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Comfort Systems USAW E 3 T 1 W n o d n o L , t e e r t S n a m w e N 7 7 , c l p i l l a d n S n a g r o M 1 0 2 9 7 0 3 7 0 2 0 : x a F 0 0 2 9 7 0 3 7 0 2 0 : l e T k u . o c . l l a d n i s n a g r o m t a e t i s b e w r u o t i s i V a n n u a l r e p o r t & a c c o u n t s 2 0 0 5 report and accounts 2005 Morgan Sindall plc is a top ten United Kingdom construction group employing over 5,000 people. Our businesses operate within four specialist divisions; Fit Out, Construction, Infrastructure Services and Affordable Housing. The strength of the Group is derived from this balance of activity and the ability to provide integrated solutions across these four areas. Fit Out Fit Out operates through four businesses. Overbury is the leading office fit out and refurbishment specialist and Morgan Lovell provides a complete office transformation service. Vivid Interiors refurbishes and fits out hotel, retail, leisure and entertainment facilities. Backbone Furniture supplies, refurbishes and installs commercial office furniture. Construction Bluestone is a national construction business operating through a network of local offices. The business’ core expertise is in building for education, healthcare, industrial and commercial organisations where it undertakes new build, refurbishment, smaller scale works and maintenance projects under a variety of procurement routes. Infrastructure Services Morgan Est is a national business undertaking a broad spectrum of infrastructure and utility projects. It provides civil engineering, utility, tunnelling and mechanical electrical services through all phases of a project from design to operation and maintenance. Affordable Housing Lovell is the country’s leading provider of affordable housing, specialising in mixed tenure and major refurbishment schemes. It works in partnership with social housing providers at the cutting edge of urban regeneration to create sustainable communities. Corporate directory Share prices (FT Cityline) The Company’s share price (15 minutes delay) is displayed on the Company’s website. The EPIC code as used in the Topic and Datastream Share Price information service is MGNS. Telephone share dealing service Details of a low cost telephone dealing service with Stocktrade are available on the Company’s website under Investor Relations. Electronic communications Shareholders may now view their shareholdings on line through the website of our registrars, Capita Registrars. If you wish to view your shareholding, please log on to www.capitaregistrars.com and click on the link 'shareholder services' then follow the instructions. The Company would also like to take advantage of recent changes to the law, which allows us to communicate with shareholders in electronic form. If you would like to receive future communications in this way, please register your e–mail address on the registrar's website, following the instructions provided. This form of communication offers a cost benefit to the Company and provides for an environmentally friendly way of communicating. The Company would therefore encourage as many of you as possible to make use of this service. To use the service, you will need to confirm your surname, UK Post Code and Investor Code. The Investor Code may be found on a recent share certificate, in the bottom right hand corner, or on the tax voucher for the forthcoming dividend payment. Financial calendar Annual general meeting 25 April 2006 Final dividend: Ex–dividend date Record date Payment date 5 April 2006 7 April 2006 5 May 2006 Interim results announcement August 2006 Directors John Morgan Paul Smith David Mulligan Paul Whitmore Bernard Asher (non-executive) Gill Barr (non-executive) Jon Walden (non-executive) Jack Lovell (non-executive) Company Secretary Mary Nettleship Registered office 77 Newman Street, London, W1T 3EW Tel: 020 7307 9200 Fax: 020 7307 9201 Registered No: 521970 Solicitors Charles Russell 8–10 New Fetter Lane, London, EC4 1RS Independent Auditors Deloitte & Touche LLP 3 Victoria Square, Victoria Street, St Albans, AL1 3TF Clearing bankers Lloyds TSB Bank plc PO Box 17328, 11–15 Monument Street, London, EC3V 9JA Brokers Hoare Govett Ltd 250 Bishopsgate, London, EC2M 4AA Registrars Capita Registrars The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU Shareholder communication Enquiries and information: Please contact the company secretary E–mail: mary.nettleship@morgansindall.co.uk Website www.morgansindall.co.uk Design: www.lgs.co.uk Printed by Folium Financial & Security Printers, Birmingham 89 Contents Chairman and chief executive’s statement Operating and financial review Divisional reviews Fit Out Construction Infrastructure Services Affordable Housing Board of directors Report of the directors Corporate social responsibility review Directors’ remuneration report Corporate governance statement Consolidated financial statements Independent auditors’ report Consolidated income statement Consolidated balance sheet Consolidated statement of recognised income and expense Consolidated cash flow statement Principal accounting policies 02 04 10 12 14 16 18 20 24 28 35 39 40 41 42 43 44 Notes to the consolidated financial statements 47 Company financial statements Independent auditors’ report Company balance sheet Combined statement of movements in reserves and shareholders’ funds Principal accounting policies 71 72 73 74 Notes to the Company financial statements 76 Notice of annual general meeting Proxy form Corporate directory 84 87 89 Morgan Sindall plc is a top ten United Kingdom construction group employing over 5,000 people. Our businesses operate within four specialist divisions; Fit Out, Construction, Infrastructure Services and Affordable Housing. The strength of the Group is derived from this balance of activity and the ability to provide integrated solutions across these four areas. Fit Out Fit Out operates through four businesses. Overbury is the leading office fit out and refurbishment specialist and Morgan Lovell provides a complete office transformation service. Vivid Interiors refurbishes and fits out hotel, retail, leisure and entertainment facilities. Backbone Furniture supplies, refurbishes and installs commercial office furniture. Construction Bluestone is a national construction business operating through a network of local offices. The business’ core expertise is in building for education, healthcare, industrial and commercial organisations where it undertakes new build, refurbishment, smaller scale works and maintenance projects under a variety of procurement routes. Infrastructure Services Morgan Est is a national business undertaking a broad spectrum of infrastructure and utility projects. It provides civil engineering, utility, tunnelling and mechanical electrical services through all phases of a project from design to operation and maintenance. Affordable Housing Lovell is the country’s leading provider of affordable housing, specialising in mixed tenure and major refurbishment schemes. It works in partnership with social housing providers at the cutting edge of urban regeneration to create sustainable communities. Corporate directory Share prices (FT Cityline) The Company’s share price (15 minutes delay) is displayed on the Company’s website. The EPIC code as used in the Topic and Datastream Share Price information service is MGNS. Telephone share dealing service Details of a low cost telephone dealing service with Stocktrade are available on the Company’s website under Investor Relations. Electronic communications Shareholders may now view their shareholdings on line through the website of our registrars, Capita Registrars. If you wish to view your shareholding, please log on to www.capitaregistrars.com and click on the link 'shareholder services' then follow the instructions. The Company would also like to take advantage of recent changes to the law, which allows us to communicate with shareholders in electronic form. If you would like to receive future communications in this way, please register your e–mail address on the registrar's website, following the instructions provided. This form of communication offers a cost benefit to the Company and provides for an environmentally friendly way of communicating. The Company would therefore encourage as many of you as possible to make use of this service. To use the service, you will need to confirm your surname, UK Post Code and Investor Code. The Investor Code may be found on a recent share certificate, in the bottom right hand corner, or on the tax voucher for the forthcoming dividend payment. Financial calendar Annual general meeting 25 April 2006 Final dividend: Ex–dividend date Record date Payment date 5 April 2006 7 April 2006 5 May 2006 Interim results announcement August 2006 Directors John Morgan Paul Smith David Mulligan Paul Whitmore Bernard Asher (non-executive) Gill Barr (non-executive) Jon Walden (non-executive) Jack Lovell (non-executive) Company Secretary Mary Nettleship Registered office 77 Newman Street, London, W1T 3EW Tel: 020 7307 9200 Fax: 020 7307 9201 Registered No: 521970 Solicitors Charles Russell 8–10 New Fetter Lane, London, EC4 1RS Independent Auditors Deloitte & Touche LLP 3 Victoria Square, Victoria Street, St Albans, AL1 3TF Clearing bankers Lloyds TSB Bank plc PO Box 17328, 11–15 Monument Street, London, EC3V 9JA Brokers Hoare Govett Ltd 250 Bishopsgate, London, EC2M 4AA Registrars Capita Registrars The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU Shareholder communication Enquiries and information: Please contact the company secretary E–mail: mary.nettleship@morgansindall.co.uk Website www.morgansindall.co.uk Design: www.lgs.co.uk Printed by Folium Financial & Security Printers, Birmingham 89 Morgan Sindall Report and Accounts 2005 Chairman and chief executive’s statement We are pleased to announce another set of record results. In 2005 profit before tax increased by 23% to £41.7m (2004:£33.8m) on revenue that increased by 6% to £1.30bn (2004: £1.22bn). Earnings per share increased by 23% to 70.7p (2004:57.6p). Accordingly the Board recommends an increase in the final dividend to 18.0p (2004: 13.3p) giving a total for the year of 25.0p (2004: 18.5p). This strong performance was achieved through our strategy of creating and developing leading positions in our chosen market sectors. In particular, Fit Out and Affordable Housing grew strongly through the year while Construction also made good progress. Meanwhile, profit margins were maintained by Infrastructure Services despite its expected reduction in workload. Our overall margin increased to 3.2% (2004: 2.8%) as we continued our focus on margin improvement. Cash balances have been maintained at a time when the Group continues to invest resources in the growth of the Affordable Housing division. Outlook Morgan Sindall has begun 2006 in an excellent position. The order book now stands at £2.80bn against £2.26bn last year and we anticipate further strong growth in the fit out and affordable housing markets in particular. In 2006 Fit Out will further develop its geographic coverage; its larger scale office fit out projects; and its work in the hotel, retail, leisure and entertainment sectors. The Construction division will continue its focus on the health and education sectors where significant investment continues to be made by the Government. Infrastructure Services’ workload in the utilities sector will increase as a result of a number of large contracts secured during 2005, although we expect the civil engineering market to remain subdued. Finally, the outlook for Affordable Housing remains very positive with strong market growth expected to continue in the medium term. Overall, we are very excited by the Group’s outlook and prospects and look forward to reporting on further developments as the year progresses. 02 Chairman and chief executive’s statement Paul Smith Chief Executive John Morgan Executive Chairman 03 Morgan Sindall Report and Accounts 2005 Operating and financial review +23% +23% +35% +19% Profit before tax up to £42m Basic earnings per share up to 71p Total dividend for the year up to 25p Net assets up to £117m 04 Operating and financial review Operating review It should be noted that all figures and their comparatives are presented on the basis of applying International Financial Reporting Standards (‘IFRS’). In 2005 profit before tax increased by 23% to £41.7m (2004: £33.8m) on revenue that increased by 6% to £1.30bn (2004: £1.22bn). Earnings per share increased by 23% to 70.7p (2004: 57.6p). Accordingly the Board recommends an increase in the final dividend to 18.0p (2004: 13.3p) giving a total for the year of 25.0p (2004: 18.5p). Cash at the year end was maintained at £72.0m (2004: £73.4m) with the average cash balance during the year at a level higher than the previous year. This reflects investment in work in progress by the Affordable Housing division offset by working capital improvements elsewhere in the Group. The forward order book increased to £2.80bn (2004: £2.26bn) reflecting growth, in particular, in the Infrastructure Services and Construction divisions. General market conditions Construction industry output grew by 2.4% in 2005 (2004: 3.7%), and growth of 1.8% is forecast in 2006. Within this overall picture, public spending in the health and education sectors is forecast to grow with further expansion also expected in affordable housing and commercial property. These are four important sectors for the Group. Group strategy The Group’s strategy continues to be the development of a construction group with market leading businesses in its chosen sectors in order to provide growth in long-term profit streams. This approach incorporates a work balance between the public and private sectors, which gives the Group the flexibility to adapt to changes within each sector. Revenue 1 (£’m) 1,138 1,219 1,297 1,038 909 01 02 03 04 05 Profit before tax 1 (£’m) 41.7 33.8 20.8 20.9 15.5 01 02 03 04 05 1 Basis of accounting The figures for 2004 and 2005 are stated under IFRS whilst for 2003 and preceeding periods are stated under UK GAAP. 05 Morgan Sindall Report and Accounts 2005 Order book (£’m) 134 504 824 Fit Out Construction Infrastructure Services 98 197 626 1,343 1,336 Affordable Housing Divisional performance Fit Out The Fit Out division provides fit out, refurbishment and furniture services to the commercial property, hotel, retail, leisure and entertainment sectors. It operates through four businesses, namely Overbury, Morgan Lovell, Vivid Interiors and Backbone Furniture. Overbury (£269m revenue) is the largest business and is focused solely on the commercial property sector where its blue chip client base employs its own professional teams of architects and project managers. This contrasts with Morgan Lovell (£42m revenue) whose focus is also on the commercial property sector but through the provision of both design and build services. Morgan Lovell’s approach involves working more closely with the client on the development of the design solution as well as delivery of the project. Its clients tend to be small and medium size enterprises and its typical project would be smaller than that delivered by Overbury. Vivid Interiors (£11m revenue) was established in 2002 and works in the hotel, retail, leisure and entertainment sectors. Backbone Furniture (£1m revenue) provides innovative commercial furniture solutions. The division’s offices cover London, the South East, the Midlands and the North of England. In 2005 Fit Out had an excellent year with an operating profit of £16.4m (2004: £11.2m) on revenue of £323m (2004: £252m) achieving an operating margin of 5.1% (2004: 4.5%), which is above average historic levels of 4.5%. The division’s growth in 2005 was due to further market penetration by Overbury as well as steady improvement in the commercial property market. The geographic expansion started at the end of 2004 continues to be successful with the offices in Manchester and Birmingham making a positive contribution. 2004: 2,264 2005: 2,798 The division starts the year with a forward order book which has increased to £134m (2004: £98m). Its priorities for 2006 are further geographic expansion, developing its larger project capability and the growth of Vivid Interiors. Construction Construction’s business, Bluestone, has national coverage in England and Wales and operates through seven regions and a network of 25 local offices. It has the capability to deliver projects up to £20m in value. It focuses on the health, education and light industrial sectors and primarily delivers through negotiated and framework contracts. This has helped it to move away from and reduce the inherent risks associated with competitively tendered contracts. In addition it provides smaller scale repeat works to a number of key clients across the country. Bluestone’s focus continues to underpin a steady improvement in the division’s performance. In 2005 Bluestone increased its operating profit significantly to £3.2m (2004: £1.3m) on revenue of £336m (2004: £271m) with the operating margin doubling to 1.0% (2004: 0.5%). During the year the division secured two further NHS LIFTs (‘Local Improvement Finance Trust’) in South East Hampshire and Doncaster bringing the total to four. NHS LIFTs are partnerships between the public and private sectors with the aim of delivering primary health and social care facilities in defined areas for a period of typically 25 years. The division also made progress in securing further workload in its chosen sectors, which now comprise around two thirds of its total revenue. It has also increased the amount of work delivered through key client, negotiated and framework contracts, which is now around 50% of total revenue compared to half that four years ago. 06 Operating and financial review Revenue analysis (£’m) 2004 2005 Construction 252 364 Affordable Housing 364 271 Construction 364 336 279 252 390 189 Affordable Housing 252 332 271 332 Fit Out Infrastructure Services 323 332 Fit Out 271 300 248 365 Infrastructure Services In December 2004 the division acquired the trade of three offices from Benson Limited. This acquisition is now fully integrated and has been earnings enhancing in 2005. Bluestone starts 2006 with a forward order book of £504m compared to £197m a year ago. The order book has strengthened significantly due to the securing of further framework and investment led opportunities. The focus for the division continues to be on margin improvement and on developing its offering to its chosen sectors. Infrastructure Services Infrastructure Services operates through Morgan Est and is a leading provider of civil engineering and utilities solutions to the water, gas, electricity and transport sectors. The division is based in Rugby and has offices providing services across the United Kingdom aligned with its client and project commitments. In 2005 the division delivered an operating profit of £6.0m (2004: £7.8m) on an anticipated reduced revenue of £248m (2004: £332m). Margins have been maintained at 2.4% which is consistent with historic levels of 2.0% to 2.5%. During 2005 the division has commenced major utility framework contracts, including a water and electricity contract with United Utilities in the North West (anticipated to be worth £450m over five years) and a gas utility contract with National Grid in the Midlands (anticipated to be worth £320m over eight years). The division begins the year with a record forward order book of £824m (2004: £626m) and has secured two major civil engineering contracts at King’s Cross for Metronet and at Croydon for National Grid. Despite a subdued civil engineering market the outlook for the division is improving and it is anticipated that this year’s performance will be broadly similar to that achieved in 2005, but improving thereafter when the benefits of recent contract wins are fully realised. Affordable Housing The Affordable Housing division operates through Lovell and is the UK’s leading provider of affordable housing. The division delivers new build social housing, new build open market affordable housing and refurbishment for complex regeneration schemes by working closely with local authorities, arms length management organisations and housing associations. Lovell’s particular expertise is in mixed tenure developments which combine new homes for public ownership as well as open market properties for sale and may also include refurbishment of existing properties within a development. The division achieved another record result in 2005 with an operating profit of £18.7m (2004: £13.4m) on an increased revenue of £390m (2004: £364m). The division has again performed strongly in a market that continues to expand, driven by the Government’s affordable housing priorities. In particular Lovell has seen significant expansion of its refurbishment operations, which now account for around half its revenue. Refurbishments are typically large schemes encompassing improvements to kitchens, bathrooms, building exteriors and public areas. Lovell begins 2006 with a forward order book of £1.34bn stretching out over the next 10 years. The Government’s Decent Homes Standard programme is expected to continue beyond the target date of 2010 and the shortage of affordable housing continues to grow, which provides a very positive outlook for the division. 07 Morgan Sindall Report and Accounts 2005 Basic EPS (p) Dividends per share (p) 70.7 57.6 36.0 36.0 25.3 25.0 15.0 16.5 14.0 18.5 01 02 03 04 05 01 02 03 04 05 Financial review Revenue and operating profit Revenue increased by 6% to £1.30bn (2004: £1.22bn). The increase was due to Fit Out up 28% to £323m, Construction up 24% to £336m and Affordable Housing up 7% to £390m. This growth is offset by a reduction in revenue of 25% at Infrastructure Services to £248m. Group operating profit was up 21% to £39.9m (2004: £32.9m). This improvement was due to strong growth at Affordable Housing and Fit Out with progress also made by Construction, offset by an anticipated reduction in profit at Infrastructure Services. Fit Out increased its operating profit by 46% to £16.4m (2004: £11.2m) and Affordable Housing by 39% to £18.7m (2004: £13.4m). Construction more than doubled its operating profit taking it to £3.2m (2004: £1.3m). Infrastructure Services’ operating profit reduced in line with revenue to £6.0m (2004: £7.8m). The cost of Group activities was £4.8m (2004: £3.7m) reflecting growth in headcount and operating costs. The share of results of joint ventures was £0.4m (2004: £2.8m). Profit before and after tax Profit before tax of £41.7m was 23% ahead of last year’s £33.8m. This includes net interest of £1.8m (2004: £0.8m) reflecting a strong average cash performance during the year. Profit after tax was £29.6m (2004: £24.0m). The tax charge was £12.1m (2004: £9.7m) giving an effective tax rate of 29%. Earnings per share and dividends Basic earnings per share have increased by 23% to 70.7p (2004: 57.6p). The final dividend is proposed at 18.0p (2004: 13.3p) giving a total dividend for the year of 25.0p up 35% on last year (2004: 18.5p). Earnings cover the dividend 2.8 times (2004: 3.1 times). Equity and capital structure Equity has increased to £116.6m (2004: £98.2m). The number of shares in issue at 31 December 2005 was 42.3m. The increase of 169,000 shares is due to the exercise of options under employee share option schemes. There were no other new issues during the year. At 31 December 2005 the directors held interests over 18% of the shares of the Company and further details are disclosed in the report of the directors. 08 Operating and financial review +21% Operating profit £39.9m Cash flow and treasury Net cash from operating activities was £14.5m (2004: £70.3m). Capital expenditure was £4.7m (2004: £4.3m) and payments to acquire interests in joint ventures were £6.2m (2004: nil), reflecting ongoing investment in the business. After payments for tax, dividends and servicing of finance the net decrease in cash and cash equivalents was £1.4m resulting in a year end balance of £72.0m. It is anticipated that these resources will be made available for the continued growth of the Group’s businesses, particularly Affordable Housing. In addition to its cash resources the Group has a £25m three year revolving facility available until June 2006 and a £30m overdraft facility with its main clearing bankers, which is reviewed annually. Banking facilities are subject to normal financial covenants, all of which have been met in the year. The Group has established treasury policies setting out clear guidelines as to the use of counterparties and the maximum period of borrowings and deposits. Deposits are for periods of no longer than three months and are at rates prevailing on the day of the transaction. The Group has no exposure to foreign exchange risk because its operations are based solely in the United Kingdom. Although the Group does not use derivatives, some of its joint venture businesses use interest rate swaps to hedge floating interest rate exposures. These arrangements meet the hedging rules under International Accounting Standard 39 and hence the Group’s share of the movement on these derivatives is accounted for as a movement on reserves. The hedging reserve at 31 December 2005 was £2.2m. Overall, the Group considers that its exposure to interest rate movements is appropriately managed. 09 Morgan Sindall Report and Accounts 2005 Fit Out Above: A high profile project for Overbury was a £23m fit out of Reuters’ new European head offices in Canary Wharf, Docklands. 