Erinaceous Group plc - Investis CMSfiles.investis.com/erinaceous/ir/reports_presentations/reports... · 2 Erinaceous Group plc Annual Report & Accounts for the year ended 31 December

Erinaceous Group plcPhoenix House11 Wellesley RdCroydonCR0 2NW

T: 0870 703 9898E: [email protected]: www.erinaceous.com

Erinaceous Group plcAnnual Report & Accounts for theyear ended 31 December 2005

Erinaceous Group plc

Report &

Accounts 2005

76510 R&A Cover 22/3/06 1:01 pm Page 1

2

Erinaceous Group plcAnnual Report & Accounts for the year ended 31 December 2005

Erinaceous provides a ‘one stop shop’ for a broadrange of services related to the management,maintenance, procurement,design, construction andinsurance of property.

Erinaceous provides services and solutions in both the private and publicsectors for residential andcommercial property. We aim to be the provider ofchoice and are well placed to build on our existinginfrastructure and achievemarket leadership.

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3

Financial highlights

• These results cover a full year(2004: nine months only) andhighlight the successfulintegration of Hercules acquiredin late 2004 and continuedorganic growth across theGroup.

• Turnover of £151.8m (2004:£67.5m) including organicgrowth of 13%.

• Profit from operations of£26.9m (2004: £2.3m).

• Adjusted profit from operations*of £27.8m (2004: £6.4m)including organic growth of40%.

• Profit before tax of £23.2m(2004: £1.6m).

• Adjusted profit before tax* of£24.3m (2004: £5.7m).

• Profit for the period of £17.4m(2004: £1.2m).

• Earnings per share of 18.1p(2004: 2.3p).

• Adjusted earnings per share* of19.2p (2004: 9.7p).

• Adjusted operating cash flows*of £26.0m (2004: £7.3m).

• Proposed dividend of 4.25p pershare (2004: 1.75p).

Turnover

Earnings per share

Adjusted earnings per share*

Profit before tax

Adjusted profit before tax*

Net assets

160

140

120

100

80

60

40

20

0

20

15

10

5

0

25

20

15

10

5

0

160

140

120

100

80

60

40

20

0

30

25

20

15

10

5

0

25

20

15

10

5

031 March

200231 March

200331 March

200431 Dec2004**

31 Dec2005

31 March2002

31 March2003

31 March2004

31 Dec2004**

31 Dec2005

31 March2002

31 March2003

31 March2004

31 Dec2004**

31 Dec2005

31 March2002

31 March2003

31 March2004

31 Dec2004**

31 Dec2005

31 March2002

31 March2003

31 March2004

31 Dec2004**

31 Dec2005

31 March2002

31 March2003

31 March2004

31 Dec2004**

31 Dec2005

£21.5m £33.7m£42.2m

£67.5m

£151.8m

4.4p 4.2p

7.2p

2.3p

18.1p

5.8p8.4p

11.39.7p

19.2p

£2.0m £2.2m£4.3m

£1.6m

£23.2m

£2.4m£4.0m

£6.0m £5.7m

£24.3m

£10.5m £18.5m£29.1m

£95.3m

£133.5m

£m

p

p

£m

£m

£m

*Excludes goodwill amortisation, exceptional items, restructuring costs, profit on disposal of non-current assets, and imputed interest.

**31 December 2004 was a nine month period.

See note 9 for adjustments to profit and earnings per share. Organic growth rates are derived from pro forma 2004 results noted in the Groupreview.

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4 Erinaceous Group plc Annual Report & Accounts 2005

3 Financial highlights

6 Chairman’s statement

9 Group review

19 Business stream overview

24 Our locations

26 Directors and officers

29 Corporate and social responsibility report

34 Directors’ report

38 Corporate governance report

43 Directors’ remuneration report

50 Report of the independent Auditor on theconsolidated accounts

52 Consolidated income statement

53 Consolidated balance sheet

54 Consolidated statement of changes in equity

55 Consolidated cash flow statement

56 Notes to the consolidated financial statements

91 Report of the independent Auditor on theCompany’s accounts

93 Company balance sheet

94 Company statement of total recognised gains andlosses

95 Notes to the Company’s financial statements

103 Five year summary

104 Shareholder information and financial calendar

Contents


5

Erinaceous /Er`i*na”ceous/a. [L. erinaceus hedgehog] (Zo[”o]l.)

Of the Hedgehog family; like, orcharacteristic of, a hedgehog.

‘Like or pertaining to ahedgehog,’ is the dictionary

definition of the worderinaceous, and like a

hedgehog, we spikily defendour clients’ interests. We are

a prickly competitor in theproperty services sector,

offering a plethora of one-stop solutions none ofour rivals can match.


6

• Introduction and background

Last year I predicted that 2005 would be a year toconcentrate on integration following the acquisitionof Hercules Property Services plc (Hercules) inOctober 2004. The process, which wasconcentrated into the first half of the year, requiredsome reorganisation of activities across the Group,the relocation of five offices and the continuousdevelopment and implementation of commonsystems. Whilst much was achieved during 2005the process continues and the acquisition inNovember 2005 of Mount Street Holdings plc andMillar Kitching Ltd together with Leach RhodesWalker Ltd, Entente Group, PPH Commercial and

other smaller acquisitions during the year havenecessitated further reorganisation of themanagement structure which will make thebusinesses more focussed in the future.

Whilst these integration activities were beingprogressed the existing businesses continued toperform robustly, securing new contracts anddemonstrating organic growth.

The development of Erinaceous will continue to beby way of organic growth and acquisitions whichextend the range of property services we are able toprovide and the geographic coverage required byour clients.

Erinaceous Group plc Annual Report & Accounts 2005

Chairman’s statement


7

• Business progress

Turnover for the year was £151.8m an increase of25% (of which 13% represents organic growth) overthe same period in 2004 (pro forma basis). Profitfrom operations (excluding restructuring costs andprofit on sale of non-current assets) increased to£27.8m, a pro forma increase of 50% of which40% came from organic growth.

Basic earnings per share rose from 2.3p (for thenine month period) to 18.1p (for the year) whileadjusted earnings per share almost doubled from9.7p to 19.2p.

• Dividend

A dividend of 4.25p per share is proposed which, ifapproved, will be paid on 28 April 2006 toshareholders on the register on 7 April 2006. TheGroup paid dividends of 6.75p per share in 2005.

The Board has maintained its commitment to aprogressive dividend policy. Dividends of 7.0p paidin respect of 2005 (being the 2.75p dividend paidin October 2005 and the 4.25p proposed dividendto be paid in April 2006) represents dividend coverof 2.6 times based on basic earnings per share.

• Staff

Erinaceous is a service business and is dependenton the people it employs. 2005 saw many changesas businesses were integrated and furtherrationalisation will occur in 2006. I would like tothank all directors and staff for their continuingefforts in helping to develop a business whichdelivers improving services to its customers.

• Board changes and senior management

Following changes made in March 2005 and theadditional appointment of Lord Poole as a NonExecutive Director in April, the Company was able tostructure committees and organise itself to be fullycompliant with the corporate governancerequirements of the Combined Code.

The Board continues to focus on strategy andmonitoring of the performance of the management,whilst the Executive Committee (which I chair)concentrates on the day to day issues. AndyHalstead was appointed to this Committee uponbeing appointed Group sales and marketing director.

With the further enlargement of the Group, theChief Executive has set up an Operations Board,reporting to him, which consists of the ExecutiveDirectors, the divisional managing directors and thefunctional heads. This is responsible for co-ordinating policy decisions across the Group andaccelerating the development of cross divisionalselling.

• Summary

Delivering value to our shareholders throughincreased total shareholder returns remains ourprime objective. 2005 showed that this could beachieved by a mix of organic growth andacquisitions and the results for 2006 should benefitfrom both the actions taken to integrate the 2004acquisitions and those now being taken in relationto more recent acquisitions. There is good potentialwithin the business if we continue to get it right.Trading in 2006 to date is in line with marketexpectations.

Nigel TurnbullChairman15 March 2006

‘Delivering value to our shareholders and customers’




9

Nine months Year ended ended

31 December 31 December2005 2004

£m £m

RevenueResidential property services 74.2 38.4Commercial property services 55.2 20.5Property insurance services 22.4 8.6

151.8 67.5

Adjusted profit from operations *Residential property services 13.0 5.6Commercial property services 7.6 1.0Property insurance services 11.3 3.2Central overheads (4.1) (3.4)

Adjusted profit from operations * 27.8 6.4

Restructuring costs (1.6) (4.1)Profit on sale of non-current assets 0.7 –Imputed interest on deferred consideration (0.2) –Other net interest (3.5) (0.7)

Profit before tax 23.2 1.6

Adjusted profit before tax * 24.3 5.7

Profit for the period 17.4 1.2

Adjusted profit for the period * 18.5 5.3

Basic earnings per share (pence) 18.1p 2.3p

Adjusted earnings per share (pence) * 19.2p 9.7p

Net assets 133.5 95.3

Adjusted cash flow from operations ** 26.0 7.3

Adjusted free cash flow ** 18.5 4.7

Increase in cash in the year 2.7 7.6

* adjusted for restructuring costs, profit on sale of non-current assets and imputed interest.

