Morgan Sindall Group
Annual Report 1997

Plain-text annual report

53558 Covers 13/3/98 15:24 Page 1 Morgan Sindall plc London (Head Office) Morgan Sindall Cambridge FIT OUT Morgan Lovell Morgan Lovell Morgan Lovell Overbury Overbury London (City) London (West End) Wokingham London Kingston REGIONAL BUILDING CONTRACTING Barnes & Elliott Barnes & Elliott Hinkins & Frewin Hinkins & Frewin Hinkins & Frewin Hinkins & Frewin Hinkins & Frewin Robert R. Roberts Sindall Sindall Sindall Sindall Sindall Sindall Construction Snape Sotham Engineering Sotham Engineering Stansell Stansell Stansell Stansell Stansell Stansell Stansell Stansell Stansell Stansell Fareham Farnborough Banbury Cheltenham Maidenhead Oxford Swindon Leeds St. Albans Cambridge Ipswich Kings Lynn Norwich St Albans Manchester Cambridge Norwich Barnstaple Bristol Guernsey Jersey Newton Abbot Poole Plymouth Taunton (Head Office) Taunton (Divisional Office) 01823 335041 Wheatley Construction Coventry Yeovil 01935 426804 01203 712233 Wheatley Construction Nottingham (Head Office) 01623 515151 Primary Medical Property London Primary Medical Property Ipswich 0171 434 4192 01473 659912 Morgan Sindall plc 77 Newman Street, London W1P 3LA Tel: 0171 307 9200 Fax: 0171 307 9201 Visit our website at www.morgansindall.co.uk Annual Report & Accounts 1997 A n n u a l R e p o r t & A c c o u n t s 1 9 9 7 Building solutions specialist expertise 0171 307 9200 01223 836611 0171 489 1707 0171 734 4466 0118 989 5300 0171 307 9000 0181 614 6000 01329 822888 01252 893900 01295 251931 Opening late Feb/March 01628 773249 01865 723221 01793 513330 0113 287 3131 01727 863081 01223 836611 01473 833966 01553 692335 01603 410322 01727 863081 0161 872 1166 01223 881081 01603 412411 01271 377777 0117 921 1000 01481 710646 01534 483331 01626 202077 01202 602400 01752 556700 01823 444406 53558 Covers 13/3/98 15:24 Page 2 CONTENTS Financial Highlights Chairman’s Statement Chief Executive’s Review Financial Review Group Overview Fit Out Regional Building Contracting Property Portfolio Report of the Directors Report of the Remuneration Committee Directors’ Responsibilities Report of the Auditors Review Report on Corporate Governance Matters Group Profit and Loss Account Group Balance Sheet Company Balance Sheet Combined Statement of Movements in Reserves and Shareholders’ Funds Group Cash Flow Statement Other Primary Statements Principal Accounting Policies Notes to the Accounts Corporate Governance Corporate Directory Financial Calendar 1 2 3 6 8 10 12 16 18 21 21 22 23 24 25 26 27 28 29 30 32 44 45 45 Substantial loft conversion, Farringdon, London Corporate Directory Directors Sir D P Hornby KB (Chairman) Auditors Deloitte & Touche, J C Morgan MBA BSc ASVA (Chief Executive) Leda House, Station Road, Cambridge CB1 2RN J M Bishop FCA FCT J J C Lovell MBA BSc ASVA B J Moorhouse MA (Oxon) FCMA A M Stoddart FCIOB Bankers Lloyds Bank Plc, City Office, PO Box 17328, B H Asher (Non-Executive) - to be appointed 1.3.98 11-15 Monument Street, London EC3V 9JA G Gallacher BA MBA (Non-Executive) Secretary W R Johnston FCIS ASCA ACIB Registered Office 77 Newman Street, London W1P 3LA Solicitors Brokers Peel, Hunt & Company Limited, 62 Threadneedle Street, London EC2R 8HP Registrars Connaught St Michaels Limited, Charles Russell, 8-10 New Fetter Lane, London EC4 1RS PO Box 30, CSM House, Victoria Street, Luton LU1 2PZ Financial Calendar Annual General Meeting: 15 April 1998 Shareholder Communication Contact with existing and prospective shareholders is welcomed by the Company. If you have any questions or enquiries about the Company or the activities of the Group, please contact: Jack Lovell, Client Director, 77 Newman Street, London W1P 3LA – telephone 0171 307 9200. Share Prices (FT Cityline) Current buying and selling prices of the Company’s shares, together with recorded information on key dates, can be obtained by dialling 0336 434027. Ordinary shares Final dividend: Ex-dividend date: 23 March 1998 Record date: 27 March 1998 Payment date: 16 April 1998 Interim results announcement: August 1998 Preference shares Dividend payment dates: 15 April 1998 15 October 1998 Next conversion date: 30 June 1998 Designed by Jarvis White 53558 P1-9 12/3/98 18:00 Page 4 • MORGAN SINDALL operates in two core sectors, Fit Out and regional building contracting. The company originated in 1994 with the reverse takeover of William Sindall plc by Morgan Lovell. • The reverse takeover combined Morgan Lovell’s Fit Out skills with an established but loss making regional building contracting operation, being a step towards creating a balanced specialist construction group. • The three ex William Sindall regional contracting companies have been returned to profitability, four further brands have been acquired, and all the MORGAN SINDALL regional building contracting companies are positioned for future growth. • The 1997 financial results demonstrate three years of progress towards the objective of long-term enhancement of shareholder value through organic growth, plus careful acquisition and management of a property portfolio. Financial Highlights Turnover Profit on ordinary activities before taxation Profit on ordinary activities after taxation Earnings per share Dividends per ordinary share Net assets Net cash funds 1997 £331m £7.260m £5.848m 16.38p 5.25p £17.5m £18.4m 1996 £283m £5.174m £4.472m 13.13p 4.20p £14.5m £9.3m INCREASE % + 17 + 40 + 31 + 25 + 25 + 21 + 98 Striking Morgan Lovell reception design. 1 53558 P1-9 12/3/98 18:00 Page 5 Chairman’s Statement Sir Derek Hornby Chairman Opportunities ahead 1997 has been another successful year for the Group, with profit before tax of £7.26 million being 40% ahead of 1996. The Board is recommending an increased final ordinary dividend of 3.58p, making 5.25p for the year (1996: 4.20p) out of the earnings per share of 16.38p. The strategic decision taken in 1994 to apply the Group’s Future proven expertise in the construction Fit Out business to regional building contracting may now be seen through the strong three-year track record. I believe that it clearly demonstrates that this policy has worked. The Group has now established a substantial and increasingly profitable network of regional building contracting companies with exciting organic growth potential. At the same time, the original Fit Out business has once again performed very strongly, despite having to deal with some setbacks at the beginning of the year. It will take time for the return from our recent investments to be fully reflected in profits, but the increasing margins in our more mature operating units gives us confidence in the future. While trading conditions are at present as good as have The acquisition of Roberts in August 1997 and Wheatley in February 1998 substantially completes the network of regional building contracting companies. We now have a basis for expansion in the North East and the Midlands as part of a network covering most of England. I am confident the same balance of entrepreneurial flair and financial rigour will enable these new brands to achieve demanding organic-growth targets similar to those achieved by their fellow companies. The Group is now well placed, with two healthy growing construction businesses supported by income and trading returns from its property portfolio. More importantly, the Group comprises a talented team of people who passionately believe in their long-term vision and welcome new challenges, whether within the existing been encountered for some time, we will not lose sight of business or in new areas. the fact that long-term successful companies take advantage of these conditions to develop their people and businesses in readiness for a tighter trading environment, whenever that may occur. Board membership I am pleased to welcome Bernard Asher as a non-executive director. For the past five years Bernard has been a director of HSBC Holdings plc, Chairman of HSBC Investment Bank plc and a director of Midland Bank plc. His undoubted experience will be of great benefit in maximising the Group’s potential. Sir Derek Hornby Chairman 2 53558 P1-9 12/3/98 18:01 Page 6 Chief Executive’s Review John Morgan Chief Executive Performance culture Morgan Sindall has completed another successful year, expanding organically and by acquisition. We are continuing to invest in our people and our companies to position ourselves for long-term growth. We recognise that in order to be a significant public company we have a great deal more to achieve. It is our commitment to this challenge that makes Morgan Sindall a very exciting growth company. The construction industry is mature, and has historically Regional Contracting 1997 1996 suffered from the variability of the economic cycle and relatively poor overall margins. I am often asked how Morgan Sindall can achieve growth, differentiation and satisfactory profit levels within the industry. Turnover Profit £184m £90m £2.87m £1.31m I believe the answer to this is the approach to customers, employees and suppliers which results from our fundamental business philosophy. I am aware that “visions” and “mission statements” are often viewed with scepticism. However, I believe that the values of our business are crucial in ensuring that the company strategy is supported by all our staff. I regard the way all our people work together to shape decisions and implement policy as the key to the future success of Morgan Sindall. Within Morgan Sindall, we are motivated by the will to win and to achieve the improbable. We have a track record of making things happen, and it is this can-do approach to life that drives our success. Operating margin 1.6% 1.5% Turnover in regional building contracting doubled and operating profit increased by 119% year on year. Of this profit increase, 60% is organic growth from companies already within the Group and 40% arises from acquisitions. Our more mature companies are now demonstrating margin improvement, while we continue to invest in the smaller brands and more recent acquisitions to strengthen their market positions. In my report for the year ended 31 December 1996, I indicated that we would continue to monitor those geographic areas where we were not represented and respond to opportunities that might arise. We have subsequently made two acquisitions. In August 1997 we acquired Robert R. Roberts, based in Leeds and in February 1998 we acquired John E.B. Wheatley, based in Nottingham and Coventry. 