Redde Northgate
Annual Report 2006

Plain-text annual report

i D e s g n e d b y T h e R o u n d h o u s e 0 1 9 1 2 2 2 1 1 4 4 A N N U A L R E P O R T A N D A C C O U N T S 2 0 0 6 NORFLEX House Allington Way Darlington DL1 4DY Telephone: 01325 467558 www.northgateplc.com ANNUAL REPORT AND ACCOUNTS 2006 OFFERING FLEXIBLE VEHICLE SOLUTIONS FOR 25 YEARS CELEBRATING OUR SILVER JUBILEE We have celebrated our 25th year in business in a number of ways with our customers, suppliers, employees and the local community. Putting something back into the local community has played a major role in our celebrations. An initiative was launched to provide a free van to local charities up and down the UK. This has proved to be a huge success. In the last few months we have helped four registered charities, providing each one with the use of a free van to use in a special charity project. Throughout our silver jubilee we will endeavour to help as many charities as we can through this scheme. In addition we have provided funding to a childrens’ museum called Eureka. Our funding has helped to support a new project called Mission Active! The aim of this project is to educate children on the benefits of healthy eating and exercise, in a fun way. Mission Active! consists of a mobile exhibition which is currently travelling throughout the North East of England. Our 25th anniversary celebrations have also seen us supporting Conrad Dickinson, an intrepid explorer whose mission was to trek 480 miles (775 km) to the North Pole unaided. He succeeded and, having already skied across the Greenland ice cap and trekked to Antarctica and back, he became the first British explorer to achieve the "polar trilogy" in battling the elements in Greenland plus the North and South Poles. A T Noble Executive Director 04 06 08 12 14 16 24 27 28 29 30 37 85 86 87 Chairman’s Statement Operational Review Financial Review Board of Directors Report of the Directors Remuneration Report Corporate Governance Health & Safety and Environmental Directors’ Responsibilities Report of the Auditors Financial Statements Notes to the Accounts Five Year Financial Summary Notice of Annual General Meeting Information for Shareholders 01 Northgate plc Annual Report and Accounts 2006 HIGHLIGHTS Vehicle fleet – UK – Spain Group profit from operations Profit before tax Earnings per share Dividend per share Net assets per Ordinary share 2006 64,000 47,000 £72.6m £56.1m 61.1p 23.0p 453p 2005 52,600 19,000 £76.2m £55.0m 60.7p 20.0p 351p > Group revenue for the year increased by 9.8% to £372.6m (2005 – £339.4m) > Underlying profit before tax* increased by 7.3% to £59.9m (2005 – £55.8m) > Adjusted earnings per share* increased by 5.8% to 65.7p (2005 – 62.1p) *Stated before intangible amortisation charges and exceptional restructuring costs Vehicle Fleet - UK Vehicle Fleet - Spain Group profit before tax (£000) Earnings per share (p) * Fualsa fleet only ** Fualsa and Record fleet combined 64,000 * UK GAAP basis ** IFRS basis * UK GAAP basis ** IFRS basis 61.1 60.7 52,600 47,400 45,000 40,500 56,062 54,988 50.7 47,000 44,592 41.4 35.8 36,603 31,674 19,000 15,000 12,000 2002 2003 2004 2005 2006 2003* 2004* 2005* 2006** 2002* 2003* 2004* 2005** 2006** 2002* 2003* 2004* 2005** 2006** 02-03 Northgate plc Annual Report and Accounts 2006 POSITIONED FOR GROWTH The Group’s acquisitions of Arriva Vehicle Rental, a leading commercial vehicle hire operator and Fleet Technique, a fleet management company, have positioned the Group’s UK business well for future growth. Similarly the investment in Record Rent a Car SA, in Spain to complement Fualsa means that the Group has a market leading position in a fast growing Spanish market. STRENGTH IN SPAIN In July 2002, we made our first significant investment in Spain, when we acquired 40% of the equity of Fualsa. The success of Fualsa encouraged us to acquire the remainder of its equity in May 2004. The purchase of 49% of the equity of Record Rent a Car, another of Spain’s leading commercial vehicle rental companies, followed in August 2005 with the remaining 51% being acquired in May 2006. With a fleet of 47,000 vehicles, operating from 35 locations we are established as Spain’s market leader in commercial vehicle rental. 04-05 Northgate plc Annual Report and Accounts 2006 CHAIRMAN’S STATEMENT The year’s performance was one of strong growth in Spain and a resilient delivery from the UK business. It was also the third and final year of Northgate’s three-year Strategy for Growth Plan, which was set out in 2003. The limited fleet growth due to market weakness experienced in the construction, retail and distribution sectors referred to in my Interim Statement has been largely overcome with the UK business achieving expected levels of growth in the six months to April 2006. The Group has achieved compound earnings per share growth of 14% per annum over the three years, and in the process has developed a robust and geographically diverse business. This is particularly pleasing as it coincides with our 25th anniversary in the business of renting light commercial vehicles. A new three-year rolling strategy has been adopted which foresees the continuation of earnings growth through building on our market leading positions in the UK and Spain. Management began the implementation of this new strategy in January 2006. This is the first financial year that the Group has prepared its results under IFRS. The impact of IFRS on profit before tax for the year was immaterial. The main presentational change to the Group's financial results is that proceeds received from the disposal of used vehicles are no longer classified as revenue. This change in policy has had the effect of reducing Group revenue as previously reported under UK GAAP. Group revenue now comprises income derived from the hire of vehicles and the supply of related goods and services. The results for the year are set out below: - Group revenue increased by 10% to £372.6m (2005 – £339.4m) - Underlying profit before tax* for the year was £59.9m (2005 – £55.8m) - Adjusted earnings per share* increased by 3.6p to 65.7p (2005 – 62.1p) *Stated before intangible amortisation of £1.2m (2005 – £0.8m) and exceptional restructuring costs of £2.6m (2005 – £nil). Based on these results and the Board’s view of future prospects, the Board has decided to recommend to shareholders a final dividend of 14p per share. This will produce a total dividend for the year of 23p – an increase of 15% over the prior year and is covered 2.7 times. The dividend will be payable on 29 September 2006 to those shareholders on the register on 1 September 2006. As previously reported, the UK market was impacted by lower residual values in the first half of the financial year. The second half has seen residual values recover, albeit not to the unusually high levels of the prior year. Continued development of retail and semi-retail channels for vehicle sales has contributed to this improvement in profitability. Whilst UK hire rates have remained competitive, we have experienced five months of relative stability since January 2006. Our new strategy included a plan to acquire Arriva Vehicle Rental Limited (“AVR”), a business with a rental fleet of over 11,000 vehicles in markets largely complementary to Northgate’s UK business. The acquisition, which was funded in part by a placing to raise £63m, was completed in January 2006 and management have worked hard so that the integration of the business is now substantially complete. The growth of the UK network and the AVR acquisition have demonstrated that efficiency improvements are achievable through managing larger numbers of vehicles per business and Northgate’s autonomous management structure is more cost-effective as a result. Further strategic restructuring in the UK along these lines is currently underway. During the year, the Group also acquired Fleet Technique Limited (“FTL”). An important element of Northgate’s growth strategy, this business has given the Group the facility to manage operators’ fleets regardless of how they choose to acquire their vehicles. In Spain, the growing vehicle rental market continues to justify Northgate's confidence in both its original investment in Fualsa and in its future strategy. In August 2005, the Group purchased 49% of Record Rent a Car SA (“Record”) and completed the acquisition of the remaining 51% on 11 May 2006. I have been encouraged by the strategic approach of the executive team and the energy and enthusiasm that they display in the continued development of the Group. The commitment of the staff and management at all levels this year has been impressive. Your Board will ensure that the new strategy is professionally adopted throughout the Group with long-term benefits for all stakeholders. Current Trading and Outlook In the current financial year, in addition to the expected organic growth in the UK, we will see the full benefit of the AVR acquisition. We will also see further development of our fleet management activities through FTL. In Spain, along with good organic growth, we will have 100% ownership of Record for the full year, an expected improvement in Fualsa's operating performance and the benefit of further synergies from combining business activities. Consequently the Board remains confident of good progress in the year ahead and trading remains in line with the Board’s expectations. Martin Ballinger Chairman 06-07 Northgate plc Annual Report and Accounts 2006 OPERATIONAL REVIEW Strategy for Growth In July 2003 we announced our Strategic Plan for the three years to April 2006, the key targets of which were: - A fleet size of 60,000 in the UK and 18,000 in Spain; - A network of 100 locations in the UK and 20 in Spain; - 100% ownership of Fualsa; and - An established portfolio of non-rental products. In the year under review the acquisition of AVR has resulted in us exceeding the fleet size objective in the UK. In Spain, Fualsa exceeded its fleet target by 5,000 units and had a network of 17 locations at 30 April 2006. The final payment of €14.9m in respect of the consideration for the purchase of Fualsa was made to the vendors on 8 May 2006. The completion of the acquisition of Record on 11 May 2006 effectively doubled both the vehicle fleet and the depot network in Spain. We now have a number of ancillary products such as vehicle tracking and parts procurement available to customers and the acquisition of FTL on 23 January 2006 significantly extended our non-rental product range. Through the successful implementation of our strategy we were seeking to achieve double-digit earnings growth in each year of the plan. Over the three-year period the Company has achieved growth in earnings per share at an annualised compound rate of 14%. In January 2006 we announced, with our interim results, our new Strategy for Growth based on a three-year rolling business plan aimed at achieving continued double-digit growth in earnings per share. The acquisitions of AVR and FTL and the completion of the purchase of Record are very much in line with that Strategic Plan and give us a platform to continue to successfully grow our business. Review of Current Year UNITED KINGDOM AND REPUBLIC OF IRELAND The first half of the financial year was one of the most difficult we have encountered with limited fleet growth, competitive pressures reducing hire rates and lower used vehicle residual values. The second half, as predicted at the time of our interim results, has seen more normal levels of fleet growth, stable hire rates since January 2006 and an improvement in residual values. DEPOT NETWORK We currently operate from 88 locations, of which 35 are primary and 53 are branches. This represents an increase of 12 locations over the financial year, of which we acquired ten as a result of the purchase of AVR. VEHICLE FLEET The historic pattern of fleet growth for the UK has been one of a stronger first half than second half of the financial year. This year has seen the opposite pattern with no growth in the first half of the year, followed by an organic increase in the fleet of 2% in the second half. As noted in the interim report in January, in the first six months the Group was affected by some weakness in demand from customers operating in the construction, retail and distribution sectors along with a major customer off-hiring a large number of vehicles. From September demand returned to more normal levels and was in line with our expectations for the remainder of the financial year. In addition, the acquisition of AVR added significantly to our fleet in February 2006, and we consequently ended the financial year with a fleet of 64,000 vehicles. Once integrated into our fleet it became impossible to distinguish between our existing fleet and the AVR fleet, particularly for common customers. As a consequence we cannot precisely split growth arising from the AVR acquisition and organic growth for the second half of the year but estimate that of the increase of 11,600 vehicles between 31 October 2005 and 30 April 2006, 10,500 came from the acquisition, once non-utilised AVR vehicles were disposed of, and 1,100 from existing businesses. UTILISATION AND HIRE RATES Utilisation again averaged 90% for the year (2005 – 90%). From the beginning of August 2005 we experienced strong competition resulting in declining hire rates. This continued until January 2006 and as a result hire rates reduced year on year by 2.5%. Since January we have not experienced the same level of aggressive activity and as a consequence hire rates have remained stable. USED VEHICLE SALES We sold 23,000 vehicles (2005 – 17,700) during the year, the largest volume we have ever disposed of. In the first half we experienced a weaker market for used vehicle values, particularly in the long wheel base van sector. Since October 2005, we have seen an improvement in values as a result of the market improving, a significant reduction in our stock levels and the continued development of our semi-retail and retail channels. Under IFRS the profit for used vehicle disposals is no longer accounted for separately since depreciation is adjusted in order that vehicles are retired from the fleet at their anticipated market value less any direct costs incurred in their disposal. If this profit arising from the used vehicle disposals had been calculated on the same basis as last year, applying UK GAAP, the UK would have recorded an operating profit per vehicle of £83 (2005 – £205). We continue to seek to increase both the overall capacity of our used vehicle sales network and our ability to sell more vehicles through the semi-retail and retail channels. To that end we have opened new facilities at Newmains in Scotland, Colchester and Warrington during the year and now have nine outlets, of which six are devoted primarily to retail and semi-retail disposals. In the year under review 12% (2005 – 10%) of our disposals were to semi-retail or retail customers and we remain on target to achieve 15% through these channels in the medium term. PURCHASE OF FLEET TECHNIQUE LIMITED (“FTL”) In line with the Group’s Strategic Plan announced at the time of the interim results, the Group acquired the entire issued share capital of FTL for a consideration in cash of £5.7m, on 23 January 2006. FTL is a specialist fleet management business, based in the North East of England, serving customers across the UK. Third party fleets under management totalled some 15,000 vehicles, including both cars and commercials as at 30 April 2006. In addition, FTL has developed a leading software package for the industry and has a reputation for excellent service to its customers. In the three months of ownership FTL contributed £0.1m to the Group's profit from operations for the year. More importantly, FTL provides us with the platform to develop a significant fleet management business through offering customers a full range of flexible vehicle solutions whilst capitalising on our core skills of purchasing, maintaining and disposing of large volumes of vehicles. PURCHASE OF ARRIVA VEHICLE RENTAL LIMITED (“AVR”) On 31 January 2006 we announced that we had entered into an agreement to acquire the entire issued share capital of AVR and that 6.05 million new Ordinary shares were being placed to partially fund payment of the consideration. The placing became wholly unconditional on 3 February 2006. The total consideration, including acquired debt, paid to date for AVR is £124.4m. This is subject to final agreement with the vendor of the net asset values acquired. At the time of acquisition AVR operated a fleet of over 11,000 vehicles through a branch network of 33 locations and employed around 650 people. Our plan was to fully integrate AVR into our existing operating structure by the end of our financial year and we are pleased to report that this was achieved. Of the 33 branches ten were retained as new locations for Northgate and another four were used as replacements for existing Northgate sites. The staffing levels were reduced from around 650 employed by Arriva to around 250 additional staff in the enlarged structure. Customer retention has to date been excellent and those vehicles not being utilised have been disposed of profitably. On 8 March 2006 the Office of Fair Trading announced that it was to examine the transaction. Having considered the evidence the OFT decided on 18 May 2006 not to refer the merger to the Competition Commission. A text of the decision is available on their website at www.oft.gov.uk REORGANISATION On 20 June 2006 the Group commenced a restructuring plan to create a functional, rather than geographic, management structure for the UK business by streamlining the number of hire companies to give fewer, but larger, business units, whilst retaining the existing network of locations. It is intended that this process, which will take around six to nine months to complete, will leave us better able to deliver consistent customer service throughout the Group and with improved productivity from increased utilisation of the fleet and reduced costs. Whilst it is likely that the benefits will be negated by the one-off transactional cost of the changes in the current financial year, future periods will benefit as evidenced by an improved operating margin. SPAIN On 5 August 2005 we significantly increased our presence in Spain with the purchase of 49% of Record, like Fualsa, one of Spain’s leading vehicle rental companies. Since the remaining 51% of the equity was not acquired until 11 May 2006, in the year under review Record is accounted for as an associate. We are therefore reporting on Fualsa and Record as two separate businesses this year but going forward, will review our Spanish businesses as one operation. During the year, the growth in the Spanish vehicle rental market has been in part due to the continued high level of activity in the construction sector. Whilst our aim remains to reduce our dependency on this sector over time, we continue to take advantage of the opportunities that exist in the medium term. FUALSA As at 30 April 2006 Fualsa operated a fleet of 23,000 vehicles from a depot network of 17 locations, an increase of 4,000 vehicles and two locations over April 2005. The utilisation rate averaged 89%, the same as the prior year. Hire rates continued to improve modestly and were up by just under 2% on the prior year, albeit the benefit of this increase is reduced by a similar increase in the capital cost of new vehicles. The operating margin at 20.9% was down by over 4% on the prior year, as a result of an increase in external maintenance costs, increased depreciation due to lower residual values and some planned increases in expenditure on management, IT and other aspects of Fualsa’s infrastructure. Maintenance costs increased due to the cumulative fleet growth of the last few years overstretching the management structure combined with a shortage of skilled personnel, particularly mechanics, leading to more work having to be completed externally. Both of these issues have been addressed and we are confident of an improvement in the year ahead. These corrective actions, along with the operational gearing benefit we will derive from a larger fleet size, should lead to an improvement of over 1% in the operating margin for the current year. RECORD Since our investment on 5 August 2005 the vehicle fleet has grown by 20% producing a closing fleet of 24,000 vehicles at 18 locations. The utilisation rate averaged 92% in the period, a slight improvement on the level achieved prior to our investment. A similar increase to Fualsa was achieved in hire rates. Whilst we remain of the belief that our customers are best served by retaining two separate brands in Spain, there are opportunities to obtain synergies by combining certain areas of the two operations. We have already brought together the purchasing activities of the two companies to benefit from the economies of scale from purchasing larger volumes, particularly vehicles. In the year ahead we intend to merge vehicle disposals into one unit. Within the next six months we expect to have appointed a CEO for Spain to allow us to further merge the businesses in the second half of the financial year. Further integration is to some extent dependent on having a common IT platform, a project currently being developed and expected to conclude in the 2007 calendar year. Steve Smith Chief Executive 08-09 Northgate plc Annual Report and Accounts 2006 FINANCIAL REVIEW FINANCIAL REPORTING The Group has delivered a resilient set of financial results, particularly taking into account the difficult trading conditions that existed in the UK during the first half of the financial year. The financial impact on these results of businesses acquired in the UK and Spain throughout the year are described separately below. Whilst the additional contribution to earnings per share in this year from these acquisitions has been marginal, they position the Group for strong growth in the future. This report represents the first annual results prepared under IFRS. The transition to IFRS has not had a material impact on reported profit before tax or cash flow. The main presentational change to the Group's financial results is that proceeds received from the disposal of used vehicles are no longer classified as revenue. This change in policy has had the effect of reducing Group revenue as previously reported under UK GAAP. Group revenue now comprises the hire of vehicles and the supply of related goods and services in the normal course of business. Sales, Margins and Return on Capital Group revenue increased by 10% to £372.6m (2005 – £339.4m) as a result of an increase in UK revenue of 6% to £300.8m (2005 – £283.4m) and a 28% increase in revenue from Fualsa to £71.8m (2005 – £56.0m). The Group acquired 49% of Record, a leading commercial vehicle rental company in Spain on 5 August 2005. The results of Record have been accounted for as an associate under the net equity method and as a consequence none of Record's revenues have been consolidated into Group revenue. UNITED KINGDOM & REPUBLIC OF IRELAND The composition of the Group's UK revenue and profit from operations as between vehicle rental activities and fleet management is set out below: Revenue Vehicle rental Fleet management Profit from operations Vehicle rental Fleet management Intangible amortisation 2006 £000 297,433 3,338 300,771 58,722* 119 (692 ) 58,149 2005 £000 283,414 – 283,414 62,863 – (321 ) 62,542 * The UK profit from operations is stated after an exceptional restructuring cost of £2.6m relating to AVR following its acquisition on 3 February 2006. Operating margins (excluding exceptional cost and intangible amortisation) UK overall Vehicle rental Fleet management 2006 20.4% 20.6% 3.6% 2005 22.2% 22.2% – The overall UK operating margin has declined to 20.4% (2005 – 22.2%) partly as a result of acquiring FTL, a fleet management company that generates a lower operating margin than vehicle rental. One of the main reasons for the reduction in margin, however, was a higher depreciation charge as a consequence of lower values being obtained for vehicles sold at the end of their life. This was particularly the case in the first half of the financial year when the Group held more stock than normal and long wheel base products experienced significant declines in value. The UK also experienced a highly competitive environment in hire rates and as a result the average hire rate declined by over 2% compared to 2005. In order to compensate for lower hire rates and lower residual values the operating expenses of the UK business were addressed and savings achieved. After a particularly difficult first half to the financial year an underlying operating margin in the UK vehicle rental business of 20.6% (2005 – 22.2%) is a satisfactory outcome. SPAIN Fualsa, a major commercial vehicle rental company in Spain, has been a wholly owned subsidiary since May 2004. On 5 August 2005 the Group acquired a 49% interest in the equity of Record, another leading Spanish commercial vehicle rental company. Fualsa has been reported as a subsidiary undertaking within the consolidated financial statements whereas Record has been accounted for as an associate. Fualsa The revenue and profit from operations generated by Fualsa during the year are set out below: Revenue Vehicle rental Profit from operations Vehicle rental Intangible amortisation 2006 £000 2005 £000 71,838 55,968 14,984 (535) 14,449 14,229 (534) 13,695 2005 25.4% Operating margins (excluding intangible amortisation) Overall 2006 20.9% Fualsa's vehicle rental revenue increased by 28%, in line with the increase in the average rental fleet size of 26% and hire rate increases of just under 2%. The operating margin achieved by Fualsa of 25.4% in 2005 was forecast to reduce as a result of investing in the infrastructure of the business. Planned expenditure was incurred with the appointment of senior managers, upgrading IT systems and introducing credit insurance. In addition to these costs, Fualsa's vehicle repair expenditure increased substantially in the second half of the financial year as a result of a shortage of skilled technicians to service the enlarged fleet resulting in a higher proportion of maintenance being carried out by third parties. These additional costs combined with increased depreciation due to lower residual values have resulted in the operating margin reducing by 4.5%. IAS 16 (Property, Plant and Equipment): Under IAS 16, the Group is required to review its depreciation rates and estimated useful lives on a regular basis to ensure that the net book value of disposals of tangible fixed assets are broadly equivalent to their market value. Depreciation charges are