** adjusted for restructuring costs

Group review

The Group has enjoyed another successful year in2005 achieving the three main goals set at thestart of the year: continued organic growth; the fullintegration of Hercules; and undertaking a numberof further complementary acquisitions. The resultsfor the year ended 31 December 2005 highlight thecontinued strong organic growth across all mainareas of business. In 2005 the Group as a wholeachieved organic revenue growth of 13% and

organic profit growth of 40% compared with the proforma full year 2004. The Group has been, and willcontinue to be, acquisitive where it identifiescomplementary businesses that will add real longterm value to shareholders. Taking intoconsideration the acquisitions made in 2005 thetotal growth rates rise to 25% (revenue) and 50%(profit) respectively.


10

Group organic analysisActual

Actual Pro forma * NineYear ended Full year ended months ended

31 December 31 December 31 December2005 Growth rate 2004 2004

£m % £m £m

Revenue:Residential property servicesAcquired 5.8 – – –Organic 68.4 24 55.2 38.4

Total 74.2 35 55.2 38.4

Commercial property servicesAcquired 7.6 – – –Organic 47.6 7 44.6 20.5

Total 55.2 24 44.6 20.5

Property insurance servicesAcquired 0.6 – – –Organic 21.8 (2) 22.2 8.6

Total 22.4 1 22.2 8.6

TotalAcquired 14.0 – – –Organic 137.8 13 122.0 67.5

Total 151.8 25 122.0 67.5

Adjusted profit from operations:Residential property servicesAcquired – – – –Organic 13.0 40 9.3 5.6

Total 13.0 40 9.3 5.6

Commercial property servicesAcquired 1.5 – – –Organic 6.1 69 3.6 1.0

Total 7.6 111 3.6 1.0

Property insurance servicesAcquired 0.4 – – –Organic 10.9 3 10.6 3.2

Total 11.3 7 10.6 3.2

CentralAcquired – – – –Organic (4.1) (18) (5.0) (3.4)

Total (4.1) (18) (5.0) (3.4)

TotalAcquired 1.9 – – –Organic 25.9 40 18.5 6.4

Total 27.8 50 18.5 6.4

* Pro forma 2004 figures represent unaudited estimates of the divisional results for the full calendar year 2004 as if all acquisitionsmade during that year had been owned throughout the full year.


Group Review (continued)


11

The Group’s business model benefits from four keycharacteristics: high visibility of income streams; lowcyclicality in relation to general macro-economicconditions; strong cash flow generation fromoperating activities; and good organic and cross-selling growth prospects.

Group income streams have high levels of visibilityarising in part from contractual relationships, butalso as a result of the skills and knowledgedeveloped by the Group and its people leading tostrong customer relationships, and identified andgrowing distribution channels. The Group’s servicesare predominantly in areas where the property user(whether the investor, owner, tenant or leaseholder)must incur expenditure throughout the macro-economic cycle, comprising as they do principallymanagement, minor repairs, facilities management,referencing, insurance and associated propertyservices. While a number of auxiliary servicesprovided by the Group such as agency andauctioneering have some element of cyclicality, andto some extent government and local authoritycapital budgets have an impact on the buildingconsultancy activities within the Group, theoverriding majority of the Group’s income streamsare robust in respect of macro-economic conditions.

As highlighted in these results and Group resultsover a number of years, the business hasconsistently generated strong organic growth andachieved high cash flow returns. For these reasonswe have been able to plan for the future withconfidence.

The Group continues to invest in its long term futurethrough suitable acquisitions and investment in itsinfrastructure of people, IT, management structuresand support services. This investment continued in2005, with the Group’s acquisitions of Mount StreetHoldings plc (Mount Street), Millar Kitching Ltd(Millar Kitching), Entente Group (Entente), PPHCommercial business (PPH) and Leach RhodesWalker Group (Leach Rhodes Walker) for a totalcash consideration (including debt) of approximately£48.6m (plus deferred consideration and sharesissued). These acquisitions add further strength tothe Group’s property service offering, as discussedin the divisional reviews below. In addition theysignify the first stages of the Group’s geographicalexpansion, more than doubling the Group’s numberof operating locations and heralding the Group’spush for substantial growth beyond its historic basesof Greater London and Greater Manchester.

The Group continues to implement the fullintegration of all its acquisitions, believing that thisensures consistent standards of service are

maintained and cross-selling opportunities aremaximised. Projects successfully progressed in2005 include:

• office rationalisation with the closure of offices inHastings, London (four offices) and Stanmore withthese activities being consolidated in the existingLincoln offices and the new 25,000 square feetleasehold offices in Farringdon;

• senior management rationalisation resulting in fullyear cost savings in excess of £3m, and a cleareroperating structure;

• consolidation of support services (payroll, HR, ITand finance) within the Group’s corporateheadquarters in Croydon;

• property rationalisation with the sale of twoproperties in London no longer required followingthe office rationalisation;

• successful restructuring initiatives withincommercial and residential property services underthe primary businesses of Eurica and DunlopHaywards; and

• the renegotiation of banking facilities (up from£42m on 1 January 2005 to £86m on 31December 2005) providing further opportunities foracquisitions by the Group.

The process of integration and infrastructuredevelopment will continue to support the Group’son-going organic and acquisitive growth in themedium term. Projects to be undertaken in 2006include:

• the continued implementation of a geographicexpansion policy to allow appropriate services to bedelivered from many more key urban centres withinthe United Kingdom and Ireland;

• implementation of a fully integrated Group-widecorporate financial statements, payroll and HRpackage to strengthen central Group supportservices infrastructure;

• the acquisition and development of the Lincolnoffices that will hold much of the Group’s core backoffice services (the freehold was acquired for £5min January 2006 and further development works ofaround £3m are expected in 2006); and

• the operational consolidation of second half2005 acquisitions which will continue in 2006including some rationalisation of seniormanagement posts.


12

The on-going investment in the Group’sinfrastructure should ensure it remains well placedto take advantage of internal and externalopportunities as they arise. The most visible ofthese are the acquisitions that are discussed withinthe divisional analysis below, but many ideas andopportunities are developed internally to ensurecontinued organic growth across the Group. This

includes the operational efficiencies delivered fromthe integration projects noted above; the cross-selling activities being developed by the Group; andthe new product initiatives within residential lettingsservices. The Group’s strength is demonstratedwithin these results for 2005 while the opportunitiesfor medium to long term growth continue to bestrong.


• Residential property services

ActualActual Pro forma * Nine

Year ended Full year ended months ended31 December 31 December 31 December

2005 Growth rate 2004 2004£m % £m £m

RevenueAcquired 5.8 n/a – –Organic 68.4 24 55.2 38.4

Total 74.2 35 55.2 38.4

Profit from operationsAcquired – n/a – –Organic 13.0 40 9.3 5.6

Total 13.0 40 9.3 5.6

* Pro forma 2004 figures represent unaudited estimates of the divisional results for the full calendar year 2004 as if allacquisitions made during that year had been owned throughout the full year.

The performance of the residential propertyservices division has been strong throughout2005. Revenue rose to £74.3m compared to proforma 2004 of £55.2m including over 20% organicgrowth on top of the impact of the Mount Streetacquisition in November 2005. Operational gearinghas led to a sharper divisional profit increase to£13.0m (2004 pro forma £9.3m) including 40%organic growth with operating margins creeping upto 18% (2004 pro forma 17%).

The division’s strong performance in 2005 is in partthe result of the one-off benefits and costrationalisations arising from the Herculesacquisition. Notwithstanding these factorsunderlying organic growth rates remained strong,particularly in the residential lettings services sub-division.

The residential lettings services division, whichrepresents around half of the residential propertyservices division as a whole, provides a range ofservices and products, including references, rentguarantees, software solutions and variousinsurance products, to landlords, tenants and lettingagents in the tenanted residential property sector.Through its Jordans chain of letting agents it has a

suitable test bed for the development of anexpanded range of products and services that cansubsequently be distributed through its fulldistribution channel of around 8,000 letting agentsand IFAs.

Already a market leader, the position of theresidential lettings services division has furtherstrengthened over the last year. Marketingdevelopments made in 2005 including thedevelopment of an outbound call-centre andstrengthened relationships with IFA consolidatorshave all helped to fuel the division’s strong organicgrowth.

The key platform for growth in this division is itsstrong distribution channels of lettings agents andIFAs. This has expanded in 2005 with:

• live ‘Premier’ lettings agents (who pay a monthlyretainer) rising by 10% to approximately 2,200;

• live registered lettings agents (including‘Premiers’) rising by an estimated 15% toapproximately 6,000; and

• live registered brokers/IFAs rising by an estimated15% to approximately 2,200.



13

IT development remains core to the success of thisdivision and further capital development works wereundertaken by the division during the year.Substantial IT capital spend has been, and willcontinue to be, one of the major ways the divisionmaintains and increases its competitive advantage(in terms of service quality and timeliness) andbarriers to entry (in terms of cost efficiency andbespoke systems). This IT investment also leads tooperational gearing benefits as the division grows,evidenced again in 2005 by significantly higherprofit growth over and above the strong turnovergrowth.

