Exhibit 10.21
HOLMES FUNDING LIMITED
(A wholly owned subsidiary of Holmes Holdings Limited)
REPORT AND ACCOUNTS
FOR THE YEAR ENDED 31 DECEMBER 2002
Registered No. 3982428
HOLMES FUNDING LIMITED
(A wholly owned subsidiary of Holmes Holdings Limited)
Report of the Directors
The Directors submit their report together with the accounts for the year to 31
December 2002.
1. Principal activity and review of the year
The principal activity of the Company is to acquire an interest in a portfolio
of mortgage loans and enter all financial arrangements in that connection. No
future changes in activity are envisaged.
The Company invests in beneficial interests in the assets of Holmes Trustees
Limited ("the Trust"), which assets comprise mortgage loans secured on
residential property in England and Wales. The Company receives a share of
income from the Trust in proportion to its share of the total mortgage assets of
the Trust.
During the year the Company purchased a further beneficial interest in the
assets of the Trust of (pound)4.0 billion on 7 November. This purchase was
financed by a loan from Holmes Financing (No. 6) plc. Holmes Trustees Limited
and Holmes Financing (No. 6) plc are both group undertakings.
2. Results and Dividend
The results for the year are set out on page 4. The loss of (pound)8,272,000
(2001 as restated - loss of (pound)600,000) will be transferred from reserves.
The Directors do not recommend the payment of a dividend (2001: (pound)nil). The
loss in the year has arisen as a result of the charge for provisions made
against the Company's investment. On the release or utilisation of this
provision in future years, the Directors anticipate that the Company will make a
profit.
3. Directors and their interests
The Directors who served throughout the year, except as noted below were:
M McDermott
M A Parsons (resigned 6 August 2002)
R Wise (appointed 6 August 2002)
SPV Management Limited
At the year end and the previous year end, Holmes Holdings Limited held one
share in the Company. The other share was held by Holmes Holdings Limited and
Martin McDermott. SPV Management Ltd and M. McDermott held one share in the
holding company, Holmes Holdings Limited, at the year end. The other share in
Holmes Holdings Limited was held by SPV Management Limited. None of the other
Directors had a beneficial interest in the shares of the Company, or of the
holding company, Holmes Holdings Limited, at the year end.
Page 1
HOLMES FUNDING LIMITED
(A wholly owned subsidiary of Holmes Holdings Limited)
4. Directors' Responsibility in respect of the Preparation of Accounts
The Directors are required by United Kingdom company law to prepare accounts for
each financial year that give a true and fair view of the state of affairs of
the Company as at the end of the financial year, and of the profit or loss for
that year.
The Directors confirm that suitable accounting policies have been used and
applied consistently and reasonable and prudent judgements and estimates have
been made in the preparation of the accounts for the year ended 31 December
2002. The Directors also confirm that applicable accounting standards have been
followed and that the statements have been prepared on the going concern basis.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and to enable them to ensure that the financial statements comply with
the Companies Act 1985. They are also responsible for the Company's system of
internal control and for safeguarding the assets of the Company and hence for
taking reasonable steps for the prevention and detection of fraud and other
irregularities.
5. Auditors
During the year the Directors re-appointed Deloitte & Touche as auditors of the
Company.
By order of the Board
/s/ Richard Wise
- -----------------------
For and behalf of
The Board of Directors,
R. Wise, Director.
28 February 2003.
Registered Office:
Abbey National House
2 Triton Square,
Regent's Place,
London,
NW1 3AN.
Page 2
HOLMES FUNDING LIMITED
(A wholly owned subsidiary of Holmes Holdings Limited)
INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF HOLMES FUNDING LIMITED
We have audited the financial statements of Holmes Funding Ltd for the year
ended 31 December 2002 which comprise the profit and loss account, the balance
sheet, the statement of total recognised gains and losses, the statement of
accounting policies and the related notes 1 to 16. These financial statements
have been prepared under the accounting policies set out therein.
