Highlights of the Year

Transcription

1 Report and Accounts 2003

2 Contents 1 Highlights of the Year 2 Chairman s Statement 4 Chief Executive s Review 14 Financial Review 18 Directors Biographical Details 20 Directors Report 22 Corporate and Social Responsibility 24 Corporate Governance 26 Remuneration Report 32 Directors and Advisers 33 Statement of Directors Responsibilities 34 Independent Auditors Report 36 Consolidated Profit and Loss Account 37 Consolidated Balance Sheet 38 Company Balance Sheet 39 Supplementary Statements 40 Consolidated Cash Flow Statement 41 Notes to the Cash Flow Statement 42 Notes to the Accounts 62 Five Year Summary 63 Shareholder Analysis 64 Financial Calendar

3 Highlights of the Year Increase Turnover 265.8m 177.1m 50% Profit before tax excluding goodwill and exceptional item* 44.5m 36.4m 22% Profit before tax 38.6m 34.5m 12% Earnings per share* 45.9p 39.6p 16% Dividend per share 18.0p 16.1p 12% 54% increase in Support Services operating profit which now represents two-thirds of the Group. Home Service shows outstanding growth with a 37% increase in operating profit and a 30% increase in policies to 2.4 million. Commercial outsourcing continues to benefit from its investment in its longer term customer relationships. The three significant acquisitions in the year, Regency, Highway and Middleton contributed 6.2m to operating profits. South Staffordshire Water continues to provide a steady profit stream from a reduced equity base. 12m cash generated after capital expenditure, tax and dividends, with 85m bond issue financing 84m spent on acquisitions. Profit Before Tax* ( m) * Excluding goodwill and exceptional item as shown on page 36 Excluding goodwill as shown on page % compound growth in profit before tax* over past five years Highlights of the Year 1

4 Chairman s Statement The Group had a particularly successful year achieving 26% organic growth in operating profits from its Support Services businesses combined with a contribution of 6.2m from the acquisitions in the year. During the year we saw a substantial increase in the liquidity of the Group s shares following the successful placing of 40% of our stock, owned for many years by Vivendi and Axa, with a range of institutional investors. Group Results In the year ended 31 March 2003 the Group s turnover (including share of joint ventures) increased by 50% to 265.8m (2002: 177.1m). Profit before tax, goodwill and exceptional item* has increased by 22% to 44.5m (2002: 36.4m). This comprises a 54% increase in operating profit from Support Services and a 2% increase in Regulated Water Supply profits. Earnings per share (excluding goodwill and exceptional item)* for the year have increased by 15.9% to 45.9p (2002: 39.6p). The Board is proposing a final dividend per share of 12.4p making a total for the year of 18.0p (2002: 16.1p), an increase of 11.8%. Following the acquisitions, which increased debt by 84m, the balance sheet remains strong with net debt at 31 March 2003 of 103.1m (2002: 28.6m) and interest cover* of 8.5 times. HomeServe The HomeServe businesses have more than doubled turnover to 121m (2002: 60m), with operating profits increasing by 70% to 24.0m (2002: 14.1m). This represents 37% organic profit growth in the existing HomeServe businesses together with a profit contribution of 4.7m from Regency and Highway, which were acquired during the year. Home Service has increased the number of policies in force by 30% to 2.4 million, which represents the largest annual increase since the business started. This reflects a combination of growth in the core plumbing product, new products introduced during the year, together with greater use of outbound telesales for customer acquisition and renewal rates being maintained at 86%. Regency, which was acquired in May 2002 and provides underwritten furniture warranties and repairs to retailers and manufacturers, has achieved strong sales growth in the year. It has significantly expanded its employed repair network and successfully implemented a new warranty programme for Harveys, one of its major retail customers. * Excluding goodwill and exceptional item as shown on page 36 Excluding goodwill as shown on page 44 Lindsay Bury Chairman 2 Chairman s Statement

5 Highway, which was acquired in July 2002 and provides emergency repair services to insurers, has achieved a reduced profit compared to last year. Highway had increased its cost base and operational capacity in anticipation of continuing to win new customers. New customers have been added but not as quickly as anticipated. This has been combined with a reduction in average job values. This has reduced profits in the short term and has led to us putting measures in place to create a more flexible cost base. Commercial Outsourcing The Commercial Outsourcing businesses have grown turnover by 34% to 104m. Operating profit has increased by 25% to 10.0m, which includes a contribution of 1.5m from the acquisition of Middleton Doorman. OnSite has achieved significant growth in its long term business with Thames Water and London Underground. Additionally, Middleton Doorman has performed well since acquisition and has broadened the division s customer base and service offering. The Echo joint venture with South West Water is now well established and our Rapid software has been implemented. In addition, our mailing services business has achieved improved margins during the year. Regulated Water Supply Prospects The Group s strategy for growth remains to develop as a Support Services business through both its HomeServe and Commercial Outsourcing activities. It will continue to benefit from the increasing demand for a broad range of assistance services into the home and the trend to outsourcing in both industry and the utilities market. Significant opportunities for growth exist in all areas of our Support Services businesses. Home Service will continue to develop new products and improve market penetration. Regency s priorities will include growing its repair business and developing new retail warranty products. Within Highway our focus will be on improving operational efficiency and developing a plumbing service for its insurance customer base. Commercial Outsourcing is well positioned to build on its established long term customer relationships. The Regulated Water Supply business will continue to provide high levels of service at low charges. Overall the Group should benefit from continued strong demand for its Support Services activities, together with stable returns from Regulated Water Supply. Lindsay Bury Chairman 3 June 2003 Operating profits from Regulated Water Supply have increased by 2% to 16.5m (2002: 16.2m) on turnover of 59m. This compares to an RPI of 0.9%, which was used as the basis for increasing charges for 2002/03. The business continues to achieve efficiency gains and deliver the highest levels of service. The business remains on course to meet all of its regulatory targets, including demanding efficiency savings, which apply until the next price review in The Water Company issued an unsecured 23 year index-linked bond of 85m which increased debt to approximately 65% of the Regulated Asset Value, thereby reducing its cost of capital. Chairman s Statement 3