The market place in which this division operates isexpanding strongly, fuelled by factors such as theincreased number of one person households, moremobile workforces and the continuing struggle forfirst time buyers to afford homes. In additionopportunities abound to undertake referencing forthe many lettings agents who currently do notoutsource this activity (a potential operational riskfor these agents). The division is looking to expandthe products and services it delivers through itsgrowing IFA and lettings agent’s distribution channelfurther in 2006 and foresees significant growthopportunities in the medium term.

The remainder of the residential property servicesdivision covers a range of services in three maintrading areas - property management, propertymaintenance and building consultancy.

The property management division providesmanagement and associated services to the publicand private sectors. In the public sector therelationships with its two main local authoritycustomers, Westminster and Lewisham, remain verystrong. This was evidenced by the recent contractextension for Westminster that sees the totalnumber of public sector properties managed by theGroup rising from 9,000 units to 9,600 units fromApril 2006. The division continues to score highlywith resident satisfaction surveys and in its keyperformance indicators on which its bonuspayments are calculated.

In the private sector the division grew substantiallyfollowing the acquisition of Mount Street whoseprivate sector management division more thandoubled the total units managed by the Group.Through the Group’s relations with major developersacross the United Kingdom the Group also has anorder book of new managements in excess of20,000 units.

Following the Mount Street acquisition the privatesector management teams will be merged during2006 and their systems aligned. The integrationplans in this division include the transfer to a singleIT system and significant operational and locationalconsolidation. The size of this project is such that itwill be the key divisional management focusthroughout 2006 and into early 2007. The benefitsin terms of cost-savings and customer servicestandards are expected to be substantial when theproject is completed and the risks inherent in theproject are reduced significantly as the project usesthe same project management team, that havesuccessfully undertaken many of these changeswithin Mount Street in 2004 and 2005. Keybenefits to customers from these changes willinclude the roll-out of “CPM Living”, a web portalallowing customers (and soon property developers)to access all relevant financial and operationalissues in respect of their properties on-line, togetherwith facilitating on-line payment of service charges.

Although the property management integrationproject will require tremendous effort and dedicationfrom the management team in 2006 the longerterm opportunities it brings to the Group as a wholeare significant. Once the implementationprogramme has been completed service qualitiesand cost efficiencies will have been improveddramatically. This will allow the division, whichalthough a market leader has a comparatively lowmarket share in the fragmented residential propertymanagement market, to target market share growthaggressively. This growth will be especially importantto the Group as a whole as property managementcan often provide the key to unlocking cross-sellingopportunities for the rest of the Group’s propertyand insurance services offerings.

The property maintenance division principallyundertakes day-to-day minor repairs and plannedmaintenance projects. Both activities are suppliedto properties managed by the residential propertymanagement sub-division but increasingly theseservices are also offered directly to local authoritiesand housing associations. The division suffered fromlack of critical mass throughout 2005 until theMount Street acquisition. This acquisition has addedthe critical mass and systems required to deliverimproved financial performance in 2006. Theincrease in scale is most notable from the numberof units now serviced, up from approximately30,000 in 2004 to over 200,000 at the end of2005.


• Commercial property services



2005 Growth rate 2004 2004£m % £m £m

RevenueAcquired 7.6 n/a – –Organic 47.6 7 44.6 20.5

Total 55.2 24 44.6 20.5

Profit from operationsAcquired 1.5 n/a – –Organic 6.1 69 3.6 1.0

Total 7.6 111 3.6 1.0



The commercial property services divisionprovides a range of services to the public andprivate sector (including many blue chipcompanies). Services provided include agency,professional services, planning, building consultancyservices, property management, public sectorsupport services, facilities management, investmentadvice and auctioneering.

This division has seen modest organic revenuegrowth of 7% which, together with the impact ofacquisitions during the year (principally MountStreet, Millar Kitching, Entente, PPH and LeachRhodes Walker) saw revenue jump to £55.2mcompared to pro forma 2004 of £44.6m. Moresubstantial organic growth of 69% was achieved atthe profit level, largely the result of the successfulintegration programme undertaken immediatelyfollowing the Hercules acquisition which led to theremoval of duplicated senior management postsand significant property and operationalrationalisation. While further modest savings may beachieved in 2006 following the various acquisitionsmade in 2005 it should be noted that the businessdynamics of the division do not readily lead to suchstrong operational gearing. Full year 2005 operating

profit margins of 14% are acceptable given thecurrent revenue mix (about 20% low margin blue-collar service provision with the balance from highermargin white-collar activities).

The commercial division has had many successesduring 2005 in respect of public sector tenderingincluding estimated £2m three year contracts toprovide professional and management services toboth Ealing and Islington while a similar contractwith Lambeth was renewed for a further three yearterm. The recently acquired architecture practice ofLeach Rhodes Walker was awarded “Architectspractice of the year” at the Insider property awardsand continues to work on a number of notableprojects with construction values of £10-50m.These include the new town centre development inWigan, Malmaison Hotel and apartmentsdevelopment in Liverpool, Doncaster/Sheffieldairport and major residential projects in Manchester,Salford and Sheffield. Eurica has successfullyextended its prestigious Palace of Westminstercontract supplying an operator and messagingbureau by a further five years (total contract valuearound £4m) representing a fifteen yearinvolvement in total.

Following the acquisition of Mount Street, theprospects for this sub-division in 2006 are muchstronger with margin growth and contract wins beingtargeted. These improved prospects are evidencedby the contract wins at Portsmouth and Portsea andLandport worth an estimated £24m in total over thenext ten years.

Building consultancy services provided to theresidential sector are currently focussed on theSouth East. The strong relationships developed witha large number of local authorities, together withthe enforced additional spending of those localauthorities under the central government “DecentHomes Initiative”, continue to provide a basis for solidmedium term revenue and profit growth in this area.



15

• Property insurance services



2005 Growth rate 2004 2004£m % £m £m

RevenueAcquired 0.6 n/a – –Organic 21.8 (2) 22.2 8.5

Total 22.4 1 22.2 8.5

Profit from operationsAcquired 0.4 n/a – –Organic 10.9 3 10.6 3.2

Total 11.3 7 10.6 3.2


The Property insurance services divisiondelivered a relatively modest 3% organic growth inprofit in 2005. Total divisional revenue for 2005was £22.4m representing a fall of 2% compared topro forma 2004 after acquisitions are excluded. Asa result of cost reductions the division neverthelessachieved profit growth for 2005 of £11.3mcompared to pro forma 2004 of £10.6m. Divisionaloperating margins remain strong at 50% (2004 proforma: 48%). These exceptionally high margins arein part the result of the niche and specialised areasthe division operates in, together with the nature ofinsurance intermediary accounting where reportedrevenues represent the fees or commissionsearned, which are typically a low proportion of theoverall costs paid by the customer for theirinsurance.

The businesses within the division offer a range ofinsurance services. Farr, which represents about halfof this division, is the market leading provider of riskmanagement and insurance solutions to thehousing association market. 2005 was a recordyear for new business for Farr offset by thesoftening market putting pressure on fee rates. Thenew business won in 2005 should lead to improvedperformance from Farr in 2006.

The balance of the division comprises commercialand residential property insurance and a range ofniche products and services specific to identifiedtrade associations and industry risks. These areashave performed better in 2005 and, in particular inrespect of the residential property insuranceactivities, opportunities for growth from cross-sellingof these services to properties managed elsewherein the Group should continue to be strong.

In the commercial management division (public andprivate sector) properties managed now have a totalvalue of over £6 billion. The opportunities this levelof management brings for cross-selling othercommercial property services is substantial and thecross-selling initiatives developed in 2005 will bestrengthened in 2006. The commercialmanagement division will also be undertaking anintegration programme similar to that withinresidential property management for which benefitswill arrive in late 2006 and throughout 2007.

The commercial division is also well placed to leadthe Group’s geographic expansion through 2006and 2007. Recent acquisitions of Entente and PPHhave resulted in significant bases in Birminghamand Hull, to go with the existing core locations ofManchester and London. In addition the geographicspread of commercial properties managed, or forwhich blue collar services are provided, gives furtheropportunities for the Group to achieve geographicexpansion without the increased cost and risk ofstart-ups.


16

• Financial review

Central overheadsCentral overhead costs rose from £3.4m to £4.1m(although this represents a like for like reduction of18%). Costs in the order of £1m have beentransferred to the centre from within the operatingdivisions as various support functions have beenconsolidated. This has reduced the impact of the£2.5m savings arising from the Herculesintegration. Central overheads include varioussupport services provided to the operating divisions,together with the costs of the Board Directors andprofessional costs in respect of being a listedCompany. As further overheads are transferred fromrecent acquisitions to the centre in 2006, andinvestment continues to be made in the quality ofthe centrally provided support services, these costsare expected to continue to rise in future years.

