20th Apr 2007 08:40
Apollo Management L.P.20 April 2007 PART 2 Our Operations The following table shows each of our operating divisions' contributions torevenue and operating profit in the year ended December 31, 2006. For the year ended December31, 2006 Revenue(1) Operating %oftotal profitbefore exceptionaland other non- recurring items Division %oftotal (audited) (£'000s and as a percentage of operating profit before (£'000s and as a percentage exceptional and other non- of total revenue) recurring items) Estate Agency.......................................... 361,822 55.3% 53,470 56.0% Lettings............................................... 43,913 6.7% 7,963 8.3% Financial Services..................................... 91,577 14.0% 20,973 22.0% Surveying and Valuation................................ 136,844 20.9% 26,733 28.0% Conveyancing........................................... 22,731 3.5% (250) (0.3)% Eliminations(2)........................................ (2,683) (0.4)% ? ? Unallocated expenses(3)................................ ? ? (10,931) (11.4)% Non-recurring items(4)................................. ? ? (2,444) (2.6)% Total.................................................. 654,204 100.0% 95,514 100.0% (1) Excluding other and exceptional income. (2) Eliminations represent intercompany sales primarily from the EstateAgency Division to the Conveyancing Division. (3) Unallocated items relate primarily to certain head office costs. (4) Non-recurring items include other non-material one-off transactions,including impairment and business closure costs, offset by profit on disposal ofbusiness. As demonstrated in the following example, we provide services at every stage ofthe typical UK residential property sale, from listing to completion. In the typical UK residential property transaction involving our business, aprospective seller of residential property instructs one of our estate agencybranches to list and market the property for sale in exchange for a fee payableto the branch on the closing of the successful sale. The fee is calculated as apercentage of the sale price of the property and varies according to whether theengagement is an exclusive listing (where the particular branch is the onlyagent engaged to market the property) or a multiple agent listing; the askingprice of the property; and general market conditions. Typical marketing effortsinclude displaying information about the property in the branch and inadvertisements in local newspapers and magazines, displaying sign boards at theproperty and listing the property with Rightmove and on our own websites. Prospective purchasers generally learn about the property through one of themeans described above and contact the relevant branch to arrange a viewing. Aspart of the initial meeting, the branch will offer the prospective purchaseradvice, through our Financial Services Division, about the size of a mortgage heor she can afford. If the prospective purchaser wants to purchase the property,the branch will organize the delivery of a formal offer from the purchaser tothe seller. When the terms of the purchase have been agreed, the branch willgive the purchaser the opportunity to meet with an in-branch (in most cases)representative of our Financial Services Division to arrange a mortgage and anynecessary insurance products. The purchaser will also be offered surveyingservices from our Surveying and Valuation Division, which in many cases willalso provide the survey and valuation to the mortgage lender. Finally, we willoffer both the seller and purchaser conveyancing services to complete allnecessary legal work in connection with the sale. In addition to the estate agency fee earned by us on the sale of the propertyand potential conveyancing fees earned from the seller and the purchaser,securing the mortgage for the purchaser generates a fee from our mortgage paneland potential further fees for the Surveying and Valuation Division from boththe mortgage lender and the prospective purchaser. The sale of life insurance,mortgage payment protection policies and general insurance products generates afee directly from the providers of those products. The operation of our retail lettings business is similar to that of our estateagency business. During the marketing process, we offer both landlord and tenantspecialized insurance products. However, we do not offer conveyancing orsurveying and valuation services to our lettings customers. Estate Agency Division Our Estate Agency Division comprises our 1,059 company-owned estate agencybranches and our 120 franchised branches operating under the Bairstow Evesbrand. For the year ended December 31, 2006, the Estate Agency Divisiongenerated revenue of £361.8 million and operating profit of £53.5 million. The following table sets out certain operating data in respect of the EstateAgency Division. Asofandfortheyearended December31, 2006 ----------------------------- (unaudited)Branches Owned............................................................... 1,059 Franchised.......................................................... 120 House sales exchanged..................................................... 103,252 Average commission rate................................................... 1.67% Average house price....................................................... £193,545 Average headcount......................................................... 6,454 Our Branch Network As noted above, our estate agency branches are the key entry point to the products and services that we offer to our customers. Our branches are located in approximately 670 towns, including almost every major UK population center, with the greatest concentration in England. The following table details the number of branches per region and each region?s percentage of the total: AsofDecember31, 2006 ---------------------------- Numberof Percentage branches of total (unaudited) Region South East.......................................................................... 362 34% Midlands............................................................................ 134 13% Scotland............................................................................ 40 4% London.............................................................................. 26 2% North............................................................................... 167 16% East................................................................................ 105 10% South and South West................................................................ 204 19% New homes, auctions and others...................................................... 21 2% Total............................................................................... 1,059 100.0% Branch Network Management We monitor each branch's contribution to revenue and operating profit and takesteps to improve the performance of under-performing branches. In exceptionalcircumstances, we will close a branch, typically at the termination of itslease. We continuously examine opportunities to open new branches in attractivelocal markets, both in areas in which we currently have operations as well as innew locations. Franchising As of December 31, 2006, we had 120 franchised estate agency branches, tradingunder the Bairstow Eves brand. In general, our franchise fees consist of anupfront payment and a portion of all commissions paid to the franchisee.Although the returns are not large we believe our franchising model allows us toextend our distributive capacity and brand recognition with limited increases toour fixed cost base and manage our branch footprint while decreasing ouroperational risk. We provide a full range of sales and marketing support and training programs toall of our franchisees. We monitor our franchisees' financial and customerservice performance on an ongoing basis. Our franchise agreements containcustomary non-compete and quality maintenance provisions that allow us toterminate franchisees that fail to meet our standards. For the year