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Annual Report 2002
DEVELOPING RISK AVERSE STRATEGIES FOR PROPERTY DevSec_Cover_WACE 11/4/03 3:23 pm Page 4
Contents 01 Financial highlights 02 Chairman's statement 04 Business model 06 Review of operations 20 Sustainable development 22 Board of Directors 24 Report of the Directors 26 Corporate governance 28 Financial statements 29 Report of the independent auditors 51 Remuneration report IBC Financial calendar and advisors Development Securities PLC Annual Report 2002 DevSec_Cover_WACE 11/4/03 3:23 pm Page 6 pm 3:23 11/4/03 DevSec_Cover_WACE DevSec_pg1-19_Wace 11/4/03 3:25 pm Page 1
Development Securities PLC is a property development and investment company. Its principal objective is to carry out substantial, complex developments in a risk-averse manner with a view to adding maximum value for its shareholders.
> Profit before tax £10.0 million > Net assets £121.5 million > Special dividend per share 28.5p > Annual dividends per share 5.0p > Nil net borrowings > Earnings per share 26.9p > Net assets per share 423.0p 66.7 50.1 423 423 393 379 337 5.0* 4.5 4.1* 3.7 3.3 26.9 24.0 23.1 Net assets per share Earnings per share Dividends per share 98 99 00 01 02 98 99 00 01 02 98 99 00 01 02
2002 special dividend 28.5p *excludes special dividend 2000 special dividend 5.0p
All stated in pence per share
Development Securities PLC Annual report 2002 1 Financial highlights DevSec_pg1-19_Wace 11/4/03 3:25 pm Page 2
Chairman’s statement
It is with satisfaction that I am again able to report strong financial results for your Company, in line with our expectations. Profit before tax for the year was £10.0 million, compared to £10.2 million in the previous year. Earnings per share increased by 12 per cent to 26.9 pence
HR Jenkins CBE, Chairman per share. 31st March 2003
In view of these results and the Company’s sound financial position, the Board has resolved to recommend the payment of a final ordinary dividend of 3.35 pence per share payable on 3rd July 2003 to shareholders on the register on 6th June 2003. This brings the total ordinary distribution for the year to 5.0 pence per share, an advance of 11.1 per cent over the previous year. Together with the special dividend of 28.5 pence per share, which we announced on 19th February 2003, the total distribution for the year is 33.5 pence per share.
Shareholders’ funds, prior to the special dividend, continued to advance for a seventh consecutive year, reaching £129.5 million, equivalent to 451 pence per share; this compares with £119.3 million and 423 pence per share 12 months earlier. After taking into account both the special dividend and the recommended final ordinary dividend in respect of 2002, shareholders’ funds at 31st December 2002 stood at £121.5 million, equivalent to 423 pence per share.
The special dividend is the second we have declared, following the payment of 5.0 pence per share by your Company in 2001. These payments are consistent with our policy of recycling an element of our development gains to shareholders as long as such distribution remains consistent with prudent financial management. We see no reason to change this policy, although shareholders will recognise that future special distributions must await development successes. In addition to the latest special dividend, which represents a distribution to shareholders of £8.0 million, or six per cent of the Company’s net assets, we also utilised £2.0 million in January 2003 to buy back, for cancellation, 640,000 of our ordinary shares at an average price of 314.7 pence per share. This has the effect of raising our balance sheet efficiency and increasing the net asset value per share by 2.8 pence.
Strategy Our performance in 2002 in both of the key sectors in which we operate, property development in London and the South East of England and property investment portfolio management, is likely to exceed the industry norms. Future development phases of the substantial projects with which we are involved, for which each current phase is wholly or substantially forward-funded, offer some prospect of either escaping the more severe effects of the current economic slowdown, or are well positioned to capitalise on the next cyclical upswing. The majority of our pipeline of significant projects involves some degree of urban regeneration and that, we believe, offers a pointer for the future of development businesses such as ours. The two out-of-town exceptions are the greenfield development at Cambourne, near Cambridge, and the proposed second phase at Broughton Shopping Centre, near Chester. It is the responsibility of local and central Government to ensure that adequate infrastructure improvements are in place in our major cities to enable the efforts of private enterprise to secure the upgrading and regeneration of the urban environment in which the majority of our population live and work.
Development Securities PLC Annual report 2002 2 Chairman’s statement DevSec_pg1-19_Wace 11/4/03 3:25 pm Page 3
In 2002, as with the previous year, our property investment At the end of the year, in line with original expectations, portfolio achieved superior results; we delivered a 12.8 per Martin Landau stood down from the Board as a Non- cent total return, which compares favourably with an executive Director after nearly ten years of service both average of 9.5 per cent for the market. Important in that capacity and, prior thereto, as Executive Deputy contributions to this consistent performance came from Chairman. Martin, the original proponent of risk-averse, realised gains on property sold during the year and from large-scale development that is now so embedded in our revaluation surpluses arising on those properties held within culture, will be missed. We wish him well in his other the portfolio at the year-end. These were in addition to the continuing activities. rental income generated from the portfolio, which makes a significant contribution to meeting the cost of our annual, Conclusion net operating expenses and net debt service costs. This is my last annual statement as your Chairman, as I am retiring from the Board at the end of 2003. I believe Our confidence in the prospects for the global economy has that your Board has a right to be proud of what has been weakened further since I reported to you 12 months ago. achieved in recent years and, after four years of service The outlook for the US economy, the engine of world on your behalf, I feel it is now time for me to hand over growth through many cycles, remains uncertain with little the Chair. The Nomination Committee is currently giving tangible prospect of a sustainable upturn in 2003. The consideration to the appointment of a successor. economies of mainland Europe are similarly anaemic. Business confidence, the key driver of the next cyclical We remain hopeful of maintaining good performance, upswing, remains absent in most of the important world although given the prevailing economic environment it markets with the strength of consumer demand a likely is not surprising that the prospects for your Company insecure cornerstone of the weak economic outlook. We in the current year are perhaps less certain than those at do not foresee an early recovery in the main UK markets the commencement of previous years. Nevertheless, I am in which we operate. For some time, our posture against confident that our profile, financial strength and pipeline the likelihood of such an economic environment has been of projects could hardly be a stronger platform from which to reduce the level of net debt to which we are exposed. to approach the challenging years ahead. Shareholders will be pleased to note that your Company had no net debt at 31st December 2002. Gearing is one It remains for me to thank all our Directors, management of the main levers of our business model and is available and staff for their valued contributions to our endeavours. to management to regulate the Company’s exposure to risk. The professionalism of our team has been the undoubted Our view continues to be one of prudence. key feature of our success over many years.
Board composition In August 2002, we appointed Victoria Mitchell and Michael Soames to the Board of your Company as Non-executive Directors, also serving on the Audit and Remuneration Committees of the Board. Victoria and Michael have extensive experience and expertise, as well as current involvement, in the property industry, and they are already making a valuable contribution to the continuing success of your Company.
Development Securities PLC Annual report 2002 3 Chairman’s statement DevSec_pg1-19_Wace 11/4/03 3:25 pm Page 4
Business model
Development Securities is one of the UK’s leading property development and investment companies. Its objective is to generate consistent, superior returns for Michael Marx investors by the creation and recycling of Joint Managing Director development gains, always subject to prudent financial management.
This is achieved by balancing the uncertainty inherent in any transaction with its potential reward in order not to over-expose the Company to forces outside its control. The emphasis on reducing risk is at the heart of our management philosophy; it assists the achievement of consistent results over time and the protection of the business and its investors from the effects of major market fluctuations. Importantly, our strategy enables the Company to focus its efforts on large and complex development projects, which would otherwise be beyond our capability to finance with internally-generated funds. These major projects, in our experience, offer greater profit potential without significantly increasing our inherent risk profile.
Our balanced business model, which we have applied consistently since the present management team began to come together in the mid-1990s, has delivered positive returns for shareholders. Over the past five years, dividends and net assets per share have each increased by more than 50 per cent, a compound growth rate, post tax, of some nine per cent per annum.
There are three strands to our approach, which are linked and operate in a complementary manner.
Forward-funding Development Securities has considerable expertise in the creation and management of major, complex commercial property developments, principally in the South East of England, with particular emphasis in Central London. We are currently managing projects with an ultimate market value in excess of £0.5 billion, comprising around one million square feet of office and commercial space. They include PaddingtonCentral, the exciting development on the old goods
Development Forward-funding/Development partner
PaddingtonCentral, London Morley Fund Management The Equitable Life Assurance Society Phase One, Royals Business Park Standard Life Investments Office Phase, Birmingham International Park The Prudential Assurance Company Industrial Phase, Birmingham International Park Legal & General Assurance Society Phase One, Cambourne Business Park Universities Superannuation Scheme Limited Phase Two, Cambourne Business Park Morley Fund Management 333 Oxford Street, London DEKA Immobilien Investment GmbH Black Friars Court, London Deutsche Grundbesitz Investmentgesellschaft Broughton Park, near Chester Pillar Property PLC
Development Securities PLC Annual report 2002 4 Business model DevSec_pg1-19_Wace 11/4/03 3:25 pm Page 5
Five year total shareholder return
Return index 160 FTSE All Share Index 140 FTSE Real Estate Index Development Securities PLC 120 100 80 60 Dec Dec Dec Dec Dec Dec 97 98 99 00 01 02
yard adjoining Paddington Station, and the Royals Business To balance this, the Company allocates the majority of Park, a 50-acre site with a one-mile frontage onto the its equity to the ownership of an investment portfolio with Royal Albert Dock, one of the foremost regeneration properties spread across the UK covering office, retail and areas in the UK. industrial sectors; the mix is driven by market conditions and availability. The rental income smoothes uneven cash Our team uses its expertise to identify a potential, major inflow resulting from the timing of major project completions development, prepares detailed drawings and seeks any and contributes significantly to meeting interest costs necessary variation to planning consents. In parallel with and central overheads. The investment portfolio provides this activity, we present the scheme to leading financial a steady and predictable flow of funds to enable the institutions, inviting them to participate in the project. Company to retain its small team of high-quality professionals Development Securities differs from most property during any market downturn. A company such as ours companies, since at no time does it own the major is only as good as its people; we have an excellent team developments it is working on, although it may, on some which has delivered value to investors and one which must schemes, have a relatively modest financial or even equity be maintained. involvement. This low-risk structure, known as forward funding, is central to the Company’s progress and provides Conservative use of debt a clear view of potential earnings and cash flow streams for While cash resources are generally available to allow us to a number of years ahead. capitalise both on appropriate development and investment opportunities, balance sheet management and the Once the funding and institutional ownership of a new conservative use of cash and debt apply an additional development have been arranged, Development Securities discipline on the Company as a further prudent method of is responsible for project managing the construction risk control. As a matter of policy, Development Securities process, in order to deliver the building on time and within does not have a fixed gearing limit, although its level of budget. As part of its agreement with the project’s investors, borrowings as a percentage of shareholders’ funds is Development Securities also assumes responsibility for currently amongst the lowest in the property sector. letting the completed building, usually on institutional terms to quality covenants. The Company’s profit comes from the Consistent with our policy of running an efficient balance project management fee and a participation in any uplift sheet, from time to time surplus cash may become available arising to the investors in the final investment value of the to return to shareholders. The timing is related to the project when compared to the total development cost. completion of major development projects, when the Forward-funding imposes no contractual liability on Company benefits from substantial cash inflows. If Development Securities should the completed building circumstances allow, funds are returned to shareholders not be let profitably. This is a key benefit and highlights by way of special dividend or a share buy-back programme. the difference between forward-funding and conventional The timing and nature of this action will be determined financing of property development. after taking into account prevailing market conditions and projected cash requirements. Investment portfolio The number of major development projects underway at any one time is restricted to ensure maximum attention to detail and the optimum out-turn. The timing of new projects can be unpredictable, as this process is influenced substantially by market conditions. Consequently, the profits and cash flow from developments can be uneven.
Development Securities PLC Annual report 2002 5 Business model DevSec_pg1-19_Wace 11/4/03 3:26 pm Page 6
Review of operations
The market trend is clear. 2002 began in a much subdued atmosphere compared to the bullish tone of early 2001. The continued slow down of economic activity in the US throughout 2002 fed into the European economies in a way that has marked previous worldwide recessionary trends.
Economic overview Weakening business confidence in the UK became more apparent as the year unfolded; the economy outperformed its major, global rivals in 2001 and looks set to have done so again in the year under review. However. the cautionary tone, already established by the significant weakening of certain sectors of the information technology and high-tech industries, was reinforced by downward pressure on the global investment banking community in the City of London which responded by significantly reducing its workforce. Simultaneously, the UK manufacturing sector continued, without much success, to struggle against the strength of sterling and again looks likely to contribute negatively to overall GDP growth. A number of contrasting factors have emerged to influence the direction Julian Barwick of the economy: Joint Managing Director – the strength of consumer demand, established in recent years on the back of relatively full employment and rising house prices, is likely to weaken as the economic fundamentals reassert themselves throughout 2003;
– public sector investment has grown strongly in recent years and is likely to continue to do so in the medium-term as the Government addresses the apparent historic under-investment in infrastructure for transport and communication, health and education; and
– the weakening inflationary threat that has characterised recent years of low interest rates is likely to diminish further until an effective rebalancing of economic activity has been achieved.
