Redde Northgate
Annual Report 2007

Plain-text annual report

ANNUAL REPORT AND ACCOUNTS 2007 CHAIRMAN’S STATEMENT 01 HIGHLIGHTS 04 06 OPERATIONAL REVIEW 08 FINANCIAL REVIEW 12 BOARD OF DIRECTORS 14 REPORT OF THE DIRECTORS 16 REMUNERATION REPORT 24 CORPORATE GOVERNANCE 27 HEALTH & SAFETY AND ENVIRONMENTAL 28 DIRECTORS’ RESPONSIBILITIES 29 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF NORTHGATE PLC FINANCIAL STATEMENTS 30 37 NOTES TO THE ACCOUNTS FIVE YEAR FINANCIAL SUMMARY 76 77 INFORMATION FOR SHAREHOLDERS 78 NOTICE OF ANNUAL GENERAL MEETING 80 NOTES ON ARTICLES OF ASSOCIATION HIGHLIGHTS 01 > GROUP REVENUE FOR THE YEAR INCREASED BY 41% TO £526.5M (2006 – £372.6M) > PROFIT BEFORE TAX UP BY 34% TO £75.4M (2006 – £56.1M) > UNDERLYING PROFIT BEFORE TAX* INCREASED BY 29% TO £79.3M (2006 – £61.3M) > ADJUSTED EARNINGS PER SHARE** INCREASED BY 24% TO 81.6P (2006 – 65.7P) *Stated before £nil (2006 – £2.6m) exceptional restructuring costs, £3.9m (2006 – £1.2m) amortisation of intangible assets and £nil (2006 – £1.4m) of share of associate taxation. **Stated before exceptional restructuring costs and amortisation of intangible assets. Vehicle fleet – UK – Spain Group profit from operations Profit before tax Earnings per share Dividend per share Net assets per Ordinary share 2007 65,300 55,000 £107.1m £75.4m 76.1p 25.5p 509p 2006 64,000 47,000 £72.6m £56.1m 61.1p 23.0p 453p Vehicle Fleet - UK Vehicle Fleet - Spain Group profit before tax (£000) * UK GAAP basis Earnings per share (p) * UK GAAP basis 75,368 76.1 64,000 65,300 52,600 47,400 45,000 55,000 47,000 54,988 56,062 44,592* 36,603* 60.7 61.1 50.7* 41.4* 19,000 15,000 12,000 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 02_03 “I AM PLEASED TO ANNOUNCE AN EXCELLENT SET OF RESULTS FOR THE GROUP AFTER A YEAR OF SIGNIFICANT CHANGE. WE HAVE ASSIMILATED TWO MAJOR ACQUISITIONS, ONE IN EACH OF OUR MARKETS, STREAMLINED OUR UK BUSINESS AND WE ARE WELL POSITIONED FOR FUTURE GROWTH.” - Philip Rogerson (Chairman) NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 CHAIRMAN’S STATEMENT 04–05 “THE LOW PENETRATION RATES OF RENTAL IN BOTH THE UK AND SPANISH COMMERCIAL VEHICLE PARCS GIVE US CONFIDENCE THAT THERE STILL EXISTS PLENTY OF OPPORTUNITY FOR GROWTH. THIS LOW PENETRATION RATE ALSO EXISTS THROUGHOUT EUROPE AND OFFERS US THE PROSPECT OF EXPANDING OUR OPERATIONS INTO FURTHER JURISDICTIONS.” This is the first year we are reporting against the targets set out in our new strategy for growth announced in January 2006. In the UK the key elements of that strategy, namely the reorganisation of the management structure, growth through a significant acquisition, and the introduction of fleet management, have all been achieved. In Spain, we have achieved continued strong organic fleet growth and have acquired the remaining 51% of the equity in Record Rent a Car S.A. (“Record”), our second commercial vehicle rental business in Spain. As a result, earnings per share increased by 24%, comfortably achieving our target of double-digit growth. Since 1999, when we announced our first strategy for growth focused solely on vehicle rental, the business has seen earnings per share grow from 19.1p to 76.1p, a compound annual growth rate of 19%. The results for the year are summarised below: • Group revenue increased by 41% to £526.5m (2006 – £372.6m) • Underlying profit before tax for the year increased by 29% to £79.3m (2006 – £61.3m) • Adjusted earnings per share increased by 24%. Based on these results, the Board has recommended to shareholders a final dividend of 15.5p per share making a total dividend for the year of 25.5p, which is covered three times and represents an increase of 11% over the prior year. The dividend will be payable on 28 September 2007 to those shareholders on the register on 24 August 2007. The UK business has seen the expected benefits flow through from the acquisition of Arriva Vehicle Rental (“AVR”) in 2006, with the high level of customer retention being particularly pleasing. The streamlining of the management structure which began in May 2006 has also produced some early gains, as evidenced by the improvement in vehicle utilisation to 91% (2006 – 90%). External factors have been generally favourable with a more benign hire rate environment than the previous year and a buoyant used vehicle market. Fleet growth has been modest as a result of the internal restructuring within the business and a focus on maintaining hire rates in the face of competitive pricing. This modest growth has been supplemented by an improvement in utilisation referred to above that has assisted in increasing the number of vehicles on hire by 3% since the start of the financial year. The overall outcome for the UK is that the rental operating margin has improved to 21.1% (2006 – 20.6%). In Spain, we have achieved another year of significant growth, with the fleet now exceeding 55,000 vehicles, up 17% over the prior year. Coupled with operational improvements, this has increased the operating margin to 22.4% (2006 – 20.9%). The Spanish business now produces 35% of the Group’s profit from operations. Having created a unified management structure, we expect to be operating on a common IT platform in Spain during this financial year and thereafter will begin to merge those activities where further synergies can be obtained. Contrary to comment in the UK press in April 2007 we have seen no evidence of any reduction in demand from our customers in the Spanish construction sector. As explained in the Operational Review we would not expect a change in the fortunes of the real estate market to affect our business materially since we have a very low exposure to this area. We have moved forward with our search for new territories and are now confident that we will find an appropriate opportunity in line with the timescale set out in our strategic plan. Whilst it will not be of the same size as Fualsa when we made our first investment in July 2002, we would expect our flexible rental product to enable us to grow strongly, albeit from a lower base. Following his retirement in November 2006 on grounds of ill health it was with sadness that we learnt of the death of Martin Ballinger, our former Chairman, in February 2007. In his short time with us Martin made a significant contribution to Northgate’s continued development. Our thoughts then, and now, are with his family. CURRENT TRADING AND OUTLOOK The new financial year has started well and the Group is performing in line with the Board’s expectations. The low penetration rates of rental in both the UK and Spanish commercial vehicle parcs give us confidence that there still exists plenty of opportunity for growth. This low penetration rate also exists throughout Europe and offers us the prospect of expanding our operations into further jurisdictions, a process that we expect to commence within the coming year. Philip Rogerson Chairman NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 OPERATIONAL REVIEW STRATEGY FOR GROWTH REVIEW OF CURRENT YEAR In January 2006 we announced a new three-year rolling strategic plan aimed at maintaining annual double-digit earnings growth. The key elements of that plan were: UK & Republic of Ireland • An increase in the fleet size, both by acquisition and organic growth • The introduction of a fleet management product • A reorganisation of the business to create a more streamlined hire company network and to implement a functional, rather than geographic, management structure. Spain • Acquisition of the remaining 51% of the equity of Record • Continued double-digit organic fleet growth • To obtain the synergies available from combining certain functions in our two Spanish businesses. We are delighted that these objectives have been substantially achieved this year. Although fleet growth in the UK was below our planned levels we have put additional measures in place designed to achieve our target level of growth of 5% per annum in future periods. In the year under review our UK business has enjoyed the benefits of the acquisition of AVR, the integration of which was concluded by 30 April 2006. We have also introduced a fleet management product to our customers through the acquisition of Fleet Technique Limited (“FTL”), streamlined the number of hire companies from 35 to 20 and revised the management structure. In Spain we acquired the balance of the share capital of Record on 11 May 2006, grew the fleet by 17%, created a unified management structure to take the business forward and obtained some economies of scale as a result of effectively doubling the size of our business. As a consequence of these achievements, the Group has increased profit from operations by 50% and, despite an increase in the interest charge due to interest rate increases and higher levels of net debt, achieved an increase in underlying profit before tax of 29%. The resultant increase of 24% in our adjusted earnings per share represents an excellent start for year one of our latest strategic plan. UNITED KINGDOM AND REPUBLIC OF IRELAND During the year ended 30 April 2007, fleet growth has been modest but has been compensated by improved utilisation and a more benign hire rate environment when compared to the prior year. In addition used vehicle residual values have been particularly strong, principally as a result of shortages in new product in a number of categories leading to a similar reduction in the number of vehicles entering the used market. When combined with the benefits of the AVR acquisition referred to above, this has seen UK profit from operations improve by 22% to £71.7m (2006 – £58.8m). DEPOT NETWORK Following the restructuring of the business, we now operate through 20 hire companies, ranging in vehicle fleet size from 1,400 vehicles to 6,000 vehicles. In addition we have 62 branches, producing a total network of 82 locations. In the year ahead we would not expect the overall number of locations to change materially, although we do expect to relocate a number of hire companies as they outgrow their existing facilities. VEHICLE FLEET AND UTILISATION We ended the year with a fleet size of 65,300 vehicles, representing growth of 2%. However, as a result of the improvement in utilisation referred to below, the number of vehicles on hire has increased by 3% since the beginning of the financial year. The internal restructuring of the UK business undoubtedly had a short-term adverse effect on our sales activity during the year, as did our determination to protect our hire rates and as a consequence we fell short of our growth target of 5% per annum. Going forward we now have a settled sales structure and an enlarged marketing resource to focus on the 90% of the market that owns commercial vehicles. In particular we expect to be able to utilise our fleet management business and our recently relaunched “sale and rentback” product as a conduit to convert those users. We achieved a utilisation rate of 91% for the year, up 1% over the prior year and the highest rate we have delivered since 1997. The improvement in utilisation was one of the efficiencies expected to be delivered by the streamlining project and we are pleased to report the progress to date. HIRE RATES During the prior financial year hire rates came under pressure in a very competitive environment. This situation eased in February 2006 and we can report that for the financial year ended 30 April 2007 hire rates were stable in the UK and have remained so in the early part of the current financial year. USED VEHICLE SALES We have exceeded the prior year record of selling 23,000 vehicles, with total disposals for this year of 24,700 vehicles. To enable us to achieve this volume of disposals, we had increased our used vehicles sales network to nine locations in the previous financial year. 06–07 HIRE RATES The slightly less competitive pricing environment in Spain has allowed us, once again, to increase hire rates modestly such that the average hire rate was up by 1% over the prior year. This benefit is partly offset by the additional depreciation arising from a similar increase in the capital cost of new vehicles. USED VEHICLE SALES During the year we have disposed of 12,200 vehicles (2006 – 4,900) which gave rise to a small profit on disposal in line with our expectations of £1.9m (2006 – £2.0m). This has been offset against vehicle depreciation in accordance with our accounting policies. These disposals were achieved from a network of 11 locations, with some 5% of the total being delivered through our semi-retail and retail channels. It is our intention to develop these channels further in the year ahead in order to achieve a medium-term goal of 8% of total disposals from these routes to market. The move towards a common IT platform continues and the Record system has now completed its upgrade and is ready to roll out in Fualsa. This process is expected to complete within the current financial year, after which we will be able to secure further efficiencies in the combined business. OTHER TERRITORIES Our search for another jurisdiction has been stepped up a gear and we are now actively examining a number of markets for potential targets. As we have previously indicated, our success in Spain came as much from identifying the right company to acquire as it did from entering the right market. Whilst our initial research suggests that there are no rental businesses of the size of Fualsa when we acquired it, we are confident that our flexible rental product will create demand once offered and that we will be able to grow quickly, even if it is from a lower base. In line with the timetable in our strategy for growth, we would expect to move forward with an acquisition during this financial year. Steve Smith Chief Executive Equally pleasing, we have seen the proportion of vehicles disposed of through our retail and semi-retail channels increase to 16% (2006 – 12%). This has been possible due to both the improved supply of good quality clean vehicles being generated by the AVR business and by the continued development of our retail and semi-retail brands. We have raised our medium-term target for these channels to 20% of total disposals. There continues to be a shortage of new light commercial vehicle product, which naturally leads to less supply into the used market and, as a consequence, an improvement in used vehicle residual values. We are not aware of circumstances which will change this situation in the short term and therefore expect to achieve similar disposal values in the current calendar year. The effect of the increase in the proportion of our retail and semi-retail sales, coupled with the strong used vehicle market, gave rise to a profit on disposal of £8.5m (2006 – £2.2m) which, in accordance with our accounting policies, was offset against the vehicle depreciation charge for the year. FLEET MANAGEMENT In its first full year of ownership, FTL, our fleet management subsidiary, produced a profit from operations in line with our expectations at £0.6m. Revenue from FTL was 6% higher compared to the previous 12 months trading period, although the Group did not have ownership for the whole of that prior year. We remain confident that FTL will enable us to sell a broader range of solutions to our customers and to utilise better our sizeable network of repair facilities thereby delivering a more significant contribution in future periods. Equally important is the visibility it provides into the owned market which, as mentioned above, will assist us in converting owners of commercial vehicles to renters. SPAIN On 11 May 2006 we acquired the remaining 51% of the share capital of Record, making us the leader in the growing Spanish vehicle rental market with a combined fleet size for Fualsa and Record, at that time, of 47,000 vehicles. Since May 2006 the fleet has grown by 17% to 55,000 vehicles, comfortably ahead of our targeted growth of 15%. At the same time improved operational procedures have enabled utilisation to improve to 90% (2006 – 89%). Whilst the customer base of our Spanish business continues to be dominated by the construction sector, which represents 58% of our total revenue, this proportion is lower than in prior years when it peaked at 65%. The reduction indicates that other sectors are growing at a faster rate than construction. As with many construction enterprises in the UK, the activities of Spanish construction companies now encompass service as well as project based business. Further analysis of our construction customer activity indicates approximately 11% of the 58% is related to service provision such as facilities management and the remaining 47% is derived from construction projects many of which are funded from central government or the EU Structural Fund. It remains our intention to reduce this dependency over the medium term. DEPOT NETWORK Whilst the network of 35 locations has not increased during the year, we have relocated five branches to larger premises to accommodate the growth in the fleet. Looking forward, we do not expect to extend the network significantly as we already have good geographic coverage across Spain but we do anticipate further relocations as the fleet continues to grow. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 08–09 The operating margin of the enlarged Spanish business has improved as a result of the acquired Record business having a higher operating margin than Fualsa and as a result of overall efficiency gains across the enlarged Spanish business. DIVIDEND The Directors recommend a final dividend of 15.5p per share (2006 – 14p) giving a total for the year of 25.5p (2006 – 23p), an increase of 11%. The dividend is covered 3.0 times (2006 – 2.7 times). 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% (2006 – 10%). Group return on equity, calculated as profit after tax divided by average shareholders’ funds, is 16% (2006 – 16%). EARNINGS PER SHARE Earnings per share increased by 24% to 76.1p (2006 – 61.1p), reflecting the growth in profits in both the UK and Spain. Excluding intangible amortisation of £3.9m (2006 – £1.2m) and exceptional restructuring costs of £nil (2006 – £2.6m), basic earnings per share grew by 24% to 81.6p (2006 – 65.7p). Basic earnings per share have been calculated in accordance with IAS 33. TAXATION The Group’s UK operations have a total tax charge of 33% (2006 – 32%), which is slightly higher than the standard rate of 30% due to disallowable expenditure incurred within the business. The 2007 Budget Statement announced a reduction in the standard rate of UK corporation tax from 30% to 28% commencing in 2008. This change will have the effect of reducing the UK’s future effective tax rate. At the same time capital allowances, which are an important component of the UK’s qualifying expenditure, are scheduled to be reduced from 25% to 20% per annum. This will not impact the UK’s future effective tax rate but it will result in a short-term cash outflow. The Spanish effective tax rate of 17% is below the standard Spanish tax rate of 35% because of tax concessions based on vehicle purchase reliefs that are available to the businesses. Legislation has been enacted in Spain that will reduce the standard rate of corporation tax from 35% to 30% over the next two financial years. The current year effect of this change is that a credit has accrued to the deferred tax charge to reflect the future reduction in tax rate. The legislation also includes provisions that will remove some element of the vehicle purchase reliefs that the Spanish businesses currently claim. It is therefore expected that the effective rate for our Spanish business will move towards 30% within the next couple of years. FINANCIAL REVIEW FINANCIAL REPORTING SALES, MARGINS AND RETURN ON CAPITAL Group revenue increased by 41% to £526.5m (2006 – £372.6m). UK revenue increased by 17% to £351.1m (2006 – £300.8m) mainly as a result of full year contributions from the AVR and FTL acquisitions. The Spanish business benefited from a 144% increase in revenue reflecting the first year contribution from Record as a subsidiary undertaking and the organic fleet growth of 17% in Spain leading to revenue of £175.4m (2006 – £71.8m). 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 Restructuring cost* Fleet management Intangible amortisation 2007 £000 337,370 13,738 351,108 71,137 - 576 (2,035) 69,678 2006 £000 297,433 3,338 300,771 61,329 (2,607) 119 (692) 58,149 *The UK profit from operations in 2006 incurred 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) The overall UK operating margin has remained static due to the mix of business from vehicle rental and fleet management changing. The operating margin from vehicle rental has improved to 21.1% (2006 – 20.6%) principally as a result of a 1% increase in fleet utilisation and a reduction in our depreciation charge after offsetting higher profits on vehicle disposals. The higher profits on vehicle disposals are expected to continue in the short term but it is less certain as to whether the current level of profits represents a permanent shift in the market. In accordance with our accounting policies we continue to review anticipated net book values and changes in the possible disposal values. The profit from operations is stated after absorbing costs of £0.8m associated with the streamlining of the hire company network. 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 and on 11 May 2006 the Group acquired the remaining 51% of Record. In the current year both businesses have been reported as subsidiary undertakings whereas in the prior year only Fualsa was a subsidiary undertaking. The revenue and profit from operations generated by Spain during the year is set out below: Revenue Vehicle rental Profit from operations Vehicle rental Intangible amortisation 2007 £000 2006 £000 175,357 71,838 39,265 (1,887) 37,378 2007 22.4% 14,984 (535) 14,449 2006 20.9% UK overall Vehicle rental Fleet management 2007 20.4% 21.1% 4.2% 2006 20.4% 20.6% 3.6% Operating margins (excluding intangible amortisation) Overall NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 FINANCIAL REVIEW 10–11 INVESTMENTS On 11 May 2006 the Company acquired the remaining 51% of the share capital of Record for £49.8m. 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. CAPITAL STRUCTURE As at 30 April 2007 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 290% (2006 – 204%). The net cash balance taken into account in calculating the gearing ratio for this year is £35m (2006 – £24m). This level of gearing is in line with our expectations, the increase being mainly due to the cash outflows following the purchase of 51% of Record for £49.8m and the debt of £146m that was acquired with Record on the same date. TREASURY STRATEGY 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 sourcing of finance for the Group and the related commercial terms is arranged and monitored through the Group’s treasury function. In January 2006 the Group extended its loan facilities with its seven banks to a total of £745m under a series of unsecured, revolving, bilateral agreements and later in 2006 these facilities were extended to £755m. In December 2006 the Group concluded a Private Placement in the United States of America by issuing a series of unsecured loan notes with maturity periods of between seven and ten years in order to raise $335m of new finance. All of this new finance was immediately converted to sterling which at 30 April 2007 was equivalent to debt of £169m. The Group entered into a series of financial instruments to fix the rate of interest at an effective rate of 5.78% per annum for the period of the loan notes. This transaction has diversified the Group’s source of debt finance and also increased the overall term of its debt repayment. All funds generated by the Group’s operations are controlled by a central treasury function. LIQUIDITY The Group’s aggregate finance facilities, including existing Spanish loan facilities, total £977m compared to net debt of £755m giving adequate funding for our expected growth. As described above, the core of these arrangements relate to the £755m unsecured bank loan facilities and £169m of unsecured US loan notes which combined have the following maturity: Maturing Within 1 year Within 1 – 3 years Within 7 years Within 10 years Total Amount (£m) 151 604 63 106 924 CASH FLOWS The Group’s net debt increased by 44% to £755.3m (2006 – £524.5m) including the debt in Record’s balance sheet. This increase reflects cash outflows associated with the purchase of 51% of the equity of Record (£49.8m), the acquisition of Record’s existing debt (£146m) and funding of fleet growth particularly in Spain. Gross cash generation as reflected by EBITDA* increased to £304.9m (2006 – £210.0m). The Group had net capital expenditure on its fleet of £249.4m representing the purchase of 26,000 new vehicles in the UK and 20,200 new vehicles in Spain for a total cash outflow of £437.9m and the sale of 24,700 UK vehicles and 12,200 vehicles in Spain that generated a cash inflow of £188.5m. *EBITDA – Earnings before interest, taxation, depreciation and amortisation. INTEREST COSTS The Group’s net interest costs have increased by 58% to £31.7m (2006 – £20.1m) compared to an increase in net debt of 44%. The reason for the balance of the increase in interest charges is due to LIBOR and EURIBOR both experiencing a series of rate increases over the financial year. Interest cover remained a healthy 3.4 times (2006 – 3.6 times). INTEREST RATE MANAGEMENT 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 but more recently has adopted a strategy to increase this coverage to a higher level of between 50% to 75%. The proportion of net debt hedged into fixed rates was 53% at 30 April 2007 and has subsequently increased to 57%. The weighting of this coverage is very much towards Sterling debt where 100% of Sterling debt is now fixed. Sterling debt represents 30% of the Group’s net debt and the remaining net debt proportion of 70% is denominated in Euros. Gerard Murray Finance Director BOARD OF DIRECTORS Philip Rogerson (age 62) 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. His appointment as Chairman of the Company on an interim basis in November 2006 was made permanent on 5 June 2007. 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. 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. Stephen Smith ACA (age 50) Jan Astrand MBA (age 60) 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. 12–13 Appointed to the Board as a non-executive Director in April 2005 and appointed Senior Independent Director in June 2007, 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 to the Board as a non- executive Director in February 2001. A Swedish national based in London, Jan was Chairman of CRC Group plc until January 2007. 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. Executive Director since 1990. In 1981 Alan founded the commercial vehicle hire business, which was acquired by the Company in 1987. Tom Brown (age 58) Phil Moorhouse FCCA (age 54) Gerard Murray ACA (age 44) Alan Noble (age 56) Board Committees Audit Philip Rogerson (Chairman) Jan Astrand Tom Brown Remuneration Tom Brown (Chairman) Jan Astrand Philip Rogerson Nomination Philip Rogerson (Chairman from 14 November 2006) Jan Astrand Martin Ballinger (resigned 14 November 2006) Tom Brown Stephen Smith NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 REPORT OF THE DIRECTORS 14–15 DIRECTORS PAYMENT OF SUPPLIERS ARTICLES OF ASSOCIATION 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 2007 the Group’s creditor days were as shown in Note 23 to the accounts. There have been changes in company law since our present Articles of Association were adopted in 2004. Accordingly, the Directors consider it appropriate for the Company to adopt new Articles of Association to reflect these changes. 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. The principal differences between the present and the proposed new Articles of Association are summarised on page 80. A copy of the proposed new Articles of Association will be available for inspection at the Company's registered office until 26 September 2007 and also at the Annual General Meeting. Copies are also available to shareholders on request and can be viewed on the Company's website. A special resolution adopting the new Articles of Association will be proposed at the Annual General Meeting. FINANCIAL INSTRUMENTS Details of the Group’s use of financial instruments are given in the Financial Review on pages 10 and 11 and in Note 25 to the accounts. 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 2 July 2007 The Directors present their report and the audited financial statements for the year ended 30 April 2007. RESULTS Profit for the year after taxation was £54,483,000 (2006 – £40,594,000). An interim dividend of 10p per share was paid on the Ordinary shares on 8 February 2007. Details of the present Directors, all of whom have served throughout the year, are listed on pages 12 and 13. Mr Ballinger retired from the Board through ill health on 14 November 2006 and Mr Rogerson was appointed as Chairman on an interim basis. This appointment was made permanent on 5 June 2007. Mr Rogerson and Mr Astrand are retiring by rotation in accordance with the Articles of Association and, being eligible, are seeking re-election. The Directors recommend a final Ordinary dividend of 15.5p per share making a total for the year of 25.5p per share. The termination provisions in respect of executive Directors’ contracts are set out in the Remuneration Report on pages 16 to 21. The final dividend, if approved, will be paid on 28 September 2007 to shareholders on the register at close of business on 24 August 2007. The following are the interests of the Directors in the share capital of the Company. All interests are beneficial unless otherwise stated. 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. 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 in the issued Ordinary share capital of the Company have been notified to the Company in accordance with the provisions of Chapter 5 of the Disclosure and Transparency Rules: P Rogerson S J Smith J Astrand T Brown P J Moorhouse G T Murray A T Noble Ordinary Shares 30 April 2007 – 71,429 – 2,000 35,596 11,198 732,937 1 May 2006 – 71,121 – 2,000 35,288 10,890 732,629 No Director has an interest in the Preference shares of the Company. No changes in the above interests have occurred between 30 April 2007 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. Direct Indirect DIRECTORS’ INDEMNITIES 3,840,135 (5.4%) AEGON UK plc AXA S.A. 1,036,118 (1.5%) Columbia Wagner Asset Management LP 2,194,500 (3.1%) - - Lazard Asset Management LLC 2,486,796 (3.5%) Legal & General Group plc 2,278,596 (3.2%) Lloyds TSB Group plc 4,380,679 (6.1%) Standard Life Investments Limited 248,732 (0.3%) 4,943,868 (6.9%) - - 3,494,276 (4.9%) - - - 4,502 3,469,705 (4.9%) 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 £27,000 (2006 – £18,000) principally to local charities serving the communities in which the Group operates. No political donations were made. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 REMUNERATION REPORT 16–17 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 Chief Executive who may be invited to attend meetings. The Company Secretary is secretary to the Committee. Neither the Chief Executive nor the Company Secretary took part in discussions relating to their own remuneration. 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”) on remuneration matters and share scheme implementation. 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 from the Company Secretary. REMUNERATION POLICY 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 2007. S J Smith P J Moorhouse G T Murray A T Noble Fixed Variable 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 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. BASIC SALARIES The current basic salaries paid to the executive Directors are as follows: S J Smith P J Moorhouse G T Murray A T Noble £400,000 £260,000 £260,000 £200,000 All were last reviewed on 1 May 2007. 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. In addition, at the May 2007 review, the Committee reviewed benchmarking data for a more bespoke group of 17 companies from the FTSE 250 on the basis of those most closely matching Northgate in terms of a combination of market capitalisation, turnover, profitability and percentage of overseas turnover. Accordingly, for the financial year ending 30 April 2008, it agreed to increase executive Directors’ basic salaries by between 8% and 14%, to reflect the continued strong performance of the business and the increased complexity of the Directors’ roles, in particular that of the Chief Executive, following the significant expansion overseas. 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) NON-EXECUTIVE DIRECTORS 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. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 The original dates of appointment to the Board and of their current letters of appointment are: Date of appointment Letter of appointment P Rogerson 5 November 2003 13 February 2001 J Astrand 13 April 2005 T Brown 5 June 2007 5 June 2007 12 April 2005 The current fees paid to the non-executive Directors are shown below: P Rogerson Chairman & Chairman of Audit Committee J Astrand T Brown Non-executive Director Senior Independent Director & Chairman of Remuneration Committee £120,000 £37,500 *£42,000 * Including £4,500 in respect of his Chairmanship of the Remuneration Committee. All were last reviewed on 1 May 2007. 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 in respect of his appointment as a non-executive Director of both Fualsa and Record and, in respect of the year ended 30 April 2007, received further fees of £45,187 in respect of a short-term arrangement in connection with researching new jurisdictions. The Board does not consider that this work in any way affected his independence. Mr Astrand’s involvement in researching new jurisdictions for expansion of the Group has been a very cost effective exercise, leveraging off his experience in European markets and avoided the inevitably higher fees that external advisers would have charged for a similar assignment. He reported directly to the Board on the work performed and operated within guidelines drawn up and agreed by the Board. THE FOLLOWING ELEMENTS OF THIS REPORT HAVE BEEN AUDITED: PENSION SCHEMES Throughout the year all pension arrangements (other than the Willhire Pension Scheme – see Note 39 of the accounts) operated by the Group were defined contribution type schemes. PERFORMANCE GRAPH 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 2007 was 1,100p (30 April 2006 – 1,100p) and the range during the year was 921p to 1,219p. TOTAL SHAREHOLDER RETURN Source: Thomson Financial £ e u l a V 300 250 200 150 100 50 0 Northgate plc FTSE 250 (Excl. inv. Trusts) Index 2002 2003 2004 2005 2006 2007 This graph shows the value, by the 30 April 2007, of £100 invested in Northgate on 30 April 2002 compared with that of £100 invested in the FTSE 250 (excl. inv. trusts) Index. The other points plotted are the values at intervening financial year-ends. P Rogerson M Ballinger S J Smith J Astrand T Brown P J Moorhouse G T Murray A T Noble R Williams Total emoluments excluding pension contributions Total pension contributions Salary/ Fees £000 Cash Bonus £000 Cost of Benefits* £000 73 61 350 97 39 240 240 185 – 1,285 – – – 119 – – 65 85 40 – 309 – – – 30 – – 28 25 31 – 114 – Total 2007 £000 73 61 499 97 39 333 350 256 – 1,708 – Total 2006 £000 38 100 435 56 35 292 288 219 17 1,480 – Pension Contributions(cid:2) 2006 £000 2007 £000 – – 63 – – 43 43 33 – – 182 – – 33 – – 31 19 24 – – 107 *These benefits include: company car, private medical insurance, permanent health insurance and life assurance. (cid:2) All contributions are to a defined contribution type scheme. REMUNERATION REPORT SHARE INCENTIVE PLANS The Group currently 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 Performance Share Plan (“PSP”) and DABP. No executive participates 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). 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 a stretching target achievement rising to 100% for achieving 100% of the stretching 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. With the introduction of the PSP in 2006 and the changes to the rules of the NSOS approved by shareholders in 2005, 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. There is an over-riding condition that no part of an award can vest if there has been a decrease in profit before tax compared to the prior year. Options over 113,000 shares granted to 44 executives, including seven in Spain, were outstanding at 30 April 2007. PERFORMANCE SHARE PLAN The PSP is designed to reward achievement of and individual contribution to, the Group’s three-year rolling business plan (“the Plan”). This scheme operates only for executives below Board level. Participants 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. NORTHGATE SHARE OPTION SCHEME With the introduction of the PSP for executives below Board level, only Directors have participated in the NSOS since 2006. In line with the rule changes approved by shareholders in 2005, 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. 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. This requires substantial improvement in the underlying financial performance of the Company before options may be exercised. There is no provision for re-testing. For options granted prior to 2005, 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 for determining EPS growth following the adoption of International Financial Reporting Standards. Options granted to Directors under the NSOS are shown on page 20. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 No options held by Directors lapsed during the year. It is proposed that an option award for 2007/08 be made in the six-week period following the announcement of the results for the year ended 30 April 2007. In addition, options over 136,100 shares granted to 24 executives at exercise prices ranging from 478p to 1037p were outstanding at 30 April 2007. 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 are retained in an employee benefit trust for three years and are subject to forfeiture if the employee leaves during that time. This provides 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 108,182 shares awarded to 59 executives were outstanding at 30 April 2007. 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 2007 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 20%. The actual growth achieved was 24% resulting in the maximum award for the share element. 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 £000 119 65 85 40 Value £000 175 96 96 74 Cash % of basic salary Awarded Maximum 34.0 27.1 35.4 21.6 50.0 40.0 40.0 40.0 Shares % of basic salary Awarded Maximum 50.0 40.0 40.0 40.0 50.0 40.0 40.0 40.0 It is intended that the number of shares to be awarded will be calculated based on the closing mid-market price on 3 July 2007, being the date of the Preliminary Results Announcement. 18–19 For the financial year ending 30 April 2008 the maximum awards will be increased to 100% (50% cash and 50% shares) for all executive Directors (previously the maximum potential for Messrs Moorhouse, Murray and Noble was 80% of basic salary). The increase in the maximum bonus potential was considered necessary to allow the Company to continue to provide competitive remuneration packages with a sufficient performance related element. The Committee has reviewed the targets applying to the bonus for the financial year ending 30 April 2008 and is satisfied that sufficiently challenging performance is required. The criteria for the executive Directors for 2007/08 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 11%, nil for growth of 5% or less and with a sliding scale 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 Committee. Bonuses for other executives 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 12 executives who were made redundant to enable them to exercise awards totalling 10,907 shares made to them as part of their bonus in previous years. 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. The sixth annual cycle ended in December 2006 and resulted in 677 employees acquiring 57,242 Partnership shares at 973.25p each and being allocated the same number of Matching shares. As at 30 April 2007 the Trust held 538,475 Ordinary shares that have vested to employees from the first six cycles. The seventh annual cycle started in January 2007 and currently some 754 employees are making contributions to the scheme at an annualised rate of £692,952. REMUNERATION REPORT 20–21 SHARE INCENTIVE PLANS At 1 May 2006 Number granted Number exercised Date of exercise Northgate Share Option Scheme Share price Exercise on date of Gross gain exercise on exercise At 30 April 2007 p £ price p 663 931 1037 – 663 931 1037 – 663 931 1037 – 931 1037 – – – – – – – – – – – – – – – – 20,000 27,500 50,000 97,500 15,000 19,000 25,000 59,000 13,500 19,000 25,000 57,500 17,000 20,000 37,000 251,000 15,813 15,832 1,750 33,395 10,542 9,672 1,100 21,314 6,325 8,751 1,050 16,126 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 20,000 27,500 – – – 50,000 47,500 50,000 15,000 19,000 – – – 25,000 34,000 25,000 13,500 19,000 – – – 25,000 32,500 25,000 17,000 – – 20,000 17,000 20,000 131,000 120,000 15,813 15,832 – 31,645 10,542 9,672 – 20,214 6,325 8,751 – 15,076 – – – 1,750 1,750 – – 1,100 1,100 – – 1,050 1,050 850 66,935 4,750 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – S J Smith P J Moorhouse G T Murray A T Noble Deferred Annual Bonus Plan S J Smith P J Moorhouse G T Murray A T Noble Executive Incentive Scheme S J Smith P J Moorhouse A T Noble 850 Jul 2009 - Jul 2011 71,685 135,000 130,000 130,537 2,975 133,512 398,512 – – – – – – (45,000) 12 Oct 2006 (80,000) 12 Oct 2006 (87,025) 12 Oct 2006 (2,975) 12 Oct 2006 (90,000) (215,000) – – 492.5 492.5 492.5 503.5 – – 1018 236,475 90,000 Sep 2003 - Sep 2009 1018 420,400 50,000 Sep 2003 - Sep 2009 1018 1018 457,316 15,306 43,512 – Sep 2003 - Sep 2009 – 472,622 43,512 – 1,129,497 183,512 EXECUTIVE INCENTIVE SCHEME 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 have been awarded under the EIS since January 2002 and none are planned. 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. Options held by the Directors under the EIS are shown on page 20. In September 2006, the fourth and final tranche of 30% 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 five financial years from 1 May 1999 to 30 April 2004 of at least 15% per annum compound was required: the actual growth achieved was 21.7%. EIS & NSOS Through the issue of new Ordinary shares. During the year 454,491 (2006 – 517,544) Ordinary shares were issued to satisfy the exercise of options under the two schemes. The total number of options exercised and exercisable as a result of awards made under the EIS and NSOS over the last 10 years is 1,880,946, which equates to 2.6% of the issued Ordinary share capital at 30 April 2007. DABP & PSP Through open market purchases by an employee benefit trust based in Guernsey (“the Guernsey Trust”). During the year 115,273 (2006 – 12,013) Ordinary shares were purchased by the Guernsey Trust and 7,876 (2006 – 500) were used to satisfy the exercise of awards under the DABP. At 30 April 2007 the Guernsey Trust held 305,722 (2006 – 198,073) 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 no (2006 – 110,000) Ordinary shares were purchased by the Capita Trust and 15,032 (2006 – 14,635) shares were forfeited by leavers. At 30 April 2007 the Capita Trust held 35,691(2006 – 138,189) Ordinary shares as a hedge against the Group’s obligations under this scheme. By order of the Board No options held by Directors lapsed during the year. In addition to those held by Directors, options over 188,230 shares granted to 14 employees at exercise prices ranging from 367.5p to 523p were outstanding at 30 April 2007. D Henderson Secretary 2 July 2007 SOURCING OF SHARES Shares to satisfy the requirements of the Group’s share schemes are currently sourced as follows: Normally exercisable Aug 2007 - Feb 2010 Oct 2008 - Oct 2015 Jul 2009 - Jul 2016 Aug 2007 - Feb 2010 Oct 2008 - Oct 2015 Jul 2009 - Jul 2016 Aug 2007 - Feb 2010 Oct 2008 - Oct 2015 Jul 2009 - Jul 2016 Oct 2008 - Oct 2015 Jul 2009 - Jul 2016 Aug 2007 - Aug 2009 Oct 2008 - Oct 2010 Jul 2009 - Jul 2011 Aug 2007 - Aug 2009 Oct 2008 - Oct 2010 Jul 2009 - Jul 2011 Aug 2007 - Aug 2009 Oct 2008 - Oct 2010 Jul 2009 - Jul 2011 NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 22–23 NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 CORPORATE GOVERNANCE 24–25 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 three 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 Mr Rogerson’s appointment as Chairman on a permanent basis on 5 June 2007, Mr Brown 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 financial year is detailed below. BOARD AUDIT REMUNERATION All Directors in office at that time were present at the Annual General Meeting held in September 2006. The external auditors attended three Audit Committee meetings. The internal audit manager attended two Audit Committee meetings. 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 was chaired by Mr Ballinger until his retirement in November 2006, since when it has been chaired by Mr Rogerson. 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. The Committee met formally on one occasion during the year. Following Mr Rogerson’s appointment as Chairman on a permanent basis on 5 June 2007, he initiated an evaluation process of the performance of individual Directors, of the Board as a whole and of its committees. The process consists of a formal and detailed questionnaire to be completed by each Director, to be followed by an evaluation of the results, one-to-one meetings with the Chairman and a Board discussion. In addition the non- executive Directors, led by the Senior Independent Director, have begun a review process of the performance of the Chairman, taking into account the views of the executive Directors. No of Meetings P Rogerson M Ballinger S J Smith J Astrand T Brown P J Moorhouse G T Murray A T Noble 11 10 5 11 11 11 11 10 10 4 4 - - 4 4 - - - 4 4 1 - 4 4 - - - 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 guidance, revised and updated by the Financial Reporting Council in October 2005, 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 Turnbull guidance. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 HEALTH & SAFETY AND ENVIRONMENTAL 26–27 The Board recognises that the monitoring and control of Environmental, Health and Safety (EHS) and strict adherence to legislative requirements in all areas of operation 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 operational management. In the UK the principles set out in the management model “HSG 65 Successful Health and Safety Management” have been adopted. This enables consistent health and safety standards and disciplines to be applied at all locations. The Group is committed to pursuing sound EHS management polices and practices and continually seeks to improve EHS standards in the workplace by: • Monitoring and managing the EHS impacts, risks and opportunities for the business for the benefit of employees, customers and the local communities in which we operate; • Promoting awareness of EHS policy across the business to assess performance and to set objectives for improvement; and • Reporting on the status of the EHS performance of the business. Common standards are applied to a wide range of EHS matters, and legislative requirements are the minimum standard accepted. Working practices and procedures are continually assessed to ensure that everything is being done to meet the highest possible standards of safety using comprehensive and robust safety operating procedures manuals. Group policies are agreed through a Steering Group, which meets at regular intervals to consider EHS issues, to review performance and to determine the necessary controls for compliance to all legislative requirements. The UK’s EHS function is now licensed to carry out a number of training courses for the British Safety Council (BSC) and the Institute of Occupational Safety and Health (IOSH). During this reporting period over one hundred employees have attended BSC Level one health and safety training courses and have successfully gained this recognised qualification. The Group remains committed to continually raising safety standards through training and is shortly to begin a process of training a number of employees within the hire companies to a Nebosh General Certificate standard. 