10 Fit Out The Fit Out division specialises in the fit out and refurbishment of commercial premises for private and public sector organisations from offices located in London, the South East, Midlands and North of England. Fit out projects are undertaken from £100,000 up to £45m in value. The division consists of four businesses. Overbury is the leading office fit out and refurbishment specialist and works for clients who employ their own professional teams of designers. Workplace transformation specialist Morgan Lovell provides a complete design and build fit out service, from design development of clients’ requirements through to the management of the fit out works. Vivid Interiors specialises in fit out and refurbishment for the hotel, retail, leisure and entertainment sectors. Backbone Furniture supplies, refurbishes and installs commercial office furniture. The division’s strategy is for each of its businesses to be the market leader in its chosen sector through the provision of superior quality, service and workmanship. In addition the aim is to maintain a balanced portfolio of sectors, thereby giving the division flexibility to sustain consistent performance in changing market conditions. Overbury’s projects range from refurbishing existing commercial office space to the complete internal fit out of a new building from its basic structure. For example, Overbury is fitting out two floors in the newly constructed iconic 25 St Mary’s Axe in the City of London. The work includes installing mechanical and electrical services, lighting, flooring and carpeting, ceilings and partitioning. Morgan Lovell’s design and build approach appeals to clients who want one organisation to take their concept from design development through to completion. With a team of in-house designers, Morgan Lovell is constantly developing new approaches to transforming office interiors into inspiring places to work. Vivid Interiors is rapidly establishing itself in its chosen sectors. It has seen particular success in the prestige hotels sector with a major programme of repeat refurbishment works at the Dorchester Hotel in London. In the entertainment sector, Vivid Interiors has won a series of theatre projects in the West End of London at the Prince Edward Theatre, the Novello Theatre and most recently at the Albery Theatre. Top: Public sector projects for Morgan Lovell included a £2.8m fit out of offices at the Department of Health in London. Centre: Backbone Furniture secured a £1.0m contract to furnish new head offices for SAB Miller in Woking. Bottom: Vivid Interiors carried out extensive refurbishment works for the Dorchester Hotel in London including the Promenade, Arcade, Crystal Suites, Grill Room and the new China Tang restaurant. 11 Morgan Sindall Report and Accounts 2005 Construction Above: The new £3.9m Student Services Centre at the University of Southampton’s Highfield Campus is the latest in a number of projects built for the university by Bluestone. 12 Construction Bluestone provides construction services from a network of 25 offices located in seven regions across England and Wales. The business’ core services include new build, refurbishment and special works under which it carries out smaller scale works including maintenance. Bluestone undertakes projects up to a value of £20m and the average project size is approximately £2m. Bluestone’s expertise is in the health, education, light industrial and repair and maintenance sectors. Currently, approximately half of its projects are secured on a long-term framework or negotiated basis rather than competitively tendered. This year Bluestone secured a three year framework, worth up to £40m, with the Driving Standards Agency to build motorcycle test centres across the country. Bluestone is also a framework construction partner delivering ongoing schemes for Warwickshire, Norfolk, Dorset and Devon County Councils. In the health sector, Bluestone is delivering four NHS LIFTs (‘Local Improvement Finance Trust’), each worth approximately £50m over five years, where the business is building primary health and social care facilities for local communities in Barnsley, Camden and Islington, South East Hampshire and Doncaster. Other schemes include a new adult mental health facility for North Devon Hospital and a new pathology unit for Princess Alexandra Hospital in Harlow. Bluestone has a strong track record in the education sector undertaking projects for universities and schools. For example, Bluestone is building a £5m state-of-the-art Nanoscience Technology Centre for the University of Sheffield and a £7.1m refurbishment project for Thomas Becket Secondary School in Northampton. In the industrial sector Bluestone has a particular expertise in building large steel portal framed buildings and has been awarded a £20m scheme to build two further industrial centres at Trentham Lakes. This is for Stoke on Trent Regeneration, a joint venture between Bluestone’s key client St Modwen Properties plc and the City Council. Bluestone is also expanding its special works services. As a result of existing local relationships with national clients such as Cunningham Lindsey, NHBC and Legal & General, Bluestone is increasingly providing smaller scale works and maintenance services across the country. Top: The new Bingfield Street Primary Care Resource Centre in Islington is the second community healthcare facility to be built by Bluestone for developers Camden & Islington Community Solutions as part of a £50m, five year NHS LIFT programme. Centre: Bluestone’s special works and maintenance operation has become an increasingly important contributor to the business, developing local client relationships which are creating long-term repeat work. Bottom: Norwich’s new bus station is one of the most advanced and eye-catching transport hubs in the country. Bluestone completed the £6m scheme for Norfolk County Council where it has a three year, £45m framework to carry out works to schools and public buildings across the county. 13 Morgan Sindall Report and Accounts 2005 Infrastructure Services Above: Morgan Est’s £90m programme of tunnelling projects for BAA at Heathrow’s new Terminal 5 reached the final stage with the Piccadilly Line and Heathrow Express extensions nearing completion. 14 Infrastructure Services Morgan Est is a national business undertaking a broad spectrum of infrastructure and utility projects. It provides civil engineering, utility, tunnelling and mechanical electrical services through all phases of a project. Morgan Est is based in Rugby and has four project delivery teams namely Infrastructure Scotland, Infrastructure South, Tunnelling and Utilities. Morgan Est typically undertakes construction projects of up to £250m in value and framework contracts with an annual value of up to £100m. In the infrastructure sector, Morgan Est offers a complete delivery process from feasibility, design and construction through to commissioning, operation and maintenance. Projects are carried out under a number of contractual arrangements, including traditional, design and build, partnering and framework agreements and Private Finance Initiative (‘PFI’) structures. A notable achievement was Morgan Est’s successful completion, seven months early, of the construction phase of the £53m A92 Dundee to Arbroath road widening scheme under a PFI agreement with Angus Council. Morgan Est with its partners will now operate and maintain the road under a 30 year concession agreement. This year the balance of Morgan Est’s work has moved from the civil engineering sector to the utilities sector in which it has been particularly successful. Key project wins have included a five year framework contract, worth up to £450m, with United Utilities for the renewal and maintenance of water and electricity distribution networks. Morgan Est is also one of four Gas Alliance partners appointed to carry out National Grid’s £1.6bn gas mains modernisation programme. Its contract, for the West Midlands area, is worth up to £320m over eight years. Morgan Est has also commenced a £28m programme of works in the North Midlands for Central Networks to lay electricity cables, build new substations and carry out associated replacement work. Top: In Scotland, Morgan Est is one of eight partners delivering a £1.8bn water and waste water renewal programme for Scottish Water Solutions. Centre: Work started this year on an eight year, £320m alliance contract to replace gas mains across the West Midlands for National Grid. Bottom: The Morgan Est built A92 dual carriageway stretching 19km from Dundee to Arbroath is the largest PFI road project undertaken by local government in Scotland. 15 Morgan Sindall Report and Accounts 2005 Affordable Housing Above: The Way: Lovell is using advanced off-site manufacture technology to deliver a £75m mixed tenure scheme at Beswick, East Manchester. The development is creating 550 homes for rent, shared ownership and open market sale. Homes also incorporate energy-saving micro combined heat and power systems. 16 Affordable Housing Lovell is the leading provider of affordable housing in the UK with specialist expertise in mixed tenure developments and housing refurbishment. Lovell operates from eight regional offices in England, Wales and Scotland and works in partnership with housing associations, local authorities and arms length management organisations at the cutting edge of urban regeneration and sustainability in order to provide housing for low income families. Lovell has particular expertise in mixed tenure developments, which are built on land owned by housing organisations, to provide homes for rent, shared ownership and open market sale. These developments consist of both social and affordable open market new build homes and may also include refurbishment of existing properties. An example of this is a £75m mixed tenure scheme at Beswick, East Manchester where Lovell is building 550 new homes in partnership with urban regeneration company New East Manchester, Northern Counties Housing Association and Manchester Methodist Housing Association. The other key area of expertise for Lovell is in housing refurbishment schemes. These are mainly concerned with improvements to kitchens, bathrooms, building exteriors and public areas. Most of these schemes are as a result of the Government’s commitment to bring the UK’s social housing stock up to a minimum Decent Homes Standard. As an example, Lovell is carrying out modernisation work totalling £75m over three years for the Glasgow Housing Association. The work involves re-roofing, external render and new doors while residents remain in occupation. Lovell has also started work on a seven year, large scale housing refurbishment programme worth up to £200m with Sheffield Homes. Overall, in excess of one million homes remain below the Decent Homes Standard and at the current annual rate of refurbishment the programme is expected to continue well beyond 2010. Top: Heart of Bow: A bird’s-eye view of Lovell’s £54m mixed tenure development in London’s East End. The 279 houses and flats for affordable rent, shared ownership and open market sale are being built near the site of the 2012 Olympic stadium. Centre: Kiln Fields: A mixed tenure scheme by Lovell at Haslemere in Surrey features 64 homes for rent and shared ownership for Waverley Borough Council and Thames Valley Housing Association and 20 homes for open market sale. Bottom: Cross Keys Homes: Lovell refurbishes around 20,000 homes a year across the UK working with housing associations, local authorities and arms length management organisations to bring properties up to the Decent Homes Standard. Current schemes include a 4,700 home modernisation programme for Cross Keys Homes in Peterborough. 17 Morgan Sindall Report and Accounts 2005 Board of directors John Morgan (50) Executive Chairman Founded Morgan Lovell together with Jack Lovell in 1977. He was appointed chief executive of Morgan Sindall in 1994 and executive chairman in 2000. John is a chartered surveyor with an MBA and is a non-executive director of Genetix Group plc. Paul Smith (46) Chief Executive Paul is a chartered engineer with an MBA from Harvard Business School. He joined Morgan Sindall in March 2003 from UK support specialists Accord plc where he was group managing director since 2000. David Mulligan (36) Finance Director David joined the Board in April 2004 having been group financial controller since 1998. He was formerly with Smiths Group plc and Ernst & Young where he qualified as a chartered accountant. Paul Whitmore (51) Commercial Director Joined the Board in April 2000 having undertaken various roles during 27 years in the construction industry, latterly as chief executive of Laing Construction plc. Paul is a chartered surveyor. Bernard Asher (69) Non-executive Appointed to the Board in March 1998 and recognised as the senior independent director since 1999. Chairman of Lion Trust Asset Management plc, director of China Shoto plc and senior independent director of Randgold Resources Limited. Formerly a director of HSBC Holdings plc and vice chairman of Legal & General Group plc. Gill Barr (47) Non-executive Joined the Board in September 2004. Gill is chief executive of Deliverance Limited, the gourmet food service. She was formerly business development director of Woolworths plc and previously held positions with Kingfisher plc, KPMG and Freemans plc. Jon Walden (52) Non-executive Joined the Board in May 2001. He is currently managing director of Lex Vehicle Leasing Limited and was formerly a main board director of RAC plc. Previously he held various roles within RAC and also at Rank Xerox having qualified as a chartered accountant at Touche Ross (now Deloitte & Touche LLP). Jack Lovell (50) Non-executive Co-founder with John Morgan of Morgan Lovell in 1977 and a member of the Board of Morgan Sindall since October 1994 when his executive responsibilities were for marketing and client services.He assumed a non-executive role from August 2001. Jack is a chartered surveyor with an MBA. 18 Board of directors 1 4 1 John Morgan 2 Paul Smith 3 David Mulligan 4 Paul Whitmore 5 Bernard Asher 6 Gill Barr 7 Jon Walden 8 Jack Lovell 2 5 7 3 6 8 19 Morgan Sindall Report and Accounts 2005 Report of the directors Introduction The directors present their annual report on the affairs of the Group together with the financial statements and independent auditors’ reports for the year ended 31 December 2005. Principal activities Morgan Sindall is a construction group with four divisions: Fit Out, Construction, Infrastructure Services and Affordable Housing. The principal subsidiary companies operating within this divisional structure are shown on page 83. The principal activities are carried out in the United Kingdom and the Channel Islands. Business review and future developments A review of the business and progress of the Group is set out in the chairman and chief executive’s statement on page 2 the Operating and Financial Review (‘OFR’) on pages 4 to 9 and the divisional reviews on pages 10 to 17. The OFR also includes details of expected future developments in the Group. Details of the use by the Company and its subsidiary undertakings of financial instruments are set out in the OFR and in note 15 to the accounts on page 56. Results and dividends The Group made a profit after tax for the year of £29.6m (2004: £24.0m). An interim dividend of 7.0p (2004: 5.3p) per ordinary share amounting to £2.9m (2004: £2.2m) was paid on 16 September 2005. The directors are recommending a final dividend for the year of 18.0p (2004:13.3p) per share amounting to £7.5m (2004: £5.6m) payable on 5 May 2006 to shareholders on the register at close of business on 7 April 2006. Fixed assets The Group’s remaining investment property was disposed of during the year. Share capital Details of shares allotted and issued during the year on the exercise of options under employee share option schemes appear in note 22 to the accounts on page 63. No other shares were issued during the year. Directors The directors at the date of this report are shown on page 18. John Bishop retired from the Board on 12 April 2005. All of the other directors held office throughout the year. Further information on the Board’s policies and procedures is set out in the corporate governance statement on pages 35 to 38. Paul Smith and Jack Lovell will retire by rotation at the forthcoming annual general meeting and, being eligible, offer themselves for re-election. Biographical details of the directors standing for re-election are shown on page 18. As further explained in the corporate governance statement, the Board is satisfied that Jack Lovell continues to be an effective member of the Board and to demonstrate commitment to the role. Directors’ interests The interests of the directors, all of which are beneficial, in the ordinary shares of 5p each in the capital of the Company (‘shares’) are given below. John Morgan Paul Smith David Mulligan Paul Whitmore Bernard Asher Gill Barr Jon Walden Jack Lovell 2005 Number of shares 2004 Number of shares 4,331,038 2,876 1,250 2,250 5,000 – – 3,409,968 5,831,038 2,876 1,250 2,250 5,000 – – 3,409,968 There have been no changes in the interests of the directors between 31 December 2005 and 22 February 2006. 20 Report of the directors The directors’ share options and interests in shares under long-term share incentive and other schemes are set out in the directors’ remuneration report on pages 32 to 34. Directors’ indemnities The articles of association of the Company entitle the directors of the Company to be indemnified, to the extent permitted by the Companies Act 1985 and any other applicable legislation, out of the assets of the Company in the event that they suffer any loss or incur any liability in connection with the execution of their duties as directors, as further described under Amendment to articles of association on page 23. In addition, in common with many other companies, the Company has in place directors and officers insurance in favour of its directors and other officers in respect of certain losses or liability to which they may be exposed due to their office. Post balance sheet event On 1 February 2006 the Group acquired from certain private individuals the 52.5% holding in Primary Medical Property Limited that it did not already own and subsequently agreed to enter into a joint venture agreement with, and dispose of 50% of its interest in Primary Medical Property Limited to a fund managed by Barclays Private Equity. Further details of the transaction are contained in note 28 to the accounts on page 67. Substantial shareholdings Excluding directors, on 20 February 2006, the Company had been notified, in accordance with sections 198 to 208 of the Companies Act 1985, of the following interests in the share capital of the Company: Name of holder Standard Life Group Aviva plc Barclays plc Employment policies Number 1,729,878 1,680,539 1,347,641 % 4.09 3.97 3.18 The Company insists that a policy of equal opportunity employment is adhered to throughout the Group. Selection criteria, procedures and training opportunities are designed to ensure that all individuals are selected, treated and promoted on the basis of their merits, abilities and potential. The Group will not tolerate sexual, mental or physical harassment in the workplace. Subject to the nature of its businesses in the construction industry, the policy of the Group is to ensure that there are fair opportunities for the employment, training and career development of disabled persons, including continuity of employment with re-training where appropriate. The Group recognises the need to ensure effective communication with employees. The key channels used for employee communications are as follows: The Morgan Sindall intranet is available to employees and has an extensive index and search capability containing relevant information such as corporate policies and directories. Its news desk is updated regularly and features a constant flow of news about the Group and the construction industry sectors in which the Group operates. Morgan Sindall News, the Group’s newsletter, is sent to all employees every four months. It reviews the Group’s activities and outlines its future plans to give employees a better understanding of Group developments. In addition, Morgan Sindall People is produced every quarter for employees and details charitable activities undertaken by and notable achievements of individuals within the Group. Creditor payment policy The Company’s policy, which is also adopted by the Group, is to clearly agree and set down the terms of payment with suppliers and subcontractors when agreeing the terms for each transaction and to make payments in accordance with its obligations, save in cases of genuine dispute. As at 31 December 2005 the Group’s number of creditor days outstanding was equivalent to 30 days’ purchases (2004: 31 days), based on the average daily amount invoiced by suppliers during the year. 21 Morgan Sindall Report and Accounts 2005 Report of the directors Political and charitable contributions During the year the Group made charitable donations of £53,984 (2004: £24,411) principally to local charities serving the communities in which the Group operates. No contributions were made to any political parties during the current or preceding years. Directors’ responsibility statement The directors are responsible for preparing the annual report and the financial statements. The directors are required to prepare accounts for the Group in accordance with International Financial Reporting Standards (‘IFRS’) and have chosen to prepare Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (‘UK GAAP’). In the case of UK GAAP accounts, the directors are required to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company. In preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and estimates that are reasonable and prudent; and • state whether applicable accounting standards have been followed. In the case of IFRS accounts, International Accounting Standard 1 requires that financial statements present fairly for each financial year the Group’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s ‘Framework for the Preparation and Presentation of Financial Statements’. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable International Financial Reporting Standards. Directors are also required to: • properly select and apply accounting policies; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and • provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a report of the directors and the directors’ remuneration report which comply with the requirements of the Companies Act 1985. The directors are responsible for the maintenance and integrity of the Company website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions. 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 Group 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. 22 Report of the directors Annual general meeting The annual general meeting of the Company will be held on 25 April 2006. The notice of the meeting is set out on pages 84 to 86. In addition to the ordinary business to be transacted at the meeting, the following items of special business will be proposed: Authority to allot shares An ordinary resolution will be proposed to give the directors authority to allot share capital in the Company in accordance with section 80 of the Companies Act 1985 (‘the Act’). The authority will be limited to an aggregate nominal value of £705,482 representing approximately one third of the current issued share capital of the Company and will expire fifteen months from the date on which this resolution is passed or, if earlier, at the conclusion of the next annual general meeting. The directors currently have no intention of issuing further shares or granting rights over shares other than in connection with the Company’s employee share option and share incentive schemes. Disapplication of pre-emption rights A special resolution will be proposed to renew the directors’ power to allot equity securities for cash other than by way of rights or other pre-emptive issues. The power will be limited to an aggregate nominal value of £105,822, representing approximately 5% of the current issued ordinary share capital of the Company and will expire fifteen months from the date on which the resolution is passed or, if earlier, at the conclusion of the next annual general meeting. Amendment to articles of association A special resolution will be proposed to amend article 146 of the articles of association of the Company. Article 146 currently permits the Company to indemnify its directors, auditor, secretary and other officers against liability incurred in defending civil or criminal proceedings in which judgment is given in their favour or the proceedings are withdrawn or they are acquitted, and against the costs of successfully applying for relief from liability for negligence, default, breach of duty or breach of trust in relation to the affairs of the Company. By virtue of legislation relating to the indemnification of directors which came into effect on 6 April 2005, directors can now be indemnified in respect of liabilities incurred by them in proceedings brought against them by third parties. They can also be indemnified in certain circumstances in respect of the costs of civil and criminal proceedings as and when such costs are incurred. However, the indemnity cannot cover liability incurred by a director to the Company or any associated company; fines imposed in criminal proceedings and penalties imposed by regulatory authorities; costs incurred in civil proceedings brought by the Company or an associated company where judgement is given against him or costs incurred in proceedings for relief where relief is refused by the court. A special resolution will be proposed to amend Article 146. The proposed new Article 146 excludes the auditors of the Company from indemnification and continues to require the Company to indemnify its officers to the extent permitted under the Act prior to 6 April 2005 and, additionally, requires the Company to indemnify its directors to the extent permitted under the recent legislative provisions summarised in the preceding paragraph. The directors are of the opinion that the aforementioned resolutions are in the best interests of the Company and its shareholders as a whole and recommend you to vote in favour of them. Independent auditors Deloitte & Touche LLP have expressed their willingness to continue in office as independent auditors and a resolution to re-appoint them will be proposed at the forthcoming annual general meeting. By order of the Board Mary Nettleship Company Secretary 22 February 2006 23 Morgan Sindall Report and Accounts 2005 Corporate social responsibility review The Group is committed to continuous improvement in its Corporate Social Responsibility (‘CSR’) activities and has analysed the businesses in terms of their impact on all stakeholders and has identified areas where the Group’s performance can be improved: • recognising that people are the key to success through the recruitment of talented people and by offering all employees the opportunity to enhance their learning and development; • improving awareness of health and safety issues throughout the Group and working to reduce accident incidence rates across the Group’s own and subcontracted workforce; • improving the Group’s performance in environmental management and the impact of its activities on the environment; and • developing Group initiatives by investing in the