The next few years will be challenging for Development Securities as we implement our strategy to exploit those niches that become apparent within our areas of expertise. We believe we are well positioned to capitalise on these opportunities.
First and foremost, we entered these uncertain times in a strong condition; having long pursued a consistent, risk-averse strategy in most aspects of our business. The manner in which we carry out substantial, complex developments by forward-funding with institutional partners is key. This technique, further elaborated within the Business Model section of this Annual Report, has ensured that our balance sheet is largely bereft of substantial, loss-making development projects that could represent a drain on future cash flow. We continue to believe that this is an appropriate risk profile.
Current development programme In 2002, our development activities remained focused on the office sector in the South East of England, with particular emphasis on Central London.
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of office accommodation let prior to practical 10 0 % completion DevSec_pg1-19_Wace 11/4/03 3:26 pm Page 8
PaddingtonCentral is one of three extensive and complex regeneration projects with which we are involved. Successful regeneration creates value for local communities, our funding partners and ourselves.
PaddingtonCentral A satisfactory conclusion has been attained at the first phase of our flagship PaddingtonCentral project, the 11-acre site immediately adjacent to Paddington Railway Station. This major, mixed-use, regenerative development in the centre of our capital city will ultimately provide 1.7 million sq. ft. of prime office, retail and leisure accommodation and 210,000 sq. ft. of residential apartments. The entire 330,000 sq. ft. office component of the first phase was fully pre-let prior to completion at the end of 2002 to Visa International Service Association, The Prudential Assurance Company Limited, Kingfisher PLC and WJB Chiltern Group on long lease terms ranging from £35 per sq. ft. initially up to £45 per sq. ft. in respect of the final letting. Of the 110,000 sq. ft. retail and leisure space in the Wally Kumar same phase, agreements to lease were signed with Cannons Group Limited for Project management team the 25,000 sq. ft. health and leisure unit and with J Sainsbury Supermarkets Limited for the 7,250 sq. ft. food retail unit. It is expected that the remaining accommodation will be taken up once the 210 residential units, being constructed by a third-party developer, are completed. The early letting of the office accommodation at rents significantly above initial expectations has enabled us both to agree and receive the bulk of our profit entitlement, with the retained balance to be released as outstanding accounts from suppliers are settled.
With the approval of our joint forward-funding partners, Morley Fund Management and The Equitable Life Assurance Society, work on future aspects of the scheme has continued during the year. Detailed planning consent is anticipated shortly in respect of the initial 400,000 sq. ft. office building for the second phase. However, engineering and costing preparations have largely been finalised for the extensive piling and decking of the remainder of the site, where construction is expected to begin during 2003. This latter work is extensive and is required to be completed by the end of 2005, not only as a pre-requisite for allowing construction on the adjacent Crossrail project to commence shortly thereafter, but also for continued development of most of the further phases of PaddingtonCentral. Present, softer letting market conditions suggest that funding of a wholly speculative development of the next phase will be delayed somewhat and, accordingly, we do not anticipate that construction work on the first building of phase two at PaddingtonCentral will commence before the end of 2003.
Paddington’s strategic location as a major, new West End business district has been established, not only by our success, but also by the progress achieved by other development activity on nearby sites. Regeneration of this long-neglected area of Central London is now well underway.
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PaddingtonCentral – phase one
Offices 51% sq.ft. planned Residential 32% development Retail/leisure 17% on the 11-acre PaddingtonCentral 1. 9 million regeneration scheme DevSec_pg1-19_Wace 11/4/03 3:26 pm Page 10
Review of operations continued
333 Oxford Street In January 2003, this strategically located 78,000 sq. ft. development, at the junction of Oxford Street and New Bond Street in London’s West End, achieved practical completion. The site was jointly acquired with our funding partner DEKA Immobilien GmbH from Sears Group Properties for £38 million in April 2001. Zara UK Limited, to whom the 35,000 sq. ft. retail unit was pre-let in May 2002, began trading from the lower ground, ground and first floors well ahead of the key Christmas shopping season. Marketing of the remaining 43,000 sq. ft. of prime office accommodation, configured over four floors has now begun.
Broughton Park Clive Bush The success of the 298,000 sq. ft. Shopping Centre developed by ourselves Development team at Broughton Park, near Chester, has led to demand by retailers for additional accommodation in the area. Accordingly, in May 2002, together with Pillar Property PLC, we submitted an outline planning application for a 126,500 sq. ft. extension to the retail park together with an outline planning application for a 350,000 sq. ft. business park and an extensive highways improvement programme. Having completed the appropriate retail and environmental impact studies, we hope to receive planning consent in the second quarter of this year.
Slough Town Centre Working with our partner Berkeley Homes, good progress has been made on this long-term regeneration scheme to transform the centre of Slough. A framework agreement is in the final stages of being negotiated with Slough Borough Council that will secure our exclusive position on the site and prepare the way for an environmental impact assessment and outline planning application for the overall development, which consists of 1.4 million sq. ft. split almost equally between office and residential accommodation. In addition, there will be some 200,000 sq. ft. of public accommodation for the Council, including a new library. Building work is not expected to commence on this long-term project until 2004 at the earliest.
Development Securities PLC Annual report 2002 10 Review of operations DevSec_pg1-19_Wace 11/4/03 3:26 pm Page 11
333 Oxford Street
Offices 52% prime location and Retail 48% quality, 100% forward- funded project with DEKA Immobilien 10 0 % Investment GmbH
333 Oxford Street: a prime retail and office location at the junction of Oxford Street and New Bond Street, in the heart of London’s West End.
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Cambourne Business Park The inherent flexibility of site configuration and layout as well as the unrestricted planning consent at the 750,000 sq. ft. business park at Cambourne, near Cambridge has provided some welcome relief from the difficulties of the out-of- London office market caused by the current economic slowdown. In October 2002, we signed an agreement with South Cambridgeshire District Council for the development of its new headquarters and civic centre, which will provide the business park with an enhanced profile and status in the region. Construction has already commenced on the new building, which is being acquired by the local authority on a freehold basis. Completion is expected in the second quarter of 2004. Also in October, we announced the launch of a new Research and Daniel Van Gelder Development phase at Cambourne, which could ultimately provide some 320,000 Development team sq. ft. of high-quality office and laboratory accommodation developed over three phases. The first of these is planned to comprise 125,000 sq. ft. in three or four buildings, targeted at the various requirements of the biotechnology industry based in and around Cambridge.
Elsewhere, leasing activity on the 82,000 sq. ft. of unlet office accommodation on the completed second phase of 132,000 sq. ft., funded with Morley Fund Management, has slowed significantly since the letting, early in 2002, of 19,000 sq. ft. to Campbell Grocery Products. We remain cautiously optimistic that the quality of location, design and environment will ultimately prove attractive to the market.
Other Business Parks Following the successful letting of three units at the first phase of 115,000 sq. ft. on Globeside Business Park, in 2001, only one unit of 38,500 sq. ft. remains to be let. Interest at this 11-acre scheme, near Marlow in the Thames Valley, is not strong and the timing of the 85,000 sq. ft. second phase is under review with The Equitable Life Assurance Society, with whom we acquired the site in August 1999. Meanwhile the second phase site is income producing on a short- term basis.
It is disappointing to report that letting prospects are equally soft at our 180,000 sq. ft. Frimley Square Business Park in Surrey where practical completion was achieved in the summer of 2002. This scheme, also forward-funded in partnership with The Equitable Life Assurance Society, is configured over four office buildings on a 7.6-acre, landscaped site.
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sq.ft. business park development on a 50-acre site located nine miles from Cambridge 750,000 city centre
The 0.5 million sq.ft. of future phases at Cambourne Business Park reflect our strategy of assembling a pipeline of development projects that offer the prospect of profit flows over an extended period.
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Review of operations continued
Development activity has been concluded at our 43-acre site at Birmingham International Park, adjacent to Birmingham International Airport. This follows the completion in May 2002 of the 24,000 sq. ft. office building pre-let to our Executive Communication Centres business. The building was forward-funded in 2001 with United Bank of Kuwait. Only one building now remains materially unoccupied on this business park, a 45,000 sq. ft. industrial unit forward-funded with The Legal & General Assurance Society. We continue to believe that the quality of the product will prove attractive, although current letting conditions remain challenging.
Royals Business Park David Enticknap The £500 million, 50-acre Royals Business Park is the second of our major Project management team regeneration projects in London and is ideally located on the Royal Albert Dock opposite London City Airport. With phased development planned over a seven-year period, this site will eventually comprise 1.6 million sq. ft. of office accommodation and 100,000 sq. ft. of ancillary and leisure accommodation, for which outline planning consent already exists. When complete, it will be East London’s leading business park.
In August 2002, we completed an agreement with our joint development partners, Standard Life Investments and the London Development Agency, for the development of the 237,000 sq. ft. first office phase comprising two buildings designed by Aukett Europe, linked by an internal winter garden. Construction has commenced and completion is planned for the second quarter of 2004.
The Royals Business Park has a one-mile waterside frontage and is expected to secure high-quality tenants attracted by its cost-effective and strategic location so close to the City, as well as its excellent road links to the M11 and M25 motorways.
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sq. ft. master-planned business park on a 50-acre site with a one-mile waterside 1. 6 million frontage
Artist’s impression of phase one at The Royals Business Park The Royals Business Park is served by a fully-integrated network of road, rail and air routes. New dual carriageways and the Docklands Light Railway, along with the UK’s fastest-expanding business airport, provide comprehensive local, national and international communications.
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Review of operations continued
We continue to base our investment strategy for out-performance on three key principles: sector rotation, stock selection and proactive management. We target assets with a core income return and the potential to improve value through active management.
Investment property portfolio 2002 saw the completion of the recent programme to restructure the investment portfolio, such that the Company now possesses a core portfolio capable of providing above-average performance over the medium-term.
During 2002 the total investment return on the investment portfolio was 12.8 per cent, comprising an income return of 7.7 per cent and capital growth of 5.1 per cent. This compares to a market return, as measured by Investment Property Databank Limited, of 9.5 per cent, following our returns in 2001 of 11.5 per cent against a 7.0 per cent market return, representing another year of significant out-peformance. Matthew Weiner Investment team We now have ten per cent less office and London exposure and 50 per cent fewer assets in number. These strategic adjustments to the portfolio should serve to enhance performance over the coming year. The focus of the strategy on building specification and location over lease length and covenant should, in the medium-term, provide out-peformance potential.
We continue to base our investment strategy on three key principles:
– proactive management of the portfolio by rotating between sectors to maximise exposure to growth stock. This has led, during the course of the year, to a reduction in the Company’s office holdings, most notably in Central London, and an increase in retail and industrial assets, where performance remains satisfactory;
– the average number of properties has been significantly reduced and will now be kept at these levels to facilitate repositioning through the market cycle and to allow management focus on key assets. During 2002, the number of assets within the portfolio was reduced from 46 to 23 with the average lot size increasing from £2.4 million to £4.1 million; and
– a preference for multi-let assets where value can be added through lease restructuring and limited refurbishment. During 2002, a number of single-let “dry” assets were disposed of. We continue to seek opportunities which allow active management of the occupational profile to generate performance.
Transaction activity during 2002 was focused primarily on disposals, as advantage was taken of what transpired to be a strong investment market to complete the final stage of the portfolio restructuring. In addition, we acted upon what we perceived to be an asset pricing “bubble” to crystallise significant valuation surpluses on assets which we felt did not meet our performance objectives. In total, 26 properties were sold for £34.7 million, generating
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total return achieved in 2002 from our investment property portfolio 12 . 8 % activities
a 6.1 per cent surplus of £2.1 million. The sale of Fetter Tenant profile Lane, London EC3 was a notable success, achieving a gain of 12.5 per cent at a time when market indices showed Government 2% negative capital growth in the City of London sub-market. Local Businesses 10% FTSE 100 10% We no longer have any investment property exposure in the PLC/Nationals 53% City market. Regional Multiples 25% The effective de-gearing of the portfolio means that we are well placed to take advantage of acquisition opportunities as they arise. Lease profile Since the year-end, a further two properties have been sold for £3.8 million, in line with book values, serving to further 0-5 years 29% reduce our London office weighting and marking the 5-10 years 21% completion of the disposals programme. Moving forward, 10-15 years 32% sales will be considered in accordance with market 15-20 years 12% conditions and the completion of asset initiatives. 20 years + 6%
In 2002, more than £14.0 million was invested through a combination of capital expenditure on the existing portfolio and, more significantly, on three acquisitions. At £6.3 million, the largest single acquisition was the Kingsland Shopping Location profile Centre, Thatcham, a district shopping scheme anchored by North 32% a Waitrose supermarket. The property achieved significant Midlands 1% capital growth over the course of the year and offers a South East 31% combination of a solid income return and active management West End 12% opportunities. Further asset-management initiatives currently London 24% underway should generate additional capital uplifts.
Since the year-end, a further shopping centre asset, with similar performance characteristics to our Thatcham centre, Analysis by sector was purchased for £9.0 million. It is intended to target such assets for further investment acquisitions. Industrial 14% Retail 33% Proactive management accounted for £1.5 million of value Office 53% creation on three investment properties held throughout the course of the year. At Great West Trading Estate, Brentford we achieved lease renewals on four units at improved rental values, incorporating landlord’s opportunities for All figures as at 31st December 2002 redevelopment in 2006. The impact of these renewals was an increase in capital value of £0.7 million. At The Genesis Centre, Warrington, a combination of lease re-structuring and re-lettings at improved rental values has led to an
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Review of operations continued
Our increasingly cautious approach to levels of net debt in recent years has resulted in a defensive posture that is appropriate to the current market and leaves us well positioned for a cyclical recovery.
uplift in capital value of £0.4 million, despite an overall increase in the level of void accommodation. Finally, at 1/5 New Street, Huddersfield, we took a surrender of the existing lease and simultaneously re-let the accommodation at an increased rent, achieving 35 per cent capital growth of £0.4 million for that particular asset.