This report is made solely to the company's members, as a body, in accordance
with section 235 of the Companies Act 1985. Our audit work has been undertaken
so that we might state to the company's members those matters we are required to
state to them in an auditors' report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone
other than the company and the company's members as a body, for our audit work,
for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
As described in the statement of directors' responsibilities, the company's
directors are responsible for the preparation of the financial statements in
accordance with applicable United Kingdom law and accounting standards. Our
responsibility is to audit the financial statements in accordance with relevant
United Kingdom legal and regulatory requirements and auditing standards.
We report to you our opinion as to whether the financial statements give a true
and fair view and are properly prepared in accordance with the Companies Act
1985. We also report if, in our opinion, the directors' report is not consistent
with the financial statements, if the company has not kept proper accounting
records, if we have not received all the information and explanations we require
for our audit, or if information specified by law regarding directors'
remuneration and transactions with the company is not disclosed.
We read the directors' report for the above year and consider the implications
for our report if we become aware of any apparent misstatements.
Basis of audit opinion
We conducted our audit in accordance with United Kingdom auditing standards
issued by the Auditing Practices Board. An audit includes examination, on a test
basis, of evidence relevant to the amounts and disclosures in the financial
statements. It also includes an assessment of the significant estimates and
judgements made by the directors in the preparation of the financial statements
and of whether the accounting policies are appropriate to the company's
circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion, we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 31 December 2002 and of its loss for the year
then ended and have been properly prepared in accordance with the Companies Act
1985.
Deloitte & Touche
Chartered Accountants and Registered Auditors
London, England
28 February 2003
Page 3
HOLMES FUNDING LIMITED
(A wholly owned subsidiary of Holmes Holdings Limited)
Profit and Loss Account
For the year ended 31 December 2002
2001
2002 (as restated)
Note (pound)'000 (pound)'000
---- ----------- -------------
Interest receivable and similar income 2 578,768 468,551
Interest payable 3 (526,854) (416,721)
-------- --------
Net interest income 51,914 51,830
Administrative expenses (52,081) (51,221)
Provision against investment in Trust property 6 (11,644) (1,475)
-------- --------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION 4 (11,811) (866)
Tax on loss on ordinary activities 1,5 3,539 266
-------- --------
LOSS ON ORDINARY ACTIVITIES AFTER TAXATION
AND RETAINED LOSS FOR THE YEAR 13 (8,272) (600)
======== ========
There is no difference between the loss on ordinary activities before taxation
and the retained loss for the year stated above and their historical cost
equivalents.
All transactions are derived from continuing operations within the United
Kingdom.
Statement of total recognised gains and losses
For the year ended 31 December 2002
2001
2002 (as restated)
(pound)'000 (pound)'000
----------- -------------
Retained loss for the year (8,272) (600)
------ ----
Total recognised gains and losses relating to the year (8,272) (600)
====
Prior year adjustment (as explained in note 1) 876
------
TOTAL GAINS AND LOSSES RECOGNISED SINCE LAST ANNUAL
REPORT AND ACCOUNTS (7,396)
======
Page 4
HOLMES FUNDING LIMITED
(A wholly owned subsidiary of Holmes Holdings Limited)
Balance Sheet
As at 31 December 2002
2001
2002 (as restated)
Note (pound)'000 (pound)'000
---- ----------- -------------
FIXED ASSETS
Beneficial interest in mortgage portfolio 6 13,679,484 11,969,990
CURRENT ASSETS
Debtors 7 28,599 43,666
Deferred taxation asset 1,9 4,449 876
Cash at bank and in hand 8 1,202,356 250,770
----------- -----------
1,235,404 295,312
CREDITORS - amounts falling due within one year 10 (1,166,612) (834,539)
----------- -----------
NET CURRENT ASSETS /(LIABILITIES) 68,792 (539,227)
----------- -----------
----------- -----------
TOTAL ASSETS LESS CURRENT LIABILITIES 13,748,276 11,430,763
----------- -----------
CREDITORS - amounts falling due after more than one year 11 (13,758,535) (11,432,750)
----------- -----------
NET LIABILITIES (10,259) (1,987)
=========== ===========
CAPITAL AND RESERVES
Called-up share capital 12 -- --
Profit and loss account (10,259) (1,987)
----------- -----------
EQUITY SHAREHOLDERS' DEFICIT 13 (10,259) (1,987)
=========== ===========
The financial statements on page 4 to 10 were approved by the Board of Directors
on 28 February 2003.