adjusted for any differences that arise between net book values and open market values of used vehicles upon transfer into non-current assets held for sale, taking into account the further direct costs to sell the vehicles. IAS 18 (Revenue): Under IFRS, income from the sale of used vehicles is not recognised within revenue and the net book value of the vehicles sold, along with associated direct selling costs, are removed from cost of sales. IAS 19 (Employee Benefits): An accrual is recognised for employee annual leave accrued, but not taken, at each balance sheet date. Where this applies to business combinations, the accrual required at the date of acquisition is deemed to reduce the fair value of the net assets acquired with a corresponding adjustment to goodwill. IAS 21 (The Effects of Changes in Foreign Exchange Rates): Certain exchange differences, previously recognised directly within the profit and loss account reserve under UK GAAP, are reclassified into a separate translation reserve, directly within equity, under IFRS. IAS 32 (Financial Instruments: Disclosure and Presentation): The Company's cumulative preference shares are deemed to be debt rather than equity under IFRS. They are reclassified from share capital to borrowings in the balance sheet and preference dividends are reclassified from dividends to finance costs in the income statement. IAS 38 (Intangible Assets): Certain software assets are reclassified from tangible to intangible assets under IFRS. Amounts previously charged to the profit and loss account as depreciation under UK GAAP relating to these fixed assets are reclassified as amortisation within the IFRS income statement. Separate intangible assets are also recognised within business combinations (see IFRS 3, above). These assets are amortised to the income statement over their estimated useful lives. IAS 39 (Financial Instruments: Recognition and Measurement): Interest rate derivatives, to which the Group is party, are recognised on the balance sheet at their fair value. Subsequent changes in the fair value are recognised either within the income statement, as a finance cost, or directly in equity to the extent that the Group elects to hedge account, within the provisions of IFRS. This standard has not been applied to the prior year as allowed under the transitional rules. Record The Group’s 49% share of Record's profit before tax in the nine month period since the date of the initial investment was £5.0m. The equivalent operating margin for Record during this period was 23.7% reflecting higher utilisations and an absence of the issues surrounding repair costs that existed in Fualsa. The fleet growth of 20% in the period since acquisition indicates that the market remains very strong for our flexible rental product in Spain. GROUP Group return on capital employed, calculated as Group profit from operations divided by average capital employed (being shareholders' funds plus net debt), is 10% (2005 – 14%). Group return on equity, calculated as profit after tax divided by average shareholders' funds, is 16% (2005 – 19%). IFRS This is the first set of Group results that have been prepared under IFRS. The Group released an announcement on 21 December 2005 detailing the impact of IFRS on the results for the year ended 30 April 2005. The comparative financial information has been restated to reflect the application of IFRS. The main impacts of IFRS on the Group’s reported results, as compared with the results for 2005 reported under previous accounting standards, are set out below. IFRS 2 (Share-based Payment): An income statement charge is recognised in respect of the cost of share options granted under the Group’s various share schemes. This cost is deemed to be the fair value of the options granted and is charged over the vesting period. An amount equivalent to the charge is credited directly to equity, resulting in no impact on net assets. This accounting treatment is the same as UK GAAP except that the fair values used under IFRS 2 differ from those under UK GAAP. IFRS 3 (Business Combinations): Separate intangible assets are recognised at fair value on the acquisition of businesses after the date of transition to IFRS, which previously formed part of goodwill under UK GAAP. These include non-contractual customer relationships, brand names and non-compete agreements, all of which are amortised over their respective estimated useful lives. The residual goodwill balance under IFRS is therefore lower in value than under UK GAAP but it is no longer amortised and is, instead, tested annually for impairment. IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations): Vehicles held for resale are reclassified from inventories into non-current assets held for sale under IFRS. IAS 10 (Events After the Balance Sheet Date): Under IFRS, dividends are not appropriated within the accounts until they are either paid or formally approved. IAS 12 (Income Taxes): Deferred taxation changes arise under IFRS as a result of differences between the accounting treatment and taxation treatment in respect of share options (IFRS 2), intangible assets (IFRS 3) and holiday pay accruals (IAS 19). Under IAS 12, deferred tax liabilities are also recognised on all capitalised buildings, regardless of whether a contractual commitment to sell exists. 10-11 Northgate plc Annual Report and Accounts 2006 FINANCIAL REVIEW Taxation Capital Structure Strategy Interest Rate Management The Group’s UK operations have a total tax charge of 32% (2005 – 31%), which is slightly higher than the standard rate of 30% due to disallowable expenditure incurred within the business. Both Fualsa’s effective tax rate of 18% (2005 – 20%) and Record’s of 29% are below the standard Spanish tax rate of 35% because of tax concessions based on vehicle purchase reliefs that are available to the businesses. There is draft legislation in Spain that proposes to reduce the standard rate of Corporation Tax from 35% to 30% whilst at the same time removing some of the vehicle purchase reliefs that the businesses currently claim. The timing of any change is not certain and the precise impact on the likely effective tax in Spain has not been quantified. It is expected, however, that this effective rate will be nearer to 30% in the medium term. Dividend The Directors recommend a final dividend of 14p per share (2005 – 12p) giving a total for the year of 23p (2005 – 20p), an increase of 15%. The dividend is covered 2.7 times (2005 – 3.0 times). Earnings per Share Earnings per share increased to 61.1p (2005 – 60.7p), reflecting the growth in underlying profits being offset by an exceptional restructuring cost associated with the acquisition of AVR and its subsequent reorganisation and the increased number of Ordinary shares in issue following the placing of 6.05 million shares in February 2006. Excluding intangible amortisation of £1.2m (2005 – £0.8m) and exceptional restructuring costs of £2.6m (2005 – £nil), basic earnings per share grew by 6% to 65.7p (2005 – 62.1p). Basic earnings per share have been calculated in accordance with IAS 33. Investments On 5 August 2005 the Company acquired 49% of the share capital of Record for €54.8m. In the UK, the entire share capital of FTL was acquired for a consideration in cash of £5.7m on 23 January 2006 and on 3 February 2006 the Company acquired the entire share capital of AVR for £50.3m. Ordinary shares of the Company have been acquired in the open market by Walbrook Trustees (Guernsey) Limited and Capita IRG Trustees Limited in order to satisfy the Company's obligations under its various share schemes. These shares are included within the Group's balance sheet within the own shares held reserve. As at 30 April 2006 the Group’s total gearing measured as net debt (including cash balances) as a percentage of shareholders' funds but after the deduction of goodwill and intangible assets increased to 204% (2005 – 198%). The net cash balance taken into account in calculating the gearing ratios for this year is £24.0m (2005 – £41.4m). This level of gearing is in line with our expectations and is mainly due to the cash outflows following the purchase of 49% of Record and the acquisition of AVR being offset by cash generation from operations and proceeds received from the issue of 6.05 million Ordinary shares in February 2006. Since the year end the Group has acquired the remaining 51% of Record's equity. If this purchase had taken place on 30 April 2006 the consolidated balance sheet of the Group would have had gearing of 314% on a pro-forma basis. TREASURY Cash Flows The Group’s net debt increased by 28% to £524.5m (2005 – £410.9m) excluding the debt in Record's balance sheet. This increase reflects cash outflows associated with the purchase of 49% of Record (£37.9m), the acquisition of AVR (£124.4m), funding of fleet growth in the UK and Spain and the receipt of the proceeds of the placing of 6.05 million Ordinary shares on 3 February 2006. Gross cash generation as reflected by EBITDA* increased to £210.0m (2005 – £197.9m). The Group funded the purchase of 22,500 new vehicles in the UK and 9,400 new vehicles in Fualsa for a total cash outflow of £306.3m. The sale of 23,000 UK vehicles and 4,900 Fualsa vehicles generated a cash inflow of £150.8m. The option over the remaining 20% of Fualsa’s equity, whilst exercised, has not yet given rise to a cash outflow. This deferred consideration of €14.9m is classified as debt in the Group’s balance sheet and was paid after the Group’s financial year end in May 2006. *EBITDA – Earnings before interest, taxation, depreciation and amortisation. Interest Costs The Group’s net interest costs have decreased by 6% to £20.1m (2005 – £21.2m) despite an increase in closing net debt of 28%. This is because the Group has benefited from the full effects of the refinancing arrangements put in place in January 2005 and also from having a higher proportion of debt denominated in Euros than in the prior year. Interest cover remained a healthy 3.6 times (2005 – 3.6 times). The Group’s financing strategy, which has been approved by the Board, is to use medium and long-term debt to finance the Group's vehicle fleet and other capital expenditure. Working capital is funded by internally generated funds and an overdraft facility. The Group's interest rate exposure is managed by a series of treasury contracts as described below. Treasury Management Each of the Group’s operations is responsible for its own day-to-day cash management. The funding arrangements of the Group with banks are negotiated and monitored centrally. In January 2006 the Group extended its facilities to a total of £745m under a series of unsecured, revolving, bilateral agreements. These extended facilities have provided funding for the acquisition of AVR and will also fund the refinancing of Record’s borrowings. All funds generated by the Group’s operations are controlled by a central treasury function. Liquidity The Group’s aggregate finance facilities, including existing Fualsa loan facilities, total £756m compared to net debt of £524m. As described above, the core of these arrangements relate to the £745m unsecured facilities with the following terms: Term Within one year Within three years Within four years Total Amount (£m) 149 298 298 745 The Group’s bilateral agreements incorporate variable interest rate clauses. Historically, it has sought to manage this risk by having in place a number of financial instruments covering 30% to 40% of its borrowings at any time. The current value of financial instruments represents 60% of net debt at 30 April 2006 with an average term outstanding of two years. This coverage fell to 44% of net debt following the acquisition of Record after the year end in May 2006. In assessing the effectiveness of these instruments, the table below details the additional interest costs to the Group, based on the Group's closing net debt position at 30 April 2006 of £524m, of a series of interest rate increases, after applying the benefit of the instruments. This table is based on the cash amounts and does not take into account the effects of applying IAS 39: Increase in interest rate Additional interest costs Sterling debt Euro debt 1% 2% 3% £1.8m £3.2m £4.3m £1.4m £2.7m £4.0m Total £3.2m £5.9m £8.3m Gerard Murray Finance Director 12-13 Northgate plc Annual Report and Accounts 2006 BOARD OF DIRECTORS Appointed to the Board as a non-executive Director in November 2004, becoming Chairman in January 2005. Formerly Chief Executive of Go-Ahead Group plc since 1982. Martin Ballinger (age 62) Stephen Smith ACA (age 49) Appointed Chief Executive Officer in October 1999, having been a member of the Board since August 1997. Managing Director of vehicle hire operations since 1990. Steve qualified as a Chartered Accountant with Coopers & Lybrand and held a number of senior financial positions in industry prior to joining the Company. Appointed to the Board as a non- executive Director in February 2001. A Swedish national based in London, Jan is a Senior Independent Director of CRC Group plc. Prior to this, he was Chairman of Car Park Group AB in Stockholm and also Senior Independent Director of PHS Group plc. From 1994 to 1999 he was President and Chief Executive of Axus (International) Inc. (previously known as Hertz Leasing International). From 1989 to 1994 he was Vice President, Finance and Administration and Chief Financial Officer of Hertz (Europe) Ltd. Jan Astrand MBA (age 59) Tom Brown (age 57) Appointed to the Board as a non-executive Director in April 2005. Tom is Chairman of Chamberlin & Hill plc and a Director of a number of private companies. He was previously Group Chief Executive of United Industries plc and before that Group Managing Director of Fenner plc. Appointed Managing Director, UK Rental operations in January 2003, having been Finance Director since February 1998 and a member of the Board since August 1997. Phil joined the vehicle hire division in 1991 as Finance Director. He previously held a number of senior financial positions within the Norcros group of companies and Meyer International. Phil Moorhouse FCCA (age 53) Appointed Group Finance Director in January 2003. Gerard qualified as a Chartered Accountant with Arthur Andersen & Co before joining Reg Vardy plc in 1988, where he served as Finance Director from 1991 to 2001 and as Chief Executive from 2001 to 2002. Executive Director since 1990. In 1981 Alan founded the commercial vehicle hire business, which was acquired by the Company in 1987. Appointed to the Board as a non- executive Director in November 2003. Philip is Chairman of Aggreko plc, Carillion plc and THUS Group plc and a non-executive Director of Davis Service Group plc. He was Deputy Chairman of BG plc (formerly British Gas plc) until February 1998 having been a Director since 1992. Gerard Murray ACA (age 43) Alan Noble (age 55) Philip Rogerson (age 61) Board Committees AUDIT Philip Rogerson (Chairman) Jan Astrand Tom Brown (Appointed 8 June 2005) Ronald Williams (Resigned 28 September 2005) REMUNERATION Tom Brown (Appointed 8 June 2005 – Chairman from 1 August 2005) Jan Astrand (Chairman until 1 August 2005) Philip Rogerson Ronald Williams (Resigned 28 September 2005) NOMINATION Martin Ballinger (Chairman) Jan Astrand Tom Brown (Appointed 8 June 2005) Philip Rogerson Stephen Smith Ronald Williams (Resigned 28 September 2005) 14-15 Northgate plc Annual Report and Accounts 2006 REPORT OF THE DIRECTORS The Directors present their report and the audited financial statements for the year ended 30 April 2006. Results Profit for the year after taxation was £40,594,000 (2005 – £39,231,000). An interim dividend of 9p per share was paid on the Ordinary shares on 9 February 2006. The Directors recommend a final ordinary dividend of 14p per share making a total for the year of 23p per share. The final dividend, if approved, will be paid on 29 September 2006 to shareholders on the register at close of business on 1 September 2006. Principal activities and Business Review The Company is an investment holding company. The principal subsidiary and associated undertakings are listed in Note 18 to the accounts. Details of the acquisitions of Arriva Vehicle Rental Limited, Fleet Technique Limited and 49% of the share capital of Record Rent a Car SA are given in Note 18 to the accounts. The information that fulfils the requirements of the Business Review can be found in the Operational and Financial Reviews on pages 6 to 11, which are incorporated in this report by reference. Close company status So far as the Directors are aware the close company provisions of the Income and Corporation Taxes Act 1988 do not apply to the Company. Interests in shares The following interests of 3% or more in the issued Ordinary share capital of the Company appear in the register required to be maintained under the provisions of Section 211 of the Companies Act 1985: AEGON UK Plc Lazard Asset Management Standard Life Group Number Of Shares 3,609,506 (5.1%) 4,151,896 (5.9%) 2,717,305 (3.8%) Directors Details of the present Directors, all of whom have served throughout the year, are listed on pages 12 and 13. Mr Williams retired from the Board on 28 September 2005. Mr Smith, Mr Moorhouse and Mr Murray are retiring by rotation in accordance with the Articles of Association and, being eligible, are seeking re-election. The termination provisions in respect of executive Directors’ contracts are set out in the Remuneration Report on pages 16 to 21. The following are the interests of the Directors in the share capital of the Company as shown in the register required to be maintained under Section 325 of the Companies Act 1985. All interests are beneficial unless otherwise stated. M Ballinger S J Smith J Astrand T Brown P J Moorhouse G T Murray A T Noble P Rogerson Ordinary Shares 30 April 2006 1 May 2005 2,500 71,121 – 2,000 35,288 10,890 732,629 – 2,500 72,271 – – 34,938 10,540 732,279 – No Director has an interest in the Preference shares of the Company. No changes in the above interests have occurred between 30 April 2006 and the date of this report. Details of options held by the Directors under the Company’s various share schemes are given in the Remuneration Report on pages 16 to 21. Directors indemnities The Directors have the benefit of qualifying third party indemnity provisions contained in the Company’s Articles of Association which were in force throughout the financial year and remained in force as at the date of signing of this report. The Company’s Articles of Association are available on the Company’s website. Donations During the year the Group made charitable donations of £18,000 (2005 – £45,000) principally to local charities serving the communities in which the Group operates. No political donations were made. Payment of suppliers The Group’s policy is to pay suppliers within normal trading terms agreed with that supplier. The policy is made known to the staff who handle payments to suppliers. At 30 April 2006 the Group’s creditor days were as shown in Note 23 to the accounts. Disabled employees Applications for employment by disabled persons are given full consideration, taking into account the aptitudes of the applicant concerned. Every effort is made to try to ensure that employees who become disabled whilst already employed are able to continue in employment by making reasonable adjustments in the workplace, arranging appropriate training or providing suitable alternative employment. It is Group policy that the training, career development and promotion of disabled persons should, as far as possible, be the same as that of other employees. The Group’s equal opportunity policy is available on the Company’s website. Remuneration report As required by the Directors’ Remuneration Report Regulations 2002, the Remuneration Report, set out on pages 16 to 21, will be put to shareholders for approval at the Annual General Meeting. Power to Allot Shares A special resolution, pursuant to Section 95 of the Companies Act 1985, will be proposed to renew the authority of the Directors to allot Ordinary shares for cash other than to existing shareholders on a proportionate basis. This authority will be limited to an aggregate nominal amount of £175,000 representing approximately 5% of the current issued Ordinary share capital and will expire not later than 15 months after the date on which the resolution is passed. Authority for the Company to purchase its own shares The Directors propose to renew the general authority of the Company to make market purchases of its own shares to a total of 7,000,000 Ordinary shares (representing approximately 10% of the issued Ordinary share capital) and within the price constraints set out in the special resolution to be proposed at the Annual General Meeting. There is no present intention to make any purchase of own shares and, if granted, the authority would only be exercised if to do so would result in an improvement in earnings per share for remaining shareholders. Financial Instruments Details of the Group's use of financial instruments are given in the Financial Review on pages 10 and 11. Auditors In the case of each of the persons who are Directors of the Company at the date when this report was approved: - so far as each of the Directors is aware, there is no relevant audit information (as defined in the Companies Act 1985) of which the Company’s auditors are unaware; and - each of the Directors has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information (as defined) and to establish that the Company’s auditors are aware of that information. A resolution for the re-appointment of Deloitte & Touche LLP as auditors of the Company will be proposed at the forthcoming Annual General Meeting. This proposal is supported by the Audit Committee. By order of the Board D Henderson Secretary 3 July 2006 16-17 Northgate plc Annual Report and Accounts 2006 REMUNERATION REPORT The Remuneration Committee has written terms of reference which are available on the Company’s website. Membership of the Committee is shown on page 13. The Committee is responsible for making recommendations to the Board on the remuneration packages and terms and conditions of employment of the Chairman, the executive Directors of the Company and of the Company Secretary. The Committee also reviews remuneration policy generally throughout the Group. The Committee consults with the Chairman of the Board and with the Chief Executive who may be invited to attend meetings. The Company Secretary is secretary to the Committee. The Committee has access to external independent advice on matters relating to remuneration. During the year the Committee took advice from New Bridge Street Consultants LLP (“NBSC”) in relation to the remuneration packages of the Chairman, the executive Directors and the Company Secretary. NBSC is appointed by the Committee and undertakes no other work for the Company or the Group. The terms of engagement between the Committee and NBSC are available on request. The dates of the contracts are: S J Smith P J Moorhouse G T Murray A T Noble 8 January 2003 8 January 2003 8 January 2003 9 June 2004 In the event of early termination of an executive Director’s service contract, compensation of up to the equivalent of one year’s basic salary and benefits may be payable: there is no contractual entitlement to compensation beyond this. Directors have a duty to make reasonable efforts to mitigate any loss arising from such termination and the Committee will have regard to that duty on a case by case basis when assessing the appropriate level of compensation which may be payable. It is also the Board’s policy that where compensation on early termination is due, in appropriate circumstances it should be paid on a phased basis. Remuneration Policy Basic salaries The Committee aims to ensure that executive Directors are fairly and competitively rewarded for their individual contributions by means of basic salary, benefits in kind and pension benefits. High levels of performance are recognised by annual bonuses and the motivation to achieve the maximum benefit for shareholders in the future is provided by the allocation of share options. Only basic salary is pensionable. Executive remuneration is structured so that a significant proportion relates to variable pay. The charts below show the balance between fixed and variable performance based pay for each executive Director for the year ended 30 April 2006. Mr S J Smith Variable Fixed Mr P J Moorhouse Variable Fixed Mr G T Murray Variable Fixed Mr A T Noble Variable Fixed Flexible Benefits Scheme The Company operates a flexible benefits scheme which is designed to help in the recruitment and retention of employees by allowing them to tailor their remuneration package to best suit their individual needs. Service Contracts The executive Directors have rolling service contracts which may be terminated by 12 months notice on either side. The current basic salaries paid to the executive Directors are as follows: S J Smith P J Moorhouse G T Murray A T Noble £350,000 £240,000 £240,000 £185,000 All were last reviewed on 1 May 2006. Basic salaries are reviewed annually taking into account the performance of the individual, changes in responsibilities and market trends. The Committee has determined that the most appropriate comparator group against which to benchmark executive Directors’ basic salaries is the FTSE 250, taking into account the roles, responsibilities and experience of each Director. Accordingly, for the 2006/07 financial year, it agreed to increase executive Directors’ basic salaries by an average of 13%, to reflect the continued strong performance of the business. Even after this increase, basic salaries are below market levels. External Appointments The Board recognises that executive Directors may be invited to become non-executive Directors of other companies and that such appointments can broaden their knowledge and experience, to the benefit of the Group. Provided that it does not impact on their executive duties, Directors are generally allowed to accept one such appointment. As the purpose of seeking such positions is self-education rather than financial reward, any resulting fees would normally be expected to be paid to the Company as compensation for the time commitment involved. External appointments currently held are: P J Moorhouse – Director, Renew (North East) Limited (non fee earning) A T Noble – Director, Tees Valley Regeneration (non fee earning) Non-executive Directors Performance Graph The remuneration of the non-executive Directors (other than the Chairman) is determined by the Board as a whole, within the overall limit set by the Articles of Association. Non-executive Directors are