3 53558 P1-9 12/3/98 18:01 Page 7 Fit Out Turnover Profit 1997 1996 £140m £183m £3.58m £4.25m Operating margin 2.6% 2.3% The Fit Out companies returned a poor performance in the first half of the year but second half performance exceeded all previous levels. In common with our earlier acquisitions these recent moves The shortfall in the first half was attributable to brought into the Group companies which met the following problems within Morgan Lovell, which I first reported at criteria: Long established, well-respected and technically competent Identified as regional contractors, not national and not local the Annual General Meeting in April 1997. At that stage we were confident that second half performance would return to normal levels and I am pleased that this was confirmed by the year-end trading result. Under its new management team Morgan Lovell is positioned as the “Workplace Specialist”, developing Wide customer base with regular repeat business design and build into a client-focused range of services Focused on relatively small projects (under £5 million) and preferably with small works activities from workplace consultancy, through design, implementation and maintenance of the workplace Lacking a sound financial base environment. I believe that our success in business turnarounds is largely attributable to a clear implementation strategy. Typically the post-acquisition companies are transformed within Morgan Sindall and that change is likely to include most of the following: Strengthening of senior management Change of premises and working practices Introduction of meaningful bonus system Late in 1997, all of the Overbury London operations moved to new offices in Newman Street, which is a showcase for Overbury’s Fit Out expertise. Operating from only two bases will streamline the approach to customer service and consolidate the operations. Overbury’s success is founded on its approach to people - its customers and its staff. During the year the company has continued to invest in training and development to maintain the calibre of its teams. Our commitment to customer service has produced a steady improvement in Introduction of Morgan Sindall financial controls client satisfaction levels, as measured by independent Change in relationships with subcontractors and suppliers Programme of expansion once the fundamentals are in place assessors. • • • • • • • • • • • These changes begin the process of bringing the management style into line with that found elsewhere in the Group. 4 53558 P1-9 12/3/98 18:01 Page 8 Property Turnover Profit 1997 1996 £8m £1m £2.28m £0.89m During the year we achieved good returns on our property portfolio from a mix of trading profits and rental income. The sale of Upper James Street provided an overall benefit to the Group of some £1.5 million. The sale proceeds from this project have been re-invested in commercial property. The Group will continue to manage a portfolio of property interests for income and trading returns, although our property interests will remain secondary to, and independent of, our construction activities. Sindall Joinery During the year we took the decision to close the Sindall Joinery operation. Although the local management team did an excellent job in reducing losses, we did not believe it was going to be a significant, consistent contributor to Group profits. The closure also enabled us to release freehold property for future sale. Future prospects In the coming years we aim to: Although we have made an impressive start towards our • • • • Retain our position amongst the market leaders in Fit aims, we have a great deal to achieve and I know that the Out. This will require continuing reappraisal of the journey will be difficult at times but ultimately very levels of service provided to a sophisticated and rewarding, not only for all our shareholders, but also for all demanding client base those people who participate in making it happen. Deliver organic growth from the network of regional contracting companies. This will be based on a real shift to a service-led approach to construction, and, in more recent acquisitions, continuing investment in management, marketing and systems Manage our property portfolio to maximise the overall returns from rental income and trading profits Assess opportunities for Morgan Sindall to continue its expansion in the medium term Morgan Sindall will continue to be an exciting growth company. As ever, we will not achieve this without attracting and retaining talented people who have the passion to win, the ability to initiate change, and a fear of complacency. Although corporate culture is difficult for those outside the company to recognise or value, I believe that it is a key differentiator for Morgan Sindall. John Morgan Chief Executive 5 53558 P1-9 12/3/98 18:01 Page 9 Financial Review Barbara Moorhouse Finance Director Turning skills into results The 1997 financial results are the third full-year published accounts since the creation of Morgan Sindall. They show turnover increasing at 38% per annum, earnings by 43% and dividends at 39%. Over the same period the Group’s net cash position has improved from £5.9 million to £18.4 million. At the end of 1997 the Group net assets totalled £17.5 million. Profit performance In Fit Out, the two brands – Overbury and Morgan Lovell – The company will continue to take advantage of selective have continued to develop their market positions. The focus on customer service and rigorous operational management of the two companies has enabled them to increase operating margins from 2.3% to 2.6%. In regional building contracting, increased profits from 1996 to 1997 of £1.6 million are attributable 60% to organic growth and 40% to acquisition. Our leading brands are achieving margins which compare well with the industry. In all the companies, we are making considerable investment in local area offices, management development, marketing, systems and processes to provide the framework for long- term growth in turnover and margin. property trading opportunities. Although the size and timing of returns must reflect the prevailing conditions in the property market, over the medium term profits such as those achieved in 1997 are a useful addition to the Group’s mainstream construction activities. Cash management The Group benefits from a strong cash position with net cash balances of £18.4 million at 31 December 1997. • Operational activities are cash positive and monitoring of monthly cash performance is a key element of the management control system Operating profit Pre-tax profit • Acquisitions have had low cash cost and have provided a relatively rapid £000's 20,000 payback on initial investment 7,546 7,260 In 1997, the Group generated £9.1 million in cash from construction activities and £10.6 million (after loan repayments of 15,000 £1.7 million) from property activities. Of this, 4,915 5,174 some £6.7 million has been re-invested in property, £1.5 million in acquisitions and 3,170 3,026 £1.3 million in net capital expenditure. After financing these investments and other costs of some £2.8 million the Group has improved its cash position by £7.4 million. Net cash funds 18,386 10,000 9,296 5,888 5,000 95 96 97 95 96 97 95 96 97 95 96 97 Year to 31.12.95 Year to 31.12.96 Year to 31.12.97 £000's 350,000 Turnover 331,236 300,000 283,145 250,000 200,000 175,173 £000's 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 150,000 100,000 50,000 6 53558 P1-9 12/3/98 18:01 Page 10 Balance sheet strengths As a growth company, Morgan Sindall is conscious of the need to maintain appropriate asset backing for its operational activities. As at 31 December 1997 the Group balance sheet showed net assets of £17.5 million. Fixed assets Current assets Liabilities Shareholders’ funds 1997 £’m 17.5 84.1 (84.2) 17.4 1996 £’m 17.9 75.2 (78.6) 14.5 £’p 16 14 12 10 8 6 4 2 Earnings per share 16.38p 13.13p 8.03p Dividends per share 5.25p 4.20p 2.70p Year to 31.12.95 Year to 31.12.96 Year to 31.12.97 Resulting from its strong trading history and cash position, Morgan Sindall holds undistributed reserves. It is the Financial control systems 95 96 97 95 96 97 Group’s strategy to hold a significant proportion of these reserves in property rather than cash, where higher returns can be achieved. Segmental analysis (Profit – £’000) Property £2,279 Group Activities £(1,178) (cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0) yyyyyyyyyyyyyy (cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0) yyyyyyyyyyyyyy (cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0) yyyyyyyyyyyyyy (cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0) yyyyyyyyyyyyyy (cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0) yyyyyyyyyyyyyy (cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0) yyyyyyyyyyyyyy (cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0) yyyyyyyyyyyyyy (cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0) yyyyyyyyyyyyyy (cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0) yyyyyyyyyyyyyy (cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0) yyyyyyyyyyyyyy (cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0) yyyyyyyyyyyyyy (cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0) yyyyyyyyyyyyyy (cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0) yyyyyyyyyyyyyy (cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0) yyyyyyyyyyyyyy (cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0) yyyyyyyyyyyyyy Fit Out £3,575 Regional Building Contracting £2,870 Acquisitions During the year Morgan Sindall completed the acquisition of Robert R. Roberts in Leeds. The consideration was £550,000 and goodwill arising of £1,671,000 has been written off to reserves. The Morgan Sindall group of companies operates on an autonomous basis. This is complimented by a management control system directed by the Morgan Sindall Board. The main elements of this system are: • • • • Definition of types of work to be undertaken, avoiding contracts with undue levels of risk Annual business planning cycle setting the strategy, resources and investment for the medium term Budgeting and management accounting systems, monitoring strategic and operational progress Frequent focus on underlying contract profitability and cash generation Dividend policy It remains our intention to adopt a progressive dividend policy and to invest undistributed reserves in a property portfolio. In addition to property returns, this investment maintains an appropriate relationship between the balance sheet and turnover. In February 1998 the Group purchased John E.B. Wheatley for a consideration of £365,000. This has been commented Barbara Moorhouse on as a post balance sheet event. Finance Director 7 53558 P1-9 12/3/98 18:01 Page 11 Group Overview Historical growth 1977 1985 1994 1996 1997 1998 Morgan Lovell formed Overbury acquired Reverse takeover of William Sindall plc Stansell acquired Snape acquired Robert R Roberts acquired Wheatley acquired ROBERTS Morgan Sindall has Morgan Sindall is a Morgan Sindall 35 offices in top 20 UK construction in 1998 forecasts England and Wales. company. turnover to exceed £400m. Morgan Sindall employs 1760 people in total. 