Restructuring costsThe Group’s results include £1.6m of restructuringcosts in respect of the major integration projectsresulting from the Mount Street and Herculesacquisitions. As an acquisitive Group integrationcosts in respect of bolt-on acquisitions are absorbedwithin operating expenses however the extra costsincurred during the year (principally redundancypayments in respect of duplicated posts and majorIT integration projects within the propertymanagement areas) arising from the moresubstantial Hercules and Mount Street acquisitionshave been separately identified. The costs of theserestructuring projects have been in line withmanagement’s plans. As discussed in the Groupreview 2006 will see further costs in these areas, inparticular in respect of the substantial propertymanagement integration project to be undertakenby the Group.

Sale of non-current assetsThe Group made profits on sale of non-currentassets, after deduction of costs, of £1.0m inrespect of the sale of two properties in GreaterLondon previously used as offices by the Group. Thiswas offset by a loss of £0.3m in respect of thedisposal of the Group’s investment in Stonemartinplc. Notwithstanding that it was sold for £0.3mmore than its book value at 1 January 2005International Financial Reporting Standards (“IFRS”)require the profit or loss to be calculated on theoriginal cost to the Group which was £0.6m higher.

Net interestThe net interest relates, principally, to the bank debtwithin the Group. The Group has a range of bankingfacilities, predominantly with its principal bankersHalifax Bank of Scotland. Interest rates on bankdebt range from 1.0-1.75% above base rate andcurrently average c. 1.5% above base rate. Interestcover for the Group has risen significantly to 7.2times (nine months ended 31 December 2004: 3.3times) as a result of the full year impact of priorperiod acquisitions.

In addition the Group has discounted deferredconsideration in respect of acquisitions made duringthe period. This discount is then unwound as afinancing cost during the period up to settlement ofthe deferred monies. This has led to an additional£0.2m imputed interest cost in respect of the yearended 31 December 2005, which, given its likelyincrease and significance in future periods, hasbeen excluded from adjusted earnings per sharecalculations as part of deriving a reasonableunderlying measure of Group performance.

DividendsA dividend of 4.25p per share is proposed which, ifapproved, will be paid on 28 April 2006 toshareholders on the register on 7 April 2006. TheGroup paid dividends of 6.75p per share in 2005.

Balance sheetNet assets at 31 December 2005 have risen by40% to £133.5m (31 December 2004: £95.3m).This major increase was largely a result of theshares issued in respect of acquisitions and shareoptions during the period (£27.7m) and theretained earnings for the year (£17.4m), offset bythe dividend payments during the year (£4.3m).

Cash flow and gearingThe Group continues to generate significant fundswith cash flows generated from operations(excluding exceptional and restructuring items) of£26.0m in 2005 (nine months ended 31 December2004: £7.3m). This represents a ratio of 94% onadjusted operating profits (nine months ended 31December 2004: 87%). Adjusted free-cash flows(after taxation and interest) grew to £18.5m (ninemonths ended 31 December 2004: £4.7m).

Capital expenditure in the year totalled £3.8m (ninemonths ended 31 December 2004: £2.1m) ofwhich £nil (nine months ended 31 December 2004:£0.3m) related to costs in respect of freehold andleasehold offices acquired.




17

Payments made in respect of acquisitions in theyear and deferred consideration in respect ofacquisitions made in prior years, totalled £51.8m(nine months ended 31 December 2004: £10.6m).The Group continues to structure its acquisitionssuch that deferred consideration remains a keyelement of most acquisitions made. Typically thesedeferred elements are fixed and can be satisfied incash or shares at the Group’s election.

The Group’s net debt has risen from £25.7m to£56.1m during 2005 as a result of expenditure onacquisitions and debt assumed within theseacquisitions. Removing restricted insurance moniesof £11.2m the underlying net debt to the Group is£66.5m. This represents a gearing level whichmanagement consider is comfortable. Bankingfacilities at the end of 2005 totalled £86m.

Impact of International Financial Reporting StandardsThe Group has adopted IFRS accounting in thesefinancial statements consistent with the Group’shalf-year announcement. This has resulted in therestating of prior period income statement, balancesheets and cash flow statement. Full reconciliationsbetween UK GAAP and IFRS are included in thefinancial section of this annual report.

Treasury sharesThe Group has undertaken selective purchase of itsown shares to be held in treasury under the termsapproved at the 2005 Annual General Meeting.Such treasury shares are held and utilised inrespect of employee share option schemes, longterm incentive plans and share incentive plans andhave been used to fund the equity elements ofacquisitions.

OutlookFollowing the success of 2005, 2006 will beimportant for the Group as it seeks to deliver furthergrowth in shareholder value and accrue benefits toits range of stakeholders. The Board looks forwardto embracing further opportunities across the Groupin 2006.

This announcement includes ‘forward- looking statements’.These statements contain the words “anticipate”,“believe”, “intend”, “estimate”, “expect”, and words ofsimilar meaning. All statements other than statements ofhistorical facts included in this announcement, including,without limitation, those regarding the Group’s financialposition, business strategy, plans and objectives ofmanagement for future operations (including developmentplans and objectives relating to the Group’s products andservices) are forward - looking statements that are basedon current expectations. Such forward - lookingstatements involve known and unknown risks,uncertainties and other important factors that could causethe actual results, performance, achievements or financialposition of the Group to be materially different from futureresults, performance, achievements or financial positionexpressed or implied by such forward-looking statements.Such forward-looking statements are based on numerousassumptions regarding the Group’s operating performance,present and future business strategies, and theenvironment in which the Group will operate in the future.These forward- looking statements speak only as at thedate of this announcement. Subject to the Listing Rules ofthe UK Listing Authority, the Group expressly disclaims anyobligation or undertaking to disseminate any updates orrevisions to any forward-looking statements containedherein to reflect any change in the Group’s expectationswith regard thereto or any change in events, conditions orcircumstances on which any statement is based. Pastperformance cannot be relied upon as a guide to futureperformance.



Providing innovative, world-class solutions to

satisfy the needsof our customers.


19

• Products and services

As a Group we provide a unique ‘one stop shop’ for all property-related support services. Be it a complex multi-million commercialshopping centre, a block of residential flats or social housing -we have innovative solutions to match the growing demands of ourcustomers.

Increasingly customers prefer to partner with companies whounderstand the property market and provide a responsibleend-to-end service solution so that they can focus on their corebusiness. The Group has responded to this challenge by building onits existing businesses through carefully structured acquisitions.These have widened the Group’s core competences to attain itscurrent enviable position.

By focussing on all aspects of property services from conceptualisingthe design and architecture to project management to seekingtenants, from maintaining the building to insurance, we can providealmost all our customers’ property services needs. Our customerschoose us as they get ‘one point of contact and a seamless service’.

Our customers know us by our various brands. The different brandshave helped us focus on every sub segment of our solution sets andat the same time retain focus on the overall solution provided byus. The three key divisions of the Group are:



• Property insurance services.

Activities by division are discussed in the following sections.

Business stream overview


20


The Group provides a wide range of propertyservices to a diverse portfolio of UK-based clients inboth the public and private sectors.

Our customers encompass the top UK developers,Government agencies, Local Councils and HousingAssociations, property owners, occupiers andinvestors.

Our portfolio continues to grow and evolve, so thatwe and our clients continue to stay ahead in theever changing marketplace.

Our multi-disciplinary approach, combined with ourresource, experience and creativity, makes us oneof the most versatile and forward thinkingcompanies in the marketplace today.

Residential lettings solutionsWe are the leading provider of services to theresidential lettings industry. We pioneered thetenant vetting and rent guarantee market, offeringletting agents and landlords the range of productsthey need within the service levels they require.

We lead the way in the industry offering threereferencing products and three referencing and rentguarantee products, meaning our clients can decideon the level of information and type of rentalinsurance they want for each individual applicant.

We process over 25,000 reference and rentguarantee applications per month, making us thelargest UK provider. In June 2005, we became theonly UK provider to offer a 24-hour service.

We also provide the bespoke insurance productsrequired by the residential lettings industry that havebeen developed in the property insurance servicesdivision.

We concentrate on being innovative and pro-activewithin the market and our main aim is to stay trueto our Company ethos, ‘Customer First and NeverLose a Customer’.

As part of our lettings service, we handle a widerange of rental properties from studio apartments tomulti-bedroom country residences. We will helpagree the terms and length of tenancy, deal withcomplex legal issues, and ensure the property ismanaged successfully whilst let.

We also offer a rent collection scheme backed upby wide ranging and tailored insurance services forlandlords, tenants and resident directors.

Property management The Group is the largest managing agent in thepublic and private sectors in the UK.

From the outset, we work closely with our clients tohelp them establish the right property managementstructure for their developments, continuing throughto manage the property to make their customers’lives as problem-free as possible from the day theymove in.

Whatever the size or range of the development -from large apartment blocks of 50 units and over,blocks of 8 units and under, luxury housingdevelopments, to social housing developments - ourproperty management teams provide acomprehensive range of owner and occupierservices from strategic advice through to day-to-daymanagement focussed on asset, service andfinancial performance.


Business stream overview (continued)


21

By working together with our commercial division,we are also specialists in mixed-use developments,as few property management companies offer anintegrated service from inception to completion. Themanagement requirements of commercial andresidential properties may appear to be similar, butin reality they require a subtly different approachand skill set, blending commercial practice withresidential legislation.