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 2007 was 65,300, with an average age of 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 31 months. Our fleet is, therefore, comprised entirely of modern vehicles. Over 99% of the fleet is diesel powered. From the last quarter calendar year 2006 all of the UK’s car and commercial vehicle purchases have been Euro IV compliant. PROPERTY As at 30 April 2007, the vehicle rental business in the UK and Republic of Ireland operated out of 82 properties, of which 20 are primary sites and 62 are 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. Our sites vary in size from the larger sites which will typically 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. The smaller sites will have an area of approximately 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. Three of the larger sites share premises with Northgate Vehicle Sales who have a further six 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. All UK locations underwent comprehensive EHS audits during this reporting period carried out by the Group’s EHS function and, where necessary, recommendations were made in a formal risk assessment report and action plans agreed and reported upon. An evaluation of EHS arrangements in our Spanish operations is now complete and a process is underway to implement a comprehensive and consistent safety management system within both Fualsa and Record. Within both companies we will apply local standards and where necessary follow UK good practice. Fualsa is certified to the internationally recognised Environmental Standard ISO 14001. The Group are sponsors of Brake, the road safety charity, and are members of the British Safety Council and the Royal Society for the Prevention of Accidents. During the year under review, no incidents resulting in fatality or significant pollution occurred at any of our locations. No health and safety enforcement notices were served on any company in the Group. CORPORATE GOVERNANCE 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; and • monitoring the audit process and any issues arising therefrom. The Board has satisfied itself that at least one member of the Committee has recent and relevant financial experience. 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 2006, the Committee has: • reviewed the financial statements for the years ended 30 April 2006 and 2007 and the interim report issued in January 2007. 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 the Group’s risk management process; • 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 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 shown in Note 7 on page 44. 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 compliance with the Transparency Rules, introduced in January 2007, the Company will be publishing Interim (effectively quarterly) Management Statements in March and September each year. 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, and that the Chairman should not be a member of the Audit Committee. Since the retirement through illness of Mr Ballinger as Chairman in November 2006, Mr Rogerson acted as Chairman on a temporary basis while retaining his roles as Senior Independent Director and Chairman of the Audit Committee. Following his appointment as Chairman on a permanent basis in June 2007, Mr Brown has been appointed Senior Independent Director and a search is underway for a new non-executive Director who will be qualified to chair the Audit Committee. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 DIRECTORS’ RESPONSIBILITIES INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF NORTHGATE PLC 28–29 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. 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. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 BASIS OF AUDIT OPINION We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors' Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group's and Company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors' Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors' Remuneration Report to be audited. OPINION In our opinion: • the Group financial statements give a true and fair view, in accordance with IFRS as adopted by the European Union, of the state of the Group's affairs as at 30 April 2007 and of its profit for the year then ended; • the parent Company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent Company's affairs as at 30 April 2007; • the financial statements and the part of the Directors' Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation; and • the information given in the Report of the Directors is consistent with the financial statements. Deloitte & Touche LLP Chartered Accountants and Registered Auditors Leeds 2 July 2007 We have audited the Group and parent Company financial statements (''the financial statements'') of Northgate plc for the year ended 30 April 2007 which comprise the Consolidated Income Statement, the Group and parent Company Balance Sheets, the Group and parent Company Cash Flow Statements, the Group and parent Company Statements of Changes in Equity, Statements of Recognised Income and Expense and the related Notes 1 to 40. 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 by the European Union are set out in the Statement of Directors' Responsibilities. Our responsibility is to audit the financial statements and the part of the Directors' Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors' Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Report of the Directors is consistent with the financial statements. The information given in the Report of the Directors includes that specific information presented in the Operating and Financial Review that is cross referred from the Business Review section of the Report of the Directors. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors' remuneration and other transactions is not disclosed. We review whether the Corporate Governance Statement reflects the Company's compliance with the nine provisions of the 2003 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 as described in the contents section and consider whether it is consistent with the audited financial statements. The other information comprises only the Report of the Directors, the unaudited part of the Directors' Remuneration Report, the Chairman's Statement, the Operating and Financial Review and the Corporate Governance Statement. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any further information outside the Annual Report. FINANCIAL STATEMENTS 30–31 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 30 APRIL 2007 BALANCE SHEETS AS AT 30 APRIL 2007 32–33 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 2007 £000 2006 £000 526,465 372,609 (345,450) (248,051) 181,015 (70,037) (3,922) (73,959) 107,056 3,764 (35,452) – – – 75,368 (20,885) 54,483 124,558 (50,733) (1,227) (51,960) 72,598 2,047 (22,125) 4,964 (1,422) 3,542 56,062 (15,468) 40,594 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 76.1p 75.8p 61.1p 60.6p STATEMENTS OF RECOGNISED INCOME AND EXPENSE FOR THE YEAR ENDED 30 APRIL 2007 Group Company Notes 2007 £000 2006 £000 2007 £000 2006 £000 Amounts attributable to equity holders of the parent Company 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 Foreign exchange differences on revaluation reserve Net foreign exchange differences on long term borrowings held as hedges Other foreign exchange differences recognised directly in equity Net fair value gains on cash flow hedges Share options fair value amount (charged) credited directly to equity Actuarial gains on defined benefit pension scheme Net current tax credit recognised directly in equity Net deferred tax (charge) credit recognised directly in equity Net income recognised directly in equity Profit attributable to equity holders Total recognised income and expense for the year 33 33 33 33 32 39 11 26 (1,756) 1,303 – – – (11) – 413 – (4,344) – – – 646 413 – 1,425 (1,571) 4,344 (1,059) 628 4,471 (75) 445 1,084 (2,616) 3,595 54,483 58,078 – 2,956 20 356 – 882 4,359 40,594 44,953 – 3,450 (75) – 1,084 (2,055) 2,404 11,241 13,645 – 2,554 20 – – 882 3,456 41,059 44,515 NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 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 14 15 16 17 18 19 20 21 Group Company Notes 2007 £000 2006 £000 75,120 26,804 860,052 68,160 44,582 18,208 643,824 50,236 928,212 694,060 2007 £000 – – – 2,950 2,950 2006 £000 – – – 3,012 3,012 – – – 41,927 212,279 – 257,221 – 1,030,136 798,777 215,229 260,233 8,709 176,760 35,039 8,918 116,939 24,048 – 796,749 5,036 – 509,359 8,945 220,508 149,905 801,785 518,304 Non-current assets classified as held for sale 22 21,941 14,705 – – 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 1,272,585 963,387 1,017,014 778,537 68,570 11,973 20,340 57,584 19,715 30,024 100,883 107,323 770,022 38,694 555 518,485 15,846 1,444 10,139 – 14,220 24,359 765,171 – – 8,084 – 25,982 34,066 515,937 – – 809,271 535,775 765,171 515,937 910,154 643,098 789,530 550,003 362,431 320,289 227,484 228,534 3,560 67,230 1,043 (4,572) 67,463 5,199 1,924 220,584 3,538 64,998 1,054 (3,331) 67,463 2,956 1,627 181,984 3,560 67,230 1,371 – 63,159 4,203 – 87,961 3,538 64,998 1,371 – 63,159 2,554 – 92,914 362,431 320,289 227,484 228,534 23 24 24 26 39 27 28 29 30 31 32 33 34 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 2 July 2007. They were signed on its behalf by: P Rogerson Director G T Murray Director CASH FLOW STATEMENTS FOR THE YEAR ENDED 30 APRIL 2007 NOTES TO THE CASH FLOW STATEMENTS FOR THE YEAR ENDED 30 APRIL 2007 34–35 Net cash from (used in) operating activities (a) 224,765 172,178 (38,160) (20,278) Profit (loss) from operations 107,056 72,598 (8,960) (4,082) Group Company 2007 £000 2006 £000 2007 £000 2006 £000 (a) Net cash from (used in) operating activities Group Company 2007 £000 2006 £000 2007 £000 2006 £000 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 & equipment Purchases of other property, plant and equipment Purchases of intangible assets Payment of deferred consideration (Note 24) Acquisition of subsidiary undertakings, including net cash and bank overdraft balances acquired Purchase of investments in subsidiary undertakings Purchase of interest in associate 3,145 – 188,512 (437,947) 3,283 (11,126) (1,281) (10,290) (49,340) – – 1,931 – 150,849 (306,273) 3,307 (12,208) (927) – (130,047) – (37,972) 12,951 30,258 – – – – – (10,290) – (78,351) 119,352 13,603 – – – – (18) – – – (50,316) (37,972) Net cash (used in) from investing activities (315,044) (331,340) 73,920 (74,703) Financing activities Dividends paid Repayments of obligations under finance leases Repayments of bank loans and other borrowings Increase in bank loans and other borrowings Loans to subsidiary undertakings Loans repaid by subsidiary undertakings Proceeds from issue of share capital Proceeds from sale of own shares Payments to acquire own shares (16,946) (63,740) (175,579) 359,891 – – 2,254 62 (1,303) (13,459) (36,994) – 130,988 – – 65,525 511 (1,371) (16,946) – (175,579) 432,891 (942,938) 659,437 2,254 – – (13,459) – – 63,202 (70,430) – 65,525 – – Net cash from (used in) financing activities 104,639 145,200 (40,881) 44,838 Net increase (decrease) 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) 14,360 20,259 (152) 34,467 (13,962) 34,057 164 20,259 (5,121) (3,981) (82) (9,184) (50,143) 46,162 – (3,981) 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 charge (credit) Share options fair value amount (charged) credited directly to equity Operating cash flows before movements in working capital Decrease (increase) in inventories (Increase) decrease in receivables (Decrease) increase in payables Cash generated from (used in) operations Income taxes paid Interest paid 193,885 366 3,922 (356) 8 136,209 (16) 1,227 (209) (386) (75) 20 304,806 209,443 460 (16,810) (5,838) 282,618 (22,446) (35,407) (2,191) (1,131) 3,139 209,260 (15,156) (21,926) 62 178 – – – (75) (8,795) – (2,686) 3,637 (7,844) – (30,316) 62 – – 710 – 20 (3,290) – 1,257 (230) (2,263) – (18,015) Net cash from (used in) operating activities 224,765 172,178 (38,160) (20,278) (b) Cash and cash equivalents 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 2007 £000 14,384 20,655 35,039 (572) 34,467 2006 £000 22,201 1,847 24,048 (3,789) 20,259 2007 £000 5,036 – 2006 £000 8,945 – 5,036 (14,220) 8,945 (12,926) (9,184) (3,981) NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 APRIL 2007 Notes Amounts attributable to equity holders of the parent Company Foreign exchange differences on retranslation of net assets of subsidiary undertakings Foreign exchange differences on retranslation of interest in associate Foreign exchange difference on revaluation reserve Net foreign exchange differences on long term borrowings held as hedges Other foreign exchange differences recognised directly in equity Net fair value gains on cash flow hedges Share options fair value amount (charged) credited directly to equity Actuarial gains on defined benefit pension scheme Net current tax credit recognised directly in equity Net deferred tax (charge) credit recognised directly in equity 33 33 33 32 39 11 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 increase in own shares held Net changes in total equity Opening total equity as at 1 May Closing total equity as at 30 April 12 27, 28, 31 30 2007 £000 (1,756) – (11) 1,425 628 4,471 (75) 445 1,084 (2,616) 3,595 54,483 58,078 (16,949) 2,254 (1,241) 42,142 320,289 362,431 COMPANY STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 APRIL 2007 Amounts attributable to equity holders of the parent Company 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 (charged) credited directly to equity Net current tax credit recognised directly in equity Net deferred tax (charge) 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 changes in total equity Opening total equity as at 1 May Closing total equity as at 30 April Notes 2007 £000 33 33 33 32 26 36 12 27, 28, 31 (4,344) – 4,344 3,450 (75) 1,084 (2,055) 2,404 11,241 13,645 (16,949) 2,254 (1,050) 228,534 227,484 2006 £000 1,303 413 – (1,571) – 2,956 20 356 – 882 4,359 40,594 44,953 (13,437) 65,525 (860) 96,181 224,108 320,289 2006 £000 646 413 (1,059) 2,554 20 – 882 3,456 41,059 44,515 (13,437) 65,525 96,603 131,931 228,534 NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 NOTES TO THE ACCOUNTS 36–37 FOR THE YEAR ENDED 30 APRIL 2007 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 77. 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 11. 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 relevant Standards and Interpretations, which have not been applied in these financial statements were in issue but not yet effective: IFRS 7 IFRS 8 IAS 1 IFRIC 10 IFRIC 11 Financial instruments: Disclosures Operating segments Presentation of financial statements (Amendment on capital disclosures) Interim financial reporting and impairment IFRS 2: Group and treasury share transactions The Directors anticipate that the adoption of the Standards 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 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). 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 2006 and 30 April 2007. The results of a new subsidiary undertaking are included from the date of its 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. NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 NOTES TO THE ACCOUNTS 38–39 FOR THE YEAR ENDED 30 APRIL 2007 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 5 to 13 years 5 to 10 years 2 to 4 years Intangible assets – other 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 Plant, equipment and fittings Vehicles for hire Motor vehicles 50 years 50 years or over the life of the lease, whichever is shorter 3 to 10 years 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 disposal 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. 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. 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. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 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. Current and 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 current or 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 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. NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 NOTES TO THE ACCOUNTS 40–41 FOR THE YEAR ENDED 30 APRIL 2007 2. PRINCIPAL ACCOUNTING POLICIES (continued) 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 net assets 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 hired 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) in the prior year, 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. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 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. 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 £75,120,000 (Note 14). NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 NOTES TO THE ACCOUNTS 42–43 FOR THE YEAR ENDED 30 APRIL 2007 4. REVENUE All revenue recognised is from the rendering of services. 5. GEOGRAPHICAL AND BUSINESS SEGMENTS Geographical segments The Group's operations are located in the United Kingdom, Republic of Ireland and Spain. These geographical locations are the basis on which the Group reports its primary segment information. 