8 53558 P1-9 12/3/98 18:01 Page 12 Fit Out Morgan Lovell The Workplace Specialist London Wokingham Overbury The Fitting Out and Refurbishment Specialist Kingston-upon-Thames London Regional Building Contracting LEEDS NOTTINGHAM MANCHESTER COVENTRY CHELTENHAM BANBURY OXFORD SWINDON MAIDENHEAD BRISTOL KINGS LYNN NORWICH CAMBRIDGE IPSWICH ST.ALBANS LONDON EGHAM BARNSTAPLE TAUNTON PLYMOUTH NEWTON ABBOT YEOVIL POOLE FARNBOROUGH FAREHAM BRIGHTON Stansell Sindall Hinkins & Frewin Snape Barnes & Elliot Roberts Wheatley JERSEY & GUERNSEY 9 53558 P10-P23 + IBC 12/3/98 16:29 Page 1 Fit Out Performance environments Office Fit Out is a fast-moving, dynamic market, where clients have high expectations of quality, speed and service. Success in this specialised environment requires sophisticated marketing, strong customer focus and project management which delivers results on time, to budget, with minimum disruption to the client. One of the keys to success in this market is the calibre of the management on site. We believe our Fit Out companies employ some of the best site managers in the UK, whose skills lie in their commitment to the Morgan Sindall core values on each and every project. Our team is committed to: • understanding clients’ requirements • exceeding clients’ expectations • pricing competitively • finding solutions • being helpful and responsive • developing long term relationships ➤ 53558 P10-P23 + IBC 12/3/98 16:29 Page 2 The project at Bloomberg illustrates Overbury’s management expertise in the successful completion of complex multi-million pound Fit Outs of occupied office space. Throughout the contract the project programme was frequently re-scheduled to ensure uninterrupted broadcasting. Overbury’s flexibility kept the project on plan. Overmatter – requires editing Protodigm asked Morgan Lovell to create a workplace environment to support their “virtual” staff. The purpose was to provide a place where they could meet, exchange ideas and relax. Workshops were used to explore various work styles. The chosen design incorporated a central hub using bright colours to reflect the dynamism of the organisation. Offering combined professional advice and construction expertise, Morgan Lovell delivered this high impact, fast track project to deadline. The office Fit Out market comprises many high profile clients. Our aims are to provide clients with the office environment that best supports their business, to anticipate problems and to provide innovative solutions. ➤ ➤ ➤ 53558 P10-P23 + IBC 12/3/98 16:29 Page 3 Regional Building Contracting Regional loyalties The companies in the Morgan Sindall portfolio have a long-standing commitment to their individual regions. The decentralised management style gives each company the freedom to respond to their customers’ needs and the demands of local circumstances. All the companies share a commitment to the Morgan Sindall management style and operate within the Group’s management control systems. All the companies within the Morgan Sindall portfolio are noted for their high quality construction work. Stansell, 175 years old this year, has extended its traditional skill base into the area of conservation work involving specialist repairs to historic buildings and restoration work to listed buildings. Recent work has included fire-damaged St Michael’s Church, Newquay, where months of work by Stansell’s craftsmen and conservation experts were repaid with the restoration of various gilded figures. Not all jobs require the painstaking expertise of intricate restoration, but commitment to quality is a consistent theme across the Group. ➤ 53558 P10-P23 + IBC 12/3/98 16:29 Page 4 The Sindall name has been synonymous with quality construction projects since the turn of the century. The brand logo is often seen on important construction projects in London’s West End, where the company’s traditional skills and careful focus on customer requirements are in demand. This picture shows part of the Cadogan Estate where Sindall is a preferred contractor. Morgan Sindall focuses on the smaller end of the contracting market, with around a quarter of the Group’s turnover in projects of less than £250,000 in value. Hinkins & Frewin’s capabilities include multi-million pound projects, but equally important are the myriad of smaller ones as well as a range of maintenance services. Repeat orders and ongoing maintenance work with existing clients are crucial to the success of the company. The client base consists of local, regional and national customers. 13 ➤ ➤ 53558 P10-P23 + IBC 12/3/98 16:29 Page 5 Regional Building Contracting Regional loyalties continued Wheatley is the most recent addition to the Group, acquired future growth will reflect the benefits of combining strong in February 1998. The company’s offices in Nottingham and regional expertise with the Morgan Sindall management Coventry will be expanded to provide a quality construction philosophy - a combination that has already achieved service across the East and West Midlands. success in other parts of the Group. The company will benefit from the management expertise and financial strength of its new parent company and its All-weather training centre at Worcester Rugby Club. ➤ 53558 P10-P23 + IBC 12/3/98 16:29 Page 6 Although acquisitions have been an important part of the strategy, organic growth is the key to the achievement of Morgan Sindall’s long term goals. The progress at Barnes & Elliott illustrates this aspect of the Group’s development. In 1994 it was loss making, with a very limited list of clients. Some three years later the company has been transformed - different culture, stronger management, new offices, new business systems. Barnes & Elliott is now a leading contractor in the South East, providing a quality construction service to an increasing number of major clients. Situated at Salford Quays in Manchester, Snape is well positioned to respond to local business needs. The project for Omega Technologies, completed in May 1997, illustrates the service philosophy and attention to detail given to every project. The client’s perspective is well expressed by Ralph S. Michel, Vice President, Omega Engineering Inc. “Omega has a substantial property portfolio in the US and has been involved with the construction of many buildings, but we have never had a project with so few problems. The quality and workmanship of the building is a credit to all concerned.” ROBERTS Morgan Sindall has developed its regional contracting network through regional companies which have a well-respected name, sound construction skills and a commitment to client service. Roberts, acquired in July 1997, was a classic example. The recently completed contract to construct the School of Contemporary Dance in Leeds is evidence of both its construction skills and its standing within the local community. Since acquisition, Morgan Sindall has invested in management - people and systems - and restored the financial strength of the company, enabling Roberts to fulfil its market potential. 15 ➤ ➤ ➤ 53558 P10-P23 + IBC 12/3/98 16:29 Page 7 Property Portfolio Property security The property portfolio produces an independent income stream which has a different economic profile from construction. Our property interests are managed within a defined risk profile and are not used to create construction opportunities. As our construction activities are cash generative, the Group strategy is to hold undistributed reserves substantially in property which provides a higher return than cash. We are committed to achieving an above-average return longer term. Further property opportunities are being from a mixture of rental and capital growth by pursuing an sought but we are prepared to leave funds in cash until the active, whilst cautious, approach to property investment. right opportunities arise. Over the last three years, this has involved a disinvestment of the inherited William Sindall property portfolio and reinvestment in a broader mix of properties where the Group has significant property expertise. Our associated company Primary Medical Property, while not fully recovering their overheads, have had an excellent year developing this new market. This company, where we share the equity with the executive management, The property division profits more than doubled in 1997, specialises in the development of, and investment in, reflecting increased rental income and profit taken on the primary care properties. It has now built up a substantial sale of Upper James Street, a property bought in 1996 portfolio of property and is fast becoming accepted as a which was refurbished, let and sold institutionally within market leader in this niche property sector. We have high eighteen months. A similar-sized office building which was expectations of capital growth on this property as rentals vacant and needing refurbishment, was bought in Newman increase and the yields improve with the maturing of the Street in the West End. Overbury have decided to take this market for this type of investment. property as their main office in London allowing them to centralise staff that were previously spread through three smaller offices. We see the management of our property portfolios as adding to shareholder value in the medium term. The returns will be commensurate with the limited risk profile The market for selling industrial income-producing property determined by the Morgan Sindall Board. has been strong, and the opportunity has been taken to sell the industrial estate in Avonmouth and one of the two industrial estates in Cambridge. The latter, due to its size, requires shareholders’ approval as will be explained in a separate circular to shareholders to be sent out on 27 February 1998. During the year we have invested in an office building in Lincoln’s Inn Fields which is fully let and offers a good yield with the possibility of rental and capital growth in the 16 53558 P10-P23 + IBC 12/3/98 16:29 Page 8 Refurbished office investment, Newman Street, London Dales Manor Business Park, Cambridge Old Courthouse Surgery, Sutton PMP Development Recent Morgan Sindall office investment in London 17 53558 P10-P23 + IBC 12/3/98 16:29 Page 9 Jack Lovell (42) Client Director Andy Stoddart (51) Operations Director Geraldine Gallacher (38) Non-executive Founder and managing director of The Executive Coaching Consultancy having formerly been head of Group Management Development for Burton Group plc. 18 John Bishop (52) Corporate Planning Director John Morgan (42) Chief Executive Sir Derek Hornby (68) Chairman Chairman of London & Continental Railways, former chairman of Rank Xerox (UK) Limited and the British Overseas Trade Board and Non-executive director of Sedgwick Group plc. Barbara Moorhouse (39) Finance Director Bernard Asher (62) Non-executive Most recently, Chairman of HSBC Investment Bank Plc and a director of HSBC Holdings Plc and Midland Bank Plc. 53558 P10-P23 + IBC 12/3/98 16:29 Page 10 Report of the Directors The directors have pleasure in submitting their report to the members together with the audited accounts for the year ended 31 December 1997. Principal activities Morgan Sindall is a specialist construction group with Further information on the Group Board’s activities including Fit Out, regional building contracting and constitution, policies and procedures is set out under property investment. The principal subsidiary companies Corporate Governance on page 44. are shown on page 43. All activities are carried out in the United Kingdom and Channel Islands. Results and dividends The Group made a profit for the year, after taxation, of £5.848 million. The final dividend for the year recommended by the directors is 3.58p per ordinary share, which together with the interim dividend of 1.67p per share gives a total dividend for the year of 5.25p per ordinary share. Preference dividends paid or accrued amounted to £0.278 million. After dividends, retained profits of £3.722 million have been transferred to reserves. Review of business and future developments A general review of the Group’s activities, development and future prospects are included in the Chairman’s Statement on page 2, the Chief Executive’s Review on Miss B J Moorhouse was appointed a director on 13 February 1997 following the resignation as a director on the same date of Mr A T Sloan. Mr J C Morgan and Mr J M Bishop are the directors to retire by rotation, and being eligible offer themselves for re-election as directors. As noted in the Chairman’s Statement, Mr B H Asher will be joining the Board on 1 March 1998. In accordance with the Articles of Association he will retire at the Annual General Meeting and being eligible offers himself for re-election. Non-executive directors A short biographical note on each independent non-executive director is shown on page 18. The role and responsibilities of the non-executive directors has been formally established by the Board. Further information on these matters may be found under Corporate Governance on page 44. pages 3 to 5, and the Financial Review on pages 6 and 7. Directors’ interests Fixed assets The directors have considered the carrying value of the Group’s interests in property and consider that there is no The interests of the directors and their families in the shares of the company are shown in Note 31 in the financial statements. substantial difference between market and balance sheet Corporate Governance value. External professional valuations of the majority of the Group’s properties were carried out in 1994 and the properties comprising the investment property portfolio were revalued during the year. Directors The directors at the date of this report are as set out on page 45. Details of the changes to Board membership noted below are given in the Chairman’s Statement on page 2. The statement on corporate governance appears this year on page 44 immediately after the Notes to the accounts. This does not reflect any lessening in the degree of importance which the Board attaches to all aspects of this matter. The statement is, however, very substantially the same as the previous year and the Board feels that this change in format should assist in showing a clearer, less fragmented presentation of the Group’s activities and its financial position. 