not eligible for performance related payments nor may they participate in the Company’s share option or pension schemes. Non-executive Directors do not have contracts of service with the Company and their appointments are terminable without notice. The current fees paid to the non-executive Directors are shown below: As required by The Directors’ Remuneration Report Regulations 2002, the graph below illustrates the performance of Northgate plc measured by Total Shareholder Return (share price growth plus dividends paid) against a ‘broad equity market index’ over the last five years. As the Company is a constituent of the FTSE 250 index, that index (excluding investment companies) is considered to be the most appropriate benchmark. The mid-market price of the Company’s Ordinary shares at 30 April 2006 was 1,100p (30 April 2005 – 812.5p) and the range during the year was 812.5p to 1,245p. M Ballinger Chairman J Astrand T Brown P Rogerson Chairman of Audit Committee & Senior Independent Director Non-executive Director Chairman of Remuneration Committee £105,000 £35,000 £39,000 £41,000 All were last reviewed on 1 May 2006. The fee structure for non- executive Directors reflects the time commitment and responsibility for carrying out non-executive duties. Fees are set taking into account market practice for similar roles in FTSE 250 companies. In addition to the fees shown, Mr Astrand receives an amount of £25,000 in recognition of the additional time commitment required following his appointment as a non-executive Director of Fualsa in May 2004 and Record in August 2005. The Board does not consider that those appointments in any way affect his independence. Pension Schemes Throughout the year all pension arrangements (other than the Willhire Group Scheme – see Note 39 of the accounts) operating throughout the Group were defined contribution schemes. The Group will not incur any additional costs as a result of the introduction of Pension Simplification on 6 April 2006. The following elements of this report have been audited: Total Shareholder Return Source: Thomson Financial £ e u l a V 300 250 200 150 100 50 0 Northgate plc FTSE Mid 250 (Excl. inv. Trusts) Index 2001 2002 2003 2004 2005 2006 This graph shows the value, by 30 April 2006, of £100 invested in Northgate on 30 April 2001 compared with that of £100 invested in the FTSE 250 (Excl. inv. Trusts) Index. Salary/fees Cash bonus benefits* Cost of Chargeable expenses £000 £000 £000 £000 2006 Total £000 2005 Total £000 2006 Pension 2005 Pension contributions† contributions† £000 £000 M Ballinger F M Waring S J Smith J Astrand T Brown P J Moorhouse G T Murray A T Noble P Rogerson R Williams Total emoluments excluding pension contributions Total pension contributions 100 – 300 56 35 220 210 168 38 17 1,144 – – – 108 – – 45 55 25 – – 233 – – – 26 – – 24 23 26 – – 99 – – – 1 – – 3 – – – – 4 – 100 – 435 56 35 292 288 219 38 17 37 71 425 49 3 301 279 229 34 40 1,480 – 1,468 – – – 33 – – 31 19 24 – – – 107 *These benefits include: company car, private medical insurance, permanent health insurance and life assurance. † All contributions are to a defined contribution type scheme. – – 30 – – 29 17 23 – – – 99 18-19 Northgate plc Annual Report and Accounts 2006 REMUNERATION REPORT SHARE INCENTIVE PLANS During the year, the Committee has reviewed the Group’s share-based incentive arrangements. Following the fulfilment of the Executive Incentive Scheme (“EIS”) the Board, on the advice of the Committee adopted a Performance Share Plan (“PSP”) for the benefit of senior management at below Board level, including, for the first time, senior managers of our Spanish operations. The Group therefore now operates three share-based incentive schemes: Directors participate in the Northgate Share Option Scheme (“NSOS”) and Deferred Annual Bonus Plan (“DABP”) and below the Board, other executives in the PSP and DABP. No executives will participate in all three schemes. Expressed in face value terms, this effectively gives Directors a cap of 200% of basic salary for share awards each year (150% under the NSOS and 50% under the DABP) and other executives a cap of 150% (100% under the PSP and 50% under the DABP). With the introduction of the PSP and the changes to the rules of the NSOS approved by shareholders at last year’s Annual General Meeting, the Committee is satisfied that the share incentive arrangements now in place and the performance measures currently applying to awards are appropriate for the Group at the present time. Performance Share Plan The PSP is designed to reward achievement of and individual contribution to, the Group’s new three-year rolling business plan (“the Plan”). Participants will receive a conditional award of free shares which will vest after three years subject to achievement of performance conditions and continued employment during the vesting period. The maximum award in any financial year will normally be 100% of salary. The Committee believes that the most appropriate measure of performance against the Plan is one based on divisional or Group profit before tax, as relevant to the individual. There is a straight line sliding scale of vesting starting at 30% for 90% of target achievement rising to 100% for achieving 100% of target. The Committee has discretion to alter the performance targets to take account of any significant event occurring after the grant of an award but prior to vesting. Such events may include a major acquisition, debt restructuring or an equity issue. The first awards under the Plan, totalling 134,000 shares, were made in May 2006 to 55 executives including nine in Spain. Northgate Share Option Scheme The NSOS was originally introduced in 2000 as a medium term incentive for senior management below the Board. With the introduction of the PSP for management below Board level, it is intended that, with effect from awards made in 2006, only Directors will participate in the NSOS. In line with the rule changes approved by shareholders at last year’s Annual General Meeting, the performance condition applying to all options granted from 2005 onwards will be based on the growth in the Company’s earnings per share (“EPS”) in excess of inflation measured over a three-year period commencing with the EPS for the financial year ending immediately prior to the date of grant. This requires substantial improvement in the underlying financial performance of the Company before options may be exercised. Options over shares at grant worth 75% of basic salary or less will vest provided average annual EPS growth is at least RPI plus 5% over the performance period. Options over shares at grant worth 150% of basic salary (the maximum grant level) or less will vest provided average annual EPS growth is at least RPI plus 11% over the performance period. For grants between 75% and 150% of basic salary a pro rata sliding scale of EPS growth between 5% and 11% will apply. There is no provision for re-testing. For options granted prior to last year’s rule change, full vesting requires average annual EPS growth of at least 3% plus RPI over the three-year vesting period, with re-tests at the end of years four and five. The Committee will apply a consistent calculation methodology following the adoption of International Financial Reporting Standards. Options granted to Directors under the NSOS are shown on page 20. No options held by Directors lapsed during the year. It is proposed that an option award for 2006/07 be made in the six-week period following the announcement of the results for the year ended 30 April 2006. In addition, options over 238,500 shares granted to 55 employees at exercise prices ranging from 403.5p to 931p were outstanding at 30 April 2006. Deferred Annual Bonus Plan The DABP was introduced in 2003 for Directors and senior and middle management. Part of the bonus is delivered in cash payable immediately after the year-end and part (not normally exceeding 50% of basic salary) in the form of deferred shares awarded following the announcement of the Group’s full year results. The shares will be retained in an employee benefit trust for three years and be subject to forfeiture if the employee leaves during that time. This will provide a strong retention mechanism and has the motivational benefits of certainty and clarity for the employee. During the retention period, executives continue to have an incentive to influence the share price so as to maximise the value on release. The Directors hold deferred shares (in the form of nil cost options) in the DABP as set out on page 20. In addition, options over 93,418 shares awarded to 69 management employees were outstanding at 30 April 2006. No options held by Directors either lapsed or were exercised during the year. The bonuses for executive Directors upon which the award for the year ended 30 April 2006 was made were based upon business and individual performance, including elements based on a target of growth in underlying earnings per share of between 5% and 12%. The bonuses payable are set out below. S J Smith P J Moorhouse G T Murray A T Noble S J Smith P J Moorhouse G T Murray A T Noble Value Cash % of basic salary £000 Awarded Maximum 108 45 55 25 36 20 26 15 50 40 40 40 Value Shares % of basic salary £000 Awarded Maximum 18 11 10 8 6 5 5 5 50 40 40 40 It is intended that the number of shares to be awarded will be calculated based on the closing mid-market price on 4 July 2006, being the date of the Preliminary Results Announcement. For the financial year ending 30 April 2007 the maximum awards will be the same as for the year ended 30 April 2006. The criteria for the executive Directors for 2006/07 will be as follows: - Share element: to be based solely on underlying earnings per share improvement over the previous year. The maximum award to be made for growth of 20%, nil for growth of less than 5% and pro rata for growth between those two figures. - Cash element: to be based on individual key performance indicators relevant to their areas of responsibility and including an element of discretion by the Remuneration Committee. Bonuses for other management are based on a combination of the performance of the relevant business unit and individual key performance indicators and the maximum amounts, again expressed as a percentage of basic salary and split equally between cash and shares, range from 20% to 60% in total. During the year the Committee exercised its discretion in favour of a manager who was made redundant to enable him to exercise an award of 500 shares made to him as part of his bonus for the year ended 30 April 2005. All Employee Share Scheme The All Employee Share Scheme (“the AESS”), which is approved by H M Revenue and Customs under Schedule 8 Finance Act 2000, was introduced in 2000 to provide employees at all levels with the opportunity to acquire shares in the Company on preferential terms. The Board believes that encouraging wider share ownership by all staff will have longer-term benefits for the Company and for shareholders. The AESS operates under a trust deed, the Trustees being Capita IRG Trustees Limited (“the Capita Trust”). To participate in the AESS, which operates on a yearly cycle, employees are required to make regular monthly savings (on which tax relief is obtained), by deduction from pay, for a year at the end of which these payments are used to buy shares in the Company (“Partnership shares”). For each Partnership share acquired, the employee will receive one additional free share (“Matching shares”). Matching shares will normally be forfeited if, within three years of acquiring the Partnership shares, the employee either sells the Partnership shares or leaves the Group. After this three-year period Partnership and Matching shares may be sold, although there are significant tax incentives to continue holding the shares in the scheme for a further two years. Those employees who are most committed to the Company will therefore receive the most benefit. 20-21 Northgate plc Annual Report and Accounts 2006 REMUNERATION REPORT SHARE INCENTIVE PLANS At 1 May Number Number 2005 granted exercised Date of Exercise Share price Gross gain At 30 April 2006 exercise on date of on exercise price Normally exercisable Northgate Share Option Scheme S J Smith P J Moorhouse G T Murray 20,000 – 20,000 15,000 – 15,000 50,000 13,500 – 63,500 A T Noble – – 27,500 27,500 – 19,000 19,000 – – 19,000 19,000 17,000 – – – – – – – – – – – – (50,000) 20Feb 2006 – – – – (50,000) – 98,500 82,500 (50,000) Deferred Annual Bonus Plan S J Smith P J Moorhouse G T Murray 15,813 – 15,813 10,542 – 10,542 6,325 – 6,325 – 15,832 15,832 – 9,672 9,672 – 8,751 8,751 32,680 34,255 – – – – – – – – – – – – – – – – – – – – – – – p 663 931 – 663 931 – 380 663 931 – 931 – – – – – – – – – – – exercise p – – – – – – 1,120 – – – – – – – – – – – – – – – £ – – – – – – 370,000 – – 370,000 – 20,000 27,500 47,500 15,000 19,000 34,000 – 13,500 19,000 32,500 17,000 Aug 2007 - Feb 2009 Oct 2008 - Apr 2010 Aug 2007 - Feb 2009 Oct 2008 - Apr 2010 Aug 2007 - Feb 2009 Oct 2008 - Apr 2010 Oct 2008 - Apr 2010 370,000 131,000 Aug 2007 - Aug 2009 Oct 2008 - Oct 2010 Aug 2007 - Aug 2009 Oct 2008 - Oct 2010 Aug 2007 - Aug 2009 Oct 2008 - Oct 2010 – – – – – – – – – – 15,813 15,832 31,645 10,542 9,672 20,214 6,325 8,751 15,076 66,935 Executive Incentive Scheme S J Smith 180,000 P J Moorhouse 180,000 A T Noble 174,050 5,950 180,000 540,000 – – – – – – (45,000) 9 Nov 2005 (50,000) 20Feb 2006 (43,513) 9 Nov 2005 (2,975) 9 Nov 2005 (46,488) (141,488) – – 492.5 492.5 492.5 503.5 – – 988 220,887 135,000 Sep 2003 - Sep 2009 1,120 313,750 130,000 Sep 2003 - Sep 2009 983 983 – – 213,587 14,275 227,862 762,499 130,537 2,975 133,512 398,512 Sep 2003 - Sep 2009 Sep 2003 - Sep 2009 All Employee Share Scheme (continued) The fifth annual cycle ended in December 2005 and resulted in 553 employees acquiring 58,876 Partnership shares at 873.25p each and being allocated the same number of Matching shares. As at 30 April 2006 the Trust held 509,480 Ordinary shares that have vested to employees from the first five cycles. The sixth annual cycle started in January 2006 and currently some 724 employees are making contributions to the scheme at an annualised rate of £651,480. The performance condition for the fourth and final tranche of 30% of options to become exercisable, in September 2006, has also been satisfied. The earnings per share growth over the five financial years to 30 April 2004 was 21.7% against the 15% required. Options held by the Directors under the EIS are shown on page 20. No Directors were granted options during the year and none lapsed. In addition to those held by Directors, options over 341,446 shares granted to 33 employees at exercise prices ranging from 367.5p to 523p were outstanding at 30 April 2006. Executive Incentive Scheme Sourcing of shares The EIS, introduced in 1999, was designed to motivate those key executives in the Group most able to influence the successful implementation of our five-year Strategy for Growth, with a target to double the size of the business over the period 1999 – 2004. As measured by earnings per share, that target was achieved in 2003. As the EIS was specifically aligned to that strategy plan, no further options will be awarded under the EIS, the last options being granted in January 2002. An award under the EIS consists of a right to acquire Ordinary shares of the Company at a pre-determined price which, in normal circumstances, can be exercised, subject to a specified performance condition being satisfied, between four and ten years following the date of grant. For all the options to become exercisable, the Company’s normalised earnings per share growth over the five-year period following their grant should exceed 15% per annum. These options will normally only first become exercisable in full on the seventh anniversary of their grant and will lapse if they do not meet the prescribed level of growth over the five years. However, they become capable of earlier exercise in tranches of 20%, 25% and 25% on the fourth, fifth and sixth anniversaries of their grant if earnings per share growth has been at least 15% per annum over the two, three and four years following their grant respectively. Partial exercise of these options over a sliding scale is permitted for growth in earnings per share of between 8% and 15% per annum over these periods. In September 2005, the third tranche of 25% of options became exercisable, the performance condition having been satisfied. For this tranche to be exercisable in full a growth in earnings per share over the four financial years from 1 May 1999 to 30 April 2003 of at least 15% per annum compound was required: the actual growth achieved was 21.3%. Shares to satisfy the requirements of the Group’s share schemes are currently sourced as follows: EIS and NSOS – New issue. During the year 517,544 (2005 – 148,877) Ordinary shares were issued to satisfy the exercise of options under the two schemes. DABP and PSP – Through open market purchases by an employee benefit trust based in Guernsey (“the Guernsey Trust”). During the year 12,013 (2005 – 140,000) Ordinary shares were purchased by the Trust and 500 (2005 – 440) were used to satisfy the exercise of awards under the DABP. At 30 April 2006 the Trust held 198,073 (2005 – 186,560) Ordinary shares as a hedge against the Group’s obligations under these schemes. AESS – Through open market purchases by the Capita Trust. During the year 110,000 (2005 – 125,000) Ordinary shares were purchased by the Capita Trust and 103,229 were used to satisfy the allocation made in respect of the 2005 cycle of the scheme. In the previous cycle 125,466 shares were sourced through the Guernsey Trust in respect of the 2004 allocation. In addition 14,635 (2005 – 14,182) shares were forfeited by leavers. At 30 April 2006 the Capita Trust held 138,189 (2005 – 129,887) Ordinary shares as a hedge against the Group’s obligations under this scheme. By order of the Board D Henderson Secretary 3 July 2006 22-23 Northgate plc Annual Report and Accounts 2006 A FLEET MANAGEMENT SOLUTION Through Fleet Technique Limited, an independent company owned by Northgate plc, we are able to provide UK customers with a complete fleet management solution. Leading edge software combined with the efficiency of the World Wide Web offers the customer an efficient way to manage their entire fleet. Fuel management to vehicle registration and placing new vehicle orders can all be managed on-line. Our business is about providing customers with vehicle solutions which are flexible. Our ability to now offer fleet management has further strengthened our product portfolio. 24-25 Northgate plc Annual Report and Accounts 2006 CORPORATE GOVERNANCE UK listed companies are required by the Financial Services Authority (the designated UK Listing Authority) to include a statement in their annual accounts on compliance with the Principles of Good Corporate Governance and Code of Best Practice set out in the Combined Code (“the Code”). The provisions of the Code applicable to listed companies are divided into four parts, as set out below: 1 Directors The business of the Company is managed by the Board of Directors, currently comprising four executive and four non-executive Directors, details of whom are shown on pages 12 and 13. All the non-executive Directors are considered to be independent both in the sense outlined in the Code and in terms of the criteria laid down by the National Association of Pension Funds for judging the independence of non-executive Directors. Following the retirement of Mr Williams in September 2005, Mr Rogerson was appointed Senior Independent Director. The offices of the Chairman and Chief Executive Officer are separate. The division of their responsibilities has been set out in writing, approved by the Board and is available on the Company’s website. The Board meets regularly to review trading results and has responsibility for the major areas of Group strategy, the annual Business Plan, financial reporting to and relationships with shareholders, dividend policy, internal financial and other controls, financing and treasury policy, insurance policy, major capital expenditure, acquisitions and disposals, Board structure, remuneration policy, corporate governance and compliance. The Chairman ensures that all Directors are properly briefed to enable them to discharge their duties. In particular, detailed management accounts are prepared and copies sent to all Board members every month and, in advance of each Board meeting, appropriate documentation on all items to be discussed is circulated. Directors’ attendance at Board and Committee meetings during the year is detailed below. All Directors in office at that time were present at the Annual General Meeting held in September 2005. Attendance by executive Directors at meetings of the Audit and Remuneration Committees were by invitation. The external auditors attended three Audit Committee meetings. The internal audit manager attended two Audit Committee meetings. The non-executive Directors, including the Chairman, but without executive Directors present, met informally on three occasions during the year. In addition, the non-executive Directors met informally on one occasion during the year without the Chairman being present. Before appointment, non-executive Directors are required to assure the Board that they can give the time commitment necessary to properly fulfil their duties, both in terms of availability to attend meetings and discuss matters on the telephone and meeting preparation time. The Company’s Articles of Association provide that at each Annual General Meeting of the Company all Directors who held office at the time of the two preceding Annual General Meetings and did not retire by rotation shall be subject to re-election. In addition, any Director appointed by the Board during the year is obliged to seek re-election at the next following Annual General Meeting. The Board has established a Nomination Committee, which is chaired by Mr Ballinger. All the non-executive Directors and the Chief Executive are members. Its main function is to lead the process for Board appointments by selecting and proposing to the Board suitable candidates of appropriate calibre. The Committee would normally expect to use the services of professional search consultants to help in the search for candidates. The Committee has written terms of reference which are available on the Company’s website. There were no formal meetings of the Committee during the year. M Ballinger S J Smith J Astrand T Brown P J Moorhouse G T Murray A T Noble P Rogerson R Williams A = Maximum number of meetings the Director was entitled to attend. B = Number of meetings attended BOARD AUDIT REMUNERATION A 12 12 12 12 12 12 12 12 5 B 12 12 11 12 11 12 12 12 5 A – – 4 3 – – – 4 2 B 4 4 3 4 4 4 4 4 2 A – – 5 4 – – – 5 2 B 4 3 5 4 – – – 5 2 During the year, an evaluation process of the performance of individual Directors, of the Board as a whole and of its committees was carried out, led by the Chairman. The process consisted of a formal and detailed questionnaire completed by each Director, followed by one-to-one meetings with the Chairman. This was followed by a letter from the Chairman to each Director suggesting areas for further training, experience and intra-Board communication so as to encourage Directors individually to improve their performance and with it the performance of the Board as a whole. As a result of this process, the Chairman was satisfied that all the non-executive Directors continued to demonstrate a commitment to their role and in particular to devote adequate time to properly carry out their duties as a member of the Board and Board committees. In addition the non-executive Directors, led by the Senior Independent Director, reviewed the performance of the Chairman, taking into account the views of the executive Directors. 2 Directors’ Remuneration The Company’s policy on remuneration and details of the remuneration of each Director are given in the Remuneration Report on pages 16 to 21. 3 Accountability and Audit An assessment of the Company’s position and prospects is included in the Chairman’s Statement and in the Operational and Financial Reviews on pages 6 to 11. INTERNAL CONTROL Provision C2.1 of the Code requires the Directors to conduct an annual review of the effectiveness of the Group’s system of internal controls. The Turnbull Report, published by the ICAEW in September 1999, provides relevant guidance for directors on compliance with the internal control provisions of the Code. The Directors are responsible for the Group’s system of internal controls which aims to safeguard Group assets, ensure proper accounting records are maintained and that the financial information used within the business and for publication is reliable. Although no system of internal controls can provide absolute assurance against material misstatement or loss, the Group’s system is designed to provide the Directors with reasonable assurance that, should any problems occur, these are identified on a timely basis and dealt with appropriately. The key features of the Group’s system of internal controls, which was in place throughout the period covered by the financial statements, are described below: CONTROL ENVIRONMENT The Group has a clearly defined organisational structure within which individual responsibilities of line and financial management for the maintenance of strong internal controls and the production of accurate and timely financial management information are identified and can be monitored. Where appropriate, the business is required to comply with the procedures set out in written manuals. To demonstrate the Board’s commitment to maintaining the highest business and ethical standards and to promote a culture of honesty and integrity amongst all staff, the Board has established a confidential telephone service, operated by an independent external organisation, which may be used by all staff to report any issues of concern relating to dishonesty or malpractice within the Group. All issues reported are investigated by senior management. IDENTIFICATION OF RISKS The Board and the Group’s management have a clearly defined responsibility for identifying the major business risks facing the Group and for developing systems to mitigate and manage those risks. The control of key risk is reviewed by the Board and the Group’s management at their monthly meetings. The Board is therefore able to confirm that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, that it has been in place for the year under review and up to the date of approval of these accounts and accords with the Turnbull guidance. INFORMATION AND COMMUNICATION The Group has a comprehensive system for reporting financial results to the Board. Each operating unit prepares monthly accounts with a comparison against their business plan and against the previous year, with regular review by management of variances from targeted performance levels. A business plan is prepared by management and approved by the Board annually. Each operating unit prepares a three-year business plan with performance reported against key performance indicators on a monthly basis together with comparisons to plan and prior year. These are reviewed regularly by management. Forecasts are updated regularly throughout the year. CONTROL PROCEDURES The Board and the Group’s management have adopted a schedule of matters which are required to be brought to it for decision, thus ensuring that it maintains full and effective control over appropriate strategic, financial, organisational and compliance issues. Measures taken include clearly defined procedures for capital expenditure appraisal and authorisation, physical controls, segregation of duties and routine and ad hoc checks. MONITORING The Board has delegated to executive management implementation of the system of internal control. The Board, including the Audit Committee, receives reports on the system of control from the external auditors and from management. An independent internal audit function reports bi-annually to the Audit Committee primarily on the key areas of risk within the business. The Directors confirm that they have reviewed the effectiveness of the system of internal controls covering financial, operational and compliance matters and risk management, for the period covered by these financial statements in accordance with the guidance contained in the Turnbull Report. 