The Paragon Group of Companies PLC
Annual Report & Accounts 2007
Contents
3
4
8
12
14
16
18
29
30
32
37
38
39
40
41
41
42
42
43
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
100
Appendices to the Annual Report
Financial highlights
9.9%
11.8%
Increase in profit before tax to
£91.0 million (2006: £82.8 million)
Increase in fully taxed earnings per share to
57.7p (2006: 51.6p)
34.3%
39.1%
Increase in buy-to-let loan advances to
£4,079.3 million (2006: £3,038.3 million)
Increase in buy-to-let portfolio to
£10,031.3 million (2006: £7,212.3 million)
Profit before taxation
Profit after taxation
Total loan assets
Shareholders' funds
Earnings per share
- basic
- diluted
Dividend per ordinary share
2007
IFRS
£m
91.0
62.8
11,034.9
313.3
2006
2005
IFRS Proforma*
£m
£m
82.8
68.8
8,426.6
279.0
71.7
55.7
6,431.1
244.4
2007
IFRS
2006
2005
IFRS Proforma*
2005
IFRS
Statutory
£m
71.8
55.8
6,528.7
312.8
2005
IFRS
Statutory
56.8p
54.7p
8.0p
61.2p
58.4p
17.0p
48.8p
46.8p
12.6p
48.9p
46.9p
12.6p
2004
UK
GAAP
£m
71.0
54.7
5,950.9
268.4
2003
UK
GAAP
£m
51.9
40.3
5,287.1
225.3
2004
UK
GAAP
48.0p
46.2p
9.6p
2003
UK
GAAP
35.5p
34.8p
6.3p
Results for the years ended 30 September 2007, 2006 and 2005 are presented under International Financial Reporting Standards (IFRS).
Results for the years ended 30 September 2004 and 2003 are presented in accordance with UK GAAP.
* For references to the proforma basis see appendix B.
The Paragon Group of Companies PLC 3
Total advances by the Group increased by 30.0%
to £4,436.4 million (2006: £3,412.6 million), of
which £4,079.3 million were buy-to-let advances
(2006: £3,038.3 million), an increase of 34.3% over the
year. Total loan assets at 30 September 2007 increased
by 31.0% to £11,034.9 million from £8,426.6 million at
30 September 2006.
In view of the possibility of a rights issue in the near
future, the Board considers that it would be inappropriate
to return any capital to shareholders until a refinancing
has been completed; hence the Group will not pay a final
dividend. The Board will reconsider the Company’s
distribution policy once the funding position for the future
is clarified.
Chairman’s statement
The year to 30 September 2007 was highly successful for
the Group from a trading perspective, with pre-tax profits,
fully taxed earnings, business volumes and loan assets all
growing strongly and the Group continuing to increase its
market share within the buy-to-let sector whilst
maintaining asset quality. However the deep turmoil in the
credit markets is affecting the normal financing activities
of the business. Whilst we expect the credit markets to
recover from the current distressed position during 2008,
the timing and extent of the recovery will have an impact
on our outlook. In the Funding section we discuss the
position of the credit markets and its impact on our
business and financing.
Discussions have taken place with our lending banks for
renewal of our £280.0 million corporate facility, but the
terms available are not attractive, as discussed later in
this statement. To ensure that the facility is repaid when it
falls due in February 2008, thereby protecting the
embedded value of the Group’s assets for shareholders,
we have entered into a standby underwriting agreement
with UBS, supported by a group of our institutional
shareholders. This agreement provides us with the
ability to launch an underwritten rights issue for up to
£280.0 million until 27 February 2008 unless satisfactory
alternative funding arrangements have been put in place
prior to that time. The main terms of this agreement are
detailed in the Funding section below.
During the year, profit on ordinary activities before
taxation increased by 9.9% to £91.0 million from
£82.8 million in the previous year. However, owing to the
reduction in the rate of corporation tax to 28% from next
year, the Group’s deferred tax assets have been written
down, resulting in a one-off increase in the charge rate
to 31.0% from a particularly low rate of 16.9% last year.
Earnings per share therefore decreased to 56.8p
(2006: 61.2p), whilst on a fully taxed basis (note 18)
earnings per share increased by 11.8% to 57.7p
(2006: 51.6p).
4 The Paragon Group of Companies PLC
FUNDING
Current funding and environment
The Group’s lending is funded largely by the securitisation
of loan assets, accounting for £9.9 billion of the Group’s
liabilities at 30 September 2007. New lending is financed
by a £2.3 billion warehouse facility provided by a banking
syndicate of which £932.0 million was drawn as at
30 September 2007 (2006: £1,112.0 million). In addition,
a corporate facility of £280.0 million, also provided by a
banking syndicate, is used to fund the Group’s working
capital requirements together with a long-term bond issue
of £120.0 million due in 2017. The Group is not a deposit
taker and has no retail depositor base.
Our use of securitisation substantially reduces the Group’s
liquidity risk by matching the Group’s funding maturity
profile to the profile of the related assets. Since the
floating rate liabilities are matched with floating rate
assets which are predominantly LIBOR-linked or fixed rate
assets hedged by the use of interest rate swap or cap
agreements, the Group’s margins are largely protected
against movements in market interest rates, underpinning
the value of the Group’s investments in the portfolios and
the ongoing margin derived from the loan assets.
The warehouse facility is an asset backed revolving credit
line at a margin for mortgages of 22.5 basis points over
LIBOR. The revolving period expires on 29 February 2008,
after which date no new drawings may be made to fund
new loan completions, although warehouse assets would
be funded to maturity at a margin over LIBOR of 67.5 basis
points for mortgages with the characteristics of a public
securitisation SPV. The cost of this facility is not
unattractive in current market conditions and we would
expect the assets within it to generate positive margins
over their residual lives. The £280.0 million corporate
facility falls due for repayment on 27 February 2008. It is
currently priced at 90 basis points above LIBOR.
We have conducted extensive discussions with our
lending banks for the renewal of the corporate facility
and extension of the revolving period of the warehouse
facility. Whilst terms for renewal have been offered in
principle, they are not attractive for a variety of reasons,
including the high cost of such facilities in the current
market environment and the short-term nature of the
terms available.
The disruption of the capital and banking markets that
has spread from difficulties in the United States sub-prime
mortgage market has had a significant effect on the
cost and availability of credit. Since the summer the
securitisation markets have been effectively closed to new
issuance and, at the same time, banks have become less
willing to renew facilities in the ordinary course. A small
number of securitisation transactions were completed in
early November by UK and European issuers, which may
be the first signs of a return to normality. We expect the
credit markets to recover during 2008 but, in the
meantime, we have adjusted our business activities
in response to the current disruption. This is
discussed fully in the Business Review section of the
Chief Executive’s Review.
Limitations on new funding impact on the value created
from new originations rather than on the value embedded
within the existing portfolio. This embedded value is
represented by the net assets of the business and also the
value of the future income stream match-funded to
maturity. We are concerned that renewal of facilities on
the proposed terms would jeopardise shareholder value.
The Board has therefore taken the decision to enter into a
standby agreement with UBS which gives the Company up
to the end of February 2008 to launch a fully underwritten
rights issue to raise up to £280.0 million. This both
ensures that current shareholder value does not dissipate
and also provides time for the Company to explore all
potential options for the refinancing of the corporate
facility and new warehouse facilities. This process may
include further discussion with the Company’s lending
banks, releasing excess credit enhancement held within
our securitisation SPVs, asset sales and alternative
funding instruments. The objective will be to create a
stable funding platform for the Group which adequately
protects net assets and the value of future revenues from
the existing SPV assets for shareholders and to secure
new sources of funding to allow the profitable creation of
income streams from our lending originations to continue.
The Paragon Group of Companies PLC 5
Standby underwriting agreement
Under the standby agreement, the Company has the right
to require UBS to underwrite, in full, a rights issue of up to
£280.0 million, before 27 February 2008. The issue or offer
price of any new shares will be determined at the time of
launch of the issue in the light of the then prevailing
market conditions. The obligation of UBS is subject to
normal conditions, including all relevant approvals for
the rights issue, including shareholder approval,
being obtained; the absence of any material adverse
change affecting the Group; and the absence of any force
majeure event.
BUSINESS REVIEW AND STRATEGY
The year ended 30 September 2007 was another strong
year for buy-to-let and the private rented sector, with
demand for rented property running at high levels all year.
The Royal Institution of Chartered Surveyors confirmed in
September that landlords were experiencing record rental
growth and that surveyors expected further strong growth
in the coming months. Similarly the latest research from
the Association of Residential Letting Agents (‘ARLA’),
also published in September, reported tenant demand
outstripping supply in all areas of the rental market. Both
organisations noted that tenant demand has been boosted
by higher borrowing costs and growing uncertainty in
financial markets as well as high levels of migration from
the European Union.
The consumer credit market has remained weak during
the year and, as a consequence, our focus within the
Consumer Finance division on the quality of lending rather
than on 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 1,445,000 shares in
the market at a cost of £8.1 million with the result that by
30 September 2007 a total of 6,689,000 shares had been
repurchased since the buy-back programme was
announced in 2005, at a total cost of £39.5 million. Given
current conditions and the appropriateness of preserving
liquidity, the Board has decided to suspend the buy-back
programme until further notice.
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. Further asset sales may be considered, as
appropriate, to supplement the organic run-down strategy.
BOARD CHANGES
As we reported last year, Gavin Lickley, a non-executive
director since 2002, retired from the Board in October
2006 and we thank him for his service and commitment
during the years of his association with the Group.
Jonathan Perry, the former Chairman, retired from the
Board in February 2007, after fifteen years of service and
I was appointed Chairman at that time. Jonathan Perry led
the Group from the early 1990s as it developed its current
range of business operations and the Board expresses its
thanks to him for his consistently outstanding
performance and contribution.
Terry Eccles joined the Board in February 2007 as
an independent non-executive director. Formerly
Vice-Chairman of JPMorgan Cazenove, Terry brings to the
Board considerable experience in the financial sector.
6 The Paragon Group of Companies PLC
The prospects of the Group in the current year will depend
substantially on the reopening of the securitised funding
markets to enable the Group to return to normal levels of
writing new business. If we are unable to secure new
warehouse facilities or alternative sources of access to the
securitisation market, we will have to scale back new
lending activities significantly and manage costs
accordingly. Over a prolonged period this would have a
negative impact on our franchise. However, the embedded
value of our existing portfolio of assets remains strong
and we expect it to continue to generate sound profits and
cash flow in the future.
We firmly believe that the private rented sector will
continue to see growth for many years to come. The
investment required to enable this expansion will have to
be financed and therefore the Group’s key products will
remain in demand. The current environment, whilst
immensely disruptive, is driven by market-wide funding
concerns and the actions taken by the Group will ensure
that the embedded value in the business is protected
whilst providing a base for future profitable lending when
credit markets recover.
Robert G Dench
Chairman
22 November 2007
STAFF
The excellent progress we have made during the year
would not have been achieved without the hard work and
dedication of our staff and my fellow directors. I thank
them all for their efforts.
OUTLOOK
For the past twelve years the Group has pursued a
strategy of careful growth in core markets which offer
high quality loan assets, funded portfolio by portfolio to
maturity through the securitisation markets. This has
produced consistent profit growth over the period.
The Group has achieved record profits in 2007, the
majority of which have arisen from the Group’s buy-to-let
businesses, a sector with strong credit defensive qualities
and long-term growth prospects, reflecting increasing
structural demand for rented property in the UK.
The present travails of the credit market coinciding with
the expiry of our syndicated credit facilities have created
uncertainties over the Group’s future funding in the near
term. Whilst we expect the capital markets to recover
during 2008, it is important that we manage our new
business generation cautiously to ensure that new
originations remain profitable, but also, fundamentally,
to protect the embedded value in the current portfolio.
The strength of profits in 2007 reflects the quality of
income generated from match-funded assets within
existing securitisation vehicles, largely insulated, as they
are, from the sharp rise in the cost of credit. However
the high cost and short-term nature of replacement
banking facilities are unattractive in the current
environment and we believe they would significantly
erode shareholder value.
For this reason, we have arranged the standby
underwriting agreement referred to above which, if called
upon, will enable the repayment of the £280.0 million
corporate facility due at the end of February 2008. This will
provide an opportunity to explore alternative funding
sources, and to seek new warehousing arrangements for
new lending activity in 2008 and beyond.
The Paragon Group of Companies PLC 7
Chief Executive’s review
During the year ended 30 September 2007 the Group advanced strongly, with profit before tax increasing by 9.9% to
£91.0 million from £82.8 million in the previous year.
Total loan assets at 30 September 2007 increased by 31.0% to £11,034.9 million from £8,426.6 million at 30 September 2006.
Total advances by the Group increased by 30.0% to £4,436.4 million (2006: £3,412.6 million), of which £4,079.3 million were
buy-to-let advances (2006: £3,038.3 million), an increase of 34.3% over the year.
FINANCIAL REVIEW
CONSOLIDATED INCOME STATEMENT
For the year ended 30 September 2007
Interest receivable
Interest payable and similar charges
Net interest income
Income from associate
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
Dividend - Rate per share
Basic earnings per share
Diluted earnings per share
2007
£m
747.5
(591.7)
155.8
0.2
28.9
184.9
(47.7)
(50.5)
86.7
4.3
91.0
(28.2)
62.8
8.0p
56.8p
54.7p
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
17.0p
61.2p
58.4p
The Group is organised into two major operating divisions: First Mortgages, which includes the buy-to-let and
owner-occupied first mortgage assets and other sources of income derived from first charge mortgages; and Consumer
Finance, which includes secured lending, car and retail finance and the residual unsecured loan book. These divisions are
the basis on which the Group reports primary segmental information. This is a change from the basis reported in 2006 in
that the closed, owner-occupied first mortgage book, which at 30 September 2007 amounted to £293.8 million, and the
closed, unsecured book of £56.9 million, both of which comprised the “Other Operations” category last year, are now
included within the First Mortgages and Consumer Finance segments respectively. For reporting purposes these books
were absorbed within the results from the two main business areas because their reduced size had rendered the Other
Operations segment insignificant in terms of assets, revenue and net profits.
8 The Paragon Group of Companies PLC
The operating results of these adjusted business segments are detailed fully in note 5 to the accounts and are
summarised below.
Operating result
First Mortgages
Consumer Finance
During the year, we saw four quarter point increases in
base rates and, by virtue of a market expectation of rising
rates, three-month LIBOR, in particular, has been higher
than base rates throughout the year. This has had an
adverse impact on margins, most noticeably in the
Consumer Finance division, where pricing is primarily set
against base rates. In addition the change in business mix
in favour of first mortgages, which are of higher credit
quality than consumer finance loans, has resulted in a
slight narrowing of overall margins, although margins
within the first mortgage businesses have remained
broadly similar to those in 2006. The growth of the loan
book resulted in net interest income increasing by 9.0%
to £155.8 million from £142.9 million.
Partially compensating for this, the rising interest rate
environment had a positive effect on fair value net gains
of £4.3 million (2006: £2.5 million), which 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.
Other operating income reduced slightly to £28.9 million,
from £30.6 million in 2006 attributable to a reduction in
activity within the Consumer Finance division, where other
operating income decreased by 22.4%. This was offset by
an increase of 19.5% within First Mortgages as a result of
increased buy-to-let activity during the year. An increased
proportion of this income has arisen from fees rather than
commissions, reflecting a continuation of the decline in
insurance related income in the Consumer Finance
division reported last year.
2007
£m
81.8
9.2
91.0
2006
£m
60.5
22.3
82.8
Our continuing focus on cost effectiveness has resulted
in a further reduction in the cost:income ratio, to 25.2%
from 25.8% (Appendix A). Operating expenses were
£47.7 million, compared with £45.4 million for 2006.