6 Chief Executive s Review HomeServe plc, the new name for our Home Service businesses, is one of the UK s largest providers of home warranties and assistance services to major business partners, with a total of over 9.5 million policies. Our partners include the majority of the UK water and power utilities, leading furniture retailers, appliance manufacturers and household insurers. HomeServe has combined significant organic profit growth with two major acquisitions, Regency and Highway. In addition, we made a smaller acquisition in March 2003, Servowarm, enhancing the delivery of our gas boiler warranty and emergency repair business. In total this year we have invested 70m in cash with estimated deferred consideration of 26m based on future profitability. Home Service is the market leader in the provision of plumbing and drainage and electrical wiring cover to the domestic market. Our customers include the majority of UK water, gas and electricity companies. Home Service had a record year for policy growth, with the number of policies increasing by 30% to 2.4 million; 1.73 million plumbing policies, 0.55 million electrical and 0.12 million other policies including domestic heating. This is the largest increase in the number of policies since the business started and policy growth rates in excess of 25% have now been maintained for the ninth successive year. Further growth will come from increasing our market penetration with the existing plumbing product together with cross selling other domestic products. Home Service has increased its outbound telesales capability to over 140 full time staff. This has been a significant contributor to our record policy growth at acquisition costs lower than those for direct mail marketing. Home Service launched a new product in the year Water Supply Pipe Cover, and sold 157,000 policies, highlighting the success of cross selling to existing members. Home Service is successfully developing its manufacturer warranty operation, increasing warranty card return rates and take up of extended warranties. In addition to Ideal Boilers, Home Service is now also working for Mira, one of the largest UK shower manufacturers. Home Hotline continues to operate claims handling and job deployment on behalf of Direct Line for its Home Response 24 product and this year was appointed to run the helpline for 1.6 million Direct Line household insurance policyholders. Growth in our joint venture business with Generale des Eaux, based in France, is encouraging, with over 60,000 plumbing policies. We have achieved good take up rates, particularly for the supply pipe product, at acquisition costs which are now comparable with the UK. 4 Chief Executive s Review

7 Far Left: Brian Whitty - Chief Executive, South Staffordshire Group Plc Left: Home Service head office in Walsall Above: Highway plumber unblocking a drain for a Home Service customer <Section Title> 5

8 Above: Regency, deploying work to their national employed cleaning network Right: Servowarm engineer repairing a policyholder s boiler Far right: Highway, the UK s leading provider of emergency repair services to household insurers

9 Regency is the market leader in the provision of underwritten furniture warranty and repair services on behalf of retailers and manufacturers, and now has over 7 million policies in issue. Since acquisition in May 2002, Regency has performed well, achieving an operating profit of 4.0m. In January 2003, Harveys announced that they were discontinuing their structural warranty product, which Regency have now replaced with an alternative extended warranty product. Regency has also increased its base of directly employed upholstery repair and cleaning operatives to over 100 enabling it to deliver the high quality service that warranty buyers expect. In July 2002, we completed the acquisition of Highway, the UK s leading provider of emergency glass, frame, lock and garage door repair and replacement services to household insurers. The acquisition of Highway provides HomeServe with a market leading position with household insurers and widens the range of domestic emergency services we provide. Highway achieved a profit of 0.7m in the nine months to 31 March 2003, compared to 2.4m over the equivalent period last year. The reduced profit reflects an increase in costs and a reduction in average job values. The cost base has increased by 0.7m which increased our operational capacity in anticipation of new insurance customers. Whilst slow to develop, we have now won important new customers, including Prudential, McDonalds and Marks and Spencer. Prudential is now one of Highway s ten largest customers. There has also been a 5% fall in average job values, with an impact of 0.6m. Highway has seen a reduction in higher value storm damage related work following the milder weather this year compared to normal. In order to ensure that we can better meet these peaks and troughs in demand, we are reorganising elements of the business and taking steps to reduce the operating cost base. We are reorganising the national branch network to reduce cost and improve efficiency. In addition, we have strengthened the existing management team, appointing a Chief Executive, with a proven track record in this industry, who will join in June Highway has continued to develop its employed plumbing and drainage network and a number of insurance customers are currently trialling this service. If successful, this service will represent a significant new market for Highway. In March 2003, we acquired Servowarm, which provides home assistance policies for domestic boiler breakdowns, supported by a service and repair operation. Servowarm complements Home Service s existing gas heating policy business and provides a high quality network of 115 employed domestic gas engineers. Servowarm s engineers are trained to repair a wide range of manufacturers boilers and will work alongside our existing subcontract network. We are confident that our HomeServe businesses are well positioned to achieve further significant growth. We will continue to add new customers and affinity partners and develop new products and services. Our UK markets still have significant potential and we will continue to develop our international presence in a low risk and cost effective manner. Chief Executive s Review 7