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 prior year all arose in Spain. 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 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 NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 UK & Republic of Ireland 2007 £000 Spain 2007 £000 Total 2007 £000 351,108 175,357 526,465 117,638 (45,925) (2,035) 63,377 (24,112) (1,887) 181,015 (70,037) (3,922) 69,678 37,378 107,056 3,764 (35,452) 75,368 266,485 127,030 703,891 510,456 190,755 66,855 457,240 193,885 568,694 399,698 1,272,585 910,154 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 Total 2006 £000 372,609 124,558 (50,733) (1,227) 72,598 2,047 (22,125) 3,542 56,062 239,304 113,537 75,374 22,672 314,678 136,209 726,536 194,924 482,187 160,911 921,460 41,927 963,387 643,098 5. GEOGRAPHICAL AND BUSINESS SEGMENTS (continued) Business segments For management purposes, the Group has two material business segments, which are the hire of vehicles and fleet management. As such, the Directors consider that these are the two business segments on which the Group should report. Revenue Segment assets Capital additions Revenue Segment assets Capital additions 6. RESTRUCTURING COSTS Hire of Fleet vehicles management 2007 £000 2007 £000 Total 2007 £000 512,727 1,263,974 457,228 13,738 8,611 12 526,465 1,272,585 457,240 Hire of Fleet vehicles management 2006 £000 2006 £000 369,271 954,692 314,678 3,338 8,695 – Total 2006 £000 372,609 963,387 314,678 In February 2006 the Group acquired the entire issued share capital of Northgate (AVR) Limited (formerly Arriva Vehicle Rental Limited). 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 were provided in respect of onerous contracts. Redundancy costs Onerous contracts 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 losses (gains) Restructuring costs Staff costs Auditors' remuneration for audit services (below) Auditors' remuneration for non-audit services (below) Notes 16, 17 15 6 8 2007 £000 – – – 2007 £000 2006 £000 1,673 934 2,607 2006 £000 193,885 3,922 366 – 77,622 308 301 136,209 1,227 (16) 2,607 62,699 313 236 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 NOTES TO THE ACCOUNTS 44–45 FOR THE YEAR ENDED 30 APRIL 2007 7. PROFIT FROM OPERATIONS (continued) 10. FINANCE COSTS Fees payable to the Company's auditors for the audit of the Company's annual accounts Fees payable to the Company's auditors and their associates for the audit of the Company's subsidiaries pursuant to legislation Total audit fees Other services pursuant to legislation Tax services Corporate finance services Other services Total non-audit fees 2007 £000 296 12 308 20 263 – 18 301 2006 £000 302 11 313 19 129 20 68 236 Fees payable to Deloitte & Touche LLP and their associates for non-audit services to the Company are not required to be disclosed because the consolidated financial statements are required to disclose such fees on a consolidated basis. 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. 8. STAFF COSTS The average number of persons employed by the Group: United Kingdom and Republic of Ireland: Direct operations Administration Spain: Direct operations Administration 2007 Number 2006 Number 1,862 503 2,365 752 198 950 1,647 489 2,136 323 68 391 3,315 2,527 The above United Kingdom administration employee numbers include 18 (2006 – 18) in respect of the Company. The aggregate remuneration of Group employees comprised: Wages and salaries Social security costs Other pension costs 2007 £000 67,755 8,387 1,480 77,622 2006 £000 54,678 6,575 1,446 62,699 The above employee remuneration includes wages and salaries costs of £1,888,000 (2006 – £1,763,000), social security costs of £402,000 (2006 – £342,000) and other pension costs of £462,000 (2006 – £345,000) in respect of the Company. 9. INVESTMENT INCOME Interest on bank and other deposits Change in fair value of interest rate derivatives (Note 25) NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 2007 £000 3,141 623 3,764 2006 £000 1,744 303 2,047 Interest on bank overdrafts and loans Interest on obligations under finance leases Amortisation of deferred consideration Total borrowing costs Preference share dividends 11. TAXATION Current tax: UK corporation tax Adjustment in respect of prior years Foreign tax Deferred tax: Current year Adjustment in respect of prior years 2007 £000 33,583 1,844 – 35,427 2006 £000 20,220 1,345 535 22,100 25 25 35,452 22,125 2007 £000 2,697 1,200 9,552 13,449 7,232 204 7,436 2006 £000 13,615 (270) 1,390 14,735 247 486 733 20,885 15,468 Corporation tax is calculated at 30% (2006 – 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% (2006 – 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 Reduction in overseas tax rate Tax effect of share of results of associate Adjustment to tax charge in respect of prior years 2007 £000 75,368 22,610 346 – (2,277) (1,198) – 1,404 % 30.0 0.4 – (3.0) (1.6) – 1.9 2006 £000 56,062 16,819 753 368 (1,631) – (1,057) 216 Tax expense and effective tax rate for the year 20,885 27.7 15,468 % 30.0 1.3 0.7 (2.9) – (1.9) 0.4 27.6 In addition to the amount charged to the income statement, a current tax amount receivable of £1,084,000 (2006 – £nil) has been credited directly to equity and a deferred tax amount of £2,616,000 has been charged (2006 – £882,000 credited) directly to equity (Note 26). The UK corporation tax rate is scheduled to fall from 30% to 28% in 2008. This will have the effect of reducing the future UK effective tax rate. At the same time, the rate of capital allowances, an important component of UK qualifying expenditure, is scheduled to fall from 25% to 20% per annum. This will not impact the future UK effective tax rate but will result in a short-term cash outflow to the Group. NOTES TO THE ACCOUNTS 46–47 FOR THE YEAR ENDED 30 APRIL 2007 14. GOODWILL Group Cost: At 1 May Exchange differences Recognised on acquisition of subsidiary undertakings (Note 35) Adjustment in respect of subsidiary undertaking acquired in prior year (Note 35) At 30 April 2007 £000 44,582 (572) 31,439 (329) 75,120 2006 £000 12,448 490 31,644 – 44,582 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 had been allocated as follows: Group Record Rent a Car S.A. Northgate (AVR) Limited Furgonetas de Alquiler S.A. Fleet Technique Limited Other UK vehicle hire companies 2007 £000 31,010 27,726 9,527 3,589 3,268 75,120 2006 £000 – 28,055 9,670 3,589 3,268 44,582 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 these cash flows in perpetuity using growth assumptions relevant for the business sectors. The growth rates used are between 3% and 5% and are not considered to be higher than average long term industry growth rates. The rates used to discount the forecast cashflows for all CGUs are based on the Group’s pre-tax weighted average cost of capital of 8.5%. NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 12. DIVIDENDS Amounts recognised as distributions to equity holders of the parent Company: Final dividend for the year ended 30 April 2006 of 14p per share Interim dividend for the year ended 30 April 2007 of 10p per share 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 2007 £000 9,853 7,096 – – 2006 £000 – – 7,676 5,761 16,949 13,437 The proposed final dividend of 15.5p 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 2007. 13. EARNINGS PER SHARE (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 non-recurring restructuring costs Earnings for the purposes of basic earnings per share (above) Amortisation Non-recurring restructuring costs (net of UK corporation tax at 30%) Earnings for the purposes of basic earnings per share before amortisation and non-recurring restructuring costs Basic earnings per share before amortisation and non-recurring restructuring costs Diluted earnings per share before amortisation and non-recurring restructuring costs 2007 £000 2006 £000 54,483 40,594 Number Number 71,584,744 66,481,499 250,032 464,060 71,834,776 66,945,559 76.1p 75.8p £000 54,483 3,922 – 61.1p 60.6p £000 40,594 1,227 1,825 58,405 43,646 81.6p 65.7p 81.3p 65.2p NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 NOTES TO THE ACCOUNTS 48–49 FOR THE YEAR ENDED 30 APRIL 2007 15. OTHER INTANGIBLE ASSETS 16. PROPERTY, PLANT AND EQUIPMENT: VEHICLES FOR HIRE Group Fair value: Brand Customer Non compete names relationships agreements £000 £000 £000 Software technology £000 Other software £000 At 1 May 2005 Additions Acquisitions of subsidiary undertakings Exchange differences At 1 May 2006 Additions Acquisitions of subsidiary undertakings Disposals Exchange differences 3,953 – 535 – 4,488 – 11,725 (4,165) (46) 1,273 – 12,614 – 13,887 – 3,575 – (10) At 30 April 2007 Amortisation: At 1 May 2005 Charge for the year Exchange differences At 1 May 2006 Charge for the year Eliminated on disposals Exchange differences At 30 April 2007 Carrying amount: At 30 April 2007 At 30 April 2006 12,002 17,452 408 456 – 864 1,329 – (9) 2,184 9,818 3,624 159 515 – 674 1,836 – (2) 2,508 14,944 13,213 137 – 148 – 285 – 123 – (1) 407 26 39 – 65 117 – – 182 225 220 – – 168 – 168 – – – – 168 – 11 – 11 34 – – 45 123 157 1,957 925 177 8 3,067 1,279 57 (94) (5) 4,304 1,861 206 6 2,073 606 (65) (4) 2,610 1,694 994 Total £000 7,320 925 13,642 8 21,895 1,279 15,480 (4,259) (62) 34,333 2,454 1,227 6 3,687 3,922 (65) (15) 7,529 26,804 18,208 Group Cost or valuation: At 1 May 2005 Additions Acquisitions of subsidiary undertakings Transfer to motor vehicles Exchange differences Disposals At 1 May 2006 Additions Acquisition of subsidiary undertaking Transfer to motor vehicles Exchange differences Disposals At 30 April 2007 Depreciation: At 1 May 2005 Charge for the year Exchange differences Transfer to motor vehicles Eliminated on disposals At 1 May 2006 Charge for the year Exchange differences Transfer to motor vehicles Eliminated on disposals At 30 April 2007 Carrying amount: At 30 April 2007 At 30 April 2006 £000 677,492 301,546 92,423 (171) 3,917 (267,865) 807,342 444,835 158,750 (113) (3,465) (323,731) 1,083,618 145,649 133,367 630 (32) (116,096) 163,518 190,095 (217) (61) (129,769) 223,566 860,052 643,824 The carrying amount of the Group's vehicles for hire includes an amount of £39,550,000 (2006 – £12,103,000) in respect of assets held under finance lease agreements. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 NOTES TO THE ACCOUNTS 50–51 FOR THE YEAR ENDED 30 APRIL 2007 17. OTHER PROPERTY, PLANT AND EQUIPMENT 17. OTHER PROPERTY, PLANT AND EQUIPMENT (continued) Group Land and buildings by category: Freehold Short leasehold 2007 £000 53,179 8,592 61,771 2006 £000 38,985 6,789 45,774 At 30 April 2007, the Group had entered into contractual commitments for the acquisition of plant, property and equipment amounting to £892,000 (2006 – £530,000). Certain of the above freehold properties were valued as at 30 April 1992 by Jones Lang Wootton, Chartered Surveyors, and certain other freehold properties as at 3 May 2004 by Amercian Appraisal, Professional Valuers, on the basis of open market value for existing use. At 30 April 2007, under the historical cost convention, land and buildings would have been stated at £68,582,000 (2006 – £51,544,000) and related accumulated depreciation of £6,621,000 (2006 – £5,584,000). Company Cost: At 1 May 2005 Additions At 1 May 2006 and 30 April 2007 Depreciation: At 1 May 2005 Charge for the year At 1 May 2006 Charge for the year At 30 April 2007 Carrying amount: At 30 April 2007 At 30 April 2006 £000 3,221 18 3,239 165 62 227 62 289 2,950 3,012 Group Cost or valuation: At 1 May 2005 Additions Acquisitions of subsidiary undertakings Transfer from vehicles for hire Exchange differences Disposals At 1 May 2006 Additions Acquisition of subsidiary undertaking Transfer from vehicles for hire Exchange differences Disposals At 30 April 2007 Depreciation: At 1 May 2005 Charge for the year Exchange differences Transfer from vehicles for hire Eliminated on disposals At 1 May 2006 Charge for the year Exchange differences Transfer from vehicles for hire Eliminated on disposals At 30 April 2007 Carrying amount: At 30 April 2007 At 30 April 2006 Cost or valuation at 30 April 2007 is represented by: Valuation performed in 1992 Valuation performed in 2004 Additions at cost Plant, Land & equipment & fittings £000 buildings £000 Motor vehicles £000 38,525 9,737 5,246 – 322 (2,567) 51,263 8,150 11,936 – (276) (2,769) 68,304 4,379 1,238 5 – (133) 5,489 1,445 1 – (402) 6,533 61,771 45,774 525 3,403 64,376 68,304 8,440 1,765 216 – 30 (844) 9,607 2,173 1,843 – (33) (1,102) 12,488 5,645 1,283 (1) – (742) 6,185 2,006 6 – (1,026) 7,171 5,317 3,422 – – 12,488 12,488 1,281 705 169 171 – (985) 1,341 803 – 113 – (848) 1,409 371 321 – 32 (423) 301 339 – 61 (364) 337 1,072 1,040 – – 1,409 1,409 Total £000 48,246 12,207 5,631 171 352 (4,396) 62,211 11,126 13,779 113 (309) (4,719) 82,201 10,395 2,842 4 32 (1,298) 11,975 3,790 7 61 (1,792) 14,041 68,160 50,236 525 3,403 78,273 82,201 NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 NOTES TO THE ACCOUNTS 52–53 FOR THE YEAR ENDED 30 APRIL 2007 18. INVESTMENTS Company Cost: At 1 May 2006 Acquisitions of subsidiary undertakings (see below) Disposals of interests in subsidiary undertakings Foreign exchange differences on investments denominated in foreign currency At 30 April 2007 Accumulated provisions: At 1 May 2006 and 30 April 2007 Carrying amount: At 30 April 2007 At 30 April 2006 Shares in subsidiary undertakings £000 Loans Investment to Group in associate undertakings £000 £000 Total £000 174,271 117,189 (119,402) (4,344) 167,714 2,435 165,279 171,836 38,385 (38,385) – 47,000 – – 259,656 78,804 (119,402) – – – – 38,385 – (4,344) 47,000 214,714 – 2,435 47,000 47,000 212,279 257,221 The investment in associate at 30 April 2006 related to 49% of the issued share capital of Record Rent a Car S.A. (“Record”), a company registered in Spain, which the Company purchased on 5 August 2005. On 11 May 2006, the Company purchased the remaining 51% of the issued share capital of Record for a cash consideration of £50,105,000. The principal activity of Record is vehicle hire. 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. In the current year, the Company increased the value of its investment by £3,699,000 (Note 35). On 30 April 2007, the Company acquired 100% of the issued share capital of Northgate (TM) Limited for a cash consideration of £25,000,000. On 1 November 2006, the Company disposed of its entire investments in the share capital of Furgonetas de Alquiler S.A. (“Fualsa”) and Record to a subsidiary undertaking for a cash consideration of £119,352,000. No profit or loss arose as a result of this transaction. On 10 April 2007, the Company reduced its interest in the share capital of Northgate (St Helier) Limited by £50,000. The proceeds from the disposal were settled by the redemption of preference shares in Northgate (St Helier) Limited. At 30 April 2007, the principal subsidiary undertaking of the Company was Northgate Vehicle Hire Limited, a company registered in England and Wales, whose principal activity is the hire of vehicles. Prior to their disposal on 1 November 2006, the investments in Fualsa and Record were denominated in Euro in the Company balance sheet. The foreign exchange movements recognised in investments arose when the investment amounts were retranslated at the foreign exchange rate prevailing on the date of disposal of the investments. 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, along with associated costs, was accounted for as an associate under the equity method of accounting. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 19. INTEREST IN ASSOCIATE (continued) The interest in associate in the Group balance sheet as at 30 April 2006 comprised the following: Results for the period 5 August 2005 to 30 April 2006 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 £000 10,131 (2,902) 7,229 3,542 38,385 41,927 On 11 May 2006, the Group acquired the remaining 51% of the issued share capital of Record. From the same date, Record was accounted for as an investment in a subsidiary undertaking and in accordance with the purchase method of accounting (Note 35). 20. INVENTORIES Inventories comprise spare parts and consumables. 