Report and Accounts for Holmes Financing



 Exhibit 10.14 
  
 HOLMES FINANCING (NO. 7) PLC 
  

REPORT AND ACCOUNTS 
  
 FOR THE PERIOD ENDED 31 DECEMBER 2003 
  
 Registered No. 4645659 







 HOLMES FINANCING (NO. 7) PLC 
  
 Report of the Directors 
  
 The Directors submit their report together with the accounts for the period from incorporation on 23 January 2003 to 31 December 2003. 
  
 1. Principal activity and review of the period 
  
 The principal activity of the Company is to issue asset backed notes and enter into all
financial arrangements in that connection. No future changes in activity are envisaged. 
  
 The Company was registered as Holmes Financing (No.7) PLC in England and Wales on 23 January 2003 as a public limited company, with an authorised share capital of £100,000 comprising 100,000 ordinary shares of £1 each.

  
 The Company commenced trading on 26 March 2003 when it issued UK sterling,
Euro and US dollar denominated loan notes to the total value of £2,403,550 and made loans to Holmes Funding Limited for equivalent amounts and on equivalent terms, in order to enable Holmes Funding Limited to purchase an interest in the assets
of Holmes Trustees Limited. The assets comprise mortgage loans secured on residential property in England and Wales. 
  
 Both Holmes Funding Limited and Holmes Trustees Limited are group undertakings. 
  

2. Results and Dividend 
  
 The results for the period are set out on page 4. There was no profit during the period. The Directors do not recommend the payment of a dividend. 
  
 3. Financial Instruments 
  
 The Company’s financial instruments, other than derivatives, comprise loans to group
undertakings, borrowings, cash and liquid resources, and various items, such as debtors and creditors that arise directly from its operations. The main purpose of these financial instruments is to raise finance for the Company’s operations.

  
 The Company also enters into derivatives transactions (principally cross
currency swaps). The purpose of such transactions is to manage the currency risks arising from the Company’s operations and its sources of finance. 
  
 It is, and has been throughout the period under review, the Company’s policy that no trading in financial instruments shall be undertaken. 
  
 The main risk arising from the Company’s financial instruments is currency risk. The
Company has debt securities in issue denominated in Euros and US dollars. The Board reviews and agrees policies for managing this risk. The Company’s policy is to eliminate all exposures arising from movements in exchange rates by the use of
cross currency swaps to hedge payments of interest and principal on the securities. 
  
 All other assets, liabilities and transactions are denominated in Sterling. 
  
 4. Directors and their interests 
  
 The Directors who served
throughout the period, except as noted below were: 
  

			
	 M McDermott
	 	(appointed 23 January 2003)
	 R Wise
	 	(appointed 23 January 2003, resigned 23 May 2003)
	 D Green
	 	(appointed 23 May 2003)
	 SPV Management Limited
	 	(appointed 23 January 2003)

  

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 HOLMES FINANCING (NO. 7) PLC 
  
 Report of the Directors (continued) 
  
 4. Directors and their interests (continued) 
  
 At the period end, Holmes Holdings Limited and M. McDermott jointly held one share in the Company. 
  
 SPV Management Ltd and M. McDermott held one share in the holding company, Holmes Holdings Limited, at the period end. The other share in
Holmes Holdings Limited was held by SPV Management Limited. M. McDermott is also a Director of 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 period end. 
  
 5. Directors’ Responsibility in respect of the Preparation of Accounts

  
 The Directors are required by United Kingdom company law to prepare
accounts for each financial period that give a true and fair view of the state of affairs of the Company as at the end of the financial period, and of the profit or loss for that period. 
  
 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 period ended 31 December 2003. 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, for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 
  
 6. Going concern 
  
 The Directors confirm that they are satisfied that Holmes Financing (No.7) plc has adequate resources to continue in business for the foreseeable future. For this reason,
they continue to adopt a going concern basis in preparing the financial statements. 
  
 7. Auditors 
  
 During the period, the
Company appointed Deloitte & Touche as auditors of the Company. 
  