19 53558 P10-P23 + IBC 12/3/98 16:29 Page 11 Report of the Directors Substantial shareholdings Post balance sheet events Excluding directors, on 26 February 1998, the following On 4 February 1998, the Company acquired shareholdings representing 3% or more of the Issued John E.B. Wheatley Limited. Details of this addition to the Ordinary Share capital has been notified to the Company: Group’s network of regional contracting companies is Number of Shares Percentage Holding Mercury Asset Management Limited 1,588,500 4.74 D S Atkinson 1,164,214 3.47 Employment policies shown in Note 21 to the accounts. The Property Portfolio report on page 16 includes a reference to the disposal of The Paddocks, a multi-let office and industrial estate of approximately 7 acres situated at 347 Cherry Hinton Road, Cambridge. The proceeds of £5.50 million net of costs means that the disposal is classified as a Super Class 1 transaction under the Listing Rules of the London Stock Exchange and therefore requires the approval of the Ordinary The Company insists that a policy of equal opportunity Shareholders. The sale contract which has been signed is employment is demonstrably evident throughout the conditional on this approval being given and a Circular to Group at all times. Selection criteria and procedures and shareholders will be dispatched on 27 February 1998. The training opportunities are designed to ensure that all Circular will include notice of an Extraordinary General individuals are selected, treated and promoted on the Meeting to be held on 16 March 1998. basis of their merits, abilities and potential. Subject to the nature of its businesses in the construction industry, the policy of the Company is to ensure that there are fair opportunities in the Group for the employment, training and career development of disabled persons, including continuity of employment with re-training where appropriate. Annual General Meeting The Annual General Meeting will be held on 15 April 1998. The notice of the meeting is set out in the letter to the shareholders accompanying this Annual Report. The letter contains details of the items which are special business. These give authority to the Board to allot equity The Group recognises the need to ensure effective securities. communication with employees. Policies and procedures, including in-house newsletters, have been developed, taking account of factors such as numbers employed and location. Creditor payment policy Political and charitable contributions During the year charitable contributions amounted to £13,487. No contributions were made to any political parties during the year. The Company does not adhere to any formal Code Auditors regarding payments to its trade creditors. Its current policy in this respect, which the Company endeavours to have its subsidiary and associated companies also follow, is to: 1. use unamended terms of Standard Forms of Contract widely recognised in, and drawn up by bodies representing the industry 2. clearly agree and set down the terms of payment with suppliers and subcontractors 3. make payments in accordance with its obligations. Calculated in accordance with Regulations made under the Companies Act 1985, as at 31 December 1997, the Company’s number of creditor days outstanding was fifty-nine. A resolution for the reappointment of Deloitte & Touche as auditors of the Company is to be proposed at the forthcoming Annual General Meeting. By order of the Board W R Johnston Company Secretary 26 February 1998 20 53558 P10-P23 + IBC 12/3/98 16:29 Page 12 Report of the Remuneration Committee Membership of the Remuneration Committee Ms G Gallacher (Chairman) Sir D P Hornby Policy on Executive Directors’ Remuneration In addition, an entitlement to an award of shares under the Long-Term Incentive Scheme adopted by the Company at last year’s Annual General Meeting has arisen for each executive director. These awards are by the nature of the scheme provisional only, as an eventual allocation in each case will depend on a comparison of the Company’s performance measured over a three-year period against a competitive peer group. A provisional award carries with it no legal rights of ownership in respect of such shares. The remuneration of the executive directors is determined by the Remuneration Committee (“the Committee”). Service contracts The Committee seeks to develop remuneration packages which satisfy the following principles: Executive directors’ contracts are terminable on one year’s notice. • • • to attract, retain and motivate the best possible person for each position to recognise the importance of achieving the expectations of performance in short and long term Of the Directors who are seeking re-election at the Annual General Meeting, the service contracts of Mr J C Morgan and Mr J M Bishop do not have a notice period for termination which is in excess of one year’s duration. to align the interests of executives with those of the shareholders Directors’ interests The Committee reviews salaries annually and seeks independent professional advice when appropriate. The shareholdings of all directors are shown in Note 31 to the Accounts. The Committee considers that the Company complies with Section A of the Best Practice Provisions of the Stock Exchange Listing Rules. The Committee has also given full consideration to Section B of the Best Practice Provisions in framing its remuneration policy. Bonus arrangements The cash bonuses shown in Note 12 to the Accounts arise from a cash bonus scheme for executive directors under which an agreed scale was set to measure pre-tax profits achieved in relation to company performance and external expectations of results, of which the major factor of reference is the profit forecasts published by the Company’s own broker. Pensions The Company contributes 10% of base salary to defined contribution schemes of the individual director’s choice. There are no arrangements for the provision of benefits in excess of the Inland Revenue cap. G Gallacher Chairman of the Committee 26 February 1998 Directors’ Responsibilities Company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and the Group as at the end of the financial year and of the profit or loss of the Group for that period. In preparing those financial statements, the Directors are required to: 3. 4. State whether applicable accounting standards have been followed Prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business 1. 2. Select suitable accounting policies and then apply them consistently Make judgements and estimates that are reasonable and prudent The Directors are responsible for keeping proper accounting records, for safeguarding the assets of the Group, for the Group systems of internal financial control and for the prevention and detection of fraud and other irregularities. 21 53558 P10-P23 + IBC 12/3/98 16:29 Page 13 Report of the Auditors to the Members of Morgan Sindall plc We have audited the financial statements on pages 24 to 43, which have been prepared under the accounting policies set out on pages 30 and 31. Respective responsibilities of directors and auditors As described on page 21, the Company’s directors are responsible for the preparation of financial statements. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you. Basis of opinion We conducted our audit in accordance with 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 and the Group’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 affairs of the Company and the Group as at 31 December 1997 and of the profit of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985. Deloitte & Touche Chartered Accountants and Registered Auditors Leda House Station Road Cambridge 26 February 1998 22 53558 P10-P23 + IBC 12/3/98 16:29 Page 14 Review Report on Corporate Governance Matters to Morgan Sindall plc by Deloitte & Touche In addition to our audit of the financial statements, we have reviewed the directors’ statements on page 44 on the Company’s compliance with the paragraphs of the Code of Best Practice specified for our review by the London Stock Exchange and their adoption of the going concern basis in preparing the financial statements. The objective of our review is to draw attention to non-compliance with Listing Rules 12.43(j) and 12.43 (v). Basis of opinion We carried out our review in accordance with guidance issued by the Auditing Practices Board. That guidance does not require us to perform the additional work necessary to, and we do not, express any opinion on the effectiveness of either the Group’s system of internal financial control or the Company’s corporate governance procedures or on the ability of the group to continue in operational existence. Opinion With respect to the directors’ statement on internal financial control and going concern on page 44, in our opinion the directors have provided the disclosures required by the Listing Rules referred to above and such statements are not inconsistent with the information of which we are aware from our audit work on the financial statements. Based on enquiry of certain directors and officers of the Company, and examination of relevant documents, in our opinion the directors’ statement on page 44 appropriately reflects the Company’s compliance with the other paragraphs of the Code specified for our review by Listing Rule 12.43 (j). Deloitte & Touche Chartered Accountants Leda House Station Road Cambridge 26 February 1998 23 53558 ACC/NOTES 12/3/98 16:34 Page 24 Group Profit and Loss Account for the year ended 31 December 1997 Turnover from continuing operations 1 Notes £’000s £’000s £’000s £’000s 1997 1996 Ongoing Acquisitions Cost of sales Gross profit Administrative expenses Other operating income Operating profit Ongoing Acquisitions Total operating profit Share of (losses)/profits of associated undertakings Net interest (payable)/receivable Profit on ordinary activities before taxation Tax charge on profit on ordinary activities Profit on ordinary activities after taxation Equity minority interest Profit for the year attributable to members of the parent company Dividends on equity and non-equity shares Retained profit for the year Earnings per ordinary share 2 1,3 4 5 6 8 325,637 5,599 ––––––– 331,236 (293,085) ––––––– 38,151 (32,218) 1,613 ––––––– 7,576 (30) ––––––– 4,915 – ––––––– 7,546 (250) (36) ––––––– 7,260 (1,412) ––––––– 5,848 (88) ––––––– 5,760 (2,038) ––––––– 3,722 ––––––– 16.38p ––––––– 283,145 – ––––––– 283,145 (252,839) ––––––– 30,306 (26,682) 1,291 ––––––– 4,915 47 212 ––––––– 5,174 (702) ––––––– 4,472 – ––––––– 4,472 (1,659) ––––––– 2,813 ––––––– 13.13p ––––––– 24 53558 ACC/NOTES 12/3/98 16:34 Page 25 Group Balance Sheet at 31 December 1997 Fixed assets Tangible assets Investments Current assets Assets held for resale Stocks Debtors Cash at bank and in hand Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges Net assets Capital and reserves Called up share capital Share premium account Goodwill reserve Revaluation reserve Profit and loss account Total shareholders’ funds Equity minority interests Total capital employed Shareholders’ funds are attributable to: Equity shareholders’ funds Non-equity shareholders’ funds Approved by the Board on 26 February 1998 J C Morgan B J Moorhouse Notes 1997 £’000s 1996 £’000s 13 14 15 16 17 18 19 24 28 17,035 504 ––––––– 17,539 ––––––– – 6,464 54,937 22,720 ––––––– 84,121 ––––––– (80,468) ––––––– 3,653 ––––––– 21,192 (3,458) (218) ––––––– 17,516 ––––––– 6,616 3,219 (7,102) 6,321 8,344 ––––––– 17,398 118 ––––––– 17,516 ––––––– 12,460 4,938 ––––––– 17,398 ––––––– 17,266 663 ––––––– 17,929 ––––––– 735 5,520 53,594 15,307 ––––––– 75,156 ––––––– (73,532) ––––––– 1,624 ––––––– 19,553 (5,085) – ––––––– 14,468 ––––––– 6,606 3,103 (4,723) 5,188 4,294 ––––––– 14,468 – ––––––– 14,468 ––––––– 9,530 4,938 ––––––– 14,468 ––––––– 25 53558 ACC/NOTES 12/3/98 16:34 Page 26 Company Balance Sheet at 31 December 1997 Fixed assets Tangible assets Investments Current assets Assets held for resale Stocks Debtors Cash at bank and in hand Creditors: amounts falling due within one year Net current liabilities Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges Net assets Capital and reserves Called up share capital Share premium account Special reserve Revaluation reserve Profit and loss account Shareholders’ funds Shareholders’ funds are attributable to: Equity shareholders’ funds Non-equity shareholders’ funds Approved by the Board on 26 February 1998 Notes 1997 £’000s 1996 £’000s 13 14 15 16 17 18 19 24 28 13,537 31,911 ––––––– 45,448 ––––––– – 5,981 1,926 1,045 ––––––– 8,952 ––––––– (12,824) ––––––– (3,872) ––––––– 41,576 (3,458) (173) ––––––– 37,945 ––––––– 6,616 3,219 13,644 6,321 8,145 ––––––– 37,945 ––––––– 33,007 4,938 ––––––– 37,945 ––––––– 12,502 24,813 ––––––– 37,315 ––––––– 735 4,891 2,180 17 ––––––– 7,823 ––––––– (8,434) ––––––– (611) ––––––– 36,704 (4,335) (616) ––––––– 31,753 ––––––– 6,606 3,103 13,644 5,051 3,349 ––––––– 31,753 ––––––– 26,815 4,938 ––––––– 31,753 ––––––– J C Morgan B J Moorhouse 26 53558 ACC/NOTES 12/3/98 16:34 Page 27 Combined Statement of Movements in Reserves and Shareholders’ Funds for the year ended 31 December 1997 Group Share Premium Goodwill Revaluation Reserve Reserve Account £'000s £'000s £'000s Profit & Loss Total Account Reserves £'000s £'000s 1997 1996 Share- Share- Share Holders' Holders' Funds Capital Funds £'000s £'000s £'000s Balance at 1 January 3,103 (4,723) 5,188 4,294 7,862 6,606 14,468 12,274 Retained profit for year New shares issued – – Options exercised 116 3,722 3,722 – – – – – 3,722 2,813 – 2,706 116 10 126 33 – – – – – – – – – – – (507) (289) – – – – – – – – – – – Transfer of realised revaluation reserve Surplus on revaluation Adjustments to fair values attributed on acquisition Additional consideration for Snape Group Limited Acquisition of subsidiary undertakings Balance at 31 December (328) 328 – 1,461 – – – – – 1,461 (507) (289) – – – – – 1,461 (507) (289) – – – – – ––––––– 3,219 ––––––– (1,583) ––––––– (7,102) ––––––– – ––––––– 6,321 ––––––– – ––––––– 8,344 ––––––– (1,583) ––––––– 10,782 ––––––– – ––––––– 6,616 ––––––– (1,583) ––––––– 17,398 ––––––– (3,358) ––––––– 14,468 ––––––– Company Share Premium Account £'000s Special Revaluation Reserve £'000s Reserve £'000s Profit & Loss Total Account Reserves £'000s £'000s 1997 1996 Share- Share- Share Holders' Holders' Funds Capital Funds £'000s £'000s £'000s Balance at 1 January 3,103 13,644 5,051 3,349 25,147 6,606 31,753 24,646 Retained profit for year New shares issued – – Options exercised 116 4,605 4,605 – – – – – 4,605 2,643 – 2,706 116 10 126 33 (191) 191 – 1,461 – 1,461 – – – 1,461 – – Transfer of realised revaluation reserve Surplus on revaluation Release of provisions against subsidiary undertakings Balance at 31 December – ––––––– 3,219 ––––––– – ––––––– 13,644 ––––––– – ––––––– 6,321 ––––––– – ––––––– 8,145 ––––––– – ––––––– 31,329 ––––––– – ––––––– 6,616 ––––––– – ––––––– 37,945 ––––––– 1,725 ––––––– 31,753 ––––––– 27 53558 ACC/NOTES 12/3/98 16:34 Page 28 Group Cash Flow Statement for the year ended 31 December 1997 Net cash inflow from operating activities Returns on investments and servicing of finance Interest received Interest paid Dividends paid to preference shareholders Taxation Corporation tax paid Capital expenditure and financial investment Payments to acquire tangible fixed assets Receipts from sale of tangible fixed assets Repayment of loans from associated undertakings Payments to acquire fixed asset investments Acquisitions and disposals Purchase of subsidiary undertakings Net overdrafts acquired with subsidiary undertakings Sale of subsidiary undertaking Net cash disposed of with subsidiary undertaking Equity dividends paid Net cash inflow before financing Financing Issue of shares, net of expenses New loans acquired Loans repaid Net cash (outflow)/inflow from financing activities Increase in cash 26,27 28 Notes 1997 £’000s 1996 £’000s 25 11,584 ––––––– 6,953 ––––––– 711 (1,083) (278) ––––––– (650) ––––––– 626 (558) (278) ––––––– (210) ––––––– (999) ––––––– (217) ––––––– (2,628) (1,629) 7,176 450 (500) ––––––– 4,498 ––––––– (916) (467) 390 (32) ––––––– (1,025) ––––––– 726 – – ––––––– (903) ––––––– (1,361) (2,574) – – ––––––– (3,935) ––––––– (1,510) ––––––– (1,019) ––––––– 11,898 ––––––– 669 ––––––– 126 4,500 (9,111) ––––––– (4,485) ––––––– 7,413 ––––––– 2,739 2,200 (932) ––––––– 4,007 ––––––– 4,676 ––––––– 53558 ACC/NOTES 12/3/98 16:34 Page 29 Other Primary Statements for the year ended 31 December 1997 Statement of Total Recognised Gains and Losses for the year ended 31 December 1997 Profit for the financial year before dividends Surplus on revaluation of investment property Total recognised gains and losses Note of Historical Cost Profits and Losses for the year ended 31 December 1997 Profit on ordinary activities before taxation Realisation of property valuation gains of prior years Difference between the historical cost depreciation charge and the actual depreciation charge for the year calculated on the revalued amount Historical cost profit on ordinary activities before taxation Historical cost profit on ordinary activities after taxation, minority interests and dividends 1997 £’000s 5,848 1,461 ––––––– 7,309 ––––––– 1996 £’000s 4,472 – ––––––– 4,472 ––––––– 1997 £’000s 7,260 328 22 ––––––– 7,610 ––––––– 1996 £’000s 5,174 – 7 ––––––– 5,181 ––––––– 4,072 ––––––– 2,820 ––––––– 29 53558 ACC/NOTES 12/3/98 16:34 Page 30 Principal Accounting Policies for the year ended 31 December 1997 Basis of accounting The financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain fixed asset properties, and in accordance with applicable accounting standards. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and all its subsidiary undertakings. Acquisitions and disposals The results of subsidiaries acquired during the year are included in the consolidated profit and loss account from the date of acquisition. Goodwill arising on consolidation is written off directly to reserves in the year of acquisition. The profit or loss on the disposal of a previously acquired business includes the attributable amount of any purchased goodwill relating to that business. Turnover Turnover is defined as the value of goods and services rendered excluding VAT. Fixed asset investments Except as stated below, investments held as fixed assets are stated at cost less provision for any permanent diminution in value. In the consolidated accounts the Group’s share of the results of the associated undertakings is shown each year in the profit and loss account and the Group’s share of retained profits and reserves is added to the cost of the investment in the balance sheet. Fixed assets and depreciation No depreciation is provided on freehold land. On other assets depreciation is provided in equal annual instalments at rates calculated to write off the cost or valuation of fixed assets over their estimated useful lives as follows: Freehold buildings Leasehold property Plant, machinery, motor vehicles and equipment – – – 50 years period of the lease between 3 and 10 years No depreciation is provided in respect of freehold investment properties which are revalued annually and the aggregate surplus or deficit is transferred to revaluation reserve. The Companies Act 1985 requires all properties to be depreciated. However, this requirement conflicts with the generally held accounting principle set out in SSAP 19. The Directors consider that, as these properties are not held for consumption, but for their investment potential, to depreciate them would not give a true and fair view, and that it is necessary to adopt SSAP 19 in order to give a true and fair view. If this departure from the Act had not been made, the profit for the financial year would have been reduced by depreciation. However, the amount of depreciation cannot reasonably be quantified because depreciation is only one of many factors reflected in the annual valuation and the amount which might otherwise have been shown cannot be separately identified or quantified. 30 53558 ACC/NOTES 12/3/98 16:34 Page 31 Principal Accounting Policies for the year ended 31 December 1997 Stocks Stocks are valued at the lower of cost and net realisable value. Interest incurred on borrowings to finance specific development is capitalised. Contract accounting Contracts are accounted for as long term contracts. Anticipated net sales value of contracts include a proportion of attributable profit where a profitable outcome can be foreseen, provision being made for foreseeable losses. Turnover less progress payments is recorded in “amounts recoverable on contracts”, within debtors. Where progress payments exceed turnover and other contract balances the excess is shown as “payments on account on contracts” in creditors. Deferred taxation Provision under the liability method is made for deferred taxation at the current rate of corporation tax on all timing differences, to the extent that they are expected to crystallise. Leases Rental costs under operating leases are charged to the profit and loss account in equal amounts over the period of the leases. Pensions Sindall Group Pension Fund The Group operated a funded defined benefit scheme for permanent staff employees. This scheme is now a closed scheme as referred to in note 11. Accounting policy followed the funding policy except where an actuarial valuation gave rise to a surplus or deficiency; such surpluses or deficiencies being dealt with as advised by the actuary. Prior to the date of closure, costs of the pension scheme were charged to the profit and loss account over the expected service lives of the participating employees. Other schemes The Group contributes to The Morgan Sindall Retirement Benefits Plan and to other employees’ personal pension arrangements which are of a defined contribution type. The annual costs are charged to the profit and loss account. 