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 and prepayments Group Company 2007 £000 142,461 – 8,374 – – 4,347 21,578 2006 £000 94,855 – 3,199 691 – 2,747 15,447 2007 £000 – 787,908 1,481 – 275 5,536 1,549 2006 £000 – 503,161 1,171 – 1,829 2,747 451 176,760 116,939 796,749 509,359 2007 2006 UK Spain 51 days 149 days 49 days 138 days Allowance for estimated irrecoverable amounts UK Spain Total 2007 £000 2,883 2,308 5,191 2006 £000 2,786 1,469 4,255 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 approximate to their fair value. Credit risk Consideration of the Group’s credit risk is documented in Note 24. A full list of the Company's subsidiary undertakings was included with the Annual Return filed with the Registrar of Companies. The average credit periods taken on goods are NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 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 Amount 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. The average credit periods taken for trade purchases are Group Company 2007 £000 33,538 – 3,868 3,435 27,729 68,570 2006 £000 27,941 – 411 5,779 23,453 57,584 UK Spain 2007 £000 163 – 3,738 117 6,121 10,139 2007 45 days 90 days 2006 £000 58 5,696 – 102 2,228 8,084 2006 44 days 84 days The Directors consider that carrying the amount of trade and other payables approximates to their fair value. 24. BORROWINGS The creditors falling due after more than one year comprise bank loans, loan notes, 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 Loan notes Vehicle related finance lease obligations Deferred consideration Property loans Cumulative Preference shares Other Group Company 2007 £000 2006 £000 2007 £000 2006 £000 572 601,326 168,628 16,104 – 2,718 500 514 3,789 518,393 – 12,326 10,290 2,019 500 1,192 14,220 596,043 168,628 – – – 500 – 12,926 518,203 – – 10,290 – 500 – 790,362 548,509 779,391 541,919 NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 NOTES TO THE ACCOUNTS 54–55 FOR THE YEAR ENDED 30 APRIL 2007 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 Property loans In the third to fifth years Bank loans Vehicle related finance lease obligations Property loans Due after more than five years Loan notes Cumulative Preference shares Property loans Group Company 2007 £000 2006 £000 2007 £000 2006 £000 572 2,939 15,894 – 421 514 20,340 952 210 631 1,793 3,789 2,956 11,527 10,290 270 1,192 30,024 – 610 216 826 14,220 – – – – – 14,220 – – – – 12,926 2,766 – 10,290 – – 25,982 – – – – 597,435 – 373 515,437 189 697 596,043 – – 515,437 – – 597,808 516,323 596,043 515,437 168,628 500 1,293 170,421 – 500 836 168,628 500 – 1,336 169,128 – 500 – 500 Total borrowings 790,362 548,509 779,391 541,919 Less: Amount due for settlement within one year (shown under current liabilities) 20,340 30,024 14,220 25,982 Amount due for settlement after more than one year 770,022 518,485 765,171 515,937 Bank overdrafts Bank overdrafts are repayable on demand and are unsecured. They are denominated in UK Sterling and Euro. Sterling denominated bank overdrafts bear interest at 1% above the Bank of England base rate and Euro denominated bank overdrafts bear interest at rates of 0.75% to 0.85% above EURIBOR. This exposes the Group to cash flow interest rate risk. Bank loans In January 2007, the Company committed term loan facilities with seven major UK and European banks. The total facilities of £755,000,000 (2006 – £745,000,000) have commitment dates being one year for £151,000,000 of the facilities and three years for £604,000,000 of the facilities. Bank loans are unsecured and bear interest at rates of 0.475% to 0.525% above the relevant interest rate index, being LIBOR for UK Sterling denominated debt and EURIBOR for Euro denominated debt. This exposes the Group to cash flow interest rate risk. NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 NOTES TO THE ACCOUNTS 56–57 FOR THE YEAR ENDED 30 APRIL 2007 24. BORROWINGS (continued) 24. BORROWINGS (continued) Loan notes In December 2006 and January 2007, the Company issued fixed rate, unsecured loan notes (“the US Notes”), with total nominal values of US$295,000,000 and £21,000,000 respectively, to investors that are principally based in the United States. The US Notes are not publicly tradeable and have the following maturity profile: Value of loan notes US$125,000,000 7 year loan notes US$120,000,000 10 year loan notes £21,000,000 10 year loan notes US$50,000,000 10 year loan notes Redemption date December 2013 December 2016 December 2016 January 2017 Carrying value 30 April 2007 £000 62,554 60,052 21,000 25,022 168,628 The redemption of the US Notes and interest payments on the US Notes are due to the loan note holders in the same currency as the issue currency of the US Notes. These factors expose the Group to foreign currency exchange risk. As explained in further detail in Note 25, the Company has entered into cross currency swap financial instruments in order to mitigate this risk. The weighted average fixed interest rate on the US Notes is 5.73%. Taking into account the interest rates within the cross currency swap instruments, the overall weighted average fixed interest rate on these borrowings is 5.78%. 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 (2006 – 1,300,000), of which 1,000,000 (2006 – 1,000,000) were allotted and fully paid at the balance sheet date. 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 2007, the average borrowing rate for vehicle related finance leases was 4.1% (2006 – 4.4%). All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. Group Amounts payable under vehicle related finance leases: Within one year In the second 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 more than one year Minimum lease payments Present value of minimum lease payments 2007 £000 16,239 220 16,459 (355) 16,104 2006 £000 11,703 853 12,556 (230) 12,326 2007 £000 15,894 210 16,104 – 16,104 2006 £000 11,527 799 12,326 – 12,326 (15,894) (11,527) 210 799 Vehicle related finance lease obligations are denominated in Sterling and Euro. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 Deferred consideration The deferred consideration liability as at 30 April 2006 was in respect of 20% of the issued share capital of Fualsa, the purchase of which occurred in May 2004. This liability was paid in May 2006. 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 ten years. For the year ended 30 April 2007, the average borrowing rate for property loans was 4.7% (2006 – 3.3%). All loans are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. Minimum lease payments Present value of minimum lease payments Group Amounts payable under property loans: Within one year In the second 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 more than one year 2007 £000 481 1,139 1,510 3,130 (412) 2,718 2006 £000 274 992 973 2,239 (220) 2,019 2007 £000 421 1,004 1,293 2,718 – 2,718 (421) 2,297 2006 £000 270 913 836 2,019 – 2,019 (270) 1,749 Other borrowings Other borrowings of £514,000 (2006 – £1,192,000) represent Spanish debt discounting arrangements which are unsecured and fall 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: In one year or less In one year to five years 2007 £000 178,474 7,958 2006 £000 194,215 129,608 186,432 323,823 The total amount permitted to be borrowed by the Company and its subsidiary undertakings in terms of the Articles of Association shall not exceed six times the aggregate of the issued share capital of the Company and Group reserves, as defined in those Articles. NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 NOTES TO THE ACCOUNTS 58–59 FOR THE YEAR ENDED 30 APRIL 2007 24. BORROWINGS (continued) Analysis of consolidated net debt Cash at bank and in hand Short term investments Bank overdraft due within one year Bank loans Loan notes Vehicle related finance lease obligations Deferred consideration Preference shares Property loans and other borrowings At 1 May 2006 £000 22,201 1,847 (3,789) Cash flow £000 (7,964) 18,808 3,217 20,259 14,061 (518,393) – (12,326) (10,290) (500) (3,211) (9,964) (175,579) 63,740 10,290 – 1,231 Foreign Acquisitions (Note 35) movements £000 exchange At 30 April 2007 £000 £000 299 – – 299 (75,878) – (69,048) – – (1,319) (152) – – (152) 2,909 6,951 1,530 – – 67 14,384 20,655 (572) 34,467 (601,326) (168,628) (16,104) – (500) (3,232) 24. BORROWINGS (continued) Financing and interest rate risk The Group's policy is to finance operating subsidiary undertakings by a combination of retained earnings, loan notes and bank borrowings, including medium term bank loans. Cash at bank and on deposit yield interest based principally on interest rate indices applicable to periods of less than three months, those indices being LIBOR for Sterling denominated cash and EURIBOR for Euro denominated cash. The Group's exposure to interest rate fluctuations on its borrowings and deposits is managed through the use of interest rate derivatives as detailed in Note 25. 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 2007, 66% (2006 – 58%) of gross borrowings were at fixed or capped rates of interest, comprising £180,000,000, €€225,000,000 and US$295,000,000 of derivative financial instruments, 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 (Note 25) and with the exception of US Dollar denominated loan notes, as explained above. An analysis of the Group’s borrowings by currency is given below: (524,461) (96,221) (145,946) 11,305 (755,323) The Group calculates gearing to be net debt as a percentage of shareholders' funds less goodwill and the net book value of intangible assets, where net debt comprises borrowings less cash at bank and short term investments. At 30 April 2007, the gearing of the Group amounted to 289.9% (2006 – 203.7%) where net debt was £755,323,000 (2006 – £524,461,000) and shareholders' funds less goodwill and the net book value of intangible assets was £260,507,000 (2006 – £257,499,000). 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 Spain is more concentrated in larger customers than the UK and, consequently, the Group has put a credit insurance policy in place to mitigate this risk. 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 financial 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 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 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. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 Group At 30 April 2007 Borrowings Bank overdrafts Bank loans Loan notes Vehicle related finance lease obligations Cumulative Preference shares Property loans Other At 30 April 2006 Borrowings Bank overdrafts Bank loans Vehicle related finance lease obligations Cumulative Preference shares Deferred consideration Property loans Other Sterling £000 Euro £000 US Dollars £000 Total £000 572 81,069 21,000 779 500 – – – 520,257 – 15,325 – 2,718 514 – – 147,628 – – – – 572 601,326 168,628 16,104 500 2,718 514 103,920 538,814 147,628 790,362 Euro £000 US Dollars £000 Total £000 Sterling £000 3,789 292,082 1,255 500 – – – – 226,311 11,071 – 10,290 2,019 1,192 297,626 250,883 – – – – – – – – 3,789 518,393 12,326 500 10,290 2,019 1,192 548,509 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 NOTES TO THE ACCOUNTS 60–61 FOR THE YEAR ENDED 30 APRIL 2007 25. DERIVATIVE FINANCIAL INSTRUMENTS 25. DERIVATIVE FINANCIAL INSTRUMENTS (continued) 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 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. The interest rate derivatives which the Group is party to, as at 30 April 2007, are summarised below: Sterling denominated interest rate swaps Euro denominated interest rate swaps Sterling denominated interest rate collars Total nominal values £75,000,000 €€225,000,000 £105,000,000 Weighted average contract rates 5.2% 2.8% Cap 6.0% Floor 4.0% Weighted average remaining life 0.9 years 2.8 years 1.6 years Net investment hedges The Group manages its exposure to movements in the reported results of those subsidiary undertakings whose functional currency is Euro ("the Euro Subsidiaries") by maintaining UK based borrowings, including relevant attributable financial instruments, denominated in Euro in the parent Company equivalent to the net assets of the Euro Subsidiaries. In accordance with IAS21, the net assets of the Euro Subsidiaries include goodwill attributable to those subsidiary undertakings. The level of these Euro borrowings is revised every month to reflect the closing net assets of the Euro Subsidiaries at the previous month end. The Group achieves net investment hedging through a combination of pre-tax and post-tax net investment hedging relationships. The hedging objective is to reduce the risk of spot retranslation foreign exchange gains or losses arising in the consolidated results of the Group upon the translation of the Euro Subsidiaires from Euro to Sterling at each reporting date in the hedging period, which is the period between each roll-over of the Euro denominated borrowings which comprise the net investment hedge. The hedges are considered fully effective in the current and prior year and the exchange differences arising on the borrowings have been recognised directly within equity along with the exchange differences on retranslation of the net assets of the Euro Subsidiaries. The interest rate swaps to which the Group is party are all pay fixed rate, receive floating rate instruments, the fixed rate being as indicated above. 26. DEFERRED TAX 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: Interest rate swaps Interest rate collars 2007 £000 3,840 377 4,217 2006 £000 2,576 (240) 2,336 The net fair value of interest rate derivatives of £4,217,000 (2006 – £2,336,000) is represented in the consolidated balance sheet as an asset of £4,347,000 (2006 – £2,747,000) and a liability of £130,000 (2006 – £411,000), as set out in Notes 21 and 23 respectively. 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, a net amount of £6,000 (2006 – £197,000) has been credited to the income statement. Interest rate collars are not hedge accounted for and, accordingly, an amount of £617,000 (2006 – £106,000) has been credited to the income statement. The total change in fair values of interest rate derivatives recognised in the income statement of £623,000 (2006 – £303,000) is shown within investment income (Note 9). Cross currency derivatives During the current year, the Group issued US Dollar denominated loan notes with a total nominal value of US$295,000,000. These loan notes will be redeemed in US Dollars between 2013 and 2017 and interest payments are to be made by the Group in US Dollars (Note 24). This exposes the Group to foreign currency exchange risk. To mitigate this risk, in the current year the Group has entered into cross-currency swaps with a total notional value of US$295,000,000. The effective start dates and termination dates of these contracts are the same as the loan notes against which hedging relationships are designated and which are shown in Note 24. The Group will have interest cash outflows in UK Sterling and interest cash inflows in US Dollars over the life of the contracts. On the termination date of each of the contracts, the Group will pay a principal amount in UK Sterling and receive a principal amount in US Dollars. The weighted average interest rate that the Group pays in UK Sterling is 5.78%. As at 30 April 2007, the estimated total fair value of these derivatives is based upon market values. The cross currency swaps are designated and fully effective as cash flow hedges and their fair value of £(3,738,000) has been deferred in equity (Note 32). From this amount, £6,951,000 has been charged to the income statement from equity, representing the loss on foreign exchange elements of the total fair value of the derivatives. This matches the gain on retranslation of the loan notes at the exchange rate prevailing on the balance sheet date, to leave a net impact of £nil in the income statement. The net impact on the hedging reserve is that it has been credited with £3,213,000, representing the gain on the interest rate element of the fair value of the derivatives. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 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 Revaluation allowances of buildings £000 £000 Share based payment £000 Intangible Retirement benefit assets obligations £000 £000 Other timing differences £000 Total £000 11,384 (1,929) – 11,153 64 – 20,672 (860) – 6,730 (140) 149 953 (9) – 2,548 – – 3,492 (535) – 2,319 (33) – (1,459) (6) (882) – – – (2,347) (479) 831 – – – 1,637 (331) – 4,039 – – 5,345 (1,692) – 3,940 (20) – – 253 – (686) – (2,391) 10,124 2,755 – 733 (882) (94) – 16,960 64 – (11,153) (11,153) (433) 133 134 – – – (10,883) 15,846 10,665 1,651 – – 55 7,232 2,616 12,989 (193) 204 Group At 1 May 2005 Charge (credit) to income Credit to equity Acquisitions of subsidiary undertakings Exchange differences Transfer relating to acquired subsidiary undertakings At 1 May 2006 Charge (credit) to income Charge to equity Acquisitions of subsidiary undertakings Exchange differences Adjustments in respect of prior years At 30 April 2007 26,551 5,243 (1,995) 7,573 (166) 1,488 38,694 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 NOTES TO THE ACCOUNTS 62–63 FOR THE YEAR ENDED 30 APRIL 2007 26. DEFERRED TAX (continued) 29. REVALUATION RESERVE The following are the major deferred tax liabilities and assets recognised by the Company and movements thereon during the current and prior years: At 1 May 2005 and 1 May 2006 Foreign exchange differences At 30 April 2007 30. OWN SHARES At 1 May 2005 Purchase of own shares Sale of own shares At 1 May 2006 Purchase of own shares Sale of own shares At 30 April 2007 Group £000 1,054 (11) 1,043 Group £000 (2,471) (1,371) 511 (3,331) (1,303) 62 (4,572) Company £000 1,371 – 1,371 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 2005 Premium on Ordinary shares issued (below) At 1 May 2006 and 30 April 2007 Group £000 4,721 62,742 67,463 Company £000 417 62,742 63,159 During the prior 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 1065p each, raising £63,045,000 (net of expenses). In accordance with Section 131 of the Companies Act 1985 the premium on the issue was credited to the merger reserve in the prior year. Company At 1 May 2005 Charge (credit) to income Credit to equity At 1 May 2006 Charge (credit) to income Charge to equity At 30 April 2007 Accelerated capital allowances £000 Share based payment £000 Other timing differences £000 167 25 – 192 17 – 209 (870) (7) (882) (1,759) (490) 254 (1,995) (895) 633 – (262) (28) 1,801 1,511 Total £000 (1,598) 651 (882) (1,829) (501) 2,055 (275) At the balance sheet date, the aggregate amount of undistributed earnings of overseas subsidiary undertakings was £112,153,000 (2006 – £40,472,000). No deferred tax liability has been recognised in respect of these amounts because the Group is in a position to control the timing of distributions from these subsidiary undertakings and it is probable that timing differences associated with their undistributed earnings will not reverse in the foreseeable future. 27. SHARE CAPITAL Group and Company Authorised: 80,000,000 Ordinary shares of 5p each Allotted and fully paid: 71,205,252 (2006 – 70,750,761) Ordinary shares of 5p each 2007 £000 2006 £000 4,000 4,000 3,560 3,538 The Company has one class of Ordinary share which carries no right to fixed income. During the year the Company issued 454,491 Ordinary shares with a nominal value of £22,725 pursuant to the exercise of options under the Group's various share schemes, for cash consideration of £2,254,583. 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 2007 £000 64,998 2,232 67,230 2006 £000 62,544 2,454 64,998 NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 NOTES TO THE ACCOUNTS 64–65 FOR THE YEAR ENDED 30 APRIL 2007 32. HEDGING RESERVE 34. RETAINED EARNINGS At 1 May 2005 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 retained earnings At 1 May 2006 Profit for the year Dividends paid Share options fair value amount charged directly to equity Defined benefit pension credit recognised directly in equity Net current tax credit recognised directly in equity Net deferred tax charge recognised directly in retained earnings Group £000 153,569 40,594 (13,437) 20 356 882 181,984 54,483 (16,949) (75) 445 1,084 (388) Company £000 64,390 41,059 (13,437) 20 – 882 92,914 11,241 (16,949) (75) – 1,084 (254) At 30 April 2007 220,584 87,961 35. ACQUISITIONS OF SUBSIDIARY UNDERTAKINGS (a) Record Rent a Car S.A. On 5 August 2005, the Group acquired a 49% share in Record Rent a Car S.A. (“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, was accounted for as an associate under the equity method of accounting, in the year ended 30 April 2006. On 11 May 2006, the Group acquired the remaining 51% of the issued share capital of Record for a consideration of €€72,400,000, payable to the vendors, under the share purchase agreement. The transaction has been accounted for under the purchase method of accounting in the current year. At 1 May 2005 Movement in fair value of hedged interest rate derivatives Transfer to income statement At 1 May 2006 Movement in fair value of hedged interest rate derivatives Movement in fair value of hedged foreign currency derivatives Deferred taxation on fair value of interest rate and foreign currency derivatives Transfer to income statement At 30 April 2007 Group £000 Company £000 – 3,153 (197) 2,956 1,264 (3,738) (2,228) 6,945 5,199 – 2,747 (193) 2,554 221 (3,738) (1,801) 6,967 4,203 The hedging reserve represents the cumulative amounts of changes in fair values of hedged interest rate and cross currency derivatives 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 2005 Foreign exchange differences on retranslation of net assets of subsidiary undertakings Foreign exchange differences on retranslation of interest in associate Foreign exchange differences on retranslation of investments in subsidiary undertakings Net foreign exchange differences on long term borrowings held as hedges At 1 May 2006 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 Other foreign exchange differences recognised directly in equity At 30 April 2007 Group £000 Company £000 1,482 1,303 413 – (1,571) 1,627 (1,756) – 1,425 628 1,924 – – 413 646 (1,059) – – (4,344) 4,344 – – The management of the Group's foreign exchange translation risks is detailed in Note 25. During the year, the Company maintained borrowings denominated in Euro in order to hedge its Euro denominated investments in Fualsa and Record, prior to the disposal of those investments on 1 November 2006 (Note 18). The Company retranslated the borrowings and the investment into Sterling using the exchange rate prevailing on the date of disposal. The full loss on the retranslation of the investment has been recognised directly in the equity of the Company and the gain on the retranslation of borrowings has been recognised directly in the equity of the Company to the extent that it offsets the loss arising on the retranslation of the investment. The remaining gain on the retranslation of the borrowings has been recognised in the income statement of the Company. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 NOTES TO THE ACCOUNTS 66–67 FOR THE YEAR ENDED 30 APRIL 2007 35. ACQUISITIONS OF SUBSIDIARY UNDERTAKINGS (continued) 35. ACQUISITIONS OF SUBSIDIARY UNDERTAKINGS (continued) Had the 49% share in Record been accounted for under the purchase method of accounting, then goodwill of £12,236,000 would have arisen as follows: Book value of net assets of Record at 5 August 2005 Fair value adjustments Fair value of net assets of Record at 5 August 2005 49% share of fair value of net assets of Record at 5 August 2005 Goodwill Acquisition cost of 49% share in Record (including expenses) £000 53,802 (436) 53,366 26,149 12,236 38,385 The acquisition cost of £38,385,000, referred to above, comprises cash flow of £37,972,000 and exchange differences of £413,000, both recognised in the results of the Group in the year ended 30 April 2006. The detail relating to the acquisition of the remaining 51% of the issued share capital of Record is as follows: Book value £000 Fair value adjustments £000 Fair value £000 Net assets acquired: 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 Trade and other payables Borrowings Deferred tax liabilities 51% share of fair value of net assets of Record at 11 May 2006 Goodwill Acquisition cost of 51% share in Record (including expenses) Fair value of consideration: Cash Net cash acquired with subsidiary undertaking Cash outflow in the year on acquisition of Record 57 158,526 14,038 499 3,162 43,523 299 (7,618) (146,244) (6,730) 59,512 11,258 224 (259) (234) – (1,375) – (2,274) (1) (6,259) 1,080 11,315 158,750 13,779 265 3,162 42,148 299 (9,892) (146,245) (12,989) 60,592 30,902 19,203 50,105 50,105 (299) 49,806 The total goodwill arising on the acquisition of Record of £31,439,000 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. Record contributed £91,374,000 of revenue and £13,775,000 profit before tax for the period between 11 May 2006 and the balance sheet date. If the acquisition of Record had been completed on the first day of the financial year then there would be no material difference between Group revenues for the year and Group profit attributable to equity holders of the parent, compared to those stated in the Consolidated Income Statement for the year ended 30 April 2007. In the above acquisition, 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. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 (b) 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 an original cash consideration of £50,316,000, including goodwill of £28,055,000. The transaction was accounted for in accordance with the purchase method of accounting in the year ended 30 April 2006. In the current year, the Group paid a further £3,699,000 to the vendor, under the terms of the sale and purchase agreement, and further fair value adjustments were made, totalling £4,028,000, such that the revised detail relating to the fair value of net assets of AVR acquired is as follows: 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 Proceeds from disposal of intangible assets to the vendor, offset against cash flows in the current year Cash outflow in the prior year on acquisition of AVR Net cash inflow in the current year relating to the 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) 10,626 (1,305) (337) (17) – 214 – – (927) (4,980) (744) (14,379) Fair value £000 – 14,845 92,423 5,427 27 2,320 16,592 3,301 (77,357) (12,883) (16,125) (2,281) 26,289 27,726 54,015 54,015 74,056 128,071 (4,165) (124,372) (466) 36. PROFIT OF THE PARENT COMPANY A profit of £11,241,000 (2006 – £41,059,000) 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. NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 NOTES TO THE ACCOUNTS 68–69 FOR THE YEAR ENDED 30 APRIL 2007 37. OPERATING LEASE ARRANGEMENTS 38. SHARE BASED PAYMENTS (continued) 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 2007 2006 £10.33 £10.37 26.9% 4.6 years 4.7% 2.9% £9.31 £9.31 19.5% 4.7 years 4.3% 3.2% Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years. Executive Incentive Scheme (“EIS”) No options have been granted since 24 January 2002 under this scheme. At 1 May Exercised during the year Forfeited during the year At 30 April 2007 2006 Weighted Number of share average options exercise price £ Weighted Number of share average options exercise price £ 739,958 (361,091) (7,125) 371,742 4.90 4.92 4.20 4.89 1,107,075 (365,944) (1,173) 739,958 4.90 4.92 3.68 4.90 Exercisable at the end of the year 333,492 4.91 337,083 4.91 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 £10.68 (2006 – £10.24). The options outstanding at 30 April 2007 had a weighted average exercise price of £4.89, and a weighted average remaining contractual life of 2.6 years. As lessee Group Minimum lease payments under operating leases recognised in the income statement for the year 2007 £000 2006 £000 6,134 5,981 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 2007 £000 4,680 11,115 7,880 23,675 2006 £000 4,592 9,141 7,926 21,659 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 ten (2006 – nine) years and rentals are fixed for an average number of four (2006 – 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. 38. SHARE BASED PAYMENTS The Group’s various share option incentive plans are explained on pages 18 to 21. The Group recognised total expenses of £1,634,000 (2006 – £1,301,000) related to equity-settled share-based payment transactions in the year. Further details regarding the plans are outlined below. Northgate Share Option Scheme (“NSOS”) At 1 May Granted during the year Exercised during the year Lapsed during the year At 30 April 2007 2006 Weighted Number of share average options exercise price £ Weighted Number of share average options exercise price £ 369,500 120,000 (93,400) (9,000) 387,100 5.16 10.37 5.11 4.22 8.60 379,500 141,600 (151,600) – 369,500 5.16 9.31 4.42 – 7.03 Exercisable at the end of the year 46,000 5.18 38,400 4.61 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 £10.68 (2006 – £10.24). The options outstanding at 30 April 2007 had a weighted average exercise price of £8.60 and a weighted average remaining contractual life of 6.7 years. In the current year, options were granted in July 2006. The aggregate of the estimated fair values of the options granted on this date is £280,000. In the prior year, options were granted in October 2005. The aggregate of the estimated fair values of the options granted on this date is £215,000. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 38. SHARE BASED PAYMENTS (continued) Deferred Annual Bonus Plan (“DABP”) All options granted under this scheme are nil cost options. At 1 May Granted during the year Exercised during the year Forfeited during the year At 30 April 2007 Number of 2006 Number of share options share options 160,353 31,050 (7,876) (3,660) 83,143 77,960 (500) (250) 179,867 160,353 3,031 (2006 – nil) options were exercisable at the end of the year. The weighted average share price at the date of exercise of options was £10.76 (2006 – £9.82). The options outstanding at 30 April 2007 had a weighted average remaining contractual life of 2.9 years. In the current year, options were granted in July 2006. The aggregate of the estimated fair values of the options granted on this date is £294,000. In the prior year, options were granted in July 2005. The aggregate of the estimated fair values of the options granted on this date is £515,000. 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 2007 2006 £10.33 £nil 26.9% 3 years 4.7% 2.9% £9.05 £nil 19.5% 3 years 4.2% 3.2% Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years. All Employee Share Scheme (“AESS”) The scheme has a 12 month Accumulation period. Partnership shares are purchased by the employee at the end of the Accumulation period from the amount contributed by the employee during that period. The Company allocates an amount of free Matching shares equivalent to the number of Partnership shares purchased. The vesting period for Matching shares is three years. Matching shares are forfeited if the employee either sells the related Partnership shares or leaves the Group before the three years have elapsed. Details of Matching shares which had not vested at 30 April were as follows: At 1 May Allocated during the year Forfeited during the year Vested during the year At 30 April 2007 Number of shares 2006 Number of shares 187,287 57,242 (15,032) (69,495) 200,171 58,876 (11,343) (60,417) 160,002 187,287 NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 NOTES TO THE ACCOUNTS 70–71 FOR THE YEAR ENDED 30 APRIL 2007 38. SHARE BASED PAYMENTS (continued) The share price at the date of vesting for Matching shares which vested during the year was £11.14 (2006 – £10.27). The non- vested Matching shares outstanding at 30 April 2007 had a weighted average remaining period until vesting of 1.7 years. In the current year, Matching shares were allocated in January 2007. The aggregate of the estimated fair values of the Matching shares allocated on this date was £597,000. In the prior year, Matching shares were allocated in January 2006. The aggregate of the estimated fair values of the Matching shares allocated on this date was £522,000. The inputs into the Black-Scholes model are as follows: Weighted average share price Weighted average vesting price Expected volatility Expected life Risk free rate Expected dividends 2007 2006 £12.06 £nil 27.0% 5 years 5.2% 2.9% £10.35 £nil 19.5% 5 years 4.2% 3.2% Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years. Performance Share Plan (“PSP”) All options granted under this scheme are nil cost options. The first grant of options under this scheme occurred in May 2006. Details of the share options outstanding during the year are as follows: At 1 May Granted during the year Forfeited during the year At 30 April 2007 Number of share options – 134,000 (21,000) 113,000 No options were exercisable at the end of the year. The options outstanding at 30 April 2007 had a weighted average remaining contractual life of 9 years. In the current year, matching share options were granted in May 2006. The aggregate of the estimated fair values of the options granted on this date is £1,330,000. 