m
550.8
(407.9)
486.8
(355.9)
485.8
(390.8)
142.9
30.6
173.5
(45.4)
(47.8)
80.3
2.5
82.8
(14.0)
68.8
17.0p
61.2p
58.4p
130.9
29.4
160.3
(45.2)
(43.4)
71.7
-
95.0
37.9
132.9
(45.2)
(15.9)
71.8
-
71.7
(16.0)
71.8
(16.0)
55.7
55.8
12.6p
48.8p
46.8p
12.6p
48.9p
46.9p
6 The Paragon Group of Companies PLC
For management purposes the Group is organised into two major operating divisions, Buy-to-Let Mortgages and
Consumer Finance, which includes secured lending and car and retail finance. These divisions are the basis on which the
Group reports primary segmental information.
Other Operations comprises closed loan books arising from owner-occupied mortgages and unsecured personal lending
operations where no further new business is being written and existing assets are being run down.
The adjusted operating results of these business segments are detailed fully in note 6 to the accounts and are
summarised below.
Operating result
Buy-to-let mortgages
Consumer finance
Other operations
Net interest income increased by 9.2% to £142.9 million
from £130.9 million on a proforma basis, reflecting the
growth in the loan book. Margins within each division were
at a similar level to 2005, although the sharp rise in
expected interest rates in recent months has caused some
contraction of margins in the second half compared to the
first half. In due course market and official rates will align
as rates move towards their cyclical peak, at which time
the margin squeeze will diminish or reverse.
Other operating income remained broadly flat on a
proforma basis at £30.6 million from £29.4 million
(£37.9 million for 2005 on a statutory basis) compared to
2005. A greater proportion of this income has arisen from
fees rather than commissions, reflecting a decline in
insurance related income during the period.
Operating expenses were £45.4 million, compared with
£45.2 million for 2005, the tight control of costs and our
low cost:income ratio reflecting our continuing focus on
cost effectiveness.
The charge for loss provisions of £47.8 million compares
with £43.4 million on a proforma basis for 2005. As a
percentage of loans to customers the charge, at 0.57%,
is lower than the charge, on a proforma basis, of 0.67%
for 2005. The charge includes amounts in respect of
income which, although accounting standards require it to
be recognised, is not expected to be received by the Group
and hence also increases the charge for loan impairment.
Under UK GAAP such income was not recognised.
2006
£m
2005
Proforma
£m
2005
Statutory
£m
51.8
22.0
9.0
82.8
30.8
25.4
15.5
71.7
28.8
20.8
22.2
71.8
The Group has maintained its focus on growing its secured
lending, principally of high quality buy-to-let assets,
whilst limiting exposure to unsecured consumer lending.
The number of accounts in arrears across the portfolios
was lower at 30 September 2006 than a year previously,
both numerically and as a percentage of live accounts.
The performance of the buy-to-let book remains
exemplary and the arrears performance of the consumer
finance books continues to be in line with expectations,
following a policy of credit tightening.
Fair value net gains of £2.5 million have arisen from the
IFRS requirement that movements in the fair value of
hedging instruments attributable to ineffectiveness in the
hedging arrangements should be credited or charged to
income and expense. Any ineffectiveness arising from
differences between the fair value movements of hedging
instruments and the fair value movements of the hedged
assets or liabilities is expected to trend to zero over time.
The charge to tax has been reduced by an exceptional
credit of £4.3 million as a result of the settlement of a
prior year item and by £6.3 million as a result of the
utilisation of prior year losses not previously recognised
for accounting purposes, resulting in an effective tax rate
of 16.9% for the year.
Profits after taxation of £68.8 million have been
transferred to shareholders' funds.
The Paragon Group of Companies PLC 7
Buy-to-let mortgages
Buy-to-let mortgage lending by the Group was
£3,038.3 million for the year (2005: £1,667.8 million),
an increase of 82.2%, evidencing the successful market
penetration of our brands which saw our share of the
buy-to-let market increase during the year to 10% from
8% a year earlier. With redemption rates stable, this
strong lending performance produced a 42.5% increase in
buy-to-let assets to £7,212.3 million from £5,059.5 million
on the proforma basis (43.3% increase on the statutory
basis from £5,031.6 million). Furthermore, strong
application flows in the summer months have resulted in
a significant increase in the new business pipeline at
30 September 2006 compared to a year previously,
ensuring an excellent start to the new financial year.
The buy-to-let market has remained strong throughout
the year. Data released by the Council of Mortgage
Lenders in August 2006 showed that buy-to-let advances
were £17.5 billion for the half year to 30 June 2006,
representing 11% of all mortgages and an increase of
20% over the previous half-year.
Record levels of tenant demand and rental growth have
been reported by the Royal Institute of Chartered
Surveyors underpinning near-term growth prospects.
Longer term social, demographic and economic indicators
point to further demand for private rented property and,
therefore, to long-term growth in buy-to-let mortgage
lending.
The Group has maintained its strong credit standards for
buy-to-let lending. The credit performance of the portfolio
remains exemplary, with arrears significantly below
industry averages.
Consumer finance
Aggregate loan advances were £372.4 million during
the year, an increase of 6.4% from £349.9 million in the
previous year. As at 30 September 2006, the total loans
outstanding on the consumer finance books were
£709.6 million, compared with £690.3 million on a
proforma basis at 30 September 2005 (£694.9 million on
a statutory basis).
Personal finance
Weak consumer confidence and the prospect of higher
interest rates has limited the appetite of consumers
for further borrowing. With lower overall volumes,
competition has been high in the prime secured second
mortgage market, with some market participants relaxing
their credit criteria to increase lending volumes. By
contrast, we have tightened credit standards, limiting
business flow to avoid a reduction in credit performance
of the portfolio. Secured personal finance advances were
£218.0 million during the year, 6.5% lower than
£233.1 million for the previous year.
Looking forward, there are good prospects for a modest
recovery in volumes as our introducer base has increased
during the year. The recent strength of the housing market
will also provide more scope for home owners to access
secured loans.
Under the terms of an agreement entered into towards the
end of the financial year, Paragon has agreed to originate
sub-prime secured loans on behalf of Morgan Stanley
International Bank. The Group will hold no principal
position on these loans but will earn fees for their
origination. This will enable us to continue to support our
brokers with a full range of products, thereby enhancing
relationships. The arrangement is expected to start
generating additional earnings in the current financial
year and we will report further on the progress of this new
venture at the half year.
8 The Paragon Group of Companies PLC
Sales aid finance
The performance of the sales aid business was in line with
our expectations, with new business volumes originated
by the division increasing by 32.3% to £154.4 million
(2005: £116.7 million) despite contracting finance volumes
both in the car and larger retail goods markets and the
implementation of stricter underwriting parameters which
have further strengthened credit performance.
The rise in volumes has been achieved by a broadening
of product distribution supported by the establishment of
a sales focused call centre, which has benefited both the
car and retail finance businesses and has resulted in
a significant number of new introducers being signed
up during the year. Additionally, the streamlining of
both internal and external processes has improved
operating efficiency and delivered an improved service
to our introducers.
Funding
The Group continued to be an active issuer in the capital
markets during the year. In November 2005, a £1.0 billion
securitisation was completed by Paragon Mortgages
(No. 10) PLC; in March 2006 a further £1.0 billion
securitisation was completed by Paragon Mortgages
(No. 11) PLC; in July 2006 a £1.5 billion securitisation
was completed by Paragon Mortgages (No. 12) PLC;
and, in October 2006 a further £1.5 billion securitisation
was completed by Paragon Mortgages (No. 13) PLC.
Over the course of this series of transactions, coupons
have reduced, reflecting the positive demand for our buy-
to-let products amongst capital market investors.
In order to provide finance for the increased level of loan
completions, the Group's committed sterling warehouse
facility, provided by a consortium of banks, was increased
in April 2006 from £1,425.0 million to £2,325.0 million, on
finer terms.
Pension scheme
During the period the Group made a special contribution
of £14.6 million to the staff pension scheme. The amount
was equal to the IAS 19 deficit at 30 September 2005. The
scheme had a small IAS 19 surplus at 30 September 2006.
The special contribution places the scheme on a more
secure financial footing, as well as minimising the Group's
ongoing payments to the Pension Protection Fund.
Nigel S Terrington
Chief Executive
22 November 2006
The Paragon Group of Companies PLC 9
Board of Directors
1. Jonathan P L Perry
Chairman
Age 67
3. Nicholas Keen
Finance Director
Age 48
Jonathan Perry joined the Group as a non-executive
director in June 1991 and was appointed Chairman in
January 1992. He is a Chartered Accountant and between
1997 and 1999 he was Vice-Chairman, Investment Banking
Division, HSBC Investment Bank plc. Previously he was a
Director of Morgan Grenfell & Co Limited for 15 years.
Nicholas Keen joined the Group in May 1991 and became
Finance Director in June 1995 having previously held the
position of Treasurer. Prior to joining the Group he worked
in Corporate Banking, Treasury and Capital Markets. He is
Chairman of the Paragon Credit Committee.
2. Nigel S Terrington
Chief Executive
Age 46
4. John A Heron
Director of Mortgages
Age 47
Nigel Terrington joined the Group in 1987 and became
Chief Executive in June 1995, having held the positions of
Treasurer and Finance Director. Prior to Paragon,
he worked in investment banking. He is a Board member
of the Finance and Leasing Association and is also
Vice-Chairman of the FLA Consumer Finance division.
He previously held the position of Chairman of the
Intermediary Mortgage Lenders Association and was also
a member of the Executive Committee of the Council of
Mortgage Lenders.
John Heron joined the Group in January 1986. He was
appointed as Marketing Director in 1990 and in 1994
played a pivotal role in re-establishing the Group's
mortgage lending operations as Managing Director of
Paragon Mortgages. As Director of Mortgages, he is
responsible for both Paragon Mortgages and Mortgage
Trust. He is a Fellow of the Chartered Institute of Bankers
and a member of the Executive Committee of the Council
of Mortgage Lenders.
1.
3.
2.
4.
10 The Paragon Group of Companies PLC
5. Pawan Pandya
Chief Operating Officer
Age 42
7. Robert G Dench
Non-Executive Director
Age 56
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.
Robert Dench joined Paragon as a non-executive director
in September 2004. He 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
Private Client businesses. He is also a non-executive
director of AXA UK plc and of Clipper Ventures plc.
6. David M M Beever
Non-Executive Director
Age 65
8. Christopher D Newell
Non-Executive Director
Age 46
David Beever joined Paragon as a non-executive director
in August 2003. He is Chairman of KPMG Corporate
Finance, Vice-Chairman of London & Continental Railways
Ltd and a non-executive director of JJB Sports plc and
Volex Group plc. He was previously a Vice-Chairman of
SG Warburg & Co Ltd. He is the Senior Independent
Non-Executive Director.
Christopher Newell has been a director of Altium Capital
Limited since 1990. He was a director of Artemis
Investment Management Limited from its formation until
2006. He is a Chartered Accountant and joined the Board
of Paragon as a non-executive director in November 2001.
He is Chairman of the Paragon Audit and Compliance
Committee.
5.
7.
6.
8.
The Paragon Group of Companies PLC 11
Directors’ report
The directors submit their Report and the Accounts for the
year ended 30 September 2006 which were approved by
the Board on 22 November 2006.
Principal activities
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.
Results and dividends
The results for the year are shown in the Consolidated
Income Statement on page 38. The directors recommend
a final dividend of 10.1p per share (2005: 7.4p per share)
which, together with the interim dividend of 6.9p per share
(2005: 5.2p per share) paid on 31 July 2006, makes a
total of 17.0p per share (2005: 12.6p per share).
Before dividends, retained profits of £68.8 million
(2005: £55.8 million) have been transferred to reserves.
Business review
The requirement under the Companies Act to provide an
enhanced business review is met by the sections of the
Chairman's Statement headed 'Business Review and
Strategy', 'Capital Management' and 'Outlook' on pages
4 and 5 and the Chief Executive's Review on pages 6 to 9
which contain a review of the Group's business during the
financial year, its current position and future prospects.
The Group presents its policies in relation to corporate
social responsibility and issues such as community
involvement, the fair 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 16 to 17. This report also gives information on
the Group's charitable activities.
Information on the Group's approach to managing
financial risk is given in note 4 to the accounts.
Details of events taking place after the balance sheet date
are given in note 55.
Directors
The interests of the directors at the year end in the share
capital of the Company, all beneficially held, are shown
opposite.
AT 30 SEPTEMBER 2006
ORDINARY SHARES
OF 10P EACH
AT 30 SEPTEMBER 2005
ORDINARY SHARES
OF 10P EACH
J P L Perry
N S Terrington
N Keen
J A Heron
P Pandya
D M M Beever*
R G Dench*
G A F Lickley*
C D Newell*
375,816
120,170
54,390
14,303
117,365
10,000
20,000
30,000
20,000
309,579
113,205
44,116
5,600
-
10,000
20,000
30,000
20,000
* Non-executive directors.
In addition, certain directors had interests in the share
capital of the Company by virtue of options granted under
the Company's executive share option schemes and awards
under the Paragon Performance Share Plan, the Deferred
Bonus Scheme and the Matching Share Plan, details of
which are given in the Report of the Board to the
Shareholders on Directors' Remuneration on pages 18 to 29.
There have been no changes in the directors' interests in
the share capital of the Company since 30 September 2006.
The directors have no interests in the shares or
debentures of the Company's subsidiary companies.
Mr G A F Lickley resigned from the Board of Directors on
12 October 2006.
On 8 November 2006 it was announced that Mr T Eccles
will be appointed to the Board with effect from
1 February 2007.
In accordance with the Articles of Association,
Mr J P L Perry, Mr P Pandya, Mr D M M Beever and
Mr T Eccles will retire from the Board at the forthcoming
Annual General Meeting. Mr P Pandya, Mr D M M Beever
and Mr T Eccles, being eligible, will offer themselves for
re-appointment. None of these directors has a service
contract with the Company requiring more than
12 months' notice of termination to be given.
Mr J P L Perry will not offer himself for re-appointment
and will stand down from the Board at the conclusion of
the Annual General Meeting.
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.
12 The Paragon Group of Companies PLC
Purchase of own shares
During the year ended 30 September 2006 the Company has, as part of a £40.0 million (2005: £20.0 million) repurchase
programme, repurchased 3,454,000 shares (2005: 1,790,000) having an aggregate nominal value of £345,400 (2005: £179,000)
at a cost of £23.1 million (2005: £8.3 million). These shares represent 3.0% of the issued share capital of the Company
(excluding treasury shares) (2005: 1.5%). This brings the total number of shares acquired as part of the programme to
5,244,000 (2005: 1,790,000). All of these shares were held as at 30 September 2006 as treasury shares and this holding
represents the maximum number of its own shares held by the Company at any time during the past year. The reasons for
the repurchase programme are as set out in the announcement made by the Company through RNS on 25 May 2005.
Substantial shareholdings
As at 31 October 2006, 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:
Barclays Global Investors
J P Morgan Fleming Asset Management
BlackRock Merrill Lynch Investment Management
M & G Investment Management
Morley Fund Management
Columbia Wanger Asset Management
Standard Life Investments
Schroder Investment Management
The Paragon Group of Companies PLC ESOP scheme
Legal & General Investment Management
Old Mutual Asset Managers
Scottish Widows Investment Partnership
Charitable contributions
Contributions to charitable institutions in the United
Kingdom amounted to £90,531 (2005: £111,833).
Close company status
So far as the directors are aware, the Company is not a
close company for taxation purposes.
Creditor payment policy
The Company agrees terms and conditions with its
suppliers. Payment is then made on the terms agreed,
subject to the appropriate terms and conditions being met
by the supplier.
The trade creditor days figure has not been stated as the
measure is not appropriate to the business.
ORDINARY SHARES
11,615,531
6,920,599
6,374,812
5,806,032
5,399,287
5,000,000
4,990,492
4,830,057
4,398,444
4,222,263
3,804,731
3,649,455
%HELD
9.99%
5.95%
5.48%
5.00%
4.65%
4.30%
4.29%
4.16%
3.78%
3.63%
3.27%
3.14%
Auditors
The directors have taken all necessary steps to make
themselves and the Company's auditors aware of any
information needed in preparing the audit of the Annual
Report and Financial Statements for the year, and, as far
as each of the directors is aware, there is no relevant audit
information of which the auditors are unaware.
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.
The Paragon Group of Companies PLC 13
Resolution 8
This resolution, which is being proposed as a Special
Resolution, will enable the Company to purchase, in the
market, up to a maximum of 11.6 million of the Company's
ordinary shares (approximately 10% of the issued share
capital, excluding treasury shares, at 31 October 2006) for
cancellation, or to be held in treasury, at a minimum price
of 10p per share and a maximum price of not more than
105% of the average middle market quotation for an
ordinary share as derived from the London Stock
Exchange Daily Official List for the five business days
immediately prior to purchase.
During the year ended 30 September 2006 the Company
has, as part of a £40.0 million repurchase programme,
repurchased 3,454,000 shares at a total cost of
£23.1 million. The directors intend to continue with this
programme. Any purchases made by the Company will
be announced no later than 7.30 a.m. on the business day
following the transaction.
Approved by the Board of Directors and signed on behalf
of the Board.
John G Gemmell
Company Secretary
22 November 2006
Details of resolutions to be proposed as special
business at the Annual General Meeting
Resolution 6
Section 80 of the Companies Act 1985 states that the
directors may not exercise a company's power to allot its
unissued shares unless given authority to do so by
resolution of the shareholders in general meeting.
The present authority of the directors to allot the unissued
ordinary share capital of the Company was granted at the
previous Annual General Meeting on 9 February 2006 and
will expire at the end of the forthcoming Annual General
Meeting. Resolution 6 seeks to renew, for a further year,
the present authority of the directors to allot ordinary
shares up to an aggregate nominal value of £4,036,000
representing approximately 34.7% of the Company's
issued capital, excluding treasury shares, at 31 October
2006 and being one third of issued capital, excluding
treasury shares, plus shares issuable under option.
At 31 October 2006 the Group held 5,244,000 treasury
shares, representing 4.5% of the Company's issued
capital, excluding treasury shares, at 31 October 2006.
The directors have no present intention of exercising this
authority, which will expire at 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.
The authority given at the previous Annual General
Meeting will expire at the end of this year's Annual
General Meeting and Resolution 7 seeks to renew it.
The resolution authorises the directors to allot shares
for cash, other than to existing shareholders in proportion
to their holdings, up to an aggregate nominal value of
£581,000, representing approximately 5% of the
Company's issued share capital, excluding treasury
shares, at 31 October 2006.
14 The Paragon Group of Companies PLC
The Paragon Group of Companies PLC 15
Corporate social responsibility
Employees' involvement
The directors recognise the benefit of keeping employees
informed of the progress of the business. The Group
sponsors a Staff Forum, attended by elected staff
representatives from each area of the business,
which exists primarily to facilitate communication and
dissemination of information throughout the Group and
provides a means by which employees can be consulted
on matters affecting them.
Employees are provided with regular information on the
performance and plans of the Group, and the financial
and economic factors affecting it, through information
circulars and presentations.
The Company operates a Sharesave share option scheme
and a profit sharing scheme, both of which enable eligible
employees to benefit from the performance of the
business.
The directors encourage employee involvement at all
levels through the staff appraisal process and
communication between directors, team leaders, teams
and individual employees.
Environmental policy
The Group complies with all applicable laws and
regulations relating to the environment and operates a
Green Charter, which:
● ensures all buildings occupied by the Group are
managed efficiently by its Facilities Team and Building
Surveyor
● provides facilities to enable employees to re-cycle used
products
● controls business travel and provides opportunities for
employees to travel to work in various ways; i.e.
providing cycle racks and showers (where possible)
● displays a Paragon Green Charter at all sites to
encourage employees to be environmentally friendly at
all times
● ensures liaison with the local community
● ensures redundant IT equipment is disposed of within
current directives/regulations (WEEE - Waste Electrical
and Electronic Equipment). 98% of such equipment is
re-cycled.
The Group believes that the long-term interests of
shareholders, employees and customers are best served
by acting in a socially responsible manner. As such the
Group ensures that a high standard of corporate
governance is maintained.
Training and development
The Group has been accredited under the 'Investors in
People' scheme since 1997. This demonstrates the
Group's commitment to the training and development of
employees. The staff appraisal system is designed to
assist employees in developing their careers and to
identify and provide appropriate training opportunities.
The corporate training and development strategy focuses
on providing opportunities to develop all its staff and is
central to the achievement of the Group's business
objectives.
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
fully implemented.
The Group's aim is that its employees should be able to
work in an environment free from discrimination,
harassment and bullying and that employees, job
applicants, customers, retailers, business introducers
and suppliers should be treated fairly regardless of:
● race, colour, nationality (including citizenship), ethnic or
national origins
● 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 of a trade union
and that they should not be disadvantaged by unjust or
unfair conditions or requirements.
Composition of the workforce is reviewed on an annual
basis and employee satisfaction with equality of
opportunity is monitored as part of the regular employee
feedback surveys. Human Resources policies are regularly
reviewed to ensure that they are non-discriminatory and
promote equality of opportunity. In particular, recruitment,
selection, promotion, training and development policies
and practices are monitored to ensure that all employees
have the opportunity to train and develop according to
their abilities.