26-27 Northgate plc Annual Report and Accounts 2006 CORPORATE GOVERNANCE HEALTH & SAFETY AND ENVIRONMENTAL AUDIT Details of membership of the Audit Committee is shown on page 13 and of meetings held during the year on page 24. The Committee’s terms of reference are available on the Company's website. In summary, these include: - monitoring the integrity of financial reporting; - reviewing the Group’s internal controls and risk management systems; - monitoring the effectiveness of the Group's internal audit function; - making recommendations to the Board regarding the appointment of the external auditors and approving their remuneration and terms of engagement; - monitoring the independence and objectivity of the external auditors and developing a policy for the provision of non-audit services by the external auditor; - monitoring the audit process and any issues arising therefrom. Guidance contained in the Smith Report on Audit Committees recommends that at least one member of the Committee should have appropriate financial experience and preferably a recognised professional accountancy qualification: the Chairman of the Committee currently satisfies this provision. Due to the cyclical nature of its agenda, which is linked to events in the Group's financial calendar, the Committee will generally meet four times a year. The other Directors are normally invited to attend, together with the external auditors, on at least two occasions during the year. The internal audit manager also normally makes a presentation to the Committee twice a year. Since May 2005, the Committee has: - reviewed the financial statements for the years ended 30 April 2005 and 2006 and the interim report issued in January 2006. As part of this review process, the Committee received reports from Deloitte & Touche on each occasion; - reviewed and agreed the scope of the audit work to be undertaken by Deloitte & Touche and agreed their fees; - reviewed half-yearly reports by the internal audit manager and approved the internal audit programme; - monitored an in-depth review of the Group’s risk management process and approved a new strategic risk matrix; - reviewed the work undertaken by the Group in preparation for the introduction of International Financial Reporting Standards, including the approval of the principal accounting policies and first time adoption choices to be applied to the financial statements for the year ended 30 April 2006 and the basis of valuation of the intangible assets included in acquisitions made in 2004 and 2005; - reviewed the Group's whistle blowing service; - verified the ongoing independence and objectivity of Deloitte & Touche; and - reviewed its own effectiveness. The Board's policy on non-audit work is: - Tax advisory and other audit-related work (including in particular Corporation Tax). This is work that, in their capacity as auditors, they are best placed to carry out and will generally be asked to do so. Nevertheless, where appropriate, they will be asked for a fee quote; - Non-audit related and general consultancy work. This type of work will either be placed on the basis of the lowest fee quote or to the consultants who are felt to be best able to provide the expertise and working relationship required. In certain instances, such as the appointment of consultants to provide external advice and support to the internal audit department, the auditors will not be invited to compete for the work. Fees paid and payable to Deloitte & Touche LLP in respect of the year under review are as follows: Group statutory audit fees Services relating to taxation Other 30 April 2006 £000 30 April 2005 £000 332 129 88 549 228 60 106 394 4 Relations with Shareholders Throughout the year the Company maintains a regular dialogue with institutional investors and brokers’ analysts, providing them with such information on the Company’s progress and future plans as is permitted within the guidelines of the Listing Rules. In particular, twice a year, at the time of announcing the Company’s interim and full year results, they are invited to briefings given by the Chief Executive and Finance Director. The Company’s major institutional shareholders have been advised by the Chief Executive that, in line with the provisions of the Code, the Senior Independent Director and other non-executives may attend these briefings and, in any event, would attend if requested to do so. All shareholders are given the opportunity to raise matters for discussion at the Annual General Meeting, of which more than the recommended minimum 20 working days notice is given. In recent years the Company has adopted the practice of issuing a brief statement at the Annual General Meeting, which is simultaneously released to the London Stock Exchange, on current trading conditions. In addition, the Company issues brief “pre-close” trading statements two months prior to the announcement of both its interim and full year results. Details of proxies lodged in respect of the Annual General Meeting will be published on the Company’s website immediately following the meeting. Compliance with the Code The Board considers that the Company complied with the provisions of the Code throughout the year with the exception that the Code states that at least half the Board, excluding the Chairman, should be comprised of independent non-executive Directors: the Directors believe that the current composition of the Board is effective. The Board recognises that the monitoring and control of health and safety and environmental issues forms a key part of its risk management programme. The Board has designated the Chief Executive as the person ultimately responsible to the Board for all health, safety and environmental matters throughout the Group. Responsibility for implementing the Group’s policy is devolved to depot management. The Group has adopted the principles set out in the management model “HSG 65 Successful Health and Safety Management”. This enables the Group to apply consistent health and safety standards and disciplines at all locations. Comprehensive health and safety procedures and vehicle user manuals provide guidance and advice on implementing the Group’s health and safety policy. Relevant training is provided to all employees through a rolling programme designed to promote a positive health and safety culture throughout the business. A head office steering group reviews health and safety and environmental policy issues on a regular basis, and Technical advice and support is provided by a chartered health and safety practitioner. Health and safety and environmental issues impact on the Group’s operations in two main areas: Vehicle fleet The total fleet in the UK and Republic of Ireland at 30 April 2006 was 64,000, with an average age of between 15 and 16 months, of which 14% were cars and the remainder commercial vehicles. Cars are sold after an average life of 20 months and commercial vehicles of 30 months. Our fleet is, therefore, comprised entirely of modern vehicles. Over 99% of the fleet is diesel powered. Of the cars purchased in calendar year 2005, just over 98% were Euro IV compliant. We expect this to rise to 100% in calendar year 2006. Commercial vehicle manufacturers are still debating the launch of Euro IV products but current expectations are that such products should become available in the UK in the last quarter of 2006. To encourage a safe driving culture amongst our own staff, we have arranged with the Institute of Advanced Motorists a rolling programme of driver assessment and training for all employees who have a company vehicle or who are otherwise required to drive as part of their duties. The Group was the first UK vehicle rental company to participate in the Institute of Road Transport Engineers Certification scheme for motor technicians, run in conjunction with the Society of Operation Engineers. Since 2004 over 30% of our technicians have successfully completed the course with another 15% scheduled to undergo the training in this financial year. The Group are sponsors of Brake, the road safety charity. Property As at 30 April 2006, the vehicle rental business in the UK and Republic of Ireland operated out of 88 properties, of which 35 were primary sites and 53 were branches. All but eight of these sites (all of which are branches) are located on industrial estates, so our activities have minimal impact on the local community of the areas in which we operate. A typical primary site will have an area of 1.2 acres, will comprise approximately 9,000 sq. ft. of workshops and office facilities, with the remainder hard-standing and will employ approximately 35 people. A typical branch location will have an area of 0.3 acres, have a small office (often of the portacabin type), a valet washbay and in some cases a workshop facility, again, often a modular building. They employ an average of nine people. Four of the primary sites are shared with Northgate Vehicle Sales who have a further five dedicated sales sites. Fleet Technique operate from offices in Gateshead and the Group’s head office building in Darlington accommodates all central administrative and support services. During the year all sites had an internal health, safety and environmental audit. Where appropriate, outside professional advice and services are also used: - in compliance with the Electricity at Work Regulations, a rolling programme of electrical inspections and surveys, covering all Group locations, is carried out by qualified electrical contractors; - a programme of surveys and ongoing monitoring has been put in place to meet the requirements of the 2004 Asbestos Regulations, using licensed contractors; - all workshop and hazardous waste (principally engine oils, batteries, tyres and other vehicle consumables) is collected and disposed of by a licensed waste removal contractor who has confirmed that over 94% of such waste is recycled. In addition, 100% of paper based waste from head office and all IT equipment and mobile phones are recycled; - prior to acquiring new sites, environmental risk assessments, to ISO 9000 standard, are carried out by external consultants; - all primary sites and some branch locations have above-ground fuel storage tanks. All such tanks comply with the guidelines relating to double-bunding laid down in the Environment Agency’s PPG2 regulations; - the Group is a member of the British Safety Council and a training programme leading to the British Safety Council Level 1 Certificate in Health and Safety is being implemented, initially for managerial staff, then progressively to all employees across the UK. During the year under review, no major incidents (classed as those resulting in death, serious injury or significant pollution) occurred at any of our locations. No health and safety enforcement notices were served on any company in the Group. There was one conviction for a minor offence under the Road Traffic Act. Following a Merit award in 2005, the Group has received a Silver award in 2006 from the Royal Society for the Prevention of Accidents for demonstrating the effective implementation of safety arrangements within the organisation. We are currently undertaking a review of health and safety and environmental arrangements at Fualsa and Record with a view to ensuring a consistent approach at our Spanish operations. 28-29 Northgate plc Annual Report and Accounts 2006 DIRECTORS’ RESPONSIBILTIES REPORT OF THE AUDITORS 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 Report of the Directors and Directors’ Remuneration Report which comply with the Companies Act 1985. The Directors are responsible for the maintenance and integrity of the Group website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Going concern The accounts have been prepared on a going concern basis as the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Statement of Directors' Responsibilities The Directors are responsible for preparing the annual report and accounts. The Directors are required to prepare financial statements for the Group in accordance with International Financial Reporting Standards (“IFRS”) and have also elected to prepare financial statements for the Company in accordance with IFRS. Company law requires the Directors to prepare such financial statements in accordance with IFRS, the Companies Act 1985 and Article 4 of the IAS Regulation. International Accounting Standard 1 requires that the 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 IFRS. 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 where compliance with the specific requirements of IFRS are insufficient to enable users to understand the impact of a particular transaction, other events and conditions on the entity’s financial statements. We have audited the Group and individual Company financial statements (“the financial statements”) of Northgate plc for the year ended 30 April 2006, which comprise the consolidated income statement, the consolidated and individual Company balance sheets, the consolidated and individual Company cash flow statements, the consolidated and individual Company statements of recognised income and expense and statements of changes in shareholders’ equity and the related Notes 1 to 42. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors' Remuneration Report that is described as having been audited. This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors The Directors’ responsibilities for preparing the annual report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and International Financial Reporting Standards (“IFRS”) as adopted for use in the European Union are set out in the Statement of Directors’ Responsibilities. Our responsibility is to audit the financial statements and the part of the Directors’ Remuneration Report described as having been audited in accordance with relevant United Kingdom legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view in accordance with the relevant financial reporting framework and whether the financial statements and the part of the Directors’ Remuneration Report described as having been audited have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We report to you whether, in our opinion, the information given in the Report of the Directors is consistent with the financial statements. We also 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 also report to you if, in our opinion, the Company has not complied with any of the four Directors’ remuneration disclosure requirements specified for our review by the Listing Rules of the Financial Services Authority. These comprise the amount of each element in the remuneration package and information on share options, details of long term incentive schemes, and money purchase and defined benefit pension schemes. We give a statement, to the extent possible, of details of any non-compliance. We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the 2003 FRC Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group's corporate governance procedures or its risk and control procedures. We read the other information contained in the annual report including the unaudited part of the Directors' Remuneration Report and we consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. We report to you whether in our opinion the information given in the Report of the Directors is consistent with the financial statements. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’ Remuneration Report described as having been audited. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the financial statements and of whether the accounting policies are appropriate to the Company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ Remuneration Report described as having been audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors’ Remuneration Report described as having been audited. Opinion In our opinion: - the Group financial statements give a true and fair view, in accordance with IFRS as adopted for use in the European Union, of the state of the Group's affairs as at 30 April 2006 and of its profit for the year then ended; - the individual Company financial statements give a true and fair view, in accordance with IFRS 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 April 2006; and - the financial statements and the part of the Directors’ Remuneration Report described as having been audited have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and - the information given in the Report of the Directors is consistent with the financial statements. Separate opinion in relation to IFRS As explained in Note 2 to the financial statements, the Group, in addition to complying with its legal obligation to comply with IFRS as adopted for use in the European Union, has also complied with the IFRS as issued by the International Accounting Standards Board. Accordingly, in our opinion the financial statements give a true and fair view, in accordance with IFRS, of the state of the Group’s affairs as at 30 April 2006 and of its profit for the year then ended. Deloitte & Touche LLP Chartered Accountants and Registered Auditors Leeds 3 July 2006 30-31 Northgate plc Annual Report and Accounts 2006 FINANCIAL STATEMENTS 32-33 Northgate plc Annual Report and Accounts 2006 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 30 APRIL 2006 BALANCE SHEETS AS AT 30 APRIL 2006 Revenue Cost of sales Gross profit Administrative expenses (excluding amortisation) Amortisation Total administrative expenses Profit from operations Investment income Finance costs Share of profit before taxation of associate Share of taxation of associate Share of profit of associate Profit before taxation Taxation Profit for the year Notes 4,5 5 5,6 15 7 9 10 19 11 34 2006 £000 372,609 (248,051) 124,558 (50,733) (1,227) (51,960) 72,598 2,047 (22,125) 4,964 (1,422) 3,542 56,062 (15,468) 40,594 2005 £000 339,382 (215,097) 124,285 (47,193) (855) (48,048) 76,237 1,814 (23,063) – – – 54,988 (15,757) 39,231 Profit for the year is wholly attributable to equity holders of the parent Company. All results arise from continuing operations. Earnings per share Basic Diluted 13 13 61.1p 60.6p 60.7p 60.3p STATEMENTS OF RECOGNISED INCOME AND EXPENSE FOR THE YEAR ENDED 30 APRIL 2006 Notes Group Company Gains on revaluation of land and properties Revaluation of foreign currency denominated investment in subsidiary undertaking upon inception of hedge Foreign exchange differences on retranslation of net assets of subsidiary undertakings Foreign exchange differences on retranslation of investments in subsidiary undertakings Foreign exchange differences on retranslation of interest in associate Net foreign exchange differences on long term borrowings held as hedges Net fair value gains on cash flow hedges Share options fair value amount credited directly to equity Net deferred tax credit recognised directly in equity Actuarial gains on defined benefit pension scheme Net income recognised directly in equity Profit attributable to equity holders Total recognised income and expense for the year 17 33 33 33 32 26 39 2006 £000 – – 1,303 – 413 (1,571) 2,956 20 882 356 4,359 40,594 44,953 2005 £000 1,031 – (153) – – 1,635 – 88 1,084 – 3,685 39,231 42,916 2006 £000 – – – 646 413 (1,059) 2,554 20 882 – 3,456 41,059 44,515 2005 £000 – 1,371 – (1,389) – 1,389 – 88 311 – 1,770 12,767 14,537 Notes Group Company Non-current assets Goodwill Other intangible assets Property plant and equipment: vehicles for hire Other property, plant and equipment Total property, plant and equipment Investments Interest in associate Current assets Inventories Trade and other receivables Cash and cash equivalents Non-current assets classified as held for sale Total assets Current liabilities Trade and other payables Tax liabilities Short term borrowings Non-current liabilities Long term borrowings Deferred tax liabilities Retirement benefit obligation Total liabilities Net assets Equity Share capital Share premium account Revaluation reserve Own shares Merger reserve Hedging reserve Translation reserve Retained earnings Total equity 14 15 16 17 18 19 20 21 22 23 24 24 26 39 27 28 29 30 31 32 33 34 2006 £000 2005 £000 44,582 18,208 643,824 50,236 694,060 – 41,927 798,777 8,918 116,939 24,048 149,905 14,705 963,387 57,584 19,715 30,024 12,448 4,866 531,843 37,851 569,694 – – 587,008 6,696 92,841 41,375 140,912 11,464 739,384 44,769 7,231 48,410 107,323 100,410 518,485 15,846 1,444 535,775 643,098 320,289 3,538 64,998 1,054 (3,331) 67,463 2,956 1,627 181,984 320,289 403,819 10,124 – 413,943 514,353 225,031 3,209 62,544 1,054 (2,471) 4,721 – 1,482 154,492 225,031 2006 £000 – – – 3,012 3,012 257,221 – 260,233 – 509,359 8,945 518,304 – 2005 £000 – – – 3,056 3,056 103,234 – 106,290 – 375,866 46,180 422,046 – 778,537 528,336 8,084 – 25,982 34,066 515,937 – – 515,937 550,003 228,534 3,538 64,998 1,371 – 63,159 2,554 – 92,914 8,248 – 18 8,266 388,139 – – 388,139 396,405 131,931 3,209 62,544 1,371 – 417 – – 64,390 228,534 131,931 Total equity is wholly attributable to equity holders of the parent Company. The financial statements were approved by the Board of Directors and authorised for issue on 3 July 2006. They were signed on its behalf by: M Ballinger Director G T Murray Director 34-35 Northgate plc Annual Report and Accounts 2006 CASH FLOW STATEMENTS FOR THE YEAR ENDED 30 APRIL 2006 NOTES TO THE CASH FLOW STATEMENTS FOR THE YEAR ENDED 30 APRIL 2006 Net cash from operating activities (a) 172,178 150,457 (20,278) (16,084) Profit (loss) from operations Group Company 2006 £000 2005 £000 2006 £000 2005 £000 (a) Net cash from operating activities Investing activities Interest received Dividends received from subsidiary undertakings Proceeds from disposal of vehicles for hire Purchases of vehicles for hire Proceeds from disposal of other property, plant and equipment Purchases of other property, plant and equipment Purchases of intangible assets Acquisitions of subsidiary undertakings, including net cash and bank overdraft balances acquired Purchase of investments in subsidiary undertakings Purchase of interest in associate Net cash (used in) from investing activities Financing activities Dividends paid Repayments of obligations under finance leases New finance lease agreements Increase in bank loans and other borrowings Loans to subsidiary undertakings Proceeds from issue of share capital Proceeds from sale of own shares Payments to acquire own shares Net cash from financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at 1 May Effect of foreign exchange movements Cash and cash equivalents at 30 April (b) 1,931 – 150,849 (306,273) 3,307 (12,208) (927) (130,047) – (37,972) (331,340) (13,459) (36,994) – 130,988 – 65,525 511 (1,371) 145,200 (13,962) 34,057 164 20,259 1,957 – 116,895 (274,517) 378 (7,613) (19) (19,353) – – (182,272) (11,874) (279,243) 93,663 221,166 – 722 – (1,141) 23,293 (8,522) 42,675 (96) 34,057 13,603 – – – – (18) – – (50,316) (37,972) (74,703) (13,459) – – 63,202 (70,430) 65,525 – – 44,838 (50,143) 46,162 – (3,981) 10,052 15,500 – – – – – – (15,143) – 10,409 (11,874) – – 21,330 (2,652) 722 – – 7,526 1,851 44,311 – 46,162 Adjustments for: Depreciation of property, plant and equipment Exchange differences Amortisation of intangible assets (Gain) loss on disposal of property, plant and equipment Defined benefit pension credit Share options fair value amount credited directly to equity Operating cash flows before movements in working capital (Increase) decrease in inventories (Increase) decrease in receivables Increase (decrease) in payables Cash generated from (used in) operations Income taxes paid Interest paid Net cash from operating activities (b) Cash and cash equivalents Group Company 2006 £000 72,598 136,209 (16) 1,227 (209) (386) 20 209,443 (2,191) (1,131) 3,139 209,260 (15,156) (21,926) 172,178 2005 £000 76,237 120,831 – 855 39 – 88 198,050 1,665 (7,735) (3,634) 188,346 (15,241) (22,648) 150,457 2006 £000 2005 £000 (4,082) (4,186) 62 – – 710 – 20 (3,290) – 1,257 (230) (2,263) – (18,015) (20,278) 61 – – (324) – 88 (4,361) – (2,577) 297 (6,641) – (9,443) (16,084) Cash and cash equivalents consist of cash in hand and at bank, investments in money market instruments and bank overdrafts. Bank overdrafts are included within cash equivalents on the grounds that they are repayable on demand and form an integral part of the Group’s cash management. Cash and cash equivalents, as described above, included in the cash flow statement comprise the following balance sheet amounts. Cash in hand and at bank Short term investments Gross cash and cash equivalents as reported Bank overdrafts Net cash and cash equivalents Group Company 2006 £000 22,201 1,847 24,048 (3,789) 20,259 2005 £000 39,601 1,774 41,375 (7,318) 34,057 2006 £000 8,945 – 8,945 (12,926) (3,981) 2005 £000 46,180 – 46,180 (18) 46,162 36-37 Northgate plc Annual Report and Accounts 2006 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 APRIL 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 