The charge for loss provisions of £50.5 million compares
with £47.8 million for 2006. As a percentage of loans to
customers the charge, at 0.46%, is lower than the charge
of 0.57% for 2006. Of the total charge, only £3.7 million, or
7.3%, relates to First Mortgages, with £1.5 million of this
relating to the closed, owner-occupied book. The charge
in respect of Consumer Finance 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. The loan book continues to be carefully
managed and the arrears performance remains in
line with our expectations, with the performance of the
buy-to-let book remaining exemplary.
The effective tax rate, at 31.0%, is slightly higher than the
normal corporation tax rate. This results from applying the
reduced future corporation tax rate of 28% to the Group’s
deferred tax assets, which are expected to unwind over a
period of up to ten years. We expect the charge to be at or
slightly below the corporation tax rate next year.
Profits after taxation of £62.8 million have been
transferred to shareholders’ funds, which totalled
£313.3 million at the year-end.
The Paragon Group of Companies PLC 9
BUSINESS REVIEW
NEW BUSINESS VOLUMES
Year ended 30 September 2007
First Mortgages
Buy-to-let
Other
Consumer Finance
Secured lending
Car Finance
Retail Finance
FIRST MORTGAGES
The latest data published by the Council of Mortgage
Lenders (“CML”) supports the picture of a strong
buy-to-let sector, both in absolute terms and particularly
when set against a softening owner occupier market.
According to the CML, buy-to-let lending represented
12% (£21.2 billion) of all new mortgage advances in the
first half of 2007, the highest proportion since the launch
of buy-to-let in 1996. Furthermore, the stock of buy-to-let
mortgages increased to £108 billion, an increase of
14% since the second half of 2006, with buy-to-let
accounting for 1 in 10 of all outstanding mortgages. This
clearly reflects the scale of the private rented sector in the
United Kingdom relative to the housing market as a whole.
The CML data also confirms the continuing superior credit
quality of buy-to-let mortgages, with both arrears and
possessions significantly lower than for the market in
general. The CML attributes this quality differential in part
to persistently strong tenant demand, shorter void periods
and rising rents.
10 The Paragon Group of Companies PLC
2007
£m
2006
£m
2007
Number
2006
Number
4,079.3
0.3
3,038.3
1.9
30,113
18
24,273
70
4,079.6
3,040.2
30,131
24,343
205.8
70.8
80.2
356.8
218.0
82.2
72.2
7,045
3,687
42,230
7,528
4,867
38,930
372.4
52,962
51,325
4,436.4
3,412.6
83,093
75,668
During the year ended 30 September 2007 Paragon's two
buy-to-let brands, Paragon Mortgages and Mortgage
Trust, both benefited from these strong trading conditions.
Buy-to-let mortgage advances by the Group were
£4,079.3 million for the year (2006: £3,038.3 million),
an increase of 34.3%. This strong lending performance
produced a 39.1% increase in buy-to-let assets to
£10,031.3 million from £7,212.3 million. This strong
growth has its roots in the two distinct propositions offered
by our two brands and in the excellent relationships the
mortgage business has developed with individual
intermediaries and mortgage adviser networks. Paragon
has been successful in focusing on distribution and
service and has maintained its strong stance on credit
quality, with the arrears performance of the book
remaining exemplary.
In response to the recent difficulties in the credit markets,
we have taken steps to reduce the origination flow whilst
the cost of funding from the capital markets remains
uncertain, so as to limit the risk of writing new business
at unprofitable margins. This has been achieved by the
withdrawal of a number of our first mortgage products
and by increasing the pricing on others. We anticipate that
volumes in the first half of 2008 will be around half the
levels in the corresponding period of 2007. The slow down
is being managed carefully with products directed at key
intermediary relationships who have the potential to
provide increased volumes when markets stabilise, as
well as providing continuing new lending support for our
existing landlord customers.
The rate of redemptions remained low during 2007, at a
similar level to 2006, at just under 15%. ARLA’s September
survey data continues to demonstrate that landlords,
on purchasing properties for rental, expect to hold the
properties for an average of sixteen years.
As part of the Group’s aim to ensure that we are
operationally efficient, we are rationalising our first
mortgage processing function. This will result in the
migration of Mortgage Trust’s new business processing
function from Epsom to Solihull, from where we will
support both brands. This will be likely to result in a
reduction of more than 60 positions in our Epsom office.
The owner-occupied book reduced to £293.8 million from
£431.5 million during the year ended 30 September 2007
and performed in line with expectations. During the year
balances with a book value of £4.5 million were sold. Save
for the management of this book in run-off, there has
been little activity in recent years in this area as the Group
has focussed originations on buy-to-let.
CONSUMER FINANCE
Aggregate loan advances were £356.8 million during the
year, a decrease of 4.2% from £372.4 million in the
previous year. As at 30 September 2007, the total loans
outstanding on the Consumer Finance books were
£709.8 million, compared with £782.8 million at
30 September 2006.
Arrears levels continue to remain stable and at low levels,
in line with expectations.
Personal finance
Secured personal advances were £205.8 million during
the year, a reduction of 5.6% from £218.0 million for the
previous year. Despite the intensely competitive
environment, a gradual tightening of criteria within the
prime secured second charge market has been in
evidence as the year has progressed. Whilst this change to
a credit stance closer to that of Paragon Personal Finance
has led to the business enjoying an improving market
position, the overall tightening of criteria has had an
adverse effect on the broker-introduced personal finance
market. We do not, therefore, anticipate that business
volumes will benefit from improved market share in the
short term, although we do expect an improvement as we
move through 2008.
Insurance sales continue to diminish in the wake of
negative sentiment for the products, a trend we expect to
continue. To address the fall in commission revenue, we
have introduced lender arrangement fees and adjusted
our loan pricing. We expect further re-pricing when the
£25,000 threshold for Consumer Credit Act regulated
lending is abolished in April 2008.
The closed unsecured book continues to run down in
accordance with our expectations. The book totalled
£56.9 million at 30 September 2007, compared to
£73.1 million a year before. During the period, balances
with a book value of £5.3 million were sold and similar
disposals are expected in the coming year.
Sales aid finance
New business volumes were £151.0 million
(2006: £154.4 million) and were in line with our
expectations. Both retail and car markets experienced
contracting volumes throughout the year as consumers,
concerned about affordability, became more wary of
committing to large purchases. Given this environment
the business again tightened its underwriting criteria,
the result of which has been a further improvement in
the credit quality of new business.
Throughout the year the key focus for the business has
been on improving profitability and increasing operational
efficiency, both of which have been achieved without
compromising service standards or portfolio quality.
SECURITISATION ACTIVITY
Prior to the present period of market turmoil, the Group
was an active issuer in the capital markets. In October
2006, a £1.5 billion buy-to-let securitisation was
completed by Paragon Mortgages (No. 13) PLC; in January
2007, a £268.6 million securitisation to repackage certain
older, owner-occupied, loan assets was completed by
First Flexible (No. 7) PLC; in March 2007, a further
£1.5 billion buy-to-let securitisation was completed by
Paragon Mortgages (No. 14) PLC; and in July 2007,
a £1.0 billion buy-to-let securitisation was completed
by Paragon Mortgages (No. 15) PLC.
For the avoidance of doubt, Paragon has no involvement in
the US mortgage market nor any investment, directly or
indirectly, in US sub-prime mortgage backed securities,
specialised investment vehicles, collateralised debt
obligations or similar vehicles.
Nigel S Terrington
Chief Executive
22 November 2007
The Paragon Group of Companies PLC 11
Board of Directors
1.
2.
3.
4.
1. Robert G Dench
Chairman
Age 57
Bob Dench joined Paragon as a non-executive director in
September 2004 and was appointed Chairman in February
2007. During an extended career with Barclays he held a
number of senior positions in the UK and overseas, leaving
in 2004. He is also a non-executive director of AXA UK plc
and AXA Ireland Limited and of Clipper Ventures plc.
2. Nigel S Terrington
Chief Executive
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
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.
12 The Paragon Group of Companies PLC
3. Nicholas Keen
Finance Director
Age 49
Nick 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.
4. John A Heron
Director of Mortgages
Age 48
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.
5.
6.
7.
8.
5. Pawan Pandya
Chief Operating Officer
Age 43
Pawan Pandya joined the Group in December 1988.
He was appointed as Chief Operating Officer in July 2002,
responsible for operational and IT areas of the Group.
Prior to joining Paragon, he worked in foreign exchange,
credit risk management, marketing and corporate finance.
6. David M M Beever
Non-Executive Director
Age 66
David Beever joined Paragon as a non-executive
director in August 2003. He is 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 and
Chairman of KPMG Corporate Finance. He is the Senior
Independent Non-Executive Director.
7. Christopher D Newell
Non-Executive Director
Age 47
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.
8. Terence C Eccles
Non-Executive Director
Age 61
Terry Eccles joined Paragon as a Non-Executive Director
on 1 February 2007. He was previously Vice Chairman of
JPMorgan Cazenove. Since joining the JPMorgan Group in
1970 he held a wide range of roles in London, New York
and Hong Kong. Since 1986 he was involved with the
development of the firm's financial institutions business,
becoming its head and then chairman. He has advised on
many of the more significant transactions in the financial
services industry.
The Paragon Group of Companies PLC 13
Directors’ report
The directors submit their Report and the Accounts for the
year ended 30 September 2007 which were approved by
the Board on 22 November 2007.
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
no final dividend (2006: 10.1p per share) which, given the
interim dividend of 8.0p per share (2006: 6.9p per share)
paid on 27 July 2007, means a total dividend for the year of
8.0p per share (2006: 17.0p per share). Before dividends,
retained profits of £62.8 million (2006: £68.8 million) have
been transferred to reserves.
Business review
The requirement under the Companies Act 1985 to provide
a business review is met by the sections of the Chairman’s
Statement headed ‘Funding’, ‘Business Review and
Strategy’, ‘Capital Management’ and ‘Outlook’ on pages
3 to 7 and the Chief Executive’s Review on pages 8 to 11
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 57.
Directors
The interests of the directors at the year end in the
share capital of the Company, all beneficially held, are
shown opposite.
14 The Paragon Group of Companies PLC
AT 30 SEPTEMBER 2007
ORDINARY SHARES
OF 10P EACH
AT 30 SEPTEMBER 2006
OR ON APPOINTMENT
ORDINARY SHARES
OF 10P EACH
R G Dench
N S Terrington
N Keen
J A Heron
P Pandya
D M M Beever*
C D Newell*
T C Eccles*
45,000
177,573
88,063
44,127
167,556
10,000
30,000
-
20,000
120,170
54,390
14,303
117,365
10,000
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 28.
There have been no changes in the directors’ interests
in the share capital of the Company since
30 September 2007.
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, and Mr J P L Perry retired from
the Board by rotation and did not offer himself for
re-appointment at the Annual General Meeting on
8 February 2007.
Mr T C Eccles was appointed to the Board on
1 February 2007.
In accordance with the Articles of Association,
Mr R G Dench, Mr N Keen and Mr C D Newell will retire
from the Board at the forthcoming Annual General
Meeting. Mr R G Dench, Mr N Keen and Mr C D Newell,
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.
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.
Purchase of own shares
During the year ended 30 September 2007 the Company has, as part of a £40.0 million (2006: £40.0 million) repurchase
programme, repurchased 1,445,000 shares (2006: 3,454,000) having an aggregate nominal value of £144,500 (2006: £345,400)
at a cost of £8.1 million (2006: £23.1 million). These shares represent 1.3% of the issued share capital of the Company
(excluding treasury shares) (2006: 3.0%). This brings the total number of shares acquired as part of the programme to
6,689,000 (2006: 5,244,000). All of these shares were held as at 30 September 2007 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 2007, being a date not more than one month before the date of the notice convening the forthcoming
Annual General Meeting, the Company had been notified of the following interests of more than 3% in the nominal value of
the ordinary share capital of the Company:
ORDINARY SHARES
PERCENTAGE HELD
Veer Palthe Voute NV
BlackRock Merrill Lynch Investment Management
M & G Investment Management
Standard Life Investments
Scottish Widows Investment Partnership
Rathbone Investment Management
Oppenheimer Capital
Legal & General Investment Management
Schroder Investment Management
Threadneedle Asset Management
Charitable contributions
Contributions to charitable institutions in the
United Kingdom amounted to £65,161 (2006: £90,531).
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.
9,458,430
8,538,250
8,375,249
6,827,442
6,197,253
5,439,812
5,208,880
5,147,201
4,805,598
4,706,813
8.24%
7.44%
7.30%
5.95%
5.40%
4.74%
4.54%
4.48%
4.19%
4.10%
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.
Annual General Meeting
A notice convening the Annual General Meeting of the
Company is being circulated to shareholders with this
Annual Report and Accounts.
Approved by the Board of Directors and signed on behalf
of the Board.
John G Gemmell
Company Secretary
22 November 2007
The Paragon Group of Companies PLC 15
Corporate social responsibility
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 reviewed
regularly 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.
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.
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.
Commitment to our customers
The Group places the needs of customers at the heart of
its day-to-day operations. With a commitment from the
Board, fairness to customers is a key consideration and
objective at all stages of the lifetime of a loan.
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.
16 The Paragon Group of Companies PLC
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
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.
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 £52,315 (2006: £59,625) made by the
Group to the work of the Foundation for Credit Counselling
which operates the Consumer Credit Counselling Service.
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: Children with
Leukaemia, Well Child, Handicapped Childrens’ Action
Group, Kids in Action, NSPCC, Samantha Dickson Brain
Tumour Trust, Shelter, Mencap and local schools.
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 £23,000 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.
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
At the beginning of the year, the Committee consisted of
three independent non-executive directors: Gavin Lickley
(who chaired the Committee), David Beever and
Robert Dench, together with the Chairman of the
Company, Jonathan Perry. Gavin Lickley and
Jonathan Perry retired from the Board on
12 October 2006 and 8 February 2007 respectively.
Following his appointment to the Board on 1 February
2007, Terence Eccles was appointed Chairman of the
Remuneration Committee. At the year end the
members of the Committee were Terence Eccles,
David Beever and Robert Dench. The Company is in
the process of appointing a further independent
non-executive director who will join the Committee.
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. The Chairman of the Company does 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 and Towers Perrin 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 executive directors receive a combination of fixed and
performance-related elements of remuneration. Fixed
remuneration consists of salary, benefits in kind and
pension scheme contributions (see under ‘Pension
contributions’ opposite). Performance-related
remuneration consists of participation in the annual
bonus plan, 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.
18 The Paragon Group of Companies PLC
Salary
The Chairman’s fees 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.
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,
prior to the beginning of the year.
Each director affected by the 2006 “A Day” changes is
offered the opportunity to terminate permanently further
contributions in exchange for a cash supplement
calculated to equate to the cost of the Company’s
contributions towards the executive’s future service
benefits had he stayed within the Plan for his future
service accrual.
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 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 Chairman and non-executive directors are not entitled
to receive a bonus and do not participate in the
performance or matching share plans.
In determining the level of annual bonus awards for the
year ended 30 September 2007, 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
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.
The Paragon Group of Companies PLC 19
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.
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 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 (until its delisting
on 9 August 2007), HSBC, Kensington Group (until its
delisting on 8 August 2007), 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.
20 The Paragon Group of Companies PLC
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 2007
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 2007 all non-executive directors have been paid an
annual base fee of £30,000 plus £2,000 for membership of
each committee, £10,000 for Remuneration Committee
and Audit and Compliance Committee chairmanship and
£6,000 for acting as the Senior Independent Director.