10 OnSite provides a comprehensive range of infrastructure maintenance services to major utilities, public authorities and a wide commercial and industrial client base, through long term partnerships and contractual relationships with its customers. OnSite has again seen a doubling in business with Thames Water from 3.6m to 8m, for whom we provide a range of planned and reactive drainage services on the sewerage networks that serve London and the home counties. This growth follows a substantial investment last year by OnSite in a dedicated call centre, operating equipment and employee training to support the Thames contract. The division has also seen a significant increase in the provision of planned and reactive drainage services for the London Underground rail network with turnover increasing from 4.6m to 6.4m. Following the restructuring of the London Underground, we are now working closely with both Tubelines and Metronet, the new PPP consortia. We added specialist water treatment to the division s offering following the transfer of the water testing and dosing operations from South Staffordshire Water into OnSite. This business has performed well during the year, winning work from other Water Companies, the Coal Authority and the Environment Agency. Middleton is contracted to provide specialist maintenance services to the London Underground rail network, thereby increasing the range of services we provide to this client. Middleton also has an established and strong relationship with the City of Birmingham, where we provide significant M&E services for their public buildings. Since acquisition, Middleton has successfully won a number of important new clients, including Argos, Nationwide Building Society and The Big Food Group, whilst continuing to provide a comprehensive service to Tesco Stores. We continue to see growth opportunities for OnSite. We have strengthened our senior management team and we are confident that we have the skills and resources which will enable us to continue to build upon our success in the utility and commercial outsourcing market. In order to broaden our already established industrial and commercial client base and to increase our service offering, we acquired Middleton Doorman in August The Company provides specialist maintenance, mechanical and electrical services and automatic door and access maintenance to commercial and public sector clients. 8 Chief Executive s Review

11 Far left: OnSite provide specialist services including CCTV surveys of drains Left and above: Middleton provide specialist maintenance services to commercial and public sector clients <Section Title> 9

12 The Customer Solutions division provides a range of services to companies to assist them in managing their customer contact. Echo Echo Managed Services specialises in the provision of customer management services such as billing, debt collection and contact management. Echo was established in 2001 to provide services to its initial customers, South Staffordshire Water and Severn Trent. Echo South West, our joint venture with South West Water to provide customer contact and billing, has performed well during the year. During this first full year of trading the joint venture has delivered efficiency savings and maintained high levels of customer service. Last year we added Green Flag and Britannic Assurance as customers and we have continued to develop these relationships. New clients won during the year include Spring Recruitment and East Devon District Council in addition to a number of short term contracts. Echo has focused on developing niche offerings, including recruitment screening, customer satisfaction surveys and outbound telemarketing, where we can add specialist skills and value. We have consistently demonstrated to our customers that we can achieve high service levels as well as cost reductions for these outsourced services. Rapid During the year South West Water completed the implementation of our Rapid software product. The software was used successfully in the annual billing of South West Water s unmeasured customer base during the year. Our support to Bristol and Wessex Billing Services continued with the completion of the second phase of software implementation, now extended to include the measured customer base. The system is now used by the joint billing venture to bill the full customer base of Bristol Water and Wessex Water. Rapid software is now used to bill over 3 million UK utility customers. We will continue to develop the product during the coming year to meet the requirements of our existing clients. The sales and implementation cycle for Rapid s products is typically over 12 months and we do not expect any significant licence fee revenue in the coming year. Mail Solutions Our mailing services business has improved its margins despite operating in a highly competitive market. We have achieved this through our continued focus on efficiency and quality. We provide services to high profile customers including HSBC, Barclaycard, Lloyds Bank and Npower and we have supplied tickets for major sporting events such as the Champions League final and the FA Cup final. This market will continue to be highly competitive. However, we are confident that we are well positioned to continue to improve our overall trading performance. 10 Chief Executive s Review

13 Far left: Mail Solutions specialises in an efficient and quality service Left: Echo, providing customer management services from its Walsall call centre Above: Rapid software is now used to bill over 3 million UK utility customers

14 Above: Using remote meter reading technology to improve service standards and achieve efficiency savings Right and far right: Detecting leaks to ensure demanding leakage targets are met