As we move into a period of limited market growth, the process of letting up voids and securing reversions at rent review will continue to significantly enhance future capital uplifts.
In 2001, we embarked on a strategy of purchasing assets with short-term reversionary potential or vacant elements. Notwithstanding the declines in rental values seen particularly in Central London, in the last 12 months, we believe that the portfolio remains well positioned to benefit from the completion of these initiatives and this was, to some extent, borne out by the increases achieved in the portfolio valuation at the year-end. The current portfolio void rate of ten per cent is at its upper limit, although just under half of this space is currently under offer. We intend to be rigorous in the application of the asset management skills required to capture value.
Looking forward, 2003 will see the continued, selective, reinvestment of the cash raised from disposals. Given limited rental growth prospects, where capital values are likely to come under pressure, we will target acquisitions that are not dependent on market momentum to deliver attractive returns, preferring assets with a core income return and the potential to improve value through active management. Stock selection on acquisitions will continue to be a principal driver of future performance.
We have now achieved two, consecutive years of strong performance from the investment portfolio and, leveraging from this base, we will start to explore methods of utilising shareholders’ funds more efficiently, in partnership, thus increasing the value of funds under management. The objective, apart from improving our overall performance, is to establish an enhanced financial presence in a market dominated by a small number of larger, financially robust participants.
Other activities The net income of £0.3 million from our operational properties relates to both the Executive Communication Centres serviced office business and the indoor retail licensee operation at Blackpool. This result was achieved after making appropriate allowances for start up and refurbishment activity of approximately £0.2 million at one serviced office centre and an operating loss of £0.1 million in respect of the now closed centre at Sheffield. We are hopeful that Executive Communications Centres should achieve break even in the current year from its five operational units, notwithstanding the weak market conditions prevailing in this sector.
Development Securities PLC Annual report 2002 18 Review of operations DevSec_pg1-19_Wace 11/4/03 3:27 pm Page 19
Development Securities achieved several industry PROPERTY ADVERTISING MARKETING & DESIGN AWARDS and investor relations awards during 2002
Finance Part of our strategy in recent years has been to reduce significantly our level of net indebtedness in anticipation of a degree of economic and market uncertainty; it is pleasing therefore that net debt at the year-end was nil. In addition to cash balances of £85.1 million held at the year-end, we had £34.5 million of unutilised, medium-term, committed facilities with HSBC Property Finance and Barclays Bank PLC. For a company with our modest balance sheet size, the existing financial resources available to us are more than adequate to capitalise on appropriate investment or development acquisitions that might arise. Your Company has experienced strong, positive cash flow in recent years, derived from both the major development projects in which we have been involved and the exercise to re-structure our investment property portfolio. Whilst we are unlikely to witness a repeat of these exceptionally strong cash flows in the near-term, we are cautiously optimistic that the next phases of our existing, large-scale schemes, together with additional projects, will lead to similar returns for shareholders as have been achieved in recent years.
C J Barwick M H Marx 31st March 2003
Development Securities PLC Annual report 2002 19 Review of operations DevSec_pg20-27_Wace 11/4/03 3:30 pm Page 20
Sustainable development
Development Securities’ sustainability policy has been developed to complement and enhance the Group’s principal objectives of carrying out substantial, complex projects in Ray Pearse a risk-averse manner. Project manangement team
We are keen that our developments enrich their local communities by achieving physical improvements and social benefits whilst simultaneously protecting and enhancing the natural and built environment. We are committed to the principles of sustainability as part of our overall approach to property development and we recognise that social and environmental well-being have important implications for both our corporate reputation and our long-term strategic and financial performance.
Long-term shareholder value and sustainable income streams can be enhanced through the careful consideration of economic, social and environmental quality in urban design.
Development Securities’ emphasis on urban regeneration projects, particularly at PaddingtonCentral and The Royals Business Park, has highlighted the desirability of pursuing partnerships at all levels in order to achieve such enhancements.
Sustainability report We have now published our first report on sustainability issues, built upon the progress made in achieving the targets set within our environmental policy programme for 2002. We are committed to improving our contribution to sustainable development. Specific targets will be broadened to encompass our social and economic goals.
Scope We view our sustainability report as a first step in which our policies and procedures are set out and subsequently improved upon, particularly through a continuous process of review of current and completed developments and, increasingly, investments.
In fulfilling our commitment to sustainability, we will aim to:
Overall Comply with all relevant legislation as a minimum standard and work towards good practice in sustainability.
Strive towards continuous improvement in performance by reviewing progress on a regular basis and reporting this to the Board.
Openly communicate our progress towards sustainability both internally and externally, thereby demonstrating our commitment and encouraging debate that will help to further our own understanding.
Operate clear and fair terms of employment and respect a policy of equal opportunities.
Development Securities PLC Annual report 2002 20 Sustainable development DevSec_pg20-27_Wace 11/4/03 3:30 pm Page 21
Encourage training, skills and knowledge development, and Ensure our key staff have the necessary skills, through set and review individual training initiatives accordingly. appropriate training, to deliver our environmental targets.
Urban regeneration Address emissions associated with travel to work. Enrich and improve the local communities and environments in which we work. Take environmental issues into account in the construction and design of our buildings, including addressing emissions As part of a balanced development portfolio, develop mixed- associated with operational energy use, whilst maintaining use projects that enable people to live and work within close good working conditions and seeking to reduce the use of distance to retail and leisure facilities. raw materials and generation of waste.
Create diverse and balanced communities that reflect the Undertake development with regards to local biodiversity. social and economic diversity of the communities in which we develop. The arts Sponsor and support projects that promote the arts in Develop successful partnerships with local stakeholders and communities in which we develop. engage them in our work towards sustainability. The property industry Youth and education Take part in sectoral debates and research programmes Sponsor and support youth programmes in their efforts concerning sustainability within the property industry and to create greater opportunities for young people in the contribute to shared learning about evolving best practice. communities in which we develop. Consider sponsoring targeted research into other aspects or Co-operate in educational initiatives in the local debates with relevance to our core business activities. communities in which we develop in order to improve local levels of skills and training as well as greater Environmental policy appreciation of local environmental issues. The environmental objectives are delivered through specific targets and timescales. In November 2001, nine environmental Health targets were developed and agreed. Despite short timescales, Ensure the health and safety of all employees and all but one were achieved on time and the remaining target visitors through the implementation of a workplace was delivered within two months of the deadline. health and safety policy. New environmental targets for 2003 are now being Liaise closely with contractors on our development sites finalised, taking into account our experience to date. to ensure compliance with best practice procedures in relation to health and safety. Our performance against property-related aspects of environmental management continue to be annually The environment benchmarked by Upstream, through our ongoing Seek assurance that principal consultants and contractors membership of the Property Environment Group (PEG). support and will aid delivery of our environmental programme.
Development Securities PLC Annual report 2002 21 Sustainable development DevSec_pg20-27_Wace 11/4/03 3:30 pm Page 22
Board of Directors
Michael Marx Julian Barwick
Hugh Jenkins William Grant Paul Manduca
Victoria Mitchell Michael Soames
Development Securities PLC Annual report 2002 22 Board of Directors DevSec_pg20-27_Wace 11/4/03 3:30 pm Page 23
Executive Directors P V S Manduca (Aged 51) M H Marx (Aged 55) Appointed in August 2001. Currently Chief Executive Joint Managing Director and Finance Director. Appointed Officer, Europe of Deutsche Asset Management Limited. to the Board in September 1994. A Fellow of the Institute CEO of Rothschild Asset Management 1999 to 2002; of Chartered Accountants in England and Wales. Non- founding CEO of Threadneedle Asset Management 1995 to executive Director of FIBI Bank (UK) PLC. Formerly Finance 1999 and a Director of Allied Dunbar Assurance Company Director and Commercial Director of Heron International PLC and Eagle Star Holdings PLC during the same period. PLC from 1981 to 1994. Former Director of MEPC PLC 1999 to 2000. A Director of Henderson Smaller Companies Investment Trust PLC and C J Barwick (Aged 49) other companies. A Fellow of the Royal Institution of Chartered Surveyors. Joined the Board in May1998, being appointed Joint V M Mitchell (Aged 52) Managing Director in June 2000. Property advisor to Appointed on 20th August 2002. Currently Consultant the Bedford Estate and former Chairman of the Paddington Director to FPD Savills, Non-executive Director of The Regeneration Partnership. A member of the Board of Berkeley Group PLC and The Golding Group (South Africa). Management of the British Council of Offices. Member of ING-Baring Residential Property Fund Advisory Board and CABE’s Enabling Panel (Commission for Chairman and Non-executive Directors Architecture and the Built Environment). Formerly an H R Jenkins (Aged 69) Executive Director of Savills PLC from 1988 to 2000. Appointed Chairman in June 1999. Previously Chairman of Thorn PLC. From 1989 to 1995 was an executive Director M S Soames (Aged 52) of the Prudential Corporation and Chairman and Chief Appointed on 20th August 2002. Group Corporate Executive of Prudential Portfolio Managers Limited. Development Director of Regus PLC and former partner of Until 1998, was Chairman of the Department of the Knight Frank. A Fellow of the Royal Institution of Chartered Environment’s Property Advisory Group. Currently a Non- Surveyors and past president of the British Council for executive Director of Johnson Matthey PLC and Gartmore Offices. European Investment Trust PLC.
W Grant (Aged 65) Appointed in January 1997. Former Partner of the international law firm, Linklaters. Previously, a Non-executive Director of Development Securities (Investments) PLC.
Development Securities PLC Annual report 2002 23 Board of Directors DevSec_pg20-27_Wace 11/4/03 3:30 pm Page 24
Report of the Directors The Directors present their annual report and the financial statements of the Group for the year ended 31st December 2002.
Principal activities such action would enhance net assets or earnings per share, The principal activities of the Group during the year were they would consider exercising this authority. As at the date property development, investment and trading. of this report, the Company has an unexpired authority to repurchase 3,565,000 ordinary shares. Review of the business A review of the Group's operations, the current state of Special Resolution 10: The Directors will seek authority the business and future prospects are contained in the to allot relevant securities pursuant to Section 80 of the Chairman's statement and Review of operations. Companies Act 1985 up to a maximum aggregate nominal value of £5,091,000 being equal to one-third of the issued Results and dividends ordinary share capital of the Company, together with the The profit for the financial year attributable to shareholders number of share options outstanding. amounted to £7,677,000 (2001: £6,767,000). An interim dividend of £473,646 representing 1.65 pence per ordinary Special Resolution 11: The Directors seek authority to share was paid on 24th October 2002. A special dividend renew the disapplication of shareholders’ pre-emptive rights of 28.5 pence per share, amounting to £7,998,751, was under Section 89 of the Companies Act 1985 up to an paid on 28th March 2003 to shareholders on the register aggregate nominal value of £701,644 being equal to five on 28th February 2003. The Board recommends a final per cent of the issued ordinary share capital of the Company. dividend of 3.35 pence per ordinary share, amounting to £940,204, be payable on 3rd July 2003 to shareholders Share Option Schemes on the register at 6th June 2003. During the year, options over 63,462 shares were granted under the Savings Related Share Option Scheme 1995. Group structure Further details of the Share Option Schemes are contained Details of principal subsidiary undertakings are disclosed on page 47 and in the Remuneration report on pages 51 on page 42. to 56.