Signed on behalf of the Board of Directors by R. Wise,
/s/ Richard Wise
- ----------------
Director.
Page 5
HOLMES FUNDING LIMITED
(A wholly owned subsidiary of Holmes Holdings Limited)
Notes to the Accounts for the year ended 31 December 2002
1. Accounting Policies
Basis of Accounting
The financial statements are prepared under the historical cost convention
and in accordance with applicable United Kingdom law and accounting
standards. The particular accounting policies adopted are described below.
(1) Interest receivable is calculated on an accruals basis.
(2) Investments held as fixed assets are stated at cost less provision for any
impairment.
(3) Specific provisions are made against loans and advances which comprise the
trust property in which the Company has a beneficial interest, when, as a
result of regular appraisals of the assets, it is considered that recovery
is doubtful. A general provision is made against loans and advances to
cover bad and doubtful debts which have not been separately identified but
which are known from experience to be present in any portfolio of loans and
advances. The specific and general provisions are deducted from loans and
advances. Provisions made during the year, less amounts released and
recoveries of amounts written off in previous years, are charged to the
profit and loss account.
(4) Deferred consideration is payable to the originator of the loans and
advances to customers, which is based upon the profitability of the company
before the charge for the general provision for bad and doubtful debts.
This has resulted in a loss after tax for the year to 31 December 2002. The
directors anticipate that the company will make a profit over the life of
the mortgage portfolio.
(5) Value added tax is not recoverable by the Company and is included with its
related cost.
(6) Transactions are undertaken in derivative financial instruments,
"derivatives", which include interest rate swaps. Derivatives are entered
into for the purpose of eliminating risk from potential movements in
interest rates inherent in the Company's non-trading assets and
liabilities. Non-trading assets and liabilities are those intended for use
on a continuing basis in the activities of the Company.
A derivative is designated as non-trading where there is an offset between
the effects of potential movements in market rates of the derivative and
the designated asset or liability being hedged. Non-trading derivatives are
reviewed regularly for their effectiveness as hedges. Non-trading
derivatives are accounted for on an accruals basis, consistent with the
asset or liability being hedged. Income and expense on non-trading
derivatives are recognised as they accrue over the life of the instruments
as an adjustment to interest receivable or payable.
(7) The Company is a wholly owned subsidiary of Holmes Holdings Limited, a
Company incorporated in Great Britain. Accordingly the Company is not
required to produce a cash flow statement as prescribed in paragraph 5 (a)
of FRS 1 (revised 1996), "Cash flow statements".
(8) During the year, the Company adopted the provisions of Financial Reporting
Standard ("FRS") 19 "Deferred tax". The effect of this was to change the
accounting policy to full provision of deferred tax for temporary
differences arising. The relevant numbers for 2001 have also been restated
to show the effect of adopting FRS 19 on that year.
The financial effect of this adoption was a decrease in loss for the year
of (pound)3,573,000 (2001: (pound)278,000), and recognition of a deferred
tax asset, and corresponding increase in retained reserves, of
(pound)4,449,000 (2001: (pound)876,000). (pound)598,000 of deferred tax
asset, and corresponding tax credit in the profit and loss account, related
to the year 2000, and hence resulted in a change of reserves brought
forward at 1 January 2001. This can be seen in note 13 to these accounts.