ended December 31, 2006, our franchises accounted for less than 1%of our revenue and operating profit. Our Brands Our estate agencies operate under 35 well-known local brands such as BairstowEves, John D Wood & Co., Mann & Co., Dixons, Bridgfords, Taylors, Slater Hogg &Howison and Gascoigne-Pees. We do not engage in significant brand advertising ormarketing, but rather promote our brands indirectly as a result of our marketingefforts on behalf of properties we sell. Bairstow Eves is our largest brand in terms of number of branches andcontribution to operating profit. Most of our brands began trading as regional estate agencies that were lateracquired by us. See "-History." As the estate agency business is highlyfragmented in terms of both geography and pricing, we believe maintainingmultiple local brands is important to our ability to increase our market shareand the overall number of listings we obtain. For example, in Chelmsford, wehave four estate agency branches trading under different brands in closeproximity. Abbotts, Bairstow Eves and Taylors serve the midmarket in Chelmsford,while John D Wood & Co. specializes in higher-end properties in that area.Accordingly, we have not consolidated our brands (although we have rebrandedcertain individual branches). Employees We had an average of approximately 6,454 employees in our estate agency branchnetwork for the year ended December 31, 2006. We manage the number of staff perbranch based on market conditions, relying on natural attrition among our estateagents for the most part during periods of market declines. Staff turnover inour Estate Agency Division in the year ended December 31, 2006 was 47.2%. Weprovide our estate agents with training throughout their careers. Currently, the compensation package for our estate agents consists of a fixedannual salary and variable components. The variable components are tied to theagent's ability to successfully execute property transactions. Regulation Individual estate agents are not currently subject to licensing or other formsof professional qualification in the United Kingdom. We are, however, requiredto comply with the Estate Agents Act 1979, which forbids misleading claims andfalse descriptions of properties and requires us to: • provide sellers with written details of all offers; • inform sellers about potential conflicts of interest; and • follow certain procedures with respect to moneys we hold on behalf of ourclients. Failure to abide by these rules could result in the Office of Fair Tradingbanning an individual or a firm from working as an estate agent. In addition, weare members of the Ombudsman for Estate Agents which provides a mediationservice in the event of disputes between our customers and ourselves. In addition, the UK Property Misdescriptions Act 1991 makes it an offence for anestate agent or property developer to make false or misleading statements in thecourse of its business about various property related matters, includinglocation or address; aspect, view, outlook or environment; accommodation,measurements and sizes; or physical or structural characteristics. The PropertyMisdescriptions Act 1991 is enforced by local authorities' trading standardsofficers, who have the authority to seek fines against the offending agent oragency. Beginning on June 1, 2007, the seller of each residential property will need toprovide a Home Information Pack prior to the initiation of the marketing of theproperty. An estate agency which markets a property without such a HomeInformation Pack in place will be subject to fines or in extreme cases be bannedfrom operating as an estate agency under the Estate Agents Act. Similarrequirements are pending in Scotland and are expected to come into force in2008. As members of the Ombudsman for Estate Agents, our estate agencies have a dutyof fair dealing on behalf of prospective purchasers in addition to our duty ofcare to sellers. As a result, prospective purchasers have redress against us,which has increased our risk of becoming embroiled in regulatory or legalproceedings and could result in changes in our operating practices. From July 1,2007, membership in the Ombudsman program will effectively become compulsory. Competition Estate agents compete for listings and prospective purchasers, primarily on thebasis of services offered, reputation, personal contacts and commission rates inthe case of listings, and the amount and quality of properties listed in thecase of prospective purchasers. As noted in "Industry-Industry Segments-EstateAgencies" the estate agency business in the United Kingdom is very fragmentedand participants vary from national estate agency chains, including ourselves,Connells, LSL Property Services and Halifax Estate Agencies, to localindependent estate agents. We have the largest branch network of any nationalestate agency chain, as demonstrated in the following table (figures are as ofJanuary 1, 2007): NumberofChain Branches 1. Countrywide............................................................................ 1,176(1) 2. Connells............................................................................... 496 3. LSL Property Services ................................................................. 420 4. Halifax Estate Agencies................................................................ 329 5. Spicerhaart............................................................................ 231 6. Arun Estates........................................................................... 123 7. Savills................................................................................ 73 8. Kinleigh Folkard& Hayward............................................................. 67 9. Hamptons International................................................................. 65 10. Humberts.............................................................................. 61 Source: Estate Agency News, January 2007 (1) This figure excludes three of our branches dedicated to the sale of new homes. Other Activities Our Estate Agency Division also provides the following property services,largely for corporate clients and banks: Auctions. Through Countrywide Property Auctions, we hold regular propertyauctions throughout the year for properties that sellers need to dispose ofquickly. Repossession Solutions. We arrange for the possession, refurbishment and sale ofproperties that have been repossessed by banks, building societies and otherlenders. Part-exchange Solutions. New home builders occasionally accept property in partexchange for a new home. We arrange for the sale of these properties on behalfof the builders. Collectively, these activities generated less than 1% of our revenue andoperating profit for the year ended December 31, 2006. Lettings Division The Lettings Division encompasses our retail lettings operations and ourcorporate property management business. The Lettings Division generated £43.9million in revenue and £8.0 million in operating profit for the year endedDecember 31, 2006. The following table sets out certain operating data in respect of the LettingsDivision. As of December31,2006 ------------------- (unaudited) Properties under management (retail)................................................ 18,943 Properties under management (corporate)............................................. 36,381 Retail branches..................................................................... 