Property maintenanceWe ensure that our clients’ properties are alwaysmaintained and repaired to the highest standard.Our innovative property maintenance servicesharness new ideas and constantly develop practicalways of managing traditional facilities.

From managing and fulfilling all cyclical andprogrammed preventative maintenance, to providingreactive and mobile maintenance, our specialismsinclude decent homes and voids works, 24/7emergency response, installation and maintenanceof central and communal heating systems.

Building consultancy servicesWe provide building consultancy services to mostLondon local authorities and are steadily expandingthis service throughout the UK to a broad base ofclients throughout both private and public sectors.This covers all the professional work involved indesigning, building and maintaining property. Ourservices are truly multi-disciplinary and combine thetalents of architects, mechanical and electricalengineers, surveyors and other specialists, who worktogether to provide our clients with innovativeintegrated solutions.


In our commercial division we manage ourcustomers’ commercial property portfolios inaddition to all the other professional services youwould expect from commercial propertyprofessionals.

The breadth of our service offering includes agencyteams, professional services, building consultancy,project management, architecture and designservices, facilities management, auctioneers andinvestment advice.

We have healthy client bases in both the public andprivate sector. Our customers include the FirstGroup, where we manage over 100 railway stations,the City of Westminster, the London Boroughs ofWandsworth and Lambeth, the North WestDevelopment Agency, Liverpool Victoria, Powergen,Gillette, Inland Revenue and HSBC.

Professional servicesWe lead the UK market with our professionalservices capability. We work for landlords andtenants to provide valuations, renewals, reviews andratings. Our dedicated teams provide acomprehensive range of specialist services.

PlanningOur considerable team experience means we areinvolved in developing plans and formulating policiesbased on national and strategic guidance.

We work across all major sectors; new housingsites, retail and shopping sites, business parks,local authority and education, regenerationschemes, green belt areas and major infrastructureprojects.


22

Building consultancy servicesOur integrated building consultancy services deliverto clients in the public and private sectors, includingarchitecture, engineering, surveying, managementconsultancy, planning supervision, projectmanagement and quantity surveying. Our teams aremulti-disciplinary, bringing together professionalsacross the design spectrum. We treat our clientsand our projects as individuals, delivering to theirspecific needs.

Property managementIn this area we work in asset management,commercial, corporate and public propertymanagement. Our team encompasses surveyors,accountants and administration providing a range ofowner and occupier services from strategic advicethrough to daily management.

Integrated facilities management solutionsOur facilities management team procure or directlyemploy facilities services teams to provide all ourcustomers’ site service requirements, includingcleaning, office support, security, catering andbuilding maintenance. In addition to our on siteteams we also operate off site resources such ashelp desks and call centres for our customers.

Investment adviceOur teams cover acquisitions, consultancy anddevelopment. We provide our services to some ofthe UK’s largest institutional investors, quotedproperty companies, developers and localauthorities, whilst also catering for smaller investorsincluding private clients and syndicated investmenttrusts.

Agency teamsOur market leading agency teams provide highquality services for clients who want to rationalise,expand or develop their portfolios. We worknationally but utilise our local knowledge to deliverfor our clients. We work across many sectorsincluding industrial, offices, retail, leisure andinvestment.

AuctioneersOur auctioneers operate in both the residential andcommercial sectors. Our commercial team provideauctioneering services in the retail, industrial, office,leisure and land sectors, running a number ofsizeable auctions each year.

• Property insurance services

We are property insurance specialists and ourdivision has grown rapidly. Our focus has alwaysbeen the same; providing integrated insurancesolutions for our clients.

We provide a wide range of insurance productsolutions and risk management and consultancyservices.

Our customers are in a wide range of sectors -developers, managing agents, residentialmanagement companies, landlords and propertyinvestors.

As we grow, so do our range of products to ensurethey stay competitive and continue to meet ourclients’ needs.

Insurance product solutionsOur innovative insurance solutions cover our diverseclients’ needs, providing comprehensive cover andunique features for every stage in a property’s life,whatever our client’s interest.

In the residential market we provide cover for ownedand let property. Homeowners can be confident thattheir property is protected and our let propertyinsurance for residential landlords recognises therealities of today’s market. Our bespoke productsdeal with all the risks which landlords face.

We have developed specific products so landlordscan choose buildings insurance from low cost tocomprehensive cover, from limited to full contentsinsurance, emergency assistance, rent guaranteeand legal expenses cover. Our tenants can protecttheir contents and personal possessions withadditional cover for loss or accidental damage inand away from their home. These are deliveredthrough the residential lettings services sub-division.


Business stream overview (continued)


23

We also provide client money protection andprofessional indemnity insurance, givingcomprehensive protection.

We are the leading UK intermediary in blocks offlats insurance, covering the usual building risksalong with property owners, employers and publicliability cover.

In the commercial property sector we havespecialist expertise and schemes designed for awide range of industries right from professionalindemnity to insurance for plastic manufacturers.We also cover special risks and contingencies ofspecial interest groups like media, trucking etc.

In the latest report of ‘Insurance Age’, we havebeen identified as the UK’s no.2 insurance broker.This has been possible due to a drive to becontinuously proactive with our customers,developing unique insurance solutions for thesectors we focus on, building strong relationshipswith our clients and insurers and delivering the beststrategies and competitive business terms.

Risk management and consultancyThe Group is the UK market leader in providing riskmanagement and consultancy to housingassociations. Working with our clients, we analysetheir portfolio and identify any associated risks,advising on the insurance risk elements and placingthem with underwriters.



•Main office locations

1 Glasgow2 Newcastle3 Sunderland4 Leeds5 Manchester6 Lincoln7 Hull8 Birmingham9 Croydon

10 Chelmsford11 Bristol12 Brentwood13 Hoddesdon14 Basildon15 Bracknell16 London17 Brighton18 Exeter19 Bournemouth20 Southampton21 Dublin22 Ennis

Our locations

National reach; local expertise.

The Erinaceous map shows the main office locations

for all our businessesdemonstrating our national

presence as a leading property services

provider.

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• Nigel Turnbull FCA FCT BSc

Chairman, aged 64

Nigel Turnbull graduated as a scientistfrom St. Andrews University and thenwas articled as an accountant in theCity of London. Once qualified, hetrained as a management accountantwith a US chemical company beforejoining Tricentrol PLC where heultimately became finance director. Hejoined Rank Group PLC as financedirector in 1987 and retired in 1999.He was chairman of the TurnbullCommittee, which was responsible forproviding guidance to directors of listedcompanies on internal control. UntilMay 2003, he served on the Executiveand Council of the Institute ofChartered Accountants in England andWales. Nigel joined the Group in 2002.He is also chairman of The RiskAdvisory Group (Holdings) plc andHotbed Group Ltd and a director of DRSData & Research Services plc.

Chairman of the NominationCommittee

• Lucy Cummings MA (Cantab) MBA (INSEAD)

Commercial Director, aged 45

Lucy Cummings has a degree inEnglish from Cambridge University and a Masters in Business Administration from INSEAD, Fontainebleau. On leaving INSEAD, she worked as a management consultant for Oliver Wyman & Co, specialising in the financial services industry. In 1990 she started working with Neil Bellis. From 1993 she was involved in establishing a property management business, which led to her becoming, with Neil Bellis, a founder shareholder and director of the Group.

• Neil Bellis LLB

Chief Executive, aged 52

Neil Bellis has a law degreefrom King’s College, London andwas called to the Bar in 1976.Following pupillage with StephenSedley (now Lord Justice ofAppeal) at the Chambers ofJohn Platts-Mills QC, Neil wasinvolved in establishing a newset of chambers in the Temple.From 1981 onwards he was adirector and shareholder in anumber of private companies,mainly in the fields of property,building services and aviation.Neil started working with LucyCummings in 1990 and from1993 onwards worked alongsideher in establishing a propertymanagement business which ledin 1999 to the formation of theGroup.

Directors and officersof Erinaceous Group plc


27

•Michael Pearson BA (Oxon) ACA

Finance Director, aged 34

Michael Pearson graduated fromMagdalen College, Oxford, as amathematician. He then joinedBDO Stoy Hayward, qualifying asa Chartered Accountant in1996. During his time at BDOStoy Hayward he focussed onpublic company work with awide range of clients. Hepreviously acted as financedirector for an internet bettingcompany, before joining theGroup as Finance Director inJune 2002.

• Nigel Davis MA ACMA

Chief Operating Officer, aged 52

Nigel Davis qualified as anaccountant in 1980 and has aMasters degree in corporatefinance & control. He previouslyheld senior financial positionswithin Hanson plc and was CFOEurope for The Crest Group.Nigel joined the ErinaceousBoard in 2004 following theacquisition of Hercules PropertyServices plc where he had beenthe finance director sinceJanuary 2002.

• Lord Razzall CBE

Senior Independent Non ExecutiveDirector, aged 62

Chief executive of City law firm FrereCholmeley Bischoff until 1993 and apartner there from 1973 to 1995,Tim has over 30 years experience incorporate finance advice. He wasNational Treasurer of the LiberalDemocrats for 11 years and aRichmond Councillor for 24 years.He is also the Liberal Democratspokesman on Trade and Industry inthe House of Lords and was awardedthe CBE in the 1993 New Year’sHonours and became a life peer in1997. Tim joined the Board in 2003and has wide experience as adirector of listed and unlistedcompanies.