31 53558 ACC/NOTES 12/3/98 16:34 Page 32 Notes to the Accounts for the year ended 31 December 1997 1 Analysis of turnover, operating profit and net assets Regional building contracting Fit out Property Group activities Specialist services Net cash balances Net assets Turnover £’000s 184,027 139,539 7,670 – – –––––––– 331,236 –––––––– 1997 Profits/ (losses) £’000s 2,870 3,575 2,279 (1,178) – –––––––– 7,546 –––––––– Net assets £’000s (3,896) (6,622) 17,777 (8,129) – –––––––– (870) 18,386 –––––––– 17,516 –––––––– Turnover £’000s 89,717 183,162 634 – 9,632 –––––––– 283,145 –––––––– 1996 Profits/ (losses) £’000s 1,310 4,252 891 (724) (814) –––––––– 4,915 –––––––– Net assets £’000s (8,773) (3,943) 18,918 (78) (952) –––––––– 5,172 9,296 –––––––– 14,468 –––––––– Net assets are stated after deducting interest bearing net cash balances. The comparative has been restated accordingly. The analysis of operating profit for 1996 includes a Specialist Services segment, which consisted of Sindall Joinery Limited and a small engineering services operation. In 1997 the operations of Sindall Joinery Limited were closed, the closure costs being allocated to the property segment and the engineering services operation being allocated to regional contracting. 2 Other operating income Rent receivable 3 Operating profit Operating profit is stated after charging Depreciation Hire of plant and machinery Operating lease costs Land and buildings Other Auditors’ remuneration Audit Other 1997 £’000s 1,613 –––––––– 1996 £’000s 1,291 –––––––– 1997 £’000s 1,554 4,809 826 1,007 149 4 1996 £’000s 1,076 3,244 289 464 125 6 Further fees of £3,000 (1996: £9,000) paid to Deloitte & Touche in 1997 are included in the cost of investment in subsidiary undertakings. Included within operating profit for the year are costs relating to the closure of the operations of Sindall Joinery Limited totalling £427,000. 4 Net interest (payable)/receivable Interest receivable Interest payable on bank loans and overdrafts Add: Interest capitalised 32 1997 £’000s 789 (1,123) –––––––– (334) 298 –––––––– (36) –––––––– 1996 £’000s 619 (546) –––––––– 73 139 –––––––– 212 –––––––– 53558 ACC/NOTES 12/3/98 16:34 Page 33 Notes to the Accounts for the year ended 31 December 1997 5 Tax charge on profit on ordinary activities Corporation tax payable at 31% (1996: 33%) Under/(over) provision in prior years Share of tax of associated undertakings 1997 £’000s 1,237 158 17 –––––––– 1,412 –––––––– 1996 £’000s 1,192 (483) (7) –––––––– 702 –––––––– The tax charge for the year is lower than the standard rate due to the availability of tax losses brought forward. 6 Dividends on equity and non equity shares Non equity dividends on preference shares Paid Accrued Equity dividends on ordinary shares Interim paid 1.67p (1996: 1.35p) Final proposed 3.58p (1996: 2.85p) 1997 £’000s 1996 £’000s 219 59 –––––––– 278 –––––––– 559 1,201 –––––––– 1,760 –––––––– 2,038 –––––––– 219 59 –––––––– 278 –––––––– 430 951 –––––––– 1,381 –––––––– 1,659 –––––––– 7 Profit of parent company The Company has taken advantage of s230 of the Companies Act 1985 and consequently the profit and loss account of the parent company is not presented as part of these accounts. The parent’s retained profit for the financial year amounted to £4,605,000 (1996: £4,302,000). 8 Earnings per ordinary share The calculation of the earnings per share is based on the weighted average number of 33,461,277 ordinary shares in issue during the year (1996: 31,952,410) and on the profits for the year attributable to ordinary shareholders of £5,482,000 (1996: £4,194,000). 9 Employees The average number of people employed by the Group during the period was: 10 Staff costs Wages and salaries Social security costs Pension costs 1997 No. 1996 No. 1,237 –––––––– 886 –––––––– 1997 £’000s 30,395 2,905 769 –––––––– 34,069 –––––––– 1996 £’000s 21,451 2,190 549 –––––––– 24,190 –––––––– 33 53558 ACC/NOTES 12/3/98 16:34 Page 34 Notes to the Accounts for the year ended 31 December 1997 11 Pensions Defined Benefits Arrangements The Sindall Group Pension Fund has been operated as a closed scheme since 1 June 1995. No contributions have been made to the Fund since that date and as a consequence, no amounts included in these accounts relate to the Fund. Since the date of the closure of the Fund, the liabilities for the accrued benefits of pensioners have been bought out by way of annuity policies. The liability for the accrued benefit rights of deferred pensioners was transferred, together with an actuarially assessed matching pool of assets, to The Morgan Sindall Retirement Benefits Plan. Details of this Plan and of the action taken in respect of former active members of the Fund are set out below. The Accounts of the Fund as at 31 March 1997 consequently show that the Fund has neither assets or liabilities. On receipt of actuarial certification of that position, the Company will shortly be writing to the Trustees stating that the winding up process has now been completed. It is expected that the Trustees will confirm their agreement in a formal resolution and will then be discharged from their respective positions as Trustees. Defined Contribution and Hybrid Schemes The Morgan Sindall Retirement Benefits Plan was established on 31 May 1995 and is a Money Purchase arrangement which is now available to all permanent salaried staff in all Group companies. Pension costs represent the employer’s contributions payable to the Plan together with employer’s contributions to the personal pension plans of individuals, where applicable. The Plan has, however, assumed responsibility for the final salary linked benefits of certain active members of the Sindall Group Pension Fund. The basis of service computation is limited to the period of membership up to 1 June 1995 but there will be a need for periodic actuarial review of the accrued liabilities and the assets allocated for this purpose. An actuarial bulk transfer valuation as at 1 November 1996 valued the liability for the accrued final salary linked benefits at £2.6 million. The main assumptions in the valuation were; rate of investment return 8.5% per annum compound, rate of earnings escalation 8.0% per annum compound, rate of growth in equity dividends 3.5% per annum. 12 Directors’ remuneration J C Morgan (Highest paid director) A M Stoddart J M Bishop J J C Lovell B J Moorhouse A T Sloan (*) Executive directors Sir D P Hornby (Chairman) G Gallacher R W Marshall Non executive directors Totals Salary £’000s Bonus £’000s Benefits Pension £’000s £’000s Fees £’000s 1997 Totals £’000s 1996 Totals £’000s 110 100 95 95 92 64 ––––– 556 ––––– – – – ––––– – ––––– 556 ––––– 70 64 61 61 59 – ––––– 315 ––––– – – – ––––– – ––––– 315 ––––– 16 14 13 11 12 5 ––––– 71 ––––– – – – ––––– – ––––– 71 ––––– 11 10 9 9 9 4 ––––– 52 ––––– – – – ––––– – ––––– 52 ––––– – – – – – – ––––– – ––––– 36 20 – ––––– 56 ––––– 56 ––––– 207 188 178 176 172 73 ––––– 994 ––––– 36 20 – ––––– 56 ––––– 1,050 ––––– 246 18 212 212 – 212 ––––– 900 ––––– 38 15 14 ––––– 67 ––––– 967 ––––– The totals of directors’ remuneration shown above include fees of £67,000 in 1996. Pension contributions made on behalf of the five executive directors are made to money purchase pension schemes. Further details of the directors’ remuneration are contained in the Report of the Remuneration Committee on page 21. * included within salary is £30,000 compensation for loss of office. 34 53558 ACC/NOTES 12/3/98 16:34 Page 35 Notes to the Accounts for the year ended 31 December 1997 12 Directors’ remuneration (Continued) Long term incentive plan A long term incentive plan ('the 1997 plan') has been established. Performance is measured over a rolling three year period by comparing the increase in total return to shareholders in Morgan Sindall plc to that of fourteen peer group companies listed in the Financial Times. All shares awarded to a participant will be allocated at the end of the three year period if Morgan Sindall plc is ranked first amongst the comparable companies and no shares will be awarded if the Company is ranked in the middle of the group. Shares will be allocated on a graduated level between these two positions. On allocation of shares to a participant, sale or transfer of the shares is restricted for a further two year period. No shares were awarded during the period. An amount of £125,000 has been accrued for potential future awards relating to 1997 which will be calculated based on the three year period ending 31 December 1999. 13 Tangible fixed assets (a) Group Cost or valuation At 1 January 1997 Additions Acquisition of subsidiary undertaking Surplus on revaluation Disposals Disposal of subsidiary undertaking At 31 December 1997 Depreciation At 1 January 1997 Provided in the year Acquisition of subsidiary undertaking Disposals Disposal of subsidiary undertaking At 31 December 1997 Net book value at 31 December 1997 Net book value at 31 December 1996 (b) Company Cost or valuation At 1 January 1997 Additions Transfers from subsidiary undertaking Surplus on revaluation Disposals At 31 December 1997 Depreciation At 1 January 1997 Provided in the year Transfers from subsidiary undertaking Disposals At 31 December 1997 Net book value at 31 December 1997 Net book value at 31 December 1996 Motor vehicles £’000s Freehold property £’000s Leasehold property £’000s 2,805 10,225 Plant, machinery & equipment £’000s 6,471 2,231 489 – (2,701) (927) –––––––– 5,563 –––––––– 4,656 989 397 (2,524) (651) –––––––– 2,867 –––––––– 2,696 –––––––– 1,815 –––––––– 817 221 – – 274 101 – (1,136) (357) –––––––– 1,687 –––––––– 1,789 409 100 (647) (329) –––––––– 1,322 –––––––– 365 –––––––– 1,016 –––––––– – – – – (739) –––––––– 299 –––––––– – –––––––– – –––––––– 781 24 – (739) –––––––– 66 –––––––– 233 –––––––– 36 –––––––– – – – – –––––––– – –––––––– – –––––––– – –––––––– 26 795 1,461 (484) – –––––––– 12,023 –––––––– 81 50 – – – –––––––– 131 –––––––– 11,892 –––––––– 10,144 –––––––– 8,505 – 1,692 1,461 – –––––––– 11,658 –––––––– 53 28 48 – –––––––– 129 –––––––– 11,529 –––––––– 8,452 –––––––– 4,488 97 3,000 – (5,264) – –––––––– 2,321 –––––––– 197 106 – (64) – –––––––– 239 –––––––– 2,082 –––––––– 4,291 –––––––– 4,152 – – – (2,264) –––––––– 1,888 –––––––– 138 39 – (64) –––––––– 113 –––––––– 1,775 –––––––– 4,014 –––––––– Total £’000s 23,989 2,628 4,385 1,461 (9,585) (1,284) –––––––– 21,594 –––––––– 6,723 1,554 497 (3,235) (980) –––––––– 4,559 –––––––– 17,035 –––––––– 17,266 –––––––– 13,474 221 1,692 1,461 (3,003) –––––––– 13,845 –––––––– 972 91 48 (803) –––––––– 308 –––––––– 13,537 –––––––– 12,502 –––––––– 35 53558 ACC/NOTES 12/3/98 16:34 Page 36 Notes to the Accounts for the year ended 31 December 1997 13 Tangible fixed assets (Continued) The net book value of land and buildings comprises: Group Company Investment properties Freehold Short leasehold Other properties Freehold Long leasehold Short leasehold 1997 £’000s 8,572 1,499 –––––––– 10,071 –––––––– 3,320 – 583 –––––––– 3,903 –––––––– 13,974 –––––––– 1996 £’000s 7,111 1,531 –––––––– 8,642 –––––––– 3,033 2,483 277 –––––––– 5,793 –––––––– 14,435 –––––––– 1997 £’000s 8,267 1,499 –––––––– 9,766 –––––––– 3,262 – 276 –––––––– 3,538 –––––––– 13,304 –––––––– 1996 £’000s 6,806 1,531 –––––––– 8,337 –––––––– 1,646 2,483 – –––––––– 4,129 –––––––– 12,466 –––––––– Land and buildings at cost or valuation are stated at: Group Company At valuation 1994 1996 1997 At cost Comparable amounts determined according to the historical cost convention: Land and buildings 1997 £’000s 1,973 – 10,134 2,237 –––––––– 14,344 –––––––– 1996 £’000s 1,973 8,673 – 4,067 –––––––– 14,713 –––––––– Cost 1997 £’000s Accumulated depreciation 1997 £’000s 8,536 –––––––– 513 –––––––– 1997 £’000s 1,973 – 9,829 1,744 –––––––– 13,546 –––––––– Net book value 1997 £’000s 8,023 –––––––– 1996 £’000s 1,973 8,368 – 2,316 –––––––– 12,657 –––––––– Net book value 1996 £’000s 9,643 –––––––– The directors have revalued the Group’s investment properties on 31 December 1997 at open market value. Based on their collective expertise and knowledge of both the sector and the individual properties, they consider that the carrying value is equivalent to current market value. 