 On 1
August 2003, Deloitte & Touche, the Company’s auditors transferred their business to Deloitte & Touche LLP, a limited liability partnership incorporated under the Limited Liability Partnerships Act 2000. The Company’s consent has
been given to treating the appointment of Deloitte & Touche as extending to Deloitte & Touche LLP with effect from 1 August 2003 under the provisions of section 26(5) of the Companies Act 1989. A resolution to re-appoint Deloitte &
Touche LLP as the Company’s auditor was passed at the Annual General Meeting on 24th June 2003. 
  
 By order of the Board 
  
 /s/    Cheryl Samuels 
 For and behalf of 
 Abbey National Secretariat Services Limited, Secretary 
  
 22 June 2004.

  
 Registered Office: 
 Abbey National House 
 2 Triton Square 
 Regent’s Place 
 London 
 NW1 3AN 
  

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 HOLMES FINANCING (NO. 7) PLC 
  
 INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF 
 HOLMES FINANCING (NO.7) PLC 
  
 We have
audited the financial statements of Holmes Financing (No. 7) plc for the period from the date of incorporation on 23 January 2003 until 31 December 2003 which comprise the profit and loss account, the balance sheet and the related notes 1 to 17.
These financial statements have been prepared under the accounting policies set out therein. 
  
 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, and the Listing Rules of the Financial Services Authority. 

 
 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 period 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 2003 and of its result for the period from 23 January 2003 to 31 December 2003, and have been properly prepared in accordance with the Companies Act
1985. 
  
 Deloitte & Touche LLP 
 Chartered Accountants and Registered Auditors 
 London, England 
  
 25 June 2004. 
  

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 HOLMES FINANCING (NO. 7) PLC 
  
 Profit and Loss Account 
  
 For the period from 23 January 2003 to 31 December 2003 
  

						
	 	  	Note

	  	£’000

	 
	 Interest receivable
	  	2	  	70,400	 
	 Interest payable
	  	3	  	(70,400	)
	 	  	 	  	
	

	 Net interest income
	  	 	  	—  	 
	 	  	 	  	
	

	 OPERATING PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
	  	4	  	—  	 
			
	 Tax on profit on ordinary activities
	  	5	  	—  	 
	 	  	 	  	
	

	 PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION AND RETAINED FOR THE PERIOD
	  	14	  	—  	 
	 	  	 	  	
	


  
 There are no recognised gains or
losses in the period other than the profit for the period and therefore no statement of total recognised gains and losses is required. 
  
 There is no difference between the profit on ordinary activities before taxation and the retained profit for the period stated above and their historical cost
equivalents. 
  
 All transactions are derived from continuing operations within
the United Kingdom. 
  

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 HOLMES FINANCING (NO. 7) PLC 
  
 Balance Sheet 
 As at 31 December 2003

  

						
	 	  	Note

	  	£’000

	 
	 FIXED ASSETS
	  	 	  	 	 
	 Loans to group undertaking
	  	6	  	2,403,550	 
			
	 CURRENT ASSETS
	  	 	  	 	 
	 Debtors
	  	7	  	20,111	 
	 Cash at bank and in hand
	  	8	  	13	 
	 	  	 	  	
	

	 	  	 	  	20,124	 
			
	 CREDITORS - amounts falling due within one year
	  	9	  	(502,394	)
	 	  	 	  	
	

	 NET CURRENT LIABILITIES
	  	 	  	(482,270	)
	 	  	 	  	
	

	 TOTAL ASSETS LESS CURRENT LIABILITIES
	  	 	  	1,921,280	 
			
	 CREDITORS - amounts falling due after more than one year
	  	10	  	(1,921,230	)
	 	  	 	  	
	

	 NET ASSETS
	  	 	  	50	 
	 	  	 	  	
	

	 CAPITAL AND RESERVES
	  	 	  	 	 
			
	 Called-up share capital
	  	13	  	50	 
	 Profit and loss account
	  	 	  	—  	 
	 	  	 	  	
	

	 EQUITY SHAREHOLDERS’ FUNDS
	  	14	  	50	 
	 	  	 	  	
	


  
 The financial statements on pages 4 to
12 were approved by the Board of Directors on 22 June 2004. 
  