Chairman of the RemunerationCommitteeMember of the Nomination and AuditCommittees



• Lord Poole MA (Oxon) MBA (INSEAD)

Non Executive Director, aged 61

David Poole has extensive corporate finance, financial services, banking and insurance expertise. He was previously a member of John Major’s policy unit at no. 10, and served aschief executive of Ockham Holdings plc until 2002. David joined the Board in 2005 and is also a director of Aldgate & CoLtd and a non executive directorof RGA Reinsurance UK Ltd, RGA UK Services Ltd and chairman of Besso Holdings Ltd.

Member of the Audit and Nomination Committee

• Nicholas Fry MA (Cantab) FCA


Nicholas Fry graduated fromCambridge University beforequalifying as a charteredaccountant. He has extensiveexperience in corporate finance,having been a director of S.G.Warburg & Co. Ltd (now part ofUBS AG) from 1983 to 1996and more recently a partner ofKPMG LLP and Vice ChairmanKPMG Corporate Finance.Nicholas joined the Board in2005. He also serves as a nonexecutive director of Brixton plc,Merrill Lynch British SmallerCompanies Trust plc, AbsoluteReturn Trust Ltd and Pochin’sPLC.

Chairman of the AuditCommitteeMember of the RemunerationCommittee

• Keith Peraux Cert PFS


Keith Peraux began hisinsurance career with GuardianRoyal Exchange in 1966 beforeleaving to become managingdirector of Bowden InsuranceBrokers Ltd, which subsequentlybecame The Hanover ParkGroup Plc. A former chair of tworegions of The British InsuranceBrokers Association, he is a PastPresident of The InsuranceInstitute of Croydon. Keith is apartner in Grosvenor ParkAssociates LLP and SummerfieldProperties and joined the Boardin August 2002.

Member of the RemunerationCommittee

Directors and officers (continued)


• Foreword by Chief Executive

The Group believes that corporate socialresponsibility is an issue for all businesses. Werecognise that our actions have an impact onsociety and the environment. We also recognisethat we have interactions with a wide range ofstakeholders, including employees, clients,investors, communities and suppliers. The demandsof these stakeholders may differ at times, but as asuccessful business we recognise the important roleeach plays in making our business a success.

Against this backdrop, corporate social responsibilityissues have rightly been gaining more prominence inthe UK in general. As a Group this has beenreflected in a very wide variety of actions andpolicies, which are included in this report. Thisreport also includes details of my personalcontribution to boards of local activities on which Isit as Chief Executive of the Group.

We are proud to be serving communities throughoutthe UK and elsewhere by providing access to ourrange of products and services. As a growing UKlisted company, employing over 4,600 staff, weprovide benefits to the UK community throughgenerating employment opportunities and economicgrowth.

We know that our continuing success depends ontaking into account the interests of all stakeholdersin our business. We recognise that this is anongoing process and this first Group corporatesocial responsibility report to you is an importantstep in that process.

Neil BellisChief Executive

Corporate and social responsibility report

29



IntroductionThe Group has a commitment to corporate socialresponsibility based on the implementation of soundpolicies, good practices and the active involvementof the senior members of the Group within the localcommunity we serve.

PeopleErinaceous is a people-based business, and iscritically dependent on the extent that it is able toharness, develop and deploy the energies and skillsof its employees. Human resources (HR) objectivesare therefore linked closely to wider businessobjectives and are to:

• recruit and retain staff with the best skillsavailable across the markets in which the Groupoperates;

• provide a working environment within which theskills of our employees can be used effectively,promoting resource sharing and skills transfersacross the Group;

• invest in the development of our employees tomeet the growing needs of the Group and itscustomers for a wide range of management,professional and technical skills;

• reward staff on the basis of performance andprovide an opportunity for them to become andremain shareholders in the Group;

• strive to become an employer of choice; and

• deal with all staff equitably as well as managingthe employment liabilities of the Group.

RewardWhilst remuneration practices vary across theGroup, in line with good practice for each of themarkets within which the Group operates, overallobjectives are to:

• pay competitive salaries to recruit and retain staffwith the right skills and experience;

• reward individuals on the basis of performance;and

• provide a range of employee benefits appropriateto each market.

Remuneration policy and practice are kept underregular review.

The Group encourages staff to own a share in thecompany and benefit from the company’s growth.The Group has set up two plans:

• Sharesave, a Save As You Earn plan, which offersemployees a saving scheme to buy shares at adiscounted option price at the end of their 3 or 5year saving period.

• The Share Incentive Plan (SIP) gives employeesthe opportunity to become shareholders throughinvesting pre-income tax salary in shares. For everyfour shares the employee purchases they receiveone free share. Employees can join both schemes ifthey wish.

In addition, the Group provides a number of benefitsfor staff including corporate discounts on a range ofproducts and services.

‘As a successful business we recognise theimportant role each stakeholder plays in making

our business a success’.

Corporate and social responsibility report (continued)


31

Employee developmentThe Group aims to make a significant investment inmanagement development and training in thecoming years in order to ensure that we are able tomeet the majority of our management needs fromwithin the Group in line with the businessintegration strategy. Structured management andsenior management development programmes willoperate across the Group. These should proveextremely effective both in identifying anddeveloping a substantial population of capablemanagers and in enhancing retention rates.Development of skills for line managers will also bea key target for 2006.

The use of personal development plans (appraisals)are required to be used across the Group in order toimprove objective setting and performancemanagement and to support continuousprofessional development in line with Investors InPeople requirements which has been awarded tosome parts of the business.

ResourcingThe Group aspires to be a major recruiter of talentacross the business sector in which it operates. TheGroup continues to invest in its recruitmentprocesses to ensure selection of staff with the rightcompetence and experience to meet the changingneeds of the Group and its customers.

Equal opportunitiesThe Group operates and is committed to the fairand equitable treatment of all its employeesirrespective of gender, race, disability or sexualorientation. Policies have been implemented acrossthe Group to ensure that this commitment isfulfilled.

The Group’s policy and practice is to encourage therecruitment and subsequent training, careerdevelopment and promotion of disabled people onthe basis of their aptitude and abilities, and theretention and re-training of employees who becomedisabled.

The Chief Executive is a member of CroydonEmployers’ Network, which is a working party set upby Croydon Council. The Chief Executive’s personalcommitment ensures that equal opportunities is atthe forefront of the Group interaction withcommunities.

The aim of the Employers’ Networking Group is toenable disabled persons within the community backinto work by retraining them, if needed, andproviding them with facilities to enable them to workeffectively. In addition the group head of HR isactively involved in mentoring local companies andeducating businesses within Croydon on theDisability Discrimination Act so that local businessescan train and support disabled persons back intowork.

‘FreqOUT!’ – visitors to the FreqOUT! exhibition(designed and curated by Vital Regeneration)

enjoying the digital artwork produced by young people in Westminster



Community and charity involvementThe Group firmly believes that opportunities need tobe created to enable economic growth within thelocal communities in which we operate. Staff andlocal offices are therefore encouraged in a numberof ways to make contribution to their localcommunities.

The Chief Executive is a board member of Croydonbusiness development partnership. This is a publicprivate partnership between Croydon Council andthe local businesses within Croydon. The aim of thispartnership is to improve the local businessenvironment to attract more businesses and hencecreate more employment and economic growthwithin Croydon. Croydon business developmentpartnership’s key aims are to:

• develop competent workforce with adequateskills;

• improve Croydon business district;

• attract funding for capital projects by localbusinesses agreeing to paying over and above thenormal business rate so that the funds can bereinvested to improve and attract businesses tooperate in Croydon;

• improve access to transport for local businessesand residents alike; and

• improve marketing of services and the area ingeneral to attract businesses.

In 2005 the Group sponsored Croydon Best ofBusinesses Awards for the Best Employer category,which was won by Mayday Hospital.

The Group is committed to improving theenvironment within which it operates. The Companyis a member of Croydon Commitment which fundsCroydon Voluntary Action. The Group makes regularcontributions to fund charitable projects run byCroydon Voluntary Action, which aims to improvethe property management sector in Croydon. TheGroup helps the charity through providing expertadvice at the board and sponsoring fund raisingevents.

In addition our regional offices up and down the UKmake donations to their preferred charity. In 2005staff raised funds for the Tsunami Appeal and theGroup matched the contributions made. In additionstaff raised a further £7,000 for a number ofcharities such as William Syndrome, Children inNeed and The Sophie McCready fund.

In recognition of this work, the Group has adopted acharity policy, which will match donations staff maketo a charity of their choice subject to prior approvalto an agreed limit. The charity committee, chairedby the Chief Executive, will oversee the Group’spolicy on charitable donations.

‘QPNMC Park Bench’ – a young participant in the animation project ‘Park Bench’ – displaying their credit design

Corporate and social responsibility report (continued)


33

Vital RegenerationThe most significant demonstration of the Group’scommitment to its involvement in the communitiesit serves is Vital Regeneration.