communities in which it operates through voluntary fund raising activities, encouraging employees to undertake ‘community business work’, training programmes for young offenders and mentoring programmes with local schools. During 2005 the Group has continued its aim of establishing a fully integrated management system within each of its divisions that will connect its activities in addressing health and safety, environmental management, community and people issues. These key areas of activity are covered by a consolidated CSR policy document, which is available on the Group’s intranet and website. Paul Whitmore is the executive director responsible for CSR matters on behalf of the Board and held the chair of the CSR Forum until November 2005 when the Group’s deputy company secretary took over the chair. The CSR Forum was set up in 2002 to review the Group’s activities in terms of its employees and the wider community, health and safety and the environment and to develop a co-ordinated approach across the Group to these matters. The CSR Forum comprises representatives from the four divisions. During the year membership of the CSR Forum was extended to include the Group’s head of procurement to assist the forum in involving the Group’s consultants, suppliers and subcontractors in its overall review of health and safety and environmental issues. The CSR Forum set each division a target to achieve accreditation under three internationally recognised schemes by the end of 2005 and to date they have achieved the following results: • BS EN ISO9001(2000) Quality Management System – 99% of the Group by revenue has an accredited system with the remaining 1% working towards achieving accreditation by the end of 2006; • BS EN ISO14001 Environmental Management System – 100% of the Group has an accredited system; and • OHSAS 18001 Occupational Health and Safety System – 68% of the Group has an accredited system in place with 28% having a currently uncertified health and safety management system. It is anticipated that 99% of the Group will have secured accreditation by the end of 2006 with the remaining 1% expected to achieve accreditation in 2007. As shown above, although the divisions have made significant progress in securing ISO accreditations for their quality, environment and health and safety systems, the initial target has been revised in terms of achieving full accreditation under ISO9001(2000) and OHSAS 18001. Once the divisions have achieved accreditation, the next stage will be to develop integrated management systems to link all of the above. Employees The CSR forum has established a human resources committee, with a rotational chair, that consists of the heads of human resources in the four divisions. The committee regularly reviews human resources policies and procedures, employee remuneration and benefit packages across the Group to ensure that they are in line with current legislation, represent best practice and have a degree of consistency whilst reflecting the specific needs and requirements of individual divisions. During 2005 the divisions have actively involved employees and sought their views through the use of facilitated focus groups and employee surveys. Certain divisions have an Employee Assistance programme which provides employees with a confidential external counselling service through which they can discuss a range of issues including personal, legal, tax and financial matters and aspects of the employee’s work and career. The Group offers a variety of training to its employees including induction, job specific training and personal and general management development courses. In 2005 the average number of training days per employee in the Group was five (2004: four). In 2004 Morgan Sindall introduced a modular development programme (‘MSDP’) for all senior management that runs over a two year period based upon five residential modules. There are currently 130 (2004: 39) senior managers in the Group at various stages of MSDP. In 2006, the Group will monitor statistics in the following areas: • proportion of the Group (by revenue) with human resources policies and procedures; • number of employees; • employee turnover rate; • average number of days’ absence due to sickness per employee; • statistics for gender, ethnicity and disability as a percentage of the total number of employees; and • training statistics for the number of training days per employee. 24 Corporate social responsibility review Health and safety The Board recognises and acknowledges the fundamental importance of health and safety in all its activities. Paul Whitmore is the executive director responsible on behalf of the Board for health and safety matters. The other members of the committee are the health and safety managers of the four divisions. The terms of reference of this committee are set out in the policy statement given below and the policy itself is available to all employees on the Group’s intranet. The Group’s health and safety policy states: ‘Morgan Sindall plc and its divisions are committed to providing a healthy and safe working environment for all the Group’s employees and others affected by our works. We accept the aims and provisions of the Health and Safety at Work Act 1974 and all regulations made thereunder. We recognise that the successful management of health and safety contributes to overall performance in a quality business. We are committed therefore to: • developing a positive health and safety culture throughout the organisation; • constantly reviewing health and safety management and performance in accordance with the objectives identified by the Group’s policy; • developing organisational structures within the subsidiary companies appropriate to meeting those objectives in each operating location; • the systematic identification and management of risks to health and safety and the environment; and • providing information, instruction, training, supervision and consultation with employees and clients as necessary to implement and maintain industry standards of excellence in all matters in the field of health and safety. All employees of the Group are expected to give full co-operation and every possible assistance to the successful implementation of the health and safety policies and procedures within their respective divisions and to take reasonable care for their own safety and that of others involved in or affected by our works.’ The Group has decided to bring its reporting of health and safety statistics in line with the Group’s financial year end reporting as opposed to the fiscal year ending 5 April as used in previous years. The health and safety statistics for the Group for the years ending 31 December 2003, 2004 and 2005 are: Accident Category Fatal (Number) Major incidents (AIR)* Over 3 day incidents (AIR)* Total of all reportable incidents (AIR)* 2005 – 203 778 981 2004 – 216 858 1,074 2003 – 209 866 1,075 *Accident Incidence Rate (AIR) is per 100,000 persons employed and is calculated as: number of reported incidents average number of persons employed x 100,000 The Group has stabilised the rate of ‘Major’ incidents and has reduced the incidence of ‘Over 3 day’ incidents by 9%. In overall terms the annualised AIR has reduced by approximately 9%. In 2005 the Group introduced a policy on occupational health monitoring which has been implemented across the Group. The divisions are using external consultants to screen all existing and new employees for the symptoms of hand arm vibration syndrome, vibration white finger, impaired hearing, dermatitis and muscular skeletal disorders, in keeping with the Major Contractors Group’s health and safety charter. Specific ventures are being developed in partnership with strategic suppliers to publish information in respect of vibration exposure times and ratings applicable to key items of mechanical plant in everyday use on the Group’s sites. As at 31 October 2005, 87% (2004: 88%) of the Group’s employees had passed the health and safety test and secured the appropriate Construction Skills Certification Scheme (‘CSCS’) card. The percentage of subcontractors certified as compliant has increased to 61% (2004: 55%) against the same criteria. Both results reflect the outcome of an audit carried out on a single date, and the Group is aware that the site population can vary considerably from day to day. The Group’s focus is on improving the quality of its supply chain and seeking to employ subcontractors who are able to demonstrate the adoption of competent health and safety management systems and adherence to the CSCS criteria. The Group is continuing the development and expansion of its existing health and safety programmes. The ‘Your Life Their Loss’ initiative in Affordable Housing and the ‘Work Safe Home Safe’ initiative in the remaining divisions are both now entering their third year. The directors consider that there has been marked success in the adoption of an improving health and safety culture on its construction sites. The programmed development of material to support daily safety briefings, toolbox talks and bi-monthly or quarterly key health and safety themes is continuing with full participation from all divisions. 25 Morgan Sindall Report and Accounts 2005 Corporate social responsibility review In order to increase awareness and change behaviour, the Group is actively participating in the Health and Safety Executive’s ‘New Intervention Strategy’. Throughout 2005 Fit Out has continued with a programme of health and safety secondments with four site managers being seconded to the Fit Out health and safety team for periods of up to three months in order to better understand health and safety issues. Both Affordable Housing and the Construction division have undertaken health and safety talks in primary schools in the vicinity of their various projects to raise awareness amongst children of the dangers of building sites. In 2006, the Group will encourage further a caring and supportive culture in which everyone takes responsibility for their part in keeping themselves, their colleagues and the general public safe and free from avoidable harm. There will be a strong emphasis placed upon reducing the frequency and impact of the most commonly occurring accidents, slips, trips and falls and the elimination of cuts to hands through the reinforcement of a gloves policy tailored to meet everyday tasks, in partnership with specialist industrial glove manufacturers. Environment The Group is committed to minimising the impact of its business and its processes on the natural environment and the community at large. To achieve this each division has implemented an effective environmental management system to the acknowledged standard BS EN IS014001. The purpose of such systems is to: • ensure continual improvement is achieved; • comply with relevant legal requirements; • control construction processes and design to protect the natural environment and built heritage; • ensure that construction materials are ethically procured and used; • reduce nuisance and disturbance associated with the Group’s activities; • reduce wastage and consumption of materials and energy; • train employees and subcontractors on environmental issues and controls; and • establish procedures for publishing information regarding the Group’s progress. Paul Whitmore is the executive director responsible on behalf of the Board for environmental affairs. The environment committee is responsible for agreeing and implementing the Group’s environmental management procedure and consists of the environmental managers from each division. The committee is also responsible for: • developing and maintaining a corporate register of relevant legislation, reviewing any imminent changes to legislation and ensuring that operational controls throughout the Group are sufficient to maintain compliance; • identifying environmental incidents, monitoring trends and ensuring that effective controls are implemented to prevent recurrence; and • disseminating information on best practice through the management teams of each division. The table below sets out the four priorities that the Group set itself for environmental monitoring in 2005 and details of the Group’s progress in these areas to date: 2005 Objectives 2005 Progress Completion of the accreditation process for all parts of the Group. 100% of the Group by turnover has implemented environmental management systems which have achieved accreditation to ISO14001. Maintaining the Group’s performance in terms of prosecutions and minimising the number of cautions and enforcement notices received. Development and implementation of a data reporting system available on the Company’s website, addressing initially waste and energy. Conformity with ethical trading practices for timber products. 26 The Group did not receive any prosecutions or cautions in 2005 although it did receive environmental notices for: • a notice under Section 34/35 of the Environmental protection Act 1990 was received by Affordable Housing relating to the transfer of excavated material from site. The division has complied with the notice and subsequent investigation identified that all Duty of Care requirements had been met; and • a Section 60 notice under the Control of Pollution Act 1974 was issued by a Westminster Council noise control officer to Fit Out, in response to a complaint by a resident. In order to alleviate the problem, night work was suspended at the site pending agreement between the Client and Westminster Council. The Group has developed a quarterly reporting programme for environmental data which currently covers waste and energy. In 2005, the Group finalised its policy on the ethical procurement of timber products. The Group will work towards collating data on the amount of timber procured from sustainable sources in 2006. Corporate social responsibility review Affordable Housing has set up an office waste paper recycling programme which has seen the planting of 18 trees to compensate for their paper usage during the year and is introducing waste segregation and recycling initiatives on their sites. Within the Fit Out division, both Overbury and Vivid became carbon neutral in 2005 with Overbury offsetting 520 tonnes of carbon dioxide generated by its three offices and from business travel. Similarly Vivid will offset the 90 tonnes of carbon dioxide which it is expected to generate in 2006. In addition, Backbone has begun recycling clients’ unwanted furniture through a charitable organisation. At a project in Havant, the Construction division identified at an early stage that it had sufficient space to introduce a comprehensive waste management system on the site. Working with partners they installed separate skips for timber, mixed waste, metal, rubble, hardcore and a bulker for reducing cardboard and packaging. The division also worked with suppliers and subcontractors to minimise the amount of packaging used in the supply and delivery of materials. This has enabled it to reduce the burden on landfill, minimise the number of wagon movements together with offering a financial saving over the course of the project. Where practicable, the division will seek to introduce similar systems on future projects. For their work at the Evesham Sewage Treatment Works Development Scheme, Infrastructure Services was awarded the Platinum Award at Severn Trent’s sustainability awards ‘for a well presented project to augment an existing asset which had a strong focus on environmental management aspects’. The Group has set itself the following objectives for 2006: • maintaining ISO14001 accreditations within each division; • developing strategies for reducing carbon dioxide emissions and waste streams; • monitoring prosecutions, cautions and environmental notices as a basic measure of environmental performance; and • engaging with the supply chain in each division to develop strategies for improving their environmental performance and to assist in further improving the Group’s performance. Community The Group has developed a variety of initiatives for interacting with and assisting the communities in which they operate. Some examples of these are given below: In 2005, the Affordable Housing division has continued to promote its Company Mentoring Scheme, whereby it works in partnership with a national network of schools and colleges to develop construction skills and career aspirations for 14 to 18 year olds. Under a new initiative developed during the year with HM Prison Onley near Rugby, the division is providing training and employment opportunities for ex-offenders who have completed the prison’s brickwork construction course. The scheme’s first two bricklayers are currently training at a construction site in the Midlands. Various Affordable Housing employees have also been involved in projects to improve community facilities in the vicinity of their projects. Infrastructure Services has a number of senior engineers who are involved in promoting the engineering profession to school children through careers lectures, engineering days in schools, supporting business days and leadership conferences. They also undertake mock interviews with school leavers in order to help them hone their interview skills prior to entering the workplace. They work alongside the CITB in promoting careers in construction and provide work experience placements in engineering design. The Group supports the Women in Construction Initiative and an Affordable Housing employee is currently the Scottish representative of the National Association of Women in Construction. The divisions are also involved in various local authority action zone projects. The Group supports local charities in a variety of ways either through financial assistance or benefits in kind, such as the donation of office equipment. Details of charitable donations are shown on page 22. In 2005, the Group also actively participated in the Metropolitan Police campaign ‘Street Vibe’ in which it sponsored educational support for teenage children at the New North Community School in Islington aimed at educating them about the potential damage inflicted by alcohol, drugs, street and car crime, bullying and violence. The Group actively supports the principles enshrined in the Considerate Contractors Schemes and in 2005 these principles were applied to 176 (2004: 173) projects. Summary As illustrated above, the Group is establishing an effective strategy to plan and develop its CSR activities. Through commitment to the education of its employees and the expansion of knowledge of CSR issues, the Group is well positioned to meet its CSR obligations as it continues to grow. 27 Morgan Sindall Report and Accounts 2005 Directors’ remuneration report Introduction This report is prepared in accordance with schedule 7A to the Companies Act 1985 (‘the Act’). This report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and the Combined Code on Corporate Governance published in July 2003 (‘the Code’). As required by the Act, a resolution to approve the report will be proposed at the annual general meeting of the Company to be held on 25 April 2006. The Act requires the auditors to report to the Company’s members on certain parts of the directors’ remuneration report and to state whether in their opinion those parts of the report have been properly prepared in accordance with the Act. The report has therefore been divided into separate sections for unaudited and audited information. Unaudited information Remuneration committee The members of the remuneration committee (‘the committee’) during 2005 were Gill Barr (chair), Bernard Asher and Jon Walden, all of whom are independent non-executive directors. The committee is responsible for determining and agreeing with the Board the broad policy for the remuneration of the executive directors, including the executive chairman. It sets the salaries and remuneration packages for the executive directors and monitors the structure and level of remuneration for other senior executives. The terms of reference of the committee are available on the Company’s website and on request from the company secretary. During the year, the committee was assisted by New Bridge Street Consultants LLP (‘NBSC’) on a number of aspects of the remuneration packages for the executive directors, including awards made under the Morgan Sindall Executive Remuneration Plan 2005. The committee also consulted the chief executive, the finance director and the chairman, but not in relation to their own remuneration. NBSC did not provide any other services to the Company or the Group. Policy on executive directors’ remuneration The committee seeks to develop remuneration packages which satisfy the following principles: • to attract, retain and motivate the best possible person for each position; • to be perceived as simple and fair and, therefore, valued by participants; • to ensure that the fixed element of remuneration (salary, pension and other benefits) is set no higher than market rates and that a significant proportion of the total remuneration package is determined by the Company’s performance; • to recognise the importance of rewarding over performance (but not under performance) in both the short and long-term; • to reward directors fairly for their contributions whilst remaining within the range of benefits offered by similar companies in the sector; and • to align the interests of executives with those of the shareholders. A fundamental review of the Company’s remuneration structure was carried out by NBSC in 2004 at the request of the committee. This resulted in a revised remuneration structure for 2005 with a more balanced mix of long-term and short-term rewards to ensure that executives focus on sustained performance rather than just short-term performance. The long-term rewards focus on Group performance with demanding criteria over a three year period, whilst short-term rewards are more closely linked to targets for the financial year and, in the case of senior executives, targets in the specific areas of responsibility of each individual. The committee has decided to retain the same remuneration structure for 2006. Base salary The base salary of individual executive directors is determined by the committee prior to the beginning of each year and, if appropriate, if an individual’s position or responsibilities change. The base salaries of the executive directors for 2005 were set by the committee following a benchmarking exercise carried out on its behalf by NBSC for each individual executive director against a comparator group of twenty five companies of a similar size and profile. Other benefits in kind The executive directors receive certain other benefits, principally a car allowance and benefits in kind, namely private medical insurance and life assurance. Annual bonus At the end of each financial year, the committee establishes the targets to be met for the executive directors to earn a cash bonus in respect of the following year. For the 2005 financial year, the performance criteria were Group profit based targets set taking into account the previous year’s likely outturn profit and growth expectations. The maximum bonus payable in cash represented 75% of base salary (100% of salary for John Bishop who did not receive a long-term incentive award in 2005) and required profit before tax for 2005 to exceed the Group budget by more than 10% and this profit target was achieved. 28 Directors’ remuneration report In recognition of the record results achieved and the outstanding performance of the Group in 2005, the committee has decided to award an additional one-off bonus to Paul Smith this year to reflect his key contribution towards the Group’s success. In order to align his interests with shareholders, this bonus will take the form of a deferred share award of 20,000 shares to be granted following the announcement of the Company’s preliminary results. The shares will be held in trust for two years and he may be required to forfeit them if he ceases to be employed by the Company during that period. For the 2006 financial year, executive directors will have the potential to earn a cash bonus worth up to 75% of base salary with performance measures and targets based on similar principles to those in respect of 2005. For other senior executives, performance criteria focus primarily on the performance of the divisions over which they have a direct management influence. Long-term incentives Morgan Sindall Executive Remuneration Plan 2005 (‘the 2005 Plan’) Following the review carried out by NBSC in 2004, the committee concluded that the Company should have the ability to offer senior executives performance shares and/or share options as a long-term incentive under the 2005 Plan which was approved by shareholders at the annual general meeting of the Company on 12 April 2005. The committee considers that the flexibility to grant both types of award provides a suitable balance of performance related incentives, with options rewarding share price growth, with performance shares encouraging executive retention and with both types of incentive rewarding sustained growth in earnings. A summary of the 2005 Plan is set out below: Award levels In normal circumstances, the maximum annual award, which is subject to the achievement of testing performance targets, will be performance shares worth 75% of base salary (100% of salary in exceptional circumstances). For the grant of awards made in 2005, executives were given the choice at the time of grant of receiving their awards either in the form of performance shares or by electing to receive share options to replace some or all of their performance shares at a rate of 4 share options for every 1 performance share. It is anticipated that future awards will give executives a similar choice, with the awards to be granted in 2006 being offered on the same ratio. Performance conditions The committee believes that long-term incentives should be structured so as to incentivise growth in the Company’s earnings by use of an earnings per share (‘EPS’) performance condition. In the committee’s opinion, an EPS performance condition will provide a clear linkage between performance and reward for senior executives and will also only reward executives for significant improvement in the underlying financial performance of the Group which should be reflected over time in enhanced shareholder value. The vesting of share options and performance shares awarded will be determined by the Group’s EPS performance against the Retail Prices Index (‘RPI’), over a single three year period with no opportunity to re-test performance. The committee will ensure that EPS is calculated on a consistent basis during the transition to and under IFRS. The committee has determined that the vesting schedule for performance shares and share options should be as follows for the awards to be made in 2006, based on the three year performance period to 31 December 2008: Average annual EPS performance in excess of RPI Performance shares Less than 4% pa 4% pa 10% pa Between 4% and 10% pa Share options Less than 5% pa 5% pa 10% pa Between 5% and 10% pa Vesting percentage 0% 25% 100% Pro rata on a straight-line basis Pension arrangements The Company makes contributions equivalent to 10% of base salary, in the case of David Mulligan, to the Morgan Sindall Retirement Benefit Plan and, in the case of the other executive directors, to their individual personal pension plans. 