Amounts attributable to equity holders of the parent Company Gains on revaluation of land and properties Foreign exchange differences on retranslation of net assets of subsidiary undertakings Foreign exchange differences on retranslation of interest in associate Net foreign exchange differences on long term borrowings held as hedges Net fair value gains on cash flow hedges Share options fair value amount credited directly to equity Actuarial gains on defined benefit pension scheme Net deferred tax credit recognised directly in equity Net income recognised directly in equity Profit attributable to equity holders Total recognised income and expense for the year Dividends paid Issue of Ordinary share capital (net of expenses) Net increase in own shares held Net changes in total equity Opening total equity as at 1 May Transitional adjustment on adoption of IAS 32 & IAS 39 Opening total equity after adoption of IAS 32 & IAS 39 Closing total equity as at 30 April Notes 17 33 33 33 32 39 26 12 27, 28, 31 30 42 2006 £000 – 1,303 413 (1,571) 2,956 20 356 882 4,359 40,594 44,953 (13,437) 65,525 (860) 96,181 225,031 (923) 224,108 320,289 2005 £000 1,031 (153) – 1,635 – 88 – 1,084 3,685 39,231 42,916 (11,916) 722 (1,141) 30,581 194,450 – 194,450 225,031 COMPANY STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 APRIL 2006 Notes 2006 £000 2005 £000 Amounts attributable to equity holders of the parent Company Revaluation of foreign currency denominated investment in subsidiary undertaking upon inception of hedge Foreign exchange differences on retranslation of investments in subsidiary undertakings Foreign exchange differences on retranslation of interest in associate Net foreign exchange differences on long term borrowings held as hedges Net fair value gains on cash flow hedges Adjustment for share options granted Net deferred tax credit recognised directly in equity 29 33 33 33 32 26 Net income recognised directly in equity Profit attributable to equity holders Total recognised income and expense for the year Dividends paid Issue of Ordinary share capital (net of expenses) Net changes in total equity Opening total equity as at 1 May Closing total equity as at 30 April 12 27, 28, 31 – 646 413 (1,059) 2,554 20 882 3,456 41,059 44,515 (13,437) 65,525 96,603 131,931 228,534 1,371 (1,389) – 1,389 – 88 311 1,770 12,767 14,537 (11,916) 722 3,343 128,588 131,931 (1) General information Northgate plc is a Company incorporated in England and Wales under the Companies Act 1985. The address of the registered office is given on page 88. The nature of the Group’s operations and its principal activities are set out in Note 5 and in the Operational and Financial reviews on pages 6 to 9. The financial statements are presented in UK Sterling because this is the currency of the primary economic environment in which the Group operates. Foreign operations are included in accordance with the policies set out in Note 2. At the date of authorisation of these financial statements, the following Standards and Interpretations, which have not been applied in these financial statements were in issue but not yet effective: IFRS 7 Financial instruments: Disclosures IAS 1 Presentation of financial statements (Amendment on capital disclosures) The Directors anticipate that the adoption of the Standard and Interpretations in future periods will have no material impact on the financial statements of the Group except for additional disclosures on capital and financial instruments when the relevant standards come into effect for periods commencing on or after 1 January 2007. (2) Principal accounting policies Statement of compliance and first time adoption choices The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and their interpretations adopted by the International Accounting Standards Board (IASB). These are the Group’s first consolidated financial statements prepared under IFRS and IFRS1 has been applied. The disclosures required by IFRS1 concerning the transition from UK GAAP to IFRS are given in Note 42. Basis of preparation The financial information has been prepared on the historical cost basis, except for the revaluation of certain land and buildings and the treatment of certain financial instruments. Basis of consolidation Subsidiary undertakings are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of the entity so as to obtain benefits from its activities. The consolidated financial statements include the financial statements of the Company and its undertakings made up to 30 April 2005 and 30 April 2006. The results of new subsidiary undertakings are included from the dates of acquisition. Where an entity has ceased to be a subsidiary undertaking during the year, its results are included to the date of cessation. On acquisition, the assets, liabilities and contingent liabilities of a subsidiary undertaking are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. discount on acquisition) is credited to the income statement in the period of acquisition. The interest of minority shareholders is stated at the minority’s proportion of the fair values of the assets and liabilities recognised. Subsequently any losses applicable to the minority interest in excess of the minority interest are allocated against the interests of the parent. Where necessary, adjustments are made to the financial statements of subsidiary undertakings to bring the accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Revenue recognition Group revenue is measured at the fair value of the consideration received or receivable in respect of the hire of vehicles and the supply of related goods and services in the normal course of business, net of value added tax and discounts. Revenue from vehicle rentals is recognised evenly over the rental period and revenue from sales of other related goods and services is recognised at the point of sale. Goodwill All business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiary undertakings and interests in associates and is the difference between the cost of the acquisition and the fair value of the net identifiable assets and liabilities acquired. Goodwill is stated at cost less any accumulated impairment losses identified through an annual test for impairment. Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal. 38-39 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (2) Principal accounting policies (continued) Intangible assets – arising on business combinations Amortisation of intangible assets is charged to the income statement on a straight-line basis over the estimated useful lives of each intangible asset. Intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows: Customer relationships Brand names Non-compete agreements Intangible assets – other 5 to 13 years 5 to 10 years 2 to 4 years Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Software assets are amortised over their estimated useful lives, which do not exceed three years. Property, plant and equipment Property, plant and equipment is stated at historical cost less accumulated depreciation and any provision for impairment. Depreciation is provided so as to write off the cost of assets to residual values on a straight-line basis over the assets’ useful estimated lives as follows: Freehold buildings Leasehold buildings 50 years Over 50 years or over the life of the lease Plant, equipment and fittings Over 8 to 10 years Vehicles for hire Motor vehicles 3 to 6 years 3 to 6 years Vehicles for hire are depreciated on a straight-line basis using depreciation rates that reflect economic lives of between three and six years. These depreciation rates have been determined with the anticipation that the net book values at the point the vehicles are transferred into non-current assets held for sale is in line with the open market values for those vehicles. Depreciation charges are adjusted for any differences that arise between net book values and open market values of used vehicles upon transfer into non-current assets held for sale, taking into account the further direct costs to sell the vehicles. Property under construction is not depreciated. Depreciation commences when these assets are ready for their intended use. Freehold land is not depreciated. Depreciation on revalued buildings is charged to the income statement. On the subsequent sale or retirement of a revalued property, the attributable revaluation surplus remaining in the revaluation reserve is transferred directly to retained earnings. The residual value, if not insignificant, is reassessed annually. Non-current assets held for sale Non-current assets classified as held for sale are valued at the lower of carrying amount or fair value less estimated costs to sell. Non-current assets are classified as held for sale if their carrying amount will be recovered through a sales transaction. Fixed asset investments Fixed asset investments are shown at cost less any provision for impairment. Impairment At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). The recoverable amount is the higher of fair value less selling costs and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (2) Principal accounting policies (continued) Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Financial instruments and hedge accounting Financial assets and liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provision of the instrument. Trade receivables are non-interest bearing and are stated at their nominal value less any appropriate provision for irrecoverable amounts. Trade payables are non-interest bearing and are stated at their nominal value. The Group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. Derivative financial instruments are stated at fair value. Any gain or loss on remeasurement to fair value is recognised immediately in the income statement. However, where derivatives qualify for hedge accounting, recognition of resultant gain or loss depends on the nature of the items being hedged. The fair value of interest rate derivatives is the estimated amount that the Group would receive or pay to terminate the derivative at the balance sheet date, taking into account current interest rates and the current creditworthiness of the derivative counterparties. Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised directly in equity, and the ineffective portion is recognised in the income statement. If the cash flow hedge of a firm commitment or forecasted transaction results in the recognition of an asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the asset or liability. For hedges that do not result in recognition of an asset or a liability, amounts deferred in equity are recognised in the income statement in the same period in which the hedged item affects net profit or loss. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement as they arise. Hedge accounting for cash flow hedges is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement as a net profit or loss for the period. Bank loans and issue costs An impairment loss is recognised in the income statement whenever the carrying amount of an asset exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash generating units and then to reduce the carrying amount of other assets in the unit on a pro rata basis. Bank loans are stated at the amount of proceeds after deduction of issue costs, which are amortised over the period of the loan. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for in the income statement on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Inventories Inventories comprise spare parts and consumables and are valued at the lower of cost or net realisable value. Net realisable value represents the estimated selling price less costs to be incurred in marketing, selling and distribution. 40-41 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (2) Principal accounting policies (continued) Foreign currencies Transactions in foreign currencies other than UK Sterling are recorded at the rate prevailing at the date of the transaction or at the contracted rate if the transaction is covered by a forward exchange contract. At each balance sheet date, monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange prevailing at the balance sheet date or, if appropriate, at the forward contract rate and any variances are reflected in the income statement. The accounts of overseas subsidiary undertakings are translated into UK Sterling at the rate of exchange ruling at the balance sheet date. The exchange difference arising on the retranslation of opening net assets is recognised directly in equity. All other translation differences are taken to the income statement with the exception of differences in equity on foreign currency borrowings to the extent that they are used to finance or provide a hedge against Group equity investments in foreign enterprises, which are recognised directly in equity, together with the exchange difference on the net investment in these enterprises. The results of overseas subsidiary undertakings and joint ventures are translated into UK Sterling using average exchange rates for the financial period and variances compared with the exchange rate at the balance sheet date are recognised directly in equity. The Company maintains certain borrowings in the same currency as the functional currency of its overseas subsidiary undertaking, as a hedge against the net assets of the subsidiary. These borrowings are translated into UK Sterling using the exchange rate prevailing at the balance sheet date. Any variances are recognised directly in equity. Goodwill and fair value adjustments, arising on acquisition of a foreign entity, are treated as assets and liabilities of the foreign entity. They are denominated in the functional currency of the foreign entity and translated at the exchange rate prevailing at the balance sheet date, with any variances reflected directly in equity. All foreign exchange differences reflected directly in equity are shown in the currency translation reserve component of equity. Leasing and hire purchase commitments As Lessee: Assets held under finance leases and hire purchase contracts are capitalised in the balance sheet at their fair value or, if lower, the present value of the future minimum lease payments and are depreciated over their useful economic lives using Group policies. The capital elements of future obligations under finance leases and hire purchase contracts are included as liabilities in the balance sheet. The interest elements of the rental obligations are charged to the income statement over the periods of the leases and hire purchase contracts so as to produce a constant rate of return on the outstanding balance. Rentals payable under operating leases are charged to the income statement on a straight-line basis over the lease term. As Lessor: Motor vehicles and equipment leased to certain customers under operating leases are included within property, plant and equipment. Income from such leases is taken to the income statement evenly over the period of the operating lease agreement. Retirement benefit costs The Group predominantly operates defined contribution pension schemes and has one defined benefit scheme as a result of the acquisition of Northgate (AVR) Limited (formerly Arriva Vehicle Rental Limited) as detailed in Note 35. Contributions in respect of defined contribution arrangements are charged to the income statement in the period they fall due. Pension contributions in respect of one of these arrangements are held in trustee administered funds, independently of the Group’s finances. For the defined benefit scheme, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside the income statement and presented in the statement of recognised income and expense. Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight line basis over the average period until the benefits become vested. 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 the scheme assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future contributions to the scheme. The Group also operate Group personal pension plans. Employee share schemes and share based payments The Group has applied the requirements of IFRS 2 (Share-based Payment). In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 30 April 2005. The Group issues equity-settled and cash-settled share-based payments to certain employees. NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (2) Principal accounting policies (continued) Equity-settled employee schemes, including employee share options and deferred annual bonuses, provide employees with the option to acquire shares of the Company. Employee share options and deferred annual bonuses are generally subject to performance or service conditions. The fair value of equity-settled share-based payments is measured at the date of grant and charged to the income statement over the period during which performance or service conditions are required to be met, or immediately where no performance or service criteria exist. The fair value of equity-settled share-based payments granted is measured using the Black-Scholes model. The amount recognised as an expense is adjusted to reflect the actual number of employee share options that vest, except where forfeiture is only due to market based performance criteria not being met. For cash-settled share-based payments a liability equal to the portion of the goods or services received is recognised at the current fair value determined at each balance sheet date. The Group also operates a Share Incentive Plan (SIP) under which employees each have the option to purchase an amount of shares annually and receive an equivalent number of free shares. The Group recognises the free shares as an expense evenly throughout the period over which the employees must remain in the employ of the Group in order to receive the free shares. Dividends Dividends on Ordinary shares are recognised as a liability in the period in which they are either paid or formally approved, whichever is earlier. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (3) Critical accounting judgments and key sources of estimation uncertainty In the process of applying the Group’s accounting policies, which are described in Note 2, the Directors have made the following judgments that have the most significant effect on the amounts recognised in the financial statements. Depreciation Vehicles for hire are depreciated on a straight-line basis using depreciation rates that reflect economic lives of between three and six years. These depreciation rates have been determined with the anticipation that the net book values at the point the vehicles are transferred into non-current assets held for sale is in line with the open market values for those vehicles. Under IAS 16, the Group is required to review its depreciation rates and estimated useful lives regularly to ensure that the net book value of disposals of tangible fixed assets are broadly equivalent to their market value. Depreciation charges are adjusted for any differences that arise between net book values and open market values of used vehicles upon transfer into non-current assets held for sale, taking into account the further direct costs to sell the vehicles. Intangible assets Amortisation of intangible assets is charged to the income statement on a straight-line basis over the estimated useful lives of each intangible asset. The Directors have made assumptions with regard to the evidence in the market, at the time of acquisitions, when determining these estimated useful lives. The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below. Goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the cash generating units to which goodwill has been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from each cash generating unit and a suitable discount rate in order to calculate present value. The carrying value of goodwill at the balance sheet date was £44,582,000 (Note 14). 42-43 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (4) Revenue All revenue recognised is from the rendering of services. (5) Business and geographical segments Business segments NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (6) Restructuring costs In February 2006, the Group acquired the entire issued share capital of Northgate (AVR) Limited (formerly Arriva Vehicle Rental Limited) (Note 35). To the extent that employees could not be integrated, termination terms were agreed and, to the extent that properties would not be utilised in the future, amounts have been provided in respect of onerous contracts. For management purposes, the Group currently has one material business segment, which is the hire of vehicles. As such, the Directors consider that this is the only business segment on which the Group should report. Geographical segments The Group’s operations are located in the United Kingdom, Republic of Ireland and Spain. The Directors consider the United Kingdom and Republic of Ireland to be a single geographical segment on the grounds that the results and net assets of operations in the Republic of Ireland are immaterial to the Group as a whole. The results of the associate in the current year all arose in Spain. Redundancy costs (net of pension credit – see Note 39) Onerous contracts Revenue Gross profit Administrative expenses Amortisation Profit from operations Investment income Finance costs Share of profit of associate Profit before taxation Other Information Capital additions Depreciation Balance Sheet Segment assets Interest in associate Consolidated total assets Segment liabilities Revenue Gross profit Administrative expenses Amortisation Profit from operations Investment income Finance costs Profit before taxation Other Information Capital additions Depreciation Balance Sheet Segment assets Segment liabilities UK & Republic of Ireland 2006 £000 300,771 102,724 (43,883) (692) 58,149 Spain 2006 £000 71,838 21,834 (6,850) (535) 14,449 239,304 113,537 75,374 22,672 726,536 194,924 482,187 160,911 UK & Republic of Ireland 2005 £000 283,414 103,509 (40,646) (321) 62,542 240,474 103,712 583,771 382,970 Spain 2005 £000 55,968 20,776 (6,547) (534) 13,695 63,009 17,119 155,613 131,383 Total 2006 £000 372,609 124,558 (50,733) (1,227) 72,598 2,047 (22,125) 3,542 56,062 314,678 136,209 921,460 41,927 963,387 643,098 Total 2005 £000 339,382 124,285 (47,193) (855) 76,237 1,814 (23,063) 54,988 303,483 120,831 739,384 514,353 The above amounts have been included within administrative expenses in the income statement. (7) Profit from operations Profit from operations is stated after charging (crediting): Depreciation of property, plant and equipment Amortisation of intangible assets Net foreign exchange gains Restructuring costs Staff costs Auditors’ remuneration for audit services (see below) Amounts payable to Deloitte & Touche LLP and their associates by the Company and its subsidiary undertakings in respect of non-audit services Notes 16, 17 15 6 8 Further detailed analysis of auditors’ remuneration on a worldwide basis is provided below: Audit services – statutory reporting Tax services – compliance services – advisory services Other services 2006 £000 1,673 934 2,607 2005 £000 – – – 2006 £000 2005 £000 136,209 1,227 (16) 2,607 62,699 332 120,831 855 – – 52,366 228 217 166 2006 £000 332 332 55 74 129 88 549 2005 £000 228 228 60 – 60 106 394 A description of the work of the audit committee is set out in the corporate governance statement on pages 24 to 26 and includes an explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the auditors. 44-45 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (8) Staff costs (11) Taxation The average number of persons employed by the Group: United Kingdom and Republic of Ireland: Direct operations Administration Spain: Direct operations Administration Their aggregate remuneration comprised: Wages and salaries Social security costs Other pension costs (9) Investment income Interest on bank and other deposits Change in fair value of interest rate derivatives (Note 25) (10) Finance costs Interest on bank overdrafts and loans Interest on obligations under finance leases Amortisation of deferred consideration (Note 24) Total borrowing costs Preference share dividends 2006 Number 2005 Number 1,647 489 2,136 323 68 391 2,527 2006 £000 54,678 6,575 1,446 62,699 2006 £000 1,744 303 2,047 2006 £000 20,220 1,345 535 1,476 387 1,863 250 56 306 2,169 2005 £000 45,855 5,386 1,125 52,366 2005 £000 1,814 – 1,814 2005 £000 16,551 5,998 489 22,100 23,038 25 22,125 25 23,063 Current tax: UK corporation tax Overprovision from prior years Foreign tax Deferred tax: Current year Adjustment in respect of prior years 2006 £000 13,615 (270) 1,390 14,735 247 486 733 2005 £000 15,308 (1,214) 1,696 15,790 (807) 774 (33) 15,468 15,757 Corporation tax is calculated at 30% (2005 – 30%) of the estimated assessable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in those respective jurisdictions. The charge for the year can be reconciled to the profit before taxation as stated in the income statement as follows: Profit before taxation Tax at the UK corporation tax rate of 30% (2005 – 30%) Tax effect of expenses that are not deductible in determining taxable profit Amortisation charge not deductible in determining taxable profit Difference in taxation in overseas subsidiary undertakings Tax effect of share of results of associate Adjustment to tax charge in respect of prior years Tax expense and effective tax rate for the year 2006 £000 56,062 16,819 753 368 (1,631) (1,057) 216 15,468 % 30.0 1.3 0.7 (2.9) (1.9) 0.4 27.6 2005 £000 54,988 16,496 474 257 (1,030) – (440) 15,757 % 30.0 0.9 0.5 (1.9) – (0.8) 28.7 In addition to the amount charged to the income statement, a deferred tax asset relating to share options of £882,000 (2005 – £901,000) has been credited directly to equity (Note 26). A further deferred tax asset of £183,000 relating to holiday pay was credited directly to equity upon the transition of the Group to IFRS on 1 May 2004. (12) Dividends Amounts recognised as distributions to equity holders of the parent Company Final dividend for the year ended 30 April 2005 of 12p per share Interim dividend for the year ended 30 April 2006 of 9p per share Final dividend for the year ended 30 April 2004 of 10.6p per share Interim dividend for the year ended 30 April 2005 of 8p per share 2006 £000 7,676 5,761 – – 13,437 2005 £000 – – 6,780 5,136 11,916 The proposed final dividend of 14p per share is subject to approval by the shareholders at the Annual General Meeting and has not been included as a liability as at 30 April 2006. 