 Signed on behalf
of the Board of Directors 
  
 /s/    Martin McDermott

 Director. 
  

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 HOLMES FINANCING (NO. 7) PLC 
  
 Notes to the Accounts for the period from 23 January 2003 to 31 December 2003 
  

	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 recognised on an accruals basis. 

  

	(2)	Loans to group undertakings held as fixed assets are stated at cost less provision for any impairment. 

  

	(3)	Transactions are undertaken in derivative financial instruments, “derivatives”, which include cross currency swaps.Derivatives are entered into for the purpose of
eliminating risk from potential movements in foreign exchange 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. 
  

	(4)	Interest receivable and payable arising in foreign currencies is translated at the average rates of exchange over the accounting period unless it is hedged in which case the
relevant hedge rate is applied. 

  
 Assets and
liabilities denominated in foreign currencies are translated into sterling at the contracted hedge rates. 
  

	(5)	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”. 

  

	(6)	Debt Securities in Issue are stated at net proceeds. 

  

	(7)	Comparative figures have not been prepared as this is the first financial period since incorporation for which accounts have been prepared. 

  

	2.	Interest Receivable 

  
 Interest receivable derives from loans made to group undertakings (see note 6). 
  

	3.	Interest Payable 

  
 Interest is payable on debt securities in issue (see note 11). 
  

	4.	Operating Profit on Ordinary Activities before Taxation 

  
 The Company has no employees other than its directors. 
  
 No emoluments were paid to the Directors by the Company during the current period. 
  
 All administrative expenses, including auditors’ remuneration, in the current period were paid for, and borne, by
Holmes Funding Limited, a fellow subsidiary undertaking. Because of this, no expenses are shown in the Company. 
  

 Page 6 








 HOLMES FINANCING (NO. 7) PLC 
  
 Notes to the Accounts for the period from 23 January to 31 December 2003 (continued) 
  
 5. Tax on Profit on Ordinary Activities 
  

			
	 	  	£’000


	 UK corporation tax at 0%
	  	—  
	 	  	


  
 The company qualifies
for the starting companies’ rate of corporation tax of nil. 
  
 6.
Loans to group undertaking 
  

			
	 	  	£’000


	 Repayable:
	  	 
	 Within one year or less or on demand
	  	482,320
	 More than two years but not more than five years
	  	803,340
	 More than five years
	  	1,117,890
	 	  	

	 	  	2,403,550
	 	  	


  
 The loans are all
denominated in Sterling and are at variable rates of interest, based on LIBOR for three-month sterling deposits. 
  
 7. Debtors 
  

			
	 	  	£’000


	 Called up share capital not paid - due from parent undertaking
	  	37
	 Accrued interest receivable
	  	20,074
	 	  	

	 	  	20,111
	 	  	


  
 8. Cash at Bank and in Hand

  
 The Company holds deposits at banks, which pay interest
based on LIBOR. 
  
 9. Creditors : amounts falling due within one year

  

			
	 	  	£’000


	 Accrued interest payable
	  	20,074
	 Debt securities in issue (note 11)
	  	482,320
	 	  	

	 	  	502,394
	 	  	


  

 Page 7 








 HOLMES FINANCING (NO. 7) PLC 
  
 Notes to the Accounts for the period from 23 January to 31 December 2003 (continued) 
  
 10. Creditors : amounts falling due after more than one year 
  

			
	 	  	£’000


	 Debt securities in issue (note 11)
	  	1,921,230
	 	  	


  
 11. Debt Securities in Issue

  

			
	 	  	£’000


	 Series 1 Class A Floating Rates Notes 2004
	  	482,320
	 Series 1 Class B Floating Rates Notes 2040
	  	14,470
	 Series 1 Class M Floating Rates Notes 2040
	  	24,600
	 Series 2 Class A Floating Rates Notes 2008
	  	803,340
	 Series 2 Class B Floating Rates Notes 2040
	  	24,100
	 Series 2 Class M Floating Rates Notes 2040
	  	40,970
	 Series 3 Class A Floating Rates Notes 2040
	  	321,000
	 Series 3 Class B Floating Rates Notes 2040
	  	15,000
	 Series 3 Class M Floating Rates Notes 2040
	  	20,000
	 Series 4 Class A1 Floating Rates Notes 2040
	  	341,500
	 Series 4 Class A2 Floating Rates Notes 2040
	  	250,000
	 Series 4 Class B Floating Rates Notes 2040
	  	28,000
	 Series 4 Class M Floating Rates Notes 2040
	  	38,250
	 	  	