29 Morgan Sindall Report and Accounts 2005 Directors’ remuneration report Performance graph The graph below shows a comparison of the total shareholder return for the Company’s shares over the last five financial years against the total shareholder return for the companies comprised in the FTSE 350 index excluding investment trusts. This is considered by the committee to be the most suitable comparable broad index against which the Company’s performance should be measured for this purpose. ) £ ( e u l a V 400 350 300 250 200 150 100 50 2001 2002 2003 2004 2005 Cumulative total shareholder return for the five years to 31 December 2005 based on original notional value of £100 Morgan Sindall plc FTSE 350 excluding investment trusts Service contracts It is the Company’s policy that executive directors’ service contracts should be terminable on one year’s notice. In circumstances of termination by notice (except in cases of removal for misconduct), compensation will be determined by the committee having regard to the particular circumstances of the case. The committee’s guidelines will be to determine an equitable compensation package while avoiding rewarding poor performance and having regard to the departing director’s obligations to mitigate his loss. In ordinary circumstances, base salary and employer pension contributions for the full period of notice of one year would be paid together with accrued bonus entitlements and shares or share options granted under long-term incentive schemes where the relevant performance criteria had been satisfied. Other employee benefits would also be maintained for the notice period subject to the rules of the appropriate Group scheme. The dates of the executive directors’ contracts are: John Morgan Paul Smith David Mulligan Paul Whitmore 28 October 1994 18 February 2003 1 March 2004 21 March 2000 At the discretion of the Board, executive directors are allowed to act as non-executive directors of other companies and retain any fees relating to that post. Currently John Morgan acts as a non-executive director of Genetix plc and receives a fee of £20,000 per annum. Non-executive directors The dates of the terms of engagement of the non-executive directors are: 4 February 1998 Bernard Asher 11 August 2004 Gill Barr 2 August 2001 Jack Lovell 5 April 2001 Jon Walden All non-executive directors have specific terms of engagement being an initial period of three years which thereafter may be extended by mutual consent. Their remuneration is determined by the Board within the limits set by the articles of association of the Company and is based on surveys together with external advice as appropriate. At the annual general meeting in 2005, a resolution was passed to increase the limit on directors’ fees, which enabled the Company to increase the fees payable to the non-executive directors to market competitive levels after several years at the same rate. Fees for 2006 will comprise a basic fee of £35,000 and, to reflect their additional responsibilities and time commitment, an additional fee of £5,000 and £3,000 will be paid to the chairs of the audit and remuneration committees respectively. Non-executive directors cannot participate in any Company share based incentive plan and do not receive any other benefits. 30 Directors’ remuneration report Audited information Aggregate directors’ remuneration The total amounts for directors’ remuneration were as follows: Emoluments Amounts vesting under long-term incentive schemes Money purchase pension contributions Directors’ emoluments Name of director Executive John Morgan Paul Smith David Mulligan Paul Whitmore John Bishop2 Non-executive Bernard Asher Gill Barr Jon Walden Jack Lovell Totals Fees/basic salary £’000s Benefits £’000s Annual cash bonuses £’000s 1 260 330 170 200 83 1,043 34 34 34 34 136 1,179 17 17 14 16 7 71 – – – – – 71 195 248 128 150 83 804 – – – – – 804 2005 £’000s 2,054 – 105 Total 2005 £’000s 472 595 312 366 173 1,918 34 34 34 34 136 2,054 2004 £’000s 1,902 162 99 Total 2004 £’000s 401 506 207 344 344 1,802 25 9 25 25 84 1,886 3 1 The maximum Group profit target of £38.1m was achieved in 2005 and the executive directors are therefore eligible to receive their maximum cash bonus. In addition, Paul Smith was awarded a one-off bonus of 20,000 shares, deferred for two years as explained above. These shares will be granted following the announcement of the Company’s preliminary results in February 2006 and details will be included in next year’s directors’ remuneration report. 2 Upon ceasing to be a director of the Company in April 2005, John Bishop remained in full time employment with the Company until 31 May 2005 and subsequently remains employed on a part time basis until 31 May 2006. The figures in the table above reflect remuneration earned in respect of his period of full time employment during the year. In respect of his period of part time employment, he receives a salary of £15,000 per annum and benefits worth £1,000. Following his departure from the Board, 19,598 of his outstanding share awards under the LTIP were voluntarily waived. The committee approved a contribution by the Company of £167,457 to his personal pension fund, equivalent to the market value of the shares waived plus the value of employers’ National Insurance saved by the Company as a result of the waiver. John Bishop received no compensatory award. 3 This figure differs from the aggregate emoluments in the previous table by £16,000, being the fees paid to a former non-executive director in 2004. During the year no compensatory awards were made to any person who was formerly a director of the Company. 31 Morgan Sindall Report and Accounts 2005 Directors’ remuneration report Pensions The Company contributes 10% of base salary to the Morgan Sindall Retirement Benefit Plan in the case of David Mulligan and to personal pension plans of the other executive directors. The contributions paid by the Company to these plans were: 2005 £’000s 2004 £’000s John Morgan Paul Smith David Mulligan Paul Whitmore John Bishop1 Totals 26 33 18 20 8 105 22 28 11 19 19 99 1 The amount shown in the table for John Bishop reflects contributions paid to his personal pension plan in respect of his period of full time employment with the Company. A further payment by the Company into his pension plan was subsequently made, as detailed in note 2 to the table of directors’ emoluments above. The 2005 Plan The following awards were made to executive directors under the 2005 Plan: Performance shares Paul Smith David Mulligan Paul Whitmore Share options John Morgan Paul Smith David Mulligan Shares awarded Date of award Date awards vest 17,093 8,805 20,718 20 May 2005 20 May 2005 20 May 2005 20 May 2008 20 May 2008 20 May 2008 Granted Date granted 107,736 68,370 35,220 20 May 2005 20 May 2005 20 May 2005 Exercise price Date from which exercisable Expiry date £7.24 £7.24 £7.24 20 May 2008 20 May 2008 20 May 2008 20 May 2015 20 May 2015 20 May 2015 Notes: • The market price of a share on 20 May 2005 was £7.30; • Awards of performance shares and share options are subject to an EPS performance condition measured over a three year period with full vesting of awards for average EPS growth of RPI + 10% per annum reducing on a sliding scale to 25% vesting for average growth of RPI + 4% per annum (performance shares) or RPI + 5% per annum (share options). 32 Directors’ remuneration report Legacy plans Long-term incentive plan (‘LTIP’) Set out below are details of outstanding awards made to executive directors under the Company’s LTIP. No awards have been granted under the LTIP since 2003 and there is no intention to grant further awards. The outstanding awards are conditional upon the Group’s total shareholder return performance over a three year period compared with a selected peer group. Once shares have been allocated to the executive after the three year performance period, the executive is entitled to receive dividends in respect of those shares and to exercise voting rights but may not transfer or otherwise deal in those shares until a further two years have elapsed and he may be required to forfeit the shares if he ceases to be employed by the Company during that period. After two years they will vest in his name. The executive directors’ interests in shares under the LTIP are: Name Shares conditionally awarded As at 1 Jan 2005 Allocated Mar 2005 Lapsed As at Mar 2005 31 Dec 2005 1 Shares allocated but not vested As at 1 Jan 2005 As at Allocated Mar 2005 31 Dec 2005 2 John Morgan Paul Whitmore John Bishop3 59,093 51,800 52,773 (13,025) (11,355) (11,689) (5,218) (4,549) (24,281) 40,850 35,896 16,803 7,852 6,366 7,003 13,025 11,355 11,689 20,877 17,721 18,692 1 The outstanding conditional awards as at 31 December 2005 comprise the conditional awards granted on 30 June 2003. Preliminary figures for the year to 31 December 2005 indicate that upon expiry of the three year period from date of grant, 100% of the shares will be allocated to the participants. 2 No awards, which had been allocated in prior years, vested during 2005. 3 When John Bishop ceased to be a full time employee at the end of May 2005, 36,401 shares had been conditionally awarded to him in respect of the 2003 LTIP award. He also had a total of 18,692 shares allocated to him from the 2001 and 2002 LTIP awards and 6,876 nil cost options awarded under the Deferred Share Bonus Plan (see below) that had not yet vested at that date. As referred to above, 19,598 of his outstanding shares under the 2003 LTIP award have been voluntarily waived (included in the ‘Lapsed Mar 2005’ column in the table above). To reflect John Bishop’s critical role in the growth and development of the Company over the past twelve years, the committee currently intends to exercise its discretion and allow a proportion of the outstanding awards to vest when he ceases to be a part time employee in 2006. Deferred share bonus plan The following nil-cost options over shares were granted to the executive directors on 10 March 2005. These represented 25% of the annual bonus earned in respect of the year ended 31 December 2004. No long-term incentive awards were made to the executive directors in respect of that financial year. The nil-cost options will be exercisable for five years from 10 March 2008, being three years after the date of grant. The market value of a share on the date of grant was 712.5p. Nil cost share options No. John Morgan Paul Smith David Mulligan Paul Whitmore John Bishop 8,046 10,241 4,114 6,876 6,876 33 Morgan Sindall Report and Accounts 2005 Directors’ remuneration report Share options Details of options granted under the 1995 share option scheme (‘1995 scheme’) for directors who served during the year are: Director Scheme Granted Date granted Exercise price Date from which exercisable Expiry date Paul Smith 1995 unapproved 100,000 10 Mar 2003 £2.07 10 Mar 2008 9 Mar 2010 The market price of a share on 31 December 2005 was 929.5p and the range during the year was 539p to 935p. Options were granted to Paul Smith under the 1995 scheme as part of his initial employment package in 2003 and in lieu of participation in the LTIP. No other executive director has any options outstanding under the 1995 scheme. Details of options granted under the 1995 scheme to other employees in the Group are shown in note 22 to the accounts on page 63. No further options may be granted under the 1995 scheme. The original performance condition for options granted under the 1995 scheme required the growth in the Company’s EPS over a period of five consecutive financial years to be sufficient to rank it within the upper quartile compared to the EPS growth of a comparator group of FTSE 100 companies. However, the introduction of IFRS from 2005 has created a significant problem in measuring this performance condition because the accounts used for calculating the base EPS figures are derived on a UK GAAP basis and the end EPS figures will be derived on an IFRS basis. It is not considered practicable by the committee to make the necessary adjustments to try to measure the base and end figures on a consistent accounting basis for all FTSE 100 companies. Accordingly, the committee (following consultation with leading shareholders and in accordance with the rules of the 1995 scheme) has amended the performance condition to use a comparative total shareholder return (‘TSR’) measure rather than a comparative EPS measure. As a result, outstanding options under the 1995 scheme are now only exercisable if the Company’s TSR is ranked at or above the upper quartile compared to a comparator group of FTSE 100 companies over a period of five consecutive financial years. This report was approved by the Board of directors and signed on its behalf by: Gill Barr Chair of the Remuneration Committee 22 February 2006 34 Corporate governance statement Governance framework The Board recognises the importance of high standards of corporate governance and is committed to managing the Group’s affairs in accordance with the principles of good governance set out in section 1 of the Code. A summary of how the Company has applied the principles of the Code is set out below. The Board has considered the provisions of the Code and considers that it was substantially in compliance throughout the year ended 31 December 2005, save in respect of provision D.1.1 which requires the senior independent director to attend sufficient meetings with a range of major shareholders to listen to their views in order to develop a balanced understanding of their issues and concerns. Whilst the senior independent director, as well as the other non-executive directors, has been available to meet with shareholders if they so request, no such meetings took place during the year. Given the amount of feedback from shareholders to the Board, as further described below, the directors are satisfied that the absence of such meetings has not affected the ability of the senior independent director to understand shareholder issues and concerns. Directors The Board currently comprises an executive chairman, three further executive directors and four non-executive directors. All of the non-executive directors, with the exception of Jack Lovell, are considered by the Board and under the Code to be independent. Jack Lovell is a former executive director of the Company and a significant shareholder. The senior independent director is Bernard Asher. The Board has a separate chairman and chief executive in line with the Code provision A.2. John Morgan as executive chairman takes responsibility for leading the Board and ensuring that it functions effectively and for the overall strategy of the Group whilst Paul Smith as chief executive is responsible for managing the businesses and critically assessing Group strategy. The Board has set out and agreed a schedule that details their individual roles and responsibilities. The Board considers that the balance of relevant experience amongst the various Board members enables the Board to exercise effective leadership and control of the Group. It also ensures that the decision making process cannot be dominated by any individual or small group of individuals. Although the Company entered the FTSE 350 during 2005, it continued to qualify as a smaller company (as defined by the Code) during the year under review. As such, it fell within the exemption for smaller companies from the requirement in provision A.3.2 that at least half the Board, excluding the chairman, should comprise independent non-executive directors. It is recognised, however, that the Company is currently not in compliance with this provision. The nominations committee has considered the size and balance of the Board and recommended to the Board that the existing structure was satisfactory and that increasing the Board would not benefit the Group. The Board does not, therefore, have any current intention to recruit a further independent non-executive director although the matter will be kept under review. The articles of association of the Company require all directors to submit for election by shareholders at the first annual general meeting after his or her appointment and to re-election thereafter at least every three years. Paul Smith and Jack Lovell are retiring by rotation and will offer themselves for re-election at the forthcoming annual general meeting. Board effectiveness Nine scheduled meetings of the Board were held during the year. The key purposes of the scheduled meetings were to review all significant aspects of the Group’s activities, supervise the executive management and to make decisions in relation to those matters that are specifically reserved to the Board. There is a formal schedule of these matters, which includes the approval of the Group’s strategic plans, annual budget, significant capital expenditure and investment proposals, major projects, acquisitions and disposals, internal control arrangements and annual and interim results. Other specific responsibilities are delegated to the Board committees described below and under Group delegated authorities. In addition, ad hoc meetings are convened for specific purposes. A formal agenda for each meeting is agreed with the chairman and is circulated well in advance of the meeting to allow time for proper consideration, together with relevant papers including key strategic, operational and financial information. 35 Morgan Sindall Report and Accounts 2005 Corporate governance statement Attendance of individual directors during 2005 at scheduled Board meetings and at meetings of the remuneration, audit and nominations committees is set out below. Name of director Board Remuneration committee Audit Nominations committee committee Total no. of meetings John Morgan Paul Smith David Mulligan John Bishop1 Paul Whitmore Bernard Asher Gill Barr Jack Lovell Jon Walden 9 9 9 8 3 7 8 8 9 9 8 8 8 8 3 3 3 3 1 1 1 1 1 1 three board meetings were held prior to John Bishop’s retirement. Professional development and board evaluation The Company provides training facilities for directors on first appointment and subsequently as necessary. The executive directors have been participating in the two year modular development programme being run for senior executives and referred to in the directors’ report above and also received ad hoc personal coaching during the year. In addition, the Board receives regular presentations and briefings from the managing directors of the Group’s divisions and the non-executive directors’ knowledge and understanding of the Group’s operations is developed through site visits. There are agreed procedures by which directors are able to take independent professional advice, at the expense of the Company, on matters relating to their duties. In addition, the directors have access to the advice and services of the company secretary. An evaluation of the Board, including its committees, was carried out during the year. This took the form of a questionnaire that was developed internally and required each director to rate his or her agreement or disagreement with a number of statements focussing on the effectiveness of the Board and of scheduled Board meetings. This year, the questionnaire also asked for comments in relation to each statement. The results of the Board evaluation were reviewed at a subsequent meeting and a number of actions were agreed. Evaluation of individual directors took the form of feedback from the other directors, which was followed by one to one meetings between the chairman and each director and, in the case of the chairman’s evaluation, between himself and the senior independent director. The requirement of Jack Lovell to retire by rotation at the forthcoming annual general meeting was considered as part of his evaluation. Jack Lovell is not considered to be an independent non-executive director, having previously been an executive director and co-founder of the Company. He does, however, have a wealth of experience and knowledge of the Group and its businesses and, following his evaluation, the Board has confirmed that he continues to be an effective member of the Board and continues to demonstrate commitment to the role. Relations with shareholders The Company actively seeks to enter into dialogue with institutional shareholders whenever possible and also encourages all shareholders to use the annual general meetings as an opportunity for effective communication with the Company. The executive directors undertake a programme of communication with institutional shareholders at regular intervals which is coordinated by the Company’s brokers. The executive directors meet with analysts covering the construction industry arranged through the Company’s financial public relations consultants. Written feedback from all these meetings is distributed to all members of the Board. The non-executive directors are available to meet with the Company’s major shareholders. Details of proxy votes submitted for this year’s annual general meeting will be announced at the meeting after a vote on a show of hands. They will also be available on the Company’s website on the day before the meeting. 36 Corporate governance statement Board committees The Board has established three committees, namely remuneration, nominations and audit. Details of the remuneration committee and reports of the nominations and audit committees are set out below. Remuneration committee The remuneration committee comprised Gill Barr (chair), Bernard Asher and Jon Walden. The remuneration committee’s terms of reference are available for review on request and on the Company’s website under the investor relations section. Eight meetings were held in the year to cover all elements of the directors’ remuneration. A report to shareholders on directors’ remuneration is shown on pages 28 to 34. Nominations committee The members of the nominations committee during 2005 were John Morgan (chair), Bernard Asher, Jon Walden and Gill Barr. The terms of reference for the committee establish a framework through which it can review the balance and effectiveness of the Board to ensure suitable candidates are identified and recommended for appointment to the Board and the various Board committees. These terms of reference are available for review on request and on the Company’s website. As referred to above, the nominations committee met once during the year to review the structure, size and composition of the Board, particularly in the light of the Company’s entry into the FTSE 350. The committee’s recommendation to the Board was that the current structure, including the balance of executive and non-executive directors, was satisfactory. Audit committee The members of the audit committee during 2005 were Bernard Asher (chair), Gill Barr and Jon Walden. All committee members are independent non-executive directors. Biographical details of each member of the committee, including financial experience where relevant, are set out on page 18. The Board is satisfied that the committee has the appropriate level of experience to fulfil its terms of reference. These terms of reference were updated this year and are available for review on request and on the Company’s website. The committee met three times during the year, prior to the announcement of the Company’s preliminary results for 2004 and approval of the annual report, prior to the announcement of its interim statement and before commencement of the audit for 2005. The external auditors attended each of these meetings. The main purpose of the meetings was to review the scope and results of the audit and its cost effectiveness and to monitor the integrity of the financial statements, including reviewing progress on the Group’s implementation of IFRS. In addition the committee is responsible for reviewing the Company’s internal financial controls and internal audit activities and the Group’s head of audit and assurance attended each of the meetings to present reports of the internal audit activity during the year and the internal audit plan for 2006. The committee also considered the Group’s arrangements by which employees may, in confidence, raise concerns about possible improprieties in financial reporting or other matters. The audit committee is also responsible for making recommendations to the Board on the appointment or re-appointment of the external auditors and monitoring the objectivity and independence of the auditors and the effectiveness of the audit process. The external auditors, Deloitte & Touche LLP, have confirmed to the committee that they have policies and safeguards in place to ensure that they are independent within the meaning of all regulatory and professional requirements and that the objectivity of the audit engagement partner and audit staff is not impaired. In particular, they have rotated key audit principals to the extent required by the ICAEW’s Additional Guidance on Independence for Auditors. During the year, a new policy was adopted to enable the committee to monitor the engagement of the external auditors for non-audit services. This provides that any proposals to engage the external auditors for services, where the fees for such services would exceed either an absolute limit or a specified proportion of the audit fee, should be referred to the committee for approval. The fees for non- audit services carried out by Deloitte & Touche LLP during the year are set out in note 2 to the accounts on page 48. In aggregate these represented approximately 14% of the audit fee. The committee has reviewed the nature of the work and level of fees for non-audit services provided by the external auditors and concluded that this has not affected their objectivity or the independence of the audit. 