Share capital Directors Three resolutions relating to share capital will be proposed The Directors during the year were as follows: as Special Business at the forthcoming Annual General Hugh Royston Jenkins CBE Meeting. The full text of the resolutions can be found in Michael Henry Marx the enclosed Notice of Annual General Meeting. Charles Julian Barwick Martin Richard Landau – resigned 31st December 2002 Special Resolution 9: The current authority for the Company Paul James Willis – resigned 20th May 2002 to purchase its own shares expires at the conclusion of the William Grant forthcoming Annual General Meeting. A special resolution is Paul Victor Sant Manduca to be proposed at the Annual General Meeting to authorise Victoria Maureen Mitchell – appointed 20th August 2002 the purchase of up to 4,181,000 ordinary 50 pence shares, Michael Sidney Soames – appointed 20th August 2002 representing approximately 14.9 per cent of the Company’s issued share capital. Between 14th and 27th January 2003, The Director retiring by rotation at the Annual General 640,000 ordinary shares of 50 pence each, representing Meeting is W Grant, who, being eligible, offers himself for 2.23 per cent of the issued share capital were purchased re-election. V M Mitchell and M S Soames, who joined as by the Company at prices between 310 pence and 320 members of the Board during the year, offer themselves pence per share, for cancellation. The Directors have no for election. further present intention of making any additional market purchases of the Company’s shares, but if they considered
Development Securities PLC Annual report 2002 24 Report of the Directors DevSec_pg20-27_Wace 11/4/03 3:30 pm Page 25
Remuneration of Non-executive Directors Payment policy The Derek Higgs review of the role and effectiveness Amounts due to suppliers are settled promptly within their of Non-executive Directors suggests that the pay of terms of payment, except in cases of dispute. The number Non-executive Directors in smaller listed companies may of creditor days outstanding for the Company at 31st be out of line with expectations for them to properly fulfil December 2002 was four days (2001: seven days). their role. The Company is undertaking a review, but without wishing to pre-empt the outcome, it is considered prudent Auditors to seek to increase the limit, as permitted in the Articles Deloitte & Touche have expressed their willingness of Association, to which Non-executive Directors may to continue in office as auditors to the Company and be remunerated in aggregate from £150,000 per annum a resolution concerning their re-appointment and to £300,000 per annum. remuneration will be proposed at the forthcoming Annual General Meeting. Directors’ service contracts and interests in the Company’s shares Approved by the Board of Directors The unexpired period of Directors’ service contracts Signed on its behalf and the interests of the Directors who were in office as at 31st December 2002 are fully disclosed in the S A Lanes Remuneration report on pages 51 to 56. Secretary 31st March 2003 Other substantial interests At the date of this report, the Directors have been notified of the following interests of 3 per cent or more of the Company's issued share capital:
Number of shares % ISIS Asset Management PLC 2,514,893 8.96 T R Property Investment Trust PLC 1,675,000 5.97 Standard Life Group 1,623,667 5.79 Stichting Pensioenfonds ABP 1,305,000 4.65 Fidelity International Limited & Subsidiaries 1,160,746 4.14
Charitable and political donations Charitable donations during the year, principally to local charities serving the communities in which the Group operates, were £10,550 (2001: £11,700). No political donations were made during the year (2001: £nil).
Disabled employees It is the Group’s policy to encourage good employment practices with regard to the disabled in accordance with Government recommended guidelines.
Development Securities PLC Annual report 2002 25 Report of the Directors DevSec_pg20-27_Wace 11/4/03 3:30 pm Page 26
Corporate governance
Compliance statement – The Approvals Committee comprises M H Marx, The Company complied throughout the financial year C J Barwick and a minimum of any two Non-executive with the Code provisions set out in section one of the Directors. Its remit is to permit the approval of certain Combined Code. transactions below £5 million, which are then reported to the Board at its next meeting. Appliance statement The Board, which met eight times during the year, currently The Executive Directors have regular dialogue with consists of two Executive and five Non-executive Directors, institutional shareholders. The Company’s Annual all of whom are considered to be independent. All Directors General Meeting provides an opportunity to respond have access to the services of the Company Secretary and to shareholders’ appropriate questions. Directors are may seek independent professional advice, as necessary, introduced to shareholders at the Annual General Meeting, subject to the consent of the Chairman. Upon election, or including the identification of Non-executives and re-election, Non-executives are invited to serve for three- Committee Chairmen. year fixed terms. Directors may receive appropriate training on introduction and whilst in office. W Grant remained as Internal control the senior independent Director throughout the year. The Directors acknowledge their responsibility for the Group’s system of internal control and for reviewing its The Board has established a number of Standing effectiveness. The risk review process is designed to Committees, which operate within defined terms of manage, rather than eliminate the risk of failure to achieve reference laid down by the Board. business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. – The Audit Committee comprises H R Jenkins CBE as Chairman, W Grant, V M Mitchell and M S Soames. The Board has conducted a review of the effectiveness of M R Landau resigned as a member of the Committee the system of internal control by means of a thorough risk on 31st December 2002, and V M Mitchell and M S assessment of the business, identifying risks, their potential Soames were both appointed on 20th August 2002. impact, likelihood of occurrence, controls and mitigating actions, together with early warning systems and further – The Nominations Committee comprises H R Jenkins CBE actions which need to be implemented. The regular process as Chairman, W Grant and M H Marx. of identifying, evaluation and managing the significant risks has been delegated by the Board to a Risk Committee, – The Remuneration Committee comprises W Grant as consisting of M H Marx as Chairman, C J Barwick and Chairman, P V S Manduca, V M Mitchell and M S four executives: R H Pearse, C D Bush, C Christofi and Soames. V M Mitchell and M S Soames were appointed M S Weiner. The Committee met four times during the on 20th August 2002. The Committee is authorised to year to ensure that the risk control procedures are further determine remuneration policy, including the exercise of embedded within the culture of the Company. The minutes powers to grant options under the Group’s option of the Committee’s deliberations are reviewed by the Board. schemes to the Executive Directors and senior management and to determine the annual bonus, special As a minimum, the Audit Committee meets twice during discretionary bonus, ad hoc bonuses for exceptional each financial period. It monitors the adequacy of the contributions and awards under the Long Term Incentive Group’s internal controls, accounting policies and financial Plan. The Remuneration report to shareholders can be reporting and provides a forum through which the Group’s found on pages 51 to 56. external auditors report to the Non-executive Directors.
Development Securities PLC Annual report 2002 26 Corporate governance DevSec_pg20-27_Wace 11/4/03 3:30 pm Page 27
The Board has adopted a schedule of matters reserved STATEMENT OF DIRECTORS’ RESPONSIBILITIES for its decision which includes the level of individual United Kingdom company law requires the Directors transactions which are approved by the Board and those to prepare financial statements for each financial year which may be delegated. The roles and remit of the which give a true and fair view of the state of affairs of Chairman and Joint Managing Directors are defined. the Company and the Group as at the end of the financial year and of the profit or loss of the Group for that year. The Board has considered the need for an internal audit In preparing those financial statements the Directors are function, but has resolved that, due to the size of the required to: Company, this cannot be justified at present. The Board will review this decision next year. – select suitable accounting policies and then apply them consistently; The Board has conducted a review of the effectiveness of the system of internal control for the year ended – make judgments and estimates that are reasonable and 31st December 2002 and to the date of this report and prudent; considers there is an ongoing process for identifying, evaluating and managing the Group’s significant risks, that it – state whether applicable United Kingdom accounting has been in place for the year ended 31st December 2002 standards have been followed, subject to any material and up to the date of approval of these financial statements, departures disclosed and explained in the financial that it is regularly reviewed by the Board and that it accords statements; and with the internal control guidance for Directors on the Combined Code. – prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group Going concern will continue in business. The Directors, having made enquiries, have a reasonable expectation that the Company and the Group have The Directors are responsible for keeping proper accounting adequate resources to continue in operation for the records, for safeguarding the assets of the Group, for the foreseeable future, and that it is appropriate to adopt the system of internal control and for the prevention and going concern basis in preparing the financial statements. detection of fraud and other irregularities. This statement also forms part of the Review of operations on pages 6 to 19. By order of the Board
S A Lanes Secretary 31st March 2003
Development Securities PLC Annual report 2002 27 Corporate governance DevSec_pgs28-39_Wace 11/4/03 3:33 pm Page 28
Contents of the financial statements
29 Report of the independent auditors 30 Consolidated profit and loss account 31 Consolidated balance sheet 32 Balance sheet 33 Consolidated cash flow statement 33 Reconciliation of net cash flow to movement in net funds/(debt) 34 Consolidated statement of total recognised gains and losses 34 Consolidated note of historical cost profits and losses 34 Reconciliation of movements in total equity shareholders’ funds 35 Notes to the financial statements 51 Remuneration report
Development Securities PLC Annual report 2002 28 Contents of the financial statements DevSec_pgs28-39_Wace 11/4/03 3:33 pm Page 29
Report of the independent auditors
We have audited the financial statements of Development risks and controls, or form an opinion on the effectiveness Securities PLC for the year ended 31st December 2002 of the Group’s corporate governance procedures or its risk which comprise the consolidated profit and loss account, and control procedures. the balance sheets, the consolidated cash flow statement, reconciliation of net cash flow to movement in net funds/ We read the Directors’ report and the other information (debt), the consolidated statement of total recognised gains contained in the Annual report for the above year as and losses, the consolidated note of historical cost profits described in the contents section including the unaudited and losses, the reconciliation of movements in total equity part of the Directors’ Remuneration report and consider shareholders’ funds, the statement of accounting policies the implications for our report if we become aware of any and the related notes 1 to 24. These financial statements apparent misstatements or material inconsistencies with have been prepared under the accounting policies set out the financial statements. therein. We have also audited the information in the part of the Directors’ Remuneration report that is described Basis of audit opinion as having been audited. We conducted our audit in accordance with United Kingdom auditing standards issued by the Auditing Practices Board. This report is made solely to the Company’s members, as An audit includes examination, on a test basis, of evidence a body, in accordance with section 235 of the Companies relevant to the amounts and disclosures in the financial Act 1985. Our audit work has been undertaken so that we statements and the part of the Directors’ Remuneration might state to the Company’s members those matters we report described as having been audited. It also includes are required to state to them in an auditors’ report and for an assessment of the significant estimates and judgements no other purpose. To the fullest extent permitted by law, made by the Directors in the preparation of the financial we do not accept or assume responsibility to anyone other statements and of whether the accounting policies are than the Company and the Company’s members as a body, appropriate to the circumstances of the Company and the for our audit work, for this report, or for the opinions we Group, consistently applied and adequately disclosed. have formed. We planned and performed our audit so as to obtain all Respective responsibilities of Directors and auditors the information and explanations which we considered As described in the statement of Directors’ responsibilities, necessary in order to provide us with sufficient evidence to the Company’s Directors are responsible for the preparation give reasonable assurance that the financial statements and of the financial statements in accordance with applicable the part of the Directors’ Remuneration report described as United Kingdom law and accounting standards. They are having been audited are free from material misstatement, also responsible for the preparation of the other information whether caused by fraud or other irregularity or error. contained in the Annual report including the Directors’ In forming our opinion, we also evaluated the overall Remuneration report. Our responsibility is to audit the adequacy of the presentation of information in the financial financial statements and the part of the Directors’ statements and the part of the Directors’ Remuneration Remuneration report described as having been audited report described as having been audited. in accordance with relevant United Kingdom legal and regulatory requirements and auditing standards. Opinion In our opinion: We report to you our opinion as to whether the financial statements give a true and fair view and whether the – the financial statements give a true and fair view of financial statements and the part of the Directors’ the state of affairs of the Company and the Group as at Remuneration report described as having been audited have 31st December 2002 and of the profit of the Group been properly prepared in accordance with the Companies for the year then ended; and Act 1985. We also report to you if, in our opinion, the Directors’ report is not consistent with the financial – the financial statements and part of the Directors’ statements, if the Company has not kept proper accounting remuneration report described as having been audited records, if we have not received all the information and have been properly prepared in accordance with the explanations we require for our audit, or if information Companies Act 1985. specified by law regarding Directors’ remuneration and transactions with the Company and other members of DELOITTE & TOUCHE the Group is not disclosed. Chartered Accountants and Registered Auditors London We review whether the corporate governance statement 31st March 2003 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all
Development Securities PLC Annual report 2002 29 Report of the independent auditors DevSec_pgs28-39_Wace 11/4/03 3:33 pm Page 30
Consolidated profit and loss account for the year ended 31st December 2002
2002 2001 Notes £’000 £’000 Turnover 2 33,462 39,133
Direct costs 2 (12,648) (14,804)
Gross profit 2 20,814 24,329 Operating expenses 2 (7,798) (7,200) Exceptional item 2 – (3,000) Total operating expenses (7,798) (10,200)
Operating profit 2 13,016 14,129 Profit/(loss) on disposal of fixed assets 1,767 (110)
Profit on ordinary activities before interest 14,783 14,019 Net interest payable 4 (4,768) (3,867)
Profit on ordinary activities before taxation 10,015 10,152 Tax on profit on ordinary activities 5 (2,338) (3,385)
Profit on ordinary activities after taxation 7,677 6,767 Dividends on equity shares 6 (9,425) (1,269)
Retained (loss)/profit for the year 18 (1,748) 5,498
Earnings per share 7 26.9p 24.0p Diluted earnings per share 7 26.7p 23.6p
All turnover, profits and losses derive from continuing operations.