46-47 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (13) Earnings per share (14) Goodwill (continued) 2006 2005 Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefit from the business combination. Before recognition of impairment losses, the carrying amount of goodwill has been allocated as follows: (a) Basic and diluted earnings per share The calculation of basic and diluted earnings per share is based on the following data: Earnings Earnings for the purposes of basic and diluted earnings per share, being net profit attributable to equity holders of the parent Number of shares Weighted average number of Ordinary shares for the purposes of basic earnings per share Effect of dilutive potential Ordinary shares: – share options Weighted average number of Ordinary shares for the purposes of diluted earnings per share Basic earnings per share Diluted earnings per share (b) Earnings per share before amortisation and exceptional restructuring costs Earnings for the purposes of basic earnings per share (above) Amortisation Exceptional restructuring costs (net of UK corporation tax at 30%) Earnings for the purpose of basic earnings per share before amortisation and exceptional restructuring costs Basic earnings per share before amortisation and exceptional restructuring costs Diluted earnings per share before amortisation and exceptional restructuring costs (14) Goodwill Group Cost: As at 1 May Exchange differences Recognised on acquisitions of subsidiary undertakings (Note 35) As at 30 April £000 £000 40,594 39,231 Number Number 66,481,499 64,598,909 464,060 465,690 66,945,559 65,064,599 61.1p 60.6p £000 40,594 1,227 1,825 43,646 65.7p 65.2p 2006 £000 12,448 490 31,644 44,582 60.7p 60.3p £000 39,231 855 – 40,086 62.1p 61.6p 2005 £000 6,274 – 6,174 12,448 Group Northgate (AVR) Limited Furgonetas de Alquiler SA (“Fualsa”) Fleet Technique Limited Other UK vehicle hire companies 2006 £000 28,055 9,670 3,589 3,268 44,582 2005 £000 – 9,180 – 3,268 12,448 The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined from the value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period. The Directors estimate discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGUs. The growth rates are based on industry growth rates forecasts. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market. The Group prepares cash flow forecasts derived from the most recent financial budgets approved by the Directors and extrapolates cash flows for the periods indicated below. The relevant growth rates and discount rates applied to each CGU are set out below: Growth Rate Discount Rate Cash Flow Period Northgate (AVR) Limited Fualsa Fleet Technique Limited Other UK vehicle hire companies Nil 4% 25% Nil 8% 8% 8% 8% 10 years 10 years 5 years 5 years The periods over which cash flows for Northgate (AVR) Limited and Fualsa have been extrapolated exceed five years on the basis that economic benefit is expected to flow to the Group over a longer period in these instances. The growth rates used do not exceed the average long-term growth rate for relevant markets, with the exception of Fleet Technique Limited which has been increased due to the immature market in which this company operates. 48-49 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (15) Other intangible assets (16) Property, plant and equipment: vehicles for hire Group Fair value At 1 May 2004 Additions Acquisitions of subsidiary undertakings Disposals At 1 May 2005 Additions Acquisitions of subsidiary undertakings Exchange differences At 30 April 2006 Amortisation: At 1 May 2004 Charge for the year Eliminated on disposals At 1 May 2005 Charge for the year Exchange differences At 30 April 2006 Carrying amount: At 30 April 2006 At 30 April 2005 Brand names £000 Customer relationships £000 Non compete agreements £000 Software technology £000 Other software £000 Total £000 – – 3,953 – 3,953 – 535 – 4,488 – 408 – 408 456 – 864 3,624 3,545 – – 1,273 – 1,273 – 12,614 – 13,887 – 159 – 159 515 – 674 13,213 1,114 – – 137 – 137 – 148 – 285 – 26 – 26 39 – 65 220 111 – – – – – – 168 – 168 – – – – 11 – 11 157 – 1,913 19 109 (84) 1,957 925 177 8 3,067 1,681 262 (82) 1,861 206 6 2,073 1,913 19 5,472 (84) 7,320 925 13,642 8 21,895 1,681 855 (82) 2,454 1,227 6 3,687 994 96 18,208 4,866 Group Cost or valuation: At 1 May 2004 Additions Acquisitions of subsidiary undertakings Transfer to motor vehicles Exchange differences Disposals At 1 May 2005 Additions Acquisitions of subsidiary undertakings (Note 35) Transfer to motor vehicles Exchange differences Disposals At 30 April 2006 Depreciation: At 1 May 2004 Charge for the year Exchange differences Transfer to motor vehicles Eliminated on disposals At 1 May 2005 Charge for the year Exchange differences Transfer to motor vehicles Eliminated on disposals At 30 April 2006 Carrying amount: At 30 April 2006 At 30 April 2005 £000 488,793 295,851 95,342 (134) (757) (201,603) 677,492 301,546 92,423 (171) 3,917 (267,865) 807,342 109,447 117,799 (252) (35) (81,310) 145,649 133,367 630 (32) (116,096) 163,518 643,824 531,843 The carrying amount of the Group’s vehicles for hire includes an amount of £12,103,000 (2005 – £26,085,000) in respect of assets leased under finance lease agreements. 50-51 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (17) Other property, plant and equipment (17) Other property, plant and equipment (continued) Group Cost or valuation: At 1 May 2004 Additions Acquisitions of subsidiary undertakings Transfer from vehicles for hire Exchange differences Disposals At 1 May 2005 Additions Acquisitions of subsidiary undertakings (Note 35) Transfer from vehicles for hire Exchange differences Disposals At 30 April 2006 Depreciation: At 1 May 2004 Charge for the year Exchange differences Transfer from vehicles for hire Eliminated on disposals At 1 May 2005 Charge for the year Exchange differences Transfer from vehicles for hire Eliminated on disposals At 30 April 2006 Carrying amount: At 30 April 2006 At 30 April 2005 Cost or valuation at 30 April 2006 is represented by Valuation performed in 1992 Valuation performed in 2004 Additions at cost Land & buildings £000 Plant, equipment & fittings £000 Motor vehicles £000 23,096 5,817 9,833 – (42) (179) 38,525 9,737 5,246 – 322 (2,567) 51,263 3,495 1,061 (2) – (175) 4,379 1,238 5 – (133) 5,489 45,774 34,146 525 3,403 47,335 51,263 8,032 1,203 689 – (8) (1,476) 8,440 1,765 216 – 30 (844) 9,607 5,528 1,494 (2) – (1,375) 5,645 1,283 (1) – (742) 6,185 3,422 2,795 – – 9,607 9,607 1,405 593 – 134 – (851) 1,281 705 169 171 – (985) 1,341 400 477 – 35 (541) 371 321 – 32 (423) 301 1,040 910 – – 1,341 1,341 Total £000 32,533 7,613 10,522 134 (50) (2,506) 48,246 12,207 5,631 171 352 (4,396) 62,211 9,423 3,032 (4) 35 (2,091) 10,395 2,842 4 32 (1,298) 11,975 50,236 37,851 525 3,403 58,283 62,211 Group Land and buildings category: Freehold Short leasehold 2006 £000 38,985 6,789 45,774 2005 £000 26,031 8,115 34,146 At 30 April 2006, the Group had entered into contractual commitments for the acquisitions of plant, property and equipment amounting to £530,000 (2005 – £119,000). Certain of the above freehold properties were valued as at 30 April 2002 by Jones Lang Wootton, Chartered Surveyors, and certain other freehold properties as at 3 May 2004 by American Appraisal, Professional Valuers, on the basis of open market value for existing use. At 30 April 2006, under the historical cost convention, land and buildings would have been stated at £51,544,000 (2005 – £38,803,000) and related accumulated depreciation of £5,584,000 (2005 – £4,472,000). During the prior year the Group increased its holding in Fualsa from 40% to 100%. A fair value adjustment was made in the prior year to revalue fixed assets which resulted in 40% of the revaluation, relating to the Group’s existing interest in Fualsa prior to 3 May 2004, being debited to fixed assets. The Group revaluation reserve in the consolidated balance sheet was credited with the corresponding amount of £1,031,000. Company Cost At 1 May 2004 and 1 May 2005 Additions At 30 April 2006 Depreciation At 1 May 2004 Charge for the year At 1 May 2005 Charge for the year At 30 April 2006 Carrying amount: At 30 April 2006 At 30 April 2005 £000 3,221 18 3,239 104 61 165 62 227 3,012 3,056 52-53 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (18) Investments Company Cost: At 1 May 2005 Acquisitions of subsidiary undertakings Purchase of interest in associate Foreign exchange differences on investments denominated in foreign currency At 30 April 2006 Accumulated provisions: At 1 May 2005 and 30 April 2006 Carrying amount: At 30 April 2006 At 30 April 2005 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 Shares in subsidiary undertakings £000 Investment in associate £000 Loans to group undertakings £000 58,669 114,749 – 853 174,271 – – 37,972 413 38,385 47,000 – – – 47,000 Total £000 105,669 114,749 37,972 1,266 259,656 2,435 – – 2,435 171,836 56,234 38,385 – 47,000 47,000 257,221 103,234 (21) Other financial assets Trade and other receivables Trade amounts receivable Amounts due from subsidiary undertakings Other taxes Corporation tax Deferred tax asset (Note 26) Financial instrument asset (Note 25) Other debtors Prepayments The average credit periods taken on goods are Group Company 2006 £000 94,855 – 3,199 691 – 2,747 2,916 12,531 116,939 2005 £000 76,291 – 1,447 492 – – 2,389 12,222 92,841 2006 £000 – 503,161 1,171 – 1,829 2,747 – 451 509,359 2005 £000 – 371,300 1,163 – 1,598 – 1,144 661 375,866 UK Spain UK Spain 2006 2005 49 days 138 days 49 days 135 days 2006 £000 2,786 1,469 4,255 2005 £000 2,101 1,129 3,230 On 5 August 2005, the Company purchased 49% of the issued share capital of Record Rent a Car S.A. (“Record”), a company registered in Spain, for a cash consideration of £37,972,000 (Note 19). The principal activity of Record is vehicle hire. Allowances for estimated irrecoverable amounts On 3 February 2006, the Company acquired 100% of the issued share capital of Northgate (AVR) Limited (formerly Arriva Vehicle Rental Limited) for a cash consideration of £50,316,000 (Note 35). Total On 3 February 2006, the Company acquired 100% of the issued share capital of Northgate (St Helier) Limited. The consideration of £64,432,500 was settled through the issue of 6,050,000 Ordinary shares, with nominal value £302,500 (Note 27). At 30 April 2006, the principal subsidiary undertakings of the Company were as follows: Northgate Vehicle Hire Limited Furgonetas de Alquiler SA (“Fualsa”) Fleet Technique Limited Vehicle hire Vehicle hire Vehicle management England and Wales Spain England and Wales A full list of the Company’s subsidiary undertakings was included with the Annual Return filed with the Registrar of Companies. The investments in Fualsa and Record are denominated in Euro in the Company balance sheet. The foreign exchange movements recognised in investments arise when the investment amounts are retranslated at the foreign exchange rate prevailing on the balance sheet date. (19) Interest in associate On 5 August 2005, the Group purchased 49% of the issued share capital of Record, a company registered in Spain, for a cash consideration, payable to the vendors of €54,800,000. In accordance with IAS 28, this investment, including associated costs, has been accounted as an associate under the equity method of accounting. Relevant book values relating to 100% of Record are as follows: Total assets Total liabilities Results for the period 5 August 2005 to 30 April 2006 Revenues Profit before taxation Taxation Profit after taxation 49% share of profit after taxation of associate Purchase of investment in associate (Note 18) Interest in associate at 30 April 2006 (20) Inventories Inventories comprise spare parts and consumables. £000 220,104 160,592 55,816 10,131 (2,902) 7,229 3,542 38,385 41,927 The Directors consider that the carrying amount of trade and other receivables approximates to their fair value. Bank balances and cash These comprise cash held by the Group and short-term deposits with an original maturity of three months or less. The Directors consider that the carrying amounts of these assets approximates to their fair value. Credit risk Consideration of the Group’s credit risk is documented in Note 24. (22) Non-current assets classified as held for sale These comprise vehicles held for resale. (23) Other financial liabilities Trade and other payables Trade payables Amounts due to subsidiary undertakings Financial instrument liability (Note 25) Social security and other taxes Accruals and deferred income Trade payables comprise amounts outstanding for trade purchases. Group Company 2006 £000 27,941 – 411 5,779 23,453 57,584 2005 £000 20,008 – – 2,138 22,623 44,769 2006 £000 58 5,696 – 102 2,228 8,084 2005 £000 48 5,693 – 88 2,419 8,248 54-55 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (23) Other financial liabilities (continued) The average credit periods taken for trade purchases are UK Spain 44 days 84 days 43 days 68 days 2006 2005 The Directors consider that the carrying amount of the trade and other payables approximates to their fair value. (24) Borrowings The creditors falling due after more than one year comprise bank loans, finance lease obligations and other borrowings. The Directors consider that the carrying amounts of the Group’s borrowings approximate to their fair value. Total borrowings Bank overdrafts Bank loans Vehicle related finance lease obligations Deferred consideration Property loans Cumulative Preference shares Other Group Company 2006 £000 2005 £000 2006 £000 2005 £000 3,789 518,393 12,326 10,290 2,019 500 1,192 548,509 7,318 382,221 48,642 9,548 3,742 500 258 452,229 12,926 518,203 – 10,290 – 500 – 541,919 18 378,091 – 9,548 – 500 – 388,157 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (24) Borrowings (continued) The borrowings are repayable as follows: On demand or within one year (shown under current liabilities) Bank overdrafts Bank loans Vehicle related finance lease obligations Deferred consideration Property loans Other In the second year Bank loans Vehicle related finance lease obligations Deferred consideration Property loans Other In the third to fifth years Bank loans Vehicle related finance lease obligations Property loans Due after more than five years Cumulative Preference shares Property loans Total borrowings Less: Amount due for settlement within one year (shown under current liabilities) Amount due for settlement after one year Bank overdrafts Bank overdrafts are repayable on demand and are unsecured. Group Company 2006 £000 3,789 2,956 11,527 10,290 270 1,192 30,024 – 610 – 216 – 826 515,437 189 697 516,323 500 836 1,336 548,509 30,024 518,485 2005 £000 7,318 3,946 36,491 – 458 197 48,410 185 11,470 9,548 921 61 22,185 378,090 681 – 378,771 500 2,363 2,863 2006 £000 12,926 2,766 – 10,290 – – 25,982 – – – – – – 515,437 – – 515,437 500 – 500 2005 £000 18 – – – – – 18 – – 9,548 – – 9,548 378,091 – – 378,091 500 – 500 452,229 541,919 388,157 48,410 403,819 25,982 515,937 18 388,139 They are denominated in UK Sterling and bear interest at 1% above the Bank of England base rate, thereby exposing the Group to cash flow interest rate risk. Bank loans On 10 January 2006, the Company committed term loan facilities with seven major UK and European banks. The total facilities of £745,000,000 (2005 – £565,000,000) have commitment dates one, three and four years from the agreement dates. Bank loans are unsecured and bear interest at rates of 0.475% to 0.525% above the relevant interest rate index, being LIBOR for Sterling denominated debt and EURIBOR for Euro denominated debt. This exposes the Group to cash flow interest rate risk. Cumulative Preference shares The cumulative Preference shares of 50p each entitle the holder to receive a cumulative preferential dividend at the rate of 5% on the paid up capital and the right to a return of capital at either winding up or a repayment of capital. The Preference shares do not entitle the holders to any further or other participation in the profits or assets of the Company. These shares have no voting rights other than in exceptional circumstances. The total number of authorised cumulative Preference shares of 50p each is 1,300,000 (2005 - 1,300,000), of which 1,000,000 (2005 - 1,000,000) were allotted and fully paid at the balance sheet date. 56-57 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (24) Borrowings (continued) (24) Borrowings (continued) Vehicle related finance lease obligations The Group previously had a policy of leasing certain of its vehicles for hire under finance leases. The average lease term is three years. For the year ended 30 April 2006, the average borrowing rate for vehicle related finance leases was 4.4% (2005 – 4.1%). All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. Finance lease obligations are secured by fixed charges over the vehicles to which they relate. Other borrowings Other borrowings of £1,192,000 represent Spanish debt discounting arrangements which are unsecured and are all due within one year. Total borrowing facilities The Group has various borrowings facilities available to it. The undrawn committed facilities at the balance sheet date, in respect of which all conditions precedent had been met at that date, are as follows: Group Amounts payable under finance leases: Within one year In the second year to fifth years inclusive Less future finance charges Present value of lease obligations Less: amount due for settlement within one year (shown under current liabilities) Amount due for settlement after one year Minimum lease payments Present value of minimum lease payments 2006 £000 11,703 853 12,556 (230) 12,326 2005 £000 37,544 12,212 49,756 (1,114) 48,642 2006 £000 11,527 799 12,326 – 12,326 2005 £000 36,491 12,151 48,642 – 48,642 (11,527) 799 (36,491) 12,151 Vehicle related finance lease obligations are denominated in Sterling and Euro. Deferred consideration The deferred consideration is due in respect of 20% of the issued share capital of Fualsa, the purchase of which occurred in May 2004. At the point of the purchase, the amount due was discounted by the Group’s cost of capital and resulted in an income statement charge of £489,000 for the year ended 30 April 2005, which was classified as a financing cost. After allowing for exchange differences, an additional amount of £535,000 was charged to the income statement for the year ended 30 April 2006 and the balance of £10,290,000 represents the actual amount payable. This amount is unsecured. Property loans All property loans relate to land and buildings held in Spain. The loans are secured on the properties to which they relate. The average loan term is eight years. For the year ended 30 April 2006, the average borrowing rate for property loans was 3.3% (2005 – 3.3%). All loans are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. Group Amounts payable under property loans: Within one year In the second year to fifth years inclusive After more than five years Less future finance charges Present value of lease obligations Less: amount due for settlement within one year (shown under current liabilities) Amount due for settlement after one year Minimum lease payments Present value of minimum lease payments 2006 £000 274 992 973 2,239 (220) 2,019 2005 £000 465 996 2,474 3,935 (193) 3,742 2006 £000 270 913 836 2,019 – 2,019 (270) 1,749 2005 £000 458 921 2,363 3,742 – 3,742 (458) 3,284 In one year or less In one year to five years 2006 £000 194,215 129,608 323,823 2005 £000 144,338 87,421 231,759 The total amount permitted to be borrowed by the Company and its subsidiary undertakings in terms of the Articles of Association shall not exceed five times the aggregate of the issued share capital of the Company and the Group reserves, as defined in those Articles. Analysis of consolidated net debt Cash at bank and in hand Short term investments Bank overdraft due within one year Bank loans Vehicle related finance lease obligations Deferred consideration Preference shares Property loans and other borrowings 1 May 2005 £000 39,601 1,774 (7,318) 34,057 (382,221) (48,642) (9,548) (500) (4,000) (410,854) Cash flow £000 Acquisitions (Note 35) £000 Other non-cash changes £000 Foreign exchange movements £000 (22,131) 73 81,244 59,186 (131,865) 36,994 – – 877 (34,808) 4,567 – (77,715) (73,148) – – – – – (73,148) – – – – – – (535) – – (535) 164 – – 164 (4,307) (678) (207) – (88) (5,116) 30 April 2006 £000 22,201 1,847 (3,789) 20,259 (518,393) (12,326) (10,290) (500) (3,211) (524,461) The Group calculates gearing to be net borrowings as a percentage of shareholders’ funds less goodwill and the net book value of intangible assets, where net borrowings comprise borrowings less cash at bank and short term investments. At 30 April 2006, the gearing of the Group amounted to 203.7% (2005 – 197.8%) where net borrowings are £524,461,000 (2005 – £410,854,000) and shareholders’ funds less goodwill and the net book value of intangible assets are £257,499,000 (2005 – £207,717,000). Financial instruments Financial assets The Group’s principal financial assets are bank balances and cash, trade and other receivables and investments. The Group’s credit risk is primarily attributable to its trade. The trade receivable amounts presented in the balance sheet are net of allowances for doubtful receivables. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers in the UK. The credit risk associated with trade receivables in Fualsa is more concentrated in larger customers and, consequently, the Group has put a credit insurance policy in place to mitigate this risk. 58-59 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (24) Borrowings (continued) Treasury policies and the management of risk The function of Group Treasury is to reduce or eliminate financial risk, to ensure sufficient liquidity is available to meet foreseeable requirements, to secure finance at minimum cost and to invest cash assets securely and profitably. Treasury operations manage the Group’s funding, liquidity and exposure to interest rate risks within a framework of policies and guidelines authorised by the Board of Directors. The Group uses derivative instruments for risk management purposes only. Consistent with Group policy, Group Treasury does not engage in speculative activity and it is policy to avoid using the more complex financial instruments. Further details regarding derivative financial instruments are shown in Note 25. The policy followed in managing credit risk permits only minimal exposures with banks and other institutions meeting required standards as assessed normally by reference to the major credit agencies. Deals are authorised only with banks with which dealing mandates have been agreed and which maintain a Double A rating. Individual aggregate credit exposures are limited accordingly. Financing and interest rate risk The Group’s policy is to finance operating subsidiary undertakings by a combination of retained earnings and bank borrowings including medium term loans. Cash at bank and on deposit yield interest based principally on LIBOR applicable to periods of less than three months. The Group’s exposure to interest rate fluctuations on its borrowings and deposits is managed through the use of interest rate caps, collars and swaps. These derivatives are also used to manage the Group’s desired mix of fixed and floating rate debt. The policy is to fix or cap a substantial element of the interest cost on outstanding debt. At 30 April 2006, 58% of gross borrowings were at fixed or capped rates of interest: £205,000,000 plus €162,000,000 of interest rate derivatives as detailed in Note 25. Foreign currency exchange risk The Group maintains borrowings in the same currency as its cash requirements, with the exception of borrowings maintained in Euro as net investment hedges against its Euro denominated investments, as detailed in Note 25. An analysis of the Group’s borrowings by currency is given below: NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (25) Derivative financial instruments Interest rate derivatives The Group’s exposure to interest rate fluctuations on its borrowings and deposits is managed through the use of interest rate swaps, caps and collars. These derivatives are also used to manage the Group’s desired mix of fixed and floating rate debt. The policy is to fix or cap a substantial element of the interest cost on outstanding debt. In addition to those derivatives currently running, the Group has further structures with forward starting dates. The nominal value, interest rate and length of each contract is shown below: UK Sterling contracts effective as at 30 April 2006 Cap amount (£m) 5 5 Cap % 7.50 Collar amount (£m) Cap % Floor % 10 10 10 10 25 10 10 10 10 10 115 7.00 7.00 7.00 7.00 5.50 5.25 5.00 4.75 7.00 7.00 5.00 5.00 5.00 5.00 3.22 3.19 3.15 3.25 5.00 5.00 Finish date June 2006 Finish date April 2007 April 2007 April 2008 April 2008 May 2008 June 2008 June 2008 June 2008 April 2009 April 2010 Finish date March 2007 March 2007 July 2007 July 2007 May 2008 May 2008 June 2008 Sterling £000 Euro £000 Total £000 3,789 292,082 1,255 500 – – – 297,626 – 226,311 11,071 – 10,290 2,019 1,192 250,883 3,789 518,393 12,326 500 10,290 2,019 1,192 548,509 Swap amount (£m) Swap % 10 10 10 10 25 10 10 85 Total value of current contracts (£m) 205 6.45 5.99 7.36 7.35 4.05 3.93 3.82 Sterling £000 Euro £000 Total £000 UK Sterling contract to commence after 30 April 2006 Collar amount (£m) 10 10 Cap % 6.50 Floor % 4.50 Start date April 2007 Finish date April 2012 7,318 258,500 3,454 500 – – – 269,772 – 123,721 45,188 – 9,548 3,742 258 182,457 7,318 382,221 48,642 500 9,548 3,742 258 452,229 Group At 30 April 2006 Borrowings Bank overdrafts Bank loans Vehicle related finance lease obligations Cumulative Preference shares Deferred consideration Property loans Other At 30 April 2005 Borrowings Bank overdrafts Bank loans Vehicle related finance lease obligations Cumulative Preference shares Deferred consideration Property loans Other 60-61 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (25) Derivative financial instruments (continued) Euro contracts effective as at 30 April 2006 Cap amount (€m) 12 12 Swap amount (€m) 50 50 50 150 Total value of current contracts (€m) 162 Cap % 3.75 Swap % 2.30 2.28 2.23 Finish date October 2006 Finish date June 2008 June 2009 June 2009 * * *The counterparty to these contracts has a right to cancel this arrangement, with no cost to the Company or the counterparty, on the third anniversary of the inception date of the contract. Both contracts were incepted in June 2005. Fair values of interest rate derivatives Market values have been used to determine fair values of interest rate derivatives at each balance sheet date. The estimated fair values are as follows: Group Interest rate swaps Interest rate collars Interest rate caps 2006 £000 2,576 (240) – 2,336 2005 £000 (577) (346) – (923) All of the interest rate swaps are designated and effective as cash flow hedges and their fair value, along with changes in fair value between balance sheet dates, has been deferred in equity. To the extent that the interest rate swaps are not 100% effective, an amount of £197,000 has been credited to the income statement. Interest rate caps and collars are not hedge accounted for and, accordingly, an amount of £106,000 has been credited in the income statement. The total change in fair values of interest rate derivatives recognised in the income statement of £303,000 is shown within investment income (Note 9). No such adjustments were made in the year ended 30 April 2005 as the Group did not adopt IAS 39 until 1 May 2005, in accordance with the transitional provisions of IFRS 1. At 30 April 2006, the net negative fair value of the Group’s interest rate derivatives is recognised in the balance sheet and comprises an asset of £2,747,000 (Note 21) and a liability of £411,000 (Note 23). Net investment hedges The Group manages its exposure to movements in the reported results of Fualsa by maintaining UK based borrowings denominated in Euro in the parent Company equivalent to the net assets plus goodwill of Fualsa. The level of these Euro borrowings is revised every month to reflect the closing net assets and goodwill of Fualsa at the previous month end. The hedging objective is to reduce the risk of spot re-translation foreign exchange gains or losses arising in the consolidated results of the Group upon the translation of Fualsa from Euro to Sterling at each reporting date in the hedging period, which is each period between each roll-over of the Euro denominated borrowings which comprise the net investment hedge. The hedge is considered fully effective in the current and prior year and the exchange differences arising on the loans have been recognised directly within equity along with the exchange differences on retranslation of the net assets of Fualsa. NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (26) Deferred tax The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior years: Accelerated capital allowances £000 Revaluation of buildings £000 Share based payment £000 Intangible assets £000 Retirement benefit obligations £000 Other timing differences £000 Group At 1 May 2004 Charge (credit) to income Credit to equity Acquisitions of subsidiary undertakings At 1 May 2005 Charge (credit) to income Credit to equity Acquisitions of subsidiary undertakings Exchange differences Transfer relating to acquired subsidiary undertaking At 30 April 2006 8,562 392 – 2,430 11,384 (1,929) – 11,153 64 – 20,672 300 (13) – 666 953 (9) – 2,548 – – 3,492 (589) 31 (901) – (1,459) (6) (882) – – – (2,347) – (202) _ 1,839 1,637 (331) – 4,039 – – 5,345 – – _ – – 253 – (686) – – (433) Total £000 6,349 (33) (1,084) 4,892 10,124 733 (882) 16,960 64 (1,924) (241) (183) (43) (2,391) 2,755 – (94) – (11,153) (10,883) (11,153) 15,846 The following are the major deferred tax liabilities and assets recognised by the Company and movements thereon during the current and prior years: Company At 1 May 2004 Charge (credit) to income Credit to equity At 1 May 2005 Charge (credit) to income Credit to equity At 30 April 2006 Accelerated capital allowances £000 Share based payment £000 Other timing differences £000 110 57 – 167 25 – 192 (590) 31 (311) (870) (7) (882) (1,759) (256) (639) – (895) 633 – (262) Total £000 (736) (551) (311) (1,598) 651 (882) (1,829) At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of the subsidiary undertakings for which deferred tax liabilities have not been recognised was £1,201,000 (2005 – £569,000). No liability has been recognised in respect of these differences because the Group is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future. Temporary differences in connection with interests in associates are insignificant. 