37 Morgan Sindall Report and Accounts 2005 Corporate governance statement Internal control statement All procedures necessary to implement ‘Internal Control: Guidance for directors on the Combined Code’ have continued to be in place for the year under review and up to the date of approval of the annual report and accounts. These procedures have been regularly reviewed and this report therefore follows an approach of full compliance throughout the year with Code Principle C.2. The Board acknowledges that it has overall responsibility for the Group’s system of internal control and for ongoing review of its effectiveness. The internal control system is designed to manage rather than eliminate the risk of failure to achieve certain business objectives. It can only provide reasonable, but not absolute, assurance against material misstatement or loss. Risk management The Board has reserved to itself specific responsibility for the formulation of the risk management strategy of the Group. A formal process is in place through which the Group identifies the significant risks attached to its strategic objectives, confirms the control strategy for each risk and identifies the appropriate early warning mechanisms. A risk management policy document has been adopted by the Board setting out the Board’s role and responsibilities and its overall approach to management and acceptance of risk. Internal control and risk management systems are embedded in the operations of the businesses. Financial information 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 flowing through each division for monthly reporting to the Board. 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. Computer systems The Group has established controls and procedures over the security of data held on computer systems. Controls over central functions A number of the Group’s key functions including treasury, risk management and insurance are dealt with centrally. Each of these functions have detailed procedures manuals. Audit and assurance The Group’s head of audit and assurance reports to the chief executive and the audit committee and is responsible for managing the audit and assurance function and assists with risk management practices. The internal audit and assurance programme was wider in scope and reach than in previous years and included reviews of the operations of key business and financial controls across the Group, including those operated centrally, as well as a rolling programme of peer group reviews. Peer group reviews assist in the professional development of the individual staff concerned while at the same time providing a mechanism for the cross fertilisation of ideas and best practice throughout the Group. Annual review The Board has conducted a review of the effectiveness of the system of internal control for the year ended 31 December 2005 and for the period to the date of this report. The process included a formal review conducted by the Board of the Group risk report, which comprised a consolidated report of each of the divisional risk reviews and which is re-appraised and updated annually. In addition the Board also received regular internal control reports from the Group head of audit and assurance referred to above. 38 Independent auditors’ report to the members of Morgan Sindall plc We have audited the consolidated financial statements (the ‘financial statements’) of Morgan Sindall plc for the year ended 31 December 2005 which comprise the consolidated income statement, the consolidated balance sheet, the consolidated statement of recognised income and expense, the consolidated cash flow statement, the statement of principal accounting policies and the related notes 1 to 30. These financial statements have been prepared under the accounting policies set out therein. The corporate governance statement and the directors’ remuneration report are included in the individual company annual report of Morgan Sindall plc for the year ended 31 December 2005. We have reported separately on the individual company financial statements of Morgan Sindall plc for the year ended 31 December 2005 and on the information in the directors’ remuneration report included in the individual company annual report that is described as having been audited. This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the annual report and the financial statements in accordance with applicable United Kingdom law and International Financial Reporting Standards (‘IFRS’) as adopted for use in the European Union are set out in the statement of directors’ responsibilities. Our responsibility is to audit the financial statements in accordance with relevant United Kingdom legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view in accordance with the relevant framework and whether the financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the International Standards on Auditing Regulation. We report to you if, in our opinion, the directors’ report is not consistent with the financial statements. We also report to you if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and transactions with the Company and other members of the Group is not disclosed. We read the directors’ report and the other information contained in the annual report for the above year as described in the contents section and we consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion: • the financial statements give a true and fair view, in accordance with IFRS as adopted for use in the European Union, of the state of the Group’s affairs as at 31 December 2005 and of its profit for the year then ended; • the financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and • as explained in the statement of principle accounting policies, the Group in addition to complying with its legal obligation to apply those IFRS adopted for use in the European Union, has also complied with the IFRS as issued by the International Accounting Standards Board. Accordingly, in our opinion the financial statements give a true and fair view, in accordance with IFRS, of the state of the Group’s affairs as at 31 December 2005 and of its profit for the year then ended. Deloitte & Touche LLP Deloitte & Touche LLP Chartered Accountants and Registered Auditors St Albans, United Kingdom 22 February 2006 39 Morgan Sindall Report and Accounts 2005 Consolidated income statement For the year ended 31 December 2005 Continuing operations Revenue Cost of sales Gross profit Administrative expenses Share of results of joint ventures Operating profit Investment revenues Finance costs Profit before tax Tax Profit for the year from continuing operations attributable to equity holders of the parent company Earnings per share From continuing operations Basic Diluted Notes 1 11 1 5 5 6 2 8 8 2005 £’000s 1,296,708 (1,154,118) 142,590 (103,109) 425 39,906 3,661 (1,867) 41,700 (12,125) 29,575 70.74p 68.83p 2004 £’000s 1,219,297 (1,095,932) 123,365 (93,227) 2,810 32,948 3,235 (2,413) 33,770 (9,736) 24,034 57.61p 56.54p There are no discontinued activities in either the current or preceding year. 40 Consolidated balance sheet at 31 December 2005 Notes 9 10 11 11 19 12 13 15 16 17 18 17 22 23 23 23 23 23 24 2005 £’000s 16,403 56,729 10,881 103 2,485 86,601 87,571 235,056 72,018 394,645 481,246 (352,156) (6,295) (766) (359,217) 35,428 (3,351) (2,059) (5,410) (364,627) 116,619 2,116 26,014 623 (1,775) 1,052 (2,238) 90,827 116,619 2004 £’000s 14,890 55,961 6,840 103 1,512 79,306 60,817 203,093 73,447 337,357 416,663 (308,517) (5,572) (483) (314,572) 22,785 (2,225) (1,707) (3,932) (318,504) 98,159 2,107 25,679 623 (993) 39 - 70,704 98,159 Non current assets Property, plant and equipment Goodwill Interests in joint ventures Investments Deferred tax Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other payables Current tax liabilities Obligations under finance leases Net current assets Non current liabilities Retirement benefit obligation Obligations under finance leases Total liabilities Net assets Equity Share capital Share premium account Capital redemption reserve Own shares Equity reserve Hedging reserve Retained earnings Total equity The financial statements were approved by the Board of directors and authorised for issue on 22 February 2006 and signed on its behalf by: Paul Smith David Mulligan 41 Morgan Sindall Report and Accounts 2005 Consolidated statement of recognised income and expense For the year ended 31 December 2005 Actuarial losses on defined pension schemes Tax on items taken directly to equity Transferred to the initial carrying amount of hedged items on cash flow hedges Net expense recognised directly in equity Profit for the year from continuing operations Total recognised income and expense for the year attributable to equity shareholders 2005 £’000s (1,284) 312 (2,238) (3,210) 29,575 26,365 2004 £’000s (1,493) 448 – (1,045) 24,034 22,989 42 Consolidated cash flow statement For the year ended 31 December 2005 Notes 26 Net cash from operating activities Investing activities Interest received Dividends received from joint ventures Proceeds on disposal of property, plant and equipment Purchases of property, plant and equipment Payments to acquire interest in joint ventures Acquisition of business Net cash used in investing activities Financing activities Payments to acquire own shares Dividends paid Repayments of obligations under finance leases Repayment of loan notes Proceeds on issue of share capital Net cash used in financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Bank balances and cash 2005 £’000s 14,477 3,686 336 1,433 (4,680) (6,190) – (5,415) (782) (8,459) (1,354) (240) 344 (10,491) (1,429) 73,447 72,018 2004 £’000s 70,290 3,217 335 501 (4,296) – (3,409) (3,652) (48) (7,099) (951) – 294 (7,804) 58,834 14,613 73,447 43 Morgan Sindall Report and Accounts 2005 Principal accounting policies For the year ended 31 December 2005 Basis of accounting The financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) for the first time. The disclosures required by IFRS 1 concerning the transition from UK GAAP to IFRS are given in note 30 on pages 69 to 70. The financial statements have also been prepared in accordance with IFRS adopted for use in the European Union and therefore comply with Article 4 of the EU IAS Regulation. At the date of authorisation of these financial statements IFRS 6 and 7 and IFRIC 4 to 8, which have not been applied in these financial statements, were in issue but not yet effective. The directors anticipate that the adoption of these standards and interpretations in future years will have no material impact on the financial statements of the Group. The financial statements have been prepared on the historical cost basis, except where otherwise indicated. The principal accounting polices adopted are set out below. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and all its subsidiary undertakings. On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the fair value of consideration given for the acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. In circumstances where the fair values of the identifiable net assets exceed the cost of acquisition the excess is immediately recognised in the income statement. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. In accordance with IFRS 3 ‘Business Combinations’, goodwill is no longer amortised but stated at cost less any provision for impairment in value. Goodwill is reviewed annually for any impairment in its value or at such time that there is an indication that its value has been reduced. Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal. Revenue recognition Revenue is defined as the value of goods and services rendered excluding VAT. Revenue represents the value of work executed on construction contracts during the year and the sales value of properties where the ownership has been legally transferred to the purchaser. The sales proceeds on properties taken in part exchange are not included in revenue. Interests in joint ventures and investments A joint venture is an entity over which the Group is in a position to exercise joint control, through participation in the financial and operating policy decisions of the venture. Joint ventures are accounted for using the equity method of accounting. The Group’s share of the results of joint ventures is reported in the income statement as part of the operating profit and the net investment disclosed in the balance sheet. Revaluation gains are recognised in the income statement net of any relevant deferred tax. Any goodwill arising on the acquisition of the Group’s interest in a jointly controlled entity is accounted for in accordance with the Group’s accounting policy for goodwill arising on the acquisition of a subsidiary. Where the Group transacts with its jointly controlled entities, unrealised profits and losses are eliminated to the extent of the Group’s interest in the joint venture. Investments are carried in the balance sheet at cost less any impairment in the value of individual investments. Losses of investments in excess of the Group’s interest are not recognised. Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established. Property, plant and equipment Freehold and leasehold properties are carried at cost less any recognised impairment loss. Depreciation of these assets is charged to income. Plant, machinery and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged so as to write off cost or valuation of assets, other than land, over their estimated useful lives, using the straight-line method, on the following bases: Freehold property Leasehold property Fixtures and equipment 2% per annum period of the lease between 10% and 33% per annum Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. Residual values of property, plant and equipment are reviewed and updated annually. 44 Principal accounting policies For the year ended 31 December 2005 Investment property, which is property held to earn rentals and/or for capital appreciation, is stated at its fair value at the balance sheet date. Gains or losses arising from changes in the fair value of investment property are included in the income statement in the period in which they arise. Inventories Inventories are valued at the lower of cost and net realisable value. Interest incurred on borrowings to finance specific developments is capitalised. Construction contracts Revenue is recognised on construction contracts as work progresses and includes a proportion of attributable profit once the final outcome can be assessed with reasonable certainty and at a percentage rate not exceeding that forecast at completion. Losses anticipated in bringing a contract to completion are provided in full once they are foreseen. Attributable pre-contract costs, incurred prior to the time that there is virtual certainty of future recovery, are expensed. Borrowing costs Borrowing costs are recognised in the income statement in the period in which they are incurred, except for amounts referred to under inventories above. Tax The tax expense represents the current tax and deferred tax charges. The current tax payable is based on the Group’s taxable profit for the year. Taxable profit differs from reported profit in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s current tax liability is calculated using tax rates prevailing at the balance sheet date. Deferred tax is the tax expected to be paid or recovered on differences between the carrying amounts of assets and liabilities and the corresponding tax bases used in tax computations and is accounted for using the balance sheet liability method. Deferred tax is provided in full on temporary differences which result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and laws. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Deferred tax assets and liabilities are not discounted. Leasing Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The lease liability is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Pensions The expense of defined benefit pension schemes is determined using the projected unit method and charged to the income statement based on actuarial assumptions at the beginning of the financial year. Actuarial gains and losses are recognised in full in the statement of recognised income and expense in the period in which they occur. Net pension obligations are included in the balance sheet at the present value of the scheme liabilities, less the fair value of the scheme assets. Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. Payments made to staff managed retirement benefit schemes are dealt with as payments to defined contribution schemes where Group’s obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit scheme. Share based payments The Group has applied the requirements of IFRS 2 ‘Share Based Payment’. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 January 2005. The Group issues equity settled and cash settled share based payments to certain employees. Equity settled share based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity settled share based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. Fair value is measured by use of a modified Black-Scholes model. None of these awards when granted was subject to a share price related performance condition. A liability equal to the portion of the services received is recognised at the current fair value determined at each balance sheet date for cash settled, share based payments. 45 Morgan Sindall Report and Accounts 2005 Principal accounting policies For the year ended 31 December 2005 Financial instruments Trade receivables Trade receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in the income statement when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Cash and cash equivalents Cash and cash equivalents comprise cash on hand, demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Trade payables Trade payables are initially measured at fair value and are subsequently measured at amortised cost using the effective interest rate method. Derivative financial instruments and hedge accounting Derivative financial instruments are used in joint ventures to hedge long-term interest rate risks. Under IAS 39 ‘Financial Instruments’, interest rate swaps are stated in the balance sheet at fair value. Where financial instruments are designated as a cash flow hedge and are deemed to be effective, gains and losses on re-measurement are recognised in equity. When the financial instrument is determined to be no longer effective as a hedge, gains or losses are recognised in the income statement. IAS 39 has been applied from 1 January 2005 as permitted under the transition arrangements in IFRS 1. Financial receivables Certain joint ventures’ financial receivables are measured at fair value at the balance sheet date. The fair value is determined by discounting the future cash flows directly associated with the financial receivables at a risk-adjusted discount rate. The change in fair value is recognised in equity. 46 Notes to the consolidated financial statements For the year ended 31 December 2005 1 Business segments For management purposes, the Group is organised into four operating divisions, Fit Out, Construction, Infrastructure Services and Affordable Housing. The divisions are the basis on which the Group reports its primary segment information. Segment information about the Group’s continuing operations is presented below: Fit Out Construction Infrastructure Services Affordable Housing Group activities Share of results of joint ventures Operating profit Investment revenues Finance costs Profit before tax Tax Profit for the year from continuing operations Other information: Depreciation Fit Out Construction Infrastructure Services Affordable Housing Group activities Revenue £’000s 322,618 335,750 247,938 390,402 – 1,296,708 2005 Operating profit/(loss) £’000s 16,398 3,214 5,974 18,682 (4,787) 39,481 425 39,906 3,661 (1,867) 41,700 (12,125) 29,575 2005 Capital additions £’000s Depreciation £’000s 1,050 1,349 3,096 408 629 6,532 543 1,250 1,841 338 533 4,505 2004 Operating profit/(loss) £’000s Revenue £’000s 251,594 271,113 332,283 364,307 – 1,219,297 2004 Capital additions £’000s 631 962 2,089 126 1,693 5,501 11,238 1,301 7,841 13,445 (3,687) 30,138 2,810 32,948 3,235 (2,413) 33,770 (9,736) 24,034 £’000s 481 608 1,682 374 320 3,465 47 Morgan Sindall Report and Accounts 2005 Notes to the consolidated financial statements For the year ended 31 December 2005 1 Business segments (continued) Balance sheet analysis of business segments: Fit Out Construction Infrastructure Services Affordable Housing Group activities Group eliminations 2005 Assets Liabilities £’000s £’000s 97,397 117,544 118,124 (78,937) (83,228) (71,827) 149,697 (124,940) Net assets £’000s 18,460 34,316 46,297 24,757 2004 Assets Liabilities Net assets £’000s £’000s £’000s 71,318 105,751 122,584 (58,825) (74,087) (78,030) 126,682 (104,070) 12,493 31,664 44,554 22,612 30,404 (37,615) (7,211) 31,368 (44,532) (13,164) (31,920) 31,920 – (41,040) 41,040 - 481,246 (364,627) 116,619 416,663 (318,504) 98,159 All the Group’s operations are carried out in the United Kingdom and the Channel Islands. 2 Profit for the year Profit for the year is stated after charging/(crediting): Depreciation of property, plant and equipment (Profit)/loss on sale of fixed assets Staff costs (note 4) Auditors’ remuneration for audit services (see below) 2005 £’000s 4,505 (919) 209,422 404 2004 £’000s 3,465 20 191,950 325 Amounts payable to Deloitte & Touche LLP by the Company and its UK subsidiary undertakings in respect of non-audit services were £58,000 (2004: £29,000). A more detailed analysis of auditors’ remuneration is provided below: 2005 £’000s 2004 £’000s Audit services: Statutory audit Further assurance services Tax services: Tax advisory and compliance to joint ventures Other services: Modelling assistance 380 24 404 33 25 462 315 10 325 29 – 354 A description of the work of the audit committee is set out in the corporate governance statement on page 37. 48 Notes to the consolidated financial statements For the year ended 31 December 2005 3 Employees The average monthly number of people employed by the Group during the year was: Fit Out Construction Infrastructure Services Affordable Housing Group activities 4 Staff costs Wages and salaries Social security costs Other pension costs (note 18) 5 Investment revenues and finance costs Bank interest Other interest Investment revenues Interest on bank overdrafts Interest on finance leases Finance costs Net interest 2005 No. 495 1,289 1,945 1,491 30 5,250 2005 £’000s 184,244 20,246 4,932 209,422 2005 £’000s 2,913 748 3,661 (1,730) (137) (1,867) 1,794 2004 No. 420 1,180 2,121 1,271 26 5,018 2004 £’000s 168,995 18,169 4,786 191,950 2004 £’000s 2,884 351 3,235 (2,306) (107) (2,413) 822 49 Morgan Sindall Report and Accounts 2005 Notes to the consolidated financial statements For the year ended 31 December 2005 6 Tax Current tax: UK corporation tax Adjustment in respect of prior years Deferred tax: Current year Adjustment in respect of prior years Income tax expense for the year 2005 £’000s 12,241 140 12,381 (214) (42) 12,125 2004 £’000s 9,822 (302) 9,520 216 - 9,736 Corporation tax is calculated at 30% (2004: 30%) of the estimated assessable profit for the year. The charge for the year can be reconciled to the profit per the income statement as follows: Profit before tax Income tax expense at standard rate Tax effect of: Share of results of associates Expenses that are not deductible in determining taxable profits Utilisation of tax losses not previously recognised Adjustments in respect of prior years Income tax expense and effective tax rate for the year 2005 % £'000s 41,700 12,510 30.0 (128) 107 (462) 98 12,125 (0.3) 0.3 (1.1) 0.2 29.1 £'000s 33,770 10,131 (843) 708 - (260) 9,736 2004 % 30.0 (2.5) 2.1 0.0 (0.8) 28.8 50 Notes to the consolidated financial statements For the year ended 31 December 2005 7 Dividends Amounts recognised as distributions to equity holders in the period: Final dividend for the year ended 31 December 2004 of 13.25p (2003: 11.75p) per share Interim dividend for the year ended 31 December 2005 of 7.00p (2004: 5.25p) per share Proposed final dividend for the year ended 31 December 2005 of 18.00p (2004: 13.25p) per share 2005 £’000s 2004 £’000s 5,551 2,929 8,480 7,617 4,824 2,188 7,012 5,551 The proposed final dividend is subject to approval by shareholders at the annual general meeting and has not been included as a liability in these financial statements. 8 Earnings per share There are no discontinued operations in either the current or prior year. The calculation of the basic and diluted earnings per share is based on the following data: Earnings Earnings for the purposes of basic and dilutive earnings per share being net profit attributable to equity holders of the parent company Number of shares Weighted average number of ordinary shares for the purposes of basic earnings per share Effect of dilutive potential ordinary shares: Share options LTIP shares 2005 £’000s 2004 £’000s 29,575 24,034 2005 ’000s 41,810 893 265 2004 ’000s 41,718 597 191 Weighted average number of ordinary shares for the purposes of diluted earnings per share 42,968 42,506 51 Morgan Sindall Report and Accounts 2005 Notes to the consolidated financial statements For the year ended 31 December 2005 9 Property, plant and equipment Owned plant, machinery & equipment £'000s Leased plant, machinery & equipment £'000s Motor vehicles £'000s Freehold property £'000s Leasehold property £'000s 3,502 670 – – 4,172 1,308 (450) 5,030 1,205 401 – 1,606 582 (353) 1,835 3,195 329 – – (21) 308 – (103) 205 304 10 (21) 293 6 (101) 198 7 15 172 – – – 172 – (162) 10 – 1 – 1 – (1) – 10 Cost or valuation At 1 January 2004 Additions On acquisition Disposals At 1 January 2005 Additions Disposals 28,228 4,296 111 (1,305) 31,330 4,680 (2,331) At 31 December 2005 33,679 Accumulated depreciation At 1 January 2004 Charge for the year Disposals At 1 January 2005 Charge for the year Disposals 18,683 2,731 (871) 20,543 3,455 (2,077) At 31 December 2005 21,921 Carrying amount at 31 December 2005 Carrying amount at 31 December 2004 11,758 10,787 2,566 The carrying amount of land and buildings comprises: Freehold Investment property Freehold Short leasehold Other properties Total carrying amount Total £'000s 35,146 5,390 111 (1,530) 39,117 6,532 (3,046) 2,915 424 – (204) 3,135 544 – 3,679 42,603 1,579 322 (117) 1,784 462 – 21,771 3,465 (1,009) 24,227 4,505 (2,532) 2,246 26,200 1,433 16,403 171 1,351 14,890 2005 £’000s – – 10 1,433 1,443 1,443 2004 £’000s 160 160 11 1,351 1,362 1,522 In 2004, the directors considered the valuation of the single investment property at the balance sheet date and concluded that no change was required to its carrying value. In 2005, no external valuation has been undertaken as the investment property was sold during the year. 52 Notes to the consolidated financial statements For the year ended 31 December 2005 10 Goodwill Cost and carrying amount At 1 January 2004 Recognised on acquisition (note 25) At 1 January 2005 Recognised on acquisition (note 25) At 31 December 2005 £’000s 53,002 2,959 55,961 768 56,729 The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. During the years ended 31 December 2004 and 2005, the Group has determined that there is no impairment of any of its cash generating units to which goodwill has been allocated. The recoverable amounts have been determined on the ‘basis of value in use’ calculations. In order to test goodwill for impairment, the Group prepares cash flow forecasts derived from the most recent financial budgets approved by management and extrapolates cash flows based on an estimated growth rate of 3%. This rate does not exceed the average long-term growth rate for the construction industry or GDP. The rate used to discount the forecast cash flows is 8%. 