Current terms of engagement apply for the
following periods:
C D Newell
- 1 November 2004 to
D M M Beever
T C Eccles
1 November 2007
- 8 August 2006 to
8 August 2009
- 1 February 2007 to
1 February 2010
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.
Terence Eccles, Chairman of the Remuneration
Committee, will be available to answer questions on
remuneration policy at the Annual General Meeting.
The Paragon Group of Companies PLC 21
This graph shows the value, by 30 September 2007, of
£100 invested in The Paragon Group of Companies PLC
on 30 September 2002, compared with £100 invested in
the FTSE General Financial sector index. The other
points plotted are the values at the intervening financial
year ends.
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:
R G Dench
N S Terrington
N Keen
- 8 February 2007
- 1 September 1990 (amended
16 February 1993 and
30 October 2001)
- 6 February 1996
(amended 30 October 2001)
J A Heron
- 1 September 1990
(amended 14 January and
8 February 1993)
P Pandya
- 1 October 1994
In the event of early termination, the directors’ contracts
provide for the payment of one year’s fees / salary in lieu
of notice.
Of the directors seeking re-election at the Annual General
Meeting, Mr R G Dench and Mr N Keen each has a service
contract with the Company.
None of the executive directors currently earns
remuneration from external non-executive appointments.
AUDITED INFORMATION
Directors’ emoluments
The emoluments of directors holding office during the year were:
Chairman
J P L Perry
R G Dench
Executive
N S Terrington
N Keen
J A Heron
P Pandya
Non-executive
D M M Beever
G A F Lickley
C D Newell
T C Eccles
2007
2006
SALARY
AND FEES
£000
BENEFITS
IN KIND
£000
ANNUAL
BONUS
£000
LOSS OF
OFFICE
£000
2007
TOTAL
£000
2006
TOTAL
£000
74
178
375
293
204
192
40
1
41
27
1,425
1,276
1
17
21
5
17
5
-
-
-
-
66
51
-
-
-
-
-
-
-
-
-
-
-
1,108
-
-
-
-
-
-
-
40
-
-
40
-
75
195
396
298
221
197
40
41
41
27
1,531
2,435
326
33
704
530
377
353
36
38
38
-
2,435
Benefits in kind comprise private health cover, fuel benefit, life assurance and company car provision.
Despite meeting the targets under the bonus plan, the directors have volunteered to defer assessment of whether a bonus
should be paid to them in respect of the year to the discretion of the Remuneration Committee who may make that
assessment in the year ending 30 September 2008. Next year’s report will contain details of and an explanation for any
bonuses paid. The bonuses that would have been paid were £375,000 for Mr N S Terrington, £281,000 for Mr N Keen,
£200,000 for Mr J A Heron and £180,000 for Mr P Pandya.
Following his retirement from the Board Mr J P L Perry was retained to provide consultancy services to the Group for a
twelve month period, compensated at a rate of £20,000 per annum.
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
£505,000 (2006: £247,000).
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
16
6
10
1
167
50
104
9
ACCUMULATED TOTAL
ACCRUED PENSION AT
30 SEPTEMBER 2007
ACCUMULATED TOTAL
ACCRUED PENSION AT
30 SEPTEMBER 2006
£000
144
65
81
57
£000
123
57
69
54
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 2007
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
2007
2006
£000
£000
TOTAL
ACCRUED
PENSION AT
YEAR END
£000
N S Terrington
N Keen
J A Heron
P Pandya
47
49
48
42
-
5
-
-
21
8
12
3
144
65
81
57
1,323
663
768
475
1,524
740
894
492
DIFFERENCE
IN TRANSFER
VALUES LESS
CONTRIBUTIONS
£000
201
72
126
17
The pension entitlement shown is that which would be paid annually on retirement based on service to 30 September 2007
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 in respect of further pension provision of £177,000 (2006: £nil) for
Mr N S Terrington, £112,000 (2006: £101,000) for Mr N Keen, £88,000 (2006: £nil) for Mr J A Heron and £72,000 (2006: £nil)
for Mr P Pandya.
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 £3,618,000
(2006: £6,924,000). At 30 September 2007 the share price of The Paragon Group of Companies PLC was 300.25p
(2006: 674.00p) and the range during the year then ended was 245.50p to 715.00p (2006: 495.50p to 761.50p).
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 2006 and
30 September 2007 are:
DATE FROM
EXPIRY DATE
WHICH
EXERCISABLE
MARKET
PRICE AT
AWARD DATE
Awards outstanding at 30 September 2006:
JPL PERRY
NS TERRINGTON
N KEEN
JA HERON
P PANDYA
NUMBER
NUMBER
NUMBER
NUMBER
NUMBER
02/07/2006*
18/12/2006*
22/06/2007*
02/12/2007*
02/06/2008*
07/03/2009†
25/05/2009†
25/09/2009†
02/01/2007
18/06/2007
22/12/2007
02/06/2008
02/12/2008
07/09/2009
25/11/2009
25/03/2010
291.00p
338.90p
350.25p
391.75p
408.00p
684.00p
643.00p
659.50p
40,790
31,250
28,036
-
-
-
-
-
-
51,953
46,610
54,897
47,034
35,722
19,352
18,295
-
39,063
35,045
41,173
35,276
26,778
14,506
13,714
-
21,875
19,625
22,102
18,937
15,111
8,186
7,739
-
21,875
19,625
22,102
18,937
15,111
8,186
7,739
100,076
273,863
205,555
113,575
113,575
Awards made in the year:
On 09/01/2007
09/01/2010†
09/07/2010
665.00p
-
18,509
13,868
8,840
7,956
On 28/03/2007
28/03/2010†
28/06/2010
576.50p
20,840
15,614
9,953
8,958
On 14/06/2007
14/06/2010†
14/12/2010
543.00p
27,043
20,264
11,538
10,385
On 26/09/2007
26/09/2010†
26/03/2011
296.50p
57,449
43,056
20,202
18,182
Awards exercised in the year:
On 18/12/2006
02/07/2006*
18/12/2006*
02/01/2007
18/06/2007
291.00p
338.90p
(40,790)
-
-
(51,953)
-
(39,063)
-
-
-
(21,875)
On 11/06/2007
18/12/2006*
18/06/2007
338.90p
-
-
(21,875)
-
On 31/07/2007
22/06/2007*
22/12/2007
350.25p
(37,409)
(28,127)
-
(15,751)
Awards lapsing in the year
22/06/2007*
22/12/2007
350.25p
(9,201)
(6,918)
(3,874)
(3,874)
At 30 September 2007 or end of appointment
59,286
299,141
224,249
138,359
117,556
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.
The first grant vesting during the year met the performance conditions for 100% vesting and the second grant vesting during
the year met the performance conditions for 80.26% vesting. Awards that did not vest are reported in the table as lapsed
awards. The share prices on the vesting dates were 681.50p on 18 December 2006 and 526.50p on 22 June 2007.
The share prices at the exercise dates were:
18 December 2006
11 June 2007
31 July 2007
681.50p
543.00p
443.00p
The Paragon Group of Companies PLC 25
Share option schemes
Details of individual options held by the directors at 30 September 2006 and 30 September 2007 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 2006
31/03/2001
11/01/2002
17/02/2003
26/05/2003
27/11/2004
29/07/2005
14/03/2006
08/12/2006†
01/12/2007†
01/08/2010
01/09/2009
01/09/2011
31/03/2008
11/01/2009
17/02/2010
26/05/2007
27/11/2011
29/07/2012
14/03/2013
08/12/2013
01/12/2014
01/02/2011
01/09/2010
01/09/2012
218.00p
147.50p
147.00p
148.50p
248.00p
186.50p
186.50p
339.00p
348.38p
326.76p
525.52p
525.52p
-
-
-
-
-
-
122,368
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
73,746
82,347
-
1,779
-
-
-
-
-
-
80,000
65,789
41,298
44,205
-
-
3,063
-
-
-
-
-
-
-
41,298
44,205
-
-
-
181,365
1,618,988
356,819
234,355
85,503
Options granted in the year:
Options exercised in the year:
On 08/12/06
08/12/2006†
08/12/2013
339.00p
On 09/01/07
26/05/2003
26/05/2007
148.50p
-
-
-
-
-
(200,000)
-
-
-
-
-
-
-
(41,298)
-
At 30 September 2007 or end of appointment
181,365
1,418,988
356,819
234,355
44,205
† 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.
The awards vesting during the year met the performance conditions for 100% vesting. The share price on the vesting date,
8 December 2006, was 667.50p. The share prices at the exercise dates were 667.50p on 8 December 2006 and 665.00p on
9 January 2007.
26 The Paragon Group of Companies PLC
Deferred bonus shares
Details of individual entitlements of the directors to Deferred Bonus Shares at 30 September 2006 and 30 September 2007 are:
AWARD DATE
TRANSFER
DATE
MARKET
PRICE AT
AWARD DATE
Awards outstanding at 30 September 2006:
JPL PERRY
NS TERRINGTON
N KEEN
JA HERON
P PANDYA
NUMBER
NUMBER
NUMBER
NUMBER
NUMBER
27/02/2004
27/02/2005
13/03/2006
01/10/2006
01/10/2007
01/10/2008
387.60p
407.75p
683.00p
29,940
14,113
-
45,284
52,694
22,904
32,934
39,490
17,178
13,473
20,528
9,416
16,467
20,528
9,416
44,053
120,882
89,602
43,417
46,411
Awards made in the year:
15/01/2007
01/10/2009
631.00p
Shares transferred in the year:
On 18/12/2006
27/02/2004
01/10/2006
387.60p
On 23/01/2007
-
-
18,078
13,552
9,559
8,285
(45,284)
(32,934)
(13,473)
(16,467)
27/02/2004
01/10/2006
387.60p
(29,940)
-
-
-
-
At 30 September 2007 or end of appointment
14,113
93,676
70,220
39,503
38,229
The Deferred Bonus Shares awarded will be transferred to the scheme participants as soon as is reasonably practicable
after the transfer date.
The share prices at the exercise dates were 681.50p on 18 December 2006 and 602.00p on 23 January 2007. Following the
transfer of the shares the participants received payment in respect of the dividends which would have accrued on the shares
since the award date as follows: Mr J P L Perry - £9,000, Mr N S Terrington - £13,000, Mr N Keen - £10,000, Mr J A Heron -
£4,000, Mr P Pandya £5,000.
The Paragon Group of Companies PLC 27
Matching Share Plan
The individual interests of the directors in the Matching Share Plan at 30 September 2006 and 30 September 2007 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 2006:
22/03/2006
761.50p
32,086
24,052
16,966
16,966
Awards made in the year:
09/01/2007
665.00p
25,116
18,818
14,995
13,495
32,086
24,052
16,966
16,966
At 30 September 2007
57,202
42,870
31,961
30,461
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 on
the first day of the financial year in which the award date falls and TSR over the three year period commencing on 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 2007
28 The Paragon Group of Companies PLC
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.
The Paragon Group of Companies PLC 29
Independent auditors’ report
To the members of The Paragon Group of Companies PLC
In addition, we report to you if, in our opinion, 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 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 other information contained in the annual
report and consider whether it is consistent with the
audited financial statements. The other information
comprises only the Directors’ report, the unaudited
part of the Directors’ Remuneration Report, the
Chairman’s Statement and the Chief Executive’s Review.
We consider the implications for our report if we
become aware of any apparent misstatements or
material inconsistencies with the financial statements.
Our responsibilities do not extend to any further
information outside the annual report.
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 2007 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 58. 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 to be 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 to be
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 and whether the
financial statements and the part of the directors’
remuneration report to be audited have been properly
prepared in accordance with the Companies Act 1985 and,
in respect of the group financial statements, Article 4 of
the IAS Regulation. We also 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.
30 The Paragon Group of Companies PLC
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 to be 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 group’s
and company’s circumstances, consistently applied and
adequately disclosed.
We planned and performed our audit so as to obtain all
the information and explanations which we considered
necessary in order to provide us with sufficient evidence to
give reasonable assurance that the financial statements
and the part of the directors’ remuneration report to be
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 to be 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 2007 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 2007; and
● the financial statements and the part of the Directors’
Remuneration Report to be audited have been properly
prepared in accordance with the Companies Act 1985
and, as regards the group financial statements, 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 group 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.
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 2007 and of its profit for the
year then ended.
Emphasis of matter - going concern
Without qualifying our opinion in this regard, we draw
attention to the disclosures made in note 2 of the financial
statements concerning the Group's ability to continue as a
going concern.
The Group’s £280 million facility expires on
27 February 2008 and if not renewed will be due for
payment on this date. In order to ensure that the facility
can be repaid when it falls due, the Group has entered into
a standby underwriting agreement for a rights issue of up
to £280 million, valid until 27 February 2008. This
agreement is subject to the following conditions which
result in material uncertainty:
● shareholder approval to enter into the rights issue;
● the absence of any material adverse change affecting
the Group; and
● the absence of any force majeure event.
Having taken into account this material uncertainty, the
directors consider it is appropriate to prepare the financial
statements on the going concern basis. In the
circumstances of the Group, these conditions, along with
other matters noted in note 2, indicate the existence of a
material uncertainty which may cast significant doubt on
the ability of the Group to continue as a going concern.
The financial statements do not include the adjustments
that would result if the Group were unable to continue as a
going concern as it is not practicable do so but would
include writing down the carrying value of assets,
including deferred tax assets to their recoverable amount
and providing for any further liabilities that might arise.
Deloitte & Touche LLP
Chartered Accountants and Registered Auditors
Birmingham, United Kingdom
22 November 2007
The Paragon Group of Companies PLC 31
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 2007 the Company complied with the
provisions of the Code, except for Code provisions A3.2 in
relation to the number of independent non-executive
directors, A4.1 in relation to the constitution of the
Nominations Committee and 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’.ectors
At the beginning of the year the Board of Directors
comprised the Chairman, four executive and four
non-executive directors. Gavin Lickley, an independent
non-executive director, retired from the Board on
12 October 2006 and Terence Eccles was appointed to the
Board as an independent non-executive director on
1 February 2007. Jonathan Perry, the former Chairman,
resigned from the Board at the conclusion of the Annual
General Meeting on 8 February 2007 and Robert Dench,
an independent non-executive director, was appointed
Chairman on that date. The Board is now seeking to
appoint at least one further independent non-executive
director, which will ensure compliance with Code
provision A3.2.
All of the directors bring to the Company a broad and
valuable range of experience. 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 12 and 13.
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. Robert Dench,
Nigel Terrington, Nicholas Keen and Pawan Pandya
attended all of the ten regular Board meetings during the
year ended 30 September 2007. Christopher Newell
attended nine meetings, John Heron and David Beever
attended eight meetings, Terence Eccles attended all
seven meetings following his appointment to the Board
and Jonathan Perry attended all three meetings up to the
date of his retirement from the Board.
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 division of responsibilities between the Chairman and
32 The Paragon Group of Companies PLC
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
until his retirement from the Board on 12 October 2006,
Terence Eccles (following his appointment to the Board
on 1 February 2007), Jonathan Perry (until his retirement
from the Board on 8 February 2007), David Beever
and Robert Dench. The Committee is chaired by
Terence Eccles.
On his appointment as Chairman Robert Dench
remained a member of the Committee in accordance
with the revised Code, published in June 2006, which
permits the Company Chairman to be a member of the
Remuneration Committee. Whilst this is not permitted
under section B2.1 of the current Code, Mr Dench’s
membership of to the Committee accords with the
revised Code which will apply to the Company from
1 October 2007.
The Company is in the process of recruiting at least one
new independent non-executive director who will join the
Committee in place of Jonathan Perry.