14 Fixed assets – investments (a) Group At 1 January 1997 Acquisition of Ottervale Estates Limited Loans repaid Share of results for year Reclassify as liabilities and charges Additions At 31 December 1997 Associated undertakings Own shares at cost £’000s – – – – – 500 –––––––– 500 –––––––– Shares £’000s 5 (1) – – – – –––––––– 4 –––––––– Share of reserves £’000s 208 (176) – (250) 218 – –––––––– – –––––––– Loans £’000s 450 – (450) – – – –––––––– – –––––––– Total £’000s 663 (177) (450) (250) 218 500 –––––––– 504 –––––––– The own shares represent 300,000 ordinary shares held by the Morgan Sindall Employee Benefits Trust in connection with the Long Term Incentive Plan. Based on the Company’s share price on 31 December 1997 of £1.94, the market value of the shares held in the trust was £582,000. 36 53558 ACC/NOTES 12/3/98 16:34 Page 37 Notes to the Accounts for the year ended 31 December 1997 14 Fixed assets – investments (Continued) (b) Company Cost at 1 January 1997 Additions Repaid during the year Cost at 31 December 1997 Provisions at 1 January 1997 (Release of provisions)/ provisions created in year Provisions at 31 December 1997 Net book value at 31 December 1997 Net book value at 31 December 1996 Other loans £’000s – 500 – –––––––– 500 –––––––– – – –––––––– – –––––––– 500 –––––––– – –––––––– Subsidiary undertakings Associated undertakings Shares £’000s 22,243 6,827 – –––––––– 29,070 –––––––– 2,108 (115) –––––––– 1,993 –––––––– 27,077 –––––––– 20,135 –––––––– Loans £’000s 5,058 1,921 (2,165) –––––––– 4,814 –––––––– 534 (54) –––––––– 480 –––––––– 4,334 –––––––– 4,524 –––––––– Shares £’000s 4 – – –––––––– 4 –––––––– – 4 –––––––– 4 –––––––– – –––––––– 4 –––––––– Loans £’000s 150 – (150) –––––––– – –––––––– – – –––––––– – –––––––– – –––––––– 150 –––––––– Total £’000s 27,455 9,248 (2,315) –––––––– 34,388 –––––––– 2,642 (165) –––––––– 2,477 –––––––– 31,911 –––––––– 24,813 –––––––– 15 Stocks Development works and building land Trading properties Materials and equipment Group Company 1997 £’000s 3,728 2,628 108 –––––––– 6,464 –––––––– 1996 £’000s 5,311 – 209 –––––––– 5,520 –––––––– 1997 £’000s 3,353 2,628 – –––––––– 5,981 –––––––– 1996 £’000s 4,891 – – –––––––– 4,891 –––––––– Included within development works and building land is £15,000 (1996: £139,000) in respect of interest capitalised. 16 Debtors Trade debtors Amounts recoverable on contracts Amounts owed by subsidiary undertakings Amounts owed by associated undertakings Corporation tax recoverable Other debtors Prepayments and accrued income Group Company 1997 £’000s 23,810 29,709 – 74 – 736 608 –––––––– 54,937 –––––––– 1996 £’000s 20,400 30,976 – 59 – 1,624 535 –––––––– 53,594 –––––––– 1997 £’000s 165 – 710 74 328 622 27 –––––––– 1,926 –––––––– 1996 £’000s 186 – 1,242 59 111 522 60 –––––––– 2,180 –––––––– 37 53558 ACC/NOTES 12/3/98 16:34 Page 38 Notes to the Accounts for the year ended 31 December 1997 17 Creditors: amounts falling due within one year Group Company Bank loans Other loan (see note 18) Trade creditors Amounts owed to subsidiary undertakings Other creditors Corporation tax Other tax and social security Accruals and deferred income Dividend 1997 £’000s 876 – 1996 £’000s 876 50 58,236 54,872 – 2,705 886 2,387 14,118 1,260 –––––––– 80,468 –––––––– – 1,731 350 2,731 11,912 1,010 –––––––– 73,532 –––––––– 1997 £’000s 876 – 49 7,551 1,181 – 63 1,844 1,260 –––––––– 12,824 –––––––– 1996 £’000s 876 – 116 4,468 655 – 74 1,235 1,010 –––––––– 8,434 –––––––– 18 Creditors: amounts falling due after more than one year Group Company Bank loans Other loan 1997 £’000s 3,458 – –––––––– 3,458 –––––––– 1996 £’000s 4,335 750 –––––––– 5,085 –––––––– 1997 £’000s 3,458 – –––––––– 3,458 –––––––– 1996 £’000s 4,335 – –––––––– 4,335 –––––––– There are two bank loans both bearing interest at 1.5% above bank base rate. One has an outstanding balance repayable in fifteen quarterly instalments of £164,000. The other has an outstanding balance repayable in thirty four quarterly instalments of £55,000. Security for the bank loans and overdrafts is described in note 23. The other loan of £800,000 which was outstanding at 1 January 1997 was discharged during the year. 19 Provisions for liabilities and charges Provisions for losses in Group undertakings: At 1 January 1997 Provision for losses of subsidiary undertakings Share of associated company losses Release to profit and loss account At 31 December 1997 Group Company 1997 £’000s – – 218 – –––––––– 218 –––––––– 1996 £’000s – – – – –––––––– – –––––––– 1997 £’000s 616 111 – (554) –––––––– 173 –––––––– 1996 £’000s – 616 – – –––––––– 616 –––––––– 38 53558 ACC/NOTES 12/3/98 16:34 Page 39 Notes to the Accounts for the year ended 31 December 1997 19 Provisions for liabilities and charges (Continued) The amounts of deferred taxation provided and not provided in the accounts are as follows: Group Provided Not provided Revaluation surplus Capital allowances in excess of depreciation Taxation loss relief and other timing differences 1997 £’000s – – – –––––––– – –––––––– 1996 £’000s – 142 (142) –––––––– – –––––––– 1997 £’000s – – – –––––––– – –––––––– 1996 £’000s 318 – (318) –––––––– – –––––––– Advance corporation tax amounting to £502,000 (1996: £511,000) written off within the accounts remains available to offset against future taxable profits. In addition there are taxation losses to carry forward of approximately £6 million (1996: £8 million). 20 Sale of business On 28 October 1997, the group completed the sale of AK Plant Limited, for net consideration of £390,000. The loss on disposal was £155,000. The profit attributable to members of the parent company include losses of £41,000 incurred by AK Plant Limited up to its date of disposal. During the year AK Plant Limited contributed £49,000 to the group's net operating cash flow, paid £18,000 in respect of net returns on investment and servicing of finance and paid £58,000 for capital expenditure and financial investment. 21 Acquisitions Roberts R. Roberts (Leeds) Limited On 1 August 1997 the Company acquired the whole of the issued share capital of Roberts R. Roberts (Leeds) Limited for a total consideration of £550,000 in cash. Additionally, acquisition expenses of £72,000 were incurred. The results, after taxation, of Roberts R. Roberts (Leeds) Limited were as follows: Results prior to acquisition: 1 August 1996 to date of acquisition Preceding financial year ending 31 July 1996 The following table analyses the book value of the major categories of assets and liabilities acquired: Tangible fixed assets Current assets Creditors Net cash balances Net liabilities Cost of acquisition including expenses Goodwill Book value at date of acquisition Accounting policy alignment Provisional fair value adjustments £'000 929 2,953 (3,499) (784) –––––––– (401) –––––––– £'000 - (43) (143) - –––––––– (186) –––––––– £'000 (47) (415) - - –––––––– (462) –––––––– The acquisition has been accounted for by the acquisition method of accounting. £'000's (871) 19 Fair value of net assets £'000 882 2,495 (3,642) (784) –––––––– (1,049) (622) –––––––– (1,671) –––––––– 39 53558 ACC/NOTES 12/3/98 16:34 Page 40 Notes to the Accounts for the year ended 31 December 1997 21 Acquisitions (Continued) Ottervale Estates Limited On 28 February 1997 the Company acquired a further 3/7th share of the issued share capital of the associate undertaking, Ottervale Estates Limited for a total consideration of £1,000 in cash. The results, after taxation, of Ottervale Estates Limited were as follows: Results prior to acquisition: 1 January 1997 to date of acquisition Preceding financial year ending 31 December 1996 The following table analyses the book value of the major categories of assets and liabilities acquired: Tangible fixed assets Current assets Creditors Loans Net cash balances Net assets 3/7th share of net assets Cost of acquisition including expenses Negative goodwill Book value at date of acquisition Fair value adjustments £'000 3,200 45 (223) (2,934) 317 –––––––– 405 –––––––– £'000 (200) – – – – –––––––– (200) –––––––– £'000's (93) 116 Fair value of net assets £'000 3,000 45 (223) (2,934) 317 –––––––– 205 –––––––– 88 (1) –––––––– 87 –––––––– The acquisition has been accounted for by the acquisition method of accounting. Cash Flow During the year, acquisitions contributed £607,000 to the group's net operating cash flows, paid £378,000 in respect of net returns on investment and servicing of finance and received £4,332,000 from investing activities. John E.B. Wheatley Limited On 4 February 1998 the Company acquired the whole of the issued share capital of John E.B. Wheatley Limited for a total consideration of £365,000 in cash. Net liabilities acquired before adjustments for accounting policy alignment and fair values totalled £234,000. Prior Year Acquisitions The prior year financial statements did not disclose that fair values were provisional. In accordance with the Financial Reporting Statement 6, fair values and goodwill have been adjusted and are disclosed in the statement of movements in shareholders' funds on page 27. 22 Financial commitments Capital expenditure Authorised and contracted Group Company 1997 £’000s 104 –––––––– 1996 £’000s 116 –––––––– 1997 £’000s 43 –––––––– 1996 £’000s – –––––––– 23 Contingent liabilities Group and associated undertakings bank accounts are supported by cross-guarantees given by the Company and floating and fixed charges on certain Group properties. A performance bond facility is supported by cross-guarantees given by the Company and participating trading companies in the Group. 40 53558 ACC/NOTES 12/3/98 16:34 Page 41 Notes to the Accounts for the year ended 31 December 1997 24 Called up share capital Authorised Ordinary shares of 5p each 5.625% Convertible cumulative redeemable preference shares of £1 each Issued and fully paid Ordinary shares of 5p each 5.625% Convertible cumulative redeemable preference shares of £1 each 1997 1996 No. ‘000s 42,960 £’000s 2,148 No. ’000s 42,960 £’000s 2,148 5,000 –––––––– 47,960 –––––––– 5,000 –––––––– 7,148 –––––––– 5,000 –––––––– 47,960 –––––––– 5,000 –––––––– 7,148 –––––––– 33,519 1,678 33,377 1,668 4,938 –––––––– 38,457 –––––––– 4,938 –––––––– 6,616 –––––––– 4,938 –––––––– 38,315 –––––––– 4,938 –––––––– 6,606 –––––––– Ordinary Shares The Ordinary Shares of 5p each of the Company issued during the year are shown below. Details of the share option schemes referred to are given later in this note. 1. 80,000 Ordinary Shares in respect of options exercised under the Company's 1988 Scheme (referred to below) for total consideration of £73,000. 2. 