11 Investments and interests in joint ventures The Group has the following significant interests in joint ventures: Primary Medical Property Limited 47.5% share Primary Medical Property Limited has a portfolio of primary health and social care centres. The Group’s involvement in the management of Primary Medical Property Limited is restricted to the appointment of two directors under the terms of a shareholder agreement under which certain matters require the approval of all directors and as such the Group has maintained joint control. See also note 28 on page 67 in relation to a post balance sheet event. Morgan–Vinci Limited 50% share Morgan–Vinci Limited is responsible for the construction and operation of the Newport Southern Distributor Road. Morgan–Vinci Limited is funded primarily by bank finance. Claymore Roads (Holdings) Limited 50% share Claymore Roads (Holdings) Limited is responsible for the upgrade and operation of the A92 between Dundee and Arbroath in Scotland. Claymore Roads (Holdings) Limited is funded primarily by bank finance. Community Solutions for Primary Care (Holdings) Limited 331/3% share Community Solutions for Primary Care (Holdings) Limited is a company formed to invest in primary health and social care facilities under the NHS LIFT initiative presently at Barnsley, Camden & Islington, South East Hampshire and Doncaster. The Compendium Group Limited 50% share The Compendium Group Limited is a company formed to carry out strategic development and regeneration projects of a primarily residential nature. All of above undertakings are registered in England. 53 Morgan Sindall Report and Accounts 2005 Notes to the consolidated financial statements For the year ended 31 December 2005 11 Investments and interests in joint ventures (continued) The following table shows the interests in joint ventures: At 1 January 2005 Share of results for the year Dividends from joint venture Increase in investment Change in fair value of hedging derivative At 31 December 2005 The following table shows the aggregated amounts in respect of joint ventures: Current assets Non current assets 1 Current liabilities Non current liabilities Revenue Results Joint ventures £’000s 6,840 425 (336) 6,190 (2,238) 10,881 Trade investment £’000s 103 – – – – 103 2005 £’000s 20,103 207,510 (24,790) 2004 £’000s 113,705 68,761 (5,828) (186,191) (157,368) 134,311 951 2,277 5,911 1 Within non current assets assets are financial receivables of £126.8m which are carried at fair value following the application of IAS 39 from 1 January 2005 as permitted under the transitional arrangements in IFRS 1. The fair values have been determined on the basis of discounting underlying future cash flows at a risk-adjusted discount rate considered by the directors to reflect the risks attaching to the future cash flows. 12 Inventories Work in progress Materials 54 2005 £’000s 84,883 2,688 87,571 2004 £’000s 58,816 2,001 60,817 Notes to the consolidated financial statements For the year ended 31 December 2005 13 Trade and other receivables Trade receivables 2005 £’000s 86,018 2004 £’000s 84,449 Amounts due from construction contract customers (note 14) 137,578 105,672 Amounts owed by joint ventures (note 29) Deferred tax asset (note 19) Other receivables Prepayments and accrued income 1,740 224 3,286 6,210 2,675 205 4,431 5,661 235,056 203,093 The directors consider that the carrying amount of trade and other receivables approximates their fair value. The average credit period taken on revenues is 21 days (2004: 22 days) 14 Construction contracts Contracts in progress at balance sheet date: Amounts due from construction contract customers included in trade and other receivables Amounts due to construction contract customers included in trade and other payables 2005 £’000s 2004 £’000s 137,578 (18,384) 119,194 105,672 (18,413) 87,259 Contract costs incurred plus recognised profits less recognised losses to date 4,811,885 4,147,717 Less: progress billings (4,692,691) (4,060,458) 119,194 87,259 At 31 December 2005, retentions held by customers for contract work amounted to £36.6m (2004: £36.8m). At 31 December 2005, amounts of £9.3m (2004: £12.0m) included in trade and other receivables and arising from construction contracts are due for settlement after more than 12 months. 55 Morgan Sindall Report and Accounts 2005 Notes to the consolidated financial statements For the year ended 31 December 2005 15 Financial instruments Cash and cash equivalents Comprises cash held by the Group and short-term deposits with an original maturity of three months or less. The carrying amount of these assets approximates to their value. Credit risk The Group’s principal financial assets are bank balances and cash, trade and other receivables and investments. The Group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful debts, estimated by the Group’s management based on prior experience and their assessment of specific circumstances. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. Interest rate swaps Certain of the Group’s joint ventures use interest rate swaps to manage their exposure to interest rate movement on its bank borrowings. The Group’s share of contracts with nominal values of £26.8m have fixed interest payments at an average rate of 4.98% for periods up until 2033. The fair value of swaps entered into at 31 December 2005 is estimated at £2.2m (2004: nil). These amounts are based on market values of equivalent instruments at the balance sheet date. All of these interest rate swaps are designated and effective as cash flow hedges and the fair value thereof has been deferred in the hedging reserve (note 23 on page 64). Loan notes Loan notes were issued in 2002 as part of the consideration for the acquisition of Pipeline Constructors Group plc. Their interest rate is determined by reference to a six month sterling money market deposit and as such varies every six months. They are redeemable by the loan note holders at six monthly intervals which commenced on 2 January 2003. Of these, £240,000 were redeemed by loan note holders in 2005 and the remaining £120,000 were redeemed on 2 January 2006. 16 Trade and other payables Loan notes (note 15) Amounts due to construction contract customers (note 14) Trade payables Other payables Other tax and social security Accruals and deferred income The directors consider that the carrying amount of trade payables approximates their fair value. The average credit period taken for trade purchases is 30 days (2004: 31 days). 2005 £’000s 120 18,384 95,752 4,659 11,222 222,019 352,156 2004 £’000s 360 18,413 94,063 5,035 11,037 179,609 308,517 56 Notes to the consolidated financial statements For the year ended 31 December 2005 17 Obligations under finance leases Minimum lease payments 2005 £’000s 2004 £’000s Amounts payable under finance leases: Within one year In the second to fifth years inclusive After five years Less: future finance charges Present value of lease obligations 889 1,951 302 3,142 (317) 2,825 583 1,610 289 2,482 (292) 2,190 Less: amount due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months Present value of minimum lease payments 2005 £’000s 766 1,770 289 2,825 n/a 2,825 (766) 2,059 2004 £’000s 483 1,437 270 2,190 n/a 2,190 (483) 1,707 It is the Group’s policy to lease certain of its fixtures and equipment under finance leases. The average lease term is 6 years. For the year ended 31 December 2005, the average effective borrowing rate was 5% (2004: 5%). Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. All lease obligations are denominated in sterling. The fair value of the Group’s lease obligations approximates to their carrying amount. The Group’s obligations under finance leases are secured by the lessors’ charges over the leased assets. 57 Morgan Sindall Report and Accounts 2005 Notes to the consolidated financial statements For the year ended 31 December 2005 18 Retirement benefit schemes Defined contribution scheme The Morgan Sindall Retirement Benefits Plan (‘MSRBP’) was established on 31 May 1995 and operates on defined contribution principles for employees of the Group. The assets of the scheme are held separately from those of the Group in funds under the control of the trustees. The total cost charged to income of £4.7m (2004: £4.6m) represents contributions payable to the defined contribution scheme by the Group at rates specified in the scheme rules. As at 31 December 2005, contributions of £0.4m (2004: £0.4m) due in respect of the current reporting period had not been paid over to the defined contribution scheme. Defined benefit scheme MSRBP includes some defined benefit liabilities and transfers of funds representing the accrued benefit rights of former active and deferred members of pension plans of companies which are now part of the Group. These include final salary related benefits for the members of the former Sindall Group Pension Fund in respect of benefits accrued before 31 May 1995. No further defined benefit membership rights can accrue after that date. Under the scheme, employees are entitled to retirement benefits at retirement age of 65. No other retirement benefits are provided. The scheme is currently being funded. The last triennial valuation of the MSRBP was undertaken on 5 April 2004 and was prepared using the assumptions of the rate of investment return of 6.0% per annum, rate of earnings escalation of 4.0% per annum and rate of inflation of 2.5% per annum. The ongoing liabilities of the MSRBP were assessed using the projected unit method whereas the assets were taken at realisable market value. The actuarial valuation referred to showed that the defined benefit liabilities were partly funded, and on an ongoing basis, the value of the assets of £3.918m represented 64% of the value of these liabilities. The actuarial valuation also showed that the realisable market value of the MSRBP’s assets was 81% of its minimum liabilities when assessed on the Minimum Funding Requirement basis (as defined in the Pensions Act 1995). The next triennial valuation will be carried out at 5 April 2007 when the funding position will be re-appraised. The most recent valuation of the scheme assets and the present value of the defined benefit obligation was carried out at 31 December 2005. The present value of the defined benefit obligation, the related current service cost and past service cost were measured using the projected unit credit method. Valuation at 2005 % 4.9% 5.6% 3.9% 2.9% 2004 % 5.5% 6.4% 3.75% 2.75% Key assumptions used: Discount rate Expected return on scheme assets Expected rate of salary increases Future pension increases 58 Notes to the consolidated financial statements For the year ended 31 December 2005 The amount included in the balance sheet arising from the Group’s obligations in respect of its defined benefit scheme is as follows: Present value of defined benefit obligations Fair value of scheme assets Deficit in the scheme Liability recognised in the balance sheet Amounts recognised in income in respect of the defined benefits scheme are as follows: Interest cost Expected return on scheme assets 2005 £’000s (7,781) 4,430 (3,351) (3,351) 2005 £’000s (334) 252 (82) 2004 £’000s (6,143) 3,918 (2,225) (2,225) 2004 £’000s (265) 269 4 The charge for the year has been included in administrative expenses. Actuarial gains and losses have been reported in the statement of recognised income and expense. The actual return on scheme assets was £420,000 (2004: £94,000). Movements in the present value of defined benefit obligations were as follows: At 1 January Interest cost Actuarial gains and losses Benefits paid At 31 December Movements in the fair value of scheme assets were as follows: At 1 January Expected return on scheme assets Actuarial gains and losses Contributions from sponsoring companies Benefits paid At 31 December 2005 £’000s (6,143) (334) (1,452) 148 (7,781) 2005 £’000s 3,918 252 168 240 (148) 4,430 2004 £’000s (4,660) (265) (1,318) 100 (6,143) 2004 £’000s 3,924 269 (175) - (100) 3,918 59 Morgan Sindall Report and Accounts 2005 Notes to the consolidated financial statements For the year ended 31 December 2005 18 Retirement benefit schemes (continued) The analysis of the scheme assets and the expected rate of return at the balance sheet date was as follows: Expected return Fair value of assets Equity instruments Debt instruments Other assets 2005 7.5% 4.75% 4.5% 2004 7.5% 5.0% 4.0% 2005 £’000s 1,844 2,512 74 4,430 2004 £’000s 2,197 1,527 194 3,918 The expected rate of return is determined in consultation with experts using prudent assumptions at the balance sheet date. The history of experience adjustments is as follows: Present value of defined benefit obligations Fair value of scheme assets Deficit in the scheme Experience adjustments on scheme liabilities: Amount Percentage of scheme liabilities Experience adjustments on scheme assets: Amount Percentage of scheme assets 2005 £’000s (7,781) 4,430 (3,351) (1,452) 18.7% 168 3.8% 2004 £’000s (6,143) 3,918 (2,225) (1,318) 21.5% (175) (4.5%) The estimated amounts of contributions expected to be paid to the scheme during the current financial year is £240,000. 60 Notes to the consolidated financial statements For the year ended 31 December 2005 19 Deferred tax The major deferred tax assets recognised by the Group and movements thereon during the current and prior year are as follows: Accelerated tax depreciation £’000s Short-term timing differences £’000s Retirement benefit obligations £’000s Share based payments £’000s At 1 January 2004 Charge to income Credit to equity At 1 January 2005 Credit to income Credit to equity At 31 December 2005 976 (132) _ 844 78 – 922 288 (83) _ 205 19 – 224 221 (1) 448 668 24 312 1,004 An analysis of the deferred tax balances for financial reporting purposes is as follows: Deferred tax within trade and other receivables Deferred tax within non current assets – – – – 135 424 559 2005 £’000s 224 2,485 Total £’000s 1,485 (216) 448 1,717 256 736 2,709 2004 £’000s 205 1,512 At the balance sheet date, the Group has unused tax losses of £1.3m (2004: £2.4m) available for offset against future profit. No deferred tax asset has been recognised in respect of such losses due to the unpredictability of future profit streams. Losses may be carried forward indefinitely. 61 Morgan Sindall Report and Accounts 2005 Notes to the consolidated financial statements For the year ended 31 December 2005 20 Operating lease arrangements Minimum lease payments under operating leases recognised as an expense for the year 2005 £’000s 12,715 2004 £’000s 9,971 At the balance sheet date, the Group has outstanding commitments for minimum lease payments under non cancellable operating leases, which fall due as follows: Leases which expire: Within one year Within two to five years After five years Land and buildings £’000s 4,123 13,499 11,724 29,346 2005 Other £’000s 3,690 3,824 130 7,644 Total £’000s 7,813 17,323 11,854 36,990 Land and buildings £’000s 4,223 14,058 14,428 32,709 2004 Other £’000s 1,052 2,354 91 3,497 Total £’000s 5,275 16,412 14,519 36,206 Operating lease payments represent rentals payable by the Group for certain of its assets. Leases are negotiated for an average term of 6 years and rentals are fixed for an average of 4 years. 21 Contingent liabilities Group bank accounts and performance bond facilities are supported by cross guarantees given by the Company and participating companies in the Group. 62 Notes to the consolidated financial statements For the year ended 31 December 2005 22 Share capital Authorised: 2005 2004 No.’000s £’000s No.’000s £’000s Ordinary shares of 5p each 60,000 3,000 57,500 2,875 Issued and fully paid: At the beginning of the year Exercise of share options At the end of the year 42,147 169 42,316 2,107 9 2,116 41,996 151 42,147 2,100 7 2,107 The Company has one class of ordinary share which carries no rights to fixed income. Ordinary shares The ordinary shares of 5p each of the Company issued during the year are shown below. Details of employee share option schemes referred to are given later in this note. 1. 6,250 ordinary shares in respect of options exercised under the Company’s 1988 Scheme (referred to below) for total consideration of £5,907.50. 2. 162,750 ordinary shares in respect of options exercised under the Company’s 1995 Scheme (referred to below) for total consideration of £337,387.50. Options The Company has two employee share option schemes. The first scheme (‘the 1988 Scheme’) was introduced on 21 January 1988 and the second scheme (‘the 1995 Scheme’) received shareholders’ approval on 24 May 1995. Options granted under the 1988 Scheme are exercisable between three and ten years from the date of grant and under the 1995 Scheme are exercisable between five and seven years from the date of grant. The period for the granting of options under the 1988 Scheme expired in January 1998 and under the 1995 Scheme expired in May 2005. As at 31 December 2005 there remained 31,075 options outstanding under that Scheme exercisable at prices between £0.73 and £1.71. On the same date there were 1,468,500 options outstanding under the 1995 Scheme exercisable at prices between £1.71 and £4.95. Other share schemes Details of other share scheme are disclosed in the Directors’ remuneration report on pages 28 to 34. It is currently intended that share awards under these schemes will be satisfied by shares purchased in the market by the employee benefit trust. Own shares Own shares at cost represent 506,898 Morgan Sindall plc ordinary shares held in the Morgan Sindall Employee Benefit Trust in connection with the Long Term Incentive Plan (‘LTIP’) as detailed in the directors’ remuneration report on pages 28 to 34. The trustee, the Legis Trust, purchases the Company’s ordinary shares in the open market with the financing provided by the Company on the basis of regular reviews of the share liabilities of the LTIP. The unallocated shares number 420,803 and dividends on these shares have been waived. Dividends on allocated shares are paid to the participants. The cost of shares expected to be awarded are charged over the three year period to which the award relates. Based on the Company’s share price at 31 December 2005 of 929.5p the market value of the shares was £4,711,617. 63 Morgan Sindall Report and Accounts 2005 Notes to the consolidated financial statements For the year ended 31 December 2005 23 Reserves Balance at 1 January 2004 Shares issued at premium Own shares purchased LTIP shares vested Recognition of share based payments Balance at 1 January 2005 Shares issued at premium Own shares purchased Change in fair value of cash flow hedging derivatives Recognition of share based payments Deferred tax arising on recognition of share based payments Share Capital premium redemption reserve £’000s account £’000s Own shares £’000s Equity reserve £’000s Hedging reserve £’000s 25,392 287 – – – 25,679 335 – – – – 623 (1,094) - - - - 623 - - - - - – (48) 149 – (993) – (782) – – – 6 – – – 33 39 – – – 589 424 – – – – – – – – (2,238) – – Balance at 31 December 2005 26,014 623 (1,775) 1,052 (2,238) Capital redemption reserve The capital redemption reserve was created on the redemption of preference shares in 2003. Own shares The own shares reserve represents the cost of shares in Morgan Sindall plc purchased in the market and held by the Employee Benefit Trust to satisfy options under the Group’s share option schemes (note 22). Equity reserve The equity reserve represents the credit to equity for share based payments. Hedging reserve Under cashflow hedge accounting, movements on the effective portion of the hedge are recognised through the hedging reserve, while any ineffectiveness is taken into the income statement. 24 Retained earnings Balance at 1 January 2004 Profit for the year attributable to equity holders of the parent company Dividends paid Actuarial losses on defined benefit pension scheme Income taxes on pension benefit Balance at 1 January 2005 Profit for the year attributable to equity holders of the parent company Dividends paid Actuarial losses on defined benefit pension scheme Income taxes on pension benefit Balance at 31 December 2005 64 £’000s 54,727 24,034 (7,012) (1,493) 448 70,704 29,575 (8,480) (1,284) 312 90,827 Notes to the consolidated financial statements For the year ended 31 December 2005 25 Acquisition of business Benson Limited On 13 December 2004 Bluestone plc acquired part of the trade and certain assets and contracts from Benson Limited. The cash consideration was £3.4m with acquisition costs of £0.3m. The net assets acquired were nil following fair value adjustments of £2.9m made during 2004. The resultant goodwill arising on acquisition is £3.7m with an increase reflected during the year of £0.8m. 26 Reconciliation of operating profit to net cash from operating activities Operating profit Adjusted for: Share of results of joint ventures Depreciation of property, plant and equipment Expense in respect of share options Defined benefit pension payment Defined benefit pension charge/(credit) (Gain)/loss on disposal of property, plant and equipment Operating cash flows before movements in working capital (Increase)/decrease in inventories Increase in receivables Increase in payables Cash generated from operations Income taxes paid Interest paid Net cash from operating activities 2005 £'000s 39,906 (425) 4,505 589 (240) 82 (919) 43,498 (26,754) (31,969) 43,118 27,893 (11,658) (1,758) 14,477 2004 £'000s 32,948 (2,810) 3,465 33 - (4) 20 33,652 4,594 (5,784) 46,271 78,733 (6,134) (2,309) 70,290 Additions to plant, property and equipment during the year amounting to £1.3m were financed by new finance leases. Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less. 65 Morgan Sindall Report and Accounts 2005 Notes to the consolidated financial statements For the year ended 31 December 2005 27 Share based payments Equity settled share option plan The Group plan provides for a grant price equal to the average quoted market price of the Group share on the five days preceding the date of grant. Details of the option vesting periods are given in note 22 on page 63. Options are forfeited if the employee leaves the Group before the options vest. Outstanding at beginning of period Granted during the period Forfeited during the period Exercised during the period Outstanding at the end of the period Exercisable at the end of the period 2005 2004 Weighted average exercise price (p) 269.6 448.3 - 203.1 338.3 282.7 Options (No.) 1,732,850 200,000 (113,400) (150,875) 1,668,575 183,075 Weighted average exercise price (p) 241.0 287.7 256.6 195.0 269.6 189.4 Options (No.) 1,668,575 318,024 - (169,000) 1,817,599 54,075 The weighted average share price at the date of exercise for share options exercised during the period was 203.1p. The options outstanding at 31 December 2005 had a weighted average exercise price of 338.3p, and a weighted average remaining contractual life of 5.0 years. In 2005, options were granted on 20 May. The estimated fair value of the options granted on that date is £0.7m. In 2004, options were granted on 25 February and 4 September. The aggregate of the estimated fair values of the options granted on those dates is £0.2m. A modified ‘Black-Scholes’ model has been used to value the awards set out below. None of these awards when granted was subject to a share price related performance condition. 1995 Scheme Feb 04 and Sep 04 DSBP (a) Mar 05 2005 Plan options May 05 2005 Plan shares May 05 Phantom (b) June – Dec 05 200,000 36,153 318,024 73,290 262,000 £1.12 £6.59 £2.16 £7.30 £3.10 £4.25 £4.25 7 years 32% 3.9% 4.8% £7.125 nil 3 years 34% 2.6% 4.8% £7.30 £7.24 6 years 32% 2.5% 4.3% £7.30 nil 3 years 32% nil (f) 4.3% £9.295 £7.80 5 years 31% 2.2% 4.2% Date(s) of grant Number of options / shares granted Weighted average fair value at date of grant (per option / share) Weighted average share price on date of grant Weighted average exercise price Expected term (from date of grant) (c) Expected volatility (d) Expected dividends (e) Risk-free interest rate (a) Deferred share bonus plan (b) As cash settled share based payment awards, Phantom options are revalued at the end of each reporting period. The valuations shown in the table above are as at 31 December 2005. (c) Adjusted from maximum term, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, vesting conditions and behavioural considerations (d) Assumed to be equal to historic volatility of Morgan Sindall over the period prior to grant equal in length to the expected term (e) Set as equal to dividend yield prevailing at date of grant (f) At the end of the vesting period, award holders receive the value, in shares, of any dividends paid during the vesting period in respect of their vested shares. Consequently, the fair value is not discounted for value lost in respect of dividends. 66 Notes to the consolidated financial statements For the year ended 31 December 2005 Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous 3 to 7 years. The Group recognised total expenses of £524,725 and £33,000 related to equity settled share based payment transactions in 2005 and 2004 respectively. Cash settled share based payments The Group issues to certain employees share appreciation rights (‘SAR’) that require the Group to pay the intrinsic value of the SAR to the employee at the date of exercise. The Group has recorded liabilities of £64,074 in 2005 (2004: nil). Fair value of the SAR is determined by use of a modified Black-Scholes model using the assumptions noted in the table above. The Group recorded total expenses of £64,074 in 2005 (2004: nil). The total intrinsic value at 2005 and 2004 was £2.4m and nil, respectively. 