During the year ended 30 September 2007 there were
seven meetings of the Remuneration Committee.
All meetings were attended by Robert Dench and
David Beever, five meetings were attended by
Terence Eccles following his appointment to the
Committee on 1 February 2007 and three meetings
were attended by Jonathan Perry up to his retirement
from the Board on 8 February 2007.
Further information about the Remuneration Committee
is given in the Report of the Board to the Shareholders
on Directors’ Remuneration on pages 18 to 28.
● The Audit and Compliance Committee, which during the
year consisted of Christopher Newell, who chairs the
Committee, David Beever, Gavin Lickley (until his
retirement from the Board on 12 October 2006),
Robert Dench (until his appointment as Chairman on
8 February 2007) and Terence Eccles (following his
appointment to the Board on 1 February 2007). 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 Paragon Group of Companies PLC 33
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 2007 there were
three meetings of the Audit and Compliance Committee
and all members of the Committee were present at
each meeting.
● The Nomination Committee, consisting of Robert Dench,
who chairs the Committee, Nigel Terrington and
two non-executive directors, David Beever and
Christopher Newell. Jonathan Perry was Chairman of
the Committee until his retirement from the Board on
8 February 2007. The Company is in the process of
recruiting at least one new independent non-executive
director, who will join the Committee ensuring that 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 were two meetings of the
Nomination Committee in the year ended 30 September
2007. All of the members of the Committee attended
both meetings, other than David Beever who attended
one meeting. 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.
● The Asset and Liability Committee, consisting of
appropriate heads of functions and chaired by
Nigel Terrington, the Chief Executive. It meets regularly
and monitors Group interest rate risks, currency risks
and treasury counterparty exposures.
● The Credit Committee, consisting of appropriate
senior executives and chaired by Nicholas Keen,
the Finance Director. It meets regularly and is
responsible for establishing credit policy and
monitoring compliance therewith.
All Board committees operate within defined terms of
reference and sufficient resources are made available to
them to undertake their duties. The terms of reference of
the Remuneration Committee, Audit and Compliance
Committee and Nomination Committee are available on
request from the Company Secretary.
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.
During the year the Board conducted a formal and
rigorous performance review, which was effected by all
Board directors considering a list of questions on Board
and Committee performance, followed by a Board
discussion facilitated by the Chairman.
34 The Paragon Group of Companies PLC
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 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 28.
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 investors comments
are communicated to all members of the Board.
The Company’s web site at www.paragon-group.co.uk
provides access to information on the Company and
its businesses.
Accountability and audit
Detailed reviews of the performance of the Group’s main
business lines are included within the Chairman’s
Statement and Chief Executive’s Review. The Board uses
these, together with the Directors’ Report on pages 14 to
15 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 29.
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 2007 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 Paragon Group of Companies PLC 35
After making enquiries, the directors have a reasonable
expectation that a rights issue will be completed or
alternative funding will be put in place to enable
repayment of the corporate facility and that the Group
will 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.
The Board receives regular reports setting out key
performance and risk indicators. In addition the Board
operates a formal risk management process, from which
the key risks facing the business are identified. The
process results in reports to the Board on how these risks
are being managed. The Board has a programme of
regular presentations from senior management to enable
the Board to review the operation of internal controls in
relation to the risks associated with their specific areas.
The system of internal control is monitored by
management and by an internal audit function that
concentrates on the areas of greater risk and reports its
conclusions regularly to management and the Audit and
Compliance Committee. The internal audit work plan is
approved annually by the Audit and Compliance
Committee, which reviews the effectiveness of the system
of internal control annually and reports its conclusions to
the Board.
Going concern basis
As referred to in note 45, the Group has a £280.0m
committed corporate syndicated sterling bank facility
which is used to provide working capital. This facility
is fully drawn and falls due for repayment on
27 February 2008. To enable the repayment of this facility
the Company has entered into an agreement with UBS,
described in note 57, whereby the Company has the right
to require UBS to underwrite, in full, an equity financing of
up to £280.0m before expenses. The obligation of UBS is
subject to the normal conditions, including all relevant
approvals, including shareholder approval, being obtained;
the absence of any material adverse change affecting the
Group; and the absence of any force majeure event. Such
conditionality gives rise to a material uncertainty related
to events or conditions which may cast significant doubt
on the Group’s ability to continue as a going concern and,
therefore it may, if it is unable to satisfy these conditions
and in the absence of other funding alternatives, be
unable to realise its assets and discharge its liabilities in
the normal course of business.
36 The Paragon Group of Companies PLC
Contacts
Registered and head office
St Catherine’s Court
Herbert Road
Solihull
West Midlands B91 3QE
Telephone: 0121 712 2323
London office
Third Floor
30-34 Moorgate
London EC2R 6PQ
Telephone: 020 7786 8474
Internet
www.paragon-group.co.uk
Auditors
Deloitte & Touche LLP
Chartered Accountants
Four Brindleyplace
Birmingham B1 2HZ
Solicitors
Slaughter and May
One Bunhill Row
London EC1Y 8YY
Registrars and transfer office
Computershare Investor Services PLC
PO Box 82
The Pavilions
Bridgwater Road
Bristol BS99 7NH
Brokers
Hoare Govett Limited
250 Bishopsgate
London EC2M 4AA
UBS Limited
1 Finsbury Avenue
London EC2M 2PP
Remuneration consultants
New Bridge Street Consultants LLP
20 Little Britain
London EC1A 7DH
Consulting actuaries
Mercer Limited
Four Brindleyplace
Birmingham B1 2JQ
The Paragon Group of Companies PLC 37
Consolidated income statement
For the year ended 30 September 2007
Interest receivable
Interest payable and similar charges
Net interest income
Share of results of associate
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
7
8
9
14
15
16
18
18
The results for the current and preceding years relate entirely to continuing operations.
2007
£m
747.5
(591.7)
155.8
0.2
28.9
184.9
(47.7)
(50.5)
86.7
4.3
91.0
(28.2)
62.8
56.8p
54.7p
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
38 The Paragon Group of Companies PLC
Consolidated balance sheet
30 September 2007
Assets employed
Non-current assets
Intangible assets
Property, plant and equipment
Interest in associate
Financial assets
Retirement benefit obligations
Deferred tax asset
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
Provisions
Other liabilities
Total liabilities
2007
2006
Notes
£m
£m
£m
£m
19
20
23
24
30
31
32
33
34
35
43
44
47
48
49
44
48
49
0.6
21.9
0.5
11,119.5
4.2
16.1
6.7
927.7
280.9
3.1
1.4
111.1
11,379.6
0.6
7.2
0.6
20.2
-
8,432.9
0.3
33.6
11,162.8
8,487.6
934.4
12,097.2
12.1
358.0
370.1
(56.8)
313.3
629.0
9,116.6
12.1
314.6
326.7
(47.7)
279.0
6.3
622.7
128.0
1.4
0.7
78.2
396.5
208.3
8,619.7
3.7
5.9
11,387.4
11,783.9
12,097.2
8,629.3
8,837.6
9,116.6
Approved by the Board of Directors on 22 November 2007.
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 2007
Assets employed
Non-current assets
Property, plant and equipment
Investment in subsidiary undertakings
Interest in associate
Financial 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
2007
2006
Notes
£m
£m
£m
£m
20
21
23
24
32
34
35
43
44
47
49
44
49
9.6
495.6
0.3
15.4
85.6
0.5
1.0
280.9
133.2
1.3
520.9
85.6
606.5
12.1
217.0
229.1
(39.5)
189.6
10.5
394.4
-
-
65.5
0.4
1.0
192.4
404.9
65.5
470.4
12.1
162.2
174.3
(31.4)
142.9
282.4
193.8
132.2
1.5
134.5
416.9
606.5
133.7
327.5
470.4
Approved by the Board of Directors on 22 November 2007.
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 2007
Notes
50
51
52
Net cash (utilised) by operating activities
Net cash (utilised) by investing activities
Net cash generated by 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 2007
Notes
50
51
52
Net cash generated by operating activities
Net cash (utilised) by investing activities
Net cash (utilised) by 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
2007
£m
(2,511.6)
(6.2)
2,822.7
304.9
622.3
927.2
927.7
(0.5)
927.2
2007
£m
79.7
(50.5)
(29.2)
-
-
-
-
-
-
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)
-
-
-
-
-
-
The Paragon Group of Companies PLC 41
Statement of recognised income and expenditure
For the year ended 30 September 2007
Profit for the year
Actuarial gain / (loss) on pension scheme
Cash flow hedge (losses) / 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
Notes
30
41
THE GROUP
2007
2006
THE COMPANY
2007
2006
£m
62.8
3.4
(1.4)
(0.5)
64.3
-
64.3
£m
68.8
(0.6)
1.5
(0.2)
69.5
(72.5)
(3.0)
£m
72.9
-
-
-
72.9
-
72.9
£m
1.5
-
-
-
1.5
(52.5)
(51.0)
Reconciliation of movements in equity
For the year ended 30 September 2007
Total recognised income and expenditure for the year
Dividends paid
Net movement in own shares
(Deficit) / surplus on transactions in own shares
Charge for share based remuneration
Tax on share based remuneration
Net movement in equity in the year
Notes
40
42
41
Equity at 30 September 2006
Adoption of IAS 32 and IAS 39
Equity at 1 October 2006
Closing equity
THE GROUP
THE COMPANY
2007
£m
64.3
(20.1)
(9.1)
(1.5)
2.6
(1.9)
34.3
279.0
-
279.0
313.3
2006
£m
69.5
(16.0)
(24.9)
0.6
0.6
8.9
38.7
312.8
(72.5)
240.3
279.0
2007
£m
72.9
(20.8)
(8.1)
0.1
2.6
-
46.7
142.9
-
142.9
189.6
2006
£m
1.5
(16.8)
(23.1)
1.2
0.6
-
(36.6)
232.0
(52.5)
179.5
142.9
42 The Paragon Group of Companies PLC
Notes to the accounts
For the year ended 30 September 2007
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 14 to 15.
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.
• IFRS 8 - 'Segmental Information'
• IAS 1 (revised) - 'Presentation of Financial Information'
• IFRIC 10 - 'Interim Financial Reporting and Impairment'
• IFRIC 11 - 'Group and Treasury Share Transactions'
• IFRIC 14 - 'The Limit on a Defined Benefit Asset, Minimum
Funding Requirements and their Interaction'
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;
(a) additional and amended disclosures on capital and
financial instruments when IFRS 7 comes into effect for
the financial year ending 30 September 2008.
(b) amended disclosures in respect of segmental
information when IFRS 8 comes into effect, expected to
be for the financial year ending 30 September 2009, if the
Standard is endorsed by the European Union.
(c) amended presentation of the financial statements when
IAS 1 comes into effect, expected to be for the financial
year ending 30 September 2010, if the Standard is
endorsed by the European Union.
Other Standards and interpretations in issue but not
effective do not address matters relevant to the Group's
accounting and reporting.
The financial statements have been prepared in accordance
with International Financial Reporting Standards as
endorsed by the European Union.
The particular policies adopted are described below.
(a) Basis of Preparation: Going concern
As referred to in note 45, the Group has a £280.0m
committed corporate syndicated sterling bank facility
which is used to provide working capital. This facility is
fully drawn and falls due for repayment on 27 February
2008. To enable the repayment of this facility the
Company has entered into an agreement with UBS,
described in note 57, whereby the Company has the
right to require UBS to underwrite, in full, an equity
financing of up to £280.0m before expenses. The
obligation of UBS is subject to the normal conditions,
including all relevant approvals, including shareholder
approval, being obtained; the absence of any material
adverse change affecting the Group; and the absence of
any force majeure event. Such conditionality gives rise
to a material uncertainty related to events or conditions
which may cast significant doubt on the Group's ability
to continue as a going concern and, therefore it may, if it
is unable to satisfy these conditions and in the absence
of other funding alternatives, be unable to realise its
assets and discharge its liabilities in the normal course
of business.
After making enquiries, the directors have a reasonable
expectation that a rights issue will be completed or
alternative funding will be put in place to enable
repayment of the corporate facility and that the Group
will 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.
The financial statements have been prepared on a going
concern basis. However until the outcome of the
proposed rights issue and Group's negotiations with its
lenders and their implications for the Group's future
funding structure are known, there is material
uncertainty about the appropriateness of this basis of
preparation. The financial statements do not include
any adjustments that would result if the going concern
basis were not appropriate.
The Paragon Group of Companies PLC 43
2. ACCOUNTING POLICIES (continued)
(b) Accounting convention
(f) Leases
The financial statements have prepared under the
historical cost convention, except as required in the
valuation of certain financial instruments which are
carried at fair value.
(c) Basis of consolidation
The consolidated financial statements deal with the
accounts of the Company and its subsidiaries made up
to 30 September 2007. 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.
(d) Goodwill
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.
(e)
Intangible assets
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.
44 The Paragon Group of Companies PLC
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 on a
straight line basis over the period of the leases.
(g) 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.
(h) Property, plant and equipment
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
(i) Associates
The Group's interest in associated undertakings is valued
at the Group's share of the net assets of the associate,
as required by IAS 28 - 'Investments in Associates'.
The interest of the Group in the profit after tax of the
associate is recognised in the income statement.
The Company's interest in the shares of associated
undertakings is valued at cost less provision for
impairment. Dividends received from the associate
by the Company are included in income when they
become receivable.
(j)
Investments
(n) 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 initial maturities
of not more than 90 days.
(o) 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.
(p) 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.
(q) Borrowings
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.
(r) Finance lease payables
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.
The Company's investments in subsidiary undertakings
are valued at cost less provision for impairment.
(k) Loans to customers
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.
(l) 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.
(m) Impairment of loans and receivables
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 Paragon Group of Companies PLC 45
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.
(u) Deferred taxation
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.
(v) 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.
2. ACCOUNTING POLICIES (continued)
(s) Derivative financial instruments
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.
(t) Hedging
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.
46 The Paragon Group of Companies PLC
(z) 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.
(aa) 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 the cash flow
hedging provisions of IAS 39.
(bb) 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 business segments reported on have been revised
as described in note 5.
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.
(w) 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.
(x) Fee and commission income
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.
(y) 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.
National Insurance on share based payments is accrued
over the vesting period, based on the share price at the
balance sheet date.
The Paragon Group of Companies PLC 47
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. In particular, if the impact of
economic factors such as employment levels on
customers is worse than is implicit in the model then
the number of accounts requiring provision might be
greater than suggested by the model, while falls in
house prices, over and above any assumed by the model
might increase the provision required in respect of
accounts currently provided.
(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.
(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 30.
Where actual conditions differ from those assumed the
ultimate value of the obligation would be different.
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
2007 approximates to the carrying value of loans to
customers (note 27). 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 uses securitisation to mitigate its exposure to
liquidity risk, ensuring, as far as possible, that the
maturities of assets and liabilities are matched.
The Group's loan assets are principally financed by asset
backed loan notes ('Notes') issued through the securitisation
process. In a securitisation deal a Group company, referred
to as a Special Purpose Vehicle ('SPV') will issue Notes
secured on a pool of mortgage or other loan assets owned
by the SPV. The Notes have a maturity date later than the
final repayment date for any asset in the pool, typically over
thirty years from the issue date. The noteholders are
entitled to receive repayment of the Note principal out of
principal funds generated by the loan assets from time to
time, but their right to the repayment of principal is limited to
the cash available in the SPV. There is no requirement for any
Group company other than the issuing SPV to make principal
payments in respect of the Notes. This has the effect of
matching the maturities of the assets and the related funding,
substantially reducing the Group's exposure to liquidity risk.