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 2007 £10.83 £nil 25.5% 3 years 4.5% 2.9% Expected volatility was determined by calculating the historical volatility of the Group's share price over the previous three years. NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 NOTES TO THE ACCOUNTS 72–73 FOR THE YEAR ENDED 30 APRIL 2007 39. RETIREMENT BENEFIT SCHEMES 39. RETIREMENT BENEFIT SCHEMES (continued) During the year the Group operated two group personal pension plans and The Willhire Pension Scheme (“the Scheme”) (acquired by the Group as part of the acquisition of Northgate (AVR) Limited on 3 February 2006), which includes both defined benefit and defined contribution sections. The total pension cost to the Group of all these arrangements was £1,480,000 (2006 – £1,446,000). The Scheme The Scheme, which is established under Trust, is financed through separate Trustee administered funds managed by independent professional fund managers on behalf of the Trustees. During the year, the Scheme was closed to both new members and to future service accrual for existing members. Contributions to the Scheme are based upon actuarial advice following the most recent actuarial valuation of the fund. Actuarial valuations of the Scheme were performed as at 3 February 2006 and 30 April 2006 by a Fellow of the Institute of Actuaries, representing Watson Wyatt Limited and at 30 April 2007 by a Fellow of the Institute of Actuaries, representing JLT Benefit Solutions Limited. 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 Valuation at 30 April 2007 %pa Valuation at Valuation at 30 April 2006 3 February 2006 %pa %pa 5.5 3.4 n/a 3.3 5.1 3.0 4.5 3.0 4.7 2.9 4.4 2.9 Amounts recognised in the income statement in respect of the Scheme are as follows: Service cost Interest (income) cost Expected return on Scheme assets Curtailments Total pension charge (credit) From 1 May 2006 to 30 April 2007 £000 From 3 February 2006 to 30 April 2006 £000 21 (13) – – 8 48 62 (53) (443) (386) The charge for service cost has been included in administrative expenses. Actuarial gains and losses have been reported directly in equity, within retained earnings. The actual return on the Scheme assets was a loss of £236,000 (2006 – £48,000 gain). There are no reimbursement rights. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 The amount included in the balance sheet arising from the Group's obligations in respect of the Scheme is as follows: Present value of defined benefit obligations Fair value of plan assets Liability recognised in the balance sheet The net movements in the deficit were as follows: At 1 May Acquisition Pension charge (credit) recognised in the income statement Actuarial gains Contributions At 30 April Movements in the present value of the defined benefit obligations were as follows: At 1 May Acquisition Current service cost Interest cost Actuarial gains Benefits paid Past service cost Curtailments At 30 April Movements in the fair value of Scheme assets were as follows: At 1 May Acquisition Expected return on Scheme assets Contributions Benefits paid Actuarial (losses) gains At 30 April 2007 £000 (3,900) 3,345 (555) 2006 £000 (4,595) 3,151 (1,444) 2007 £000 1,444 – 8 (445) (452) 555 2007 £000 4,595 – 21 234 (928) (22) – – 3,900 2007 £000 3,151 – 247 452 (22) (483) 3,345 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 asset 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 the bond returns and the movement in market indices since the previous measurement date. NOTES TO THE ACCOUNTS FOR THE YEAR ENDED 30 APRIL 2007 NOTES TO THE ACCOUNTS 74–75 FOR THE YEAR ENDED 30 APRIL 2007 39. RETIREMENT BENEFIT SCHEMES (continued) 40. RELATED PARTY TRANSACTIONS The analysis of the Scheme assets and the expected rate of return at the balance sheet date was as follows: Transactions with subsidiary undertakings Transactions between the Company and its subsidiary undertakings, which are related parties, are as follows: Net interest receivable Management charges 2007 £000 11,327 300 11,627 2006 £000 6,951 300 7,251 During the year, the Company also disposed of investments to a subsidiary undertaking, as detailed in Note 18. Balances with subsidiary undertakings at the balance sheet date are shown in Notes 21 and Note 23. 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 Directors' Remuneration Report on pages 16 to 21. The fair value charged to the consolidated income statement in respect of equity-settled share-based payment transactions with the Directors is £443,000. Equity instruments Debt instruments Other 30 April 2007 30 April 2006 Expected return % Fair value of assets £000 Expected return % Fair value of assets £000 6.0 4.0 4.0 2,046 1,137 162 3,345 7.9 4.5 4.0 2,663 305 183 3,151 The Scheme 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 Scheme. During the current year, contributions have been made of £21,000 per month in accordance with latest actuarial advice received. A single special contribution of £200,000 was also made during the current year. The estimated amount of contributions expected to be paid to the Scheme during the year ended 30 April 2008 is £252,000. The history of experience adjustments is supplied only for financial periods since the acquisition of the Scheme 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 Scheme assets Deficit in the Scheme Experience adjustments on Scheme obligations: Amount Percentage of Scheme obligations Experience adjustments on Scheme assets: Amount Percentage of Scheme assets Year ended Period ended 30 April 2007 30 April 2006 £000 £000 3,900 3,345 555 738 19.0% 4,595 3,151 1,444 48 1.5% (483) (14)% 493 10.7% NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 FIVE YEAR FINANCIAL SUMMARY INFORMATION FOR SHAREHOLDERS 76–77 Based on the consolidated financial statements for years ended 30 April and adjusted to reflect the effect of subsequent changes in accounting policy. Income statement Revenue 526,465 372,609 339,382 355,624 337,875 IFRS 2007 £000 IFRS 2006 £000 IFRS 2005 £000 UK GAAP 2004 £000 UK GAAP 2003 £000 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 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 107,056 – 107,056 (31,688) – – 75,368 (20,885) 54,483 76.1p 16,949 25.5p 72,598 – 72,598 (20,078) 4,964 (1,422) 56,062 (15,468) 40,594 61.1p 13,437 23.0p 76,237 – 76,237 (21,249) – – 54,988 (15,757) 39,231 60.7p 11,916 20.0p 55,605 4,342 59,947 (15,355) – – 44,592 (13,303) 31,289 50.7p 11,064 17.6p 49,015 2,620 51,635 (15,032) – – 36,603 (11,497) 25,106 41.4p 9,736 16.0p IFRS 2007 £000 IFRS 2006 £000 IFRS 2005 £000 UK GAAP 2004 £000 UK GAAP 2003 £000 1,030,136 119,625 21,941 (809,271) 798,777 42,582 14,705 (535,775) 587,008 40,502 11,464 (413,943) 419,136 (15,929) – (214,900) 402,173 (86,615) – (162,597) 362,431 320,289 225,031 188,307 152,961 3,560 67,230 291,641 3,538 64,998 251,753 3,209 62,544 159,278 3,702 61,829 122,776 3,545 45,635 103,781 362,431 320,289 225,031 188,307 152,961 Net asset value per Ordinary share 509p 453p 351p 293p 250p Classification Information concerning day to day movements in the price of the Company’s Ordinary shares is available on Cityline (09068 123456) code 2722. The Company’s listing symbol on the London Stock Exchange is NTG. The Company’s joint corporate brokers are Citigroup Global Marketing Limited and UBS Limited and the Company’s Ordinary shares are traded on SETSmm Financial calendar December January March July September Publication of Half Yearly Report Payment of interim dividend Publication of Interim Management Statement Announcement of year end results Report and accounts posted to shareholders Annual General Meeting Payment of final dividend Publication of Interim Management Statement 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 NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 NOTICE OF ANNUAL GENERAL MEETING NOTICE OF ANNUAL GENERAL MEETING 78–79 The Directors of the Company consider that all the proposals to be considered at the Annual General Meeting are in the best interests of its shareholders as a whole and they recommend that you vote in favour of them. By Order of the Board D. Henderson Secretary 2 July 2007 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 24 September 2007 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. THIS NOTICE OF ANNUAL GENERAL MEETING IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you have any doubt as to the action you should take, you are recommended to seek your own personal financial advice from your stockbroker, bank manager, solicitor, accountant or other financial adviser authorised under the Financial Services and Markets Act 2000. If you have sold or otherwise transferred all your Ordinary shares in Northgate plc, please send this document, together with the accompanying documents to the purchaser or transferee, or to the stockbroker, bank or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee. Notice is hereby given that the one hundred and ninth Annual General Meeting of Northgate plc will be held at Norflex House, Allington Way, Darlington at 11.30 am on 26 September 2007 for the following purposes: 1. To receive and adopt the Directors’ report and audited accounts of the Company for the year ended 30 April 2007. 2. To declare a final dividend of 15.5p per Ordinary share. 3. To approve the Remuneration Report for the financial year ended 30 April 2007 set out on pages 16 to 21 of the 2007 Annual Report and Accounts. 4. To re-appoint Deloitte & Touche LLP as auditors of the Company. 5. To authorise the Audit Committee to determine the remuneration of the auditors. 6. To re-elect Mr J Astrand as a Director. 7. To re-elect Mr P Rogerson 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: 8. 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: (a) (b) (c) 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); the allotment of equity securities in connection with any employees’ share scheme approved by the members in general meeting; and 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 2008 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. 9. 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 2008 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. 10. That the Regulations contained in the document submitted to the Meeting marked ‘A’ and signed by the Chairman of the Meeting for the purposes of identification be and the same are hereby adopted as the Articles of Association of the Company to the exclusion of and in substitution for all existing Articles of Association of the Company. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 80–81 ARTICLES OF ASSOCIATION EXPLANATORY NOTES ON PROPOSED CHANGES TO THE ARTICLES OF ASSOCIATION Companies Act 2006 We are proposing changes to our Articles of Association to reflect those provisions of the Companies Act 2006 which came into effect in January and April 2007. In summary, these changes are to: – permit the Company to communicate with its shareholders electronically; – replace the references to section 212 of the Companies Act 1985 with section 793 of the Companies Act 2006 in respect of the Company's powers to investigate its' shareholder register; and – reflect the removal from company legislation of an upper age limit of 70 years for directors. The principal changes introduced by the Companies Act 2006 earlier this year relate to electronic communications with shareholders. The new Articles of Association will permit the Company to use electronic communications for all notices, documents and information to be sent to shareholders, in accordance with individual preference. The Companies Act 2006 allows the Company to use website communication with its shareholders as the default position. The Company will be able to ask each individual shareholder for their consent to receive communications from the Company via its website. If the shareholder does not respond to the request for consent within 28 days, the Company will be entitled to take that as consent to receive communications in this way. However, when the Company places a document on its website, it must notify each shareholder who has agreed to receive documents via the website that the document has been made available on its website. A shareholder who has received a document electronically can ask for a hard copy of the document at any time and shareholders may also revoke their consent to receive electronic communications at any time. This new regime, while continuing to ensure that shareholders are able to receive communications and documents in hard copy if that is their preference, will enable the Company to take advantage of the efficiencies and cost savings inherent in electronic communications to a greater extent than is currently possible. In addition, with effect from 1 October 2007, the Companies Act 2006 will reduce the statutory notice periods for general meetings. Except for annual general meetings which will continue to require 21 days' notice, all other general meetings may be held on 14 days' notice irrespective of whether or not a special resolution is to be proposed at the relevant meeting. We are proposing to amend our Articles of Association to reflect this relaxation in the law. The Government has announced that it intends to bring into force the remaining provisions of the Companies Act 2006 in various stages in October 2007, April 2008 and October 2008. It is anticipated that shareholders may be asked to approve further changes to our Articles of Association during the course of the next two annual general meetings as may be necessary. Directors' indemnities Since our present Articles of Association were adopted in 2004, the Companies Act 1985 has been amended to provide for a relaxation of the prohibition against the granting of directors' indemnities. Under the old law, subject to certain exceptions, provisions in the articles of association of a company or in any contract with a company were void if they sought to exempt a director, the company secretary or its auditors from liability, or indemnify such an officer or auditor against any such liability, for negligence, default, breach of duty or breach of trust. The exceptions to this prohibition are (i) purchasing insurance for an officer or auditor; (ii) indemnifying an officer or auditor against any liability incurred in defending civil or criminal proceedings in which judgment is given in his favour or he is acquitted; and (iii) indemnifying an officer or auditor against the costs of successfully procuring an order from the court excusing a director from liability for negligence, default or breach of duty or trust where he has acted honestly and reasonably, and in all the circumstances ought fairly to be excused. The changes to the Companies Act 1985 mean that (i) companies will not be permitted to indemnify a director of another company in its group if the indemnity would be unlawful if it was given by the company of which the individual is a director; (ii) the restrictions only apply to directors and not to “officers”; (iii) in the case of liabilities arising from actions brought by third parties, both the costs (of the director and of the third party) and any damages may, subject to certain exclusions, be paid by the company even if the judgment goes against the director; (iv) in the case of liabilities owing to the company, the company will not be able to indemnify a director against damages awarded to the company itself but may pay directors' defence costs as they are incurred (although a director would be liable to repay his defence costs if his defence was to be unsuccessful); (v) companies will not be permitted to indemnify directors against criminal fines, fines by regulators or the legal costs of successful criminal proceedings against directors; and (vi) indemnities permitted by the new provisions must be disclosed in the directors' report in the annual accounts and made available for inspection at the company's registered office. It is proposed that our Articles of Association be amended to reflect this change in company law. The proposed amendment is a permissive power that tracks the wording of the provisions of the Companies Act 1985 and allows the Company to indemnify its directors subject to those provisions. NORTHGATE PLC ANNUAL REPORT & ACCOUNTS 2007 4 4 1 1 2 2 2 1 9 1 0 e s u o h d n u o R e h T y b d e n g i s e D Registered office: Norflex House, Allington Way, Darlington DL1 4DY Telephone: 01325 467558 Fax: 01325 363204 www.northgateplc.com 

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