Development Securities PLC Annual report 2002 30 Consolidated profit and loss account DevSec_pgs28-39_Wace 11/4/03 3:33 pm Page 31
Consolidated balance sheet 31st December 2002
2002 2001 Notes £’000 £’000 £’000 £’000 Fixed assets Investment properties 8 104,799 115,311 Operating properties 8 7,240 9,750 Other tangible assets 9 4,182 4,237 Investments 10 905 965
117,126 130,263 Current assets Land, developments and trading properties 11 10,284 9,512 Debtors 12 22,411 35,992 Cash at bank and in hand 85,063 45,197
117,758 90,701 Creditors: amounts falling due within one year 13 (29,736) (29,703)
Net current assets 88,022 60,998
Total assets less current liabilities 205,148 191,261 Creditors: amounts falling due after more than one year Borrowings 14 (83,630) (71,996)
Net assets 121,518 119,265 Financed by: Capital and reserves Called up share capital 16 14,353 14,110 Share premium account 17 62,779 61,692 Revaluation reserve 17 2,376 1,959 Other reserves 17 45,299 45,299 Profit and loss account – deficit 18 (3,289) (3,795)
Total equity shareholders’ funds 121,518 119,265
Net assets per share 7 423p 423p Diluted net assets per share 7 419p 417p
Approved by the Board of Directors on 31st March 2003 and signed on its behalf
M H Marx Director
Development Securities PLC Annual report 2002 31 Consolidated balance sheet DevSec_pgs28-39_Wace 11/4/03 3:33 pm Page 32
Balance sheet 31st December 2002
2002 2001 Notes £’000 £’000 £’000 £’000 Fixed assets Investment property 8 – 2,941 Other tangible assets 9 733 907 Investments 10 55,123 55,183
55,856 59,031 Current assets Debtors 12 173,682 135,338 Cash at bank and in hand 223 1,133
173,905 136,471
Creditors: amounts falling due within one year 13 (129,901) (99,399)
Net current assets 44,004 37,072
Net assets 99,860 96,103 Financed by: Capital and reserves Called up share capital 16 14,353 14,110 Share premium account 17 62,779 61,692 Investment property revaluation reserve 17 – 730 Capital redemption reserve 17 1,111 1,111 Profit and loss account 18 21,617 18,460
Total equity shareholders’ funds 99,860 96,103
Approved by the Board of Directors on 31st March 2003 and signed on its behalf
M H Marx Director
Development Securities PLC Annual report 2002 32 Balance sheet DevSec_pgs28-39_Wace 11/4/03 3:33 pm Page 33
Primary statements for the year ended 31st December 2002
CONSOLIDATED CASH FLOW STATEMENT for the year ended 31st December 2002 2002 2001 Notes £’000 £’000 Cash inflow from operating activities 22 22,215 25,988 Returns on investments and servicing of finance 23 (4,938) (3,891) Taxation (4,815) (4,030) Capital expenditure and financial investment 23 16,748 (31,500) Equity dividends paid (1,333) (2,606)
Cash inflow/(outflow) before financing 27,877 (16,039) Financing: 23 Issue of new shares 1,330 804 Repayment of debt (1,246) (1,284) Proceeds from new borrowings 12,653 9,134 (Increase) /decrease in pledged cash (5,920) 13,137
Increase in cash in the year 24 34,694 5,752
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS/(DEBT) for the year ended 31st December 2002 2002 2001 Notes £’000 £’000 Increase in cash in the year 34,694 5,752 Cash outflow from reduction in debt 1,016 1,284 Cash inflow from new borrowings (12,653) (9,134) Cash outflow/(inflow) from movement in pledged cash 5,920 (13,137)
Change in net debt resulting from cash flow 28,977 (15,235) Non cash adjustment – (193)
Movement in net funds/(debt) in the year 28,977 (15,428) Net debt at 1st January (28,645) (13,217)
Net funds/(debt) at 31st December 24 332 (28,645)
Development Securities PLC Annual report 2002 33 Primary statements DevSec_pgs28-39_Wace 11/4/03 3:33 pm Page 34
Primary statements continued for the year ended 31st December 2002
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES for the year ended 31st December 2002 2002 2001 £’000 £’000 Profit on ordinary activities after taxation 7, 677 6,767 Unrealised surplus on revaluation of property portfolio 2,671 3,781
Total recognised gains for the financial year 10,348 10,548
CONSOLIDATED NOTE OF HISTORICAL COST PROFITS AND LOSSES for the year ended 31st December 2002 2002 2001 £’000 £’000 Profit on ordinary activities before taxation as reported 10,015 10,152 Revaluation reserve realised on disposals 2,254 (279)
Historical cost profit on ordinary activities before taxation 12,269 9,873
Historical cost profit for the year after taxation and dividends 506 5,219
RECONCILIATION OF MOVEMENTS IN TOTAL EQUITY SHAREHOLDERS’ FUNDS for the year ended 31st December 2002 2002 2001 £’000 £’000 Profit on ordinary activities after taxation 7, 677 6,767 Dividends on equity shares (9,425) (1,269)
Retained (loss)/profit for the financial year (1,748) 5,498 Net proceeds of issue of new shares 1,330 311 Surplus on revaluation of property portfolio 2,671 3,781
Net movement in total equity shareholders’ funds 2,253 9,590 Opening total equity shareholders’ funds 119,265 109,675
Closing total equity shareholders’ funds 121,518 119,265
Development Securities PLC Annual report 2002 34 Primary statements DevSec_pgs28-39_Wace 11/4/03 3:33 pm Page 35
Notes to the financial statements 31st December 2002
1. ACCOUNTING POLICIES a) Basis of accounting The financial statements have been prepared in accordance with applicable United Kingdom accounting standards and under the historical cost convention as modified by the revaluation of the investment property portfolio and certain other properties.
b) Basis of consolidation The consolidated financial statements comprise those of the Company and its subsidiaries. The results of subsidiaries acquired during the year are included from the effective date of acquisition. Acquisitions are accounted for under the acquisition method. Goodwill arising on the acquisition of subsidiaries before 1998 was written off directly against reserves in the year of acquisition.
c) Turnover Turnover, which excludes value added tax, represents: i) the sales proceeds of trading properties, undeveloped land and buildings units sold during the year; ii) rental income; iii) trading income from operating properties; iv) development profits; and v) project management fee income.
d) Joint ventures and joint arrangements A joint venture is defined as an undertaking other than a subsidiary or associated undertaking in which the Group has significant influence and which is jointly controlled by joint venturers. The Group’s share of the post acquisition results of joint ventures is shown in the consolidated profit and loss account. Investments in joint ventures are included in the consolidated balance sheet at cost plus the appropriate share of post-acquisition results and reserves as disclosed in the latest available financial information. The Group accounts for its joint arrangements by including its share of assets, liabilities and cash flows on a proportional consolidation basis according to the terms of the agreement governing those arrangements.
e) Investment properties i) Investment properties are revalued each year by independent, professional valuers on the basis of Open Market Value. Surpluses and deficits arising are transferred directly to revaluation reserve unless the deficit is considered to be permanent, whereupon it is charged to the profit and loss account. ii) Profits and losses on disposal of investment properties are calculated by reference to book value. iii) In the light of the policy on revaluations no depreciation or amortisation is provided in respect of freehold investment properties and leasehold investment properties with over 20 years to run. This treatment, as regards certain of the Group’s investment properties, may be a departure from the requirements of the Companies Act 1985 concerning depreciation of fixed assets. However, these properties are not held for consumption but for investment and the Directors consider that systematic annual depreciation would be inappropriate. The accounting policy adopted is therefore necessary for the accounts to give a true and fair view. Depreciation or amortisation is only one of many factors reflected in the annual valuation and the amount which might otherwise have been shown cannot be separately identified or quantified. iv) Investment properties in the course of development are stated at cost less provisions for any foreseeable losses. Cost includes capitalised net outgoings, including interest, up to the date of completion.
Development Securities PLC Annual report 2002 35 Notes to the financial statements DevSec_pgs28-39_Wace 11/4/03 3:33 pm Page 36
Notes to the financial statements continued 31st December 2002
1. ACCOUNTING POLICIES continued f) Operating properties Operating properties are those properties classified as being held for business purposes rather than for investment. These properties are revalued each year by independent, professional valuers on the basis of Existing Use Value. Surpluses and deficits are transferred directly to revaluation reserve. Depreciation is provided where material. Impairments to operating properties are charged to the profit and loss account.
g) Depreciation of other fixed assets Depreciation is provided so as to write off the cost less estimated residual value of fixed assets over their expected useful lives. The principal annual rates used for this purpose are as follows: Operating properties – 4% Fixtures and fittings – 10% to 33% on cost Motor vehicles – 20%
h) Land, developments in progress and trading properties Land, developments in progress and properties held as trading assets are valued at the lower of cost and estimated net realisable value. The cost of property developments includes net outgoings and attributable interest, up to the date of completion, where the development period exceeds one year, or where financing costs represent a substantial element of the eventual cost of sale.
No profit on long-term developments is recognised until the development is substantially complete and profit is recognised only where the outcome of the development can be determined with reasonable certainty. Full provision is made for foreseeable losses as soon as such losses are identified.
i) Deferred tax Deferred taxation is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in financial statements. Deferred tax is not provided on timing differences arising from the revaluation of fixed assets where there is no binding contract to dispose of these assets. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Deferred tax assets and liabilities are not discounted.
j) Investment in subsidiaries The shares in subsidiaries shown as fixed assets in the balance sheet of the Company are included at cost, less any deficits arising from diminutions considered to be permanent, which are charged to the profit and loss account. Where subsidiaries are held for resale, they are classified as current asset investments and are stated at the lower of cost and net realisable value.
k) Pension schemes The Group operates a defined contribution scheme. The charge to the profit and loss account in the period represents the actual amount paid to the scheme.
l) Foreign currencies Transactions denominated in foreign currencies are translated into sterling at the rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the rates ruling at that date. Exchange movements are dealt with in the profit and loss account.
Development Securities PLC Annual report 2002 36 Notes to the financial statements DevSec_pgs28-39_Wace 11/4/03 3:33 pm Page 37
2. TURNOVER, PROFITS AND NET ASSETS a) Analysis of turnover and gross profit All turnover and profits derive from continuing property operations in the United Kingdom, except £107,000 (2001: £838,000) included in direct costs in respect of a development property in France.
b) Analysis of gross profit 2002 2001 Turnover Direct costs Gross profit Turnover Direct costs Gross profit £’000 £’000 £’000 £’000 £’000 £’000 Rental income 9,164 (1,832) 7,332 8,307 (2,190) 6,117 Operating property income 4,539 (4,267) 272 4,151 (3,329) 822 Project management fee income 1,009 – 1,009 1,681 – 1,681 Land, developments and trading properties 18,750 (6,549) 12,201 24,994 (9,285) 15,709
33,462 (12,648) 20,814 39,133 (14,804) 24,329
c) Operating profit 2002 2001 £’000 £’000 The operating profit is stated after charging/(crediting): Depreciation 877 588 Impairment (credit)/charge – equity investment (refer note 2(e)) – 1,000 – loans (refer note 2(e)) (500) 2,000 Operating leases in respect of land and buildings 577 309 Auditors’ remuneration in respect of audit work – current year 103 101 – prior year – 35
Auditors’ remuneration in respect of non-audit work amounted to £109,000 (2001: £88,000).
d) Analysis of net assets 2002 2001 £’000 £’000 Property 121,518 119,265
Net assets are all in the United Kingdom except £1,021,000 (2001: £1,021,000) in respect of a development property in France and £855,000 (2001: £915,000) in respect of an associated company incorporated and registered in the Netherlands (refer to note 10).
e) Exceptional item The exceptional item in 2001 represents an impairment in the book value of the Group’s equity investment in, and the majority of loans to, Stead & Simpson Group Limited, arising from the Directors’ evaluation of the amounts recoverable from the investment and associated loans (refer note 10).
Development Securities PLC Annual report 2002 37 Notes to the financial statements DevSec_pgs28-39_Wace 11/4/03 3:33 pm Page 38
Notes to the financial statements continued 31st December 2002
3. EMPLOYEE INFORMATION Staff costs including Directors: 2002 2001 £’000 £’000 Wages and salaries 5,260 4,450 Social security 540 534 Other pension costs 358 313
6,158 5,297
Average weekly number of employees, including Directors, during the year: 2002 2001 Number Number Property development and investment 37 37 Operating properties 38 36
75 73
4. NET INTEREST PAYABLE 2002 2001 £’000 £’000 Interest on bank loans and overdrafts 5,104 4,829 Debenture loan 2,200 2,200 Share of interest payable in joint venture 60 70 Capitalised interest (570) (776)
6,794 6,323 Interest receivable (2,026) (2,456)
4,768 3,867
Capitalised interest in the amount of £430,000 (2001: £1,216,000) was written off in the year against gross profit.