134 Our Services The Lettings Division has two principal lines of business: Retail Lettings. Our retail lettings business, which accounted for the majorityof the Letting's Division's revenue for the year ended December 31, 2006, listsresidential properties to let in assured shorthold tenancies (the commonest typeof residential tenancy arrangement in the United Kingdom) with our retaillettings branches and provides landlords with three tiers of services: • "let only," in which we find and vet potential tenants for a property inexchange for up to 10% of the rents payable for the term of the tenancy(typically 6 months), paid out of the first month's rent; • lettings and rent collection, in which we find the tenant, prepare therelevant documentation and collect rent from the tenant on an ongoing basis inexchange for up to 12% of the monthly rent, paid over the course of the tenancy;and • property management, in which we find the tenant, prepare the relevantdocumentation, collect rent, serve as the primary point of contact for thetenant, arrange repairs and otherwise manage the property, in exchange for up to15% of the monthly rent, paid over the course of the tenancy. We also charge tenants upfront administrative and other fees at the commencementof the lease. Principally in London, with respect to the let-only business weare also able to secure renewal fees from landlords and tenants upon the renewalof a lease and a further percentage of the rent payable under the new lease. Corporate Property Management. Our corporate property management businessconsists of three principal activities: • leasehold management for residential apartment blocks and otherlong-leasehold residential properties, consisting of administrative andmaintenance services for both residents' associations and freeholders; • commercial property management for office parks and other commercialpremises, consisting of rent collection, tenant relationship management andmaintenance for commercial property landlords and pension trustees (which oftenown commercial property under Self-Invested Personal Pension plans) and; • residential property management for investors; and corporate clients withlarge portfolios of residential property or apartment blocks. These services are generally provided in exchange for a percentage of the rentor on a fee-per-unit basis. Our Branch Network Our retail lettings business operates outside London largely through CountrywideResidential Lettings, with 81 branches co-located with our estate agencies and32 dedicated lettings-only branches as of January 1, 2007. These branches arelargely concentrated in the South East and South regions of England. In London,our residential lettings business has 12 branches, which are largely co-located.Our corporate property management business has 11 co-located or stand-aloneoffices throughout England and Scotland. Branch Network Management In the past five years, we have considerably increased the size of our lettingsbranch network, particularly through the 2004 addition of 69 branches acquiredin connection with the Bradford & Bingley acquisition. Increasingly, we havefound that dedicated lettings-only high-street branches achieve superior resultscompared to branches co-located with estate agencies. We are continuouslyexamining opportunities to open or acquire new lettings branches in attractivelocations. In February 2007, we acquired a single-branch lettings business inNottingham. We do not currently enter into franchise arrangements with respect to ourlettings business. Our Brands Outside London, our retail lettings business operates largely under ourCountrywide Residential Lettings brand and, primarily in markets where wealready have a Countrywide Residential Lettings presence, under certain of ourestate agency brands. Inside London and its immediate environs, our lettingsbusiness operates on a co-located basis under our Faron Sutaria, Gasgoine Peesand John D Wood & Co. brands. Our corporate property management business operates under our CountrywideProperty Management brand. Employees We have had an average of approximately 930 employees in our Lettings Divisionfor the year ended December 31, 2006, consisting of lettings negotiators (thelettings business' equivalent of estate agents), property managers andadministrative staff. Like our estate agents, the compensation package for our lettings negotiatorsconsists of a fixed annual salary and a variable component. Our propertymanagers and administrative staff receive a higher proportion of fixed salarythan our lettings negotiators, but are also eligible for various performancebonuses. Regulation Lettings negotiators are not subject to individual licensing or qualificationrequirements or the Estate Agency Act 1979. We are, however, members of theOmbudsman for Estate Agents and the Association of Residential Letting Agents,respectively, which are empowered to hear complaints about lettings practices. Under the Housing Act 2004, from April 6, 2007, deposits taken from tenants inassured shorthold tenancies must be either deposited in a deposit protectionprogram or covered by approved insurance arrangements in order to safeguard thedeposit during the tenancy and any dispute proceedings. This requirement and therelated procedures may impose additional administrative and compliance costs onour Lettings Division's operations, but may also encourage more landlords to lettheir properties through dedicated lettings agencies or to seek professionalmanagement. In addition, we manage a small number of properties (primarilystudent housing) subject to local licensing as "Houses under Multiple Occupation" which are required to meet certain standards. In addition we are responsible for ensuring that the properties we manage meetall the relevant health and safety regulations. Competition Lettings agencies compete for listings and prospective tenants on the basis ofservices offered, reputation, personal contacts and fees in the case oflistings, and the amount and quality of properties listed in the case oftenants. We have the largest non-franchised branch network of any lettings agentin the United Kingdom. Our primary nationwide competition consists of Martin &Co., Belvoir and Castle Estates (all of which are franchised brands) and YourMove and RO Leaders (which are company-owned networks), along with many otherregional, local and specialized lettings agents. Other Activities Our Lettings Division also provides the following products and services: Insurance. We sell own-brand, AXA-underwritten rent protection, household andcontents and property owners' liability insurance to landlords and tenants underthe "lets-cover.co.uk" brand through Countrywide Residential Lettings Limited,which is an Appointed Representative of Countrywide Principal Services Ltd. Relocation. We offer executive relocation services to corporate clients, largelyin London and emergency nationwide relocation services to insurers whose policyholders have suffered the loss of their home. Collectively, these activities generated less than 1% of our revenue andoperating profit for the year ended December 31, 2006. Financial Services Division Our Financial Services Division sells third party financial services productsthrough a dedicated sales force primarily to customers of our Estate AgencyDivision. The primary financial services products sold by our Financial ServicesDivision are mortgages, general insurance policies, term life insurance andmortgage payment protection policies. The Financial Services Division generated£91.6 million in revenue and £21.0 million in operating profit in the year endedDecember 31, 2006. The following table sets out certain operating data in respect of the FinancialServices Division. Fortheyearended December31, 2006 (unaudited) Total mortgages arranged.......................................................... 61,354 Value....................................................................... £7.1billion Panel mortgages arranged.......................................................... 56,097 Value....................................................................... £6.5 billion Life insurance and mortgage payment protection policies sold...................... 49,811 General insurance policies sold................................................... 56,711 Conversion rates(1) Mortgages................................................................... 59.4% Life insurance and mortgage payment protection policies..................... 48.2% General insurance........................................................... 54.9% Average number of FSA authorized financial consultants............................ 