Details of Notes in issue are given in note 45 and the assets
backing the Notes are shown in notes 25 and 26.
The Group provides additional funding to the SPV at
inception, subordinated to the external funding, which
means that the credit risk on the pool assets is retained
within the Group. The Group also receives the residual
income generated by the assets. These factors mean that
the risks and rewards of ownership of the assets remain
with the Group, and hence the loans remain on the Group's
balance sheet.
Cash received in each SPV is held until the next interest
payment date, after which the remaining balances become
available to the Group. Cash balances are also held within
each SPV to provide credit enhancement for the deal,
allowing principal payments to be made even if loans
default. These cash balances are included within the
restricted cash balances disclosed in note 33.
The Paragon Group of Companies PLC 49
4. FINANCIAL RISK MANAGEMENT (continued)
The interest rate swaps have fixed rate payments at an
average rate of 5.32% for periods up to 2013 and have
floating rate receipts at LIBOR. At 30 September 2006 the
outstanding interest rate swaps had fixed rate payments at
an average rate of 4.82% for periods up to 2013 and had
floating rate receipts at LIBOR.
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 swap has fixed rate payments at 7.00% and
floating rate receipts 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. 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. The
'Other assets' and 'Other liabilities' amounts in the table
include all balance sheet balances not individually disclosed.
From the point of origination until their inclusion in a
securitisation deal, the Group's loan assets are held within
the revolving 'warehouse' facility provided to Paragon
Second Funding Limited. This warehouse functions in a
similar way to an SPV, except that funds are drawn down as
advances are made and repaid when loans are securitised.
Although the warehouse has a date where it ceases to be
available for new drawings, repayment of the principal is not
required unless amounts are realised from the assets. The
final repayment date of the facility is later than the final due
date of the assets it is used to fund. As with the SPVs, the
Group provides funding to this company and restricted cash
balances are held within it. Further details of the warehouse
facility are given in note 45 and details of the loan assets
within the warehouse are given in notes 25 and 26.
The securitisation process and the terms of the warehouse
facility effectively limit liquidity risk from the funding of the
Group's loan assets. It remains to ensure that sufficient
funding is available to fund the Group's participation in the
SPVs, 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 manages interest rate risk, the risk that margins
will be adversely affected by movements in market interest
rates, by maintaining floating rate liabilities and matching
these with floating rate assets, hedging fixed rate assets and
liabilities 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 Group's
assets predominantly bear LIBOR linked interest rates or
are hedged fixed rate assets. 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.
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 2007
Cash and cash equivalents
Loans to customers
Loans to associate
Other assets
927.7
4,634.4
15.4
-
-
696.6
-
-
-
-
1,965.7
3,590.7
-
-
-
-
Total assets
5,577.5
696.6
1,965.7
3,590.7
Bank loans and overdrafts
Corporate bond
Asset backed loan notes
Other liabilities
Equity
(1,212.1)
-
(9,892.6)
-
-
Total liabilities and equity
(11,104.7)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
27.9
-
-
27.9
-
(115.8)
-
-
-
-
119.6
-
119.2
927.7
11,034.9
15.4
119.2
238.8
12,097.2
-
-
-
(563.4)
(313.3)
(1,212.1)
(115.8)
(9,892.6)
(563.4)
(313.3)
(115.8)
(876.7)
(12,097.2)
Notional swap principal
5,629.4
(684.0)
(1,229.8)
(3,715.2)
(0.4)
-
12.6
735.9
(124.5)
(88.3)
(637.9)
114.8
850.7
726.2
637.9
-
-
-
-
Interest rate repricing gap
Cumulative gap
At 30 September 2006
Cash and cash equivalents
Loans to customers
Loans to associate
Other assets
102.2
102.2
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
-
-
-
-
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. Loans to associates and inter company assets and liabilities bear interest at
floating rates based on LIBOR which reset within three months of the balance sheet date. 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 45. 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 2007 and 30 September 2006 are:
US dollar notes
Euro notes
2007
EQUIVALENT
STERLING
PRINCIPAL
£m
2007
CARRYING
VALUE
£m
2006
EQUIVALENT
STERLING
PRINCIPAL
£m
2006
CARRYING
VALUE
£m
4,551.0
2,699.3
4,177.5
2,773.5
2,416.6
2,118.6
2,313.2
2,103.0
7,250.3
6,951.0
4,535.2
4,416.2
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 and cash equivalents, 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.
The Paragon Group of Companies PLC 53
5. SEGMENTAL INFORMATION
For management purposes the Group is organised into two major operating divisions, First Mortgages and Consumer
Finance, which includes secured lending, car and retail finance and the residual unsecured loans book which formed part of
Other Operations in the year ending 30 September 2006. 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.
This represents a change from the basis reported in 2006 in that the closed, owner-occupied first mortgage book and the
closed unsecured book, which together comprised the “Other Operations” category last year, are now included within the
First Mortgages and Consumer Finance segments respectively. For reporting purposes these books were absorbed within
the results from the two main business areas because their reduced size had rendered the Other Operations segment
insignificant in terms of assets, revenue and net profits.
Financial information about these business segments is shown below. Results for the year ended 30 September 2006 have
been reanalysed between the new segments as described above.
Year ended 30 September 2007
FIRST
MORTGAGES
£m
CONSUMER
FINANCE
£m
629.2
(534.6)
94.6
0.2
14.7
109.5
(28.1)
(3.7)
77.7
4.1
81.8
118.3
(57.1)
61.2
-
14.2
75.4
(19.6)
(46.8)
9.0
0.2
9.2
TOTAL
£m
747.5
(591.7)
155.8
0.2
28.9
184.9
(47.7)
(50.5)
86.7
4.3
91.0
(28.2)
62.8
Interest receivable
Interest payable
Net interest income
Income from associate
Other operating income
Total operating income
Operating expenses
Provisions for losses
Fair value net gains
Operating profit
Tax charge
Profit after tax
54 The Paragon Group of Companies PLC
Year ended 30 September 2006
Interest receivable
Interest payable
Net interest income
Income from associate
Other operating income
Total operating income
Operating expenses
Provisions for losses
Fair value net gains
Operating profit
Tax charge
Profit after tax
FIRST
MORTGAGES
£m
CONSUMER
FINANCE
£m
428.8
(356.8)
72.0
-
12.3
84.3
(23.7)
(2.5)
58.1
2.4
60.5
122.0
(51.1)
70.9
-
18.3
89.2
(21.7)
(45.3)
22.2
0.1
22.3
TOTAL
£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
The assets and liabilities attributable to each of the segments at 30 September 2007 and 30 September 2006 were:
30 September 2007
Segment assets
Segment liabilities
30 September 2006
Segment assets
Segment liabilities
FIRST
MORTGAGES
£m
CONSUMER
FINANCE
£m
TOTAL
£m
11,133.9
(10,939.3)
963.3
(844.6)
12,097.2
(11,783.9)
194.6
118.7
313.3
8,124.3
(7,966.8)
992.3
(870.8)
9,116.6
(8,837.6)
157.5
121.5
279.0
The capital expenditure attributable to each segment during the year ended 30 September 2007 and 30 September 2006 was:
2007
2006
FIRST
MORTGAGES
£m
CONSUMER
FINANCE
£m
1.4
1.1
5.8
4.6
TOTAL
£m
7.2
5.7
The Paragon Group of Companies PLC 55
6. REVENUE
Interest receivable
Other income
Total revenue
Arising from:
First Mortgages
Consumer Finance
Total revenue
7. INTEREST RECEIVABLE
Interest on loans to customers
Interest on loans to associate
Other interest receivable
Total interest on financial assets
Return on pension scheme assets
Other finance income
8. 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
Other finance costs
56 The Paragon Group of Companies PLC
2007
£m
747.5
28.9
776.4
643.9
132.5
776.4
2007
£m
692.7
1.2
50.8
744.7
2.8
-
747.5
2007
£m
511.3
9.2
64.2
584.7
2.3
1.3
3.4
591.7
2006
£m
550.8
30.6
581.4
441.1
140.3
581.4
2006
£m
512.5
-
33.4
545.9
2.2
2.7
550.8
2006
£m
339.7
8.3
53.5
401.5
2.0
1.3
3.1
407.9
9. OPERATING EXPENSES
Employment costs (note 10)
Auditor remuneration (note 13)
Amortisation of intangible assets (note 19)
Depreciation (note 20)
Operating lease rentals (note 54)
Other administrative costs
2007
£m
29.3
0.8
0.2
3.9
3.4
10.1
47.7
10. EMPLOYEES
The average number of persons (including directors) employed by the Group during the year was 763 (2006: 724).
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
2007
£m
2.6
23.8
(1.2)
2.0
2.0
0.1
2007
£m
26.4
0.8
2.1
29.3
2006
£m
27.3
1.1
0.2
3.5
3.5
9.8
45.4
2006
£m
22.0
3.3
2.0
27.3
The credit in the year in respect of National Insurance on share based remuneration relates to the partial reversal of accruals
made on unvested awards at 30 September 2006 and based on the share price at that date, following the reduction in the
share price during the year.
Details of the pension schemes operated by the Group are given in note 30.
The Company has no employees. Details of the directors' remuneration are given in note 11.
The Paragon Group of Companies PLC 57
11. 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 28.
Short-term employee benefits
Post-employment benefits
Termination benefits
Share based payment
2007
£m
1.8
0.5
0.1
0.7
3.1
2006
£m
2.7
0.3
-
1.2
4.2
12. 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 10.
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 28.
(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 2007
and the year ended 30 September 2006 is shown below.
2007
NUMBER
2007
WEIGHTED
AVERAGE
EXERCISE
PRICE
p
2006
NUMBER
2006
WEIGHTED
AVERAGE
EXERCISE
PRICE
p
4,385,684
337,004
(452,380)
(207,868)
246.54
430.24
184.95
497.78
5,814,891
236,883
(1,634,329)
(31,761)
219.37
525.52
190.08
257.97
4,062,440
255.78
4,385,684
246.54
2,878,938
213.45
2,848,978
188.28
Options outstanding
At 1 October 2006
Granted in the year
Exercised in the year
Lapsed during the year
At 30 September 2007
Options exercisable
58 The Paragon Group of Companies PLC
The weighted average share price at date of exercise for share options exercised during the period was 585.48p (2006: 600.17p).
The weighted average remaining contractual life of options outstanding at 30 September 2007 was 5.4 months (2006: 6.4 months)
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
31/03/1998
11/01/1999
17/02/2000
26/05/2000
27/11/2001
29/07/2002
14/03/2003
18/12/2003
01/06/2004
01/12/2004
Sharesave schemes
18/06/2003
18/06/2003
23/06/2005
23/06/2005
28/07/2006
28/07/2006
20/06/2007
20/06/2007
218.00p
147.50p
147.00p
148.50p
248.00p
186.50p
186.50p
339.00p
322.50p
348.38p
183.04p
183.04p
326.76p
326.76p
525.52p
525.52p
430.24p
430.24p
31/03/2001 to 31/03/2008
11/01/2002 to 11/01/2009
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
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 †
01/08/2006 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
01/09/2009 to 01/03/2010
01/09/2011 to 01/03/2012
01/08/2010 to 01/02/2011
01/08/2012 to 01/02/2013
NUMBER
2007
279,000
480,000
150,000
-
510,000
390,000
658,552
371,386
40,000
434,552
NUMBER
2006
279,000
480,000
150,000
320,000
540,000
390,000
658,552
432,890
40,000
434,552
3,313,490
3,724,994
-
123,018
140,916
95,654
48,132
13,227
226,937
101,066
748,950
31,426
131,718
149,839
110,824
180,782
56,101
-
-
660,690
4,062,440
4,385,684
† 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
12. 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
Binomial model. Grants made in the year ended 30 September 2006 were valued using a Black-Scholes Merton model.
Details of the awards made in the year ended 30 September 2007 and the year ended 30 September 2006 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
20 JUNE
2007
20 JUNE
2007
28 JULY
2006
28 JULY
2006
235,938
101,066
535.00p
3.0
142.64p
535.00p
5.0
143.53p
180,782
622.00p
3.0
131.60p
56,101
622.00p
5.0
138.31p
27.02%
3.42
5.67%
2.74%
5.00%
27.02%
5.39
5.67%
2.74%
5.00%
17.09%
3.50
4.77%
1.99%
8.83%
17.09%
5.50
4.77%
1.99%
6.52%
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 2007 and 30 September 2006 were:
GRANT
DATE
02/07/2003
18/12/2003
22/06/2004
02/12/2004
02/06/2005
07/03/2006
25/05/2006
25/09/2006
09/01/2007
28/03/2007
14/06/2007
26/09/2007
PERIOD
EXERCISABLE
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 †
09/01/2010 to 09/07/2010 †
28/03/2010 to 28/09/2010 †
14/06/2010 to 14/12/2010 †
26/09/2010 to 26/03/2011 †
NUMBER
2007
-
-
53,511
295,389
261,178
177,412
90,981
87,606
123,082
89,459
157,086
208,088
NUMBER
2006
69,081
289,533
268,169
297,273
265,204
179,456
92,088
88,653
-
-
-
-
1,543,792
1,549,457
60 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.
† 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 2007
and 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
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
09 JANUARY
2007
28 MARCH
2007
14 JUNE 26 SEPTEMBER
2007
2007
124,132
655.00p
456.00p
89,459
576.50p
393.00p
157,086
208,088
543.00p
362.00p
296.50p
192.00p
25.74%
5.07%
2.56%
26.60%
5.18%
2.61%
26.73%
5.80%
2.73%
36.75%
4.93%
3.11%
07 MARCH
2006
25 JUNE 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%
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.
The Paragon Group of Companies PLC 61
12. SHARE BASED REMUNERATION (continued)
c) Deferred Bonus awards
Awards under this scheme 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.
The conditional entitlements outstanding under this scheme at 30 September 2007 and 30 September 2006 were:
GRANT
DATE
27/02/2004
27/02/2005
13/03/2006
15/01/2007
TRANSFER
DATE
01/10/2006
01/10/2007
01/10/2008
01/10/2009
NUMBER
2007
-
184,962
75,671
68,217
328,850
NUMBER
2006
170,430
189,947
77,153
-
437,530
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 issued in the year was determined using a Black-Scholes Merton model. The fair value
of grants made in the year ended 30 September 2006 was based on the market value of the shares awarded at the grant date.
Details of the awards made in the year ended 30 September 2007 and 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
Risk-free interest rate
Expected dividend yield
13 MARCH
2006
77,153
605.00p
605.00p
15 JANUARY
2007
69,342
631.00p
584.44p
5.07%
2.56%
62 The Paragon Group of Companies PLC
(d) Matching Share Plan
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 2007 and at 30 September 2006 were:
GRANT
DATE
22/03/2006
09/01/2007
TRANSFER
DATE
22/06/2009 †
09/01/2010 †
NUMBER
2007
149,649
134,037
283,686
NUMBER
2006
158,541
-
158,541
†
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 2007 and 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
09 JANUARY
2007
140,785
655.00p
456.00p
25.74%
5.07%
2.56%
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.