2. Interest Receivable and Similar Income
2002 2001
(pound)'000 (pound)'000
----------- -----------
Income from beneficial interest in mortgage portfolio 648,054 494,578
Expense from derivatives used to hedge beneficial
interest in mortgage portfolio (93,842) (32,097)
Bank interest receivable 24,556 6,070
------- -------
578,768 468,551
======= =======
The mortgage portfolio is held on trust by Holmes Trustees Limited, a group
undertaking.
Page 6
HOLMES FUNDING LIMITED
(A wholly owned subsidiary of Holmes Holdings Limited)
Notes to the Accounts for the year ended 31 December 2002 (continued)
3. Interest Payable
2002 2001
(pound)'000 (pound)'000
----------- -----------
Interest payable on loans from group undertakings 524,200 414,322
Interest payable on start-up loans 2,654 2,399
------- -------
Total 526,854 416,721
======= =======
4. Loss on Ordinary Activities before Taxation
Loss on ordinary activities before taxation is stated after charging:
2002 2001
(pound)'000 (pound)'000
----------- -----------
Audit fees 23 116
=== ===
The Company has no employees. No emoluments were paid to the Directors by
the Company during the year (2001:(pound)nil).
5. Tax on Loss on Ordinary Activities
2001
2002 (as restated)
(pound)'000 (pound)'000
----------- -------------
UK corporation tax for the year at 28% (2001: 25%) 27 12
Adjustments in respect of prior years 7 --
Deferred taxation (3,573) (278)
------ ----
(3,539) (266)
====== ====
The tax charge in the year arises due to the disallowable general provision
on the Trust mortgage income.
The tax assessed for the year is higher than the standard rate of
corporation tax in the UK (30 per cent). The differences are explained
below:
The corporation tax charge is made up as follows:
2001
2002 (as restated)
(pound)'000 (pound)'000
----------- -------------
Loss on ordinary activities before tax (11,811) (866)
======= ====
Loss on ordinary activities multiplied by standard
rate of corporation tax in the UK of 30% (3,543) (260)
Effects of:
Non tax-deductable general provisions 3,573 278
Benefit of small companies corporation tax rate (3) (6)
Adjustments to tax charge in respect of previous
periods 7 --
------- ----
34 12
======= ====
Page 7
HOLMES FUNDING LIMITED
(A wholly owned subsidiary of Holmes Holdings Limited)
Notes to the Accounts for the year ended 31 December 2002 (continued)
6. Beneficial interest in mortgage portfolio
2002 2001
(pound)'000 (pound)'000
----------- -----------
Cost:
At 1 January 11,973,516 4,660,516
Additions 3,999,221 7,313,000
Capital repayments (2,278,200) --
---------- ----------
At 31 December 13,694,537 11,973,516
========== ==========
Provisions:
At 1 January
General 2,921 1,993
Specific 605 58
---------- ----------
3,526 2,051
Transfer from profit and loss account 11,644 1,475
Irrecoverable amounts written off (117) --
---------- ----------
At 31 December 15,053 3,526
========== ==========
Being:
General 14,831 2,921
Specific 222 605
---------- ----------
15,053 3,526
========== ==========
Net book value:
At 31 December 13,679,484 11,969,990
========== ==========
The mortgage portfolio in which the Company holds a beneficial interest is
held on trust for the Company and the originator of the mortgage loans by
Holmes Trustees Limited, a group undertaking. During the year the company
increased its interest in the trust property in three tranches. The
mortgage loans are secured on residential property in England and Wales. At
31 December 2002 the total mortgage assets held on trust for the
beneficiaries amounted to (pound)23,104,300,000 (2001 -
(pound)17,513,308,000).
7. Debtors
2002 2001
(pound)'000 (pound)'000
----------- -----------
Accrued income from beneficial
interest in mortgage portfolio -- 16,267
Other debtors 28,599 27,399
------ ------
Total 28,599 43,666
====== ======
The accrued income is receivable from a group undertaking.
8. Cash at bank and in hand
The Company holds deposits at banks which pay interest based on the LIBOR.