946 (1) The conversion rate for each of our financial products is the number ofsuch products sold in the year ended December 31, 2006 as a percentage of thehouse sales exchanged by our Estate Agency Division in such year. Our Mortgage Lender Panel We offer our customers mortgages from six to eight banks, the composition ofwhich changes over time as we seek out the most attractive products for ourcustomers. Panel members generally undertake to provide exclusive offerings toour customers and generally commit to instructing our Surveying and ValuationDivision in respect of any surveys or valuations required under their mortgageguidelines. We receive mortgage origination and panel fees from lenders plusapplication fees from borrowers. Our Insurance Providers We are party to an exclusive distribution agreement with Friends Provident untilAugust 21, 2017 (unless extended by mutual agreement) under which we have agreedto sell only Friends Provident life insurance products. A few mortgage lenderswill require borrowers to have life insurance or other mortgage paymentprotection policies to cover the remaining principal amount of their mortgage inthe event of their death or other inability to service the mortgage. Under theagreement, we were paid £25.0 million as advanced commissions at the initiationof the arrangement. Commissions are subject to repayment in the event thatcertain sales volume thresholds are not met and clawback in the event that apolicyholder allows his or her policy to lapse in the first four years. We are also party to an agreement with AXA until December 31, 2010 to sell AXAbuilding insurance, which is required by most mortgage lenders, contentsinsurance and mortgage payment protection products to our customers. Theagreement provides for certain minimum commission levels. In addition, the AXAagreement contains provisions for profit sharing. Our agreement with AXA alsocontains a change of control provision which allows AXA to terminate suchagreement following a change of control, which includes the Acquisition. Employees For the year ended December 31, 2006, we had an average of approximately 946FSA-authorized financial consultants, largely located side-by-side with EstateAgency personnel in most of our branches outside central London (where higherhouse prices and demographic profile for our Faron Sutaria and John D Wood & Co.customers generally do not lend themselves to estate-agency-based financialservices). We believe that basing financial services consultants in our estateagency branches facilitates cross-selling of products and services to ourcustomers. Staff turnover in the division for the year ended December 31, 2006was 34.9%. The compensation package for financial services consultants consists of a fixedannual salary and a relatively small variable component based on fees generated. Regulation Our insurance and mortgage brokerage and advisory activities are regulated bythe UK Financial Services Authority (the "FSA") in the exercise of its statutorypowers under the Financial Services and Markets Act 2000 ("FSMA"). The principalrequirements of the regulatory regime applicable to our Financial ServicesDivision are: • Authorization-since October 31, 2004 and January 14, 2005, respectively,mortgage and general insurance brokers must be either authorized by the FSA orappointed as an appointed representative of an FSA authorized entity in order tosell or advise on these products. • Advertising Restrictions-authorized entities and their appointedrepresentatives must observe the FSA rules on form and content requirements forwritten promotional materials and restrictions on cold calling. • Conduct of Business-authorized entities and their appointedrepresentatives must observe FSA conduct of business rules, which regulate theconduct of intermediaries during the sale process, communications withcustomers, suitability of products to meet particular customers' needs, andthrough the "Treating Customers Fairly" initiative imposes requirements that ourterms and conditions and other customer communications are fair and notmisleading and requires us to keep customers appropriately informed before,during and after the point of sale and ensure that they do not face unreasonablepost-sale barriers to change products or providers. Countrywide Principal Services Ltd. has FSA authorizations relating to sales ofmortgages and general insurance contracts. Countrywide Estate Agents FS Limitedand Countrywide Residential Lettings Limited and a number of our franchisees areAppointed Representatives of Countrywide Principal Services Ltd. Any failure to comply with the provisions of the FSMA or the rules andregulations promulgated thereunder may give rise to civil or criminal liability,and may result in the imposition of disciplinary sanctions by the FSA. The FSA'spowers include the power to withdraw the authorization of the relevant firm orof the approval of persons performing controlled functions within it and thepower to impose financial penalties and issue public censures or statements inrespect of breaches. Competition Mortgage brokers compete primarily on the basis of service, reputation, productscovered and prices of those products. The mortgage brokerage business isdominated by a combination of in-house brokers operating primarily within estateagencies (including Countrywide) and selling primarily to prospective purchasesof properties the estate agency lists and independent mortgage brokers (such asJohn Charcol, Alexander Hall and members of the Bankhall and Sesame networks).In addition, these brokerages compete against price aggregators, which mayinclude advisory businesses (such as Moneysupermarket.com and Money Expert), andmortgage lenders which specialize in direct-to-borrower marketing (such as INGDirect). In the life insurance, mortgage payment protection and general insurancebusiness, although we do not compete in the general marketplace, we do competefor our own customers' business against the banks, supermarkets, insurancebrokers and insurers who advertise insurance products directly to the public(such as Direct Line or More Than). Selective repricings of certain of our financial services products in mid-2005and 2006 resulted in an improvement to our conversion rates in 2006 compared to2005. Surveying and Valuation Division The Surveying and Valuation Division performs residential mortgage valuationsand surveys for customers of our Estate Agency Division and third parties,including major mortgage lenders. The Surveying and Valuation Division generated£136.8 million in revenue and £26.7 million in operating profit for the yearended December 31, 2006. The following table sets out certain operating data in respect of the Surveyingand Valuation Division. Fortheyearended December31, 2006 ------------------- (unaudited) Valuations and survey instructions completed........................................ 697,305 Average number of surveyors......................................................... 