The Paragon Group of Companies PLC 63
13. AUDITOR REMUNERATION
The analysis of fees payable to the Group's auditors, excluding irrecoverable VAT, required by the Companies (Disclosure of
Auditor Remuneration) Regulations 2005 is set out below. This disclosure has been revised following the issue of the revised
TECH 06/06 'Disclosure of Auditor Remuneration' by the Institute of Chartered Accountants in England and Wales in July
2007. 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
Audit of associated undertakings pursuant to legislation
Subsidiary audit fees
Total audit fees
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 fees
Irrecoverable VAT
Total fees charged to income
2007
£000
2007
2006
£000
2006
188
28%
160
17%
33%
61%
6%
22%
11%
33%
-
-
-
-
100%
221
409
40
151
76
227
-
-
-
-
676
118
794
224
384
40
177
59
236
24%
41%
4%
19%
6%
25%
72
8%
17%
5%
22%
100%
164
44
208
940
166
1,106
In addition to the amounts above, the auditors received fees of £6,000 (2006: £6,000), excluding VAT, in respect of the audit of
the Group pension scheme.
64 The Paragon Group of Companies PLC
14. PROVISIONS FOR LOSSES
Impairment of financial assets
First mortgage loans
Other secured loans
Finance lease receivables
Retail finance loans
Other loans
Other provisions
2007
£m
3.6
4.7
1.9
1.0
39.2
50.4
0.1
50.5
2006
£m
1.4
1.6
3.3
-
40.4
46.7
1.1
47.8
15. FAIR VALUE NET GAINS
The fair value net gain of £4.3m (2006: £2.5m) 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.
The Paragon Group of Companies PLC 65
16. 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
2007
£m
15.2
(1.2)
14.0
14.2
28.2
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
Change in tax rate
Deferred tax charge / (credit) (note 31)
2007
£m
0.3
1.3
18.3
(8.8)
2.3
13.4
(0.2)
1.0
14.2
2006
£m
12.6
(5.8)
6.8
7.2
14.0
2006
£m
-
1.4
5.1
4.7
0.7
11.9
(4.7)
-
7.2
The United Kingdom government has enacted provisions reducing the standard rate of corporation tax to 28% with effect
from 1 April 2008. Therefore the standard rate of corporation tax applicable to the Group will be 29% in the year ending
30 September 2008 and 28% thereafter. The expected impact of this change on the values at which deferred tax amounts
are expected to crystallise has been accounted for in the year.
66 The Paragon Group of Companies PLC
(c) Factors affecting tax charge for the year
The tax assessed for the year is higher than the standard rate of corporation tax in the United Kingdom of 30% (2006: 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% (2006: 30%)
Effects of:
Results of associate
Permanent differences
Recognition of deferred tax asset not previously recognised
Change in rate of taxation on deferred tax assets and liabilities
Other movements in unprovided deferred taxation
Prior year credit
Tax charge for the year
2007
£m
91.0
27.3
(0.1)
0.7
(0.2)
1.0
0.7
(1.2)
28.2
2006
£m
82.8
24.8
-
(0.7)
(4.7)
-
0.4
(5.8)
14.0
17. PROFIT ATTRIBUTABLE TO MEMBERS OF
THE PARAGON GROUP OF COMPANIES PLC
The Company's profit after tax for the financial year amounted to £72.9m (2006: £1.5m). A separate income statement has not
been prepared for the Company under the provisions of Section 230 of the Companies Act 1985.
18. 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
2007
62.8
110.5
4.2
114.7
56.8p
54.7p
2006
68.8
112.4
5.3
117.7
61.2p
58.4p
The Paragon Group of Companies PLC 67
18. EARNINGS PER SHARE (continued)
Fully taxed earnings per ordinary share is based on earnings calculated by reducing profit before tax for the period by a
notional tax rate of 30%, the standard rate of corporation tax in the United Kingdom. The numbers of shares used are as
shown above.
Fully taxed earnings per ordinary share is calculated as follows:
2007
91.0
(27.3)
63.7
57.7p
55.6p
2006
82.8
(24.8)
58.0
51.6p
49.3p
2007
£m
2006
£m
1.8
0.2
-
2.0
1.2
0.2
-
1.4
0.6
0.6
1.3
0.5
-
1.8
1.0
0.2
-
1.2
0.6
0.3
Profit before tax for the year (£m)
Notional tax at 30% (£m)
Fully taxed earnings for the year (£m)
Fully taxed earnings per ordinary share - basic
- diluted
19. INTANGIBLE ASSETS
Intangible assets comprise computer software used in the Group's operations.
Cost
At 1 October 2006
Additions
Disposals
At 30 September 2007
Accumulated amortisation
At 1 October 2006
Charge for the year
Disposals
At 30 September 2007
Net book value
At 30 September 2007
At 30 September 2006
68 The Paragon Group of Companies PLC
20. PROPERTY, PLANT AND EQUIPMENT
(a) The Group
Cost
At 1 October 2005
Additions
Disposals
At 30 September 2006
Additions
Disposals
At 30 September 2007
Accumulated depreciation
At 1 October 2005
Charge for the year
On disposals
At 30 September 2006
Charge for the year
On disposals
At 30 September 2007
Net book value
At 30 September 2007
At 30 September 2006
At 30 September 2005
LEASEHOLD
PREMISES
£m
PLANT AND
MACHINERY
£m
TOTAL
£m
19.3
-
-
19.3
-
-
19.3
6.8
1.0
-
7.8
0.9
-
8.7
10.6
11.5
12.5
15.6
5.2
(4.0)
16.8
7.0
(3.4)
20.4
8.4
2.5
(2.8)
8.1
3.0
(2.0)
9.1
11.3
8.7
7.2
34.9
5.2
(4.0)
36.1
7.0
(3.4)
39.7
15.2
3.5
(2.8)
15.9
3.9
(2.0)
17.8
21.9
20.2
19.7
The net book value of leasehold buildings includes £9.6m in respect of assets held under finance leases (2006: £10.5m).
The Paragon Group of Companies PLC 69
20. PROPERTY, PLANT AND EQUIPMENT (continued)
(b) The Company
Cost
At 1 October 2005, 1 October 2006 and 30 September 2007
Accumulated depreciation
At 1 October 2005
Charge for the year
At 30 September 2006
Charge for the year
At 30 September 2007
Net book value
At 30 September 2007
At 30 September 2006
At 30 September 2005
The net book value of leasehold buildings represents assets held under finance leases.
21. INVESTMENT IN SUBSIDIARY UNDERTAKINGS
LEASEHOLD
PREMISES
£m
16.6
5.3
0.8
6.1
0.9
7.0
9.6
10.5
11.3
TOTAL
£m
409.1
(52.5)
356.6
262.4
(224.5)
(0.1)
394.4
268.7
(218.5)
51.0
SHARES IN
GROUP
COMPANIES
£m
LOANS TO
GROUP
COMPANIES
£m
LOANS TO
ESOP
TRUSTS
£m
253.8
(52.5)
201.3
-
-
(0.1)
201.2
-
-
53.2
141.0
-
141.0
258.1
(221.3)
-
177.8
265.3
(218.5)
-
14.3
-
14.3
4.3
(3.2)
-
15.4
3.4
-
(2.2)
254.4
224.6
16.6
495.6
At 30 September 2005
Introduction of IAS 39
At 1 October 2005
Loans advanced
Loans repaid
Provision movements
At 1 October 2006
Loans advanced
Loans repaid
Provision movements
At 30 September 2007
During the year ended 30 September 2007 the Company received £31.3m in dividend income from its subsidiaries (2006: £8.2m)
and £13.7m of interest on loans to Group companies (2006: £7.8m).
The principal operating subsidiaries, and the nature of the Group's interest in them, are shown in note 22.
70 The Paragon Group of Companies PLC
22. 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
Paragon Vehicle Contracts Limited
Paragon Car Finance Limited
Paragon Personal Finance Limited
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 Mortgages (No. 13) PLC
Paragon Mortgages (No. 14) PLC
Paragon Mortgages (No. 15) 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
First Flexible (No. 7) 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%
100%
74%
100%
100%
Residential mortgages and
asset administration
Residential mortgages
Residential mortgages
Vehicle fleet management
Vehicle finance
Unsecured lending
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Loan and vehicle finance
Loan and vehicle finance
Loan and vehicle finance
Loan and vehicle finance
Loan finance
Residential mortgages
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 parent company identified
above, except that for the shareholdings marked * the parent company holds only 74% of the share capital, the remainder
being held by other group companies.
The issued share capital of all subsidiaries consists of ordinary share capital, except that First Flexible No. 6 PLC has
additional preference share capital held by the Group. The minority interest in this company is not material.
The Paragon Group of Companies PLC 71
22. PRINCIPAL OPERATING SUBSIDIARIES (continued)
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. 3 plc
First Flexible No. 4 plc
First Flexible No. 5 plc
Mortgage Funding Corporation plc
23. INTEREST IN ASSOCIATE
PRINCIPAL ACTIVITY
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
Residential mortgages
On 25 January 2007 the Group acquired a 33% interest in the equity of The Business Mortgage Company Limited, a mortgage
broker. This company operates in the United Kingdom and is registered in England and Wales. The net assets position of the
associate and its result for the period from 25 January 2007 to 30 September 2007 are shown below.
Total assets
Total liabilities
Total equity
Revenue
Costs
Profit before tax
Taxation
Profit after tax
2007
£m
18.9
(17.8)
1.1
4.1
(3.2)
0.9
(0.3)
0.6
2006
£m
-
-
-
-
-
-
-
-
In the period from 25 January 2007 to 30 September 2007 the associate was charged £1.2m by the Group and the Company in
interest and received £1.8m in commission income from Group companies. The Group has provided the associate with certain
management services.
72 The Paragon Group of Companies PLC
(a) The Group
Equity interest in the associate carried in the consolidated balance sheet using the equity method.
2007
£m
At 1 October 2006
Additions
Share of profit of associate
Dividends received
At 30 September 2007
(b) The Company
Equity interest in the associate carried in the balance sheet of the Company at cost.
-
0.3
0.2
-
0.5
2007
£m
-
0.3
0.3
2006
£m
-
-
-
-
-
2006
£m
-
-
-
At 1 October 2006
Additions
At 30 September 2007
24. FINANCIAL ASSETS
Loans and receivables (note 25)
Finance lease receivables (note 26)
Loans to customers (note 27)
Fair value adjustments from portfolio hedging
Loans to associate (note 28)
Derivative financial assets (note 29)
THE GROUP
THE COMPANY
2007
£m
10,892.7
142.2
11,034.9
(22.8)
15.4
92.0
2006
£m
8,279.0
147.6
8,426.6
(14.0)
-
20.3
11,119.5
8,432.9
2007
£m
2006
£m
-
-
-
-
15.4
-
15.4
-
-
-
-
-
-
-
The Paragon Group of Companies PLC 73
25. LOANS AND RECEIVABLES
Loans and receivables at 30 September 2007 and 30 September 2006, which are all denominated and payable in
sterling, were:
First mortgage loans
Secured loans
Retail finance loans
Other unsecured loans
2007
£m
10,325.1
448.9
61.8
56.9
10,892.7
2006
£m
7,643.8
509.0
53.1
73.1
8,279.0
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 twenty five years, retail finance loans up
to ten years and other unsecured loans up to ten 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 2007 and 30 September 2006 were:
First mortgage loans
Secured loans
Retail finance loans
Other unsecured loans
The interest rate repricing profile of the above loans is shown in note 4.
AVERAGE RATE CHARGED
TO CUSTOMERS
2007
2006
AVERAGE EFFECTIVE
INTEREST RATE
2007
2006
5.79%
9.03%
10.88%
21.07%
5.82%
8.95%
10.49%
18.08%
6.53%
8.65%
8.72%
21.01%
6.18%
8.09%
10.12%
18.10%
74 The Paragon Group of Companies PLC
The loans shown left pledged as collateral for the liabilities described in note 45 at 30 September 2007 and
30 September 2006 were:
30 September 2007
In respect of:
Asset backed loan notes
Warehouse facilities
Total pledged as collateral
Not pledged as collateral
30 September 2006
In respect of:
Asset backed loan notes
Warehouse facilities
Total pledged as collateral
Not pledged as collateral
FIRST
MORTGAGES
£m
CONSUMER
FINANCE
£m
TOTAL
£m
9,342.9
946.0
10,288.9
36.2
515.9
15.8
531.7
35.9
9,858.8
961.8
10,820.6
72.1
10,325.1
567.6
10,892.7
6,360.2
1,237.9
7,598.1
45.7
553.0
40.4
593.4
41.8
6,913.2
1,278.3
8,191.5
87.5
7,643.8
635.2
8,279.0
The Paragon Group of Companies PLC 75
26. FINANCE LEASE RECEIVABLES
The Group's finance lease receivables are car finance loans. The average contractual life of such loans is 53 months
(2006: 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 7.4% per annum (2006: 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 uncollectable amounts
Provision for recoveries
MINIMUM LEASE
PAYMENTS
2007
£m
2006
£m
43.8
114.3
4.4
162.5
(22.0)
140.5
(2.3)
4.0
49.1
114.9
4.2
168.2
(21.3)
146.9
(2.5)
3.2
PRESENT VALUE OF
MINIMUM LEASE
PAYMENTS
2007
£m
38.0
98.7
3.8
2006
£m
43.1
100.1
3.7
140.5
(2.3)
4.0
146.9
(2.5)
3.2
Present value of lease obligations
142.2
147.6
142.2
147.6
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 2007 and 30 September 2006 were:
2007
£m
133.2
5.0
138.2
4.0
142.2
2006
£m
129.8
14.6
144.4
3.2
147.6
In respect of:
Asset backed loan notes
Warehouse facilities
Total pledged as collateral
Not pledged as collateral
At 30 September 2007
76 The Paragon Group of Companies PLC
27. LOANS TO CUSTOMERS
The movement in the Group's investment in loans to customers in the year ended 30 September 2007 was:
Cost
At 1 October 2006
Brought forward
Adoption of IAS 32 and IAS 39
Acquisitions
Additions
Disposals
EIR adjustments
Other debits
Repayments and redemptions
At 30 September 2007
2007
£m
8,426.6
-
8,426.6
-
4,334.9
(9.8)
39.0
680.2
(2,436.0)
11,034.9
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
'Other debits' includes primarily interest charged to customers on loans outstanding and impairment movements on
these loans.
28. LOANS TO ASSOCIATE
Loans to the associated undertaking at 30 September 2007 are all denominated and payable in sterling. Interest is charged on
these loans at a fixed margin above six-month LIBOR. Details of these loans are shown below.
Carrying value (£m)
Outstanding principal (£m)
Maximum contractual life (months)
Average contractual life (months)
Maximum remaining life (months)
Average remaining life (months)
Average margin charged above LIBOR
2007
£m
15.4
16.1
108
76
100
68
4.14%
2006
£m
-
-
-
-
-
-
-
The fair values of these loans are not considered to be significantly different to their carrying values and the effective interest
rates are not materially different to the rates charged.
The interest rate repricing profile of the above loans is shown in note 4.
The Paragon Group of Companies PLC 77
29. 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.
Derivative financial assets and liabilities are included within Financial Assets (note 24) and Financial Liabilities
(note 44) respectively.
(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
Total recognised derivative
assets / (liabilities)
(b) The Company
Derivatives in accounting
hedge relationships
Fair value hedges
Interest rate swaps
Total recognised derivative
assets / (liabilities)
78 The Paragon Group of Companies PLC
2007
NOTIONAL
AMOUNT
£m
2007
ASSETS
2007
LIABILITIES
£m
£m
2006
NOTIONAL
AMOUNT
£m
2006
ASSETS
£m
2006
LIABILITIES
£m
5,850.0
5,850.0
7,250.3
26.8
7,277.1
13,127.1
847.5
72.7
920.2
42.4
42.4
47.3
0.2
47.5
89.9
1.7
0.4
2.1
(11.0)
3,965.0
(11.0)
3,965.0
(414.3)
(0.1)
4,535.1
37.5
(414.4)
4,572.6
17.9
17.9
0.5
0.1
0.6
(2.9)
(2.9)
(156.7)
(0.8)
(157.5)
(425.4)
8,537.6
18.5
(160.4)
(0.7)
-
(0.7)
695.4
101.8
797.2
1.5
0.3
1.8
(1.9)
-
(1.9)
14,047.3
92.0
(426.1)
9,334.8
20.3
(162.3)
2007
NOTIONAL
AMOUNT
£m
2007
ASSETS
2007
LIABILITIES
£m
£m
2006
NOTIONAL
AMOUNT
£m
2006
ASSETS
£m
2006
LIABILITIES
£m
120.0
120.0
120.0
-
-
-
(4.0)
(4.0)
120.0
120.0
(4.0)
120.0
-
-
-
(0.4)
(0.4)
(0.4)
30. 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 2007 by a qualified independent actuary.