62-63 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (27) Share capital (29) Revaluation reserve Group and Company Authorised: 80,000,000 Ordinary shares of 5p each Allotted and fully paid: 70,750,761 (2005 – 64,183,217) Ordinary shares of 5p each 2006 £000 4,000 3,538 2005 £000 4,000 3,209 The Company has one class of Ordinary share which carries no right to fixed income. During the year the Company completed a placing of 6,050,000 new Ordinary shares in exchange for ordinary and preference shares in Northgate (St Helier) Limited. The price of the issued Ordinary shares of the Company was 1,065p each, raising £63,045,000 (net of expenses). In accordance with Section 131 of the Companies Act 1985 the premium on the issue has been credited to the merger reserve (Note 31). During the year the Company issued 517,544 Ordinary shares with a nominal value of £25,877 pursuant to the exercise of options under the Group’s various share schemes, for cash consideration of £2,480,116. The premium on the issue of these shares has been credited to the share premium account (Note 28). (28) Share premium account Group and Company At 1 May Premium on Ordinary shares issued (Note 27) At 30 April 2006 £000 62,544 2,454 64,998 2005 £000 61,829 715 62,544 At 1 May 2004 Revaluation of land and buildings (Note 17) Revaluation of foreign currency denominated investment in subsidiary undertaking upon inception of hedge At 1 May 2005 and 30 April 2006 (30) Own shares At 1 May 2004 Purchase of own shares Sale of own shares At 1 May 2005 Purchase of own shares Sale of own shares At 30 April 2006 Group £000 Company £000 23 1,031 – 1,054 – – 1,371 1,371 Group £000 (1,330) (2,567) 1,426 (2,471) (1,371) 511 (3,331) Company £000 – – – – – – – The own shares reserve represents shares held by employee trusts in order to meet commitments under the Group’s various share schemes (Note 38). (31) Merger reserve At 1 May 2004 and 1 May 2005 Premium on Ordinary shares issued (Note 27) At 30 April 2006 Group £000 4,721 62,742 67,463 Company £000 417 62,742 63,159 64-65 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (32) Hedging reserve (34) Retained earnings At 1 May 2005 Movement in fair value of hedged interest rate derivatives Transfer to income statement At 30 April 2006 Group £000 Company £000 – 3,153 (197) 2,956 – 2,747 (193) 2,554 The hedging reserve represents the cumulative amounts of changes in fair values of hedged interest rate derivative financial instruments that are deferred in equity, as explained in Note 2 and Note 25, less amounts transferred to the income statement. (33) Translation reserve At 1 May 2004 Foreign exchange differences on retranslation of net assets of subsidiary undertakings Foreign exchange differences on retranslation of investments in subsidiary undertakings Net foreign exchange differences on long term borrowings held as hedges At 1 May 2005 Foreign exchange differences on retranslation of net assets of subsidiary undertakings Foreign exchange differences on retranslation of investments in subsidiary undertakings Foreign exchange differences on retranslation of interest in associate Net foreign exchange differences on long term borrowings held as hedges At 30 April 2006 Group £000 Company £000 – (153) – 1,635 1,482 1,303 – 413 (1,571) 1,627 – – (1,389) 1,389 – – 646 413 (1,059) – During the year, the Company maintained borrowings denominated in Euro in order to hedge its Euro denominated investments in Fualsa and Record. The investment balance in Fualsa was translated into Sterling at the exchange rate prevailing when this hedge was put into place and the exchange difference arising was reflected in the revaluation reserve of the Company. The Company retranslated the borrowings and the investments into Sterling using the exchange rate prevailing at the balance sheet date. The exchange differences on the retranslation of the investments have been recognised directly in reserves and the exchange difference on the retranslation of the borrowings has been recognised directly in reserves to the extent that it offsets the exchange differences arising on the retranslation of the investments. The remaining exchange difference on the retranslation of the borrowings has been recognised in the income statement of the Company. At 1 May 2004 Profit for the year Dividends paid Share options fair value amount credited directly to equity Net deferred tax credit recognised directly in equity At 1 May 2005 Transitional adjustment in respect of IAS 32 and IAS 39 (Note 42) At 1 May 2005 after adoption of IAS 32 and IAS 39 Profit for the year Dividends paid Share options fair value amount credited directly to equity Defined benefit pension credit recognised directly in equity Net deferred tax credit recognised directly in equity At 30 April 2006 Group £000 Company £000 126,005 63,140 39,231 (11,916) 88 1,084 154,492 (923) 153,569 40,594 (13,437) 20 356 882 181,984 12,767 (11,916) 88 311 64,390 – 64,390 41,059 (13,437) 20 – 882 92,914 (35) Acquisitions of subsidiary undertakings Fleet Technique Limited On 23 January 2006, the Group acquired the entire issued share capital of Fleet Technique Limited (“FTL”) for a cash consideration of £6,583,000, including goodwill of £3,589,000. The transaction has been accounted for in accordance with the purchase method of accounting. Net assets acquired: Intangible assets Property, plant and equipment Trade and other receivables Cash and cash equivalents Bank overdraft Trade and other payables Deferred tax liabilities Goodwill Acquisition cost (including expenses) Fair value of consideration: Cash Net cash acquired with subsidiary undertaking Cash outflow in the year on acquisition of FTL Book value £000 Fair value adjustments £000 177 204 2,763 1,266 (358) (3,038) – 1,014 2,785 – 30 – – – (835) 1,980 Fair value £000 2,962 204 2,793 1,266 (358) (3,038) (835) 2,994 3,589 6,583 6,583 (908) 5,675 The goodwill arising on the acquisition of FTL is attributable to the fair value of the workforce, in place at the date of acquisition, and other potential future economic benefit that it is anticipated will be derived from the business. FTL contributed £3,338,000 of revenue and £110,000 profit before tax for the period between 23 January 2006 and the balance sheet date. If the acquisition of FTL had been completed on the first day of the financial year then, excluding the impact of the acquisition of Northgate (AVR) Limited (see below), Group revenues for the year would have been £382,279,000 and Group profit before taxation would have been £56,382,000. 66-67 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (35) Acquisitions of subsidiary undertakings (continued) (37) Operating lease arrangements Northgate (AVR) Limited On 3 February 2006, the Group acquired the entire issued share capital of Northgate (AVR) Limited (formerly Arriva Vehicle Rental Limited) (“AVR”) for a cash consideration of £50,316,000, including goodwill of £28,055,000. The transaction has been accounted for in accordance with the purchase method of accounting. As lessee Group Minimum lease payments under operating leases recognised in the income statement for the year 2006 £000 5,981 2005 £000 5,080 At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: Group Within one year In the second to fifth years inclusive After five years 2006 £000 4,592 9,141 7,926 21,659 2005 £000 4,840 11,415 8,934 25,189 Operating lease payments represent rentals payable by the Group for certain of its operating sites as well as rentals for certain vehicles. Leases are negotiated for an average term of nine years and rentals are fixed for an average number of four years. As lessor The revenue of the Group is generated from the hire of vehicles under operating lease arrangements. There is no minimum contracted rental period. The revenue of the Group under these arrangements is as shown in the consolidated income statement. There are no contingent rentals recognised in income. Net assets acquired: Goodwill Intangible assets Property, plant and equipment: vehicles for hire Other property, plant and equipment Inventories Non-current assets held for sale Trade and other receivables Cash and cash equivalents Bank overdraft Trade and other payables Deferred tax liabilities Defined benefit pension obligation Goodwill Acquisition cost (including expenses) Fair value of consideration: Cash Net bank overdraft acquired with subsidiary undertaking Cash outflow in the year on acquisition of AVR Book value £000 Fair value adjustments £000 16,909 4,219 93,728 5,764 44 2,320 16,378 3,301 (77,357) (11,956) (11,145) (1,537) 40,668 (16,909) 6,461 (1,305) (337) (17) – (8) – – (568) (4,980) (744) (18,407) Fair value £000 – 10,680 92,423 5,427 27 2,320 16,370 3,301 (77,357) (12,524) (16,125) (2,281) 22,261 28,055 50,316 50,316 74,056 124,372 The goodwill arising on the acquisition of AVR is attributable to the fair value of the workforce, in place at the date of acquisition, and other potential future economic benefit that it is anticipated will be derived from the business. Between the date of acquisition and the balance sheet date, the trade of AVR was transferred into existing subsidiary undertakings of the Group. The underlying trade of AVR contributed £14,180,000 of revenue and £851,000 of profit before taxation for the period between 3 February 2006 and the balance sheet date. If the acquisition of AVR had been completed on the first day of the financial year then, excluding the impact of the acquisition of Fleet Technique Limited (see above), Group revenues for the year would have been £419,414,000 and Group profit before taxation would have been £59,029,000. In both of the above acquisitions, the fair values represent the Directors’ current estimates of the net assets acquired. In accordance with IFRS 3, the values attributed may be revised as further information becomes available. (36) Profit of the parent Company A profit of £41,059,000 (2005 – £12,767,000) is dealt with in the accounts of the Company. The Directors have taken advantage of the exemption available under Section 230 of the Companies Act 1985 and not presented an income statement for the Company alone. 68-69 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (38) Share based payments The Group’s various share option incentive plans are explained on pages 18 to 21. (38) Share based payments (continued) Executive Incentive Scheme The Group recognised total expenses of £1,301,000 (2005 – £1,184,000) related to equity-settled share-based payment transactions in the year. No options have been granted since 24 January 2002 under this scheme. Number of share options 2006 Weighted average exercise price £ Number of share options 2005 Weighted average exercise price £ At 1 May Exercised during the year Lapsed during the year At 30 April 1,107,075 (365,944) (1,173) 739,958 4.90 4.92 3.675 4.90 1,348,500 (182,176) (59,249) 1,107,075 Exercisable at the end of the year 337,083 4.91 392,692 4.91 4.94 4.93 4.90 4.93 Share options were exercised at several points during the year. The weighted average share price of the Company’s Ordinary shares during the year was £10.24. The options outstanding at 30 April 2006 had a weighted average exercise price of £4.91 and a weighted average remaining contractual life of 3.6 years. Further details regarding the plans are outlined below. Northgate Share Option Scheme At 1 May Granted during the year Exercised during the year Lapsed during the year At 30 April Exercisable at the end of the year Number of share options 2006 Weighted average exercise price £ Number of share options 2005 Weighted average exercise price £ 379,500 141,600 (151,600) – 369,500 38,400 5.16 9.31 4.42 – 7.03 4.61 385,850 83,500 (75,850) (14,000) 379,500 23,000 4.72 6.63 4.53 4.98 5.16 4.32 Share options were exercised at several points during the year. The weighted average share price of the Company’s Ordinary shares during the year was £10.24. The options outstanding at 30 April 2006 had a weighted average exercise price of £7.03 and a weighted average remaining contractual life of 5.3 years. In the current year, options were granted in October 2005. The aggregate of the estimated fair values of the options granted on this date is £215,000. In the prior year, options were granted in August 2004. The aggregate of the estimated fair values of the options granted on this date is £102,000. The inputs into the Black-Scholes model are as follows: Weighted average share price Weighted average exercise price Expected volatility Expected life Risk free rate Expected dividends 2006 2005 £9.31 £9.31 19.5% 4.7 years 4.3% 3.2% £6.84 £6.63 19.5% 4.7 years 5.0% 3.2% Expected volatility was determined by calculating the historical volatility of the Company’s share price over the previous three years. 70-71 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (38) Share based payments (continued) Deferred Annual Bonus Plan All options granted under this scheme are nil cost options. At 1 May Granted during the year Exercised during the year Expired during the year At 30 April 2006 Number of share options 2005 Number of share options 83,143 77,960 (500) (250) 160,353 – 84,346 (440) (763) 83,143 No options were exercisable at the end of either year. The weighted average share price at the date of exercise of options was £9.82 (2005 – £7.10). The options outstanding at 30 April 2006 had a weighted average remaining contractual life of 1.7 years. In the current year, options were granted in July 2005. The aggregate of the estimated fair values of the options granted on this date is £515,000. In the prior year, options were granted in July 2004. The aggregate of the estimated fair values of the options granted on this date is £641,000. The inputs into the Black-Scholes model are as follows: Weighted average share price Weighted average exercise price Expected volatility Expected life Risk free rate Expected dividends 2006 2005 £9.05 £nil 19.5% 3 years 4.2% 3.2% £6.83 £nil 19.5% 3 years 5.1% 3.2% Expected volatility was determined by calculating the historical volatility of the Company’s share price over the previous three years. NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (38) Share based payments (continued) All Employee Share Scheme The vesting period for partnership shares is one year. The vesting period for matching shares is four years. Matching share options are nil cost options and are forfeited if the employee either sells the partnership shares or leaves the Group before the matching share options vest. Details of the share options outstanding during the year are as follows: At 1 May Granted during the year Forfeited during the year Exercised during the year At 30 April 2006 Number of share options 2005 Number of share options 200,171 58,876 (11,343) (60,417) 187,287 199,352 69,434 (16,976) (51,639) 200,171 No options were exercisable at the end of either year. The weighted average share price at the date of exercise for share options exercised during the period was £10.27 (2005 – £7.79). The options outstanding at 30 April 2006 had a weighted average remaining contractual life of 1.6 years. In the current year, matching share options were granted in January 2006. The aggregate of the estimated fair values of the options granted on this date is £522,000. In the prior year, options were granted in January 2005. The aggregate of the estimated fair values of the options granted on this date is £467,000. The inputs into the Black-Scholes model are as follows: Weighted average share price Weighted average exercise price Expected volatility Expected life Risk free rate Expected dividends 2006 2005 £10.35 £nil 19.5% 5 years 4.2% 3.2% £8.73 £nil 19.5% 5 years 4.4% 3.2% Expected volatility was determined by calculating the historical volatility of the Company’s share price over the previous three years. 72-73 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (39) Retirement benefit schemes Defined contribution schemes During the year the Group operated two defined contribution arrangements. The pension cost to the Group of these arrangements was £1,369,000 (2005 – £1,125,000). Upon the acquisition of Northgate (AVR) Limited on 3 February 2006 (Note 35), the Group also acquired a further defined contribution scheme and a defined benefit scheme (see below). The defined contribution scheme acquired with Northgate (AVR) Limited is established under Trust. Independent fund managers are employed by the Trustees to invest the contributions received from the employer and the employees. The pension cost to the Group of this arrangement was £77,000 (2005 – £nil). Defined benefit scheme The Willhire Group Limited 1991 Retirement and Death Benefit Plan (“the Plan”) was acquired by the Group as part of the acquisition of Northgate (AVR) Limited on 3 February 2006 (Note 35). Certain employees of the Group participate in the Plan which is financed through separate Trustee administered funds managed by independent professional fund managers on behalf of the Trustees. Contributions to the Plan are based upon actuarial advice following the most recent actuarial valuation of the fund. Actuarial valuations of the Plan were performed as at 3 February 2006 and 30 April 2006 by a Fellow of the Institute of Actuaries representing Watson Wyatt Actuaries. The present value of the defined benefit obligation, the related current service cost and the past service cost were measured using the projected unit credit method. The principal actuarial assumptions used were: Discount rate Inflation rate Salary increases Future pension increases Amounts recognised in the income statement in respect of the Plan are as follows: Service cost Interest cost Expected return on scheme assets Curtailments Total pension credit Valuation at 30 April 2006 %pa Valuation at 3 February 2006 %pa 5.1 3.0 4.5 3.0 4.7 2.9 4.4 2.9 From 3 February 2006 to 30 April 2006 £000 48 62 (53) (443) (386) All of the credit for the period has been included in administrative expenses. The £443,000 credit in respect of curtailments relates to the restructuring of Northgate (AVR) Limited subsequent to acquisition by the Group. Consequently, this credit is included within restructuring costs as referred to in Note 6. Actuarial gains and losses have been reported directly in equity, within retained earnings. The actual return on the Plan assets was £48,000. There are no reimbursement rights. NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (39) Retirement benefit schemes (continued) The amount included in the balance sheet arising from the Group’s obligations in respect of the Plan is as follows: Present value of defined benefit obligations Fair value of Plan assets Deficit in Plan 30 April 2006 £000 3 February 2006 £000 (4,595) 3,151 (1,444) (5,236) 2,955 (2,281) The deficit of £2,281,000 as at 3 February 2006 has been included as part of the fair value of net assets of Northgate (AVR) Limited acquired (Note 35). The net movements in the deficit were as follows: At 3 February 2006 Pension credit recognised in the income statement Actuarial gains Contributions At 30 April 2006 Movements in the present value of the defined benefit obligations were as follows: At 3 February 2006 Current service cost Interest cost Actuarial gains Past service cost Curtailments At 30 April 2006 Movements in the fair value of the defined benefit assets were as follows: At 3 February 2006 Expected return on Plan assets Contributions Actuarial gains At 30 April 2006 2006 £000 2,281 (386) (356) (95) 1,444 2006 £000 5,236 35 62 (308) 13 (443) 4,595 2006 £000 2,955 53 95 48 3,151 The derivation of the overall expected return on assets reflects the actual allocation at the measurement date combined with an expected return for each asset class. The bond return is based on the prevailing return available on bonds. The return on equities and property is based on a number of factors including the income yield at the measurement date, the long-term growth prospects for the economy in general, the long-term relationship between each asset class and bond returns and the movement in market indices since the previous measurement date. 74-75 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (39) Retirement benefit schemes (continued) (40) Events after the balance sheet date The analysis of the Plan assets and the expected rate of return at the balance sheet date was as follows: Equity instruments Debt instruments Other 30 April 2006 Expected return % 7.9 4.5 4.0 Fair value of assets £000 2,663 305 183 3,151 The Plan assets do not comprise any of the Group’s own financial instruments nor does the Group occupy any property or use any other assets held by the Plan. The estimated amount of contributions expected to be paid to the Plan during the year ended 30 April 2007 is £265,000. The history of experience adjustments is supplied only for the period since the acquisition of the Plan as part of the acquisition of Northgate (AVR) Limited by the Group on 3 February 2006. Funded status: Present value of defined benefit obligation Fair value of Plan assets Deficit in the Plan Experience adjustments on Plan obligations: Amount Percentage of Plan obligations Experience adjustments on Plan assets: Amount Percentage of Plan obligations Period ended 30 April 2006 £000 4,595 3,151 1,444 48 1.5% 493 10.7% On 5 August 2005, the Group acquired a 49% share in Record Rent a Car SA (“Record’), a Company registered in Spain, for a cash consideration, payable to the vendors, of €54,800,000. In accordance with IAS 28, this investment, including associated costs, has been accounted for as an associate (Note 19). On 11 May 2006, the Group acquired the remaining 51% of the issued share capital of Record for a consideration of €72,700,000 under the share purchase agreement. The book values of the net assets acquired are detailed below. Net assets acquired: Intangible assets Property, plant and equipment: vehicles for hire Other property, plant and equipment Non-current assets classified as held for sale Trade and other receivables Cash and cash equivalents Trade and other payables Borrowings Deferred tax liabilities Book value £000 57 158,526 14,038 3,162 44,022 299 (7,618) (146,244) (6,730) 59,512 In accordance with IFRS 3, the Directors will assess the fair values of the net assets acquired as further information becomes available. (41) Related party transactions Trading transactions Transactions between the Company and its subsidiary undertakings, which are related parties, have been eliminated on consolidation and are not disclosed here. Remuneration of key management personnel The remuneration of the Directors, who are the key management personnel of the Group, is set out in the audited part of the Remuneration Report on pages 16 to 21. 