767 Products and Services Our Surveying and Valuation Division provides mortgage valuation reports tomortgage lenders and conducts homebuyer and building surveys for prospectivepurchasers seeking detailed information on the condition of a house. In atypical residential property transaction, these services are paid for by thepurchaser. We also conduct remortgage surveys and valuations for lenders. Thesesurveys and valuations are typically less in-depth than initial purchase surveysand valuations. We are investigating the use of Automated Valuation Models,described in "Industry-Industry Segments-Surveying and Valuation," but do notcurrently use such models. Finally, we undertake surveys and valuations in anumber of other situations such as compulsory purchase orders and tax ratingassessments. In addition to our core surveying business, our Surveying and Valuation Divisionprovides surveyor panel management services to other participants in the UKresidential property market (including mortgage lenders) who do not have theirown in-house surveying capabilities. In anticipation of the implementation of the Home Information Pack, we arecurrently training our existing surveyors in order to allow them to obtain thenecessary certification to provide Energy Performance Certificates. See "Industry-Industry Segments-Surveying and Valuation." Our Brands We provide our Surveying and Valuation Services under three brands: CountrywideSurveyors, Harvey, Donaldson and Gibson and Securemove Property Services. As ofDecember 31, 2006, our Surveying and Valuation Division had 124 officesthroughout the United Kingdom that provide support staff and a physical officelocation for the surveyors when they return from the field. As a result of theinvestment in technology and the rationalization program discussed in "-Information Technology," we anticipate the closure of a significant number ofour local offices within the next two to three years (although these closuresare not expected to reduce headcount in the division). Employees The Surveying and Valuation Division employed an average of approximately 767chartered surveyors for the year ended December 31, 2006. Our surveyors aretypically paid a fixed annual salary and are given the opportunity to receive abonus if certain productivity requirements are met. In addition, we are developing a Countrywide Associates program, which givesindependent surveyors access to our instruction flow (when our capacity isotherwise constrained) in exchange for a percentage of the surveying fee. Weanticipate that this practice will allow us to avoid the carrying cost of suchsurveyors during less busy periods. Regulation The Royal Institute of Chartered Surveyors operates as a self-regulatory regimeand requires certain standards of technical education and levels of insurancecover. It also handles arbitration and complaints within the industry. Members of the Royal Institute of Chartered Surveyors are liable on a negligencebasis for valuation and condition report errors, complaints about which tend toincrease during downturns in the UK residential property market. Competition In the surveying and valuation business, we compete on the basis of price,service standards and inclusion on financial service provider panels. Ourprincipal competitors in the surveying and valuation business are the surveyingand valuations businesses of other large estate agency chains, including e-Surv(part of LSL Property Services), Connells, Colleys (part of the HBOS Group,which also owns Halifax Estate Agencies). We also compete against independentnetworks of surveyors, such as Allied, and smaller local and regional firms andindependent sole-proprietors. Conveyancing Division The Conveyancing Division provides legal documentation and conveyancing servicesfor customers of our Estate Agency Division and for third parties andconveyancing panel management services for both clients introduced by our estateagencies and third party clients. The Conveyancing Division generated £22.7million in revenue and recorded a £250,000 operating loss for the year endedDecember 31, 2006. The following table sets out certain operating data in respect of theConveyancing Division. Fortheyearended December31, 2006 ------------------- (unaudited) Completions......................................................................... 66,751 In-house...................................................................... 27,676 Panelled...................................................................... 30,251 Remortgages................................................................... 8,824 Average Headcount................................................................... 591Services Our Conveyancing Division, operating under the Countrywide Property Lawyersbrand, offers conveyancing services related to residential property saletransactions carried through our Estate Agency Division. Our Conveyancing Division provides all of the documentation necessary tocomplete a residential property sales transaction, including purchase and saleagreements, deeds and title documentation, deeds of covenant and easements. Wetypically charge a fixed fee per transaction, based on the value of theproperty, plus a fee for certain ancillary documentation. In 2004, we expanded our conveyancing operations to include the provision ofremortgage conveyancing services. Due to pricing pressures, however, we plan toexit the remortgage conveyancing business in 2007 once our existing remortgagetransactions have been serviced. We recorded a provision of £2.1 million in 2006for costs related to the discontinuance of our remortgage conveyancing business. Our Conveyancing Division also provides a conveyancing panel management service,referring conveyancing instructions to a panel of solicitors and licensedconveyancers, both for customers of our Estate Agency Division and for otherestate agencies and lenders on a "white label" basis. Service Providers The operations of our Conveyancing Division are supported by TMG Holdings, inwhich we currently hold a 33.3% stake. TMG Holdings carries out regulatorysearch services with different governmental authorities (with respect to streetregulations, land use restrictions and the like) for lawyers in connection witha residential property transaction. Employees For the year ended December 31, 2006, our Conveyancing Division had an averageof approximately 591 employees, including an average of approximately 21licensed conveyancers and an average of approximately 23 solicitors. Regulation Until 1987, conveyancing services were exclusively provided by solicitors,governed by the Law Society of England and Wales. Since that time,non-solicitors have been able to qualify as licensed conveyancers, subject tothe regulation of the Council for Licensed Conveyancers which setsqualifications and administers the relevant examinations. Only solicitors orlicensed conveyancers can offer conveyancing services to the public, althoughunlicensed individuals may perform many of the relevant services on their ownbehalf. The Council for Licensed Conveyancers has jurisdiction over complaints and setsout certain standards of practice, such as the requirement that all licensedconveyancers purchase professional indemnity insurance and provide writtenestimates at the outset of a transaction. Violations can result indisqualification and termination of a license. The Solicitors Regulation Authority has recently taken over the regulation ofsolicitors in the United Kingdom and sets the rules for qualification ofpracticing solicitors. In the event of misconduct, the Solicitors RegulationAuthority can refer cases to the Solicitors Disciplinary Tribunal, which may, inaddition to fines and reprimands, strike a solicitor from the Roll of Solicitorsand revoke his or her practicing certificate, effectively disqualifying thatsolicitor from practice. Both solicitors and licensed conveyancers are also subject to the jurisdictionof the Legal Services Ombudsman, which can hear complaints after a determinationby the relevant professional body. Competition Conveyancing service providers compete on the basis of reputation, price andspeed of completion. Conveyancing services in the UK residential property marketare offered primarily by specialist law firms, high street solicitors, and theconveyancing businesses and conveyancing panels of other estate agencies, banksand other alternative providers. Most estate agencies have referral panels ofconveyancing providers and some, including Countrywide, have in-house operationsto service at least some of their own transactions. We compete against theseproviders both for third party instructions (via our panel management service)and for instructions from our own estate agency clients. Information Technology We have a large number of information technology systems in place at our variousdivisions with little integration among the systems. Most of our technologysystems are standard software solutions provided by third parties, with theexception of our point of sale system in