16 The Paragon Group of Companies PLC
Charitable contributions
The Group contributes to registered charities serving the
local communities in which it operates. Included in the
charitable contributions shown in the Directors' Report
are contributions of £59,625 (2005: £76,431) made by the
Group to the work of the Foundation for Credit Counselling
which operates the Consumer Credit Counselling Service
and contributions of £10,000 (2005: £5,000) to the Money
Advice Trust, which operates National Debtline. The Group
has also contributed to charities throughout the year by
way of single donations.
The Group's main objective is to support children's and
local charities although no charity request is overlooked.
During the last year the Group has helped many and
varied charities and causes such as: The Children's Heart
Foundation, Children's Safety Education (which helps
support local schools in their anti-bullying campaign),
the British Red Cross and Shelter.
The Group also supports Paragon's Charity Committee,
consisting of volunteer employees, which organises a
variety of fundraising activities throughout the year,
raising in the region of £20,000 for the employees' chosen
charity. All employees are given the opportunity to
nominate a charity and a vote is carried out to select the
beneficiary of the year's fundraising.
Health and Safety policy
It is the Group's policy to comply with the terms of the
Health and Safety at Work Act 1974, and subsequent
legislation and to provide and maintain a healthy and safe
working environment. The health and safety objective of
the Group is to minimise the number of instances of
occupational accidents and illnesses and ultimately
achieve an accident-free workplace.
The Group recognises and accepts its duty to protect
the health and safety of all visitors to its premises,
including contractors and temporary workers, as well
as any members of the public who might be affected by
our operations.
While the management of the Group will do all within its
power to ensure the health and safety of its employees,
it is recognised that health and safety at work is the
responsibility of each and every individual associated with
the Group. It is the duty of each employee to take
reasonable care of their own and other people's welfare
and to report any situation which may pose a threat to the
well-being of any other person.
Health and safety policies and procedures are managed by
the Group's Property Services team who liaise with senior
management and Human Resources as necessary.
External consultants are employed and regular meetings
are held with Group Property Services. The consultants
also attend senior management meetings twice a year.
All employees are provided with such equipment,
information, training and supervision as is necessary to
implement the policy in order to achieve the above stated
objective. The Group makes available such finances and
resources deemed reasonable to implement this policy.
All injuries, however small, sustained by a person at work
must be reported. Accident records are crucial to the
effective monitoring and revision of the policy and must
therefore be accurate and comprehensive.
The Group recognises the civil and moral need to ensure
that all employees adhere to this health and safety policy
and is prepared to invoke the disciplinary procedure
in case of any deliberate disregard for the health and
safety policy.
The Group's health and safety policy is continually
monitored and updated, particularly when changes in the
scale or nature of our operations occur. The policy is
updated at least every twelve months.
The Paragon Group of Companies PLC 17
Report of the Board to the shareholders on
directors’ remuneration
This report has been prepared in accordance with the
Directors' Remuneration Report Regulations 2002 and
also sets out how the principles of the Combined Code on
Corporate Governance relating to executive directors'
remuneration are applied by the Group. 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
During the year the Committee consisted of three non-
executive directors: Gavin Lickley, David Beever and
Robert Dench. The Chairman of the Company,
Jonathan Perry joined the Committee on 10 August 2006
to assist in the transitional period whilst Robert Dench
prepares to take on the role of Company Chairman in the
new year and following the retirement of Gavin Lickley.
The Company is in the process of recruiting two new
independent non-executive directors who will both join the
Committee, replacing Jonathan Perry and Gavin Lickley.
During the year the Chairman of the Remuneration
Committee was Gavin Lickley. None of the non-executive
directors who sit on 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. Jonathan Perry did
not participate in discussions on his own remuneration.
The Committee determines the Company's policy on
executive remuneration and specific compensation
packages for each of the executive directors and the
Chairman. No director contributes to any discussion about
his own remuneration. The Committee also reviews the
level and structure of remuneration of senior
management.
The terms of reference of the Committee are available on
request from the Company Secretary.
In determining the directors' remuneration for the year,
the Committee consulted Mr J P L Perry (Chairman),
Mr N S Terrington (Chief Executive) and Mr C D Newell
(non-executive director) about its proposals. The
Committee also utilised New Bridge Street Consultants
LLP to provide advice on structuring directors'
remuneration packages. New Bridge Street Consultants
LLP advised the Company on various sundry remuneration
matters during the year.
Remuneration policy for the Chairman and
executive directors
The Company's policy is to ensure that the Chairman and
the executive directors are fairly rewarded for their
individual performance, having regard to the importance
of retention and motivation. The performance
measurement of the Chairman and the executive directors
and the determination of their annual remuneration
packages are undertaken by the Committee.
In forming and reviewing remuneration policy the
Committee has given full consideration to the Combined
Code on Corporate Governance and has complied with the
Code's provisions relating to directors' remuneration
throughout the year.
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.
The Chairman and the executive directors receive a
combination of fixed and performance-related elements of
remuneration. Fixed remuneration consists of salary,
benefits in kind and, with the exception of the Chairman,
pension scheme contributions (see under 'Pension
contributions' below). Performance-related remuneration
consists of participation in the annual bonus plan and, for
the executive directors, the award of shares under the
performance share plan and participation in the award of
shares under the matching share plan from time to time.
The performance-related elements of remuneration are
intended to provide a significant proportion of executive
directors' potential total remuneration.
Salary
The Chairman and executive directors' salaries are
determined by the Committee at the beginning of each
year. In deciding appropriate levels, the Committee
considers remuneration levels within the Group as a
whole, individual and business performance during the
year and relies on objective research which gives
up-to-date information on comparable companies.
Directors' contracts of service will be available for
inspection at the Annual General Meeting.
18 The Paragon Group of Companies PLC
The maximum potential annual bonus for the Chairman is
62.5% of salary, payable in cash. The Chairman does not
participate in the matching share plan.
In determining the level of annual bonus awards for the
year ended 30 September 2006, the Committee compared
the actual performance of the Company with a series of
financial, operational, funding and shareholder value
targets agreed at the start of the year by the Committee,
the Chairman and the Chief Executive. The targets were
based on a business plan which had been prepared using
assumptions of stretched performance.
When considering the level of awards, the Committee
also considers the performance of individual directors
and executives. Approximately 25% of the potential
bonus award for each individual is dependent on an
assessment by the Committee of personal performance.
The Committee made the appropriate assessments
of individual performance necessary to justify the
relevant awards.
In the intensely competitive environment within the sector,
the overall performance of the Group, together with the
exceeding of key financial performance targets and
individual performance, justified the award of bonuses
appropriate to a 'stretch' level.
Pension contributions
During the year the executive directors were members of
the Group Retirement Benefits Plan, to which the
Company contributes at the same rate as for all members.
Dependants of executive directors who are members of
the Group Retirement Benefits Plan are eligible for a
dependant's pension and the payment of a lump sum in
the event of death in service. The pension arrangements
provide for a pension of 1/37.5 of basic annual salary
(to a maximum of 2/3) for every year of eligible service.
Where pension contributions are capped, additional
payments are made to enable further provision. The
executive directors contribute 5% of eligible salary as
participants in the Plan. Three of the executive directors
suspended their contributions to the Plan, and the accrual
of benefits, with effect from 5 April 2006.
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.
Performance bonuses
The Chairman and executive directors participate in an
annual bonus scheme under which awards are
determined by consideration of several business-specific
financial measures, including profit before tax and
earnings per share (“EPS”) but also including measures
relevant to current business plans and objectives.
Consideration is also given to individual executive
performance. Bonuses are normally paid in November
but are accrued in the year to which they relate.
The total target bonus for executive directors is 100% of
salary, total stretch bonus is 150% of salary and the bonus
payable under the bonus scheme is capped at 200% of
salary. (The enhanced levels of bonus will only be
triggered by performance levels in excess of those
currently required to receive a stretch bonus). One quarter
of the bonus is compulsorily deferred 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. The shares will vest after
three years and may be forfeitable if the director were to
leave the Company during that time.
The Paragon Group of Companies PLC 19
Share awards
In prior years, executive directors received grants of share
options under the Paragon 2000 Executive Share Option
Scheme (“ESOS”). Executive directors no longer receive
share option grants under the ESOS. The ESOS has been
retained but grants of share options will only be made in
exceptional circumstances, such as recruitment.
The Chairman and the executive directors remain entitled
to receive options under the Paragon 1999 Sharesave
Scheme, on the same terms as other employees.
Paragon Performance Share Plan (“PSP”)
The PSP has an annual award limit to an individual of
shares worth 200% of salary.
PSP awards granted prior to 30 September 2005 are
subject to performance testing conditions based on
comparing the total shareholder return (“TSR”) generated
in respect of the Company with the TSR for a group of
similar companies.
50% of PSP awards made after 30 September 2005 are
subject to an EPS test and 50% to a TSR test. The growth
in the Company's EPS (as adjusted for a common rate of
corporation tax) and its TSR will be compared over a single
three-year period to the performance of the following
companies: Alliance & Leicester, Barclays, Bradford &
Bingley, Cattles, Egg (until its delisting on
20 February 2006), HBOS, Hitachi Capital, HSBC,
Kensington Group, Lloyds TSB, London Scottish Bank,
Northern Rock, Provident Financial, Royal Bank of Scotland.
35% of each element of the PSP award will vest for
median performance with full vesting for upper quartile
performance; between these points awards will vest on a
straight-line basis. For below median performance, none
of the relevant element of the award will vest. In addition,
the Remuneration Committee will have regard to the
underlying financial performance of the Company as
compared with the level of TSR and EPS performance
when determining whether to scale back the level of
awards that will ultimately vest.
TSR and EPS have been selected as the performance
measures for these awards since they provide a balance of
internal and external measures to incentivise and reward
executives more effectively, whilst also aligning the interests
of executives with those of other shareholders. The Company's
TSR performance and the TSR and EPS performance of the
peer companies will be independently calculated by New
Bridge Street Consultants LLP before being reviewed and
confirmed by the Remuneration Committee.
Awards under the scheme are made quarterly.
Paragon Matching Share Plan (“MSP”)
Under the terms of the MSP, executive directors and
senior management are invited to invest in shares in the
Company out of their after-tax cash bonus. Assuming that
the executives decide to invest, the shares so acquired
must remain held by the executives for three years. At the
end of the three-year period and, subject to satisfaction of
the same performance conditions as set out for the PSP
above, the executives will receive a match in shares on a
two-for-one basis related to the number of shares which
could have been purchased with the pre-tax equivalent of
the bonus invested.
Currently, executive directors are invited to invest the
after-tax equivalent of up to 25% of salary; at such a level,
their award would be over 'free' matching shares worth
50% of salary.
The plan provides the facility to increase the level of
potential investment up to the after-tax equivalent of 50%
of salary should the Remuneration Committee feel in
future years that this would be appropriate.
Performance graph
The following graph shows the Company's performance,
measured by TSR, compared with the performance of the
FTSE All Share General Financial sector index, also
measured by TSR. The General Financial sector has been
selected for this comparison because it is the sector index
that contains the Company's shares.
5 year return index for the FTSE All Share General
Financial sector as at 30 September 2006
This graph shows the value, by 30 September 2006, of
£100 invested in The Paragon Group of Companies PLC
on 30 September 2001, compared with £100 invested in
the FTSE General Financial sector index. The other
points plotted are the values at the intervening financial
year ends.
20 The Paragon Group of Companies PLC
Non-executive directors are not eligible to participate in
any of the Company's incentive or pension schemes and
are not entitled to receive compensation for early
termination of their terms of engagement.
Following the retirement of Gavin Lickley, former
Chairman of the Remuneration Committee, David Beever,
the Senior Independent Director, will be available to
answer questions on remuneration policy at the Annual
General Meeting.
Directors' contracts
The Chairman and executive directors hold one year
rolling contracts in line with current market practice and
the Remuneration Committee reviews the terms of these
contracts regularly.
The current contracts are dated as follows:
J P L Perry
N S Terrington
N Keen
J A Heron
P Pandya
-
-
-
-
-
1 March 2004
1 September 1990
(amended16 February 1993
and 30 October 2001)
6 February 1996
(amended 30 October 2001)
1 September 1990
(amended 14 January and
8 February 1993)
1 October 1994
In the event of early termination, the directors' contracts
provide for the payment of one year's salary in lieu
of notice.
Of the directors seeking re-election at the Annual General
Meeting, Mr P Pandya has a service contract with the
Company.
None of the executive directors currently earns
remuneration from external non-executive appointments.
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 April 2006 all non-executive directors have been paid an
annual base fee of £28,000 plus £2,000 for membership of
each committee, £8,000 for Remuneration Committee and
Audit and Compliance Committee chairmanship and
£3,000 for acting as the Senior Independent Director.
Current terms of engagement apply for the following
periods:
C D Newell
D M M Beever
R G Dench
-
-
-
1 November 2004 to
1 November 2007
8 August 2006 to
8 August 2009
29 September 2004 to
29 September 2007
The Paragon Group of Companies PLC 21
AUDITED INFORMATION
Directors’ emoluments
The emoluments of directors holding office during the year were:
Chairman
J P L Perry
Executive
N S Terrington
N Keen
J A Heron
P Pandya
Non-executive
D M M Beever
R G Dench
G A F Lickley
C D Newell
2006
2005
SALARY
AND FEES
£000
BENEFITS
IN KIND
£000
ANNUAL
BONUS
£000
LOSS OF
OFFICE
£000
2006
TOTAL
£000
2005
TOTAL
£000
201
321
254
173
182
36
33
38
38
1,276
1,210
7
21
5
13
5
-
-
-
-
51
38
118
362
271
191
166
-
-
-
-
1,108
998
-
-
-
-
-
-
-
-
-
-
-
326
704
530
377
353
36
33
38
38
2,435
2,246
312
665
506
312
314
35
30
35
37
2,246
Benefits in kind comprise private health cover, fuel benefit, life assurance and company car provision.
22 The Paragon Group of Companies PLC
Directors’ pensions
The total amount charged to the profit and loss account of the Group in respect of pension provision for directors was
£247,000 (2005: £295,000).
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
5
5
6
5
48
53
63
39
ACCUMULATED TOTAL
ACCRUED PENSION AT
30 SEPTEMBER 2006
ACCUMULATED TOTAL
ACCRUED PENSION AT
30 SEPTEMBER 2005
£000
123
57
69
54
£000
114
50
61
48
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 service to 30 September 2006
for Mr Keen and service to 6 April 2006 for Messrs Terrington, Heron and Pandya who each elected to suspend future benefit
accrual within the plan from that date.
The increase in accrued pension during the year (and transfer value of the increase) excludes any increase for inflation.
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 AT
YEAR
END
DIRECTORS’
CONTRIBUTIONS
IN THE YEAR
INCREASE IN
ACCRUED
PENSION IN
THE YEAR
£000
£000
ACCUMULATED TRANSFER VALUE TRANSFER VALUE
OF ACCRUED
OF ACCRUED
BENEFITS AT
BENEFITS AT
30 SEPTEMBER
30 SEPTEMBER
2006
2005
£000
£000
TOTAL
ACCRUED
PENSION AT
YEAR END
£000
DIFFERENCE
IN TRANSFER
VALUES
LESS
CONTRIBUTIONS
£000
N S Terrington
N Keen
J A Heron
P Pandya
46
48
47
41
8
5
4
4
9
7
8
7
123
57
69
54
1,185
566
657
400
1,323
663
768
475
130
92
107
71
The pension entitlement shown is that which would be paid annually on retirement based on service to 30 September 2006
for Mr Keen and service to 6 April 2006 for Messrs Terrington, Heron and Pandya who each elected to suspend future benefit
accrual within the plan from that date.
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 £101,000 (2005: £92,000) in respect of further pension provision for Mr N Keen.
The Paragon Group of Companies PLC 23
Details of share based awards
Aggregate gains before taxation made by directors on the exercise of share based awards during the year were £6,924,000
(2005: £1,875,000). At 30 September 2006 the share price of The Paragon Group of Companies PLC was 674.0p (2005: 531.0p)
and the range during the year then ended was 495.5p to 761.5p (2005: 322.0p to 531.0p).
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.
Details of individual entitlements of the directors under the Paragon Performance Share Plan at 30 September 2005 and
30 September 2006 are:
DATE FROM
EXPIRY DATE
WHICH
EXERCISABLE
MARKET
PRICE AT
AWARD DATE
Awards outstanding at 30 September 2005:
JPL PERRY
NS TERRINGTON
N KEEN
JA HERON
P PANDYA
NUMBER
NUMBER
NUMBER
NUMBER
NUMBER
13/03/2006*
02/07/2006*
18/12/2006*
22/06/2007*
02/12/2007*
02/06/2008*
13/09/2006
02/01/2007
18/06/2007
22/12/2007
02/06/2008
02/12/2008
186.50p
291.00p
338.90p
350.25p
391.75p
408.00p
61,184
40,790
31,250
28,036
-
-
95,526
63,684
51,953
46,610
54,897
47,034
69,474
46,316
39,063
35,045
41,173
35,276
32,895
21,930
21,875
19,625
22,102
18,937
34,211
22,807
21,875
19,625
22,102
18,937
161,260
359,704
266,347
137,364
139,557
Awards made in the year:
07/03/2009†
25/05/2009†
25/09/2009†
07/09/2009
25/11/2009
25/03/2010
684.00p
643.00p
659.50p
Awards exercised in the year:
On 13/03/2006
13/03/2006*
13/09/2006
186.50p
On 05/07/2006
02/07/2006*
02/01/2007
291.00p
-
-
-
-
-
On 15/08/2006
13/03/2006*
13/09/2006
186.50p
(61,184)
On 12/09/2006
13/03/2006*
13/09/2006
186.50p
On 20/09/2006
02/07/2006*
02/01/2007
291.00p
-
-
35,722
19,352
18,295
26,778
14,506
13,714
15,111
8,186
7,739
15,111
8,186
7,739
-
-
-
-
-
-
-
-
-
(95,526)
(69,474)
(32,895)
(63,684)
(46,316)
(21,930)
(34,211)
(22,807)
-
-
-
At 30 September 2006
100,076
273,863
205,555
113,575
113,575
24 The Paragon Group of Companies PLC
* The receipt of these shares is subject to the Company's TSR exceeding the TSR of a relevant proportion of the constituents
of the FTSE All Share Banks and General Financial sectors. No part of an award vests for below median performance,
25% vests for median performance and 100% vests for upper quartile performance. Between median and upper quartile
performance, awards vest on a straight line basis.
† 50% of these awards are subject to an EPS test and 50% to a TSR test. No part of an award vests for below median
performance, 35% of each element vests for median performance and full vesting will occur for upper quartile
performance. Between median and upper quartile performance, awards vest on a straight line basis.
Both tranches of awards vesting during the year met the performance conditions for 100% vesting. The share prices on the
vesting dates were 683.0p on 13 March 2006 and 663.0p on 3 July 2006 (the first trading day after 2 July 2006).
The share prices at the exercise dates were:
13 March 2006
05 July 2006
15 August 2006
12 September 2006
20 September 2006
683.0p
660.5p
592.0p
645.5p
676.0p
The Paragon Group of Companies PLC 25
Share option schemes
Details of individual options held by the directors at 30 September 2005 and 30 September 2006 are:
DATE FROM
WHICH
EXERCISABLE
EXPIRY DATE
OPTION
PRICE
JPL PERRY
NS TERRINGTON
N KEEN
JA HERON
P PANDYA
NUMBER
NUMBER
NUMBER
NUMBER
NUMBER
Options held at 30 September 2005
31/03/2001*
11/01/2002*
17/02/2003†
26/05/2003
27/11/2004†
29/07/2005†
14/03/2006†
01/08/2006
08/12/2006†
01/12/2007†
01/08/2010
31/03/2008
11/01/2009
17/02/2010
26/05/2007
27/11/2011
29/07/2012
14/03/2013
01/02/2007
08/12/2013
01/12/2014
01/02/2011
218.00p
147.50p
147.00p
148.50p
248.00p
186.50p
186.50p
183.04p
339.00p
348.38p
326.76p
120,000
-
100,000
200,000
170,000
20,000
122,368
5,053
58,997
-
-
255,000
300,000
100,000
200,000
300,000
60,000
191,053
-
98,083
109,795
5,057
-
-
-
-
-
60,000
138,947
5,053
73,746
82,347
-
-
-
-
-
-
80,000
65,789
5,053
41,298
44,205
-
-
-
-
-
60,000
80,000
68,421
-
41,298
44,205
-
796,418
1,618,988
360,093
236,345
293,924
Options granted in the year:
01/09/2009
01/09/2011
01/09/2010
01/09/2012
525.52p
525.52p
-
-
Options exercised in the year:
On 01 March 2006
31/03/2001*
17/02/2003†
26/05/2003
27/11/2004†
29/07/2005†
31/03/2008
17/02/2010
26/05/2007
27/11/2011
29/07/2012
218.00p
147.00p
148.50p
248.00p
186.50p
(120,000)
(100,000)
(200,000)
(170,000)
(20,000)
On 07 July 2006
14/03/2006†
14/03/2013
186.50p
-
On 01 August 2006
01/08/2006
01/02/2007
183.04p
(5,053)
-
-
-
-
-
-
-
-
-
1,779
-
-
3,063
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(60,000)
(80,000)
(68,421)
(5,053)
(5,053)
-
At 30 September 2006
181,365
1,618,988
356,819
234,355
85,503
26 The Paragon Group of Companies PLC
* 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 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.