15 South Staffordshire Water continues to be at the forefront of the Water Industry, delivering exceptional value for money through a combination of low bills and high levels of service. The last few years have seen significant change, including outsourcing of customer services to Echo and laboratory analysis to Severn Trent, together with the consolidation of our divisional offices. Each of these initiatives has been successful, both in improving service standards to customers and achieving cost reductions. We are continuing to make excellent progress towards Ofwat s efficiency targets to reduce operating costs in the year and are on track to meet Ofwat s target reduction in operating expenditure for the period 2000 to Our domestic customers continue to pay the second lowest charge in England and Wales with annual bills of 86, which when combined with Severn Trent s sewerage charge, which we collect on their behalf through our contract with Echo, means that our domestic customers benefit from the lowest overall charge in England and Wales. In addition, our large industrial clients enjoy the lowest volumetric rates in the country. We achieved water quality compliance levels of 99.9%, amongst the very highest in the Industry. Our demanding leakage targets were also achieved. Ofwat s latest annual review of customer service again reported that all of the company s service levels were in the highest category and the Water Company was ranked second highest in overall performance assessment for the industry for 2001/02. Levels of service for 2002/03 have seen further improvement. The Water Company raised 85m through the issue of an unsecured index linked bond. This has enabled the business to improve its capital structure by funding the repurchase of Water Company shares from the Group. Gearing within the Water Company has now increased to 65% of Regulated Asset Value. The Company has seen another substantial year of capital investment, primarily on the extensive programme of water treatment upgrades agreed with the Drinking Water Inspectorate together with increasing capacity at its second largest treatment works will be an important year as we move towards the setting of prices for the period 2005 to We will submit the Company s draft Business Plan to the Regulator in August 2003 in anticipation of a final determination in November Brian Whitty Group Chief Executive 3 June 2003 Chief Executive s Review 13

16 Financial Review Turnover for the year increased by 50% to 265.8m. Profit before tax* was 44.5m, an increase of 22%. Group Results Turnover for the year (including share of joint ventures) increased by 50% to 265.8m (2002: 177.1m), including organic growth of 14%. This reflects strong growth in HomeServe with turnover doubling to 121.3m (2002: 60.3m), including 44.6m from the acquisitions in the year. The existing HomeServe business achieved organic growth in turnover of 27% to 76.7m (2002: 60.3m), with a 30% increase in policies to 2.4m (2002: 1.85m). Commercial Outsourcing increased turnover by 26.2m to 104.0m, a 34% increase, including 19.2m from Middleton Doorman. OnSite achieved 13% organic growth, benefitting from increased activity with Thames Water and London Underground, with an increase of 4% in Customer Solutions. Regulated Water Supply turnover was marginally lower at 58.8m (2002: 59.1m) reflecting the increase in RPI of 0.9% which was used as the basis for increasing charges for the year and the Company s K factor of 1%. Group operating profit before goodwill increased by 32% to 50.5m (2002: 38.3m), including 16% organic growth. HomeServe profits increased 70% to 24.0m (2002: 14.1m), with a 4.0m contribution from Regency, 0.7m from Highway and 37% organic growth from Home Service, which increased its margin to 25% (2002: 23%). The growth in Home Service is after increasing the investment in overseas operations to 0.7m (2002: 0.2m). Profits from Commercial Outsourcing increased by 25% to 10.0m (2002: 8.0m), including 1.5m from Middleton Doorman. Organic profit growth of 6% reflects the continued investment in long term relationships within OnSite and Echo, with margins being maintained at 10%. Regulated Water Supply achieved a 2% increase in operating profit despite lower turnover and a higher depreciation charge, with the continuing focus on cost control resulting in further efficiency savings in the year. Profit before tax excluding goodwill and exceptional costs* was 44.5m, an increase of 22% (2002: 36.4m). This was after an increase in the net interest charge to 6.0m (2002: 1.9m), reflecting the acquisitions in the year. The increased goodwill charge of 6.0m (2002: 1.3m) is due to the acquisitions. There were no exceptional costs in the year (2002: 0.6m loss on sale of subsidiary). Taxation The effective rate of tax for the year, based on profits excluding goodwill and exceptional costs, was 28.7% compared to 27.0% for the previous year. The increased rate was largely attributable to the impact of the acquisitions in the year with the Group s future tax rate likely to be closer to the standard rate of 30%. Andrew Belk - Group Finance Director 14 Financial Review

17 Earnings per Share Earnings per share, excluding goodwill and exceptional item*, was 45.9p, 15.9% ahead of last year (2002: 39.6p). The increase in earnings is lower than the growth in profit before tax due to the higher minority interest charge reflecting the growth in HomeServe and the increase in the tax rate. Compound annual earnings growth, excluding goodwill and exceptional item, over the last five years is 12.8% with annual operating profit growth of 35% in Support Services and 2.5% in Regulated Water Supply over the same period. Divisional Contribution to Operating Profit (%) Dividends The Board is proposing a full year dividend of 18.0p (2002: 16.1p), an increase of 11.8%, with dividend cover* of 2.5 times. The Regulated Water business has declared a reduced dividend for the year of 4.8m (2002: 6.1m) as a result of an increased interest charge following the bond issue. 47% HomeServe ( 24.0m) 20% Commercial Outsourcing ( 10.0m) 33% Regulated Water ( 16.5m) Acquisitions The Group has completed a number of significant acquisitions in the year, investing 84.1m in cash and assumed debt, together with estimated deferred consideration of 26.4m based on future profitability. Divisional Contribution to Turnover (excluding inter-division) (%) 46% HomeServe ( 121.3m) 32% Commercial Outsourcing ( 85.7m) 22% Regulated Water ( 58.8m) * Excluding goodwill and exceptional item as shown on page 36 Excluding goodwill as shown on page 44 Financial Review 15