5. TAX ON PROFIT ON ORDINARY ACTIVITIES 2002 2001 £’000 £’000 Corporation tax on income at 30.0% (2001: 30.0%) 2,215 3,540 Adjustment in respect of prior years (76) 145
Total current tax charge 2,139 3,685 Deferred taxation 199 (300)
2,338 3,385
Development Securities PLC Annual report 2002 38 Notes to the financial statements DevSec_pgs28-39_Wace 11/4/03 3:33 pm Page 39
5. TAX ON PROFIT ON ORDINARY ACTIVITIES continued 2002 2001 £’000 £’000 Reconciled by: Tax on profit on ordinary activities at 30.0% (2001: 30.0%) 3,006 3,046 Permanent differences 202 684 Short-term timing differences (199) 300 Relief for capital losses (794) (490) Adjustment in respect of prior years (76) 145
2,139 3,685
6. DIVIDENDS 2002 2001 £’000 £’000 Interim paid: 1.65 pence per share (2001: 1.50 pence) 473 423 Proposed final: 3.35 pence per share (2001: 3.00 pence) 953 846 Special dividend: 28.5 pence per share (2001: nil) 7, 9 9 9 –
9,425 1,269
7. EARNINGS AND NET ASSETS PER SHARE a) Earnings per share and diluted earnings per share, based on profit on ordinary activities after taxation of £7,677,000 (2001: £6,767,000), have been calculated as follows: 2002 2001 Weighted Earnings Weighted Earnings Earnings average no. per share Earnings average no. per share £'000 '000 pence £'000 '000 pence Basic 7, 677 28,543 26.9 6,767 28,186 24.0 Effect of dilutive shares – 195 – – 393 –
Diluted 7, 677 28,738 26.7 6,767 28,579 23.6
b) Net assets per share and diluted net assets per share, based on net assets of £121,518,000 (2001: £119,265,000) have been calculated as follows: 2002 2001 No. of Net assets No. of Net assets Net assets shares per share Net assets shares per share £'000 '000 pence £'000 '000 pence Net assets 121,518 28,706 423 119,265 28,221 423 Effect of dilutive shares 2,308 828 – 3,683 1,251 –
Diluted 123,826 29,534 419 122,948 29,472 417
Development Securities PLC Annual report 2002 39 Notes to the financial statements DevSec_pgs40-56_Wace 11/4/03 3:34 pm Page 40
Notes to the financial statements continued 31st December 2002
8. INVESTMENT AND OPERATING PROPERTIES a) Group – investment properties Long Freehold leasehold Total £’000 £’000 £’000 At cost or valuation 1st January 2002 87,415 27,896 115,311 Additions 17,298 717,305 Disposals (18,210) (12,510) (30,720) Surplus on revaluation 2,176 727 2,903 At cost or valuation 31st December 2002 88,679 16,120 104,799
Original cost of investment properties 105,104 12,155 117,259
b) Group – operating properties Long Short Freehold leasehold leasehold Total £’000 £’000 £’000 £’000 At cost or valuation 1st January 2002 6,900 1,350 1,500 9,750 Additions 92 23 – 115 Disposals (2,155) – – (2,155) Depreciation charge for the year and cumulative depreciation to date (140) (38) (60) (238) (Deficit)/surplus on revaluation (447) 115 100 (232) At cost or valuation 31st December 2002 4,250 1,450 1,540 7,240
Original cost of operating properties 7,540 1,255 – 8,795
c) Company – investment property Long leasehold £’000 At cost or valuation 1st January 2002 2,941 Disposals (2,941) At cost or valuation 31st December 2002
Original cost of investment property –
The Group’s investment properties include freehold land and developments in progress held at Directors’ valuation in the amount of £12,370,000 (2001: £11,042,000) and capitalised interest of £2,644,000 (2001: £2,144,000). The other investment properties have been valued as at 31st December 2002 by External Valuers: DTZ Debenham Tie Leung, Chartered Surveyors, and Colliers CRE (incorporating Gooch Webster), Chartered Surveyors, on the basis of Open Market Value in accordance with the Appraisal and Valuation Manual of the Royal Institution of Chartered Surveyors.
The Group’s operating properties have been valued as at 31st December 2002 by External Valuers: DTZ Debenham Tie Leung, Chartered Surveyors, and Colliers CRE (incorporating Gooch Webster), Chartered Surveyors, on the basis of Existing Use Value in accordance with the Appraisal and Valuation Manual of the Royal Institution of Chartered Surveyors.
Development Securities PLC Annual report 2002 40 Notes to the financial statements DevSec_pgs40-56_Wace 11/4/03 3:34 pm Page 41
9. OTHER TANGIBLE ASSETS a) Group Motor vehicles Fixtures and and other fittings tangible assets Total £’000 £’000 £’000 Cost: At 1st January 2002 5,181 754 5,935 Additions 1,408 93 1,501 Disposals (983) (192) (1,175) At 31st December 2002 5,606 655 6,261
Depreciation: At 1st January 2002 1,420 278 1,698 Charge for the year 546 93 639 Disposals (154) (104) (258) At 31st December 2002 1,812 267 2,079
Net book value 31st December 2002 3,794 388 4,182
Net book value 31st December 2001 3,761 476 4,237
b) Company Motor vehicles Fixtures and and other fittings tangible assets Total £’000 £’000 £’000 Cost: At 1st January 2002 1,220 511 1,731 Additions 51 93 144 Disposals – (193) (193) At 31st December 2002 1,271 411 1,682
Depreciation: At 1st January 2002 646 178 824 Charge for the year 136 93 229 Disposals – (104) (104) At 31st December 2002 782 167 949
Net book value 31st December 2002 489 244 733
Net book value 31st December 2001 574 333 907
Development Securities PLC Annual report 2002 41 Notes to the financial statements DevSec_pgs40-56_Wace 11/4/03 3:34 pm Page 42
Notes to the financial statements continued 31st December 2002
10. INVESTMENTS a) Group Interests in joint ventures £’000 Cost and share of post-acquisition reserves: At 1st January 2002 965 Provision against investment in joint venture (60) At 31st December 2002 905
b) Company
Shares in Interests subsidiary in joint Total undertakings ventures investments £’000 £’000 £’000 Cost and share of post-acquisition reserves: At 1st January 2002 54,218 965 55,183 Provision against investment in joint venture – (60) (60) At 31st December 2002 54,218 905 55,123
Interests in joint ventures include £855,000 (2001: £915,000) invested in the loan stock of Continental Estates Corporation BV, together with a 29 per cent interest in the equity of that company. The Directors consider that the Group’s share of the assets and liabilities of that company is not material. Continental Estates Corporation BV is incorporated and registered in the Netherlands. The company’s principal activity is currently as an investment holding company.
At 31st December 2002, the Group and the Company held 19.9 per cent of the ordinary share capital and 1,524,126 preference shares of £1 each in Stead & Simpson Group Limited (2001: 524,126 shares), a company incorporated in Great Britain, registered in England and Wales and operating in the United Kingdom. The investment is held at nil value (2001: £nil).
(c) Principal subsidiary undertakings The following principal subsidiary undertakings at 31st December 2002, incorporated in Great Britain, registered in England and Wales and which operate in the United Kingdom are:
% holding in ordinary shares at 31st December 2002 Principal activity Birmingham International Park Limited* 100 Property development Development Securities (Paddington) Limited* 100 Property development DS Property Developments Limited* 100 Property development Development Securities Estates PLC* 100 Management and investment company Development Securities (Investments) PLC 100 Property investment
* indirectly held
Development Securities PLC Annual report 2002 42 Notes to the financial statements DevSec_pgs40-56_Wace 11/4/03 3:34 pm Page 43
11.LAND, DEVELOPMENTS AND TRADING PROPERTIES
Group Company 2002 2001 2002 2001 £’000 £’000 £’000 £’000 Developments in progress 6,818 5,866 – – Trading properties 3,466 3,646 – –
10,284 9,512 – –
Land, developments in progress and trading properties are stated at the lower of cost and estimated net realisable value. The total above includes interest capitalised in the amount of £nil (2001: £nil).
12. DEBTORS
Group Company 2002 2001 2002 2001 £’000 £’000 £’000 £’000 Trade debtors 8,277 16,250 22 66 Amounts owed by subsidiary undertakings – – 167,943 132,260 Other debtors 11,871 18,159 5,069 2,071 Corporation tax 810 – – – Deferred tax 281 480 281 480 Prepayments 1,172 1,103 367 461
22,411 35,992 173,682 135,338 The deferred tax asset of £281,000 recoverable after more than one year (2001: £300,000) relates to the reversal of a provision previously disallowed for tax purposes. Trade debtors include recoverable development expenditure in the sum of £4,800,000 (2001: £12,300,000). Other debtors include accrued development profits of £3,300,000 (2001: £8,372,000).
13. CREDITORS: amounts falling due within one year
Group Company 2002 2001 2002 2001 £’000 £’000 £’000 £’000 Bank loans and overdrafts 1,085 1,830 – 94 Loan notes 16 16 16 16 Trade creditors 3,545 11,665 27 49 Amounts owed to subsidiary undertakings – – 119,188 96,432 Other creditors 1,709 1,585 849 234 Corporation tax – 1,866 – 138 Other tax and social security 4,743 2,754 476 709 Accruals and deferred income 9,700 9,141 407 881 Proposed dividends 8,938 846 8,938 846
29,736 29,703 129,901 99,399 Bank loans, loan notes and overdrafts are secured by way of mortgages and legal charges on certain properties and cash deposits owned by the Group.
Development Securities PLC Annual report 2002 43 Notes to the financial statements DevSec_pgs40-56_Wace 11/4/03 3:34 pm Page 44
Notes to the financial statements continued 31st December 2002
14.CREDITORS: amounts falling due after more than one year
Group Company 2002 2001 2002 2001 £’000 £’000 £’000 £’000 First mortgage debenture 11% due 2016 20,000 20,000 – – Bank loans 63,630 51,996 – –
83,630 71,996 – – Bank loans and the Debenture are supported by way of mortgages and legal charges on certain properties and cash deposits owned by the Group.
Bank loans, loan notes and overdrafts in the sum of £16,886,000 (2001: £9,730,000), included in notes 13 and 14, attract variable rates of interest based on LIBOR/base rate in the range +1.075 per cent to +1.100 per cent and £67,845,000 (2001: £64,112,000) attract fixed rates between 7.00 per cent and 11.00 per cent.
Group Company 2002 2001 2002 2001 £’000 £’000 £’000 £’000 Analysis of borrowings by date of repayment: Less than 1 year 1,101 1,846 16 110 Between 1 and 2 years 1,106 1,092 – – Between 2 and 5 years 24,400 10,611 – – After 5 years 58,124 60,293 – –
84,731 73,842 16 110 Cash in the amount of £27,509,000 (2001: £21,589,000) is held on deposit as security against the above borrowings and facilities. Borrowings due for repayment after five years include £6,544,000 (2001: £10,542,000) repayable by installments.
FINANCE REVIEW Summary The Group’s financial instruments, other than trade debtor and creditor balances arising from its operations, comprise borrowings, cash resources and equity investments. Monetary assets and liabilities, other than certain equity investments, are denominated in sterling.
The Group had no net borrowings at 31st December 2002 (2001: £28,645,000). Cash balances were £85,063,000 (2001: £45,197,000), of which £27,509,000 (2001: £21,589,000) was pledged as security against borrowings. Undrawn, committed revolving credit facilities were £34,506,000 (2001: £48,866,000).
The decrease in net borrowings largely reflects net cash receipts from development projects and disposal of certain investment properties.
Development Securities PLC Annual report 2002 44 Notes to the financial statements DevSec_pgs40-56_Wace 11/4/03 3:34 pm Page 45
Financing and interest rate strategy The Group’s investment portfolio is mainly financed with fixed rate debt facilities, matching debt service costs with cash flow from rental income. Where appropriate, interest rate swaps have been used to hedge the Group’s exposure to short-term fluctuations in interest rates on floating rate debt.
The Group seeks to pre-fund and pre-let appropriate projects in line with its risk-averse development strategy. Elsewhere, the Group’s own development project finance is arranged by way of internally-generated cash resources and medium-term, revolving credit facilities which provide the necessary flexibility to draw down funds when required.
Fixed and floating rate liabilities and financial assets as at 31st December 2002 are analysed as:
Weighted Weighted Weighted Weighted average average average average 2002 interest rate debt maturity 2001 interest rate debt maturity £ million % Years £ million % Years Fixed rate debt 67.8 9.0 12.6 64.1 9.2 11.9 Floating rate debt 16.9 5.1 6.3 9.7 5.0 5.6
Gross debt 84.7 8.3 11.4 73.8 8.711.3 Cash balances (85.1) 3.9 – (45.2) 4.0 –
Net (funds)/debt (0.4) – – 28.6 – – Undrawn facilities 34.5 5.3 5.0 48.9 5.3 6.1
34.1 6.0 9.2 77.5 7.3 8.3
Valuation of financial assets & liabilities A valuation was carried out as at 31st December 2002 by J C Rathbone Associates Limited, to calculate the market value of the Group’s fixed rate debt on a replacement basis, taking into account the difference between fixed interest rates for the Group’s borrowings and the market value and prevailing interest rates of appropriate debt instruments as a fair value adjustment. Whilst the replacement basis provides a consistent method for the valuation of fixed rate debt, such financing facilities are in place to provide continuing funding for the Group’s activities. The valuation is therefore only an indication of a notional effect on the net asset value of the Group as at 31st December 2002 and may be subject to daily fluctuations in line with money market movements.
The debt valuation as at 31st December 2002 is analysed as:
Fair value Fair value Book value Fair value adjustment adjustment 31st December 31st December 31st December 28th March 2002 2002 2002 2003 £’million £’million £’million £’million Fixed rate mortgage facilities 47.8 55.6 (7.8) (7.5) Interest rate swaps – 0.2 (0.2) (0.3) First mortgage debenture 11% due 2016 20.0 27.9 (7.9) (7.6)
Total financial liabilities 67.8 83.7 (15.9) (15.4) The fair value adjustment of £15,923,000 at 31st December 2002 (2001: £11,938,000) represents approximately 23.5 per cent of gross, fixed rate borrowings (2001: 18.6 per cent). The effect on net assets per share after tax of this adjustment would be a decrease of 38.8 pence (2001: 29.6 pence). As at 28th March 2003, the fair value adjustment had decreased to £15,438,000, equivalent to a decrease of 38.5 pence per share after tax. The Directors consider that the fair value of other remaining financial assets and liabilities is not materially different to their book values as at 31st December 2002.
Development Securities PLC Annual report 2002 45 Notes to the financial statements DevSec_pgs40-56_Wace 11/4/03 3:34 pm Page 46
Notes to the financial statements continued 31st December 2002
14.CREDITORS: amounts falling due after more than one year continued Debt maturity The maturity profile of the Group’s borrowings is set out above in this note. Of the total of £34,506,000 of currently undrawn revolving credit facilities, £500,000 expire in 2003, with the remaining £15,866,000 in 2007 and £18,140,000 in 2008.
Gearing Gearing, measured as net debt to total shareholders’ funds, has decreased to nil per cent (2001: 24.0 per cent) as at 31st December 2002.