	 	  	2,403,550
	 	  	


  
 The notes are
denominated in the following currencies: 
  

			
	 UK Sterling
	  	285,000
	 Euros
	  	407,750
	 US Dollars
	  	1,710,800
	 	  	

	 	  	2,403,550
	 	  	


  
 Foreign currency notes
are converted at the rate of exchange in the applicable hedging currency swap. 
  
 All the Class A Notes (irrespective of series) will rank pari passu and rateably without any preference or priority except, until enforcement of the security for the Notes, as to payments of principal in
respect of which the Class A1 Notes will rank in priority to the Class A2 Notes and the Class A3 Notes, and the Class A2 Notes will rank in priority to the Class A3 Notes. 
  
 Payments in respect of the Class B and M Notes will only be made if, and to the extent that, there are sufficient funds
after paying or providing for certain liabilities, including liabilities in respect of the Class A Notes. The Class B Notes rank after the Class A Notes in point of security but before the Class M Notes. 
  

 Page 8 








 HOLMES FINANCING (NO. 7) PLC 
  
 Notes to the Accounts for the period from 23 January to 31 December 2003 (continued) 
  

	11.	Debt Securities in Issue (continued) 

  
 Interest is payable on the notes at variable rates based on the three-month Sterling LIBOR, the three-month US Dollar LIBOR and three-month EURIBOR.

  
 The Company’s obligations to note holders, and to other
secured creditors, are secured under a deed of charge which grants security over all of its assets in favour of the security trustee. The principal assets of the Company are loans made to Holmes Funding Limited, a group company, whose obligations in
respect of these loans, are secured under a deed of charge which grants security over all of its assets, primarily comprising shares in a portfolio of residential mortgage loans, in favour of the security trustee. 
  
 The security trustee holds this security for the benefit of all secured
creditors of Holmes Funding Limited, including the Company. 
  
 The estimated fair values of the notes, based on the mid-market price at 31 December, are as follows: 
  

			
	 	  	£’000


	 Series 1 Class A Floating Rates Notes 2004
	  	482,320
	 Series 1 Class B Floating Rates Notes 2040
	  	14,367
	 Series 1 Class M Floating Rates Notes 2040
	  	24,418
	 Series 2 Class A Floating Rates Notes 2008
	  	803,501
	 Series 2 Class B Floating Rates Notes 2040
	  	23,922
	 Series 2 Class M Floating Rates Notes 2040
	  	40,601
	 Series 3 Class A Floating Rates Notes 2040
	  	321,000
	 Series 3 Class B Floating Rates Notes 2040
	  	15,209
	 Series 3 Class M Floating Rates Notes 2040
	  	20,030
	 Series 4 Class A1 Floating Rates Notes 2040
	  	342,490
	 Series 4 Class A2 Floating Rates Notes 2040
	  	250,683
	 Series 4 Class B Floating Rates Notes 2040
	  	28,092
	 Series 4 Class M Floating Rates Notes 2040
	  	38,307
	 	  	

	 	  	2,404,940
	 	  	


  

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 HOLMES FINANCING (NO. 7) PLC 
  
 Notes to the Accounts for the period from 23 January to 31 December 2003 (continued) 
  

	12.	Financial Instruments 

  
 The Company’s policies as regards derivatives and financial instruments are set out in the Report of the Directors on page 1 and the accounting
policies on page 6. The Company does not trade in financial instruments. The following disclosures are made in respect of financial instruments. Short-term debtors and creditors are included in all of the following disclosures: 
  
 12 (a) Maturity profile of financial liabilities 
  

							
	 	  	 Debt
 Securities
 in issue
 £’000

	  	 Other
 liabilities
£’000

	  	Total
Liabilities
£’000


	 Within one year or less or on demand
	  	482,320	  	20,074	  	502,394
	 More than one year but not more than two years
	  	—  	  	 	  	—  
	 More than two years but not more than five years
	  	803,340	  	—  	  	803,340
	 More than five years
	  	1,117,890	  	—  	  	1,117,890
	 	  	
	  	
	  	

	 	  	2,403,550	  	20,074	  	2,423,624
	 	  	
	  	
	  	


  
 There are no material
undrawn committed borrowing facilities. 
  