Both tranches of awards vesting during the year met the performance conditions for 100% vesting. The share prices on the
vesting dates were 699.0p on 14 March 2006 and 620.0p on 1 August 2006.
The share prices at the exercise dates were:
01 March 2006
07 July 2006
01 August 2006
675.5p
678.5p
620.0p
The Paragon Group of Companies PLC 27
Deferred bonus shares
Details of individual entitlements of the directors to Deferred Bonus Shares at 30 September 2005 and 30 September 2006 are:
AWARD DATE
TRANSFER
DATE
MARKET
PRICE AT
AWARD DATE
Awards outstanding at 30 September 2005:
27/02/2004
27/02/2005
01/10/2006
01/10/2007
387.60p
407.75p
Awards made in the year:
JPL PERRY
NS TERRINGTON
N KEEN
JA HERON
P PANDYA
NUMBER
NUMBER
NUMBER
NUMBER
NUMBER
29,940
14,113
44,053
45,284
52,694
97,978
32,934
39,490
72,424
13,473
20,528
34,001
16,467
20,528
36,995
13/03/2006
01/10/2008
683.00p
-
22,904
17,178
9,416
9,416
At 30 September 2006
44,053
120,882
89,602
43,417
46,411
The Deferred Bonus Shares awarded will be transferred to the scheme participants as soon as is reasonably practicable
after the transfer date.
Rights to the following shares are due to be granted in respect of the compulsory deferral of 25% of performance bonuses
for the year ended 30 September 2006. The shares will be transferred to the recipients on 1 October 2009, subject to the
recipient being employed by the Company at that time.
N S Terrington
N Keen
J A Heron
P Pandya
18,078 shares
13,552 shares
9,559 shares
8,285 shares
28 The Paragon Group of Companies PLC
Matching Share Plan
The individual interests of the directors in the Matching Share Plan at 30 September 2005 and 30 September 2006 are:
AWARD DATE
MARKET
PRICE AT
AWARD DATE
NS TERRINGTON
N KEEN
JA HERON
P PANDYA
NUMBER
NUMBER
NUMBER
NUMBER
Awards outstanding at 30 September 2005:
-
-
-
-
Awards made in the year:
22/03/2006
761.50p
32,086
24,052
16,966
16,966
At 30 September 2006
32,086
24,052
16,966
16,966
Awards are exercisable for six months from the date on which the Remuneration Committee determines the extent to which
the performance conditions have been satisfied. EPS performance is measured over the three year period commencing
1 October 2005 (being the first day of the financial year in which the award date falls) and TSR over the three year period
commencing 1 January 2006 (being the first day of the calendar quarter in which the award date falls).
Signed on behalf of the Board of Directors
John G Gemmell
Company Secretary
22 November 2006
The Paragon Group of Companies PLC 29
Statement of directors’ responsibilities
in relation to financial statements
The directors are responsible for preparing the Annual
Report and the financial statements. The directors are
required to prepare accounts for the Group in accordance
with International Financial Reporting Standards ('IFRS')
and have also elected to prepare company financial
statements in accordance with IFRS. Company law
requires the directors to prepare such financial
statements in accordance with International Financial
Reporting Standards, the Companies Act 1985 and
Article 4 of the IAS Regulation.
International Accounting Standard 1 - 'Presentation of
Financial Statements' requires that financial statements
present fairly for each financial year the Company's
financial position, financial performance and cash flows.
This requires the faithful representation of the effects of
transactions, other events and conditions in accordance
with the definitions and recognition criteria for assets,
liabilities, income and expenses set out in the
International Accounting Standards Board's 'Framework
for the preparation and Presentation of Financial
Statements'. In virtually all circumstances, a fair
presentation will be achieved by compliance with all
applicable International Financial Reporting Standards.
Directors are also required to:
● properly select and apply accounting policies;
● present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information; and
● provide additional disclosures when compliance with the
specific requirements in International Financial
Reporting Standards is insufficient to enable users to
understand the impact of particular transactions, other
events and conditions on the entity's financial position
and financial performance.
The directors are responsible for keeping proper
accounting records which disclose with reasonable
accuracy at any time the financial position of the company,
for safeguarding the assets, for taking reasonable steps
for the prevention and detection of fraud and other
irregularities and for the preparation of a directors' report
and directors' remuneration report which comply with the
requirements of the Companies Act 1985.
The directors are responsible for the maintenance and
integrity of the Company's website. Legislation in the
United Kingdom governing the preparation and
dissemination of financial statements differs from
legislation in other jurisdictions.
30 The Paragon Group of Companies PLC
Independent auditors’ report
To the members of The Paragon Group of Companies PLC
We have audited the group and individual company
financial statements (the 'financial statements') of The
Paragon Group of Companies PLC for the year ended
30 September 2006 which comprise the consolidated
income statement, the consolidated and individual
company balance sheets, the consolidated and individual
company cash flow statements, the consolidated and
individual company statements of recognised income and
expenditure, the consolidated and individual company
reconciliations of movements in equity and the related
notes 1 to 56. These financial statements have 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
The directors' responsibilities for preparing the annual
report, the directors' remuneration report and the
financial statements in accordance with applicable law
and International Financial Reporting Standards (IFRSs)
as adopted for use in the European Union are set out in
the statement of directors' responsibilities.
Our responsibility is to 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
International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial
statements give a true and fair view in accordance with
the relevant financial reporting framework and whether
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 and Article 4 of the IAS Regulation.
We report to you whether in our opinion the information
given in the Directors' Report is consistent with the
financial statements. The information given in the
Directors' Report includes that specific information
presented in the Chairman's Statement and Chief
Executive's Review that is cross referred from the
Business Review section of the Directors' Report.
We also report to you 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 regarding directors'
remuneration and other transactions is not disclosed.
We also report to you if, in our opinion, the Company has
not complied with any of the four directors' remuneration
disclosure requirements specified for our review by the
Listing Rules of the Financial Services Authority. These
comprise the amount of each element in the remuneration
package and information on share options, details of
long-term incentive schemes, and money purchase and
defined benefit schemes. We give a statement, to the
extent possible, of details of any non-compliance.
We review whether the corporate governance statement
reflects the Company's compliance with the nine
provisions of the 2003 FRC Combined Code specified for
our review by the Listing Rules of the Financial Services
Authority and we report if it does not. We are not required
to consider whether the Board's statements on internal
control cover all risks and controls, or form an opinion on
the effectiveness of the Group's corporate governance
procedures or its risk and control procedures.
We read the Directors Report and other information
contained in the annual report including the unaudited
part of the Directors' Remuneration Report and we
consider the implications for our report if we become
aware of any apparent misstatements or material
inconsistencies with the financial statements.
Basis of audit opinion
We conducted our audit in accordance with International
Standards on Auditing (UK and Ireland) issued by the
Auditing Practices Board. An audit includes examination,
on a test basis, of evidence relevant to the amounts and
disclosures in the 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 company's
circumstances, consistently applied and adequately
disclosed.
The Paragon Group of Companies PLC 31
We planned and performed our audit so as to obtain all
the information and explanations which we considered
necessary in order to provide us with sufficient evidence
to give reasonable assurance that the financial statements
and the part of the directors' remuneration report
described as having been audited are free from material
misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also
evaluated the overall adequacy of the presentation of
information in the financial statements and the part of
the directors' remuneration report described as having
been audited.
Opinion
In our opinion;
● the Group financial statements give a true and fair view,
in accordance with IFRSs as adopted for use in the
European Union, of the state of the Group's affairs as at
30 September 2006 and of its profit for the year then
ended;
● the individual Company financial statements give a true
and fair view, in accordance with IFRSs as adopted for
use in the European Union as applied in accordance with
the requirements of the Companies Act 1985, of the
state of the individual company's affairs as at
30 September 2006; and
● 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 and Article 4 of the IAS Regulation;
and
● the information given in the directors' report is
consistent with the financial statements.
Separate opinion in relation to IFRS
As explained in Note 1 to the financial statements, the
Group, in addition to complying with its legal obligation to
comply with IFRSs as adopted for use in the European
Union, has also complied with IFRSs as issued by the
International Accounting Standards Board. Accordingly, in
our opinion the financial statements give a true and fair
view in accordance with IFRSs, of the state of the Group's
affairs as at 30 September 2006 and of its profit for the
year then ended.
Deloitte & Touche LLP
Chartered Accountants and Registered Auditors
Birmingham, United Kingdom
22 November 2006
32 The Paragon Group of Companies PLC
Corporate governance
The Board of Directors is committed to the principles of
corporate governance contained in the Combined Code on
Corporate Governance (“Code”) issued by the Financial
Reporting Council in July 2003. Throughout the year ended
30 September 2006 the Company complied with the
provisions of the Code, except for Code provision B2.1
in relation to the constitution of the Remuneration
Committee. An explanation of this temporary departure
is given under the section of this report headed 'Directors'.
Directors
Throughout the year the Board of Directors comprised the
Chairman, four executive and four non-executive directors.
All of the directors bring to the Company a broad and
valuable range of experience. Jonathan Perry has been
Chairman since February 1992 and Nigel Terrington
Chief Executive since June 1995. In accordance with the
Code, all directors will submit themselves for re-election
at least once in every three years. The names of the
directors in office at the date of this report and their
biographical details are set out on pages 10 and 11.
The Group is in the process of recruiting two new
independent non-executive directors who will join the
Board in place of Jonathan Perry, who retires on
8 February 2007, and Gavin Lickley, who retired from the
Board on 12 October 2006.
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 Director.
This provides effective balance and challenge. The Board
is responsible for overall Group strategy, for approving
major agreements, transactions and other financing
matters and for monitoring the progress of the Group
against budget. All directors receive sufficient relevant
information on financial, business and corporate issues
prior to meetings and there is a formal schedule of
matters reserved for decision by the Board, which
includes material asset acquisitions and disposals,
granting and varying authority levels of the Chairman and
the executive directors, determination and approval of the
Group's objectives, strategy and annual budget,
investment decisions, corporate governance policies and
financing and dividend policies.
Normally, there are ten regular Board meetings a year
with other meetings being held as required.
Jonathan Perry, Nigel Terrington, Nicholas Keen and
Pawan Pandya attended all of the ten regular Board
meetings during the year ended 30 September 2006.
Christopher Newell and Gavin Lickley attended nine
meetings and John Heron, David Beever and Robert
Dench attended eight meetings.
All of 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.
All directors have access to the advice and services of the
Company Secretary, who is responsible to the Board for
ensuring that board procedures are complied with. Both
the appointment and removal of the Company Secretary
are matters for the Board as a whole.
All directors are able to take independent professional
advice in the furtherance of their duties whenever it is
considered appropriate to do so.
The Board also operates through a number of committees
covering certain specific matters, these being:
● The Remuneration Committee, which during the year
consisted of Gavin Lickley, who chaired the Committee,
Jonathan Perry, David Beever and Robert Dench.
Mr Lickley retired from the Board on 12 October 2006.
Jonathan Perry was appointed to the Committee
following publication of the revised Code in June 2006,
which permits the Company Chairman to be a member
of the Remuneration Committee, although this is not
permitted under section B2.1 of the current Code.
Mr Perry's appointment to the Committee accords with
the revised Code and was made to enable him to assist
in the transitional period whilst Robert Dench prepares
to take on the role of Company Chairman following
Mr Perry's retirement from the Board on 8 February 2007.
The Company is in the process of recruiting two new
independent non-executive directors who will join the
Committee in place of Jonathan Perry and Gavin Lickley.
The Paragon Group of Companies PLC 33
During the year ended 30 September 2006 there were
ten meetings of the Remuneration Committee. All
meetings were attended by Gavin Lickley, Robert Dench
and David Beever and three meetings were attended by
Jonathan Perry following his appointment to the
Committee on 10 August 2006.
Further information about the Remuneration Committee
is given in the Report of the Board to the Shareholders
on Directors' Remuneration on pages 18 to 29.
● The Audit and Compliance Committee, which during
the year consisted of Christopher Newell, who chairs
the Committee, David Beever, Gavin Lickley and
Robert Dench. The Board is satisfied that all members
of the Committee have recent and relevant financial
experience. 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 Audit and Compliance Committee reviews the scope
and the results of the annual external audit, its cost
effectiveness and the independence and objectivity of the
external auditors. Both the Audit and Compliance
Committee and the external auditors have in place
safeguards to avoid compromises of the independence
and objectivity of the external auditors. The Group has a
formal policy for the engagement of its external auditors
to supply non-audit services. The policy is designed to
ensure that neither the nature of the service to be
provided nor the level of reliance placed on the services
could impact the objectivity of the external auditors'
opinion on the Group's financial statements. The policy
incorporates a comprehensive system for reporting to
the Audit and Compliance Committee all proposals
considered and the level of fees payable to the external
auditors for the provision of non-audit services. In
pursuance of this policy other accounting firms have
been engaged for particular assignments.
At each meeting the Audit and Compliance Committee
receives reports of reviews conducted throughout the
Group by the Internal Audit and, from time to time,
compliance functions.
The Chairman, Group Chief Executive and other
executive directors, Director of Financial Accounting and
Group Company Secretary, Director of Business Analysis
and Planning, Director of Legal Services, Head of
Internal Audit and a partner from the external auditors
normally attend meetings of the Committee.
During the year ended 30 September 2006 there were
four meetings of the Audit and Compliance Committee
and all members of the Committee were present at each
meeting with the exception of Robert Dench and
David Beever, both of whom attended three meetings.
● The Nomination Committee, consisting of
Jonathan Perry, who normally chairs the Committee,
Nigel Terrington and three non-executive directors,
David Beever, Robert Dench and Christopher Newell.
A majority of the Committee's members are
independent non-executive directors, in accordance with
Code provision A4.1. The Committee is convened as
required to nominate candidates for membership of the
Board, although ultimate responsibility for appointment
rests with the Board. There was one meeting of the
Nomination Committee in the year ended 30 September
2006, at which all of the members of the Committee
were present. The meeting was chaired by the Senior
Independent Director, David Beever, to consider the
appointment of a successor to Jonathan Perry following
his decision to retire from the Board at the Annual
General Meeting on 8 February 2007. The Committee
recommended to the Board that, in view of his eminently
suitable experience and profile, Robert Dench should
succeed Jonathan Perry as Chairman and that no
external candidates need be sought. The Committee's
recommendation was accepted by the Board. The
Committee only engages in the process of identification
of suitable candidates for appointment to the Board
when requested by the Board to do so.
There is a formal process for the appointment of
directors, starting with a review of the Board structure,
size and composition, leading to the preparation of a
written job specification and the identification of suitable
candidates. The Nomination Committee ensures that
prospective non-executive directors can devote sufficient
time to the appointment. The Board recognises the
benefits that can flow from non-executive directors
holding other appointments but requires them to seek
the agreement of the Chairman before entering into any
commitments that might affect the time they can devote
to the Company. The choice of appointee would be
based entirely on merit.
34 The Paragon Group of Companies PLC
● 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.
At the Annual General Meeting the Chairman will confirm
to shareholders, when proposing the re-election of any
non-executive director, that, following formal performance
evaluation, the individual's performance continues to be
effective and demonstrates commitment to the role.
● 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 and sufficient resources are made available to
them to undertake their duties.
The composition of the Board and its committees is kept
under review, with the aim of ensuring that there is an
appropriate balance of power and authority between
executive and non-executive directors and that the
directors collectively possess the skills and experience
necessary to direct the Company and the Group's
business activities.
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 upon 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 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.
In 2004 the Board utilised the services of an external
consultant to facilitate a Board evaluation. All Board
directors were required to complete a detailed
questionnaire on the performance of the Board and Board
committees. During 2006 the Board reconsidered the
specific matters raised by the questionnaire and, through
a discussion facilitated by the Chairman, engaged in a
formal and rigorous performance review.
The non-executive directors meet at least annually to
review the performance of the Chairman.
Directors' remuneration
The Remuneration Committee reviews the performance of
executive directors and members of senior management
prior to determining its recommendations on annual
remuneration, performance bonuses and share options for
the Board's determination.
The Report of the Board to the Shareholders on Directors'
Remuneration is on pages 18 to 29.
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
Detailed reviews of the performance of the Group's main
business lines are included within the Chairman's
Statement and Chief Executive's Review. The Board uses
these, together with the Directors' Report on pages 12 to
14 to present a balanced and understandable assessment
of the Company's position and prospects.
The directors' responsibility for the financial statements is
described on page 30.
The Paragon Group of Companies PLC 35
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.
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 2006 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.
36 The Paragon Group of Companies PLC
Brokers
Hoare Govett Limited
250 Bishopsgate
London EC2M 4AA
UBS Limited
1 Finsbury Avenue
London EC2M 2PP
Remuneration consultants
New Bridge Street Consultants LLP
20 Little Britain
London EC1A 7DH
Consulting actuaries
Mercer Human Resource Consulting Limited
Four Brindleyplace
Birmingham B1 2JQ
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
The Paragon Group of Companies PLC 37
Consolidated income statement
For the year ended 30 September 2006
Interest receivable
Interest payable and similar charges
Net interest income
Other operating income
Total operating income
Operating expenses
Provisions for losses
Fair value net gains
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
Earnings per share
- basic
- diluted
Notes
8
9
10
15
16
17
19
19
The results for the current and preceding years relate entirely to continuing operations.
2006
£m
550.8
(407.9)
142.9
30.6
173.5
(45.4)
(47.8)
80.3
2.5
82.8
(14.0)
68.8
61.2p
58.4p
2005
£m
485.8
(390.8)
95.0
37.9
132.9
(45.2)
(15.9)
71.8
-
71.8
(16.0)
55.8
48.9p
46.9p
38 The Paragon Group of Companies PLC
Consolidated balance sheet
30 September 2006
Assets employed
Non-current assets
Intangible assets
Property, plant and equipment
Financial assets
Retirement benefit obligations
Tax assets
Current assets
Other receivables
Cash and cash equivalents
Total assets
Financed by
Equity shareholders’ funds
Called-up share capital
Reserves
Share capital and reserves
Own shares
Total equity
Current liabilities
Financial liabilities
Current tax liabilities
Provisions
Other liabilities
Non-current liabilities
Financial liabilities
Retirement benefit obligations
Deferred tax liabilities
Provisions
Other liabilities
Total liabilities
2006
2005
Notes
£m
£m
£m
£m
20
21
22
27
30
32
33
34
35
41
42
45
46
47
42
27
31
46
47
0.6
20.2
8,432.9
0.3
33.6
6.3
622.7
128.0
1.4
0.7
78.2
8,619.7
-
-
3.7
5.9
0.3
19.7
6,528.7
-
5.7
8,487.6
6,554.4
629.0
9,116.6
12.1
314.6
326.7
(47.7)
279.0
537.0
7,091.4
12.1
323.5
335.6
(22.8)
312.8
6.6
530.4
0.9
12.9
-
59.9
208.3
73.7
6,684.8
14.6
0.7
2.1
2.7
8,629.3
8,837.6
9,116.6
6,704.9
6,778.6
7,091.4
Approved by the Board of Directors on 22 November 2006.
Signed on behalf of the Board of Directors
N S Terrington
Chief Executive
N Keen
Finance Director
The Paragon Group of Companies PLC 39
Company balance sheet
30 September 2006
Assets employed
Non-current assets
Property, plant and equipment
Investment in subsidiary undertakings
Tax assets
Current assets
Other receivables
Total assets
Financed by
Equity shareholders’ funds
Called-up share capital
Reserves
Share capital and reserves
Own shares
Total equity
Current liabilities
Financial liabilities
Current tax liabilities
Other liabilities
Non-current liabilities
Financial liabilities
Other liabilities
Total liabilities
2006
2005
Notes
£m
£m
£m
£m
21
28
30
32
34
35
41
42
45
47
42
47
10.5
394.4
-
11.3
409.1
1.9
404.9
422.3
65.5
59.8
65.5
470.4
12.1
162.2
174.3
(31.4)
142.9
59.8
482.1
12.1
228.2
240.3
(8.3)
232.0
0.4
1.0
192.4
132.2
1.5
0.4
-
115.6
193.8
116.0
132.5
1.6
133.7
327.5
470.4
134.1
250.1
482.1
Approved by the Board of Directors on 22 November 2006.