Currency risk The Group does not undertake significant trade overseas, but does hold certain investments denominated in foreign currencies. Details of these investments are set out in notes 2 and 10. The currency exposure arising from these investments is not considered to materially affect the Group’s operations and is not subject to hedging arrangements.
15.DEFERRED TAX The amounts provided for deferred tax assets and liabilities in the Group and the Company are set out below:
Group Company
Provided Provided Provided Provided 2002 2001 2002 2001 £’000 £’000 £’000 £’000 Deferred tax asset Short-term timing differences recoverable within one year – 180 – 180 Short-term timing differences recoverable after more than one year 281 300 281 300
Deferred tax asset at 31st December 281 480 281 480
There are no amounts of unprovided deferred tax. The movement in the year is: Group Company
2002 2001 2002 2001 £’000 £’000 £’000 £’000 Deferred tax asset at 1st January 480 180 480 180 Profit and loss account movement (199) 300 (199) 300
Deferred tax asset at 31st December 281 480 281 480
Deferred tax has been recognised in accordance with Financial Reporting Standard No.19 “Deferred Tax”.
16. CALLED UP SHARE CAPITAL 2002 2001 £’000 £’000 Authorised: 37,000,000 ordinary shares of 50p (2001: 37,000,000 ordinary shares of 50p) 18,500 18,500
Issued, called up and fully paid: 28,705,794 ordinary shares of 50p (2001: 28,220,829 ordinary shares of 50p) 14,353 14,110
Number of shares Shares in issue at the date of this report 28,065,794 During the year, £1,330,227 was received following the allotment of 484,965 ordinary shares as a consequence of the exercise of share options. Between 14th and 27th January 2003, 640,000 ordinary shares were purchased by the Company at prices between 310 pence and 320 pence per share, for cancellation.
Development Securities PLC Annual report 2002 46 Notes to the financial statements DevSec_pgs40-56_Wace 11/4/03 3:34 pm Page 47
Share option schemes: As at 31st December 2002 and at the date of this Report the options outstanding under the Company’s Share Option Schemes were exercisable as follows (price stated in pence per share):
1985 Share option scheme:
Number Number 31st December 31st March Date of grant 2002 2003 Exercise dates Price 7th April 1994 22,500 22,500 7th April 1997 to 6th April 2004 322.5 12th October 1994 216,000 216,000 12th October 1997 to 11th October 2004 250.0
238,500 238,500
Executive share option scheme 1995:
Number Number 31st December 31st March Date of grant 2002 2003 Exercise dates Price 6th June 1996 30,000 30,000 6th June 1999 to 5th June 2006 190.5 19th May 1997 20,000 20,000 19th May 2000 to 18th May 2007 250.0 21st May 1998 50,000 50,000 21st May 2001 to 20th May 2008 328.5 26th May 1998 214,395 214,395 26th May 2001 to 25th May 2008 326.5 27th March 2001 58,651 58,651 27th March 2004 to 26th March 2011 341.0 30th April 2001 125,000 125,000 30th April 2004 to 29th April 2011 400.5
498,046 498,046
Savings-related share option scheme 1995:
Number Number 31st December 31st March Date of grant 2002 2003 Exercise dates Price 14th November 2000 28,317 28,317 1st December 2003 to 31st May 2004 233.5 22nd October 2002 63,462 63,462 1st December 2005 to 31st May 2006 270.0
91,779 91,779
Development Securities PLC Annual report 2002 47 Notes to the financial statements DevSec_pgs40-56_Wace 11/4/03 3:34 pm Page 48
Notes to the financial statements continued 31st December 2002
17. RESERVES a) Group Investment Other Share property property Capital premium revaluation revaluation redemption Capital account reserve reserve reserve reserve £’000 £’000 £’000 £’000 £’000 At 1st January 2002 61,692 1,605 354 1,111 44,188 Net proceeds of issue of new shares 1,087–––– Net surplus/(deficit) on revaluation of properties – 2,903 (232) – – Revaluation (surplus)/deficit realised on disposal of properties – (2,343) 89 – – At 31st December 2002 62,779 2,165 211 1,111 44,188
The cumulative goodwill written off at 31st December 2002 is £5,301,000 (2001: £5,301,000). This goodwill was eliminated against reserves in accordance with the Group’s accounting policy prior to 1998.
b) Company Investment Share property Capital premium revaluation redemption account reserve reserve £’000 £’000 £’000 At 1st January 2002 61,692 730 1,111 Net proceeds of issue of new shares 1,087 – – Revaluation surplus realised on disposal of property – (730) – At 31st December 2002 62,779 – 1,111
18. PROFIT AND LOSS ACCOUNT Group Company £’000 £’000 At 1st January 2002 (3,795) 18,460 Revaluation surplus realised on disposal of properties 2,254 730 Retained (loss)/profit for the year (1,748) 2,427 At 31st December 2002 (3,289) 21,617
As permitted by Section 230 of the Companies Act 1985, the profit and loss account of the Company is not presented. The profit after tax of the Company was £11,852,000 (2001: £4,978,000).
Development Securities PLC Annual report 2002 48 Notes to the financial statements DevSec_pgs40-56_Wace 11/4/03 3:34 pm Page 49
19.FINANCIAL COMMITMENTS Financial commitments authorised and commitments not provided for in these financial statements are estimated at: 2002 2001 £’000 £’000 Financial commitments 4,191 15,723
Annual commitments in respect of operating leases expiring after more than five years 577 550
20. CONTINGENT LIABILITIES Performance bonds of Group companies are guaranteed by banks in favour of third parties for a total of £429,935 (2001: £429,935). The due performance of obligations under various leases entered into by Group companies, expiring subsequent to 2015, amount to £1,593,000 per annum (2001: £1,757,000). The net present value after tax of estimated negative cash flows over the term of certain leases to Stead & Simpson Limited amounted to £2,400,000 at 31st December 2002 (2001: £2,800,000). Obligations in respect of a guarantee for the provision of finance to Stead & Simpson Group Limited amount to £ 2,118,000 (2000: £2,118,000) (refer note 10).
21. PENSION SCHEME The Company operates a defined contribution scheme for Directors and employees. Monthly premiums are invested in an independent insured fund. The amounts charged to the profit and loss account during the year are set out in note 3.
22. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING ACTIVITIES 2002 2001 £’000 £’000 Operating profit 13,016 14,129 Provision against investments and loans – 3,000 Loss on disposal of tangible fixed assets 15 50 Capitalised interest charged to direct costs 70 – (Increase)/decrease in developments and trading properties (772) 3,700 Decrease/(increase) in debtors 14,206 (12,264) (Decrease)/increase in creditors (5,197) 16,733 Depreciation charge 877 588 Other items – non-cash – 52
22,215 25,988
Development Securities PLC Annual report 2002 49 Notes to the financial statements DevSec_pgs40-56_Wace 11/4/03 3:34 pm Page 50
Notes to the financial statements continued 31st December 2002
23. ANALYSIS OF CASH FLOW FOR HEADINGS NETTED IN THE CASH FLOW STATEMENT
2002 2002 2001 2001 £’000 £’000 £’000 £’000 Returns on investments and servicing of finance Interest received 1,784 3,068 Interest paid (6,652) (6,959)
Net cash outflow for returns on investments and servicing of finance (4,938) (3,891)
Capital expenditure and financial investment Purchase of tangible fixed assets (1,293) (1,448) Receipts from sale of tangible fixed assets 407 113 Receipts from sale of investment and operating properties 34,554 9,827 Purchase of investment properties (16,920) (39,992) Net cash inflow/(outflow) from capital expenditure and financial investment 16,748 (31,500)
Financing Issue of shares 1,330 804 Debt falling due within one year – repayment of secured loan (1,246) (1,284) – (increase)/decrease in pledged cash (5,920) 13,137 Debt falling due after more than one year – new secured loan 12,653 9,134
Net cash inflow from financing 6,817 21,791
24. ANALYSIS OF NET FUNDS /(DEBT) Balance at Other Balance at 1st January non-cash 31st December 2002 Cash flow changes 2002 £’000 £’000 £’000 £’000 Cash at bank and in hand 23,608 33,946 – 57,554 Bank overdraft (830) 748 – (82) 34,694
Debt falling due within one year (1,016) 1,016 (1,019) (1,019) Debt falling due after more than one year (71,996) (12,653) 1,019 (83,630) Pledged cash 21,589 5,920 – 27,509 (5,717)
(28,645) 28,977 – 332
Development Securities PLC Annual report 2002 50 Notes to the financial statements DevSec_pgs40-56_Wace 11/4/03 3:34 pm Page 51
Remuneration report
The Remuneration Committee, as constituted by the Board, is responsible for the determination of the remuneration policy for the Development Securities Executive Directors and employees and to ensure that the remuneration of senior executives is consistent with the Company’s remuneration philosophy. The Committee, which met three times during the year, comprises W Grant as Chairman, P V S Manduca, V M Mitchell and M S Soames. Both V M Mitchell and M S Soames were appointed on 20th August 2002. All four members of the Committee are considered independent, Non-executive Directors of the Company. No member has any personal financial interest in the matters to be decided.
The Committee’s principal role is to determine the total remuneration of the Executive Directors and to ensure that senior management remuneration is consistent with corporate policy. Apart from the support of the Executive Directors, M H Marx and C J Barwick and the Company Secretary, S A Lanes, the Committee sought professional advice from external consultants Gateway Consulting Group and Linklaters. Both consultants were appointed by M H Marx. However, the nature of the consultants’ reports did not have a specific bearing upon him personally. Linklaters are also the Group’s principal legal advisor.
This report sets out the Committee’s existing policy and disclosures on Executive Directors’ and senior executives’ pay and also outlines the several incentive plans and option schemes in operation by the Company. The Company has complied throughout the year with section 1 of the best practice provisions of The Combined Code for Directors’ remuneration annexed to the Listing Rules of the Financial Services Authority and this report contains the appropriate information detailed in Schedule B thereto. In addition, the report has been prepared in accordance with the Directors’ Remuneration Report Regulations 2002. As part of the Regulation requirements, sections 2 and 3 of this report have been audited.
1. EXECUTIVE REMUNERATION POLICY The objective of the Development Securities’ remuneration policy is to ensure that Executive Directors and senior executives are rewarded in a way that attracts, retains, motivates and rewards management of the highest quality. The long-term incentive plan, together with the various option schemes, are designed to encourage Executive Directors and senior executives to align their long-term career aspirations with the long-term interests of the Group, promoting both individual and corporate achievements against performance criteria. They are also designed to ensure a significant proportion of the total remuneration package is performance related, thereby correlating with the interests of shareholders through the attainment of net asset value per share growth.
(a) Salary The salaries of the Executive Directors are reviewed each year and are determined by reference to individual performance and in relation to comparable companies of similar size in the same business sector.
(b) Annual bonus The non-pensionable annual bonus is based on the performance of the Company during the year, team achievements and the specific contribution of the individuals concerned. The maximum amount which any individual will be awarded will normally be limited to 75 per cent of salary (at the rate payable at the time the award is granted) for Executive Directors, 50 per cent for executives and 25 per cent for other staff. In addition to the annual bonus, unless a special discretionary bonus is awarded, a similar amount to the annual bonus will form the basis of the award under the long-term incentive plan described in (d) below.
(c) Special discretionary bonus The Remuneration Committee reserves the right to award special discretionary bonuses to Executive Directors and other executives who have been instrumental in securing development opportunities for the Company. Such bonuses will probably only be awarded on transactions where the first phase is likely to produce profits in excess of £2.0 million and the return on the Company’s equity employed in the transaction exceeds 20 per cent. No more than ten per cent of the profits of the transaction will be awarded in total and no individual will receive more than five per cent of such profit.
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When any particular transaction becomes unconditional, the Remuneration Committee will determine which individuals should receive special discretionary bonuses and the amount of the award. Normally, 20 per cent of the special discretionary bonus will be paid on account to the specified individuals, reflecting the risk of the profits not being realised. The balance of the bonus will be paid when the profits are realised.
In awarding annual and special discretionary bonuses there will be no “double-counting”. The impact of any team and individual performance, which leads to a special discretionary bonus being awarded, will be disregarded in assessing the annual bonus, but will not be disregarded in making an award under the long-term incentive plan as described in (d) below.
Following the receipt of £20,000,000 in December 2002 as an on-account development profit arising from the completion of the first phase of PaddingtonCentral, an interim payment of £800,000 has been remitted to C J Barwick in respect of his discretionary bonus entitlement.
An award of five per cent of anticipated profits in respect of a project was awarded to C J Barwick on 12th December 2002, for which an on-account bonus payment of £10,000 has been made.
In addition to awarding discretionary bonuses in securing development opportunities, the Remuneration Committee retains the discretion to award bonuses to Executive Directors and other executives at any time for making an exceptional contribution towards the Company. Such awards will not be applied in securing any corporate acquisitions.