the Financial Services Division,enterprise software for our Surveying and Valuation Division and our databasefor our Lettings Division. Most of the systems have been in place for a numberof years, with the exception of the Conveyancing Division's file managementsystem which suffered from a failed roll-out of a system specifically designedfor that division and now relies on an upgraded version of the prior third-partysoftware. In our Surveying and Valuation Division, we are currently investing in theroll-out of hand-writing recognition and digital photography devices to all ofour surveyors which we believe will produce administrative cost savings.Furthermore, we have initiated the integration of our back office administrationprocesses for the Surveying and Valuation Division in order to realizeefficiencies of scale through the use of proprietary digital interfaces andtablet computer technology. Intellectual Property We have a portfolio of approximately 80 registered trade marks in respect of thetrading names used by our estate agencies and other businesses. We routinelymonitor the marketplace and have a policy of vigorously enforcing our claimsagainst infringers. As of December 31, 2006, we had not identified any materialinfringement of our registered trademarks. Property The vast majority of our estate agency branches occupy leasehold premises, whichhave recently tended to be on 10-year terms. We manage our leasehold estate on ageographic and historical basis, reflecting the estates inherited from ourpredecessor companies. For the year ended December 31, 2006, the total annualnet rent for all leasehold premises was approximately £27.8 million. We own the freehold of our head office in Witham, Essex. Vehicle Leasing As of December 31, 2006, we leased approximately 5,150 vehicles, primarily carsfor our estate agents, lettings negotiators, financial consultants, surveyorsand head office staff at an annual cost, for the year ended December 31, 2006,of £19.5 million. Leases are generally no longer than three years and our totalleasing commitment as of December 31, 2006 was £32.1 million. Employees The following table details our average monthly number of employees during theyears ended December 31, 2004, 2005 and 2006. FortheyearendedDecember31, --------------------------------------- 2004 2005 2006 Estate Agency........................................................... 5,205 6,163 6,454 Lettings................................................................ 867 867 930 Financial Services...................................................... 1,377 1,374 1,454 Surveying and Valuation................................................. 1,428 1,678 1,468 Conveyancing............................................................ 544 591 591 Head Office............................................................. 71 64 74 Total................................................................... 9,492 10,737 10,971 We consider our relations with our employees to be satisfactory. Environmental Matters We believe that we do not have any material environmental compliance costs orenvironmental liabilities. Litigation and Legal Expenses We are currently party to various claims and legal actions that arise in theordinary course of business. We believe such claims and legal actions,individually and in the aggregate, will not have a material adverse effect onour financial position or results of operations. The following is a brief description of the more significant legal matters thatwe are involved in the twelve months preceding the date of this announcement. Webelieve that we have adequately provided for such matters where necessary. Pension Mis-Selling Disputes We are involved in two disputes with certain of our former life insurance andfinancial advisory subsidiaries regarding the extent of indemnities we (or apredecessor firm) provided at the time of their disposal in respect of pensionmis-selling claims. We have recently lost one case on appeal and, as a result,we must indemnify our former subsidiary for pension mis-selling claimssuccessfully brought by customers of such subsidiary. We are currently innegotiations to settle the second pension mis-selling dispute to which we are aparty. As of December 31, 2006, we had recorded a provision of £5.3 million inrespect of such claims. Tax Dispute We are involved in a dispute with HMRC regarding the tax treatment of certainconsideration paid to us in respect of our distribution of insurance products.While we believe that the recept of such consideration has been treatedcorrectly for tax purposes, in the event HMRC succeeds in its challenge, furthertax would be payable by us. IT Systems Dispute We have recently settled our dispute with Logica in respect of the failure ofthe Fusion IT system installed in 2004 and written off in 2005. MANAGEMENT Management of Castle HoldCo 4, Ltd. Castle HoldCo 4 is an exempted company incorporated in the Cayman Islands withlimited liability. Board of Directors The following table provides information regarding our executive officers andthe members of our board of directors. Name Age Title Lukas Kolff................................ 33 Director Tobias Habbig........................... 28 Director Director Biographies Lukas Kolff has been a member of the board of Castle HoldCo 4 since 2007. Mr.Kolff is a principal of Apollo Management International LLP and sits on theboard of CEVA Group plc. From 1999 until 2006, Mr. Kolff worked as a VicePresident for Ripplewood Holdings. Mr. Kolff holds a master's degree in businesseconomics from Rijks Universteit Groningen, University of Groningen, theNetherlands, where he graduated with highest honors. Tobias Habbig has been a member of the board of Castle HoldCo 4 since 2007. Mr.Habbig is a senior associate of Apollo Management International LLP. Mr. Habbigpreviously worked in the Leveraged Finance Group of Lehman Brothers in London.Prior to that, he worked in the Mergers and Acquisitions Group of LehmanBrothers. Mr. Habbig holds a master's degree with distinction in businessadministration from Handelshochschule Leipzig and University of Cologne,Germany. Management of Countrywide Executive Officers, Board of Directors and Executive Management The following table provides information regarding certain of the executiveofficers and members of the board of directors and executive committee ofCountrywide. Name Title Harry D Hill...................... 58 Chairman Grenville Turner.................. 49 Managing Director Michael C Nower................... 57 Finance Director John Hards........................ 51 Managing Director, Countrywide Residential Lettings Gareth R Williams................. 43 Head of Group Legal and Company Secretary Gerald R Fitzjohn................. 57 National Sales Director, Estate Agency and Financial Services Division; Director, Countrywide Franchising Limited Christopher P Shaw................ 54 Managing Director, Countrywide Surveyors Limited Anthony H Ekins................... 63 Sales Director, Estate Agency and Financial Services Division John Williams..................... 52 Director of Corporate Developments; Director, Countrywide Principal Services Limited and Countrywide Estate Agents FS Limited David Fletcher.................... 55 Sales Director, Estate Agency and Financial Services Division Robert Scarff..................... 48 Sales Director, Estate Agency and Financial Services Division J Allen Snowball.................. 