Signed on behalf of the Board of Directors
N S Terrington
Chief Executive
N Keen
Finance Director
40 The Paragon Group of Companies PLC
Consolidated cash flow statement
For the year ended 30 September 2006
Notes
48
49
50
Net cash (used in) operating activities
Net cash (used in) investing activities
Net cash from financing activities
Net increase in cash and cash equivalents
Opening cash and cash equivalents
Closing cash and cash equivalents
Represented by balances within:
Cash and cash equivalents
Financial liabilities
Company cash flow statement
For the year ended 30 September 2006
Notes
48
49
50
Net cash from / (used in) operating activities
Net cash (used in) investing activities
Net cash (used in) / from financing activities
Net increase in cash and cash equivalents
Opening cash and cash equivalents
Closing cash and cash equivalents
Represented by balances within:
Cash and cash equivalents
Financial liabilities
2006
£m
(1,824.0)
(1.4)
1,917.8
92.4
529.9
622.3
622.7
(0.4)
622.3
2006
£m
78.0
(38.9)
(39.1)
-
-
-
-
-
-
2005
£m
(500.7)
(0.3)
530.3
29.3
500.6
529.9
530.4
(0.5)
529.9
2005
£m
(65.8)
(32.2)
97.9
(0.1)
0.1
-
-
-
-
The Paragon Group of Companies PLC 41
Statement of recognised income and expenditure
For the year ended 30 September 2006
Profit for the year
Actuarial (loss) on pension scheme
Cash flow hedge gains taken to equity
Tax on items taken directly to equity
Total recognised income and expenditure for the year
Adoption of IAS 32 and IAS 39
THE GROUP
THE COMPANY
2006
£m
68.8
(0.6)
1.5
(0.2)
69.5
(72.5)
(3.0)
2005
£m
55.8
-
-
-
55.8
-
55.8
2006
£m
1.5
-
-
-
1.5
(52.5)
(51.0)
2005
£m
14.1
-
-
-
14.1
-
14.1
Reconciliation of movements in equity
For the year ended 30 September 2006
Total recognised income and expenditure for the year
Dividends paid (note 40)
Net movement in own shares
Surplus on transactions in own shares
Charge for share based remuneration
Tax on share based remuneration
Net movement in equity in the year
Equity at 30 September 2005
Adoption of IAS 32 and IAS 39
Equity at 1 October 2005
Closing equity
THE GROUP
THE COMPANY
2006
£m
69.5
(16.0)
(24.9)
0.6
0.6
8.9
38.7
312.8
(72.5)
240.3
279.0
2005
£m
55.8
(12.4)
(10.5)
2.3
2.6
-
37.8
275.0
-
275.0
312.8
2006
£m
1.5
(16.8)
(23.1)
1.2
0.6
-
(36.6)
232.0
(52.5)
179.5
142.9
2005
£m
14.1
(13.0)
(8.3)
1.5
2.6
-
(3.1)
235.1
-
235.1
232.0
42 The Paragon Group of Companies PLC
Notes to the accounts
For the year ended 30 September 2006
1. GENERAL INFORMATION
2. ACCOUNTING POLICIES
The Paragon Group of Companies PLC is a company
domiciled in the United Kingdom and incorporated in
England and Wales under the Companies Act 1985. The
address of the registered office is given on page 37. The
nature of the Group's operations and its principal activities
are set out in the Directors Report on pages 12 to 14.
These financial statements are presented in pounds sterling
which is the currency of the economic environment in which
the Group operates.
At the date of authorisation of these financial statements the
following International Financial Reporting Standards and
Interpretations which have not been applied in these
financial statements were in issue but not yet effective:
● IFRS 7 - 'Financial Instruments: Disclosures' and the
related amendment to IAS 1 on capital disclosures.
The directors anticipate that the adoption of these Standards
and Interpretations in future periods will have no material
impact on the financial statements of the Group except for
additional and amended disclosures on capital and financial
instruments when the relevant standards come into effect
for the financial year ending 30 September 2008.
The financial statements have been prepared in accordance
with International Financial Reporting Standards as
endorsed by the European Union except that, as permitted
by IFRS 1 - 'First Time Adoption of International Financial
Reporting Standards' the requirements of IAS 32 - 'Financial
Instruments: Disclosure and Presentation' and IAS 39 -
'Financial Instruments: Recognition and Measurement' have
not been applied in preparing the comparative amounts for
the year ended 30 September 2005. In these disclosures,
financial instruments are accounted for using the policies
and practices previously adopted under UK GAAP.
The particular policies adopted are described below.
(a) Accounting convention
The financial statements have been prepared under the
historical cost convention, except as required in the
valuation of certain financial instruments which are
carried at fair value.
(b) Basis of consolidation
The consolidated financial statements deal with the
accounts of the Company and its subsidiaries made up
to 30 September 2006. Subsidiaries comprise all those
entities over which the Group has control. The results of
businesses acquired are dealt with in the consolidated
accounts from the date of acquisition.
In accordance with SIC 12 - 'Consolidation: Special
Purpose Entities' companies owned by charitable trusts
into which loans originated by Mortgage Trust Limited
were sold as part of its securitisation programme,
where the Group enjoys the benefits of ownership, are
treated as subsidiaries.
Similarly, trusts set up to hold shares in conjunction
with the Group's employee share ownership
arrangements are also treated as subsidiaries.
The Paragon Group of Companies PLC 43
2. ACCOUNTING POLICIES (continued)
(c) Goodwill
(g) Property, plant and equipment
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
reviewed annually to determine whether any
impairment has occurred.
Negative goodwill is written off as it arises.
As permitted by IFRS 1, the Group has elected not to
apply IFRS 3 - 'Business Combinations' to combinations
taking place before its transition date to IFRS (1 October
2004). Therefore any goodwill which was written off to
reserves under UK GAAP will not be charged or credited
to the profit and loss account on any future disposal of
the business to which it relates.
Property, plant and equipment is stated at cost less
accumulated depreciation. Cost for property held
under a sale and leaseback transaction represents
the sale value.
Depreciation is provided on cost in equal annual
instalments over the lives of the assets. The rates of
depreciation are as follows:
over the term of the lease
25% per annum
Short leasehold premises
Computer hardware
Furniture, fixtures and
office equipment
Company motor vehicles
Motor vehicles subject to
contract hire arrangements over the term of the lease
15% per annum
25% per annum
(d)
Intangible assets
(h)
Investments
Intangible assets comprise purchased computer
software, which is capitalised where it has a sufficiently
enduring nature. This is stated at cost less accumulated
amortisation. Amortisation is provided in equal
instalments at a rate of 25% per annum.
(e) Leases
Leases are accounted for as operating or finance leases
in accordance with IAS 17 - 'Leases'. A finance lease is
deemed to be one which transfers substantially all of
the risks and rewards of the ownership of the asset
concerned. Any other lease is an operating lease.
Rental income and costs under operating leases are
credited or charged to the profit and loss account over
the period of the leases.
(f) Contract hire
Motor vehicles acquired in connection with contract hire
arrangements are sold to finance houses, who lease
them to customers for a pre-determined period. The
Group has undertaken to repurchase these vehicles at
the end of the lease term.
In accordance with the requirements of IAS 17, the
assets are not derecognised on the sale to the finance
house and remain as the Group's assets and the
consideration received is spread over the customer's
lease term.
The Company's investments in subsidiary undertakings
are valued at cost less provision for impairment.
(i) Loans to customers
In the results for the year ended 30 September 2006
Loans to customers are considered to be 'loans and
receivables' as defined by IAS 39 - 'Financial
Instruments: Recognition and Measurement'. They are
therefore accounted for on the amortised cost basis.
Such loans are valued at inception at the initial advance
amount, which is the fair value at that time, inclusive of
procuration fees paid to brokers or other business
providers and less initial fees paid by the customer.
Thereafter they are valued at this amount less the
cumulative amortisation calculated using the Effective
Interest Rate ('EIR') method. The loan balances are then
reduced where necessary by a provision for balances
which are considered to be impaired.
The EIR method spreads the expected net income
arising from a loan over its expected life. The EIR is that
rate of interest which, at inception, exactly discounts the
future cash payments and receipts arising from the loan
to the initial carrying amount.
The Group's policy is to hedge against any exposure to
fixed rate loan assets.
44 The Paragon Group of Companies PLC
In the results for the year ended 30 September 2005
In the results for the year ended 30 September 2005
Loans are stated at cost, inclusive of brokers'
commissions payable on origination, less provision for
diminution in value.
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'.
Amortisation of brokers' commissions is recognised
within interest payable.
Interest arising on loans is recognised in the profit and
loss account as it is charged to borrowers, to the extent
that is expected to be recoverable. Other fee income
arising from borrower accounts is recognised in 'other
income' as it is charged.
(j) Finance lease receivables
Finance lease receivables are included within 'Loans to
Customers' at the total amount receivable less interest
not yet accrued, unamortised commissions and
provision for doubtful debts.
Income from finance lease contracts is accounted for
on the actuarial basis.
(k)
Impairment of loans and receivables
In the results for the year ended 30 September 2006
Loans and receivables are reviewed for indications of
possible impairment throughout the year and at each
balance sheet date, in accordance with IAS 39. Where
loans exhibit objective evidence of impairment, the
carrying value of the loans is reduced to the net present
value of their expected future cash flows, including the
value of the potential realisation of any security,
discounted at the original EIR. Loans are assessed
collectively, grouped by risk characteristics and account
is taken of any impairment arising due to events which
are believed to have taken place but have not been
specifically identified at the balance sheet date.
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.
(l) Cash and cash equivalents
Balances shown as cash and cash equivalents in the
balance sheet comprise demand deposits and short-
term deposits with banks with maturities of not more
than 90 days.
(m) Own shares
Shares in The Paragon Group of Companies PLC held in
treasury or by the trustees of the Group's employee
share ownership plans are shown on the balance sheet
as a deduction in arriving at total equity. Own shares are
stated at cost.
(n) Taxation
The charge for taxation is based on the profit for the
period and takes into account taxation deferred because
of temporary differences. Temporary 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.
Tax relating to items taken directly to equity is also
taken directly to equity.
(o) Borrowings
In the results for the year ended 30 September 2006
Borrowings are carried in the balance sheet on the
amortised cost basis. The initial value recognised
includes the principal amount received less any
discount on issue or costs of issuance.
Interest and all other costs of the funding are expensed
to the income statement as interest payable over the
term of the borrowing on an Effective Interest Rate basis.
In the results for the year ended 30 September 2005
Borrowings are stated at their outstanding value less
unamortised issue costs and discounts on issue.
Discounts on issue of borrowings and initial costs
incurred in arranging funding facilities are amortised
over the period of the facility.
The Paragon Group of Companies PLC 45
2. ACCOUNTING POLICIES (continued)
(p) Finance lease payables
(r) Hedging
Balances due on the lease arising from the sale and
leaseback of a Group property are recognised in
creditors at the total amount payable less interest not
yet accrued. Interest is accrued on the actuarial basis.
The profit which arose on the sale and leaseback
transaction is held within accruals and deferred income
and is being credited to profit over the lease term on a
straight line basis.
(q) Derivative Financial instruments
In the results for the year ended 30 September 2006
Derivative instruments utilised by the Group comprise
currency swap, interest rate swap, interest rate option
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.
The Group does not enter into speculative
derivative contracts.
All derivatives are carried in the balance sheet at fair
value, as assets where the value is positive or as
liabilities where the value is negative. Fair value is
based on market prices, where a market exists. If there
is no active market, fair value is calculated using
present value models which incorporate assumptions
based on market conditions and are consistent with
accepted economic methodologies for pricing financial
instruments. Changes in the fair value of derivatives are
recognised in the income statement, except where such
amounts are permitted to be taken to equity as part of
the accounting for a cash flow hedge.
In the results for the year ended 30 September 2005
Derivative instruments utilised by the Group comprise
currency swap, interest rate swap, interest rate option
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.
In the results for the year ended 30 September 2006
For all hedges, the Group documents, at inception, the
relationship between the hedging instruments and the
hedged items, as well as its risk management strategy
and objectives for undertaking the transaction. The
Group also documents its assessment, both at hedge
inception and on an ongoing basis, of whether the
hedging arrangements put in place are considered to
be 'highly effective' as defined by IAS 39.
For a fair value hedge, as long as the hedging
relationship is deemed 'highly effective' and meets the
hedging requirements of IAS 39, any gain or loss on the
hedging instrument recognised in income can be offset
against the fair value loss or gain arising from the
hedged item for the hedged risk. For macro hedges
(hedges of interest rate risk for a portfolio of loan
assets) this fair value adjustment is disclosed in the
balance sheet alongside the hedged item, for other
hedges the adjustment is made to the carrying value of
the hedged asset or liability. Only the net ineffectiveness
of the hedge is charged or credited to income. Where a
fair value hedge relationship is terminated, or deemed
ineffective, the fair value adjustment is amortised over
the remaining term of the underlying item.
Where a derivative is used to hedge the variability of
cash flows of an asset or liability, it may be designated
as a cash flow hedge so long as this relationship meets
the hedging requirements of IAS 39. For such an
instrument the effective portion of the change in the fair
value of the derivative is taken initially to equity, with the
ineffective part taken to profit or loss. The amount taken
to equity is released to the income statement at the
same time as the hedged item affects the income
statement. Where a cash flow hedge relationship is
terminated, or deemed ineffective, the amount taken to
equity will remain there until the hedged transaction is
recognised, or is no longer highly probable.
46 The Paragon Group of Companies PLC
(s) Deferred taxation
(v) Fee and commission income
Deferred taxation is provided in full on temporary
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. Deferred
tax assets are recognised to the extent that it is
regarded as probable that they will be recovered. As
required by IAS 12 - 'Income Taxes', deferred tax assets
and liabilities are not discounted to take account of the
expected timing of realisation.
It is assumed that all taxable IFRS transition
adjustments give rise to tax adjustments to reserves at
the current UK tax rate of 30%.
(t) Retirement benefit obligations
The expected cost of providing pensions within the
funded defined benefit scheme, determined on the
basis of annual valuations by professionally qualified
actuaries using the projected unit method, is charged
to the income statement. Actuarial gains and losses
are recognised in full in the period in which they occur
and do not form part of the result for the period, being
recognised in the Statement of Recognised Income
and Expenditure.
The retirement benefit obligation recognised in the
balance sheet represents the present value of the
defined benefit obligation, as adjusted for unrecognised
past service cost, and as reduced by the fair value of
scheme assets at the balance sheet date.
Both the return on investment expected in the period
and the expected financing cost of the liability, as
estimated at the beginning of the period are recognised
in the result for the period. Any variances against these
estimates in the year form part of the actuarial gain
or loss.
The assets of the scheme are held separately from those
of the Group in an independently administered fund.
The charge to the income statement for providing
pensions under defined contribution pension schemes
is equal to the contributions payable to such schemes
for the year.
(u) Provisions
Provisions are recognised where there is a present
obligation as a result of a past event, it is probable that
this obligation will result in an outflow of resources and
this outflow can be reliably quantified. Provisions are
discounted where this effect is material.
Other income includes administration fees charged to
borrowers, which are credited when the related service is
performed, and commissions receivable on the sale of
insurances, which are taken to profit at the point at which
the Group becomes unconditionally entitled to the income.
(w) Share based payments
In accordance with IFRS 2 – ‘Share based payments’,
the fair value at the date of grant of awards to be made
in respect of options and shares granted under the
terms of the Group’s various share based employee
incentive arrangements is charged to the profit and
loss account over the period between the date of
grant and the vesting date.
As permitted by IFRS 1, only those options and awards
granted after 7 November 2002 and not vested at
1 January 2005 have been restated on transition to IFRS.
(x) Dividends
In accordance with IAS 10 – ‘Events after the balance
sheet date’, dividends payable on ordinary shares are
recognised in equity once they are appropriately
authorised and are no longer at the discretion of the
Company. Dividends declared after the balance sheet
date, but before the authorisation of the financial
statements remain within shareholders’ funds.
(y) Foreign currency
Foreign currency transactions, assets and liabilities are
accounted for in accordance with IAS 21 – ‘The Effects
of Changes in Foreign Exchange Rates’. The functional
currency of the Group is the pound sterling.
Transactions which are not denominated in sterling are
translated into sterling at the spot rate of exchange on
the date of transaction. Monetary assets and liabilities
which are not denominated in sterling are translated at
the closing rate on the balance sheet date.
Gains and losses on retranslation are included in
interest payable or interest receivable depending on
whether the underlying instrument is an asset or a
liability, except where deferred in equity in accordance
with cash flow hedging provisions of IAS 39.
(z) Segmental reporting
Costs attributed to each segment represent the direct
costs incurred by the segment operations and an
allocation of the costs of areas of the business which
serve all segments. Such allocations are weighted by
the value of loan assets in each segment, adjusted for
the relative effort involved in the administration of each
asset class.
The Paragon Group of Companies PLC 47
(c) Fair values
Where financial assets and liabilities are carried at fair
value, in the majority of cases this can be derived by
reference to quoted market prices. Where such a
quoted price is not available the valuation is based on
cash flow models based, where possible, on
independently sourced parameters. The accuracy of the
calculation would therefore be affected by unexpected
market movements or other variances in the operation
of the models or the assumptions used.
(d) Retirement benefits
The present value of the retirement benefit obligation is
derived from an actuarial calculation which rests on a
number of assumptions. These are listed in note 27.
Where actual conditions differ from those assumed the
ultimate value of the obligation would be different.
3. CRITICAL ACCOUNTING ESTIMATES
Certain of the balances reported in the financial statements
are based wholly or in part on estimates or assumptions
made by the directors. There is, therefore, a potential risk
that they may be subject to change in future periods. The
most significant of these are:
(a)
Impairment losses on loans to customers
Impairment losses on loans are calculated based on
statistical models. The key assumptions revolve around
estimates of future cash flows from customer’s
accounts, their timing and, for secured accounts, the
expected proceeds from the realisation of the property.
These key assumptions are based on observed data
from historical patterns and are updated regularly
based on new data as it becomes available.
In addition the directors consider how appropriate past
trends and patterns might be in the current economic
situation and make any adjustments they believe are
necessary to reflect the current conditions.
The accuracy of the impairment calculations would
therefore be affected by unexpected changes to the
economic situation, variances between the models used
and the actual results, or assumptions which differ
from the actual outcomes.
(b) Effective interest rates
In order to determine the effective interest rate
applicable to loans an estimate must be made of the
expected life of each loan and hence the cash flows
relating thereto. These estimates are based on
historical data and reviewed regularly. The accuracy of
the effective interest rate applied would therefore be
compromised by any differences between actual
borrower behaviour and that predicted.
48 The Paragon Group of Companies PLC
4. FINANCIAL RISK MANAGEMENT
The principal risks arising from the Group’s normal business
activities are credit risk, liquidity risk, interest rate risk and
currency 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. The position disclosed below
is materially similar to that existing throughout the year.
Credit risk
The Group’s credit risk is primarily attributable to its loans
to customers. The maximum credit risk at 30 September
2006 approximates to the carrying value of loans to
customers (note 25). There are no significant concentrations
of credit risk due to the large number of customers included
in the portfolios.
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 principal
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. Details
of the Group’s borrowings are given in note 43.
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 securitisation process and the terms of the warehouse
facilities effectively limit 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 the
Group’s liquidity policy and uses detailed cash flow
projections to ensure that an adequate level of liquidity is
available at all times.
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 may be used
to hedge against any perceived risk of temporary increases
in LIBOR rates at month ends.
The Paragon Group of Companies PLC 49
4. FINANCIAL RISK MANAGEMENT (continued)
The fixed rate corporate bond is hedged by use of a
long-term interest rate swap agreement, of notional
principal equal to the principal amount of the bond. This
swap is in place until the optional repayment date in 2012
and converts the interest payable to a LIBOR-linked floating
rate basis.
The interest rate swaps have fixed rate receipts at an
average rate of 4.85% for periods up to 2012 and have
floating rate payments at LIBOR.
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. In the 2006 table the
carrying values of derivative financial instruments are
included in the ‘non interest bearing’ column. For those
fixed rate loan assets where the customer has contracted to
make regular repayments of both capital and interest, the
assets have been allocated across the time bands in the
table by reference to the contracted repayments. The
analysis takes no account of early terminations which are
likely to occur in practice. In determining the amount of
hedging required, the Group makes assumptions about the
level of regular capital repayments and early terminations
of its loan assets. The actual interest rate sensitivity will
therefore be determined by reference to subsequent
customer and management decisions and is expected to
be less sensitive than shown.
The table includes short term creditors and debtors.