(d) Long-term incentive plan The long-term incentive plan was approved by shareholders at an Extraordinary General Meeting of the Company on 15th December 1999. The Plan which first became operative in respect of the financial year ended 31st December 2000, permits the Remuneration Committee to award performance-related deferred bonuses. The deferred bonuses will vest over a three-year period and, unless a special discretionary bonus is awarded, the maximum amount which can be awarded to any individual is twice the amount of the annual bonus referred to in (b) above. A deferred bonus will take the form of an option to subscribe for shares in the Company at the end of the three-year period at the market price of the shares at the time the option is exercised. At the end of each year, the Group’s net asset value per share will be calculated. If the increase in the Group’s net asset value per share is at least equal that of the median of a group of 20 listed property companies, then the option will vest as to one-sixth of the maximum amount which can be awarded. If growth reaches the upper quartile level, the option will vest as to one-third of the maximum amount which can be awarded. Between these criteria, the option will vest pro rata. If the Group’s net asset value is below the median for any year, the option will not vest at all in respect of that year. The selected 20 listed property companies being: Ashtenne Holdings PLC, The British Land Company PLC, Brixton PLC, CLS Holdings PLC, Capital & Regional PLC, Chelsfield PLC, Compco Holdings PLC, Daejan Holdings PLC, Derwent Valley Holdings PLC, Estates & General PLC, Great Portland Estates PLC, Hammerson PLC, Helical Bar PLC, Land Securities Group PLC, Liberty International PLC, London Merchant Securities PLC, McKay Securities PLC, Pillar Property PLC, Slough Estates PLC and Tops Estates PLC. Furthermore, there will be an underpin that the increase in the Group’s net asset value per share must also have at least equalled the increase in the retail price index plus two per cent for the first performance year, four per cent over the first two years for the second year and six per cent over all three years for the third year. The primary performance condition is considered appropriate as it measures the Company’s added value against a representative peer group of companies.
The award will be paid in cash, all of which will be used to buy shares in the Company, except that where participants are subject to tax and social security in respect of the award, they will to that extent receive cash only.
On 8th May 2002, an option under the long-term incentive plan was granted to the two Executive Directors and 35 members of staff with a maximum award of £1,513,500 in total, including £337,500 each in respect of C J Barwick and M H Marx. Options representing £75,000 of the total maximum award have subsequently lapsed.
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Development Securities PLC ranked seventh against the comparator group of companies in respect of the first year of vesting for those options granted under the long-term incentive plan on the 2nd May 2001. The total value of the first vesting is £349,650, including £95,400 each in respect of C J Barwick and M H Marx. Remittance of the first vesting is subject to the Rules of the Scheme, normally once the full three years of vesting have been determined by the Remuneration Committee, following which the option is then capable of exercise during the period of 42 days from the announcement of the Company’s results.
Following the declaration of a 28.5 pence special dividend on 19th February 2003, as permitted under the Plan Rules, the performance conditions have been adjusted for outstanding vestings, in order to represent a fairer measure.
The graph below demonstrates Development Securities PLC total shareholder return as represented by share price growth plus reinvested dividends, against the FTSE Real Estate Index also measured by total shareholder return over the past five financial years. The FTSE Real Estate Index is considered the most appropriate index for comparing the Company’s business performance, as it represents the Company’s direct competitors.
Return Index
200 200
180 180 Development Securities PLC FTSE Real Estate Index 160 160
140 140
120 120
100 100
80 80
60 60
40 40 un 98 un 99 un 00 un 01 un 02 Dec 97 J J J J J Dec 98 Dec 99 Dec 00 Dec 01 Dec 02
(e) Option scheme 1993 The option scheme 1993 is a share-based bonus scheme approved by shareholders in that year. It allows individuals to benefit from movements in the price of the Company’s shares over the period between the third and tenth year following grant. The Directors may at the date of grant limit the aggregate notional bonus which may become payable.
The remaining 900 notional shares with a cash bonus limit of £6,016 were exercised during the year following the grant under the option scheme 1993 on 26th November 1998 and which became exercisable as from 26th November 2001. No new grants have been made during the year and none are currently outstanding.
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(f) Share option schemes The original executive share option 1985 scheme was approved in that year and following its ten-year life, was renewed by a new scheme, the executive share option scheme 1995. The options are granted under the new scheme on the basis that they may only be exercised if a performance condition is satisfied. The performance condition is that the net assets per ordinary share of the Company are equal to or in excess of the average growth in the All Properties Capital Growth Index, published by Investment Property Databank Limited, during the same period over three consecutive financial years of the Company. The performance condition is considered appropriate as the index measures against the Company’s added value. Notwithstanding the Executive Directors receiving awards under the relevant executive option scheme of four times salary shortly following their original appointment, it is the Remuneration Committee’s subsequent policy to phase the grant of executive options. No grants were made during the year. Options over 39,500 shares were exercised during the year by three executives.
Following the declaration of a 28.5 pence special dividend on 19th February 2003, the Remuneration Committee have resolved that option holders may receive a cash bonus upon exercise, equivalent to the special dividend as equitable compensation.
(g) Savings-related option scheme On 22nd October 2002, 31 members of staff, including C J Barwick, were granted an option over a total of 63,462 shares at an exercise price of 270 pence per share under the savings-related option scheme 1995. The option was open to all employees who had been employed by the Group in excess of one month. The options may be exercised after three years at a price not less than 80 per cent of the market value of the shares at the time of invitation.
The grant made on the 6th May 1997 under a five-year term matured on the 1st June 2002 resulting in 33,970 shares being allotted to seven members of staff, following exercise at an option price of 196 pence per share. Furthermore, on 1st July 2002, the grant made on 7th June 1999 under a three-year term matured, resulting in 21,495 shares being allotted to 14 members of staff, including 4,602 in favour of C J Barwick, following exercise at an option price of 210.5 pence per share.
In a similar manner to that described in (f) above, option holders will receive an equivalent cash bonus upon exercise as compensation for payment of the special dividend.
(h) Directors’ contracts and retirement benefits M H Marx’ contract of employment dated 24th June 1994 and that of C J Barwick dated 12th May 1998 may be terminated upon 12 months’ notice by either party. The contracts do not specify an expiry date, or compensation for early termination. In the event of early termination, the contractual entitlements include salary, pension, benefits in kind and any awards outstanding under the sections described above, subject to the rules of the individual schemes and plans. H R Jenkins CBE, P V S Manduca, V M Mitchell and M S Soames serve for fixed terms expiring at the date of the Annual General Meetings to be held in 2004, 2005, 2006 and 2006 respectively. H R Jenkins CBE contract of appointment may be terminated with 12 months’ notice by either party and those for P V S Manduca, V M Mitchell and M S Soames may be terminated with six months’ notice by either party. W Grant, whose fixed term expires at the date of the 2003 Annual General Meeting is seeking re-election and if re-appointed, the term will be extended until the Annual General Meeting to be held in 2006. Again, termination of appointment is subject to six months’ notice by either party.
The service contract with M R Landau and service agreement with Executive Services Overseas Inc (ESO) for the provision of M R Landau’s services, terminated on the 31st December 2002 following M R Landau’s resignation as a Director. A new consultancy service agreement has been executed with ESO for the provision of M R Landau’s services on a non-exclusive basis for the period 1st January 2003 to 31st December 2005 on a number of specific potential development projects. A fee of £20,000 per annum is payable, together with, in broad terms, 10 per cent of the development profits on completed projects, with a deduction of £675,000 from any profit entitlement in respect of future development at Broughton Park, near Chester.
The fees of the Non-executive Directors are determined by the Board within the aggregate limit set by the Articles of Association. No Director participates in any discussion about their own particular remuneration.
Development Securities PLC Annual report 2002 54 Remuneration report DevSec_pgs40-56_Wace 11/4/03 3:34 pm Page 55
Severance payments are based upon the service contract terms, whilst bearing in mind a duty to mitigate, where appropriate. Executive Directors may accept appointment to a limited number of external Non-executive Directorships, for which they may retain any attributable fees.
Qualifying members of staff are invited to join the Development Securities PLC retirement benefits scheme, which is a contracted-in money purchase scheme, including appropriate life assurance. Since the Company’s policy is to render pension payments on a defined contribution basis, this avoids the uncertainty of pension liabilities to the Company, which would be the case had a defined benefit scheme been adopted. M H Marx has separate personal pension arrangements. Funded unapproved retirement benefits schemes (FURBS) have been established for both M H Marx and C J Barwick. The maximum contributions by the Company may not exceed 17.5 per cent of salary in total towards the approved scheme/arrangement and the FURBS.
2. DIRECTORS’ EMOLUMENTS (AUDITED) The total Directors’ remuneration was as follows: 2002 2001 £’000 £’000 Emoluments 1,796 1,391 Company contributions to money purchase pension schemes 75 74 Gain on exercise of share options 541 219
2,412 1,684
The remuneration of the individual Directors who held office during the year is set out below: Pension Pension Salaries Benefits Total Total contributions contributions and fees Bonus in kind 2002 2001 2002 2001 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Chairman: H R Jenkins CBE 50 – – 50 50 – – Executive Directors: C J Barwick (highest paid Director) 230 982 28 1,240 757 38 38 M H Marx 230 172 19 421 516 37 36 Non-executive Directors: M R Landau (to 31st December 2002) 20 – 6 26 26 – – P J Willis† (to 20th June 2002) 5 – – 5 15 – – W Grant 20 – – 20 19 – – P V S Manduca 20 – – 20 8 – – M S Soames (from 20th August 2002) 7 – – 7 – – – V M Mitchell (from 20th August 2002) 7 – – 7 – – –
589 1,154 53 1,796 1,391 75 74
Benefits in kind received during the year comprised motor vehicles, fuel and medical insurance.
Executive Services Overseas Inc provided the services of M R Landau as a consultant outside of the United Kingdom, receiving a total income of £510,000 (2001: £510,000).
†Fees paid to Knight Frank of which P J Willis is a partner.
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3. DIRECTORS’ SHARE INTERESTS (AUDITED) The interests of the Directors, all of which were beneficial in the share capital of the Company were:
2002 2001 Ordinary shares: No. No. M H Marx 64,139 64,139 C J Barwick 14,602 10,000 W Grant 5,000 5,000
83,741 79,139
Options: Market 1st January 31st December Exercise price at Gain on Date from 2002 2002 price exercise exercise which Expiry No Granted Exercised No. (pence) (pence) £’000 exercisable date
M H Marx 1985 option scheme 216,000 – – 216,000 250.0 – – 12.10.97 11.10.04 Savings-related scheme 4,148 – – 4,148 233.5 – – 1.12.03 31.05.04 C J Barwick Executive option scheme 1995 214,395 – – 214,395 326.5 – – 26.05.01 25.05.08 Savings-related scheme 4,602 – 4,602 – 210.5 415.5 9 1.07.02 31.12.02 Savings-related scheme – 3,500 – 3,500 270.0 – – 1.12.05 31.05.06 M R Landau Granted to Executive Services Overseas Inc 140,000 – 140,000 – 350.0 456.0 148 27.07.96 26.07.03 Granted to Executive Services Overseas Inc 250,000 – 250,000 – 245.0 398.5 384 10.04.00 09.04.07
541
Long-term incentive plan: 1st January Awarded 31st December Vested 2002 during year 2002 during Final Date of maximum maximum maximum year vesting grant award £’000 award £’000 award £’000 £’000 date M H Marx 02.05.01 318 – 318 95 31.12.03 08.05.02 – 337 337 – 31.12.04 C J Barwick 02.05.01 318 – 318 95 31.12.03 08.05.02 – 337 337 – 31.12.04 (a) None of the Directors had a beneficial interest in the shares of any subsidiary company. (b) On 28th January 2003, M S Soames acquired 5,000 shares in the Company at 313 pence per share. (c) The mid-market price of the shares as at 31st December 2002 was 336.0 pence and the range during 2002 was 308.5 pence to 463.5 pence. (d) On 10th April 2002, Executive Services Overseas Inc (ESO) exercised 250,000 options granted on 10th April 1997 at an exercise price of 245 pence per share, disposing of the total holding at 398.5 pence per share. Furthermore, on 23rd May 2002, ESO exercised a further 140,000 options granted on 27th July 1993 at an exercise price of 350 pence, selling 107,832 shares thereof at 456 pence per share. (e) No options lapsed or were exercised during the year, except as disclosed above.
There were no further transactions between 31st December 2002 and the date of this report.
Approved by the Board and signed on its behalf by:
W Grant Chairman of the Remuneration Committee 31st March 2003
Development Securities PLC Annual report 2002 56 Remuneration report DevSec_Cover_WACE 11/4/03 3:23 pm Page 5
Financial calendar and advisors
FINANCIAL CALENDAR Annual General Meeting 20th May 2003 Payment of Ordinary Dividend 3rd July 2003 Announcement of Interim Results to 30th June 2003 September 2003
SECRETARY S A Lanes FCA
REGISTERED OFFICE Portland House, Stag Place, London SW1E 5DS Telephone: 020 7828 4777 Facsimile 020 7828 4999
WEBSITE ADDRESS: www.developmentsecurities.com
REGISTERED NUMBER 1528784
AUDITORS Deloitte & Touche
PRINCIPAL BANKERS Barclays Bank PLC HSBC Property Finance Bank of Scotland Norwich Union Mortgage Finance Limited
MERCHANT BANKERS HSBC Bank plc
CORPORATE SOLICITORS Linklaters
STOCKBROKERS HSBC Bank plc
REGISTRARS AND TRANSFER OFFICE Capita Registrars The Registry 34 Beckenham Road, Beckenham, Kent BR3 4TU Telephone: 0870 162 3100
Designed and produced by GA Corporate Marketing. Photography by Richard Learoyd and Jez Coulson. Printed by Wace. DevSec_Cover_WACE 11/4/03 3:23 pm Page 2
Development Securities PLC Portland House Stag Place London SW1E 5DS
www.developmentsecurities.com