66,500 Ordinary Shares in respect of options exercised under the Company's 1995 Scheme (referred to below) for total consideration of £43,000. Preference shares The Convertible Preference Shares are convertible at the option of the holder on 30 June in each of the years 1991 to 2003 inclusive on the basis of 40 Ordinary Shares for every 100 Convertible Preference Shares. After conversion of 75% of the Convertible Preference Shares the Company has the right to require the conversion of the outstanding balance. The Convertible Preference Shares are redeemable at par at the Company's option after the last date of conversion in 2003 and are finally redeemable on 30 June 2005. There is no premium payable on a return of capital on a winding up and the Convertible Preference Shares do not entitle the holders to any participation in the profits or assets of the Company beyond their preference dividend entitlement. Options The company currently has two share option schemes. The first scheme ('the 1988 Scheme') was introduced on 21 January 1988 and the second scheme ('the 1995 Scheme') received approval on 24 May 1995. At 31 December 1997 the outstanding options for ordinary shares under both schemes were: 1988 Scheme: Numbers 18,000 180,250 69,100 167,800 231,750 1995 Scheme Numbers 240,000 101,000 262,800 255,000 (3 staff) (37 staff) (35 staff) (33 staff) (113 staff) (24 staff) (14 staff) (38 staff) (100 staff) Exercise price Period for exercise £1.85 £0.73 £0.97 £1.47 £1.71 12 May 1991 to 11 May 1998 9 August 1998 to 8 August 2005 28 March 1999 to 27 March 2006 17 August 1999 to 16 August 2006 24 September 2000 to 23 September 2007 Exercise price Period for exercise £0.73 £0.97 £1.47 £1.71 9 August 2000 to 8 August 2002 28 March 2001 to 27 March 2003 17 August 2001 to 16 August 2003 24 September 2002 to 23 September 2004 No options have been granted to any present members of the Morgan Sindall plc Board. 41 53558 ACC/NOTES 12/3/98 16:34 Page 42 Notes to the Accounts for the year ended 31 December 1997 25 Reconciliation of operating profit to net cash inflow from operating activities Operating profit Depreciation charges Profit on sale of fixed assets Decrease/(increase) in stocks and work in progress Decrease/(increase) in debtors Increase in creditors Net cash inflow from operating activities 26 Analysis of net cash Cash at bank and in hand Loans due within one year Loans due after more than one year 27 Reconciliation of net cash flow to movement in net cash Increase in cash Net cash flow from decrease/(increase) in loans Movement in net cash Net cash at 1 January Net cash at 31 December 28 Revaluation reserve Investment property revaluation reserve Other property revaluation reserve 29 Operating lease commitments 1997 £’000s 7,546 1,554 (671) 37 704 2,414 –––––––– 11,584 –––––––– 1996 £’000s 4,915 1,076 (95) (3,145) (19,267) 23,469 –––––––– 6,953 –––––––– At 1 January 1997 £’000s 15,307 (926) (5,085) –––––––– 9,296 –––––––– Cash flow 7,413 50 1,627 –––––––– 9,090 –––––––– At 31 December 1997 £’000s 22,720 (876) (3,458) –––––––– 18,386 –––––––– 1997 £’000s 7,413 1,677 –––––––– 9,090 9,296 –––––––– 18,386 –––––––– 1996 £’000s 4,676 (1,268) –––––––– 3,408 5,888 –––––––– 9,296 –––––––– Group Company 1997 £’000s 6,101 220 –––––––– 6,321 –––––––– 1996 £’000s 4,640 548 –––––––– 5,188 –––––––– 1997 £’000s 6,101 220 –––––––– 6,321 –––––––– 1996 £’000s 4,640 411 –––––––– 5,051 –––––––– Land and buildings £’000s 467 959 326 –––––––– 1,752 –––––––– Other £’000s 236 1,197 – –––––––– 1,433 –––––––– At 31 December 1997 the Group was committed to making the following payments during the next year in respect of operating leases Leases which expire: Within one year Within two to five years After five years 42 53558 ACC/NOTES 12/3/98 16:34 Page 43 Notes to the Accounts for the year ended 31 December 1997 30 Additional information on subsidiaries and associated undertakings The Company acts as a holding company for the Group and has the following principal subsidiary and associated undertakings which affected the Group's results or net assets. Subsidiary undertakings *Morgan Lovell London Limited *Morgan Lovell Regions Limited *Overbury plc *Overbury Projects Limited *Overbury & Sons Limited *Overbury Southern Limited *Overbury Special Works Limited *Overbury Construction Limited *Sindall Construction Limited *Sindall Joinery Limited *Sindall Maintenance Limited *Sindall Norwich Limited *Sotham Engineering Services Limited Barnes & Elliott Limited T. J. Braybon & Son Limited Hinkins & Frewin Limited Stansell Limited *Stansell QVC Limited The Snape Group Limited *Snape Limited Ottervale Estates Limited (86%) Robert R Roberts Limited Activity Office design, fitting out and refurbishment specialists Office design, fitting out and refurbishment specialists Fitting out and refurbishment contractor (x) Fitting out and refurbishment contractor (x) Fitting out and refurbishment contractor (x) Fitting out and refurbishment contractor (x) Fitting out and refurbishment contractor (x) Fitting out and refurbishment contractor Building contractors Joinery manufacturers Property refurbishment and maintenance Building contractors Mechanical and electrical engineering contractors Building contractors Building contractors Building contractors Building contractors Building contractors Intermediate holding company Building contractors Ownership and management of investment properties Building contractors Associated undertakings Primary Medical Property Limited (50%) Development of medical properties All subsidiary undertakings are wholly owned unless shown otherwise and with the exception of companies marked * all shareholdings are in the name of Morgan Sindall plc. With the exception of Stansell QVC Limited, registered and operating in Jersey, all undertakings are registered in England and England is the principal place of business. The businesses and assets of the companies marked (x) have all been transferred to Overbury plc which is now a principal operating company. As part of the arrangements, the resources of Overbury plc are available to ensure that all of the residual contractual and other obligations of the transferring companies are fully and properly satisfied. 31 Directors’ interests According to the register maintained as required by the Companies Act 1985, the interests of the directors in office at 31 December 1997 and 1 January 1997 (or the date of appointment if later) were as follows: Sir D P Hornby J C Morgan J M Bishop J J C Lovell B J Moorhouse A M Stoddart G Gallacher 5p Ordinary Beneficial 31.12.97 5,452 6,186,426 20,000 6,183,706 250 5,000 – 1.1.97 5,452 6,186,426 16,666 6,183,706 – 5,000 – No director had any non beneficial interest in the Ordinary Shares or any interest in the Preference Shares of the Company There have been no changes in the interests of the directors between the year end and 26 February 1998. No director had any material interest in any contract with the Company. 32 Related party transactions During the year amounts totalling £10,000 were paid to The Executive Coaching Consultancy of which Ms G Gallacher is a director. 43 53558 ACC/NOTES 12/3/98 16:34 Page 44 Corporate Governance for the year ended 31 December 1997 Policy statement Morgan Sindall plc fully supports the Cadbury Code of Best Practice and has been in compliance with the Code during 1997 except paragraph 4.3, when following the resignation of Mr R W Marshall the number of non-executive directors was less than the Code's recommendation of three. The appointment on 1 March 1998 of Mr B H Asher, after a very careful search for a suitable candidate, will ensure that the Company is fully compliant with the Code. Board constitution and procedures After 1 March 1998 the Board will consist of eight directors of whom three are non-executives, the roles of Chairman and Chief Executive being separated. The Board meets a minimum of six times a year to review all significant aspects of the Group’s activities, supervise the executive management and to make decisions on matters, which are specifically reserved, for decision of the full Board. Directors are entitled to take independent professional advice where circumstances are appropriate. Board committees The Board has established an Audit Committee and a Remuneration Committee. Each Committee operates within defined terms of reference. Membership is comprised of the non-executive directors listed on page 18. Audit Committee The audit committee is responsible for reviewing the annual accounts before their submission to the board and for advising the board on the appointment and remuneration of external auditors. Meetings of the Committee, chaired by Sir D P Hornby, will normally be attended by the Finance Director and by a representative of the external auditors. Remuneration Committee The Remuneration Committee, chaired by Ms G Gallacher, is responsible for determining the contract terms, remuneration and other benefits for the executive directors including the long term incentive plan. The Committee meetings are normally held twice in each year and are normally expected to be attended by the Chief Executive. A report to the shareholders by the Remuneration Committee is shown on page 21. Internal financial control The Board has formally acknowledged that they are responsible for the Group’s system of internal financial control. They consider that the system as a whole and its constituent elements are appropriate to the nature of the Group’s activities and are designed and operated so as to provide reasonable, but not absolute, assurance that the Group’s assets are correctly stated and are safeguarded against loss. The main features of the system are as follows: Financial reporting systems The Board recognises that an essential part of the responsibility for running a business is the effective safeguarding of assets, the proper recognition of liabilities and the accurate reporting of profits. The Group has a comprehensive system for monthly reporting to the Board of financial results with budget comparisons and the Board is represented at key subsidiary board meetings. Subsidiary companies prepare detailed annual budgets, which are reviewed by the Board and formally adopted. Quality and integrity of personnel The Board has established a set of Core Values for the Group. These are set out in its Business Plan and are actively communicated to Group personnel at all levels. Integrity is a key component of those values and this quality is regarded as a vital factor in maintaining the effectiveness of the Group’s system of internal control. Risk management Formulation of risk management strategy is a matter specifically reserved for decision by the Board. Key areas of risk are identified and reviewed by the Board and by executive management on a regular basis. The Board also reserves to itself the evaluation of any risk arising from the acquisition or development of any new activities where size or nature of business is, or is likely to be, material to the Group’s existing activities. Having regard to the nature of the Group’s activities, particular care is taken to ensure that appropriate and adequate insurance arrangements are in place. Investment and capital expenditure appraisal There are clear policies, detailed procedures and defined levels of authority in relation to investment, capital expenditure, significant cost commitments and asset disposals. Board review The Board has reviewed the effectiveness of the system of internal controls for the accounting year and for the period up to the date of approval of the financial statements. Going Concern After making enquiries, the directors have formed a judgement at the time of approving the financial statements that there is a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason, the directors continue to adopt a going concern basis in preparing the financial statements. 44 

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