50 The Paragon Group of Companies PLC
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 2006
Cash and cash equivalents
Loans to customers
Other assets
622.7
4,020.6
-
-
169.2
-
-
829.9
-
-
3,316.1
-
Total assets
4,643.3
169.2
829.9
3,316.1
Bank loans and overdrafts
Corporate bond
Asset backed loan notes
Other liabilities
Equity
(1,395.5)
-
(7,057.7)
-
-
Total liabilities and equity
(8,453.2)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
35.8
-
35.8
-
(117.9)
-
-
-
-
55.0
67.3
622.7
8,426.6
67.3
122.3
9,116.6
-
-
-
(266.5)
(279.0)
(1,395.5)
(117.9)
(7,057.7)
(266.5)
(279.0)
(117.9)
(545.5)
(9,116.6)
Notional swap principal
3,785.8
(61.9)
(658.0)
(3,183.6)
117.7
-
Interest rate repricing gap
(24.1)
107.3
171.9
132.5
35.6
(423.2)
Cumulative gap
(24.1)
83.2
255.1
387.6
423.2
-
-
-
-
At 30 September 2005
Cash and cash equivalents
Loans to customers
Other assets
Total assets
Bank loans and overdrafts
Corporate bond
Asset backed loan notes
Other liabilities
Equity
530.4
4,684.3
-
5,214.7
(1,022.8)
-
(5,530.0)
-
-
Total liabilities and equity
(6,552.8)
-
76.9
-
76.9
-
-
-
-
-
-
-
210.9
-
-
1,389.4
-
-
161.3
-
-
5.9
32.3
530.4
6,528.7
32.3
210.9
1,389.4
161.3
38.2
7,091.4
-
-
-
-
-
-
-
-
-
-
-
-
-
(118.2)
-
-
-
-
-
-
(107.6)
(312.8)
(1,022.8)
(118.2)
(5,530.0)
(107.6)
(312.8)
(118.2)
(420.4)
(7,091.4)
Notional swap principal
1,259.1
(36.2)
(74.2)
(1,218.7)
70.0
-
Interest rate repricing gap
(79.0)
40.7
136.7
170.7
113.1
(382.2)
Cumulative gap
(79.0)
(38.3)
98.4
269.1
382.2
-
-
-
-
The Paragon Group of Companies PLC 51
4. FINANCIAL RISK MANAGEMENT (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.
The only interest rate risk in the Company arises from the corporate bond described above which is a fixed rate instrument, until
its maturity in 2017, which is fully hedged. Inter company assets and liabilities bear interest at floating rates based on LIBOR
which reset at least quarterly. The finance lease bears notional interest only; all other balances are non-interest bearing.
Currency risk
All of the Group’s assets and liabilities are denominated in sterling with the exception of the asset backed loan notes
denominated in US dollars and euros, which are described in note 43. Although IAS 39 requires that they be accounted for as
currency liabilities and valued at their spot rates, it was a condition of the issue of these notes that 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.
The equivalent sterling principal amounts of notes in issue under these arrangements, and their carrying values at
30 September 2006 and 30 September 2005 are:
US dollar notes
Euro notes
2006
EQUIVALENT
STERLING
PRINCIPAL
£m
2006
CARRYING
VALUE
£m
2005
EQUIVALENT
STERLING
PRINCIPAL
£m
2005
CARRYING
VALUE
£m
2,416.6
2,118.6
2,313.2
2,103.0
535.2
1,724.0
535.2
1,724.0
4,535.2
4,416.2
2,259.2
2,259.2
52 The Paragon Group of Companies PLC
Use of derivative financial instruments
The Group uses derivative financial instruments for risk management purposes. Such instruments are used only to limit the
exposure of the Group to movements in market interest or exchange rates, as described above.
It is, and has been throughout the year under review, the Group’s policy that no trading in financial instruments shall be
undertaken, and hence all of the Group’s derivative financial instruments are for commercial hedging purposes. These are
used to protect the Group from exposures principally arising from fixed rate lending or borrowing and borrowings
denominated in foreign currencies. Hedge accounting is applied where appropriate, though it should be noted that some
derivatives, while forming part of an economic hedge relationship, do not qualify for this accounting treatment under IAS 39
either because natural accounting offsets are expected, or obtaining hedge accounting would be especially onerous.
The Group has designated a number of derivatives as fair value hedges. In particular this treatment is used for
(a) hedging the interest rate risk of groups of fixed rate prepayable loan assets with interest rate derivatives on a portfolio
basis. The Group believes this solution is the most appropriate as it is consistent with the economic hedging approach
taken by the Group to these assets.
(b) hedging the interest rate risk of fixed rate corporate bond borrowings with a designated fixed to floating interest rate swap.
The Group has also designated cash flow hedging relationships, principally arising from currency borrowings, where a
specified foreign exchange basis swap, set up as part of the terms of the borrowing is used.
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.
Derivative financial instruments are stated at their fair values. 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.
The fair value of loans to customers is considered to be not materially different to the amortised cost value at which they
are disclosed.
Set out below is a comparison by category of book values and fair values of the Group’s derivative financial instruments as
they were disclosed at 30 September 2005 under UK GAAP.
Derivative financial instruments held
to manage the interest rate profile
Swaps
Caps
2005
BOOK VALUE
£m
2005
FAIR VALUE
£m
(0.7)
1.4
0.7
(9.7)
0.2
(9.5)
The Paragon Group of Companies PLC 53
5. DISPOSAL OF SUBSIDIARY
On 26 October 2004 the Group disposed of a subsidiary, NHL Reversions Limited, for a cash consideration of £2.0m. A profit
of £0.9m was realised on this sale. The effect of this disposal on the results of the Group for the year is immaterial. The
contribution of NHL Reversions to the operating profit and cash flows of the Group in the year ended 30 September 2005 was
immaterial. No cash balances were disposed of with the subsidiary.
6. SEGMENTAL INFORMATION
For management purposes the Group is organised into two major operating divisions, Buy-to-Let Mortgages and Consumer
Lending, which includes secured lending and car and retail finance. These divisions are the basis on which the Group reports
primary segmental information. All of the Group’s operations are conducted in the United Kingdom.
Other Operations comprises closed loan books arising from owner-occupied mortgages and unsecured personal lending
operations where no further new business is being written and existing assets are being run down.
Financial information about these business segments is shown below.
Year ended 30 September 2006
Interest receivable
Interest payable
Net interest income
Other operating income
Total operating income
Operating expenses
Provisions for losses
Fair value net gains
Operating profit
Segment assets
Segment liabilities
Capital expenditure
BUY-TO-LET
MORTGAGES
£m
CONSUMER
LENDING
£m
OTHER
OPERATIONS
£m
385.8
(326.5)
59.3
8.4
67.7
(16.8)
(1.5)
49.4
2.4
51.8
61.5
(42.8)
18.7
16.1
34.8
(8.0)
(4.9)
21.9
0.1
22.0
103.5
(38.6)
64.9
6.1
71.0
(20.6)
(41.4)
9.0
-
9.0
TOTAL
£m
550.8
(407.9)
142.9
30.6
173.5
(45.4)
(47.8)
80.3
2.5
82.8
7,612.6
(7,399.2)
872.9
(795.2)
631.1
(643.2)
9,116.6
(8,837.6)
213.4
0.5
77.7
4.5
(12.1)
279.0
0.7
5.7
54 The Paragon Group of Companies PLC
Year ended 30 September 2005
Interest receivable
Interest payable
Net interest income
Other operating income
Total operating income
Operating expenses
Provisions for losses
Fair value net gains
Operating profit
Segment assets
Segment liabilities
Capital expenditure
7. REVENUE
Interest receivable
Other income
Total revenue
Arising from:
Buy-to-Let Mortgages
Consumer Loans
Other Operations
Total revenue
BUY-TO-LET
MORTGAGES
£m
CONSUMER
LENDING
£m
OTHER
OPERATIONS
£m
298.2
(263.7)
34.5
13.7
48.2
(18.2)
(1.2)
28.8
-
28.8
84.7
(68.6)
16.1
17.2
33.3
(7.9)
(4.6)
20.8
-
20.8
102.9
(58.5)
44.4
7.0
51.4
(19.1)
(10.1)
22.2
-
22.2
TOTAL
£m
485.8
(390.8)
95.0
37.9
132.9
(45.2)
(15.9)
71.8
-
71.8
5,346.5
(5,226.0)
844.5
(763.1)
900.4
(789.5)
7,091.4
(6,778.6)
120.5
0.3
81.4
3.1
110.9
312.8
0.5
3.9
2006
£m
550.8
30.6
581.4
394.2
77.6
109.6
581.4
2005
£m
485.8
37.9
523.7
311.9
101.9
109.9
523.7
The Paragon Group of Companies PLC 55
8. INTEREST RECEIVABLE
Interest on loans to customers
Other interest receivable
Total interest on financial assets
Return on pension scheme assets
Other finance income
2006
£m
512.5
33.4
545.9
2.2
2.7
550.8
2005
£m
455.1
29.3
484.4
1.4
-
485.8
As permitted by IFRS 1 the interest figures shown above for the years ended 30 September 2006 and 30 September 2005 are
prepared under different bases (see note 2). They are therefore not directly comparable.
9. INTEREST PAYABLE AND SIMILAR CHARGES
On asset backed loan notes
On corporate bond
On bank loans and overdrafts
Total interest on financial liabilities
On pension scheme liability
On finance leases
Amortisation of brokers' commissions payable
Other finance costs
2006
£m
339.7
8.3
53.5
401.5
2.0
1.3
-
3.1
407.9
2005
£m
297.7
4.0
50.9
352.6
1.9
1.4
34.9
-
390.8
As permitted by IFRS 1 the interest figures shown above for the years ended 30 September 2006 and 30 September 2005 are
prepared under different bases (see note 2). They are therefore not directly comparable.
10. OPERATING EXPENSES
Employment costs (note 11)
Auditor remuneration (note 14)
Amortisation of intangible assets (note 20)
Depreciation (note 21)
Operating lease rentals (note 52)
Other administrative costs
2006
£m
27.3
1.1
0.2
3.5
3.5
9.8
45.4
2005
£m
26.8
0.8
0.2
3.8
3.5
10.1
45.2
56 The Paragon Group of Companies PLC
11. EMPLOYEES
The average number of persons (including directors) employed by the Group during the year was 724 (2005: 692).
Staff costs incurred during the year in respect of these employees were:
Share based remuneration
Other wages and salaries
Total wages and salaries
National Insurance on share based remuneration
Other social security costs
Total social security costs
Defined benefit pension cost
Other pension costs
Total pension costs
Total staff costs
2006
£m
0.6
21.4
1.6
1.7
1.9
0.1
2006
£m
22.0
3.3
2.0
27.3
2005
£m
1.7
19.2
2.3
1.6
1.7
0.3
2005
£m
20.9
3.9
2.0
26.8
Details of the pension schemes operated by the Group are given in note 27.
The Company has no employees. Details of the directors' remuneration are given in note 12.
12. KEY MANAGEMENT REMUNERATION
The remuneration of the directors, who are the key management personnel of the Group and the Company, is set out below in
aggregate in accordance with IAS 24 - 'Related Party Transactions'. Further information about the remuneration of individual
directors is provided in the Report of the Board to the Shareholders on Directors' Remuneration on pages 22 to 29.
Short-term employee benefits
Post-employment benefits
Termination benefits
Share-based payment
2006
£m
2.7
0.3
-
1.2
4.2
2005
£m
2.5
0.3
-
2.6
5.4
The Paragon Group of Companies PLC 57
13. SHARE BASED REMUNERATION
During the year the Group had various share based payment arrangements with employees. They are accounted for by the
Group and the Company as shown below.
The effect of the share based payment arrangements on the Group's profit is shown in note 11.
Further details of share based payment arrangements are given in the Report of the Board to the Shareholders on Directors'
Remuneration on pages 22 to 29.
(a) Share option schemes
Options under the Executive Share Option ('Executive') schemes have been granted to directors and senior employees from
time to time, on the basis of performance and at the discretion of the Remuneration Committee. These options vest so long as
the grantee is still employed by the Group at the end of the vesting period and, where applicable, performance criteria have
been satisfied. It is not the present intention of the Group that any further awards should be made under the Executive schemes.
The Group also operates an All Employee Share Option ('Sharesave') scheme. Grants under this scheme vest after the
completion of the appropriate service period and subject to a savings requirement.
A reconciliation of movements in the number and weighted average exercise price during the year ended 30 September 2006
and the year ended 30 September 2005 is shown below.
Options outstanding
At 1 October 2005
Granted in the year
Exercised in the year
Lapsed during the year
At 30 September 2006
Options exercisable
2006
NUMBER
2006
WEIGHTED
AVERAGE
EXERCISE
PRICE
p
2005
NUMBER
2005
WEIGHTED
AVERAGE
EXERCISE
PRICE
p
5,814,891)
236,883)
(1,634,329)
(31,761)
219.37
525.52
190.08
257.97
7,250,721)
712,176)
(2,116,687)
(31,319)
201.16
339.75
198.21
171.89
4,385,684)
246.54
5,814,891)
219.37
2,848,978)
188.28
3,297,974)
190.27
The weighted average share price at date of exercise for share options exercised during the period was 600.17p (2005: 402.61p).
The weighted average remaining contractual life of options outstanding at 30 September 2006 was 6.4 months
(2005: 7.4 months).
58 The Paragon Group of Companies PLC
Options are outstanding under the Executive and Sharesave schemes to purchase ordinary shares of 10p each as follows:
GRANT
DATE
EXERCISE
PRICE
PERIOD
EXERCISABLE
Executive schemes
31/02/1998
11/01/1999
27/09/1999
17/02/2000
26/05/2000
27/11/2001
29/07/2002
23/12/2002
14/03/2003
18/12/2003
01/06/2004
01/12/2004
Sharesave schemes
21/06/2000
18/06/2003
18/06/2003
23/06/2005
23/06/2005
28/07/2006
28/07/2006
218.00p
147.50p
209.50p
147.00p
148.50p
248.00p
186.50p
161.50p
186.50p
339.00p
322.50p
348.38p
120.64p
183.04p
183.04p
326.76p
326.76p
525.52p
525.52p
31/03/2001 to 31/03/2008 *
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
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 †
18/12/2006 to 18/12/2013 †
01/06/2007 to 01/06/2014 †
01/12/2007 to 01/12/2014 †
01/08/2005 to 01/02/2006
01/08/2006 to 01/02/2007
01/08/2008 to 01/02/2009
01/08/2008 to 01/02/2009
01/08/2010 to 01/02/2011
01/08/2009 to 01/02/2010
01/08/2011 to 01/02/2012
NUMBER
2006
279,000
480,000
-
150,000
320,000
540,000
390,000
-
658,552
432,890
40,000
434,552
NUMBER
2005
435,000
480,000
100,000
285,000
600,000
830,000
540,000
620
782,237
432,890
40,000
434,552
3,724,994
4,960,299
-
31,426
131,718
149,839
110,824
180,782
56,101
660,690
27,974
408,890
141,114
160,735
115,879
-
-
854,592
4,385,684
5,814,891
*
The exercise of these options is conditional upon earnings per share ('EPS') increasing at a rate in excess of the retail
price index over the three preceding financial years.
† The exercise of these options is conditional upon the Company's total shareholder return ('TSR') exceeding the TSR for at
least half of a specified group of comparator companies.
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.
The Paragon Group of Companies PLC 59
13. SHARE BASED REMUNERATION (continued)
All grants in the period were made under the Sharesave scheme. The fair value of options granted is determined using a
Black-Scholes Merton model. Details of the awards made in the year ended 30 September 2006 and the year ended
30 September 2005 are shown below:
GRANT DATE
Number of awards granted
Market price at date of grant
Contractual life (years)
Fair value per share at date of grant
Inputs to valuation model
Expected volatility
Expected life at grant date (years)
Risk-free interest rate
Expected dividend yield
Expected annual departures
28 JULY
2006
28 JULY
2006
23 JUNE
2005
23 JUNE
2005
180,782
622.00p
3.0
131.60p
56,101
622.00p
5.0
138.31p
160,735
443.37p
3.0
115.91p
115,879
443.37p
5.0
122.10p
17.09%
3.5
4.77%
1.99%
8.83%
17.09%
5.5
4.77%
1.99%
6.52%
12.30%
3.5
4.23%
2.01%
11.10%
12.30%
5.5
4.23%
2.01%
6.50%
The expected volatility of the share price used in determining the fair value of the awards is based on the annualised standard
deviation of daily changes in price over the previous year from the grant date.
(b) Paragon Performance Share Plan
Awards under this plan comprise a right to acquire ordinary shares of 10p each 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, if the holder is still employed by the Group. 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 2006 and 30 September 2005 were:
GRANT
DATE
13/03/2003
02/07/2003
18/12/2003
22/06/2004
02/12/2004
02/06/2005
07/03/2006
25/05/2006
25/09/2006
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 *
02/12/2007 to 02/06/2008 *
02/06/2008 to 02/12/2008 *
07/03/2009 to 07/09/2009 †
25/05/2009 to 25/11/2009 †
25/09/2009 to 25/03/2010 †
NUMBER
2006
-
69,081
289,533
268,169
297,273
265,204
179,456
92,088
88,653
NUMBER
2005
451,118
260,748
289,533
268,169
297,273
265,204
-
-
-
1,549,457
1,832,045
*
The receipt of these shares is subject to the Company's TSR exceeding the TSR of a relevant proportion of the
constituents of the FTSE All Share Banks and General Financial sectors. No part of an award vests for below median
performance, 25% vests for median performance and 100% vests for upper quartile performance. Between median and
upper quartile performance, awards vest on a straight line basis.
60 The Paragon Group of Companies PLC
† The receipt of these shares is 50% subject to an EPS test and 50% to a TSR test. The growth in the Company's EPS
(as adjusted for a common rate of corporation tax) and its TSR will be compared over the vesting period to the
performance of a group of designated comparator companies. 35% of each element of the award will vest for median
performance with full vesting for upper quartile performance; between these points awards will vest on a straight-line
basis. For below median performance, none of the relevant element of the award will vest. In addition, the
Remuneration Committee will have regard to the underlying financial performance of the Company as compared with
the level of TSR and EPS performance.
The fair value of awards granted under the Performance Share Plan is determined using a Monte Carlo simulation model, to
take account of the effect of the market based condition. Details of the awards made in the year ended 30 September 2006
and the year ended 30 September 2005 are shown below:
GRANT DATE
Number of awards granted
Market price at date of grant
Fair value per share at date of grant
Inputs to valuation model
Expected volatility
Risk-free interest rate
Expected dividend yield
GRANT DATE
Number of awards granted
Market price at date of grant
Fair value per share at date of grant
Inputs to valuation model
Expected volatility
Risk-free interest rate
Expected dividend yield
07 MARCH
2006
25 MAY 25 SEPTEMBER
2006
2006
179,456
684.00p
453.00p
92,088
643.00p
433.50p
88,653
659.50p
445.50p
23.87%
4.37%
2.17%
21.16%
4.63%
2.03%
22.31%
4.75%
1.98%
02 DECEMBER
2004
02 JUNE
2005
297,273
265,204
363.00p
150.00p
410.00p
154.00p
22.37%
4.44%
1.99%
27.72%
4.08%
2.29%
For all of the above grants the contractual life and expected life at grant date is three years and no departures are expected.
The expected volatility of the share price used in determining the fair value of the awards is based on the annualised standard
deviation of daily changes in price over the previous year from the grant date.
c) Deferred Bonus Scheme
Awards under this scheme comprised a right to acquire 10p ordinary shares in the Company for nil or nominal payment and
will vest on the third anniversary of their granting. No further awards are to be made under this scheme.
The conditional entitlements outstanding under this scheme at 30 September 2006 and 30 September 2005 were:
GRANT
DATE
27/02/2004
27/02/2005
13/03/2006
TRANSFER
DATE
01/10/2006
01/10/2007
01/10/2008
NUMBER
2006
170,430
189,947
77,153
437,530
NUMBER
2005
170,430
189,947
-
360,377
The Paragon Group of Companies PLC 61
13. SHARE BASED REMUNERATION (continued)
The shares awarded will be transferred to the scheme participants as soon as is reasonably practicable after the transfer date.
The fair value of Deferred Bonus awards is based on the market value of the shares awarded at the grant date. Details of the
awards made in the year ended 30 September 2006 and the year ended 30 September 2005 are shown below:
GRANT DATE
Number of awards granted
Market price at date of grant
Fair value per share at date of grant
(d) Matching Share Plan
13 MARCH
2006
77,153
605.00p
605.00p
27 FEBRUARY
2005
189,947
431.00p
431.00p
Awards under this plan comprise a right to acquire 10p ordinary 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,
if the holder is still employed by the Group. 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 2006 were:
GRANT
DATE
22/03/2006
TRANSFER
DATE
22/06/2009 †
NUMBER
2006
158,541
158,541
NUMBER
2005
-
-
†
The receipt of these shares is 50% subject to an EPS test and 50% to a TSR test. The growth in the Company's EPS (as
adjusted for a common rate of corporation tax) and its TSR will be compared over the vesting period to the performance of a
group of designated comparator companies. 35% of each element of the award will vest for median performance with full
vesting for upper quartile performance; between these points awards will vest on a straight-line basis. For below median
performance, none of the relevant element of the award will vest. In addition, the Remuneration Committee will have regard
to the underlying financial performance of the Company as compared with the level of TSR and EPS performance.
The fair value of awards granted under the Matching Share Plan is determined using a Monte Carlo simulation model, to take
account of the effect of the market based condition. Details of the awards made in the year ended 30 September 2006 are
shown below:
GRANT DATE
Number of awards granted
Market price at date of grant
Fair value per share at date of grant
Inputs to valuation model
Expected volatility
Risk-free interest rate
Expected dividend yield
22 MARCH
2006
158,541
761.50p
504.50p
23.77%
4.39%
2.15%
For all of the above grants the contractual life and expected life at grant date is three years and no departures are expected.
The expected volatility of the share price used in determining the fair value of the awards is based on the annualised standard
deviation of daily changes in price over the previous year from the grant date.