56 Managing Director, Countrywide Principal Services Limited Director and Management Biographies Harry D Hill has been a member of the board of Countrywide since 2004. Mr. Hillqualified as a Chartered Surveyor in 1967 and was formerly Managing Director ofAbbotts (East Anglia) Limited. He is a Non-Executive Director of Jupiter SecuredSplit Trust plc. He has previously served as the Managing Director ofCountrywide Assured Group plc and Countrywide, respectively. Grenville Turner has been a member of the board of Countrywide since August 1,2006, when he joined Countrywide as an Executive Director. He became GroupManaging Director on January 1, 2007 and is also a director of CountrywideEstate Agents. Mr Turner qualified as a Chartered Banker in 1982 and holds amaster's degree in business administration from Cranfield Business School. Hewas formerly Chief Executive, Intelligent Finance and Chief Executive, Businessto Business at HBOS and previously served as a director of St James PlaceCapital Plc, Sainsbury's Bank Plc and Rightmove.co.uk Limited. Michael C Nower has been a member of the board of Countrywide since 2004. MrNower qualified as a Certified Accountant in 1975 and was formerly Group FinanceDirector of Lancaster PLC. He joined Countrywide Assured Group plc as GroupFinance Director in 1989 and, on March 1, 2004, was appointed to the sameposition with Countrywide. John Hards was appointed to the executive committee on November 29, 2006. Mr.Hards is Managing Director of Countrywide Residential Lettings. Mr. Hards is aChartered Surveyor and a Director of the Association of Residential LettingsAgents and The Dispute Service, which has recently won a government contract toadministrator The Tenancy Deposit Scheme. Gareth R Williams was appointed to the executive committee on May 24, 2004. Mr.Williams is Company Secretary and Head of Group Legal. He previously served asthe Company Secretary for Countrywide Assured Group plc. Mr. Williams qualifiedas a Solicitor in 1990 and is a Chartered Company Secretary. Gerald R Fitzjohn has been with Countrywide since 1974 and was appointed to theexecutive committee on December 7, 1989. Mr. Fitzhjohn is currently the NationalSales Director of the Estate Agency and Financial Services Division and adirector of Countrywide Franchising Limited. Mr. Fitzhjohn was formerly ManagingDirector of Taylors Estate Agents Limited. Mr. Fitzhjohn was previously adirector of Countrywide Assured Group plc. Christopher P Shaw was previously a director of Countrywide Assured Group plc,and was appointed to the executive committee on January 1, 2002. Mr. Shaw isManaging Director of Countrywide Surveyors Limited. Mr. Shaw qualified as aChartered Surveyor in 1978 and is a Fellow and Vice President of the RoyalInstitution of Chartered Surveyors. Mr. Shaw previously served as a director ofAbbotts (East Anglia) Limited. Anthony H Ekins joined Countrywide in 1990 and was appointed to the executivecommittee on January 27, 1999. Mr. Ekins was previously Operations Director ofPrudential Property Services, which acquired Ekins, Dilley and Handley in 1986.Mr. Ekins was previously a director of Countrywide Assured Group plc. Mr. Ekinsqualified as a Chartered Surveyor in 1965. John Williams was appointed to the executive committee on May 24, 2004. Mr.Williams is Director of Corporate Developments and a Director of CountrywidePrincipal Services Limited and Countrywide Estate Agents FS Limited. Mr.Williams is a Fellow of the Chartered Institute of Bankers and has over 30 yearsof experience working in the financial services industry including positionswith Lloyds Bank, HSBC and Yorkshire Building Society. Mr. Williams has workedon Industry Committees on the Mortgage Code and Substantial Home Ownership. David Fletcher has been with Countrywide for over 30 years and was appointed tothe executive committee on January 1, 2005. Mr. Fletcher is a Sales Director ofthe Estate Agency and Financial Services Division and a director of H2O HomesOverseas Countrywide. Mr. Fletcher qualified as a Chartered Surveyor in 1983 andwas formerly Managing Director of Abbots Estate Agents Limited. Robert Scarff joined Countrywide as a trainee sales negotiator with TaylorsEstate Agents in 1978 and was appointed to the executive committee on January 1,2005. Mr. Scarff is a Sales Director of the Estate Agency and Financial ServicesDivision. He was instrumental in establishing Countrywide's ConveyancingDivision in 1997 and held the position of Managing Director until December 31,1998, when he was appointed to his current position. Mr. Scarff previouslyserved as Managing Director of Dixons Estate Agents and is a Fellow of theNational Association of Estate Agents. J Alan Snowball joined Countrywide in 1998 as Managing Director of CountrywideFranchising Limited and was appointed to the executive committee on November 30,2005. Mr. Snowball qualified as a Chartered Surveyor in 1976. After a career inprivate practice, he served as a director of Prudential Property ServicesLimited and a director of Halifax Estate Agencies Limited. Management Compensation Executive Director Service Contracts Countrywide has three Executive Directors, Harry D Hill, Michael C Nower andGrenville Turner, whose employment is subject to service agreements (the "Service Agreements"). Details of the terms of engagement for our ExecutiveDirectors are set out below: Name Position Annual Date of Service Salary Agreement HarryDHill........................ Chairman £310,000 October 31, 1997 MichaelCNower.....................GroupFinanceDirector £200,000 October 31, 1997 GrenvilleTurner(1).................GroupManagingDirector £360,000 July 25, 2006 (1) Mr. Turner joined Countrywide on August 1, 2006. Accordingly, Countrywidepaid Mr. Turner £120,000 for the year ended December 31, 2006, which representshis pro rated salary for such year. The salary of each Executive Director is reviewed annually by the board. TheExecutive Directors are entitled to reimbursement of expenses incurred duringthe course of their duties and are entitled to receive full remuneration andbenefits if incapacitated by sickness for up to 26 weeks in any period of 12months. Countrywide is entitled to pay the Executive Directors remuneration andbenefits in lieu of the whole of any part of the notice period. Notice The Service Agreements of Mssrs. Turner and Nower are terminable by eitherCountrywide or the applicable Executive Director giving not less than 12 months'written notice. The Service Agreement of Mr. Hill is terminable by eitherCountrywide or Mr. Hill giving not less than 6 months' written notice. Theemployment of each Executive Director is terminable with immediate effect ifsuch Executive Director fails or neglects to perform his duties over a period ofnot less than six months, is guilty of any material or persistent breach of theapplicable Service Agreement, is guilty of gross misconduct, is disqualifiedfrom holding office, is convicted of a criminal offense (excluding certain roadtraffic offences), is subject to a bankruptcy/administration order, becomesmentally ill or forms a prohibited addiction or becomes unable to perform hisduties by reason of accident, ill-health or otherwise for a period aggregatingnot less than 26 consecutive weeks in any period of 12 months. If any of the Executives Directors' employment is terminated as a result ofliquidation, reorganization or reconstruction of Countrywide and he is offeredemployment by a reconstructed company or by another Countrywide company on termsnot less favorable, such Executive Director shall be obliged to accept such anoffer and shall have no claim against Countrywide. However, if, as a result of a general offer made to members of Countrywide, athird party obtains control of Countrywide, each Executive Directors is entitledto terminate his employment on three months' written notice, provided that suchnotice is served within one month of the third party obtaining control. In sucha case, the restrictive covenants described below will not apply. In addition,the period of notice required to be given by Countrywide to the ExecutiveDirectors to terminate their employment will, for a period of 12 months from thedate of the third party obtaining control, be 12 months (and in Mr. Hill's case,extended to 12 months) and the restrictive covenants will again not applyfollowing any such termination. Bonus Each of the Executive Directors is entitled to participate in the bonusarrangements operated by Countrywide from time to time. Such bonus arrangementsshall be determined at the discretion of the board. The bonuses are awardedsubject to the