76-77 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (42) Transition to International Financial Reporting Standards ("IFRS") (42) Transition to IFRS (continued) The year ended 30 April 2006 is the first year that the Group has presented its financial statements under IFRS. The following disclosures are required for the year of transition. The last financial statements under UK GAAP were for the year ended 30 April 2005 and the date of transition to IFRS was 1 May 2004. Differences between UK GAAP and IFRS All relevant accounting standards have been applied to the financial information and the following accounting standards are those that have the most significant impact on the Group. IFRS 2 (Share-based Payment): An income statement charge is recognised in respect of the cost of share options granted under the Group’s various share schemes. This cost is deemed to be the fair value of the options granted and is charged over the vesting period. An amount equivalent to the charge is credited directly to equity, resulting in no net impact on net assets. This accounting treatment is the same as UK GAAP except that the fair values used under IFRS 2 differ from those under UK GAAP. IFRS 3 (Business Combinations): Separate intangible assets are recognised at fair value on the acquisition of businesses after the date of transition to IFRS, which previously formed part of goodwill under UK GAAP. These include non-contractual customer relationships, brand names and non- compete agreements, all of which are amortised over their respective estimated useful lives. The residual goodwill balance under IFRS is therefore lower in value than under UK GAAP but it is no longer amortised and is, instead, tested annually for impairment. IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations): Vehicles held for resale are reclassified from inventories into non-current assets held for sale under IFRS. IAS 10 (Events After the Balance Sheet Date): Under IFRS, dividends are not appropriated within the accounts until they are either paid or formally approved. IAS 12 (Income Taxes): Deferred taxation changes arise under IFRS as a result of differences between the accounting treatment and taxation treatment in respect of share options (IFRS 2), intangible assets (IFRS 3) and holiday pay accruals (IAS 19). Under IAS 12, deferred tax liabilities are also recognised on all capitalised buildings, regardless of whether a contractual commitment to sell exists. IAS 16 (Property, Plant and Equipment): Under IAS 16, the Group is required to review its depreciation rates and estimated useful lives on an annual basis to ensure that the net book value of disposals of tangible fixed assets are broadly equivalent to their market value. Depreciation charges are adjusted for any differences that arise between net book values and open market values of used vehicles upon transfer into non-current assets held for sale, taking into account the further direct costs to sell the vehicles. IAS 18 (Revenue): Under IFRS, income from the sale of used vehicles is not recognised within revenue and the net book value of vehicles sold is removed from cost of sales. IAS 19 (Employee Benefits): An accrual is recognised for employee annual leave accrued, but not taken, at each balance sheet date. Where this applies to business combinations, the accrual required at the date of acquisition is deemed to reduce the fair value of the net assets acquired with a corresponding adjustment to goodwill. IAS 21 (The Effects of Changes in Foreign Exchange Rates): Certain exchange differences, previously recognised directly within the profit and loss account reserve under UK GAAP, are reclassified into a separate translation reserve, directly within equity, under IFRS. IAS 32 (Financial Instruments: Disclosure and Presentation): The Company’s cumulative Preference shares are deemed to be debt rather than equity under IFRS. They are reclassified from share capital to borrowings in the balance sheet and preference dividends are reclassified from dividends to finance costs in the income statement. IAS 38 (Intangible Assets): Certain software assets are reclassified from tangible to intangible assets under IFRS. Amounts previously charged to the profit and loss account as depreciation under UK GAAP relating to these fixed assets are reclassified as amortisation within the IFRS income statement. Separate intangible assets are also recognised within business combinations (see IFRS 3 above). These assets are amortised to the income statement over their estimated useful lives. IAS 39 (Financial Instruments: Recognition and Measurement): Interest rate derivatives, to which the Group is party, are recognised on the balance sheet at their fair value. Subsequent changes in the fair value are recognised either within the income statement, as a finance cost, or directly in equity to the extent that the Group elects to hedge account, within the provisions of IFRS. As explained under IFRS 1 options below, this standard was applied by the Group from 1 May 2005 only. IFRS 1 (First-time Adoption of IFRS) has been applied to the financial statements for the year ended 30 April 2006 and the relevant comparative financial information. The first-time adoption choices are as follows: IFRS options Share based payments There are two first-time adoption exemptions for accounting for share based payments: • Share based payments granted on or before 7 November 2002 and vested before 1 May 2005 may be restated but restatement is not mandatory; • Share based payments granted on or before 7 November 2002 and not vested before 1 May 2005 may be restated but restatement is not mandatory. Business combinations and goodwill Basis of election • Share options granted on or before 7 November 2002 and vested before 1 May 2005 have not been restated in accordance with IFRS 2. • IFRS 2 has been applied to all share options granted on or after 7 November 2002 which had not vested by 1 May 2005. The standard is mandatory for all acquisitions after the Company’s transition date, 1 May 2004. The standard has been applied only to business combinations taking place after the Group’s transition date of 1 May 2004. However, the standard allows a first-time adopter to apply the standard to all business combinations that occurred before this date. Goodwill relating to acquisitions prior to the transition date will be held at net book value on 1 May 2004, no longer amortised and subject to annual impairment review (IAS 36). Financial instruments The standard is applicable from the Company’s transition date, 1 May 2004. The Group will not account retrospectively for financial instruments, including derivatives. However, the standard grants a first year exemption from its application to the comparative period but also allows first-time adopters to retrospectively account for financial instruments in line with the standard. Foreign exchange differences IFRS requires certain translation differences to be recognised as a separate component of equity, rather than within retained earnings, and to be considered as part of the profit or loss on disposal of foreign operations in future. However, the standard allows first-time adopters to deem the cumulative translation differences to be zero at the date of transition. The restated results for the year to 30 April 2005 do not reflect the impact of IAS 32 and IAS 39 and the related applicable financial instruments have been accounted for under UK GAAP, with the exception of the Preference shares. The Group will deem cumulative exchange differences to be zero as at 1 May 2004 and will not consider any cumulative exchange differences arising prior to 1 May 2004 if the relevant foreign operations are disposed of in the future. 78-79 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (42) Transition to IFRS (continued) Group Reconciliation of equity at 1 May 2004 Notes (a) (b) (c) (c) (e) (f) (g) (f) Goodwill Other intangible assets Property, plant and equipment Interest in joint venture Total non-current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Non-current assets classified as held for sale Total assets Trade and other payables Tax liabilities Short term borrowings Proposed dividends Total current liabilities Long term borrowings Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Share capital Share premium account Revaluation reserve Own shares Merger reserve Retained earnings Total equity NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (42) Transition to IFRS (continued) Group Reconciliation of equity at 30 April 2005 Notes (a) (b) (c) (c) (e) (f) (g) (f) (h) Goodwill Other intangible assets Property, plant and equipment Total non-current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Non-current assets classified as held for sale Total assets Trade and other payables Tax liabilities Short term borrowings Proposed dividends Total current liabilities Long term borrowings Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Share capital Share premium account Revaluation reserve Own shares Merger reserve Translation reserve Retained earnings Total equity Effect of transition to IFRS £000 UK GAAP £000 14,110 – 569,790 583,900 18,160 92,841 41,375 152,376 – 736,276 43,925 7,231 48,410 7,718 107,284 403,319 9,424 412,743 520,027 216,249 3,709 62,544 1,054 (2,471) 4,721 – 146,692 216,249 (1,662) 4,866 (96) 3,108 (11,464) – – (11,464) 11,464 3,108 803 – – (7,677) (6,874) 500 700 1,200 (5,674) 8,782 (500) – – – – 1,482 7,800 8,782 IFRS £000 12,448 4,866 569,694 587,008 6,696 92,841 41,375 140,912 11,464 739,384 44,728 7,231 48,410 41 100,410 403,819 10,124 413,943 514,353 225,031 3,209 62,544 1,054 (2,471) 4,721 1,482 154,492 225,031 Effect of transition to IFRS £000 UK GAAP £000 1,981 – 402,688 14,467 419,136 15,285 56,382 46,160 117,827 – 536,963 31,926 7,143 87,907 6,780 133,756 208,079 6,821 214,900 348,656 188,307 3,702 61,829 23 (1,330) 4,721 119,362 188,307 – 232 (232) – – (9,671) – – (9,671) 9,671 – 609 – – (6,780) (6,171) 500 (472) 28 (6,143) 6,143 (500) – – – – 6,643 6,143 IFRS £000 1,981 232 402,456 14,467 419,136 5,614 56,382 46,160 108,156 9,671 536,963 32,535 7,143 87,907 – 127,585 208,579 6,349 214,928 342,513 194,450 3,202 61,829 23 (1,330) 4,721 126,005 194,450 80-81 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (42) Transition to IFRS (continued) Group Reconciliation of profit for the year ended 30 April 2005 Notes (i) (j) (k) (l) (m) (n) (m) (o) Notes (d) (e) (f) (g) (f) Revenue Cost of sales Gross profit Administrative expenses Amortisation Profit from operations Investment income Finance costs Profit before taxation Taxation Profit after taxation Preference dividends Ordinary dividends Profit for the year Company Reconciliation of equity at 1 May 2004 Property, plant and equipment Investments Total non-current assets Trade and other receivables Cash and cash equivalents Total current assets Total assets Trade and other payables Proposed dividends Total current liabilities Borrowings Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Share capital Share premium account Merger reserve Retained earnings Total equity UK GAAP £000 458,267 (333,913) 124,354 (47,557) (1,116) 75,681 1,814 (23,038) 54,457 (15,963) 38,494 (25) (12,812) 25,657 Effect of transition to IFRS £000 (118,885) 118,816 (69) 364 261 556 – (25) 531 206 737 25 896 1,658 UK GAAP £000 Effect of transition to IFRS £000 3,117 79,050 82,167 122,881 44,311 167,192 249,359 5,417 6,780 12,197 100,000 (119) 99,881 112,078 137,281 3,702 61,829 417 71,333 137,281 – – – (15,500) – (15,500) (15,500) 90 (6,780) (6,690) 500 (617) (117) (6,807) (8,693) (500) – – (8,193) (8,693) IFRS £000 339,382 (215,097) 124,285 (47,193) (855) 76,237 1,814 (23,063) 54,988 (15,757) 39,231 – (11,916) 27,315 IFRS £000 3,117 79,050 82,167 107,381 44,311 151,692 233,859 5,507 – 5,507 100,500 (736) 99,764 105,271 128,588 3,202 61,829 417 63,140 128,588 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (42) Transition to IFRS (continued) Company Reconciliation of equity at 30 April 2005 Notes (d) (e) (f) (f) Property, plant and equipment Investments Total non-current assets Trade and other receivables Cash and cash equivalents Total current assets Total assets Trade and other payables Borrowings Proposed dividends Total current liabilities Borrowings Total non-current liabilities Total liabilities Net assets Share capital Share premium account Revaluation reserve Merger reserve Retained earnings Total Equity Company Reconciliation of profit for the year ended 30 April 2005 Profit for the year under UK GAAP Adjustment for fair value of share options granted De-recognition of intergroup dividend for the year ended 30 April 2005 Recognition of intergroup dividend for the year ended 30 April 2004 Holiday pay accrual Preference dividends reclassified as finance costs Taxation adjustments Profit for the year under IFRS UK GAAP £000 Effect of transition to IFRS £000 3,056 103,234 106,290 391,968 46,180 438,148 544,438 8,110 18 7,718 15,846 387,639 387,639 403,485 140,953 3,709 62,544 1,371 417 72,912 140,953 – – – (16,102) – (16,102) (16,102) 97 – (7,677) (7,580) 500 500 (7,080) (9,022) (500) – – – (8,522) (9,022) IFRS £000 3,056 103,234 106,290 375,866 46,180 422,046 528,336 8,207 18 41 8,266 388,139 388,139 396,405 131,931 3,209 62,544 1,371 417 64,390 131,931 £000 14,225 103 (17,000) 15,500 (7) (25) (29) 12,767 82-83 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (42) Transition to IFRS (continued) Notes to the reconciliation of equity as at 1 May 2004 and 30 April 2005 Group Company 30 April 2005 £000 01 May 2004 £000 30 April 2005 £000 01 May 2004 £000 (a) Goodwill UK GAAP Amounts reclassified into other intangible assets Reversal of goodwill amortisation, not charged under IFRS 3 Deferred tax adjustments in respect of intangible assets Deferred tax adjustments in respect of assets and liabilities acquired with Fualsa and Foley Reduction in Fualsa net assets acquired due to recognition of holiday pay accrual IFRS (b) Other intangible assets UK GAAP Reclassification of software assets at net book value Brand names recognised* Non-contractual customer relationships recognised* Non-compete agreements recognised* Amortisation of recognised intangible assets IFRS * Previously classified within goodwill under UK GAAP (c) Inventories UK GAAP Net book value of used vehicles held for resale reclassified from inventories to non-current assets held for sale in accordance with IFRS 5 IFRS (d) Trade and other receivables UK GAAP Deferred tax adjustments (Note (g)) De-recognition of intergroup dividends IFRS (e) Trade and other payables UK GAAP Holiday entitlement accrued by employees but not taken as at the balance sheet date under IAS 19 Unpaid preference dividends reclassified under IAS 32 IFRS (f) Borrowings UK GAAP Book and fair value of Preference shares reclassified from equity to debt under IAS32 IFRS (g) Deferred tax UK GAAP Date of transition adjustments Deferred tax provision on intangible assets Deferred tax provision on buildings Deferred tax asset on share options Deferred tax asset on holiday pay accrual IFRS (h) Translation reserve UK GAAP Cumulative exchange difference from 1 May 2004 to 30 April 2005 reclassified from retained earnings into separate component IFRS 14,110 (5,363) 1,116 1,839 623 123 1,981 – – – – – 12,448 1,981 – 96 3,953 1,273 137 (593) 4,866 – 232 – – – – 232 18,160 15,285 (11,464) 6,696 (9,671) 5,614 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 92,841 – – 92,841 43,925 802 1 44,728 56,382 – – 56,382 31,926 609 – 32,535 391,968 898 (17,000) 375,866 122,881 – (15,500) 107,381 8,110 96 1 8,207 5,417 90 – 5,507 403,319 208,079 387,639 100,000 500 403,819 500 208,579 500 500 388,139 100,500 9,424 (472) 1,637 652 (869) (248) 10,124 – 1,482 1,482 6,821 – – 300 (589) (183) 6,349 – – – (700) (617) – – (280) (1) (1,598) – – – (119) – – – (589) (28) (736) – – – NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (42) Transition to IFRS (continued) Notes to the reconciliation of Group profit for the year ended 30 April 2005 (i) Revenue UK GAAP Removal of used vehicle sales proceeds from revenue in accordance with IAS18 IFRS (j) Cost of sales UK GAAP Removal of cost of used vehicles sold from cost of sales to correspond with revenue adjustment (Note (i)) Adjustment to depreciation on updated estimate of residual values of vehicles sold Additional holiday pay accrual IFRS (k) Administrative expenses UK GAAP Adjustment to fair value of share options granted Additional holiday pay accrual Reclassification of depreciation of software assets as amortisation IFRS (l) Amortisation UK GAAP Reversal of goodwill amortisation Amortisation of intangible assets Reclassification of depreciation of software assets as amortisation IFRS (m) Finance costs and preference dividends UK GAAP Preference dividends reclassified from dividends to finance costs to match reclassification of Preference shares from equity to debt IFRS (n) Taxation UK GAAP Deferred tax credit on intangible assets Deferred tax credit on buildings Deferred tax charge on share options Deferred tax credit on holiday pay IFRS (o) Ordinary dividends UK GAAP Reversal of 2005 final dividend not formally approved at 30 April 2005 2004 final dividend formally approved in the year ended 30 April 2005 IFRS 2005 £000 458,267 (118,885) 339,382 333,913 (111,725) (7,160) 69 215,097 47,557 (103) 1 (262) 47,193 1,116 (1,116) 593 262 855 23,038 25 23,063 15,963 (202) (13) 31 (22) 15,757 12,812 (7,676) 6,780 11,916 84-85 Northgate plc Annual Report and Accounts 2006 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2006 (42) Transition to IFRS (continued) Adoption of IAS 32 and IAS 39 on 1 May 2005 FIVE YEAR FINANCIAL SUMMARY Based on the consolidated financial statements for years ended 30 April and adjusted to reflect the effect of subsequent changes in accounting policy. In accordance with the transitional provisions of IFRS 1, the date of transition of the Group in respect of IAS 32 and IAS 39 only is 1 May 2005. The reconciliation of equity as at 1 May 2005 in respect of IAS 32 and IAS 39 only is as follows: Income statement Group Total equity at 30 April 2005 Fair value of financial instruments Total equity at 1 May 2005 after the adoption of IAS 32 and IAS 39 There is no impact on the total equity of the Company. £000 225,031 (923) 224,108 Explanation of material adjustments to the cash flow statement for the year ended 2005 The significant differences between the Group cash flow statements under IFRS, as compared to UK GAAP, are as follows: Movements in non-current assets held for sale and movements in trade debtors relating specifically to these non-current assets, between the previous and current balance sheet dates, are both classified within “proceeds of disposal of vehicles for hire” and form part of cash flows from investing activities under IFRS. Under UK GAAP, the non-current assets were classified within “stock” and their movement formed part of “(increase) decrease in stock” and the changes in debtors formed part of “(increase) decrease in debtors”, both of which were classified within net cash flows from operating activities. Preference dividends form part of finance costs under IFRS and payments of preference dividends are classified as “interest paid” within net cash from operating activities. Under UK GAAP, these amounts were separately classified within “returns on investments and servicing of finance”. Revenue Profit from operations Share of joint venture profit from operations Net finance costs Share of profit before taxation of associate Share of taxation of associate Profit before taxation Taxation Profit for the year Basic earnings per Ordinary share Dividends Dividends per Ordinary share All UK GAAP to IFRS adjustments that impact on profit from operations have no net impact on net cash flows from operating activities under IFRS. Balance sheet Assets employed Non-current assets Net current assets (liabilities) Non-current assets held for sale Non-current liabilities Financed by Share capital Share premium account Reserves Net asset value per Ordinary share IFRS 2006 £000 372,609 72,598 – 72,598 (20,078) 4,964 (1,422) 56,062 (15,468) 40,594 61.1p 13,437 23.0p IFRS 2006 £000 798,777 42,582 14,705 (535,775) 320,289 3,538 64,998 251,753 320,289 453p IFRS 2005 £000 339,382 76,237 – 76,237 (21,249) – – 54,988 (15,757) 39,231 60.7p 11,916 20.0p UK GAAP 2004 £000 UK GAAP 2003 £000 UK GAAP 2002 £000 355,624 55,605 4,342 59,947 (15,355) – – 44,592 (13,303) 31,289 50.7p 11,064 17.6p 337,875 277,289 49,015 2,620 51,635 (15,032) – – 36,603 (11,497) 25,106 41.4p 9,736 16.0p 45,055 – 45,055 (13,381) – – 31,674 (9,953) 21,721 35.8p 9,119 15.0p IFRS 2005 £000 UK GAAP 2004 £000 UK GAAP 2003 £000 UK GAAP 2002 £000 587,008 40,502 11,464 (413,943) 225,031 3,209 62,544 159,278 225,031 351p 419,136 (15,929) – (214,900) 188,307 3,702 61,829 122,776 188,307 293p 402,173 (86,615) – (162,597) 152,961 3,545 45,635 103,781 152,961 250p 344,494 (60,676) – (147,201) 136,617 3,542 45,471 87,604 136,617 224p 86-87 Northgate plc Annual Report and Accounts 2006 NOTICE OF ANNUAL GENERAL MEETING INFORMATION FOR SHAREHOLDERS Notice is hereby given that the one hundred and eighth Annual General Meeting of Northgate plc will be held at Norflex House, Allington Way, Darlington at 11.00 am on 27 September 2006 for the following purposes: Classification Information concerning day to day movements in the price of the Company’s Ordinary shares is available on Cityline (09068 123456) code 2722. To receive and adopt the Report of the Directors and audited accounts of the Company for the year ended 30 April 2006. The Company’s listing symbol on the London Stock Exchange is NTG. To declare a final dividend of 14p per Ordinary share. The Company’s sponsoring broker is Hoare Govett Limited (part of ABN AMRO) and the Company’s Ordinary shares are traded on SETSmm. Financial calendar January February July September Announcement of interim results Payment of interim dividend Announcement of year end results Report and accounts posted to shareholders Annual General Meeting Payment of final dividend Secretary and registered office D Henderson FCIS Norflex House Allington Way Darlington DL1 4DY Tel: 01325 467558 Registrars Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Tel: 0870 1623100 The Group’s website address is www.northgateplc.com 1. 2. 3. 4. 5. 6. 7. 8. To approve the Remuneration Report for the financial year ended 30 April 2006 set out on pages 16 to 21 of the 2006 Annual Report and Accounts. To re-appoint Deloitte & Touche LLP as auditors of the Company. To authorise the Audit Committee to determine the remuneration of the auditors. To re-elect Mr S J Smith as a Director. To re-elect Mr P J Moorhouse as a Director. To re-elect Mr G T Murray as a Director. As special business to consider, and if thought fit, to pass the following resolutions which are to be proposed as Special Resolutions: 9. (a) That the Directors be and they are hereby empowered pursuant to Section 95 of the Companies Act 1985 (‘the Act’), to allot equity securities (within the meaning of Section 94 of the Act) for cash, pursuant to the authority given in accordance with Section 80 of the Act by a resolution passed at the Annual General Meeting of the Company held on 8 September 2004 as if Section 89(1) of the Act did not apply to any such allotment, provided that this power shall be limited to: the allotment of equity securities in connection with an offer of securities, open for acceptance for a period fixed by the Directors, by way of rights to holders of Ordinary shares and such other equity securities of the Company as the Directors may determine on the register on a fixed record date in proportion to their respective holdings of such securities or in accordance with the rights attached thereto (but subject to such exclusions or other arrangements as the Directors may deem necessary or expedient to deal with fractional entitlements that would otherwise arise or with legal or practical problems under the laws of, or the requirements of, any recognised regulatory body or any stock exchange in any territory or otherwise howsoever); (b) the allotment of equity securities in connection with any employees’ share scheme approved by the members in general meeting; and (c) the allotment (otherwise than pursuant to sub-paragraphs (a) and (b) above) of equity securities up to an aggregate nominal amount of £175,000. And shall expire at the conclusion of the Annual General Meeting of the Company to be held in 2007 or, if earlier, fifteen months after the passing of this resolution except that the Company may before such expiry make offers or agreements which would or might require equity securities to be allotted after such expiry and notwithstanding such expiry the Directors may allot equity securities in pursuance of such offers or agreements. 10. That the Company be generally and unconditionally authorised to make market purchases (as defined in Section 163, Companies Act 1985) of its Ordinary shares of 5p each provided that: (a) the Company does not purchase under this authority more than 7,000,000 Ordinary shares; (b) the Company does not pay less than 5p for each share; (c) (d) (e) the Company does not pay more for each share than 5% over the average of the middle market price of the Ordinary shares according to the Daily Official List of the London Stock Exchange for the five business days immediately preceding the date on which the Company agrees to buy the shares concerned; this authority shall expire at the conclusion of the Annual General Meeting of the Company to be held in 2007 unless such authority is renewed prior to such time; and the Company may agree before the aforesaid authority terminates to purchase Ordinary shares where the purchase will or may be executed (either wholly or in part) after the authority terminates. The Company may complete such a purchase even though the authority has terminated. By Order of the Board D Henderson Secretary 3 July 2006 Registered Office: Norflex House Allington Way Darlington DL1 4DY NOTES 1. Only the holders of Ordinary shares registered in the register of members of the Company as at 6.00 pm on 25 September 2006 shall be entitled to attend and vote at the meeting in respect of the number of shares registered in their name at that time. Changes to entries on the register of members after that time shall be disregarded in determining the right of any person to attend and vote at the meeting. 2. A member entitled to attend and vote is entitled to appoint one or more proxies to attend and (on a poll) vote instead of him. A proxy so appointed need not also be a member. A three-way proxy card for this purpose is enclosed. 88 Northgate plc Annual Report and Accounts 2006 NOTES 

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