 12 (b) Interest rate profile of
financial assets and liabilities 
  
 After taking into
account the cross currency swaps entered into by the Company, the interest rate profile of the Company’s financial assets and liabilities was: 
  

									
	 	  	 Total
 £’000

	  	 Floating
rate
 £’000

	  	Non-interest
bearing
£’000

	  	Weighted
average years
until
maturity*
Years


	 Assets:
	  	 	  	 	  	 	  	 
	 Sterling
	  	2,423,674	  	2,403,563	  	20,111	  	0.1
	 	  	
	  	
	  	
	  	

	 Liabilities:
	  	 	  	 	  	 	  	 
	 Sterling
	  	2,423,624	  	2,403,550	  	20,074	  	0.1
	 	  	
	  	
	  	
	  	




	*	for non-interest bearing assets/liabilities only. 

  
 Benchmark rates for determining interest payments for the floating rate assets and liabilities are given in the note to the accounts relevant to the
financial instrument type. 
  
 12 (c) Fair values of financial assets and
liabilities 
  
 The fair value of debt securities in issue is
disclosed in note 11 to the accounts. 
  
 Fair value disclosures
are not provided for loans to group undertakings, as there is no liquid and active market for such instruments. 
  
 The estimated fair values of other assets and liabilities on the balance sheet are not materially different from their carrying amounts. 
  
 The estimated fair value of the cross currency swaps entered into by the
Company as at 31 December 2003 was a liability of £222,162,630. 
  
 The cross currency swaps mature between April 2004 and July 2040. 
  
 The fair value of the instruments will largely be recognised after the end of the next financial year. 
  

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 HOLMES FINANCING (NO. 7) PLC 
  
 Notes to the Accounts for the period from 23 January to 31 December 2003 (continued) 
  
 12 (d) Currency profile 
  
 Taking into account the effect of derivative instruments, the Company did
not have a material financial exposure to foreign exchange gains or losses on monetary assets and monetary liabilities denominated in foreign currencies at 31 December 2003. 
  
 13. Share Capital 
  

			
	 	  	£’000


	 Authorised:
	  	 
	 100,000 Ordinary shares of £1 each
	  	100
	 	  	

	 Allotted and called up:
	  	 
	 50,000 Ordinary shares of £1 each
	  	50
	 	  	


  
 On 5 February 2003,
49,998 ordinary shares were partly paid to 25 pence and 2 subscriber shares were fully paid up. The balance of £37,498 is payable by the shareholders upon the company’s demand. 
  
 14. Reconciliation of Movements in Shareholders’ Funds 
  

			
	 	  	£’000


	 Ordinary share capital
	  	50
	 Retained result for the period
	  	—  
	 	  	

	 Closing shareholders’ funds
	  	50
	 	  	


  
 15. Capital Commitments and
Contingent Liabilities 
  
 There were no outstanding capital
commitments or contingent liabilities at 31 December 2003. 
  
 16. 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. 
  
 The group remunerates SPV Management Limited for administration services provided to Holmes Financing (No. 7) plc. The total
amount paid relating to the Company in the period ended 31 December 2003, by the group, was £7,000. 
  

 Page 11 








 HOLMES FINANCING (NO. 7) PLC 
  
 Notes to the Accounts for the period from 23 January to 31 December 2003 (continued) 
  

	17.	Parent and Controlling Party 

  
 The immediate parent of the Company is Holmes Holdings Limited, a company incorporated in Great Britain and registered in England and Wales, which
prepares the only accounts into which the Company is consolidated. SPV Management Limited, a company incorporated in Great Britain and 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. 
  

 Page 12