achievement of certain targets notified to the ExecutiveDirectors at the commencement of each financial year. Benefits Each Executive Director is entitled to 30 days' holiday per annum (in additionto statutory holidays). Each Executive Director may elect to receive a carallowance for business and personal travel. Alternatively, each may have acompany car for business and personal use for which Countrywide bears allrelated maintenance, insurance, tax and fuel expenses. Mr. Hill is entitled to membership in Countrywide's Pension Scheme DefinedContribution Section, to which he transferred from the Defined Benefit Sectionin December 2003. Mr. Nower has a personal pension plan to which Countrywidecontributes at the same level as if he had joined the Defined Benefit Sectionand subsequently transferred to the Pension Scheme Defined Contribution Section.Mr. Turner is not entitled to pension benefits. Each Executive Director is entitled to the benefits of a life assurance policywhich provides a benefit of four times the applicable Executive Director'spensionable salary plus a spouse's pension of one quarter of the applicableExecutive Director's pensionable salary. Each Executive Director is entitled toprivate medical insurance (for himself and his family), and permanent healthinsurance. Each Executive Director is entitled to be indemnified by Countrywide againstliabilities incurred in the course of his employment in defending proceedings inwhich he is acquitted or judgment is given in his favour. Each ExecutiveDirector is entitled to cover under the Group Directors' and Officers' LiabilityInsurance Policy. The board may at any time substitute any of the remunerationand benefits of any of the Executive Directors (with the exception of salary),provided that the total overall compensation does not disadvantage theapplicable Executive Director. In addition, upon a material change in thecircumstances of Countrywide, the board may withdraw or restrict theremuneration and benefits provided to the Executive Directors, except for salaryand bonus, on giving not less than 12 months' notice. Restrictions The Executive Directors are prohibited, without prior consent from the Board,from being directly or indirectly engaged, concerned or interested in businessactivities which may compete with Countrywide. Each Executive Director issubject to a confidentiality undertaking without limitation in time and issubject to copyright and intellectual property restrictions in respect of workundertaken in the course of his employment without limitation in time. Inaddition, each Executive Director is subject to non-compete and non-solicitationrestrictive covenants for a period of six months following termination of hisemployment and is restricted from soliciting, enticing away or employing anyemployee of Countrywide engaged in a managerial capacity in a department forwhich the Executive Director has had direct or indirect responsibility. EachExecutive Director is also prohibited from assisting, advising or giving anyinformation to any person in connection with the above restrictions. Management Incentive Plan As of the date of this announcement, none of our Executive Directors who isexpected to be employed by Castle HoldCo 4 after the Acquisition has enteredinto any agreement, arrangement or understanding with Apollo Management, L.P. orany of its affiliates regarding employment with, or the right to purchase orparticipate in the equity of, Castle HoldCo 1 or Castle HoldCo 4. If CastleHoldCo 4 does not reach an agreement, arrangement or understanding with one ormore Executive Director, such Executive Director will be entitled to certainseverance and other benefits set forth in his existing employment agreement. Countrywide's existing equity incentive plans and employee stock purchase planwill be terminated as of the closing date of the Acquisition. Castle HoldCo 4currently plans to adopt an omnibus equity incentive plan to be effectivefollowing the closing of the Acquisition for certain key members of itsmanagement, which will provide for the granting of stock options, restrictedstock, restricted stock units and other stock-based awards relating to thecommon stock of Castle HoldCo 1. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Rightmove Listings Agreement We are party to an agreement with Rightmove plc, a company in which we will holda 21.5% interest at the time of the Acquisition, for the online listing of ourresidential property inventory through Rightmove's online property listingdatabase. By the terms of this agreement, we have agreed to provide our propertylistings to Rightmove and Rightmove has agreed to include such listings in itsproperty listing database and to make such listings available to users of itsproperty search engine through its website. In return for this service, we haveagreed to pay Rightmove monthly fees based on the number of our estate agentbranches displayed on its web site. In the year ended December 31, 2006, we paid Rightmove £1.4 million in listingfees. Pursuant to the Acquisition, we will distribute our entire interest inRightmove to Countrywide shareholders. GENERAL INFORMATION No Significant Change Except as disclosed in this announcement: • there has been no material adverse change in the financial position ofCastle HoldCo 4 or any of the guarantors (the "Companies") since December 31,2006; and • we are not, and have not been, involved in any governmental, legal orarbitration proceedings that may have or had in the 12 months before the date ofthis announcement, a significant effect on our financial position orprofitability. We are not aware that any such proceedings are pending orthreatened. Guarantor Information Following the completion of the financial assistance "whitewash" procedures andin any event not later than 90 days after the closing date of the Acquisition,the guarantors are expected to include: • Countrywide plc, Countrywide House, Perry Way, Witham CM8 3SX, UnitedKingdom, with registered number 04947152, date of incorporation: October 29,2003, telephone number: +44 (0) 1376 533 700; • Countrywide Property Lawyers Limited, Lee House, 90 Great BridgewaterStreet, Manchester M1 5RR, United Kingdom, with registered number 02066827, dateof incorporation: October 23, 1986, telephone number: +44 (0) 1376 533 700; • Balanus Ltd., Countrywide House, Perry Way, Witham CM8 3SX with registerednumber 01837522, date of incorporation: August 1, 1984, telephone number: +44(0) 1376 533 700; • Countrywide Estate Agents FS Ltd., Sovereign House, Leighton Buzzard LU71GT United Kingdom with registered number 01084123, date of incorporation:November 28, 1972, telephone number: +44 (0) 1376 533 700; • Slater Hogg Mortgages Ltd., Sovereign House, Hockliffe Street, LeightonBuzzard LU7 1GT, United Kingdom with registered number 04206425, date ofincorporation: April 26, 2001, telephone number: +44 (0) 1376 533 700; • Countrywide Estate Agents, Countrywide House, Perry Way, Witham CM8 3SX,United Kingdom, with registered number 00789476, date of incorporation: January27, 1964, telephone number: +44 (0) 1376 533 700; • Countrywide Franchising Ltd., Century House, Rosemount Avenue, WestByfleet KT14 6LB, United Kingdom with registered number 03777494, date ofincorporation: May 26, 1999, telephone number: +44 (0) 1376 533 700; • Securemove Property Services 2005 Ltd., Countrywide House, Perry Way,Witham CM8 3SX, United Kingdom, with registered number 04542716, date ofincorporation: September 23, 2002, telephone number: +44 (0) 1376 533 700; • Countrywide Surveyors Ltd., Market House, Market Square, Stony Stratford,Milton Keynes, MK11 1BE, United Kingdom with registered number 01954031, date ofincorporation: November 4, 1985, telephone number: +44 (0) 1376 533 700; and • Countrywide Estate Agents (South) Ltd., Countrywide, Perry Way, Witham,CM8 3SX, United Kingdom with registered number 02276358, date of incorporation:July 12, 1988, telephone number: +44 (0) 1376 533 700. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
CWD.LRightmove