18 HomeServe acquired Regency Financial Holdings Plc on 14 May 2002 for a consideration of 45.3m (including costs) of which 6.7m is deferred. Highway Emergency Services Limited was acquired on 5 July 2002 for a consideration of 48.5m (including costs) including 19.5m payable on deferred terms dependent on future profitability, of which 13.5m is payable after 31 March HomeServe also purchased Servotomic Limited for 2.4m on 3 March 2003 and the 40% minority holding in Home Hotline Limited for 1.9m on 1 April On 1 August 2002, OnSite acquired Middleton Maintenance Services Limited for a consideration of 15.8m (including costs). Goodwill on these acquisitions totalled 112m and is being amortised over its estimated useful life of 20 years. Financing During the year South Staffordshire Water PLC successfully issued an unsecured 23 year indexlinked bond of 85m at a coupon of 3.75% based upon a rating by Standard and Poor s of A-. 65m of the funds raised were used to repurchase shares in the Water Company from the Group, thereby increasing net debt in the business to 96m, being 65% of the Regulated Asset Value. The level of debt is expected to increase to approximately 70% of RAV next year, before declining thereafter, reflecting the timing of capital expenditure. The Support Services businesses continue to be cash generative with net debt at 31 March 2003 of 7m and interest cover* of over 25 times. The HomeServe acquisitions in the year were financed by loans from the Group on commercial terms, resulting in net debt in HomeServe (including these Group loans) of 51m. The Group now has in place total bank facilities and bond financing of 147m. A significant proportion of this is long term to reflect the nature of the assets in the Water business and to support the ongoing development of the Group. The bond issue has reduced the Group s exposure to potential increases in short term interest rates with inflation risk on the cost of the bond being effectively hedged against regulated water revenues, which are also linked to RPI. Capital expenditure Capital investment in the year, net of capital contributions, totalled 27.7m (2002: 33.2m). This included further significant investment in the regulated water business of 21.3m (2002: 22.4m), together with 3.0m in HomeServe on IT, telephony systems and equipment to support future growth and 3.4m in Commercial Outsourcing, principally to support growth in OnSite. Capital expenditure in the Water business is expected to increase in 2003/4 before reducing significantly in 2004/5. Cash Flow and Borrowings The Group generated cash of 66.6m in the year from operating activities. After capital expenditure of 26.0m (net of capital contributions and sale proceeds) and interest, tax and dividends totalling 29.5m, this resulted in a net cash inflow of 12.2m, compared to a cash outflow of 4.4m in the previous year. The cash outflow in respect of acquisitions was 78.9m and with 80.0m raised from financing resulted in an increase in net debt in the year of 74.5m to 103.1m at 31 March 2003 (2002: 28.6m). Working capital in the year increased by 1.0m reflecting strong working capital management. 16 Financial Review

19 Pensions Pension costs relating to the Group s defined benefit pension scheme continue to be accounted for in accordance with SSAP 24. The actuarial valuation of the scheme at 1 April 2002 showed a surplus of 4.9m. The additional disclosures presented under the second year of transitional arrangements for FRS 17, Retirement Benefits, show a pension deficit, net of deferred tax, of 7.8m (2002: 10.8m surplus). This arises from the recent stock market falls and its calculation is not considered reflective of the long term funding of the scheme. Dividend per Share (p) There have been no other new accounting standards which have had an impact on the financial statements for the year Andrew Belk Group Finance Director 3 June 2003 Earnings per Share (p) (excluding goodwill and exceptional item) Financial Review 17

20 Directors Biographical Details Back Row (left to right); Robert Harley, John Harris, David Sankey, Andrew Belk, Richard Harpin, Adrian Page, David Penna, Panton Corbett. Front Row (left to right); Brian Whitty, Lindsay Bury. 18 Directors Biographical Details

21 Lindsay Claude Neils Bury, BA * Age 64. Appointed Chairman in 1992 having been a Director since A Director of Sage Group PLC, Henderson Electric and General Investment Company PLC and Servicepower Technologies PLC. He is also Chairman of Fauna & Flora International. Brian Howard Whitty, FCA Age 49. Appointed Group Chief Executive and Chairman of the principal operating subsidiaries in July 1998 following 3 years as Group Finance Director. Previously Finance Director of ACT Group PLC. Andrew John Belk, BSc (Hons), ACA Age 39. Appointed Group Finance Director in 2002 following a period as Commercial Director of HomeServe. Previously Chief Executive of a small UK IT and telecommunications business and a Corporate Finance Director with Andersen. Richard Panton Corbett * Age 65. Appointed to the Board in He is a Director of Haynes Publishing Group PLC, Tex Holdings PLC and Sterling Publishing Group PLC. He was Chairman of the Alternative Investment market until April Robert Ian Harley Age 49. Appointed to the Board in May 2001, also Managing Director of OnSite. Formerly co-owner of Insight Surveys which was acquired by the Group in John Richard Harris, MBA, LLB, ACIS * Age 62. Appointed as a Non-Executive Director in July 1998 following 8 years as Managing Director. Also a Director of Brintons Ltd and Wallis Group Ltd. David Malcolm Penna, BSc (Hons), CEng, FCMA, MICE Age 54. Appointed to the Board in October 1996, also Managing Director of South Staffordshire Water. Has 33 years experience in the water industry including 7 years previously with South Staffordshire Water. David Baldwin Sankey, MA * Age 59. Appointed to the Board in 1982, following 10 years involvement with the G.K.N. Group both in the UK and overseas. A Director of Eliza Tinsley PLC and James Beattie PLC. * Non-Executive Member of Audit Committee (Chairman: R P Corbett) Member of Remuneration Committee (Chairman: L C N Bury) Member of Nomination Committee (Chairman: L C N Bury) Company Secretary: Adrian Peter Page, BSc (Hons), ACA Richard David Harpin, BA (Hons), CDipAF Age 38. Appointed to the Board in May Chief Executive of HomeServe having founded the business in conjunction with South Staffordshire Group in Directors Biographical Details 19