62 The Paragon Group of Companies PLC
14. AUDITOR REMUNERATION
The total amount charged to the profit and loss account in respect of audit fees in the year was:
Total audit fees for the Group
Company audit fee
2006
£000
452
22
2005
£000
405
22
The analysis of fees payable to the Group's auditors required by the Companies (Disclosure of Auditor Remuneration)
Regulations 2005 is set out below. This analysis includes amounts charged to the profit and loss account or included within
the issue costs of debt in respect of fees paid to the Group auditors and their associates.
Group audit fee
Other services
2006
£000
2006
%
2005
£000
2005
%
188
17%
127
15%
Audit of associated undertakings pursuant to legislation
Subsidiary audit fees
264
24%
278
33%
Other services pursuant to legislation
Interim review
Other services related to taxation
Compliance services
Advisory services
Services relating to corporate finance transactions
Securitisation services
Other services
IFRS advice and audit
Other
Total other services
Total fees
47
4%
12
1%
208
69
277
19%
6%
25%
129
88
217
15%
11%
26%
85
8%
144
17%
193
52
245
918
17%
5%
22%
83%
1,106
100%
69
-
69
720
847
8%
-
8%
85%
100%
In addition to the amounts above, the auditors received fees of £7,000 (2005: £7,000) in respect of the audit of the
Group pension scheme.
The Paragon Group of Companies PLC 63
15. PROVISIONS FOR LOSSES
Impairment of financial assets
First mortgage loans
Other secured loans
Finance lease receivables
Retail finance loans
Other loans
Other provisions
2006
£m
1.4
1.6
3.3
-
40.4
46.7
1.1
47.8
This disclosure arises from IAS 32 and was not required under UK GAAP. Therefore no comparative is provided.
16. FAIR VALUE NET GAINS
The fair value net gain of £2.5m (2005: £nil) represents the accounting volatility on derivative instruments which are matching
risk exposure on an economic basis. Some accounting volatility arises on these items due to accounting ineffectiveness on
designated hedges, or because hedge accounting has not been adopted or is not achievable on certain items. The gain is
primarily due to timing differences in income recognition between the derivative instruments and the economically hedged
assets and liabilities.
64 The Paragon Group of Companies PLC
17. 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
Total current tax
Deferred tax
Tax charge on profit on ordinary activities
(b) Deferred tax charge for the year
2006
£m
12.6
(5.8)
6.8
7.2
14.0
The deferred tax charge in the income statement comprises the following temporary differences:
Accelerated tax depreciation
Retirement benefit obligations
Impairment and other provisions
Utilisation of tax losses
Other timing differences
Deferred tax charge for the year
Recognition of asset not previously recognised
Deferred tax charge / (credit) (note 31)
(c) Factors affecting tax charge for the year
2006
£m
-
1.4
5.1
4.7
0.7
11.9
(4.7)
7.2
2005
£m
17.5
-
17.5
(1.5)
16.0
2005
£m
0.5
(0.1)
3.0
-
1.0
4.4
(5.9)
(1.5)
The tax assessed for the year is lower than the standard rate of corporation tax in the United Kingdom of 30% (2005: 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% (2005: 30%)
Effects of:
Permanent differences
Recognition of deferred tax asset not previously recognised
Other movements in unprovided deferred taxation
Prior year credit
Tax charge for the year
2006
£m
82.8
24.8
(0.7)
(4.7)
0.4
(5.8)
14.0
2005
£m
71.8
21.5
-
(5.9)
0.4
-
16.0
The Paragon Group of Companies PLC 65
18. PROFIT ATTRIBUTABLE TO MEMBERS OF THE PARAGON GROUP OF
COMPANIES PLC
The Company's profit after tax for the financial year amounted to £1.5m (2005: £14.1m). A separate income statement has not
been prepared for the Company under the provisions of Section 230 of the Companies Act 1985.
19. EARNINGS PER SHARE
Earnings per ordinary share is calculated as follows:
Profit for the year (£m)
Basic weighted average number of ordinary shares ranking for dividend
during the year (million)
Dilutive effect of the weighted average number of share options and incentive
plans in issue during the year (million)
Diluted weighted average number of ordinary shares ranking for dividend
during the year (million)
Earnings per ordinary share
- basic
- diluted
20. INTANGIBLE ASSETS
Intangible assets comprise computer software used in the Group's operations.
Cost
At 1 October 2005
Additions
Disposals
At 30 September 2006
Accumulated amortisation
At 1 October 2005
Charge for the year
Disposals
At 30 September 2006
Net book value
At 30 September 2006
At 30 September 2005
66 The Paragon Group of Companies PLC
2006
68.8
112.4
5.3
117.7
61.2p
58.4p
2006
£m
1.3
0.5
-
1.8
1.0
0.2
-
1.2
0.6
0.3
2005
55.8
114.1
4.9
119.0
48.9p
46.9p
2005
£m
1.6
0.2
(0.5)
1.3
1.3
0.2
(0.5)
1.0
0.3
0.3
21. PROPERTY, PLANT AND EQUIPMENT
(a) The Group
Cost
At 1 October 2004
Additions
Disposals
At 30 September 2005
Additions
Disposals
At 30 September 2006
Accumulated depreciation
At 1 October 2004
Charge for the year
On disposals
At 30 September 2005
Charge for the year
On disposals
At 30 September 2006
Net book value
At 30 September 2006
At 30 September 2005
At 30 September 2004
LEASEHOLD
PREMISES
£m
PLANT AND
MACHINERY
£m
TOTAL
£m
19.3
-
-
19.3
-
-
19.3
5.8
1.0
-
6.8
1.0
-
7.8
11.5
12.5
13.5
19.1
3.7
(7.2)
15.6
5.2
(4.0)
16.8
11.2
2.8
(5.6)
8.4
2.5
(2.8)
8.1
8.7
7.2
7.9
38.4
3.7
(7.2)
34.9
5.2
(4.0)
36.1
17.0
3.8
(5.6)
15.2
3.5
(2.8)
15.9
20.2
19.7
21.4
The net book value of leasehold buildings includes £10.5m in respect of assets held under finance leases. (2005: £11.3m)
The Paragon Group of Companies PLC 67
21. PROPERTY, PLANT AND EQUIPMENT (continued)
(b) The Company
Cost
At 1 October 2004, 1 October 2005 and 30 September 2006
Accumulated depreciation
At 1 October 2004
Charge for the year
At 30 September 2005
Charge for the year
At 30 September 2006
Net book value
At 30 September 2006
At 30 September 2005
At 30 September 2004
The net book value of leasehold buildings represents assets held under finance leases.
22. FINANCIAL ASSETS
Loans and receivables (note 23)
Finance lease receivables (note 24)
Loans to customers (note 25)
Fair value adjustments from portfolio hedging
Derivative financial assets (note 26)
2006
£m
8,279.0
147.6
8,426.6
(14.0)
20.3
8,432.9
LEASEHOLD
PREMISES
£m
16.6
4.4
0.9
5.3
0.8
6.1
10.5
11.3
12.2
2005
£m
6,375.9
152.8
6,528.7
-
-
6,528.7
68 The Paragon Group of Companies PLC
23. LOANS AND RECEIVABLES
Loans and receivables at 30 September 2006 and 30 September 2005, which are all denominated and payable in
sterling, were:
First mortgage loans
Secured loans
Retail finance loans
Other unsecured loans
2006
£m
7,643.8
509.0
53.1
73.1
8,279.0
2005
£m
5,653.8
511.8
30.3
180.0
6,375.9
First mortgages are secured on residential property within the United Kingdom; Secured loans enjoy second charges on
residential property. Retail finance loans are unsecured.
Mortgage loans have a contractual term of up to thirty years, secured loans up to 25 years, retail finance loans up to 10 years
and other unsecured loans up to 10 years. In all cases the borrower is entitled to settle the loan at any point and in most cases
early settlement does take place. All borrowers are required to make monthly payments, except where an initial deferred
period is included in the contractual terms.
The average rate of interest being charged on customer accounts and the average rate at which income is being recognised
under the effective interest rate method at 30 September 2006 was:
AVERAGE RATE CHARGED
AVERAGE EFFECTIVE
TO CUSTOMERS
2006
INTEREST RATE
2006
First mortgage loans
Secured loans
Retail finance loans
Other unsecured loans
5.82%
8.95%
14.37%
18.08%
The interest rate repricing profile of the above loans is shown in note 4.
The loans shown above pledged as collateral for liabilities at 30 September 2006 and 30 September 2005 were:
In respect of:
Asset backed loan notes
Warehouse facilities
Total pledged as collateral
Not pledged as collateral
At 30 September 2006
2006
£m
6,913.2
1,278.3
8,191.5
87.5
8,279.0
6.18%
8.09%
10.12%
18.10%
2005
£m
5,261.3
965.8
6,227.1
148.8
6,375.9
The Paragon Group of Companies PLC 69
24. FINANCE LEASE RECEIVABLES
The Group's finance lease receivables are car finance loans. The average contractual life of such loans is 53 months, but it is
likely that a significant proportion of customers will choose to settle their obligations early.
The contractual interest rate inherent in these leases is fixed at the outset. The average effective interest rate in these
contracts is 7.8% per annum.
Amounts receivable under finance leases
Within one year
Within two to five years
After five years
Less: future finance income
Present value of lease obligations
Allowance for uncollectible amounts
Provision for recoveries
MINIMUM LEASE
PAYMENTS
2006
£m
2005
£m
49.1
114.9
4.2
168.2
(21.3)
146.9
(2.5)
3.2
54.0
110.3
4.4
168.7
(18.5)
150.2
(2.3)
4.9
PRESENT VALUE OF
MINIMUM LEASE
PAYMENTS
2006
£m
43.1
100.1
3.7
2005
£m
48.1
98.1
4.0
146.9
(2.5)
3.2
150.2
(2.3)
4.9
Present value of lease obligations
147.6
152.8
147.6
152.8
The Group considers that the fair value of its finance lease receivables is not significantly different to their carrying values.
The interest rate repricing profile of the above loans is shown in note 4.
The loans shown above pledged as collateral for liabilities at 30 September 2006 and 30 September 2005 were:
In respect of:
Asset backed loan notes
Warehouse facilities
Total pledged as collateral
Not pledged as collateral
At 30 September 2006
2006
£m
129.8
14.6
144.4
3.2
147.6
2005
£m
137.4
11.3
148.7
4.1
152.8
70 The Paragon Group of Companies PLC
25. LOANS TO CUSTOMERS
The movement in the Group's investment in loans to customers in the year ended 30 September 2006 was:
Cost
At 1 October 2005
Brought forward
Adoption of IAS 32 and IAS 39
Acquisitions
Additions
Disposals
Amortisation of commissions
EIR adjustments
Other debits
Repayments and redemptions
At 30 September 2006
2006
£m
6,528.7
(97.6)
6,431.1
91.0
3,433.0
(67.8)
-
(9.5)
503.2
(1,954.4)
8,426.6
2005
£m
5,953.9
-
5,953.9
-
2,071.9
(1.1)
(34.9)
-
448.3
(1,909.4)
6,528.7
'Other debits' includes primarily interest charged to customers on loans outstanding and impairment movements on
these loans.
The Paragon Group of Companies PLC 71
26. DERIVATIVE FINANCIAL ASSETS AND LIABILITIES
All of the Group's financial derivatives are held for economic hedging purposes, although not all may be designated for hedge
accounting in accordance with the provisions of IAS 39. The analysis below therefore splits derivatives between those
accounted for as hedges and those which, while representing an economic hedge do not qualify for this treatment.
(a) The Group
Derivatives in accounting hedge relationships
Fair value hedges
Interest rate swaps
Cash flow hedges
Foreign exchange basis swaps
Interest rate swaps
Other derivatives
Interest rate swaps
Interest rate caps
2006
NOTIONAL
AMOUNT
£m
2006
ASSETS
2006
LIABILITIES
£m
£m
3,965.0
3,965.0
4,535.1
37.5
4,572.6
17.9
17.9
0.5
0.1
0.6
(2.9)
(2.9)
(156.7)
(0.8)
(157.5)
8,537.6
18.5
(160.4)
695.4
101.8
797.2
1.5
0.3
1.8
(1.9)
-
(1.9)
Total recognised derivative assets / (liabilities)
9,334.8
20.3
(162.3)
(b) The Company
Derivatives in accounting hedge relationships
Fair value hedges
Interest rate swaps
Total recognised derivative assets / (liabilities)
2006
NOTIONAL
AMOUNT
£m
2006
ASSETS
2006
LIABILITIES
£m
£m
120.0
120.0
120.0
-
-
-
(0.4)
(0.4)
(0.4)
72 The Paragon Group of Companies PLC
Under UK GAAP changes in the fair value of instruments used as hedges were not recognised in the financial statements until
the hedged position matured. Set out below is an analysis of those unrecognised gains and losses at 30 September 2005 as
required under UK GAAP.
Unrecognised gains and losses on hedges at 1 October 2004
Gains and losses arising in previous years that were recognised in the year
Gains and losses arising before 1 October 2004 that were not recognised in the year
Gains and losses arising in the year that were not recognised in the year
2005
GAINS
2005
LOSSES
£m
5.4
(3.4)
2.0
8.3
£m
(6.2)
0.8
(5.4)
(15.1)
2005
TOTAL NET
GAINS/
(LOSSES)
£m
(0.8)
(2.6)
(3.4)
(6.8)
Unrecognised gains and losses on hedges at 30 September 2005
10.3
(20.5)
(10.2)
Of which:
Gains and losses expected to be realised in the year to 30 September 2006
Gains and losses expected to be realised in the year to 30 September 2007 or later
0.9
9.4
(4.9)
(15.6)
(4.0)
(6.2)
10.3
(20.5)
(10.2)
The Paragon Group of Companies PLC 73
27. RETIREMENT BENEFIT OBLIGATIONS
The Group operates a funded defined benefit pension scheme in the UK. A full actuarial valuation was carried out at
31 March 2004 and updated to 30 September 2006 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 weighted average assumptions used by the actuary were (in nominal terms):
30 SEPTEMBER
2006
30 SEPTEMBER
2005
In determining net pension cost for the year
Discount rate
Rate of compensation increase
Rate of increase of pensions
in payment (accrued before 6 April 2006)
in payment (accrued after 5 April 2006)
in deferment
In determining benefit obligations
Discount rate
Rate of compensation increase
Rate of increase of pensions
in payment (accrued before 6 April 2006)
in payment (accrued after 5 April 2006)
in deferment
Further life expectancy at age 60
Pensioner (male)
Pensioner (female)
Non-retired member (male)
Non-retired member (female)
5.10%
3.50%
2.50%
2.25%
2.50%
5.20%
3.70%
2.70%
2.25%
2.70%
26
29
28
31
5.60%
3.75%
2.75%
n/a
2.75%
5.10%
3.50%
2.50%
n/a
2.50%
26
29
28
31
The assets in the Plan at 30 September 2006 and 30 September 2005 and the expected rates of return were:
LONG
TERM RATE
OF RETURN
EXPECTED
7.0%
4.3%
-
Equities
Bonds
Other
Total market value of assets
Present value of scheme liabilities
Surplus / (deficit) in the scheme
AT 30 SEPTEMBER 2006
VALUE
ASSET
ALLOCATION
AT 30 SEPTEMBER 2005
VALUE
ASSET
ALLOCATION
LONG
TERM RATE
OF RETURN
EXPECTED
74.5%
25.5%
-
7.0%
4.3%
4.0%
86.1%
13.5%
0.4%
£m
21.1
3.3
0.1
24.5
(39.1)
(14.6)
£m
32.7
11.2
-
43.9
(43.6)
0.3
The rate of return expected on scheme assets is based on the current level of expected returns on risk free investments
(primarily government bonds), the historical level of the risk premium associated with other asset classes in which the
portfolio is invested and the expectations for future returns of each asset class.
74 The Paragon Group of Companies PLC
The movement in the market value of the scheme assets during the year was as follows:
At 1 October 2005
Movement in year
Contributions by the Group
Contributions by scheme members
Benefits paid
Expected return on scheme assets
Actuarial gain
At 30 September 2006
2006
£m
24.5
17.2
0.4
(0.8)
2.2
0.4
43.9
The actual rate of return on scheme assets in the year ended 30 September 2006 was 11.4% (2005: 21.7%)
The movement in the present value of the scheme liabilities during the year was as follows:
At 1 October 2005
Movement in year
Current service cost
Past service costs
Contributions by scheme members
Benefits paid
Finance cost
Actuarial loss
At 30 September 2006
2006
£m
39.1
1.9
-
0.4
(0.8)
2.0
1.0
43.6
2005
£m
18.3
1.9
0.4
(0.1)
1.4
2.6
24.5
2005
£m
32.6
1.7
-
0.4
(0.1)
1.9
2.6
39.1
The agreed rate of employer contributions was 12.5% of gross salaries for participating employees until 31 March 2005,
38.4% from 1 April 2005 to 31 March 2006 and 24.5% of gross salaries for participating employees thereafter.
The contribution to the plan expected to be made by the Group in the year ending 30 September 2007 is £1.9m.
The amounts charged in the income statement in respect of the pension scheme are:
Current service cost
Past service cost
Included within operating expenses (note 11)
Expected return on scheme assets (note 8)
Funding cost of scheme liability (note 9)
Total expense recognised in profit
2006
£m
1.9
-
1.9
(2.2)
2.0
1.7
2005
£m
1.7
-
1.7
(1.4)
1.9
2.2
The Paragon Group of Companies PLC 75
27. RETIREMENT BENEFIT OBLIGATIONS (continued)
The five year history of experience adjustments on the scheme is as shown below:
Fair value of scheme assets
Present value of scheme obligations
Surplus / (deficit) in the scheme
Experience adjustments on scheme assets:
Amount (£m)
Percentage of scheme assets
Experience adjustments on scheme liabilities:
Amount (£m)
Percentage of scheme liabilities
2006
£m
43.9
(43.6)
0.3
0.4
1%
-
-
2005
£m
24.5
(39.1)
2004
£m
18.3
(32.6)
2003
£m
15.5
(22.0)
2002
£m
12.0
(18.5)
(14.6)
(14.3)
(6.5)
(6.5)
2.6
11%
-
-
0.3
1%
(1.7)
(5)%
1.3
8%
-
-
(3.5)
(30)%
0.2
1%
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 2006 were £0.1m (2005: £0.0m).
28. INVESTMENT IN SUBSIDIARY UNDERTAKINGS
At 1 October 2004
Loans advanced
Loans repaid
Investment in shares
Provision movements
At 30 September 2005
Introduction of IAS 39
At 1 October 2005
Loans advanced
Loans repaid
Provision movements
SHARES IN
GROUP
COMPANIES
£m
LOANS TO
GROUP
COMPANIES
£m
LOANS TO
ESOP
TRUSTS
£m
243.3
-
-
5.0
5.5
253.8
(52.5)
201.3
-
-
(0.1)
113.8
220.4
(193.2)
-
-
141.0
-
141.0
258.1
(221.3)
-
12.3
2.0
-
-
-
14.3
-
14.3
4.3
(3.2)
-
TOTAL
£m
369.4
222.4
(193.2)
5.0
5.5
409.1
(52.5)
356.6
262.4
(224.5)
(0.1)
201.2
177.8
15.4
394.4
During the year ended 30 September 2006 the Company received £8.2m in dividend income from its subsidiaries
(2005: £19.8m) and £7.8m of interest on loans to Group companies (2005: £4.0m).
The principal operating subsidiaries, and the nature of the Group's interest in them, are shown in note 29.
76 The Paragon Group of Companies PLC
29. PRINCIPAL OPERATING SUBSIDIARIES
The financial year end of all of the Group's subsidiary companies is 30 September. They are all registered and operate in
England and Wales.
Principal operating subsidiaries where the share capital is held within the Group 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
Paragon Vehicle Contracts Limited
Paragon Car Finance Limited
Paragon Personal Finance Limited
Paragon Mortgages (No. 5) PLC
Paragon Mortgages (No. 6) PLC
Paragon Mortgages (No. 7) PLC
Paragon Mortgages (No. 8) PLC
Paragon Mortgages (No. 9) PLC
Paragon Mortgages (No. 10) PLC
Paragon Mortgages (No. 11) PLC
Paragon Mortgages (No. 12) PLC
Paragon Loan Finance (No. 1) PLC
Paragon Loan Finance (No. 2) PLC
Paragon Personal and Auto Finance (No. 2) PLC
Paragon Personal and Auto Finance (No. 3) PLC
Paragon Secured Finance (No. 1) PLC
Subsidiary of Paragon Mortgages Limited
Paragon Second Funding Limited
Subsidiaries of Mortgage Trust Limited
Mortgage Trust Services plc
First Flexible No. 6 PLC
Subsidiaries of Mortgage Trust Services plc
TMC Tattenham No. 1 PLC
TMC Tattenham No. 2 PLC
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
74%
100%
100%
Residential mortgages and
asset administration
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
Loan and vehicle finance
Loan and vehicle finance
Loan and vehicle finance
Loan and vehicle finance
Loan finance
Residential mortgages and loan
and vehicle finance
Residential mortgages and
asset administration
Residential mortgages
Residential mortgages
Residential mortgages
The holdings shown above are those held by the Group. These are the same as those held by the Company, except that
The Paragon Group of Companies PLC holds only 74% of the share capital of Paragon Mortgages (No. 8) PLC,
Paragon Mortgages (No. 9) PLC, Paragon Mortgages (No. 10) PLC, Paragon Mortgages (No. 11) PLC and
Paragon Mortgages (No. 12) PLC, the remainder being held by other group companies.