Page 8
HOLMES FUNDING LIMITED
(A wholly owned subsidiary of Holmes Holdings Limited)
Notes to the Accounts for the year ended 31 December 2002 (continued)
9. Deferred taxation asset
2002 2001
(pound)'000 (pound)'000
----------- -----------
As at 1 January 876 598
Transfer to profit and loss account 3,573 278
----- ---
As at 31 December 4,449 876
===== ===
Provided on:
------------
2002 2001
(pound)'000 (pound)'000
----------- -----------
General provision against beneficial
interest in mortgage portfolio 4,449 876
===== ===
The deferred tax asset has been recognised under FRS 19 (Deferred tax)
since it is considered more likely than not that there will be sufficient
future chargeable profits against which the future reversal of the general
provision can be deducted.
10. Creditors : amounts falling due within one year
2002 2001
(pound)'000 (pound)'000
----------- ------------
Loans from group undertakings 961,292 704,000
Amounts due to group undertakings 178,889 111,522
Corporation tax 28 16
Other creditors 20,907 16,160
Accrued interest payable 5,496 2,841
--------- -------
Total 1,166,612 834,539
========= =======
11. Creditors : amounts falling due after more than one year
2002 2001
(pound)'000 (pound)'000
----------- ------------
Loans from group undertakings 13,593,987 11,319,516
Start-up loans 62,450 56,350
Other creditors 102,098 56,884
---------- ----------
Total 13,758,535 11,432,750
========== ==========
The amounts are repayable as follows:-
2002 2001
(pound)'000 (pound)'000
----------- ------------
Due 2 - 5 years 3,447,498 2,750,500
Due over 5 years 10,311,037 8,682,250
---------- ----------
Total 13,758,535 11,432,750
========== ==========
Interest payable on the loans from group undertakings and the start-up loans is
based on the LIBOR.
Amounts due over 5 years are paid when cash is available after other commitments
have been fulfilled, in order of priority.
Page 9
HOLMES FUNDING LIMITED
(A wholly owned subsidiary of Holmes Holdings Limited)
Notes to the Accounts for the year ended 31 December 2002 (continued)
12. Share Capital
2002 2001
(pound)'000 (pound)'000
----------- -----------
Authorised:
100 Ordinary shares of (pound)1 each -- --
=== ===
Called up, allotted and fully paid:
2 Ordinary shares of (pound)1 each -- --
=== ===
13. Reconciliation of Movements in Shareholders' Funds
2001
2002 (as restated)
(pound)'000 (pound)'000
----------- ------------
Opening shareholders' deficit as previously
stated (2,863) (1,985)
Prior year adjustment 876 598
------- ------
Opening shareholders' deficit as restated (1,987) (1,387)
Retained loss for the year (8,272) (600)
------- ------
Closing shareholders' deficit (10,259) (1,987)
======= ======
The opening shareholders' deficit as at 1 January 2001 has been restated
for the deferred tax asset recognised under the change of accounting policy
for the adoption of FRS 19 (Deferred tax).
14. Capital Commitments and Contingent Liabilities
There were no outstanding capital commitments or contingent liabilities at
31 December 2002 (2001 - (pound)nil).
15. Related Party Transactions
The Company has taken advantage of the exemption covered by paragraph 3 (c)
of FRS 8, "Related party disclosures", not to disclose transactions with
entities that are part of the Holmes Group.
16. Parent and Controlling Party
The immediate parent of the Company is Holmes Holdings Limited, a company
registered in England and Wales, which prepares the only accounts into
which the Company is consolidated. SPV Management Limited, a company
registered in England and Wales, holds all of the beneficial interest in
the issued shares of Holmes Holdings Limited on a discretionary trust for
persons employed as nurses in the United Kingdom and for charitable
purposes.
The administration, operations, accounting and financial reporting
functions of the Company are performed by Abbey National plc, which is
incorporated in Great Britain. During 2002, Abbey National plc has
delegated administration and servicing functions in respect of the loans on
behalf of the mortgages' trustee and the beneficiaries to a service
provider.
Page 10