22 Directors Report The Directors have pleasure in presenting their Report and Accounts for the year ended 31 March Principal Activities and Review of Business The Group is engaged in business support services and water supply to domestic, industrial and commercial customers. Details of Group activities are set out in the Chairman s Statement and Chief Executive s Review on pages 2 to 13. Financial Results and Dividends The Group s results are shown in the consolidated profit and loss account on page 36. The Directors are recommending the payment on 1 July 2003 of a final dividend of 12.4 pence per ordinary share to shareholders on the register at the close of business on 13 June 2003, making a total dividend for the year of 18.0 pence per ordinary share (2002: 16.1 pence). Fixed Assets Capital expenditure on tangible fixed assets, including infrastructure renewals, amounted to 32.5m during the year. Directors Details of the Directors who held office at 3 June 2003 are given on page 19. Mr Andrew Belk was appointed to the Board on 2 September Mr Simon Kenyon-Slaney retired on 28 June Mr Adrian Page resigned as a Director on 2 September All of the other Directors served throughout the financial year. Mr Belk, having been appointed since the last Annual General Meeting, will retire from the Board in accordance with the Articles of Association and, being eligible, will offer himself for election. Mr Penna, Mr Corbett and Mr Sankey retire by rotation and, being eligible, offer themselves for re-election. Both Mr Belk and Mr Penna have one year rolling service contracts. Mr Corbett and Mr Sankey were both appointed for a three year renewable term in June The beneficial interests of the Directors in the shares of the Company and the options held as at 31 March 2003 are set out in the Remuneration Report. None of the Directors serving at the year end had a beneficial interest in the share capital of any subsidiary company save for Mr Harpin who held 21,300 ordinary shares of 1 each in HomeServe plc which represents 19 1 /2% of the share capital (2002: 21,300 shares in Home Service (GB) Ltd which were exchanged for shares in HomeServe plc during the year). Annual General Meeting Allotment of Shares and Pre-emption Rights There will be proposed at the Annual General Meeting a renewal of the Directors general authority to allot shares up to a maximum nominal amount ( the Section 80 Amount ) and the Directors authority to issue shares for cash without applying the statutory pre-emption rights up to a maximum nominal amount ( the Section 89 Amount ). Authority to Purchase Own Shares Approval is being sought for the Company to renew the authority contained in the Articles of Association to purchase its own ordinary shares. The Board has no firm intention that the Company should make purchases of its own shares if the proposed authority becomes effective, but would like to be able to act quickly if circumstances arise in which such a purchase would be desirable. Purchases will only be made on the London Stock Exchange and only in circumstances where the Board believes that they are in the best interests of the shareholders generally. Further details on the resolutions to be proposed at the Annual General Meeting can be found in the Shareholder Circular. Donations Charitable donations of 88,799 (2002: 95,176) were made during the year, including amounts contributed to the South Staffordshire Water Charitable Trust. There were no political contributions in either year. 20

23 Auditors On 31 July 2002 Arthur Andersen resigned as auditors and Deloitte & Touche were appointed to fill the resulting vacancy. A resolution proposing the reappointment of Deloitte & Touche as auditors will be put to the Annual General Meeting. Payment of Creditors The Group s policy is to pay suppliers in line with the terms of payment agreed with each of them when contracting for their products or services. Trade creditors at 31 March 2003 represent 88 days of purchases during the year (2002: 84 days) for the Group and nil for the Company. This calculation is distorted by the higher than average level of capital and certain other expenditure incurred during February and March 2003 and reflected in year end trade creditors. Substantial Shareholdings As far as the Directors are aware, no person had a beneficial interest in 3% or more of the voting share capital at 9 May 2003, except for the following: Ordinary Percentage Shares Holding AMVESCAP PLC 7,584, % HBOS PLC 6,379, % Barclays PLC 2,925, % Wesleyan Assurance Society 2,846, % Invesco Perpetual High Income Fund* 2,674, % Legal & General Group Plc 2,012, % *Included in AMVESCAP PLC holding By Order of the Board A P Page Company Secretary 3 June