The Paragon Group of Companies PLC 77
29. PRINCIPAL OPERATING SUBSIDIARIES (continued)
The issued share capital of all subsidiaries consists of ordinary share capital, except that Homeloans (No. 4) PLC and
First Flexible No. 6 PLC have additional preference share capital held by the Group.
The minority interest in First Flexible No. 6 PLC is not material.
In addition, prior to its acquisition by the Group, certain loans originated by Mortgage Trust Limited had been sold to special
purpose entity companies, ultimately beneficially owned by charitable trusts, which had raised non-recourse finance to fund
these purchases. The Group is considered to control these entities, as defined by SIC-12 'Special Purpose Entities' and hence
they are considered to be subsidiaries of the Group.
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
30. TAX ASSETS
Deferred tax (note 31)
Other tax balances
PRINCIPAL ACTIVITY
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
THE GROUP
THE COMPANY
2006
£m
33.5
0.1
33.6
2005
£m
4.6
1.1
5.7
2006
£m
-
-
-
2005
£m
-
1.9
1.9
78 The Paragon Group of Companies PLC
31. DEFERRED TAX
The movements in the net deferred tax asset are as follows:
Net asset at 1 October 2005
Adoption of IAS 32 and IAS 39
Income statement (charge) / credit
Credit to equity
Net asset at 30 September 2006
THE GROUP
THE COMPANY
2006
£m
3.9
30.9
(7.2)
5.9
33.5
2005
£m
2006
£m
2005
£m
2.4
-
1.5
-
3.9
-
-
-
-
-
-
-
-
-
-
The net deferred tax asset for which provision has been made is analysed as follows:
Accelerated tax depreciation
Retirement benefit obligations
Impairment and other provisions
Other timing differences
Net deferred tax asset
THE GROUP
THE COMPANY
2006
£m
2.4
3.3
21.2
6.6
33.5
2005
£m
2.4
4.4
-
(2.9)
3.9
2006
£m
2005
£m
-
-
-
-
-
-
-
-
-
-
Certain deferred tax assets and liabilities have been offset. The balances above are analysed as follows:
Deferred tax assets
Deferred tax liabilities
Net deferred tax asset
THE GROUP
THE COMPANY
2006
£m
33.5
-
33.5
2005
£m
4.6
(0.7)
3.9
2006
£m
2005
£m
-
-
-
-
-
-
The Paragon Group of Companies PLC 79
32. OTHER RECEIVABLES
Current assets
Amounts owed by Group companies
Other debtors
Prepayments and accrued income
THE GROUP
THE COMPANY
2006
£m
2005
£m
-
3.8
2.5
6.3
-
6.1
0.5
6.6
2006
£m
65.5
-
-
65.5
2005
£m
59.8
-
-
59.8
The fair values of the above items are not considered to be materially different to their carrying values.
33. CASH AND CASH EQUIVALENTS
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 and Cash Equivalents' at 30 September 2006 is £601.2m subject to
such restrictions (2005: £410.5m).
'Cash and Cash Equivalents' also includes £0.9m (2005: £1.7m) 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.
Cash and Cash Equivalents includes current bank balances and fixed rate sterling term deposits with London banks.
34. CALLED-UP SHARE CAPITAL
Authorised:
175,000,000 (2005: 175,000,000) ordinary shares of 10p each
Allotted and paid-up:
121,452,366 (2005: 120,762,342) ordinary shares of 10p each
Movements in the issued share capital in the year were:
Ordinary shares of 10p each
At 1 October 2005
Shares issued in respect of share option schemes
At 30 September 2006
2006
£m
17.5
12.1
2005
£m
17.5
12.1
2006
NUMBER
2005
NUMBER
120,762,342
690,024
119,891,708
870,634
121,452,366
120,762,342
80 The Paragon Group of Companies PLC
35. RESERVES
Share premium account (note 36)
Merger reserve (note 37)
Cash flow hedging reserve (note 38)
Profit and loss account (note 39)
36. SHARE PREMIUM ACCOUNT
Balance at 1 October 2005
Share options exercised
Balance at 30 September 2006
37. MERGER RESERVE
Balance at 1 October 2005
Balance at 30 September 2006
THE GROUP
THE COMPANY
2006
£m
71.4
(70.2)
(1.5)
314.9
2005
£m
70.2
(70.2)
-
323.5
2006
£m
71.4
(23.7)
-
114.5
2005
£m
70.2
(23.7)
-
181.7
314.6
323.5
162.2
228.2
THE GROUP
THE COMPANY
2006
£m
70.2
1.2
71.4
2005
£m
68.8
1.4
70.2
2006
£m
70.2
1.2
71.4
2005
£m
68.8
1.4
70.2
THE GROUP
THE COMPANY
2006
£m
(70.2)
(70.2)
2005
£m
(70.2)
(70.2)
2006
£m
(23.7)
(23.7)
2005
£m
(23.7)
(23.7)
38. CASH FLOW HEDGING RESERVE
Balance at 1 October 2005
As originally reported
Adoption of IAS 32 and 39
Movement in fair value of hedging derivatives
Balance at 30 September 2006
THE GROUP
2006
£m
2005
£m
-
(2.6)
(2.6)
1.1
(1.5)
-
-
-
-
-
The Paragon Group of Companies PLC 81
39. PROFIT AND LOSS ACCOUNT
Balance at 1 October 2005
As previously stated
Adoption of IAS 32 and 39
Dividends paid (note 40)
Share options exercised
Charge for share based remuneration
Tax on share based remuneration
Actuarial (loss) / gain on retirement obligation
Profit for the year
THE GROUP
THE COMPANY
2006
£m
2005
£m
2006
£m
2005
£m
323.5
(69.9)
253.6
(16.0)
(0.6)
0.6
8.9
(0.4)
68.8
276.7
-
276.7
(12.4)
0.8
2.6
-
-
55.8
181.7
(52.5)
129.2
(16.8)
-
0.6
-
-
1.5
178.0
-
178.0
(13.0)
-
2.6
-
-
14.1
Balance at 30 September 2006
314.9
323.5
114.5
181.7
40. EQUITY DIVIDEND
Amounts recognised as distributions to equity shareholders in the period:
Equity dividends on ordinary shares
Final dividend for the year ended 30 September 2005
Interim dividend for the year ended 30 September 2006
Amounts paid and proposed in respect of the year:
Interim dividend for the year ended 30 September 2006
Proposed final dividend for the year ended 30 September 2006
2006
PER SHARE
2005
PER SHARE
7.4p
6.9p
5.7p
5.2p
2006
£m
8.4
7.6
14.3p
10.9p
16.0
2006
PER SHARE
2005
PER SHARE
6.9p
10.1p
17.0p
5.2p
7.4p
12.6p
2006
£m
7.6
12.3
19.9
2005
£m
6.5
5.9
12.4
2005
£m
5.9
8.4
14.3
The proposed final dividend is subject to approval by the shareholders at the Annual General Meeting and will be recognised
in the accounts when it has been approved.
82 The Paragon Group of Companies PLC
41. OWN SHARES
Treasury shares
At 1 October 2005
Shares purchased
At 30 September 2006
ESOP shares
At 1 October 2005
Shares purchased
Options exercised
At 30 September 2006
Balance at 30 September 2006
THE GROUP
THE COMPANY
2006
£m
2005
£m
2006
£m
2005
£m
8.3
23.1
31.4
14.5
4.3
(2.5)
16.3
47.7
-
8.3
8.3
12.3
4.1
(1.9)
14.5
22.8
8.3
23.1
31.4
-
-
-
-
-
8.3
8.3
-
-
-
-
31.4
8.3
At 30 September 2006 the number of the Company's own shares held in treasury was 5,244,000 (2005: 1,790,000).
These shares had a nominal value of £524,400 (2005: £179,000). The dividends on these shares have been waived.
The ESOP 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, Matching Share Plan and Deferred Bonus Scheme.
The trustees' costs are included in the operating expenses of the Group. At 30 September 2006, the trusts held 5,028,353
shares (2005: 5,994,552) with a nominal value of £502,835 (2005: £599,455) and a market value of £33,891,099
(2005: £31,831,071). Options, or other share-based awards, were outstanding against 4,851,712 of these shares at
30 September 2006 (2005: 5,952,101). The dividends on 629,909 of these shares have been waived (2005: none).
The Paragon Group of Companies PLC 83
42. FINANCIAL LIABILITIES
THE GROUP
THE COMPANY
2005
£m
2006
£m
2005
£m
Current liabilities
Finance lease liability
Bank loans and overdrafts
Non-current liabilities
Asset backed loan notes
Corporate bond
Finance lease liability
Bank loans and overdrafts
Derivative financial instruments
2006
£m
0.4
127.6
128.0
0.4
0.5
0.9
7,057.7
117.9
13.9
1,267.9
162.3
5,530.0
118.2
14.3
1,022.3
-
8,619.7
6,684.8
0.4
-
0.4
-
117.9
13.9
-
0.4
132.2
0.4
-
0.4
-
118.2
14.3
-
-
132.5
A maturity analysis of the above borrowings and further details of asset backed loan notes and bank loans are given
in note 43.
Further details of finance lease liabilities are given in note 44 and further details of derivative financial instruments
are given in note 26.
84 The Paragon Group of Companies PLC
43. BORROWINGS
Set out below is the maturity profile of the Group's borrowings at 30 September 2006 and 30 September 2005:
FINANCIAL LIABILITIES FALLING DUE:
IN ONE
YEAR OR
LESS, OR
IN MORE
IN MORE
THAN ONE
THAN TWO
YEAR, BUT YEARS, BUT
ON DEMAND NOT MORE NOT MORE
THAN FIVE
THAN TWO
YEARS
YEARS
£m
£m
£m
Bank overdrafts
Bank loans
Corporate bond
Asset backed loan notes
0.4
127.2
-
-
-
149.6
-
-
-
7.0
-
-
2006
TOTAL
IN MORE
THAN FIVE
YEARS
£m
-
1,111.3
117.9
7,057.7
£m
0.4
1,395.1
117.9
7,057.7
FINANCIAL LIABILITIES FALLING DUE:
IN ONE
YEAR OR
LESS, OR
IN MORE
IN MORE
THAN ONE
THAN TWO
YEAR, BUT YEARS, BUT
ON DEMAND NOT MORE NOT MORE
THAN FIVE
THAN TWO
YEARS
YEARS
£m
£m
£m
2005
TOTAL
IN MORE
THAN FIVE
YEARS
£m
£m
0.5
-
-
-
-
31.8
-
-
-
77.3
-
-
-
913.2
118.2
5,530.0
0.5
1,022.3
118.2
5,530.0
127.6
149.6
7.0
8,286.9
8,571.1
0.5
31.8
77.3
6,561.4
6,671.0
The fair values of borrowings are not considered to be significantly different to their carrying values and the effective interest
rates are not materially different to the rates charged.
(a) Asset backed loan notes
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. The maturity date of the notes matches the maturity date of the underlying assets. It is likely that a substantial
proportion of these notes will be repaid within five years.
In each issue there exists an option for the Group to repay the all of the notes at an earlier date, at the outstanding
principal amount.
Interest is payable at a fixed margin above;
● the London Interbank Offered Rate ('LIBOR') on notes denominated in sterling;
● the Euro Interbank Offered Rate ('EURIBOR') on notes denominated in euros; and
● the London Interbank Offered Rate ('US Dollar LIBOR') on notes denominated in US dollars.
All payments in respect of the notes are required to be made in the currency in which they are denominated.
The Paragon Group of Companies PLC 85
43. BORROWINGS (continued)
Notes in issue at 30 September 2006 and 30 September 2005 were:
MATURITY
DATE
CALL
DATE
PRINCIPAL
OUTSTANDING
ISSUER
Sterling notes
15/12/41
Paragon Mortgages (No. 5) PLC
15/09/38
Paragon Mortgages (No. 6) PLC
15/05/43
Paragon Mortgages (No. 7) PLC
15/04/44
Paragon Mortgages (No. 8) PLC
15/05/41
Paragon Mortgages (No. 9) PLC
15/06/41
Paragon Mortgages (No. 10) PLC
15/10/41
Paragon Mortgages (No. 11) PLC
15/11/38
Paragon Mortgages (No. 12) PLC
15/09/28
Homeloans (No. 4) PLC
30/11/31
First Flexible No. 1 PLC
01/06/32
First Flexible No. 2 PLC
01/06/34
First Flexible No. 3 PLC
01/07/36
First Flexible No. 4 PLC
01/06/34
First Flexible No. 5 PLC
First Flexible No. 6 PLC
01/12/35
Paragon Personal and Auto Finance (No. 3) PLC 15/04/36
15/11/35
Paragon Secured Finance (No. 1) PLC
US dollar notes
Paragon Mortgages (No. 6) PLC
Paragon Mortgages (No. 7) PLC
Paragon Mortgages (No. 9) PLC
Paragon Mortgages (No. 10) PLC
Paragon Mortgages (No. 11) PLC
Paragon Mortgages (No. 12) PLC
First Flexible No. 6 PLC
Euro notes
15/09/38
15/05/43
15/05/41
15/06/41
15/10/41
15/11/38
01/12/35
15/09/38
Paragon Mortgages (No. 6) PLC
15/05/43
Paragon Mortgages (No. 7) PLC
15/04/44
Paragon Mortgages (No. 8) PLC
15/05/41
Paragon Mortgages (No. 9) PLC
15/06/41
Paragon Mortgages (No. 10) PLC
15/10/41
Paragon Mortgages (No. 11) PLC
15/11/38
Paragon Mortgages (No. 12) PLC
First Flexible No. 6 PLC
01/12/35
Paragon Personal and Auto Finance (No. 3) PLC 15/04/36
2006
£m
-
-
163.0
389.5
315.0
187.5
162.2
187.0
-
48.3
-
114.7
207.6
223.9
182.9
204.5
300.0
$m
-
417.1
52.8
1,030.2
963.6
1,811.0
40.0
€m
-
436.8
631.6
408.4
269.0
384.8
477.0
119.9
358.0
07/06/06
15/09/06
15/05/08
15/10/08
15/05/09
15/12/09
15/04/10
15/08/10
15/06/05
30/10/05
01/07/06
01/11/06
01/07/08
01/07/09
01/03/08
15/04/09
15/11/08
15/09/06
15/05/08
15/05/09
15/12/09
15/04/10
15/08/10
01/03/08
15/09/06
15/05/08
15/10/08
15/05/09
15/12/09
15/04/10
15/08/10
01/03/08
15/04/09
2005
£m
211.3
230.6
190.9
409.9
356.0
-
-
-
82.6
75.6
179.4
192.2
276.5
316.0
249.6
204.5
300.0
$m
340.0
472.9
60.0
-
-
-
58.4
€m
259.0
498.8
766.4
450.5
-
-
-
169.7
358.0
AVERAGE INTEREST
MARGIN
2006
%
2005
%
-
-
0.21
0.26
0.18
0.28
0.13
0.16
-
0.57
-
0.47
0.40
0.36
0.45
0.34
0.35
%
-
0.31
0.18
(0.02)
(0.01)
0.00
0.28
%
-
0.29
0.19
0.24
0.20
0.22
0.22
0.38
0.32
0.43
0.36
0.21
0.25
0.18
-
-
-
0.57
0.48
0.35
0.39
0.37
0.32
0.41
0.34
0.35
%
0.43
0.30
0.18
-
-
-
0.28
%
0.59
0.28
0.18
0.23
-
-
-
0.35
0.32
During the year, Group companies issued £3,500.6m (2005: £1,700.0m) of mortgage backed floating rate notes at par and £nil
(2005: £750.0m) of asset backed floating rate notes at par.
86 The Paragon Group of Companies PLC
(b) Bank borrowings
During the year ended 30 September 2006 the Group had the following sterling borrowing facilities:
ISSUER
(i) Paragon Finance PLC
(ii) Paragon Second Funding Limited
(iii) Paragon Mortgages (No. 14) PLC
(iv) Herbert (5) PLC
(v) Arianty No. 1 PLC
(vi) Mortgage Funding Corporation PLC
AVAILABLE
FACILITY
PRINCIPAL
OUTSTANDING
CARRYING
VALUE
2006
£m
280.0
2,325.0
0.5
-
10.0
134.5
2005
£m
280.0
1,425.0
16.6
1.0
60.0
55.0
2006
£m
150.0
1,112.0
0.5
-
7.0
127.3
2005
£m
72.0
897.0
16.6
1.0
6.0
31.7
2006
£m
149.6
1,110.8
0.5
-
7.0
127.2
2005
£m
71.3
895.8
16.4
1.0
6.0
31.8
2,750.0
1,837.6
1,396.8
1,024.3
1,395.1
1,022.3
i.
The Company and Paragon Finance have a committed corporate syndicated sterling bank facility used to provide working
capital for the Group. This facility falls due for repayment on 27 February 2008, but may be repaid and redrawn from time
to time. The facility is secured by a fixed and floating charge over the assets of the Company, Paragon Finance PLC and
certain other Group companies.
ii. 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 drawn down to fund completions and repaid when assets are securitised.
This is currently provided by a committed sterling facility provided to Paragon Second Funding Limited by a consortium of
banks. 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 29 February 2008 and
although its final repayment date is 28 February 2050 it is likely that substantial repayments will be made within the next
five years.
iii.
In connection with the acquisition of Mortgage Trust the Group, through Paragon Mortgages (No. 14) PLC, 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. This facility was repaid in full on 10 October 2006.
iv. The Group was party to an arrangement, made through Herbert (5) PLC, 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 was 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 were made out of receipts from borrowers in the same way as for the asset
backed loan notes. This borrowing was settled in full in the year.
v.
The committed sterling bank facility provided to Arianty No. 1 PLC is secured on all the assets of that company. At the
year end the facility remained available for further drawings until 8 November 2006. This was renewed for a further year
and may be further renewed on an annual basis. Repayment of the loan is due two years after it ceases to be available for
further drawings.
vi. Assets originated by Mortgage Funding Corporation PLC are funded by a committed sterling bank facility. This facility is
secured on all the assets of that company. The facility was increased and extended during the year and is now repayable
on 31 March 2007.
The Paragon Group of Companies PLC 87
43. BORROWINGS (continued)
As with the asset backed loan notes, repayments of all of these facilities, other than the Paragon Finance facility, before
the final repayment date are restricted to the amount of principal cash realised from the funded assets.
The Group additionally has entered into £108.5m (2005: £215.0m) of sterling revolving credit facilities to fund, where
necessary, the purchase of mortgage redraws in certain subsidiary companies. At 30 September 2006 £nil (2005: £nil) had
been drawn down under these facilities.
Interest on the bank facilities is payable monthly in sterling at various rates between 0.20% and 1.35% above LIBOR.
The weighted average margin above LIBOR on bank borrowings at 30 September 2006 was 0.23% (2005: 0.39%).
The undrawn amounts on these bank facilities at 30 September 2005, required to be disclosed under UK GAAP 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
2005
£m
23.3
54.0
636.0
713.3
(c) Corporate bond
On 20 April 2005 the Company issued £120.0m of 7% Callable Subordinated Notes at an issue price of 99.347% to provide long
term capital for the Group. These bonds bear interest at a fixed rate of 7% per annum and are repayable on 20 April 2017, but
may be repaid on 20 April 2012 at the Company's option. They are unsecured and subordinated to any other creditors of the
Company. At 30 September 2006 £117.9m (2005: £118.2m) was included within financial liabilities in respect of these bonds.
0 The Paragon Group of Companies PLC
88 The Paragon Group of Companies PLC
44. OBLIGATIONS UNDER FINANCE LEASES
The finance lease obligations recorded in the accounts arise from a sale and leaseback transaction of the Group's former
head office building in 1997 which falls to be treated as a finance lease under IAS 17 - 'Leases'. The lease expires in 2019
and is subject to five yearly rent reviews, with guaranteed minimum rent increases.
Obligations under this lease are:
Amounts payable under finance leases
Within one year
Within two to five years
After five years
Less: future finance charges
Present value of lease obligations
MINIMUM LEASE
PAYMENTS
2006
£m
1.7
7.6
15.1
24.4
(10.1)
14.3
2005
£m
1.7
7.3
17.1
26.1
(11.4)
14.7
PRESENT VALUE OF
MINIMUM LEASE
PAYMENTS
2006
£m
0.4
3.0
10.9
2005
£m
0.4
2.5
11.8
14.3
14.7
The fair value of the lease obligation is not considered to be materially different to the present value of the future obligations
shown above. The interest rate implicit in the lease is 9.13% (2005: 9.13%).
At 30 September 2006 the minimum amount of payments expected to be received in respect of non-cancellable sub-leases
in respect of this building was £7,400,000 (2005: £5,500,000).