The liabilities of the benefit scheme are measured by discounting the best estimate of future cash flows to be paid out by
the scheme using the Projected Unit method. This amount is reflected in the asset in the balance sheet. The Projected Unit
method is an accrued benefits valuation method in which the technical provisions are calculated based on service up until
the valuation date allowing for future salary growth until the date of retirement, withdrawal or death, as appropriate. The
future service rate is then calculated as the contribution rate required to fund the service accruing over the control period
again allowing for future salary growth. 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
2007
30 SEPTEMBER
2006
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)
5.20%
3.70%
2.70%
2.25%
2.70%
6.10%
4.10%
3.10%
2.50%
3.10%
26
29
29
32
5.10%
3.50%
2.50%
2.25%
2.50%
5.20%
3.70%
2.70%
2.25%
2.70%
26
29
28
31
The Paragon Group of Companies PLC 79
30. RETIREMENT BENEFIT OBLIGATIONS (continued)
The assets in the Plan at 30 September 2007 and 30 September 2006 and the expected rates of return were:
LONG
TERM RATE
OF RETURN
EXPECTED
7.7%
5.6%
0.5%
Equities
Bonds
Other
Total market value of assets
Present value of scheme liabilities
Surplus / (deficit) in the scheme
AT 30 SEPTEMBER 2007
VALUE
ASSET
ALLOCATION
AT 30 SEPTEMBER 2006
VALUE
ASSET
ALLOCATION
LONG
TERM RATE
OF RETURN
EXPECTED
76.0%
23.8%
0.2%
7.0%
4.3%
-
74.5%
25.5%
-
£m
32.7
11.2
-
43.9
(43.6)
0.3
£m
37.4
11.7
0.1
49.2
(45.0)
4.2
The pension scheme assets are held in a separate trustee-administered fund to meet long-term pension liabilities to past
and present employees. The trustees of the fund are required to act in the best interests of the fund's beneficiaries. The
appointment of trustees to the fund is determined by the scheme's trust documentation. The Group has a policy that one
third of all trustees should be nominated by active and pensioner members of the fund.
At 30 September 2007 the scheme assets were invested in a diversified portfolio that consisted primarily of equity and gilt
investments. The target asset allocations for the year ending 30 September 2008 are 75% equities, 20% bonds and 5%
other assets.
In conjunction with the trustees, the Group has recently conducted an asset-liability review of the Group. These studies are
used to assist the trustees and the Group to determine the optimal long-term asset allocation with regard to the structure
of liabilities within the scheme. The results of the study are used to assist the trustees in managing the volatility in the
underlying investment performance and risk of a significant increase in the scheme deficit by providing information used
to determine the pension scheme investment strategy.
The majority of the equities held by the scheme are in international blue chip entities. To maintain a wide range of
diversification, a proportion of the equity investment (approximately 5%) is to be diverted to a diversified growth fund
or GTAA during 2007.
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.
The movement in the market value of the scheme assets during the year was as follows:
At 1 October 2006
Movement in year
Contributions by the Group
Contributions by scheme members
Benefits paid
Expected return on scheme assets
Actuarial gain
At 30 September 2007
2007
£m
43.9
2.0
0.4
(0.8)
2.8
0.9
49.2
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 2007 was 8.6% (2006: 11.4%)
80 The Paragon Group of Companies PLC
The movement in the present value of the scheme liabilities during the year was as follows:
At 1 October 2006
Movement in year
Current service cost
Past service costs
Contributions by scheme members
Benefits paid
Finance cost
Actuarial (gain) / loss
At 30 September 2007
2007
£m
43.6
1.9
0.1
0.4
(0.8)
2.3
(2.5)
45.0
2006
£m
39.1
1.9
-
0.4
(0.8)
2.0
1.0
43.6
The most recent valuation of the scheme liabilities on a buy out basis obtained by the trustees in accordance with section 224
of the Pensions Act 2004 was calculated at 30 September 2006, when the valuation on that basis was £85.3m.
The sensitivity of the valuation of the scheme liabilities to the principal assumptions disclosed above at 30 September 2007
is as follows:
ASSUMPTION
Discount rate
Rate of inflation *
Rate of salary growth
Rates of mortality
INCREASE IN
ASSUMPTION
IMPACT ON
SCHEME LIABILITIES
0.1%
0.1%
0.1%
1 year of life expectancy
Decrease by 2.6%
Increase by 2.4%
Increase by 0.9%
Increase by 1.9%
* maintaining a 1% real increase in salary growth
The duration of the scheme's liabilities are shown in the table below:
CATEGORY OF MEMBER
Active members
Deferred pensioners
Current pensioners
All members
DURATION OF LIABILITY
YEARS
29
28
13
28
The Group's funding objective for the plan is to achieve within 15 years, and then maintain, a funding target which requires
assets equal to 100% of the present value of benefits based on completed service including provision for the effects of future
salary growth and inflation up to retirement.
The agreed rate of employer contributions was 38.4% of gross salaries for participating employees until 31 March 2006
and 24.5% of gross salaries for participating employees thereafter.
The Group and the Trustees are currently involved in discussions regarding the level of contributions which will be made to
the plan by the Group in the year ending 30 September 2008.
The Paragon Group of Companies PLC 81
30. RETIREMENT BENEFIT OBLIGATIONS (continued)
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 10)
Expected return on scheme assets (note 7)
Funding cost of scheme liability (note 8)
Total expense recognised in profit
2007
£m
1.9
0.1
2.0
(2.8)
2.3
1.5
The actuarial gains in the statement of recognised income and expenditure in respect of the pension scheme are:
Gain on scheme assets
Gain / (loss) on scheme liabilities
Total actuarial gain / (loss)
Tax thereon (note 41)
Net actuarial gain / (loss) (note 39)
2007
£m
0.9
2.5
3.4
(1.0)
2.4
2006
£m
1.9
-
1.9
(2.2)
2.0
1.7
2006
£m
0.4
(1.0)
(0.6)
0.2
(0.4)
The cumulative value of actuarial losses charged to the Statement of Recognised Income and Expenditure since
1 October 2001, the first date on which a valuation of the scheme assets and liabilities on a basis consistent with IAS 19
was carried out is £9.5m (2006: £12.9m):
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
2007
£m
49.2
(45.0)
4.2
0.9
1.8%
2.5
5.6%
2006
£m
43.9
(43.6)
2005
£m
24.5
(39.1)
2004
£m
18.3
(32.6)
2003
£m
15.5
(22.0)
0.3
(14.6)
(14.3)
(6.5)
0.4
1%
-
-
2.6
11%
-
-
0.3
1%
(1.7)
(5)%
1.3
8%
-
-
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 2007 were £0.1m (2006: £0.1m).
82 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 2006
Adoption of IAS 32 and IAS 39
Income statement (charge) (note 16)
Charge / (credit) to equity (note 41)
Net asset at 30 September 2007
THE GROUP
THE COMPANY
2007
£m
33.6
-
(14.2)
(3.3)
16.1
2006
£m
4.0
30.9
(7.2)
5.9
33.6
2007
£m
2006
£m
-
-
-
-
-
-
-
-
-
-
The deferred tax which arose on adoption of IAS 32 and IAS 39 includes £29.2m relating to the changes in carrying value
of loan assets on the adoption of the effective interest rate method and the IAS 39 rules on impairment and £1.7m arising
on the recognition of financial derivatives at fair value.
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
Tax losses
Other timing differences
Net deferred tax asset
THE GROUP
THE COMPANY
2007
£m
2.8
0.9
0.4
10.0
2.0
16.1
2006
£m
2.4
3.3
21.2
-
6.7
33.6
2007
£m
2006
£m
-
-
-
-
-
-
-
-
-
-
-
-
Temporary differences arising in connection with interests in the associated undertaking are not significant.
32. OTHER RECEIVABLES
Current assets
Amounts owed by Group companies
Other debtors
Prepayments and accrued income
THE GROUP
THE COMPANY
2007
£m
2006
£m
-
3.6
3.1
6.7
-
3.8
2.5
6.3
2007
£m
85.3
-
0.3
85.6
2006
£m
65.5
-
-
65.5
The fair values of the above items are not considered to be materially different to their carrying values.
The Paragon Group of Companies PLC 83
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 2007 is £875.1m subject to
such restrictions (2006: £601.2m).
'Cash and Cash Equivalents' also includes £2.2m (2006: £0.9m) 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 (2006: 175,000,000) ordinary shares of 10p each
Allotted and paid-up:
121,493,242 (2006: 121,452,366) ordinary shares of 10p each
Movements in the issued share capital in the year were:
Ordinary shares of 10p each
At 1 October 2006
Shares issued in respect of share option schemes
At 30 September 2007
35. RESERVES
Share premium account (note 36)
Merger reserve (note 37)
Cash flow hedging reserve (note 38)
Profit and loss account (note 39)
2007
£m
17.5
12.1
2006
£m
17.5
12.1
2007
NUMBER
2006
NUMBER
121,452,366
40,876
120,762,342
690,024
121,493,242
121,452,366
THE GROUP
THE COMPANY
2007
£m
71.5
(70.2)
(2.4)
359.1
2006
£m
71.4
(70.2)
(1.5)
314.9
2007
£m
71.5
(23.7)
-
169.2
2006
£m
71.4
(23.7)
-
114.5
358.0
314.6
217.0
162.2
84 The Paragon Group of Companies PLC
36. SHARE PREMIUM ACCOUNT
Balance at 1 October 2006
Share options exercised
Balance at 30 September 2007
37. MERGER RESERVE
Balance at 1 October 2006
Balance at 30 September 2007
38. CASH FLOW HEDGING RESERVE
Balance at 1 October 2006
As originally reported
Adoption of IAS 32 and 39
Movement in fair value of hedging derivatives
Deferred tax thereon (note 41)
Balance at 30 September 2007
THE GROUP
THE COMPANY
2007
£m
71.4
0.1
71.5
2006
£m
70.2
1.2
71.4
2007
£m
71.4
0.1
71.5
2006
£m
70.2
1.2
71.4
THE GROUP
THE COMPANY
2007
£m
(70.2)
(70.2)
2006
£m
(70.2)
(70.2)
2007
£m
(23.7)
(23.7)
2006
£m
(23.7)
(23.7)
THE GROUP
THE COMPANY
2007
£m
2006
£m
2007
£m
2006
£m
(1.5)
-
(1.5)
(1.4)
0.5
(2.4)
-
(2.6)
(2.6)
1.5
(0.4)
(1.5)
-
-
-
-
-
-
-
-
-
-
-
-
The Paragon Group of Companies PLC 85
39. PROFIT AND LOSS ACCOUNT
Balance at 1 October 2006
As previously stated
Adoption of IAS 32 and 39
Dividends paid (note 40)
Share options exercised (note 42)
Charge for share based remuneration (note 10)
Tax on share based remuneration (note 41)
Actuarial gain / (loss) on retirement obligation (note 30)
Profit for the year
THE GROUP
THE COMPANY
2007
£m
2006
£m
2007
£m
2006
£m
314.9
-
314.9
(20.1)
(1.6)
2.6
(1.9)
2.4
62.8
323.5
(69.9)
253.6
(16.0)
(0.6)
0.6
8.9
(0.4)
68.8
114.5
-
114.5
(20.8)
-
2.6
-
-
72.9
181.7
(52.5)
129.2
(16.8)
-
0.6
-
-
1.5
Balance at 30 September 2007
359.1
314.9
169.2
114.5
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 2006
Interim dividend for the year ended 30 September 2007
Amounts paid and proposed in respect of the year:
Interim dividend for the year ended 30 September 2007
Proposed final dividend for the year ended 30 September 2007
2007
PER SHARE
2006
PER SHARE
10.1p
8.0p
18.1p
7.4p
6.9p
14.3p
2007
PER SHARE
2006
PER SHARE
8.0p
-
8.0p
6.9p
10.1p
17.0p
2007
£m
11.2
8.9
20.1
2007
£m
8.9
-
8.9
2006
£m
8.4
7.6
16.0
2006
£m
7.6
11.2
18.8
Dividends of £0.7m (2006: £0.8m) were paid by the Company in respect of shares held by ESOP trusts on which dividends had
not been waived.
86 The Paragon Group of Companies PLC
41. TAX CHARGED / CREDITED TO EQUITY
On actuarial gain / (loss) on pension scheme (note 30)
On gains / (losses) on cash flow hedges (note 38)
Tax on items taken to equity
On share based payment
Total tax (charged) / credited to equity
Of which
Current tax
Deferred tax (note 31)
THE GROUP
THE COMPANY
2007
£m
2006
£m
2007
£m
2006
£m
(1.0)
0.5
(0.5)
(1.9)
(2.4)
0.9
(3.3)
(2.4)
0.2
(0.4)
(0.2)
8.9
8.7
2.8
5.9
8.7
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Included in tax charged to equity is £0.1m (2006: £nil) in respect of the effect of the changes in corporation tax rates described
in note 16 on deferred tax assets.
42. TRANSACTIONS IN SHARES
Awards from ESOP schemes
Proceeds (note 52)
Cost of shares issued (note 43)
(Deficit) on exercise (note 39)
Shares issued
Nominal value (note 4)
Premium on issue (note 36)
Proceeds of issue (note 52)
(Deficit) / surplus on transactions in own shares
THE GROUP
THE COMPANY
2007
£m
2006
£m
2007
£m
2006
£m
0.8
(2.4)
(1.6)
-
0.1
0.1
(1.5)
1.9
(2.5)
(0.6)
-
1.2
1.2
0.6
-
-
-
-
0.1
0.1
0.1
-
-
-
-
1.2
1.2
1.2
The Paragon Group of Companies PLC 87
43. OWN SHARES
Treasury shares
At 1 October 2006
Shares purchased
At 30 September 2007
ESOP shares
At 1 October 2006
Shares purchased
Options exercised (note 42)
At 30 September 2007
Balance at 30 September 2007
THE GROUP
THE COMPANY
2007
£m
31.4
8.1
39.5
16.3
3.4
(2.4)
17.3
56.8
2006
£m
8.3
23.1
31.4
14.5
4.3
(2.5)
16.3
47.7
2007
£m
31.4
8.1
39.5
-
-
-
-
2006
£m
8.3
23.1
31.4
-
-
-
-
39.5
31.4
At 30 September 2007 the number of the Company's own shares held in treasury was 6,689,000 (2006: 5,244,000).