24 Corporate and Social Responsibility It is recognised that the Group's future success will depend in part on taking into account the interests of all of the stakeholders in our business including employees, customers, shareholders and the wider community. The Group is committed to improving its corporate responsibility activities and will continue to report on them. Employees Our employees are key to our success. The Water Company has maintained its 'Investors in People' accreditation and Home Service has been voted one of the top 100 companies to work for by the Sunday Times for the second year running. The Group has a policy of equal opportunities and nondiscrimination. Every reasonable effort is made to provide disabled people with equal opportunities for employment, training and promotion, taking into account their particular aptitudes and abilities. The Water Company has been awarded a certificate in recognition of it being 'Positive about Disabled People'. Health & Safety The Group is committed to maintaining high standards of health and safety across all its business activities. A fulltime Group Safety Adviser is employed to develop and implement a strategy that effectively protects the health and safety of employees and ensures consistency with statutory requirements. The Adviser provides support in setting corporate objectives and formulating Group policy and minimum standards in conjunction with David Penna, who is the nominated main Board Director for reporting on health and safety. Each Division has appointed a board member to act as champion for health and safety and has in place arrangements for the effective co-ordination and implementation of consistent practices that meet or exceed minimum statutory requirements. The involvement of employees is critical to the success of any health and safety programme and employee forums have been established at local and Divisional level throughout the Group. Communication is extremely important, particularly as the Group grows. Team briefings are held monthly in the majority of the Group's businesses to keep employees informed about new developments and this initiative will continue to be rolled out to newly acquired companies. Newsletters and special publications are also used to communicate within the Divisions and across the Group. A Savings Related Share Option Scheme is operated across the Group and is highly successful in involving employees in the performance of the Group. All Group employees have access to a pension scheme, including those employed by newly acquired businesses. The majority of employees have regular performance and development reviews. Training continues to be of great importance to ensure that all employees have the right skills to perform to their maximum ability. Reportable Incident Rate Total RIDDOR-reportable incidents per 1,000 employees over the past ten years Financial Year 22

25 The Group continues to demonstrate a commendable health and safety record, with a steady decline in the reportable incident rate as illustrated in the chart opposite. This is despite the fact that the expansion of the Group over recent years has increased its exposure to safety critical activities such as the confined space work undertaken by OnSite. Health and safety is fundamental to the success of the Group's business activities and the development of good working practices will continue to be promoted at all levels within the Group. Customers All of the Divisions are committed to providing excellent service to both commercial and domestic customers. Within commercial outsourcing, building long term relationships with customers is key to the future success and stability of the business. Without high levels of service, customers would not be retained. The Water Company was rated second overall in the water industry for service last year and is constantly reviewing its activities to ensure that it maintains its high standards. There is a Special Services Scheme for customers who require additional assistance and bills are available in braille, large print and on audio cassette if required. Home Service attempts to call customers within 48 hours of the use of their service to ensure they were fully satisfied. They also provide documentation in alternative formats. Environment The Group has a clear strategy to make a significant contribution to environmental sustainability. The operational activities of Group companies have varying environmental demands and we therefore prioritise attention to those activities with the largest impact. The Water Company now publishes a comprehensive Environment Report detailing a wide range of the Company s environmental activities. Work is underway on reviewing and updating the Water Efficiency Plan and the Bio-Diversity Action Plan. The comprehensive five-year woodland management plan for the 205 acres of mixed woodland at Blithfield Reservoir is now being implemented. This affords opportunities for expanding the area of native broadleaf woodland at the site through active bracken control and weeding. It also allows the Company to demonstrate its commitment to nature conservation and education, as areas are developed and maintained with clear objectives in mind. OnSite is committed to the continual improvement of environmental performance and is currently implementing an integrated Quality, Environment, Safety and Health (QUENSH) management system and will be seeking certification to ISO9001:2000 in 2003 and ISO14001:1996 and OHSAS18001:1999 in They have a dedicated manager appointed to this project who also provides environmental consultancy to external clients and other Divisions within the Group. OnSite's water treatment business has been entered for nomination for an Environmental Engineering Award for its work on the Six Bells Minewater Treatment Plant on behalf of the Coal Authority. Community & Charitable Giving The Group is committed to assisting charities that have a direct impact on the communities in which its businesses operate. It supports the Air Ambulance both financially, by charitable donation and practically, by providing office space. Other organisations supported by the Group include the Princes Trust, Lichfield Cathedral and British Blind Sport. We also encourage employees to support charities of their choice and they can contribute to those charities in a tax efficient manner through the Give As You Earn Scheme. In addition, employees of the Water Company are particularly active in their fundraising efforts for WaterAid, the official charity for the water industry that is dedicated exclusively to the provision of safe domestic water to the world's poorest people. The Water Company has continued to improve its energy efficiency. The effectiveness of the Company s strategies for the management and use of energy have been recognised by the Institute of Energy who awarded the Company with the Energy Efficiency Accreditation Scheme, which is managed by the National Energy Foundation. 23