Vital Regeneration is a creative regeneration charityestablished in 2005 born from the communityregeneration division of Dunlop Haywards. Since1996 Dunlop Haywards had been developingcommunity regeneration expertise whilst deliveringpublic sector regeneration contracts. In order toensure that the communities continue to benefitfrom these ‘Estate Action’ programmes, a charitywas established to ensure the sustainabledevelopment of a number of valuable communityassets and to provide the platform to grow anddevelop the impact of these specialist services.

Vital Regeneration manages a portfolio ofcommunity regeneration projects, which encompasscommunity learning services, youth arts andenterprise schemes and community developmentprogrammes. The Group supports the ongoingdevelopment of the charity through representationon the Board of Trustees and through the provisionof support services, advice and advocacy.

Vital Regeneration works to address deprivation inthe 20% most deprived neighbourhoods in London.Its vision is for individuals and communities to haveequal expectations and opportunities in life and notbe seriously disadvantaged by where they live. Inthe year ahead the Group plans to look at otheropportunities to promote the work of VitalRegeneration including establishing corporatevolunteering schemes, campaigning, time banks,lottery schemes and more.

Health and safety & environmentThe Group is committed to creating and maintaininga culture which provides a safe working environmentfor employees and everyone affected by ourundertaking. The Group’s Health and Safety Policyand procedures have been published and madeavailable to all staff via the Group’s Intranet andother appropriate means of communication.

The Chief Executive is responsible for health andsafety matters at Board level and reports on theseas appropriate. During the year a number of healthand safety reviews have been carried out in relationto compliance with policies and proceduresespecially where staff use hazardous substances.The results of all such reviews are reported to theExecutive Committee.

The director of health and safety is responsible forembedding policies and procedures across theGroup, and has updated existing policies andprocedures and issued revised guidelines inparticular to all staff working with hazardousmaterials. Staff who come into contact withasbestos and related fibres or act as propertymanagers are given further specific training. Specificguidelines such as asbestos management plans andbuilding compliance tools have been produced andissued to all relevant staff.

The Group’s aim is to achieve certification to theEnvironmental Standard ISO 14001:2004 forvarious parts of the business and an independentconsultant is advising on the development of theenvironmental management system.

Quality assuranceEffective quality management systems continue tobe crucial for the Group in sustaining a competitiveadvantage. The Group continues to maintain itsexisting registrations of quality systems approvalsatisfactorily. Some businesses continue to maintaincertification to ISO 9001:2000 and there is anongoing programme to achieve this standard inother parts of the Group where applicable.

‘Silver cafe’ – one of Vital Regeneration’sICT tutors working with a local residentat the Silver Cafe – an internet cafe forolder residents.



Directors’ reportfor the year ended 31 December 2005

The Directors present their report together with theaudited financial statements for the year ended 31 December 2005.

• Principal activities

The Company operates principally as a Groupholding company providing accommodation,management and technical services to its subsidiarycompanies.

The Group provides services to an extensive rangeof private and public sector property clients throughits residential property services, commercial propertyservices and property insurance services divisions.

• Business review

The Group achieved profits before taxation of£23.2m in the year to 31 December 2005 (ninemonths ended 31 December 2004: £1.6m).Excluding restructuring costs, sale of non-currentassets and imputed interest, the profit before tax forthe year was £24.3m (nine months ended 31December 2004: £5.7m).

The Group made basic earnings per share of 18.1p(nine months ended 31 December 2004: 2.3p) andbasic adjusted earnings per share of 19.2p (ninemonths ended 31 December 2004: 9.7p).

The Group maintains a strategy of increasingprofitability and shareholder value by a combinationof targeted acquisitions and organic growth withinits existing divisions.

• Dividends

The Directors recommend a proposed dividend of4.25p per ordinary share which, together with thedividend of 2.75p per ordinary share already paid,makes a total of 7.0p per ordinary share for thefinancial year. If approved at the Annual GeneralMeeting to be held on 26 April 2006, the proposeddividend will be paid on 28 April 2006 to thoseshareholders on the register at close of business on7 April 2006.

• Acquisitions in the year

During the year the Group’s largest acquisition wasof Mount Street, acquired for total consideration of£51.7m in November 2005. Mount Street’sactivities include residential and commercialproperty management, minor repairs services andproperty insurance services.

The other major acquisitions made by the Group inthe year comprise Entente, Leach Rhodes Walker,PPH and Millar Kitching. These acquisitions providea range of property services, predominantly tocommercial property clients.

All the acquisitions made by the Group during 2005will be fully integrated during 2006 into the Group’sthree trading divisions, residential property services,commercial property services and propertyinsurance services.

Further information in respect of the Group’sacquisitions is included in the notes to thesefinancial statements.

• Post balance sheet events

There have been no post balance sheet eventssince the period end that require disclosure.

• Substantial shareholdings

In addition to the Directors, as at 28 February 2006the Company had been notified under the provisionsof the Companies Act 1985 that the following wereinterested in 3% or more of the Company’s ordinaryshare capital:

Number of ordinary shares %

Legal & General Group plc 4,260,697 4.1%

Barclays plc 4,205,997 4.0%


35

• Directors

The Board comprises the following Executive andNon Executive Directors who bring significantexperience to the Group’s operations and activities.

Nigel Turnbull ChairmanNeil Bellis Chief ExecutiveLucy Cummings Commercial DirectorNigel Davis Chief Operating OfficerMichael Pearson Finance DirectorNicholas Fry Non Executive DirectorKeith Peraux Non Executive DirectorLord Poole Non Executive DirectorLord Razzall Non Executive Director

All Directors served throughout the year except forNicholas Fry and Lord Poole who were appointedduring the year.

Biographies of the Directors can be found onpages 26 to 28.

Jon Gooding was a Director of the Board until hisresignation on 25 January 2005, and Ken Hackneyand Danny Innes were both Directors until theirresignation on 15 March 2005.

The interests of the Directors and their families inthe shares of the Company are disclosed in theDirectors’ remuneration report.

No Director had, during the year or at the end ofthe year, a material interest in any contract whichwas significant in relation to the Group’s business,except as disclosed in the notes to the financialstatements.

The Group maintains directors’ and officers’ liabilityinsurance.

• Directors’ responsibilities for the financial statements

Company law in the United Kingdom requires thedirectors to prepare financial statements for eachfinancial year, which give a true and fair view of thestate of affairs of the Company and the Group andof the profit or loss of the Group for that period. Inpreparing those financial statements, the Directorsare required to:

• select suitable accounting policies and then applythem consistently;

• make judgement and estimates that arereasonable and prudent;

• state whether applicable accounting standardshave been followed, subject to any materialdepartures disclosed and explained in the financialstatements; and

• prepare the financial statements on the goingconcern basis unless it is inappropriate to presumethat the Group will continue in business.

The Directors are responsible for keeping properaccounting records which disclose with reasonableaccuracy at any time the financial position of theGroup and to enable them to ensure that thefinancial statements comply with the Companies Act1985. They are also responsible for thesafeguarding of the assets of the Group and fortaking reasonable steps for the prevention anddetection of fraud and other irregularities.

A copy of the financial statements of the Group isplaced on the Erinaceous Group plc website. Themaintenance and integrity of the website is theresponsibility of the Directors and the work carriedout by the auditors does not involve consideration ofthese matters. Accordingly, the auditors accept noresponsibility for any changes that may haveoccurred to the financial statements since they wereinitially presented on the website.



The Directors are responsible for ensuring that theDirectors’ report and other information included inthe annual report is prepared in accordance withCompany law in the United Kingdom. They are alsoresponsible for ensuring that the annual reportincludes information required by the Listing Rules.The Board considers that since April 2005 it hascomplied with the Combined Code on CorporateGovernance (see Corporate governance report onpage 38).

• Annual General Meeting

The 2006 Annual General Meeting will take placeon 26 April 2006 at 11.30am at Founders Hall, 1Cloth Fair, London EC1A 7HT.

• Employees

The Group has continued its practice of keepingemployees informed of matters affecting them asemployees and the financial and economic factorsaffecting the performance of the Group.

This is achieved through the Company intranet,newsletter, staff briefings, regular roadshows to allstaff and senior management, and divisionaloperations meetings.

Employees are encouraged to participate in theshare ownership of the Company by, for example,joining the sharesave scheme and the shareincentive plan outlined on page 45.

Applications for employment by disabled personsare given full and fair consideration for all vacanciesin accordance with their particular aptitudes andabilities. In the event of employees becomingdisabled, every effort is made to retrain them inorder that their employment with the Company maycontinue.

• Donations

Details of the Company’s principal charitableactivities can be found in the Corporate and socialresponsibility report on page 29. No politicaldonations were made during the year.

• Supplier payment policy

It is the Company’s policy to settle the terms ofpayment with suppliers when agreeing the terms ofthe transaction, to ensure that suppliers are awareof these terms and to abide by them. Tradecreditors due at the year end amount to 46 dayspurchases (nine months ended 31 December2004: 45 days).

• Related party transactions

Details of transactions with related partiesundertaken by the Group during the year aredisclosed in the notes to the financial statements.