28 Post balance sheet event Primary Medical Property shareholding transaction On 1 February 2006, the Group purchased the remaining 52.5% shareholding in Primary Medical Property Limited from certain private individuals for £11.1m. Subsequently, the Group agreed to dispose of 50% of its interest by way of entering into a 50-50 owned joint venture agreement with a fund managed by Barclays Private Equity. Investment properties Trade receivables Cash Trade payables Corporation tax Deferred tax Loans Net assets acquired Consideration Acquisition costs Total cost Goodwill arising Provisional fair value of net assets £’000s 33,167 143 271 (660) (167) (789) (20,021) 11,944 11,100 850 11,950 6 67 Morgan Sindall Report and Accounts 2005 Notes to the consolidated financial statements For the year ended 31 December 2005 29 Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint ventures are disclosed below. Transactions between the Company and its subsidiaries and associates are disclosed in the Company’s separate financial statements. Trading transactions During the year, Group companies entered into the following transactions with related parties who are not members of the Group: Claymore Roads (Holdings) Limited Morgan-Vinci Limited Community Solutions for Primary Care (Holdings) Limited The Compendium Group Limited Provision of goods and services Amounts owed by related parties 2005 £’000s 15,731 476 13,310 – 2004 £’000s 22,988 5,091 – – 2005 £’000s 1,337 36 367 – 2004 £’000s 1,953 722 – – 29,517 28,079 1,740 2,675 Sales to related parties were made at market rates. The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of amounts owed by related parties. Remuneration of key management personnel The remuneration of the directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 ‘Related Party Disclosures’. Further information about the remuneration of individual directors is provided in the audited part of the directors’ remuneration report on pages 31 to 34. Short–term employee benefits Post employment benefits Other long–term benefits 2005 £’000s 2,054 105 – 2004 £’000s 1,902 99 162 2,159 2,163 Directors’ transactions There were no transactions with directors during the year or in the subsequent period to 22 February 2006. There have been no related party transactions with any director either during the year or in the subsequent period to 22 February 2006. Directors’ material interests in contracts with the Company No director had any material interest in any contract with the Company or any Group company in the year or in the subsequent period to 22 February 2006. 68 Notes to the consolidated financial statements For the year ended 31 December 2005 30 Reconciliation on transition to IFRS The tables below reconcile the total equity and profit for the financial year from UK GAAP to IFRS as required by IFRS 1. Total equity as presented under UK GAAP Dividends Employee benefits Amortisation of goodwill Tax Equity as presented under IFRS Profit as presented under UK GAAP Amortisation of goodwill Joint ventures revaluation gains Employee benefits Share based payments Income taxes Profit as presented under IFRS January 2004 £’000s 78,878 4,824 (736) - (1,212) 81,754 December 2004 £’000s 93,218 5,551 (2,009) 3,101 (1,702) 98,159 December 2004 £’000s 18,049 3,101 2,763 220 (33) (66) 24,034 Dividends Under UK GAAP proposed dividends were accrued at the balance sheet date although there was no obligation to pay until formal approval by shareholders was granted at the annual general meeting. Under International Accounting Standard (‘IAS‘) 10 ‘Events after the Balance Sheet Date’, a liability should only be recognised once there is an obligation to pay. As a result the dividend will only be recognised once shareholders approve it. The impact is that the proposed dividends have been added back and have resulted in an increase in total equity of £4.8m at 31 December 2003 and £5.6m at 31 December 2004. Employee benefits Under UK GAAP, FRS 17 ‘Retirement Benefits’ required the pension deficit to be shown by way of memorandum disclosure in the notes to the accounts rather than accounted for in the balance sheet. IAS 19 ‘Employee Benefits’ requires that the operating and financing costs of defined benefit pension schemes are shown separately in the income statement and allows a number of options for the recognition of actuarial gains and losses. The Group has adopted the approach of recognising the full pension deficit at the date of transition. The overall impact of recognising the pension deficit is a reduction in total equity of £0.7m at 1 January 2004 and £2.0m at 31 December 2004. Actuarial gains and losses have been recognised in full in the consolidated statement of income and expense (‘SORIE’). The impact of the transition on the income statement is an increase of £0.2m in the profit for the financial year to 31 December 2004. Share based payments Under UK GAAP no charge was made to the profit and loss account for the value of options granted to employees as options were granted at their intrinsic value. Under IFRS 2 ‘Share Based Payment’ a charge is made reflecting the fair value of options granted since 7 November 2002, which is applying the exemption permitted under IFRS 1. The impact has been a charge of £0.03m to operating profit for the financial year to 31 December 2004. There is no impact on net assets as the income statement charge is offset by an equivalent amount credited to the equity reserve. Goodwill Under UK GAAP, goodwill was amortised over its useful economic life. Under IFRS 3 ‘Business Combinations’ goodwill is not amortised but is carried at cost with impairment reviews being undertaken annually or when there is an indication that the carrying value has been reduced. Under IFRS 1 the Group has applied the change from the date of transition as opposed to full application to all business combinations prior to that date. The goodwill in the balance sheet at the date of transition to IFRS was £53.0m. The impact on the 2004 profit for the financial year is a reversal of the amortisation previously charged under UK GAAP of £3.1m. 69 Morgan Sindall Report and Accounts 2005 Notes to the consolidated financial statements For the year ended 31 December 2005 30 Reconciliation on transition to IFRS (continued) Tax Under UK GAAP deferred tax was provided for timing differences between when an amount was taxable or allowable for tax purposes as against when it was recognised in the profit and loss account and was only recognised if realisable in the short-term. Under IAS 12 ‘Income Taxes’ deferred tax is provided on temporary differences based upon the discrepancy between the tax base and the carrying value of assets and liabilities. The accounting changes made are principally related to the deferred tax provided on the revaluation of investment properties in our joint venture, Primary Medical Properties Limited and the pension deficit recognised as noted above. The net result is a decrease in total equity of £1.2m at 1 January 2004 and £1.7m at 31 December 2004. Joint ventures Under UK GAAP the results of joint ventures were included within turnover, operating profit and taxation in the profit and loss account and the net investment as a single line in the balance sheet. Under the option allowed in IAS 31 ‘Interest in Joint Ventures’, the approach adopted by the Group is that joint ventures are accounted for using the equity method and are reported in the income statement as part of operating profit and the net investment in the balance sheet on a single line as before. Previously revaluation gains (or losses) on joint venture properties were recognised in the revaluation reserve. Under IFRS this treatment no longer exists and revaluation gains will now be recognised in the income statement. The net impact is to increase profit for the financial year to 31 December 2004 by £2.8m as a result of the joint venture revaluation gains now being reflected in arriving at profit. 70 Independent auditors’ report to the members of Morgan Sindall plc We have audited the individual Company financial statements (the ‘financial statements’) of Morgan Sindall plc for the year ended 31 December 2005 which comprise the balance sheet, the combined statement of movements in reserves and shareholders’ funds, the statement of principal accounting policies and the related notes 1 to 10. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the directors’ remuneration report that is described as having been audited. We have reported separately on the Group financial statements of Morgan Sindall plc for the year ended 31 December 2005. This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the annual report, the directors’ remuneration report and the individual Company financial statements in accordance with applicable United Kingdom law and United Kingdom Generally Accepted Accounting Practice are set out in the statement of directors’ responsibilities. Our responsibility is to audit the financial statements and the part of the directors’ remuneration report described as having been audited in accordance with relevant United Kingdom legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view in accordance with the relevant framework and whether the financial statements and the part of the directors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985. We report to you if, in our opinion, the directors’ report is not consistent with the financial statements. We also report to you if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and transactions with the Company is not disclosed. We also report to you if, in our opinion, the company has not complied with any of the four directors’ remuneration disclosure requirements specified for our review by the Listing Rules of the Financial Services Authority. These comprise the amount of each element in the remuneration package and information on share options, details of long-term incentive schemes, and money purchase and defined benefit schemes. We give a statement, to the extent possible, of details of any non–compliance. We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the 2003 FRC Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Company’s corporate governance procedures or its risk and control procedures. We read the directors’ report and the other information contained in the annual report for the above year and described in the contents section including the unaudited part of the directors’ remuneration report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) 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 and the part of the directors’ remuneration report described as having been audited. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the directors’ remuneration report described as having been audited 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 and the part of the directors’ remuneration report described as having been audited. Opinion In our opinion: • the financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Company's affairs as at 31 December 2005; and • the financial statements and the part of the directors’ remuneration report described as having been audited have been properly prepared in accordance with the Companies Act 1985. Deloitte & Touche LLP Deloitte & Touche LLP Chartered Accountants and Registered Auditors St Albans, United Kingdom 22 February 2006 71 Morgan Sindall Report and Accounts 2005 Company balance sheet At 31 December 2005 Fixed assets Tangible assets Investments Current assets Trade debtors Amounts owed by subsidiary undertakings Other debtors Prepayments and accrued income Corporation tax recoverable Deferred tax Amounts owed by joint ventures Cash at bank and in hand Creditors: amounts falling due within one year Loan notes Trade creditors Amounts owed to subsidiary undertakings Other creditors Other tax and social security Accruals and deferred income Net current liabilities Total assets less current liabilities Provisions for liabilities and charges Deferred tax Retirement benefit obligation Net assets Shareholders’ funds Share capital Share premium account Own shares Capital redemption reserve Equity reserve Special reserve Retained earnings Total equity shareholders’ funds Notes 4 5 6 7 6 8 9 2005 £’000s 1,909 133,315 135,224 1 10,993 1,361 2,702 1,040 559 367 4,888 21,911 (120) (2,060) (24,556) (90) (393) (6,080) (33,299) (11,388) 123,836 (54) (2,346) 121,436 2,116 26,014 (1,775) 623 1,052 13,644 79,762 121,436 2004 (restated) £’000s 2,004 125,145 127,149 2 9,415 157 3,532 406 1 – 13,105 26,618 (360) (2,241) (35,336) (1) (503) (3,243) (41,684) (15,066) 112,083 (92) (1,557) 110,434 2,107 25,679 (993) 623 39 13,644 69,335 110,434 The financial statements were approved by the Board of directors and authorised for issue on 22 February 2006 and were signed on its behalf by: Paul Smith David Mulligan 72 Combined statement of movements in reserves and shareholders’ funds For the year ended 31 December 2005 Share premium account capital £'000s £'000s Share Investment Capital in own redemption shares £'000s Total equity Equity Special Retained shareholders’ funds £'000s reserve reserve reserve earnings £'000s £'000s £'000s £'000s Balance at 1 January 2004 2,100 25,392 (1,094) 623 Profit for the year Recognition of share based payments 2004 interim dividend declared and paid 2003 final dividend declared and paid Actuarial loss on defined benefit pension scheme Income taxes on pension benefit Own shares purchased Options exercised LTIP shares vested – – – – – – – 7 – – – – – – – – 287 – – – – – – – (48) – 149 – – – – – – – – – 6 – 33 – – – – – – – 13,644 58,240 19,152 – (2,188) (4,824) 98,911 19,152 33 (2,188) (4,824) (1,493) (1,493) 448 – – – 448 (48) 294 149 – – – – – – – – – Balance at 1 January 2005 2,107 25,679 (993) 623 39 13,644 69,335 110,434 Profit for the year Recognition of share based payments 2005 interim dividend declared and paid 2004 final dividend declared and paid Own shares purchased Options exercised Deferred tax arising on recognition of share based payments Actuarial loss on defined benefit pension scheme Income taxes on pension benefit – – – – – 9 – – – – – – – – 335 – – – – – – – (782) – – – – – – – – – – – – – – 589 – – – – 424 – – – – – – – – – – – 19,879 19,879 – (2,929) (5,551) – – – 589 (2,929) (5,551) (782) 344 424 (1,284) (1,284) 312 312 Balance at 31 December 2005 2,116 26,014 (1,775) 623 1,052 13,644 79,762 121,436 73 Morgan Sindall Report and Accounts 2005 Principal accounting policies For the year ended 31 December 2005 Basis of accounting The financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain fixed asset properties, pension assets and liabilities and share based payments and in accordance with applicable United Kingdom accounting standards. Compliance with SSAP 19 ‘Accounting for Investment Properties’ requires departure from the requirements of the Companies Act 1985 relating to the depreciation and an explanation is given below. The Company Balance Sheet at 31 December 2004 has been restated following implementation of the following: • FRS 17 ‘Retirement Benefits’, which requires the pension deficit to be recognised on the balance sheet; • FRS 20 ‘Share Based Payment’, which has no impact on the net assets as the profit and loss account charge is offset by an equivalent amount credited to the equity reserve; and • FRS 21 ‘Events after the Balance Sheet Date’, which only requires recognition of a dividend as a liability once there is an obligation to pay. Turnover Turnover is defined as the value of goods and services rendered excluding VAT. Turnover represents the sales value of properties where the ownership has been legally transferred to the purchaser and management charges made to subsidiary companies. Fixed asset investments Except as stated below, investments held as fixed assets are stated at cost less provision for any impairment in value. Fixed assets and depreciation By adopting FRS 15 ‘Tangible Fixed Assets’, non investment properties are now held at cost. Under the transitional rules of the standard, the Company has frozen the book amounts of certain revalued properties and the valuation has been updated. No depreciation is provided on freehold land. On other assets depreciation is provided at rates calculated to write off the cost or valuation of fixed assets over their estimated useful lives as follows: Freehold property Leasehold property Plant, machinery, motor vehicles and equipment 2% per annum period of the lease between 10% and 33% per annum No depreciation is provided in respect of freehold investment properties which are revalued annually and the aggregate surplus or deficit is transferred to the revaluation reserve. The Companies Act 1985 requires all properties to be depreciated, however this requirement conflicts with the generally accepted 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. Deferred tax Deferred tax is provided in full on temporary differences which result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and laws. Timing differences arise from the inclusion of items of income and expenditure in tax computations in periods different from those in which they are included in the financial statements. Deferred tax is not provided on timing differences arising from the revaluation of fixed assets where there is no commitment to sell the asset, or on unremitted earnings of subsidiaries and associates where there is no commitment to remit these earnings. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Deferred tax assets and liabilities are not discounted. 74 Principle accounting policies For the year ended 31 December 2005 Pensions The Company operated a funded defined benefit scheme for permanent employees. This scheme is now a closed scheme as referred to in note 8 on pages 79 to 81. Where an actuarial valuation gave rise to a surplus or deficit it is dealt with in accordance with the advice of 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. The Company contributes to the Morgan Sindall Retirement Benefits Plan and to other employees’ personal pension arrangements which are of a defined contribution type. Subject to the circumstances referred to in note 8 on pages 79 to 81, the annual costs are charged to the profit and loss account. FRS 17 ‘Retirement Benefits’ has been adopted during the year and as a result the defined benefit pension scheme liability is now recognised on the balance sheet. Share based payments The Company has applied the requirements of FRS 20 ‘Share Based Payment’. In accordance with the transitional provisions, FRS 20 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 January 2005. The Company issues equity settled and cash settled share based payments to certain employees. Equity settled share based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity settled share based payments is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of shares that will eventually vest. Fair value is measured by use of a modified Black-Scholes model. None of these awards when granted was subject to a share price related performance condition. A liability equal to the portion of the services received is recognised at the current fair value determined at each balance sheet date for cash settled, share based payments. Dividends The Company has adopted FRS 21 ‘Events after the Balance Sheet Date’ and accordingly only recognises a liability once there is an obligation to pay. As a result the dividend will only be recognised once the shareholders approve it. 75 Morgan Sindall Report and Accounts 2005 Notes to the Company financial statements For the year ended 31 December 2005 1 Employees The average number of people employed by the Company including directors during the year was 30 (2004: 26). 2 Staff costs Wages and salaries Social security costs Pension costs 3 Profit of the Company 2005 £’000s 4,595 1,152 383 6,130 2004 £’000s 3,669 470 392 4,531 The Company has taken advantage of section 230 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 profit of the parent company for the financial year amounted to £19.9m (2004: £19.2m). 4 Tangible assets Cost or valuation At 1 January 2004 Additions Revaluation At 1 January 2005 Additions Disposals At 31 December 2005 Depreciation At 1 January 2004 Charge for the year Revaluation At 1 January 2005 Charge in the year Disposals At 31 December 2005 Net book value at 31 December 2005 Net book value at 31 December 2004 76 Owned plant, machinery & equipment £’000s Freehold property £’000s 951 1,694 – 2,645 629 (57) 3,217 492 320 – 812 532 (26) 1,318 1,899 1,833 219 – (47) 172 – (162) 10 47 1 (47) 1 – (1) – 10 171 Total £’000s 1,170 1,694 (47) 2,817 629 (219) 3,227 539 321 (47) 813 532 (27) 1,318 1,909 2,004 Notes to the Company financial statements For the year ended 31 December 2005 The net book value of land and buildings comprises: 2005 £’000s 2004 £’000s Freehold Investment property Freehold Other properties Total net book value Land and buildings at cost or valuation are stated: Investment properties at valuation Other properties at cost – – 10 10 10 2005 £’000s – 10 10 160 160 11 11 171 2004 £’000s 160 12 172 In 2004, the directors considered the valuation of the single investment property as at the balance sheet date and concluded that no change was required to its carrying value. In 2005, no external valuation has been undertaken as the investment property was sold during the year. 5 Investments Cost At 1 January 2005 Additions At 31 December 2005 Provisions Subsidiary undertakings Shares £’000s Loans £’000s Shares £’000s Joint ventures Loans £’000s 126,035 2,154 4,405 6,016 128,189 10,421 Total £’000s 130,444 8,170 138,614 5,299 133,315 125,145 4 – 4 4 – – – – – – – – At 1 January 2005 and 31 December 2005 890 Net book value at 31 December 2005 127,299 Net book value at 31 December 2004 125,145 4,405 6,016 – The Company has the following significant interests in joint ventures: Primary Medical Property Limited 47.5% share Primary Medical Property Limited has a portfolio of primary health care centres. The Group’s involvement in the management of Primary Medical Property Limited is restricted to the appointment of two directors under the terms of a shareholder agreement under which certain matters require the approval of all directors and as such the Group has maintained joint control. See also note 28 on page 67 in the consolidated financial statements in relation to a post balance sheet event. The above undertaking is registered in England. 77 Morgan Sindall Report and Accounts 2005 Notes to the Company financial statements For the year ended 31 December 2005 6 Deferred tax The major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting period are as follows: At 1 January 2004 Charge to profit and loss account Credit to equity At 1 January 2005 Credit to profit and loss account Credit to equity As 31 December 2005 Accelerated capital allowance and other short-term timing differences £’000s Retirement benefit obligations £’000s Share based payments £’000s - (92) - (92) 38 - (54) 221 - 448 669 24 312 1,005 - - - - 135 424 559 Total £’000s 221 (92) 448 577 197 736 1,510 Certain deferred tax assets and liabilities have been offset. The analysis of the deferred tax balances (after offset) for financial reporting purposes is as follows: Deferred tax within provisions for liabilities and charges Deferred tax within current assets Deferred tax within retirement benefit obligations 2005 £’000s (54) 559 1,005 1,510 2004 £’000s (92) 1 668 577 At the balance sheet date, the Company has unused tax losses of £552,000 (2004: £552,000) available for offset against future profit. No deferred tax asset has been recognised in respect of £165,000 (2004: £165,000) of such losses due to the unpredictability of future profit streams. 78 Notes to the Company financial statements For the year ended 31 December 2005 7 Financial instruments The financial instruments, excluding short-term debtors and creditors are comprised of cash and loan notes. The directors consider the fair value not to be materially different to the carrying value for financial instruments. The Company holds part of its cash as sterling deposits with counterparties, which are at a fixed rate based on LIBOR and for periods not exceeding three months. The objective of placing these deposits with financial institutions approved by the Board is to maximise interest received. By placing surplus funds with approved counterparties the Company’s risk profile is not significantly changed from maintaining funds with the Company’s clearing bank. There are no amounts included within cash at bank and in hand (2004: £8,365,000) which is not accessible within 24 hours without penalty. During the year under review the Company did not enter into derivative transactions and has not undertaken trading in any financial instruments. Loan notes Loan notes were issued in 2002 as part of the consideration for the acquisition of Pipeline Constructors Group plc. Their interest rate is determined by reference to a six month sterling money market deposit and as such varies every six months. They are redeemable by the loan note holders at six monthly intervals which commenced on 2 January 2003. Of these, £240,000 were redeemed by loan note holders in 2005 and the remaining £120,000 were redeemed on 2 January 2006. 