26 Corporate Governance The Board has continued to apply the Combined Code with flexibility and common sense. The publication of the Higgs Report has been noted and will be reported on in due course. Directors At the year end the Board comprised nine Directors, five executive and four non-executive. As Mr Harris was previously Managing Director of the Company he is not considered to be independent but the Board feel that the other three non-executive directors are independent. Full details of the Directors are shown on page 19. Ten board meetings are held each year with additional meetings held as necessary. A pack of information is provided to each Director in advance of any board meeting to allow sufficient time for preparation. Committee members are shown on page 19. Following the retirement of Mr Kenyon-Slaney there are only two members of the Audit Committee instead of the three required. This is considered appropriate given the experience of the members but will be kept under review. The Combined Code requires that members of the Remuneration Committee are independent. Mr Harris is not considered independent but he is a member of the Remuneration Committee. This will also be kept under review. The Audit Committee has met four times in the year and the Remuneration Committee meets annually (or more often if required). The Nomination Committee met during the year to consider the appointment of Mr Belk. A schedule of matters reserved for the Board was adopted in 1996 based on ICSA Best Practice. However, the Board maintains a flexible approach to Board matters with the delegation of power to a committee being used for specific routine purposes. The Board has an established formal procedure for Directors wishing to seek independent legal and other professional advice. No such advice was sought during the year. The Board also has access to the advice and services of the Company Secretary. The Board has elected not to nominate a senior independent Director as it is felt that where there is already an experienced independent non-executive Chairman this could prove unnecessarily divisive. The Board s approach to non-executive appointments was revised in 1996 such that future appointments, whilst still for a fixed term of three years (subject to retirement by rotation), would not normally, as a matter of policy, be renewable more than twice. All the Directors are subject to retirement by rotation and will submit themselves for re-election at least once every three years. Directors Remuneration This area of policy and practice is dealt with in full in the remuneration report on pages 26 to 31. The remuneration report will be put to a shareholder vote at the AGM. Relations with Shareholders Meetings take place regularly with the Company s largest institutional investors. The Board is available at the AGM to answer questions on all aspects of the Company. Proxy votes will be announced at the AGM following the show of hands. The Board has considered the recommendation within the Code that the AGM notice be sent to shareholders at least twenty working days before the meeting but has decided, as last year, to remain compliant with the Companies Act requirements. Currently, the Company is able to announce its Preliminary Results, send the Annual Report and AGM notice to shareholders, hold the AGM and pay the final dividend all within three months of the year end. To allow additional time for the notice period could extend this period and delay payment of the final dividend and the Board does not believe this would be advantageous either to the Company or the shareholders. No formal training has been provided for the Board due to the knowledge and experience of its members. However, the Board is conscious of the need to ensure that all Directors are kept up to date with legislation, good practice and other issues. Therefore, its professional advisers now hold informal training sessions for the Board as necessary. 24

27 Accountability and Audit A review of the Group s position and prospects is set out in the Chairman s Statement, Chief Executive s Review and Financial Review on pages 2 to 17. The Directors acknowledge their responsibility for the Group s system of internal control and for reviewing its effectiveness, including their responsibility for taking reasonable steps for the safeguarding of the assets of the Group and for preventing and detecting fraud and other irregularities. Such a system can nonetheless provide only reasonable and not absolute assurance against misstatement or loss. There is an established internal control framework which is continually reviewed and updated taking into account the changing nature of the Group s operations. This process includes the identification, evaluation and management of the significant risks faced by the Group. The Directors confirm that procedures to comply with the Turnbull guidance are in place and that there has been full compliance with the guidance for the period ended 31 March 2003 and up to the date of this Report. A defined organisation structure for the Group exists with clear lines of accountability and appropriate division of duties. The Group s financial regulations specify authorisation limits for individual managers, with all material transactions being approved by the Board. In addition, formal treasury policies are in place. Three year business plans, annual budgets and investment proposals for each business and for the Group are formally prepared, reviewed and approved by the Board. Financial results and cash flows, including a comparison with budgets and forecasts, are reported to the Board monthly with variances being identified and used to initiate action. Risk management is discussed at Board level both in terms of the Group and the Divisions on a regular basis. The key risks for each Division and the Group have been identified together with the controls to monitor, reduce and mitigate against their potential impact. The Board has reviewed the effectiveness of the internal control framework for the period covered by these financial statements. During the year the Group enhanced its internal audit function and recruited an experienced Head of Internal Audit. The need for this has arisen due to the increased size and complexity of the Group following the significant acquisitions in the year. Internal Audit reports directly to the Audit Committee and a formal audit plan is in place to address the key risks across the Group. The external auditors are subject to an annual vote by shareholders and the Audit Committee monitors both their performance and independence on an annual basis. In general, the non-audit services undertaken by the external auditors are regulatory in nature or related to corporate tax advice. This work is so closely related to the core audit services that the external auditors are best placed to undertake it. The external auditors have not been involved in due diligence work or general consultancy. The Board is of the opinion that having reviewed the external auditors performance and fees during the period, both are satisfactory. The Board does not believe that the value of non-audit services provided to the Company by the external auditors is substantial. Going Concern The Directors consider that it is appropriate to prepare the accounts on a going concern basis. This is based upon a review of the Group s budget for 2003/4, the three year operating plan and investment programme, together with the committed borrowing facilities available to the Group. Compliance Statement The Company has complied with the provisions of the Code except with regard to the appointment of a senior independent non-executive Director, the period of notice of the AGM and committee membership as detailed above. The responsibilities of the Directors and auditors in the area of financial reporting are set out on pages 33 to 35. Members of the Audit Committee are set out on page 19. The Committee normally meets to review the interim and annual accounts, to monitor the adequacy and effectiveness of internal controls and to agree audit strategy. The external auditors and the Group Finance Director are invited to attend all meetings. 25