45. CURRENT TAX LIABILITIES
UK Corporation Tax
THE GROUP
THE COMPANY
2006
£m
1.4
1.4
2005
£m
12.9
12.9
2006
£m
1.0
1.0
2005
£m
-
-
The Paragon Group of Companies PLC 89
46. PROVISIONS
Provision at 1 October 2005
Created in year
Current year charge
Utilised in the year
Released in the year
Provision at 30 September 2006
Included in current liabilities
Included in non-current liabilities
2006
£m
2.1
2.1
1.1
(0.9)
-
4.4
0.7
3.7
4.4
2005
£m
3.5
-
0.4
(1.2)
(0.6)
2.1
-
2.1
2.1
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. The relocation provision had
reduced to zero at 30 September 2005, the other provisions are expected to be utilised within five years.
47. OTHER LIABILITIES
Current liabilities
Amounts owed to Group companies
Accruals
Non-current liabilities
Accruals
THE GROUP
THE COMPANY
2006
£m
-
78.2
78.2
5.9
5.9
2005
£m
-
59.9
59.9
2.7
2.7
2006
£m
187.9
4.5
192.4
1.5
1.5
2005
£m
111.0
4.6
115.6
1.6
1.6
90 The Paragon Group of Companies PLC
48. NET CASH FLOW FROM OPERATING ACTIVITIES
(a) The Group
Profit before tax
Non-cash items included in profit and other adjustments:
Depreciation of property, plant and equipment
Amortisation of intangible assets
Non-cash movements on borrowings
Impairment losses on loans to customers
Charge for share based remuneration
Profit on sale of subsidiary
Net (increase) / decrease in operating assets:
Loans to customers
Derivative financial instruments
Fair value of portfolio hedges
Other receivables
Net increase / (decrease) in operating liabilities:
Derivative financial instruments
Other liabilities
Cash (utilised) by operations
Income taxes paid
2006
£m
82.8
3.5
0.2
(114.0)
47.8
0.6
-
(1,951.2)
3.6
14.0
(2.3)
100.9
5.5
(1,808.6)
(15.4)
(1,824.0)
2005
£m
71.8
3.8
0.2
7.4
15.9
2.6
(0.9)
(594.4)
-
-
1.0
-
4.1
(488.5)
(12.2)
(500.7)
The Paragon Group of Companies PLC 91
48. NET CASH FLOW FROM OPERATING ACTIVITIES (continued)
(b) The Company
Profit / (loss) before tax
Non-cash items included in profit and other adjustments:
Depreciation of property, plant and equipment
Non-cash movements on borrowings
Impairment losses on investments in subsidiaries
Charge for share based remuneration
Profit on sale of subsidiary
Net (increase) / decrease in operating assets:
Derivative financial instruments
Other receivables
Net increase / (decrease) in operating liabilities:
Derivative financial instruments
Other liabilities
Cash generated / (utilised) by operations
Income taxes paid
2006
£m
(3.9)
0.8
(2.8)
1.1
0.6
-
2.5
(5.7)
0.4
76.7
69.7
8.3
78.0
2005
£m
10.9
0.9
0.2
(5.8)
2.6
(2.0)
-
(8.4)
-
(66.9)
(68.5)
2.7
(65.8)
49. NET CASH FLOW FROM INVESTING ACTIVITIES
Proceeds on disposal of property, plant and equipment
Purchases of property, plant and equipment
Purchases of intangible assets
Acquisition of subsidiary undertakings net of cash acquired (note 51)
Investment in subsidiary undertakings
Sale of subsidiary undertaking
Net cash (utilised) by investing activities
THE GROUP
THE COMPANY
2006
£m
1.2
(5.2)
(0.5)
3.1
-
-
(1.4)
2005
£m
1.6
(3.7)
(0.2)
-
-
2.0
(0.3)
2006
£m
-
-
-
-
(38.9)
-
(38.9)
2005
£m
-
-
-
-
(34.2)
2.0
(32.2)
92 The Paragon Group of Companies PLC
50. NET CASH FLOW FROM FINANCING ACTIVITIES
Dividends paid
Issue of corporate bond
Issue of asset backed floating rate notes
Repayment of asset backed floating rate notes
Capital element of finance lease payments
Movement on bank facilities
Purchase of shares
Exercise of options under ESOP scheme
Exercise of other share options
THE GROUP
THE COMPANY
2006
£m
(16.0)
-
3,493.6
(1,906.6)
(0.4)
371.5
(27.4)
1.9
1.2
2005
£m
(12.4)
118.0
2,444.7
(2,102.1)
(0.3)
90.6
(12.4)
1.5
2.7
2006
£m
(16.8)
-
-
-
(0.4)
-
(23.1)
-
1.2
2005
£m
(13.0)
118.0
-
-
(0.3)
-
(8.3)
-
1.5
Net cash generated / (utilised) by financing activities
1,917.8
530.3
(39.1)
97.9
51. PURCHASE OF SUBSIDIARY UNDERTAKINGS
During the period the Group acquired TMC Tattenham No. 1 PLC and TMC Tattenham No. 2 PLC. This acquisition did not meet
the definition of a business combination set out in IFRS 3 - 'Business Combinations', hence the disclosures required by that
standard are not given.
The fair values of the assets acquired and the liabilities assumed were as follows:
Loans to customers
Other debtors
Cash
Borrowings
Other creditors
Total cash consideration
Less: cash acquired
Cash flow on acquisition less cash acquired
2006
£m
91.0
-
6.0
(89.6)
(4.5)
2.9
(6.0)
(3.1)
The Paragon Group of Companies PLC 93
52. OPERATING LEASE ARRANGEMENTS
(a) As lessee
THE GROUP
THE COMPANY
2006
£m
2005
£m
2006
£m
2005
£m
Minimum lease payments under operating leases recognised
in income for the year
3.5
3.5
0.3
0.3
At 30 September 2006 the Group had outstanding commitments for future minimum lease payments under non-cancellable
operating leases, which fall due as follows:
Amounts falling due:
Within one year
Between two and five years
After more than five years
THE GROUP
THE COMPANY
2006
£m
3.4
12.7
12.4
28.5
2005
£m
3.5
13.4
15.0
31.9
2006
£m
2005
£m
0.3
1.0
1.9
3.2
0.3
1.0
2.1
3.4
Operating lease payments represent rents payable by the Group is respect of certain of its office premises and amounts
attributed to land rent under the finance lease described in note 44. The average term of the current leases is 15 years
(2005: 15 years) with rents subject to review every five years.
(b) As lessor
Certain of the Group's office premises which are not currently required by the Group have been sub-let. Rental income from
these premises during the year ended 30 September 2006 was:
Rental income
THE GROUP
THE COMPANY
2006
£m
1.8
2005
£m
1.8
2006
£m
1.8
2005
£m
1.8
At 30 September 2006 the Group had received outstanding commitments from tenants for future minimum lease
payments under non-cancellable operating leases, which fall due as follows:
Amounts receivable:
Within one year
Between two and five years
After more than five years
THE GROUP
THE COMPANY
2006
£m
2005
£m
2006
£m
2005
£m
1.9
6.1
0.3
8.3
1.8
4.0
-
5.8
1.8
5.3
0.3
7.4
1.8
3.7
-
5.5
94 The Paragon Group of Companies PLC
53. CAPITAL COMMITMENTS
There were no capital commitments (2005: £nil) contracted but not provided for.
54. RELATED PARTY TRANSACTIONS
The Group had no transactions with related parties other than the key management compensation disclosed in note 12.
During the year the parent company entered into transactions with its subsidiaries, which are related parties. Management
services were provided to the Company by one of its subsidiaries and the Company granted awards under the share based
payment arrangements described in note 13 to employees of subsidiary undertakings.
Details of the Company's investments in subsidiaries and the income derived from them are shown in note 28.
Outstanding current account balances with subsidiaries are shown in notes 32 and 47.
During the year the Company incurred interest costs of £11.0m in respect of borrowings from its subsidiaries (2005: £10.6m).
55. EVENTS OCCURING AFTER THE BALANCE SHEET DATE
On 26 October 2006 the Group issued £1,500.2m of Mortgage Backed Floating Rate Notes through a subsidiary company,
Paragon Mortgages (No. 13) PLC, to refinance existing borrowings. The Notes were denominated in sterling, US dollars
and euros.
56. TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS
The Group reported under UK GAAP in its previous financial statements for the year ended 30 September 2005. The analysis
below shows a reconciliation of total equity for the Group and the Company at 1 October 2004 (the date of transition to IFRS),
30 September 2005 (the date of the last financial statements prepared under UK GAAP) and 1 October 2005 (the date of
adoption of IAS 32 and IAS 39), and of the profit after tax of the Group and the Company for the year ended 30 September
2005, between the figures already reported under UK GAAP to those on an IFRS basis.
The cash flow statements have also been restated to comply with the requirements of IAS 7 - 'Cash Flow Statements'. These
changes represent the re-classification of balances only, the principal difference being the classification of the movement in
loans to customers as an operating, rather than an investing cash flow.
The Paragon Group of Companies PLC 95
56. TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)
Reconciliation of total equity
(a) The Group
Total equity under UK GAAP
(i) Goodwill
(iii) Pension scheme
(iv) Dividend
(v) Share based payment
(vi) Leases
(viii) Effective interest rate
(ix)
(x) Derivative financial instruments
Impairment
Total equity under IFRS
(b) The Company
Investments
Total equity under UK GAAP
(ii)
(iv) Dividend
(v) Share based payment
(vi) Leases
(vii) Consolidation
(ix) Impairment
Total equity under IFRS
Reconciliation of profit for the year ended 30 September 2005
Profit under UK GAAP
Goodwill
(i)
(ii)
Investments
(iii) Pension scheme
(iv) Dividend
(v) Share based payment
(vi) Leases
Profit under IFRS
1 OCTOBER 30 SEPTEMBER
2005
£m
2005
£m
1 OCTOBER
2004
£m
308.0
9.9
(10.2)
8.8
1.4
(5.1)
2.2
(70.6)
(4.1)
308.0
9.9
(10.2)
8.8
1.4
(5.1)
-
-
-
268.4
14.0
(10.0)
6.8
0.5
(4.7)
-
-
-
240.3
312.8
275.0
1 OCTOBER 30 SEPTEMBER
2005
£m
2005
£m
1 OCTOBER
2004
£m
317.9
(103.5)
8.8
1.3
(5.1)
12.6
(52.5)
317.9
(103.5)
8.8
1.3
(5.1)
12.6
-
282.4
(61.6)
6.8
0.4
(4.7)
11.8
-
179.5
232.0
235.1
THE GROUP
THE COMPANY
PROFIT
PROFIT
BEFORE TAX
£m
AFTER TAX
£m
PROFIT
AFTER TAX
£m
76.8
(4.1)
-
(0.3)
-
(0.2)
(0.4)
71.8
60.7
(4.1)
-
(0.2)
-
(0.2)
(0.4)
55.8
19.0
-
(4.5)
-
-
-
(0.4)
14.1
96 The Paragon Group of Companies PLC
Explanation of adjustments
(i) Goodwill
IFRS does not recognise the concept of negative goodwill. It therefore requires that any excess of the fair value of assets
acquired over the fair value of consideration in an acquisition is written off immediately. Under UK GAAP the Group had
carried a negative goodwill balance, which arose on the acquisition of Mortgage Trust in 2003, on its balance sheet which has
therefore been released through opening reserves on transition to IFRS. The amortisation of this goodwill is deducted from
the UK GAAP profit.
(ii) Investments
Under UK GAAP the Company's investments in its subsidiaries were valued at their net asset value in the Company's
separate financial statements. Under IAS 27 this treatment is no longer permissible and these investments are valued
at cost less impairment.
(iii) Pension scheme
IAS 19 - 'Employee benefits' requires that the surplus or deficit on the Group's defined benefit pension scheme be carried
as an asset or liability on the balance sheet. The Group has elected to adopt the provisions of the standard allowing
actuarial gains or losses on the scheme to be recognised directly in equity and shown in the Statement of Recognised
Income and Expenditure.
Using this option, the accounting required by the international standard is very similar to that required by FRS 17 under
UK GAAP. Disclosures relating to this calculation have been made in the Group accounts since 2001.
The adjustment shown in the opening Group balance sheet represents the recognition of the pension scheme deficit at
30 September 2004 of £14.3m and the associated deferred tax asset of £4.3m, producing a reduction in reserves of £10.0m.
The effect on the profit and loss account represents the reversal of the charge under SSAP 24 and its replacement with the
charge required by IAS 19. A related tax credit has also been recognised. No actuarial gain or loss arose in the year ended
30 September 2005.
(iv) Dividend
Under IAS 10 - 'Events After the Balance Sheet Date', proposed dividends are not reflected in the accounts until approved by
the shareholders at the Annual General Meeting, whereas under UK GAAP such amounts were normally accrued in the
period to which they relate.
The final dividend for the year ended 30 September 2004, which was approved at the Annual General Meeting on
9 February 2005, has been added back to opening reserves at 1 October 2004 and accounted for in the year ended
30 September 2005. The final dividend proposed for the year ended 30 September 2005 has been added back to closing
reserves and has been accounted for in the year ended 30 September 2006.
(v) Share based payment
Under IFRS 2 the Group recognises an expense in respect of share options granted under the Sharesave scheme in the same
way as such expenses are recognised for the other share-based remuneration arrangements, the UK GAAP accounting for
which was already in accordance with the International Standard.
The Paragon Group of Companies PLC 97
56. TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)
(vi) Leases
The provisions for determining whether a lease should accounted for as a finance lease under IFRS are different from those
under UK GAAP. Consequently the sale and lease-back transaction on the Group's former freehold property in Solihull falls to
be treated as a finance lease under IFRS.
This requires the building to be re-instated in fixed assets, a finance lease creditor to be recognised, and the £2.5m profit on
sale to be spread over the lease term. No deferred tax is provided on this adjustment as the potential deferred tax arose from
the initial recognition of the property asset and the associated lease creditor.
This change reduces profit for the year ended 30 September 2005 by £0.4m, as a result of the charging of finance lease
interest and depreciation rather than the rent payable. The annual impact of this change will reduce in future periods.
(vii) Consolidation
Under UK GAAP the ESOP Trusts operated by the Group were treated as forming part of the parent company and were thus
included in its individual financial statements. Under IFRS the Trusts are, by definition, subsidiary undertakings and are
therefore accounted for in the parent company's individual financial statements at cost.
(viii) Effective interest rate
Under IAS 39, the Group's loan assets are required to be accounted for on the 'amortised cost' basis. This requires that, for all
loan assets other than those arising from hire purchase agreements, revenue be recognised on a constant basis over the
estimated actual (not contractual) life of the loan, taking into account all costs and fees attributable to the loan, in the same
way that all these factors would be taken into account in determining an investment return for a product. The rate at which
income is recognised is referred to as the 'Effective Interest Rate' ('EIR'). The revenue stream includes estimated early
redemption penalties.
For the Group this means that costs such as commissions and other external (but not internal) fees paid are spread across
the expected life of the loan, income such as up front fees is spread on a similar basis and the effect of discounts offered is
spread over the expected life of the loan rather than the discount period. Similarly where fees or penalties are payable at the
point of settlement, these also are required to be estimated and included in the EIR calculation. For items such as
commissions, which were already spread under the Group's UK GAAP accounting policies, the new basis involves a change in
the period over which they are spread, but for completion fees and similar items the income is deferred rather than being
taken at the advance date.
The adjustments in respect of the buy-to-let assets arise principally from spreading commissions paid over a longer period
and the carry forward of fee income within loans to customers, while those on consumer finance assets relate principally to
changes in the periods over which commissions are spread and the inclusion of terminal charges in the EIR calculations. The
adjustments on other assets, which affect primarily owner-occupied mortgages written by Mortgage Trust before its
acquisition by the Group, relate to changes in the periods over which commissions are spread and the spreading of initial fees
and terminal fees.
98 The Paragon Group of Companies PLC
(ix) Impairment
IAS 39 replaces the concept of provision for losses on customer loans with 'loan impairment'. An impairment is only
recognised when there is evidence to suggest, at the balance sheet date that the value of the loan is impaired.
Under IFRS the amount of impairment provision required on any loan is that amount which would reduce the carrying value of
the asset to the value of the future cash flows related to the loan, discounted at the original EIR. Where security exists, the
security value can be used to offset any shortfall arising from the discounting approach. In the Group's UK GAAP provisioning
methodology discounting was not used and therefore additional provisions are required by IFRS where balances are to be
collected over a long period, as is the case with many of the assets held within the Group's closed loan books.
The change in definitions and the compulsory discounting methodology have resulted in changes to the Group's provisioning
methodologies, with differing results on different asset portfolios. The largest part of the adjustment arises from the Group's
closed portfolios, on loans arising from those business areas in which the Group is no longer active. The effect on the active
businesses is not great, due in the greater part to their exemplary credit quality.
This change, which is also required in those subsidiaries accounting under UK GAAP by FRS 26, causes a reduction in
reserves in certain subsidiaries, which requires a provision to be made in the parent company's accounts against its
investments in these entities.
(x) Derivative financial instruments
Under IAS 39 certain financial instruments are carried at fair value, including all derivatives. Movement in these fair values is
shown in the income statement for the period, but this effect is mitigated where the derivative is used for hedging purposes
and can be shown to be 'highly effective', subject to the hedge accounting criteria of IAS 39 being met. Under UK GAAP these
instruments were shown at cost.
Where a derivative is designated as a fair value hedge, the carrying value of hedged items is adjusted for those changes in fair
value relating to the hedged risk and this adjustment is offset against the movement in the fair value of the derivative in the
income statement. Where a derivative is designated as a cash flow hedge, only that part of the movement in fair value relating
to inefficiency in the hedging arrangement affects profit, the remainder being taken to equity. Any gains or losses taken to
equity will be recognised in the income statement at the same time as the effect of the hedged item.
The Paragon Group of Companies PLC 99
Appendices to the annual report
For the year ended 30 September 2006
I. INTERNATIONAL FINANCIAL REPORTING STANDARDS
The Group published a detailed explanation of the adjustments made on transition to IFRS on 21 February 2006. Copies of this
announcement are available from the Group's website at www.paragon-group.co.uk or from the Group Company Secretary,
The Paragon Group of Companies PLC, St. Catherine's Court, Herbert Road, Solihull, West Midlands, B91 3QE.
II. PROFORMA FINANCIAL INFORMATION
To enable a more meaningful presentation of results, in addition to the statutory comparative information, the results for the
year ended 30 September 2005 have been compiled on a proforma basis. This shows the Group's customer loan balances,
borrowings and interest income as they would have been shown had IAS 32 and 39 applied to these balances. The remaining
adjustments required by these standards relate to fair values and hedging and cannot be applied as the required
documentation for these arrangements was not in place at 1 October 2004. A reconciliation between the statutory
comparatives and the proforma information was given in the announcement of 21 February 2006. The differences in the
segment results and segmental 'loans to customers' figures between the statutory and proforma bases are also detailed in
the announcement.
Financial highlights for 2005 on the proforma and statutory bases are shown below:
Profit before taxation
Profit after taxation
Total loan assets
Shareholders' funds
Earnings per share - basic
- diluted
Dividend per ordinary share
2005
PROFORMA
£m
71.7
55.7
6,431.1
244.4
2005
PROFORMA
48.8p
46.8p
12.6p
2005
STATUTORY
£m
71.8
55.8
6,528.7
312.8
2005
STATUTORY
48.9p
46.9p
12.6p
100 The Paragon Group of Companies PLC
Notice of Annual General Meeting
To all shareholders
NOTICE IS HEREBY GIVEN that the eighteenth Annual General Meeting of The Paragon Group of Companies PLC will be held
at the offices of Hoare Govett Limited at 250 Bishopsgate, London, EC2M 4AA on 8 February 2007 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 2006 and the Reports of the
Directors and the Auditors.
To consider and adopt the Report of the Board to the Shareholders on Directors' Remuneration.
To declare a dividend.
To re-appoint as directors (a) Mr P Pandya and (b) Mr D M M Beever (both of whom retire under Article 77) and
(c) Mr T Eccles (who retires under Article 83).
To re-appoint Deloitte & Touche LLP as Auditors and to authorise the directors to fix their remuneration.
2
3
4
5
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 Resolutions
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 £4,036,000 PROVIDED THAT this
authority shall expire at the conclusion of the next Annual General Meeting of the Company after the passing of this
resolution (unless previously revoked or varied by the Company in general meeting) save that the Company may before
such expiry make an offer or agreement which would or might require relevant securities to be allotted after such
expiry and the Board may allot relevant securities in pursuance of such an offer or agreement as if the authority
conferred hereby had not expired.'
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 £581,000,
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.'
The Paragon Group of Companies PLC 101
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 11,600,000
(representing approximately 10 per cent of the Company's issued ordinary share capital excluding treasury shares);
(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
22 November 2006
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 current directors are provided on pages 10 and 11. Biographical details of Mr T Eccles are given in the
Chairman's Statement on page 5.
102 The Paragon Group of Companies PLC
The Paragon Group of Companies PLC
Registered office:
St Catherine’s Court
Herbert Road
Solihull
West Midlands
B91 3QE
Telephone: 0121 712 2323
www.paragon-group.co.uk