8 Retirement benefit schemes The Morgan Sindall Retirement Benefits Plan (‘MSRBP’) was established on 31 May 1995 and operates on defined contribution principles where contributions are invested to accumulate capital sums to provide members with retirement and death benefits. MSRBP includes some defined benefit liabilities and transfers of funds representing the accrued benefit right of former active and deferred members of pension plans of companies which are part of the Group as it now stands. These include final salary related benefits for the members of the former Sindall Group Pension Fund in respect of benefits accrued before 31 May 1995. No further defined benefit membership rights can accrue after that date and consequently there is no service cost for such benefits in the year. The last triennial valuation of the MSRBP was undertaken on 5 April 2004 and was prepared using the assumptions of the rate of investment return of 6.0% per annum, rate of earnings escalation of 4.0% per annum and rate of inflation of 2.5% per annum. The ongoing liabilities of the MSRBP were assessed using the projected unit method whereas the assets were taken at realisable market value. The actuarial valuation referred to showed that the defined benefit liabilities were partly funded and on an ongoing basis, the value of the assets of £3.9m represented 64% of the value of these liabilities. The actuarial valuation also showed that the realisable market value of the MSRBP’s assets was 81% of its minimum liabilities when assessed on the Minimum Funding Requirement basis (as defined in the Pensions Act 1995). The next triennial valuation will be carried out at 5 April 2007 when the funding position will be re–appraised. Valuation date Valuation method Fair value of the scheme assets Present value of scheme liabilities Scheme shortfall Related deferred taxation at 30% Net pension liability Notes a 2005 Projected unit £’000s 2004 Projected unit £’000s 2003 Projected unit £’000s 4,430 (7,781) (3,351) 1,005 (2,346) 3,918 (6,143) (2,225) 668 (1,557) 3,924 (4,660) (736) 221 (515) 79 Morgan Sindall Report and Accounts 2005 Notes to the Company financial statements For the year ended 31 December 2005 8 Retirement benefit schemes (continued) Actuarial assumptions Inflation per annum Increase for pensions – members who left before 1 June 1995 Increase for pensions – members who left after 31 May 1995 Increase for non guaranteed minimum pension deferred pensions Salary scale increase per annum Discount rate for liabilities Notes 2005 % 2.9% 2004 % 2003 % 2.75% 2.75% 3.5% 3.5% 3.5% b 3.0% 3.0% 3.0% 2.9% 3.9% 4.9% 2.75% 3.75% 5.5% 2.75% 3.75% 5.75% Disclosure of fair value of assets and expected rates of return: Fair value Expected rate of return Asset class: Equities Fixed interest Corporate bonds Other Overall 2005 £’000s 2004 £’000s 2003 £’000s 1,844 1,256 1,256 74 4,430 2,194 2,668 – 1,528 196 3,918 – 903 353 3,924 2005 % 7.5% 4.5% 5.0% 4.5% 2004 % 2003 % 7.5% 8.0% – 5.0% 4.0% – 5.0% 4.0% The total pension costs for the Company in respect of: Defined benefit schemes Money purchase schemes Notes c c 2005 £’000s 240 377 2004 £’000s 2003 £’000s 216 392 – 140 There are no amounts included within the operating profit for current or past service costs in either 2005, 2004 or 2003. Amounts included in other finance costs: Expected return on scheme assets Interest on pension scheme liabilities 80 2005 £’000s 2004 £’000s 2003 £’000s 252 (334) (82) 269 (265) 4 272 (267) 5 Notes to the Company financial statements For the year ended 31 December 2005 Amounts included in the statement of total recognised gains and losses (‘STRGL’): Difference between actual and expected return of scheme assets Experience gain/(loss) arising on scheme liabilities Effects of changes in assumptions underlying the present value of scheme liabilities Total actuarial (loss)/gain recognised in the STRGL 2005 £’000s % asset or liability value 2004 £’000s % asset or liability value % asset 2003 or liability value £’000s 2002 £’000s % asset or liability value 168 60 3.8% (175) 4.5% 179 4.6% (1,153) 25.8% 0.8% (1,065) 17.3% (187) 4.0% 29 0.5% (1,512) 19.4% (253) 4.1% 152 3.3% 114 2.1% (1,284) (1,493) 144 (1,010) Analysis of the movement in scheme deficit during the year: Opening deficit in the scheme Contributions Other finance income Interest cost Actuarial (losses)/gains Closing deficit in the scheme Notes 2005 £’000s (2,225) 240 252 (334) (1,284) (3,351) 2004 £’000s (736) – 269 (265) (1,493) (2,225) 2003 £’000s (885) – 272 (267) 144 (736) a: Represents the ongoing value of assets invested in managed funds operated by Scottish Equitable at the valuation date. The assets and liabilities relating to money purchase members are in addition to these figures. b: Any pension which accrues in respect of service after 6 April 1997 will increase in line with inflation, subject to a maximum of 5% per annum. c: In view of the funding position of the defined benefit section of MSRBP there is a requirement for an employer’s contribution in the year of £240,000 and the position will be reviewed following the next triennial valuation as at 5 April 2007. Employer’s contributions for money purchase benefits remain unchanged at agreed standard rates. 81 Morgan Sindall Report and Accounts 2005 Notes to the Company financial statements For the year ended 31 December 2005 9 Share capital Authorised: Ordinary shares of 5p each Issued and fully paid: At the beginning of the year Exercise of share options At the end of the year 2005 2004 No. ‘000s £’000s No. ‘000s £’000s 60,000 3,000 57,500 2,875 42,147 169 42,316 2,107 9 2,116 41,996 151 42,147 2,100 7 2,107 The Company has one class of ordinary share which carries no rights to fixed income. Ordinary shares The ordinary shares of 5p each of the Company issued during the year are shown below. Details of employee share option schemes referred to are given later in this note. 1. 6,250 ordinary shares in respect of options exercised under the Company’s 1988 Scheme (referred to below) for total consideration of £5,907.50 2. 162,750 ordinary shares in respect of options exercised under the Company’s 1995 Scheme (referred to below) for total consideration of £337,387.50. Options The Company has two employee share option schemes. The first scheme (‘the 1988 Scheme’) was introduced on 21 January 1988 and the second scheme (‘the 1995 Scheme’) received shareholders’ approval on 24 May 1995. Options granted under the 1988 Scheme are exercisable between three and ten years from the date of grant and under the 1995 Scheme are exercisable between five and seven years from the date of grant. The period for the granting of options under the 1988 Scheme expired in January 1998 and under the 1995 Scheme expired in May 2005. As at 31 December 2005 there remained 31,075 options outstanding under that Scheme exercisable at prices between £0.73 and £1.71. On the same date there were 1,468,500 options outstanding under the 1995 Scheme exercisable at prices between £1.71 and £4.95. Other share schemes Details of other share schemes are disclosed in the Directors’ remuneration report on pages 28 to 34. It is currently intended that share awards under these schemes will be satisfied by shares purchased in the market by the employee benefit trust. Own shares Own shares at cost represent 506,898 Morgan Sindall plc shares held in the Morgan Sindall Employee Benefit Trust in connection with the Long Term Incentive Plan (‘LTIP’) as detailed in the directors’ remuneration report on pages 28 to 34. The trustee, the Legis Trust, purchases the Company’s shares in the open market with the financing provided by the Company on the basis of regular reviews of the share liabilities of the LTIP. The unallocated shares number 420,803 and dividends on these shares have been waived. Dividends on allocated shares are paid to the participants. The cost of shares expected to be awarded are charged over the three year period to which the award relates. Based on the Company’s share price at 31 December 2005 of 929.5p the market value of the shares was £4,711,617. 82 Notes to the Company financial statements For the year ended 31 December 2005 10 Additional information on subsidiary undertakings and joint ventures The Company acts as a holding company for the Group and has the following principal subsidiary undertakings and joint ventures which affected the Group’s results or net assets: Subsidiary undertakings Lovell Partnerships Limited Morgan Lovell plc Overbury plc Vivid Interiors Limited Backbone Furniture Limited Bluestone plc Morgan Est plc Morgan Utilities Limited Magnor Plant Hire Limited * Stansell QVC Limited Newman Insurance Company Limited Activity Affordable housing Office transformation services Fitting out and refurbishment specialists Retail and leisure fit out specialist Furniture specialists Construction Infrastructure services Infrastructure services Construction plant hire Construction Insurance Joint Ventures Primary Medical Property Limited (47.5%) * Morgan–Vinci Limited (50%) * Claymore Roads (Holdings) Limited (50%) * Community Solutions for Primary Care (Holdings) Limited (331/3%) * The Compendium Group Limited (50%) Investment in medical properties Infrastructure services Infrastructure services Investment in the development of primary care facilities Investment in affordable housing 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. The proportion of ownership interest is the same as the proportion of voting power held. With the exception of Stansell QVC Limited, registered and operating in Jersey and Newman Insurance Company Limited registered in Bermuda, all undertakings are registered in England. The principal place of business is the United Kingdom. Newman Insurance Company Limited has a year end of 30 November coterminous with the renewal date for the Group’s insurance arrangements in which it participates. 83 Morgan Sindall Report and Accounts 2005 Notice of annual general meeting Notice is hereby given that the annual general meeting of the Company will be held at the offices of College Hill, the Conference Room, 78 Cannon Street, London, EC4N 6HH at 12.00pm on Tuesday 25 April 2006 to consider and, if thought fit, approve the following resolutions which are proposed, in the case of resolutions numbered 1 to 8, as ordinary resolutions and, in the case of resolutions numbered 9 and 10, as special resolutions. Ordinary business Ordinary resolutions 1. To receive and adopt the financial statements and the reports of the directors and the independent auditors for the year ended 31 December 2005. 2. To declare a final dividend of 18.0p per ordinary share for the year ended 31 December 2005. 3. To re–elect Paul Smith as a director. 4. To re–elect Jack Lovell as a director. 5. To approve the directors' remuneration report for the year ended 31 December 2005. 6. To re–appoint Deloitte & Touche LLP as independent auditors. 7. To authorise the directors to fix the independent auditors' remuneration. Special business Ordinary resolution 8. That the directors be and are hereby generally and unconditionally authorised (in substitution for any existing authority subsisting at the date of this resolution) in accordance with section 80 of the Companies Act 1985 (‘the Act’) to exercise all the powers of the Company to allot relevant securities (within the meaning of that section) of the Company up to an aggregate amount of £705,482 such authority (unless previously revoked or varied) to expire on the earlier of the conclusion of the Company's next annual general meeting and fifteen months from the date of the passing of this resolution save that the Company may before such expiry make offers or agreements which would or might require relevant securities to be allotted after such expiry and the directors may allot relevant securities in pursuance of such offers or agreements as if the authority conferred hereby had not expired. Special resolutions 9. That, subject to the passing of the previous resolution, the directors be and are hereby empowered pursuant to section 95 of the Act to allot equity securities (as defined in section 94(2) of the Act) for cash pursuant to the authority given in the previous resolution as if section 89(1) of the Act did not apply to such allotment, provided that such power shall be limited to: i) the allotment of equity securities which are offered to all the holders of equity securities of the Company (at a date specified by the directors) where the equity securities respectively attributable to the interests of such holders are as nearly as practicable in proportion to the respective number of equity securities held by them, but subject to such exclusions and other arrangements as the directors may deem necessary or expedient in relation to fractional entitlements and any legal or practical problems under any laws, or requirements of any regulatory body or stock exchange in any territory or otherwise; and ii) the allotment (otherwise than pursuant to sub–paragraph i) above) of equity securities up to an aggregate nominal amount of £105,822 and provided that this power shall expire on the earlier of the conclusion of the Company's next annual general meeting and fifteen months from the date of the passing of this resolution save that the Company may before such expiry make offers or agreements which would or might require equity securities to be allotted after such expiry and the directors may allot equity securities in pursuance of such an offer or agreement as if the power conferred hereby had not expired. 84 Notice of annual general meeting 10.That the existing Article 146 of the Articles of Association be deleted and the following be substituted therefore: ‘INDEMNITY 146.1 Subject to the provisions of and so far as may be consistent with the Act, every director, secretary or other officer of the Company shall be entitled to be indemnified by the Company against all costs, charges, losses, expenses and liabilities incurred by him in the execution and/or discharge of his duties and/or the exercise of his powers and/or otherwise in relation to or in connection with his duties, powers or office provided that any such indemnity in relation to a director shall only be valid to the extent that it constitutes a qualifying third party indemnity provision as defined in section 309B of the Act. 146.2 For the purpose of this Article 146 a director shall be entitled to vote and to be counted in the quorum at any meeting of the Board or a committee of the Board at which any indemnity, arrangement or proposal falling within this Article 146 is to be considered and, for the purpose of Article 96, any interest which any director may have in such indemnity, arrangement or proposal shall not be a material interest unless the terms of such indemnity, arrangement or proposal confer upon such director a privilege or benefit not available to, or awarded to, any other director. The decision of the chairman of the meeting as to whether the indemnity, arrangement or proposal to be considered at the meeting falls within this Article 146 or as to the materiality of any director’s interest therein for the purposes of this Article and Article 96 shall be final and conclusive.’ By order of the Board Mary Nettleship Company Secretary 22 February 2006 Registered office 77 Newman Street London W1T 3EW 85 81 Morgan Sindall Report and Accounts 2005 Notice of annual general meeting Notes 1. A member entitled to attend and vote at the annual general meeting (‘AGM’) may appoint a proxy (who need not be a member of the Company) to attend and, on a poll, to vote on his or her behalf. In order to be valid, an appointment of proxy must be returned by one of the following methods: • in hard copy in the form enclosed, by post, by courier or by hand to the Company’s registrars, Capita Registrars, Proxy Department, PO Box 25, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU; or • in the case of CREST members, by utilising the CREST electronic proxy appointment service in accordance with the procedures set out below and in each case must be received by the Company not less than 48 hours before the time appointed for holding the meeting. CREST members who wish to appoint a proxy or proxies by utilising the CREST electronic proxy appointment service may do so by utilising the procedures described in the CREST Manual. CREST Personal Members or other CREST sponsored members, and those CREST members who have appointed a voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. In order for a proxy appointment made by means of CREST to be valid, the appropriate CREST message (a ‘CREST Proxy Instruction’) must be properly authenticated in accordance with CRESTCo’s specifications and must contain the information required for such instructions, as described in the CREST Manual. The message, regardless of whether it relates to the appointment of a proxy or to an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the issuer’s agent (ID RA10) by the latest time(s) for receipt of proxy appointments specified in the notice of meeting. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. CREST members and, where applicable, their CREST sponsors or voting service providers should note that CRESTCo does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. 2. Appointment of a proxy does not preclude a shareholder from attending the AGM and voting in person. 3. Copies of the executive directors’ service contracts with the Company and copies of the non–executive directors terms and conditions of appointment and the register of interests of the directors in the share capital of the Company are available for inspection at the registered office of the Company during usual business hours (excluding weekends and English public holidays) and will be available at the place of the AGM from 15 minutes prior to and during the AGM. 4. Short biographical details of the directors seeking re–election are shown on page 18 of the accounts. Explanatory notes to the items of special business to be proposed at the annual general meeting can be found in the report of the directors on page 23. 5. If no indication of how the proxy shall vote is given, the proxy will exercise discretion as to voting or abstention therefrom. 6. The Company, pursuant to regulation 41 of The Uncertificated Securities Regulations 2001, specifies that only those ordinary shareholders registered in the register of members of the Company 48 hours before the meeting shall be entitled to attend or vote at the meeting in respect of the number of shares registered in their name at that time. Changes to entries on the relevant register of securities after that time will be disregarded in determining the rights of any person to attend and/or vote at the meeting. 86 Morgan Sindall plc – Proxy Form For use at the annual general meeting of Morgan Sindall plc. To be held at the offices of College Hill, the Conference Room, 78 Cannon Street, London EC4N 6HH at 12.00pm on Tuesday 25 April 2006 Name: (Please print) Address: (Please print) I/We, the undersigned, being (a) member(s) of Morgan Sindall plc, hereby appoint the chairman of the meeting or Name of proxy (see Note 4) Please print: Address of proxy: (Please print) as my/our proxy to vote for me/us and on my/our behalf at the annual general meeting of the Company to be held on Tuesday 25 April 2006 and at any adjournment thereof. I/We direct the proxy to vote in respect of the resolutions to be proposed at the meeting as indicated below (note 1). Signed Dated 2006 Ordinary Resolutions For Against Abstention 1 To receive and adopt the financial statements and the reports of the directors and the independent auditors for the year ended 31 December 2005 2 To declare a final dividend of 18.0p per ordinary share for the year ended 31 December 2005 3 To re–elect Paul Smith as a director 4 To re–elect Jack Lovell as a director 5 To approve the directors’ remuneration report for the year ended 31 December 2005 6 To re–appoint Deloitte & Touche LLP as independent auditors 7 To authorise the directors to fix the independent auditors’ remuneration Ordinary Resolution 8 To authorise the directors to allot shares pursuant to Section 80 of the Companies Act 1985 Special Resolutions 9 To disapply the statutory pre–emption provisions pursuant to Section 95 of the Companies Act 1985 10 To amend the articles of association of the Company Notes 1. Please indicate how you wish your proxy to vote on the resolutions by inserting ‘X’ in the appropriate space. If no indication of how the proxy shall vote is given, the proxy will exercise discretion as to voting or abstention therefrom. 2. In the case of a corporation the proxy must be under its common seal (if any) or the hand of its duly authorised agent or officer. In the case of an individual the proxy must be signed by the appointor or his agent, duly authorised in writing. 3. This proxy form has been sent to you by post. It may be returned by either of the following methods: in hard copy form, by post or courier or by hand to the Company's registrars, Capita Registrars, Proxy Department, PO Box 25, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU; or, in the case of CREST members, by using the CREST electronic proxy appointment service. CREST members should refer to note 1 to the notice of annual general meeting enclosed with this proxy form in relation to the submission of a proxy appointment via CREST. In each case the proxy appointment must be received not less than 48 hours before the time for the holding of the meeting or adjourned meeting together (except in the case of appointments utilising the CREST electronic appointment service) with any authority (or a notorially certified copy of such authority) under which it is signed. 4. If you wish to appoint a proxy other than the chairman of the meeting, delete the words ‘the chairman of the meeting’ and insert the name and address of your proxy in the space provided. Please initial the amendment. A proxy, who need not be a member of the Company, must attend the meeting in person to represent you. 5. Completion of a proxy form will not prevent the members from attending and voting at the meeting in person should they so wish. 6. In the case of joint holders the signature of only one of the joint holders is required but, if more than one holder votes, the vote of the first named on the register of members will be accepted to the exclusion of other joint holders. 7. The Company, pursuant to regulation 41 of The Uncertificated Securities Regulations 2001, specifies that only those members registered in the register of members of the Company 48 hours before the meeting shall be entitled to attend or vote at the meeting in respect of the number of shares registered in their name at that time. Changes to entries on the relevant register of securities after that time will be disregarded in determining the rights of any person to attend or vote at the meeting. 87 SECOND FOLD BUSINESS REPLY SERVICE Licence No. MB122 11 Capita Registrars Proxy Department P.O. Box 25 The Registry 34 Beckenham Road Beckenham Kent BR3 4TU THIRD FOLD F I R S T F O L D Morgan Sindall plc is a top ten United Kingdom construction group employing over 5,000 people. Our businesses operate within four specialist divisions; Fit Out, Construction, Infrastructure Services and Affordable Housing. The strength of the Group is derived from this balance of activity and the ability to provide integrated solutions across these four areas. Fit Out Fit Out operates through four businesses. Overbury is the leading office fit out and refurbishment specialist and Morgan Lovell provides a complete office transformation service. Vivid Interiors refurbishes and fits out hotel, retail, leisure and entertainment facilities. Backbone Furniture supplies, refurbishes and installs commercial office furniture. Construction Bluestone is a national construction business operating through a network of local offices. The business’ core expertise is in building for education, healthcare, industrial and commercial organisations where it undertakes new build, refurbishment, smaller scale works and maintenance projects under a variety of procurement routes. Infrastructure Services Morgan Est is a national business undertaking a broad spectrum of infrastructure and utility projects. It provides civil engineering, utility, tunnelling and mechanical electrical services through all phases of a project from design to operation and maintenance. Affordable Housing Lovell is the country’s leading provider of affordable housing, specialising in mixed tenure and major refurbishment schemes. It works in partnership with social housing providers at the cutting edge of urban regeneration to create sustainable communities. Corporate directory Share prices (FT Cityline) The Company’s share price (15 minutes delay) is displayed on the Company’s website. The EPIC code as used in the Topic and Datastream Share Price information service is MGNS. Telephone share dealing service Details of a low cost telephone dealing service with Stocktrade are available on the Company’s website under Investor Relations. Electronic communications Shareholders may now view their shareholdings on line through the website of our registrars, Capita Registrars. If you wish to view your shareholding, please log on to www.capitaregistrars.com and click on the link 'shareholder services' then follow the instructions. The Company would also like to take advantage of recent changes to the law, which allows us to communicate with shareholders in electronic form. If you would like to receive future communications in this way, please register your e–mail address on the registrar's website, following the instructions provided. This form of communication offers a cost benefit to the Company and provides for an environmentally friendly way of communicating. The Company would therefore encourage as many of you as possible to make use of this service. To use the service, you will need to confirm your surname, UK Post Code and Investor Code. The Investor Code may be found on a recent share certificate, in the bottom right hand corner, or on the tax voucher for the forthcoming dividend payment. Financial calendar Annual general meeting 25 April 2006 Final dividend: Ex–dividend date Record date Payment date 5 April 2006 7 April 2006 5 May 2006 Interim results announcement August 2006 Directors John Morgan Paul Smith David Mulligan Paul Whitmore Bernard Asher (non-executive) Gill Barr (non-executive) Jon Walden (non-executive) Jack Lovell (non-executive) Company Secretary Mary Nettleship Registered office 77 Newman Street, London, W1T 3EW Tel: 020 7307 9200 Fax: 020 7307 9201 Registered No: 521970 Solicitors Charles Russell 8–10 New Fetter Lane, London, EC4 1RS Independent Auditors Deloitte & Touche LLP 3 Victoria Square, Victoria Street, St Albans, AL1 3TF Clearing bankers Lloyds TSB Bank plc PO Box 17328, 11–15 Monument Street, London, EC3V 9JA Brokers Hoare Govett Ltd 250 Bishopsgate, London, EC2M 4AA Registrars Capita Registrars The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU Shareholder communication Enquiries and information: Please contact the company secretary E–mail: mary.nettleship@morgansindall.co.uk Website www.morgansindall.co.uk Design: www.lgs.co.uk Printed by Folium Financial & Security Printers, Birmingham 89 W E 3 T 1 W n o d n o L , t e e r t S n a m w e N 7 7 , c l p i l l a d n S n a g r o M 1 0 2 9 7 0 3 7 0 2 0 : x a F 0 0 2 9 7 0 3 7 0 2 0 : l e T k u . o c . l l a d n i s n a g r o m t a e t i s b e w r u o t i s i V a n n u a l r e p o r t & a c c o u n t s 2 0 0 5 report and accounts 2005
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