These shares had a nominal value of £668,900 (2006: £524,400). 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 2007, the trusts held
4,510,734 shares (2006: 5,028,353) with a nominal value of £451,073 (2006: £502,835) and a market value of £13,543,479
(2006: £33,891,099). Options, or other share-based awards, were outstanding against 4,271,664 of these shares at
30 September 2007 (2006: 4,851,712). The dividends on 1,174,566 of these shares have been waived (2006: 629,909).
88 The Paragon Group of Companies PLC
44. FINANCIAL LIABILITIES
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
THE GROUP
THE COMPANY
2007
£m
0.5
280.4
280.9
2006
£m
0.4
127.6
128.0
9,892.6
115.8
13.4
931.7
426.1
7,057.7
117.9
13.9
1,267.9
162.3
11,379.6
8,619.7
2007
£m
2006
£m
0.5
-
0.5
-
115.8
13.4
-
4.0
133.2
0.4
-
0.4
-
117.9
13.9
-
0.4
132.2
The Group's securitisation borrowings are denominated in sterling, euros and US dollars. All currency borrowings are
swapped at inception so that they have the effect of sterling borrowings. These swaps provide an effective hedge against
exchange rate movements, but the requirement to carry them at fair value leads, when exchange rates have moved
significantly since the issue of the notes, to large balances for the swaps being carried in the balance sheet. This is
currently the case with US dollar swaps, although the credit balance is compensated for by retranslating the borrowings
at the current exchange rate.
A maturity analysis of the above borrowings and further details of asset backed loan notes and bank loans are given in
note 45.
Further details of finance lease liabilities are given in note 46 and further details of derivative financial instruments are
given in note 29.
The Paragon Group of Companies PLC 89
45. BORROWINGS
Set out below is the maturity profile of the Group's borrowings at 30 September 2007 and 30 September 2006:
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
0.5
279.9
-
-
280.4
-
-
-
-
-
-
-
-
-
-
2007
TOTAL
IN MORE
THAN FIVE
YEARS
£m
£m
-
931.7
115.8
9,892.6
0.5
1,211.6
115.8
9,892.6
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
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
10,940.1 11,220.5
127.6
149.6
7.0
8,286.9
8,571.1
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 all of the notes at an earlier date (the 'call 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 notes outstanding at 30 September 2007 comprised £9,140.0m (2006: £6,312.6m) in respect of mortgage backed notes
and £752.6m (2006: £745.1m) in respect of notes backed by other loan assets. The details of the assets backing these
securities are given in notes 25 and 26.
A more detailed description of the securitisation structure under which these notes are issued is given in note 4.
90 The Paragon Group of Companies PLC
Notes in issue at 30 September 2007 and 30 September 2006 were:
MATURITY
DATE
CALL
DATE
PRINCIPAL
OUTSTANDING
ISSUER
Sterling notes
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
15/01/39
Paragon Mortgages (No. 13) PLC
15/09/39
Paragon Mortgages (No. 14) PLC
15/12/39
Paragon Mortgages (No. 15) PLC
30/11/31
First Flexible No. 1 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
01/12/35
First Flexible No. 6 PLC
First Flexible No. 7 PLC
15/09/33
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. 7) PLC
Paragon Mortgages (No. 9) PLC
Paragon Mortgages (No. 10) PLC
Paragon Mortgages (No. 11) PLC
Paragon Mortgages (No. 12) PLC
Paragon Mortgages (No. 13) PLC
Paragon Mortgages (No. 14) PLC
Paragon Mortgages (No. 15) PLC
First Flexible No. 6 PLC
Euro notes
15/05/43
15/05/41
15/06/41
15/10/41
15/11/38
15/01/39
15/09/39
15/12/39
01/12/35
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
15/01/39
Paragon Mortgages (No. 13) PLC
15/09/39
Paragon Mortgages (No. 14) PLC
15/12/39
Paragon Mortgages (No. 15) PLC
First Flexible No. 6 PLC
01/12/35
Paragon Personal and Auto Finance (No. 3) PLC 15/04/36
2007
£m
127.0
364.2
241.4
187.5
150.3
175.7
186.7
194.0
226.5
-
-
148.9
163.9
132.8
214.9
204.5
300.0
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
$m
342.5
40.1
787.2
885.3
1,669.4
1,741.6
1,856.7
1,150.0
26.1
€m
353.9
494.4
332.9
269.0
367.3
457.8
461.5
464.7
306.0
82.9
358.0
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
15/05/08
15/10/08
15/05/09
15/12/09
15/04/10
15/08/10
15/10/10
15/03/11
15/06/11
30/10/05
01/11/06
01/07/08
01/07/09
01/03/08
15/03/11
15/04/09
15/11/08
15/05/08
15/05/09
15/12/09
15/04/10
15/08/10
15/10/10
15/03/11
15/06/11
01/03/08
15/05/08
15/10/08
15/05/09
15/12/09
15/04/10
15/08/10
15/10/10
15/03/11
15/06/11
01/03/08
15/04/09
AVERAGE INTEREST
MARGIN
2007
%
2006
%
0.21
0.27
0.19
0.28
0.14
0.17
0.16
0.15
0.14
-
-
0.46
0.42
0.53
0.12
0.34
0.35
%
0.34
0.18
0.09
(0.01)
0.01
0.03
0.02
0.01
0.28
%
0.31
0.22
0.26
0.20
0.23
0.23
0.18
0.20
0.32
0.43
0.32
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
During the year, Group companies issued £4,270.2m (2006: £3,500.6m) of mortgage backed floating rate notes at par
and £nil (2006: £nil) of asset backed floating rate notes at par.
The Paragon Group of Companies PLC 91
45. BORROWINGS (continued)
(b) Bank borrowings
During the year ended 30 September 2007 the Group had the following sterling borrowing facilities:
ISSUER
(i) Paragon Finance PLC
(ii) Paragon Second Funding Limited
(iii) Earlswood Finance PLC
(iv) Arianty No. 1 PLC
(v) Mortgage Funding Corporation PLC
AVAILABLE
FACILITY
PRINCIPAL
OUTSTANDING
CARRYING
VALUE
2007
£m
280.0
2,325.0
-
-
-
2006
£m
280.0
2,325.0
0.5
10.0
134.5
2007
£m
280.0
932.0
-
-
-
2006
£m
150.0
1,112.0
0.5
7.0
127.3
2007
£m
279.9
931.7
-
-
-
2006
£m
149.6
1,110.8
0.5
7.0
127.2
2,605.0
2,750.0
1,212.0
1,396.8
1,211.6
1,395.1
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 final 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. More
information on this process is given in note 4.
The warehouse facility 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.
Details of assets held within the warehouse are given in notes 25 and 26.
iii.
In connection with the acquisition of Mortgage Trust the Group, through Earlswood Finance PLC (formerly Paragon
Mortgages (No. 14) PLC), entered into a bank loan secured against cashflows generated by certain of the acquired assets.
Interest was payable on this loan at a rate of 1.35% above LIBOR. This facility was repaid in full on 10 October 2006.
iv. The committed sterling bank facility provided to Arianty No. 1 PLC was secured on all the assets of that company.
The facility was repaid in full on 25 January 2007.
v.
Assets originated by Mortgage Funding Corporation PLC were funded by a committed sterling bank facility. This facility
was secured on all the assets of that company. The facility was repaid in full on 25 January 2007.
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.
92 The Paragon Group of Companies PLC
The Group additionally has entered into £85.0m (2006: £108.5m) of sterling revolving credit facilities to fund, where necessary,
the purchase of mortgage redraws in certain subsidiary companies. At 30 September 2007 £nil (2006: £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 0.30% above LIBOR
(2006: 0.20% and 1.35% above LIBOR). The weighted average margin above LIBOR on bank borrowings at 30 September 2007
was 0.23% (2006: 0.23%).
(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 2007 £115.8m (2006: £117.9m) was included within financial liabilities in respect of these bonds.
46. 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
2007
£m
1.7
7.8
13.2
22.7
(8.8)
13.9
2006
£m
1.7
7.6
15.1
24.4
(10.1)
14.3
PRESENT VALUE OF
MINIMUM LEASE
PAYMENTS
2007
£m
0.5
3.4
10.0
2006
£m
0.4
3.0
10.9
13.9
14.3
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% (2006: 9.13%).
At 30 September 2007 the minimum amount of payments expected to be received in respect of non-cancellable sub-leases in
respect of this building was £5,600,000 (2006: £7,400,000).
The Paragon Group of Companies PLC 93
47. CURRENT TAX LIABILITIES
THE GROUP
THE COMPANY
UK Corporation Tax
48. PROVISIONS
Provision at 1 October 2006
Created in year
Current year charge
Utilised in the year
Released in the year
Provision at 30 September 2007
Included in current liabilities
Included in non-current liabilities
2007
£m
3.1
3.1
2007
£m
1.0
1.0
2006
£m
1.4
1.4
2007
£m
4.4
-
0.1
(0.9)
(1.6)
2.0
1.4
0.6
2.0
2006
£m
1.0
1.0
2006
£m
2.1
2.1
1.1
(0.9)
-
4.4
0.7
3.7
4.4
Provisions include committed future lease costs for properties no longer occupied by the Group. The provisions are expected
to be utilised within five years.
49. OTHER LIABILITIES
Current liabilities
Amounts owed to Group companies
Accruals
Non-current liabilities
Accruals
94 The Paragon Group of Companies PLC
THE GROUP
THE COMPANY
2007
£m
-
111.1
111.1
7.2
7.2
2006
£m
-
78.2
78.2
5.9
5.9
2007
£m
277.0
3.9
280.9
1.3
1.3
2006
£m
187.9
4.5
192.4
1.5
1.5
50. 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
Share of profit of associated undertaking
Foreign exchange movement on borrowings
Other non-cash movements on borrowings
Impairment losses on loans to customers
Charge for share based remuneration
Loss on disposal of property plant and equipment
Net (increase) / decrease in operating assets:
Loans to customers
Loans to associate
Derivative financial instruments
Fair value of portfolio hedges
Other receivables
Net increase in operating liabilities:
Derivative financial instruments
Other liabilities
Cash (utilised) by operations
Income taxes paid
2007
£m
91.0
3.9
0.2
(0.2)
(208.8)
2.9
50.5
2.6
0.1
(2,658.7)
(15.4)
(71.7)
8.8
(4.3)
263.8
35.1
(2,500.2)
(11.4)
(2,511.6)
2006
£m
82.8
3.5
0.2
-
(119.3)
5.3
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)
The Paragon Group of Companies PLC 95
50. 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
Net (increase) / decrease in operating assets:
Loans to associate
Derivative financial instruments
Other receivables
Net increase in operating liabilities:
Derivative financial instruments
Other liabilities
Cash generated / (utilised) by operations
Income taxes paid
2007
£m
67.5
0.9
(2.1)
(51.0)
2.6
(15.4)
-
(20.1)
3.6
88.3
74.3
5.4
79.7
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
51. 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 53)
Investment in subsidiary undertakings
Investment in associated undertaking
Net cash (utilised) by investing activities
THE GROUP
THE COMPANY
2007
£m
2006
£m
1.3
(7.0)
(0.2)
-
-
(0.3)
(6.2)
1.2
(5.2)
(0.5)
3.1
-
-
(1.4)
2007
£m
-
-
-
-
(50.2)
(0.3)
(50.5)
2006
£m
-
-
-
-
(38.9)
-
(38.9)
96 The Paragon Group of Companies PLC
52. NET CASH FLOW FROM FINANCING ACTIVITIES
THE GROUP
THE COMPANY
Dividends paid
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
2007
£m
2006
£m
(20.1)
4,262.1
(1,223.7)
(0.4)
(184.6)
(11.5)
0.8
0.1
(16.0)
3,493.6
(1,906.6)
(0.4)
371.5
(27.4)
1.9
1.2
Net cash generated / (utilised) by financing activities
2,822.7
1,917.8
2007
£m
(20.8)
-
-
(0.4)
-
(8.1)
-
0.1
(29.2)
2006
£m
(16.8)
-
-
(0.4)
-
(23.1)
-
1.2
(39.1)
53. PURCHASE OF SUBSIDIARY UNDERTAKINGS
During the year ended 30 September 2006 the Group acquired TMC Tattenham No. 1 PLC and TMC Tattenham No. 2 PLC.
These two companies had been established by a third party to hold a portfolio of mortgage assets in run-off and were not,
therefore, conducting a business as that term is defined in IFRS 3 - 'Business Combinations'. Thus the acquisition did not
meet the definition of a business combination set out in IFRS 3 and, 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 97
54. OPERATING LEASE ARRANGEMENTS
(a) As lessee
THE GROUP
THE COMPANY
2007
£m
2006
£m
2007
£m
2006
£m
Minimum lease payments under operating leases recognised
in income for the year
3.4
3.5
0.3
0.3
At 30 September 2007 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
2007
£m
3.4
11.8
10.0
25.2
2006
£m
3.4
12.7
12.4
28.5
2007
£m
2006
£m
0.3
1.0
1.7
3.0
0.3
1.0
1.9
3.2
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 46. The average term of the current leases is 15 years
(2006: 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 2007 was:
Rental income
THE GROUP
THE COMPANY
2007
£m
1.9
2006
£m
1.8
2007
£m
1.8
2006
£m
1.8
At 30 September 2007 the Group had received outstanding commitments from tenants for future minimum lease
payments under non-cancellable operating leases, which fall due as follows:
THE GROUP
THE COMPANY
2007
£m
2006
£m
2007
£m
2006
£m
2.1
5.5
0.8
8.4
1.9
6.1
0.3
8.3
1.8
3.8
-
5.6
1.8
5.3
0.3
7.4
Amounts receivable:
Within one year
Between two and five years
After more than five years
98 The Paragon Group of Companies PLC
55. CAPITAL COMMITMENTS
There were no capital commitments (2006: £nil) contracted but not provided for.
56. RELATED PARTY TRANSACTIONS
(a) The Group
The Group had no transactions with related parties other than the key management compensation disclosed in note 11
and the transactions with its associated undertaking disclosed in notes 23 and 28.
(b) The Company
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 12 to employees of subsidiary undertakings.
Details of the Company's investments in subsidiaries and the income derived from them are shown in note 21.
Outstanding current account balances with subsidiaries are shown in notes 32 and 49.
During the year the Company incurred interest costs of £20.0m in respect of borrowings from its subsidiaries (2006: £11.0m).
The Company has made investments in an associated undertaking and made loans to this associate. Details of equity
investments in the associate are given in note 23 and details of loans to the associate are given in note 28.
57. EVENTS OCCURING AFTER THE BALANCE SHEET DATE
On 19 November 2007 the Group entered into a standby underwriting agreement with UBS. Under the terms of this
agreement the Company has the right to require UBS to underwrite, in full, a rights issue of up to £280.0 million, before
27 February 2008 unless satisfactory alternative funding arrangements have been put in place prior to that time. The
obligation of UBS is subject to the normal conditions, including all relevant approvals, including shareholder approval,
being obtained; the absence of any material adverse change affecting the Group; and the absence of any force majeure
event. The issue or offer price of any new shares will be determined at the time of launch of the issue in the light of the
then prevailing market conditions.
58. ADOPTION OF IAS 32 AND IAS 39
Details of the impact of the adoption of IAS 32 and IAS 39 with effect from 1 October 2005 are included in note 56 of the
annual report and accounts for the year ended 30 September 2006.
The Paragon Group of Companies PLC 99
Appendices to the annual report
For the year ended 30 September 2007
A. COST:INCOME RATIO
Cost:income ratio is derived as follows:
Operating expenses
Cost
Total operating income
Fair value net gains
Income
Cost / Income
2007
£m
47.7
47.7
184.9
4.3
189.2
25.2%
2006
£m
45.4
45.4
173.5
2.5
176.0
25.8%
B. 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.
Financial highlights for 2005 on the proforma and statutory bases are shown below:
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
Profit before taxation
Profit after taxation
Total loan assets
Shareholders' funds
Earnings per share - basic
- diluted
Dividend per ordinary share
100 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