• Treasury shares

Pursuant to the authority given to the Company atthe last Annual General Meeting, in 2005 theCompany purchased a total of 801,000 of its ownshares to be held in treasury at prices ranging from£2.71 to £2.96. Of these, a total of 249,131 hadbeen cancelled as at the year end with thosecancellations matched by the issue of shares asconsideration for acquisitions. The maximumpercentage of the Company’s issued share capitalheld in treasury during the course of the year was0.7%.

Directors’ report (continued)


37

• Going concern

After making enquiries, the Directors havereasonable expectation that the Company and theGroup have adequate resources to continue inoperational existence for the foreseeable future. Forthis reason they continue to adopt the goingconcern basis in preparing the financial statements.

• Auditors

Grant Thornton UK LLP offer themselves forreappointment as auditors in accordance withsection 385 of the Companies Act 1985.

By order of the Board

Juliet BellisSecretary15 March 2006



This report sets out the Company’s compliance withthe Combined Code on Corporate Governance,which is appended to the Listing Rules of theFinancial Services Authority.

Statement of compliance with the Combined Code.The Company has complied with the provisions setout in Section 1 of the Combined Code throughoutthe year ended 31 December 2005 except for theperiod prior to the appointment of Non ExecutiveDirectors Nicholas Fry in January 2005 and LordPoole in April 2005. The appointments of the NonExecutive Directors created the required balance ofExecutive Directors and Non Executive Directors andallowed the establishment of appropriate committeestructures.

The BoardThe Board of Directors are responsible for corporategovernance, establishing policies and objectives andfor the stewardship of the Group’s resources. It isthe Group’s policy that the roles of Chairman andChief Executive are separated. The Board is madeup of the Chairman, four Executive Directors andfour other Non Executive Directors. Lord Razzall isthe Senior Independent Non Executive Director. Thebiographies of the Directors as at the date of thisreport are given on pages 26 to 28.

In the Board’s opinion the Non Executive Directorsare independent of management and have nobusiness or other relationship which could interferematerially with the exercise of their judgement.

The Board has a schedule of regular meetingstogether with ad hoc meetings when required. Inaddition, Directors meet as members of relevantcommittees. The Board has reserved a formalschedule of matters for decisions such as strategy,the approval of financial statements andshareholder circulars, treasury policy, major capitalinvestments, risks management strategy,acquisitions and disposals and delegated someresponsibility to its committees.

The Chairman and the other Non Executive Directorsmeet without the Executive Directors present atleast once a year.

All Directors have access to the advice and servicesof the Company Secretary, who is responsible forensuring that Board procedures and applicable rulesand regulations are observed. There is an agreedprocedure for Directors to obtain independentprofessional advice, paid for by the Group.

In line with best practice, all Directors are requiredto offer themselves for re-election, at the AGM, atleast once every three years.

ChairmanNigel Turnbull, the Chairman, is a Non ExecutiveDirector. His other significant commitments aredisclosed in his biography on page 26. The Boardconsiders that these commitments do not hinder hisabilities to discharge his responsibilities to theCompany effectively.

Committees of the BoardThe Board’s Committees meet regularly to enablethem to discharge their responsibilities. Eachcommittee has terms of reference, which arereviewed annually by the Board. Copies areavailable from the Company Secretary on request.

Audit CommitteeThe Audit Committee comprises Nicholas Fry, LordPoole and Lord Razzall, all independent NonExecutive Directors. Nicholas Fry, a CharteredAccountant, is Chairman of the Committee withrecent and relevant financial experience as requiredby the Combined Code.

The Committee’s role is to review the scope of theexternal audit, to receive direct reports from theexternal and internal auditors and to review the halfyearly and annual financial statements before theyare presented to the Board, focussing in particularon accounting policies and compliance, areas ofmanagement judgement and estimates, and theeffectiveness of internal control procedures.

Corporate governance reportfor the year ended 31 December 2005

76510 Erinaceous Pt3 22/3/06 12:22 pm Page 38

39

The assessment of the effectiveness of the systemsof internal control include:

• review of internal and external audit plans;

• review of significant issues arising from internaland external audits; and

• risk management framework.

The Audit Committee’s terms of reference addressthe provisions in the Combined Code in relation tothe Audit Committees and auditors. The Board andthe Audit Committee monitor the cost effectivenessof audit and non-audit work performed by theauditors and also considers the potential impact, ifany, on the corporate relationship andindependence of the auditors before awarding anynon-audit work.

The external auditors continue to operateprocedures to safeguard against the possibility thattheir objectivity and independence could becompromised. This includes the use of independentconcurring partners, use of a technical review board(where appropriate) and annual independenceconfirmations by all staff. The auditors report to theAudit Committee on matters includingindependence and non-audit fees on an annualbasis. In addition, the audit partner is rotated on aperiodic basis.

The Audit Committee is responsible for overseeingthe appointment and removal of the externalauditors and the head of group risk managementand internal audit. Internal audit reports directly tothe Audit Committee on matters of risk, complianceand internal control. The Audit Committee willreview the effectiveness of the internal auditfunction annually.

Nomination CommitteeThe Nomination Committee comprises Nigel Turnbullas Chairman, Lord Razzall and Lord Poole. TheCommittee is responsible for nominating candidatesfor appointment to the Board, review of thestructure of the Board and the Board’s ongoingrelevance to the nature of the business. TheCommittee ensure that relevant training andinduction requirements of any new Boardappointments are addressed.

The Nomination Committee met twice this year torecommend the appointment of Nicholas Fry andLord Poole. The Committee did not use an externalsearch consultancy.

All Non Executive Directors are fully aware of thetime commitment considered necessary to enablethem to fulfil their responsibilities.

Remuneration CommitteeThe Remuneration Committee comprises LordRazzall, Nicholas Fry and Keith Peraux. Lord Razzallchairs the Committee. The Committee has metseven times this financial year. The Directors’remuneration report on page 43 includes details ofthe Remuneration Committee and its work.

Executive CommitteeThe Executive Committee is currently chaired byNigel Turnbull and comprises the Executive Directorstogether with Ken Hackney (a former Boardmember) and Andy Halstead (currently actingmanaging director of insurance and residentiallettings).

The respective roles of the Board and the ExecutiveCommittee are discussed further on page 41.

Operations BoardThe Operations Board, chaired by Neil Bellis, theChief Executive was established in January 2006.The Operations Board consists of ExecutiveDirectors, managing directors of core business unitsand heads of corporate functions. The OperationsBoard mainly focusses on operational matters.



Board and Committee attendanceThe following table details the number of Board andCommittee meetings held during the year ended 31December 2005 and the attendance record of eachDirector.

Committee meetingsBoard —————————————————————

Meetings Audit Remuneration NominationNumber of meetings held in year 8 3 7 2

————— —————————————————————Neil Bellis 8 – 6(5) –Lucy Cummings 8 – 1(5) –Nigel Davis 8 – – –*Nicholas Fry (1) 7 2 4 –Michael Pearson 8 3(5) – –*Keith Peraux 8 – 7 –*Lord Poole (2) 5 2 3(5) –*Lord Razzall 7 2 6 2*Nigel Turnbull 8 2(3) 7(4) 2

* Non Executive Director

(1) Nicholas Fry was appointed as a Director in January 2005.

(2) Lord Poole was appointed as a Director in April 2005 and attended the Board meeting in April by invitation.

(3) Nigel Turnbull was a member of the Audit Committee until 22 April 2005. The meetings he attended thereafter were by invitation.

(4) Nigel Turnbull was the chairman of the Remuneration Committee until 22 April 2005. The meetings he attended thereafter were by invitation.

(5) Attendance by invitation (for all or part of the meeting).

Board performance evaluation and trainingThe Board is committed to ensuring its effectivenessand evaluates its performance together with that ofits Directors and Committees. The Chairman hascompleted an appraisal of the Board’s performancefor the first full year of its operation. In addition, theAudit Committee undertook a formal assessment ofits performance and audit process, which showedthe Board together with the Committee and theaudit process to be effective in identifying areas forimprovement.

The Non Executive Directors have met, without theChairman, to appraise the Chairman’s performance.

The Company has a continuing professionaldevelopment framework to assist the Chairman,Executive Directors and Non Executive Directors indischarging their responsibilities effectively. NonExecutive Directors meet regularly with members ofthe Executive Committee and receive regularbusiness updates via scheduled presentations.These, coupled with site visits, and open invitationto business divisional board meetings, ensure NonExecutive Directors gain a first hand experience ofdevelopments within the Group. External training isprovided as necessary.

Risk management and internal controlThe Board has accountability for reviewing andapproving the adequacy and effectiveness ofinternal controls operated by the Group, includingfinancial, operational and compliance controls andrisk management. It is the role of management toimplement the agreed policies on risk, complianceand control.

This is effected both by the Executive Committeeand the Operations Board.

The system of internal financial and operationalcontrol is designed to meet the Group’s particularneeds and aims to facilitate effective and efficientoperation, to safeguard the Group’s assets, ensureproper accounting records are maintained and thatthe financial information used within the business,and for publication, is reliable.

Such systems of internal control can only bedesigned to manage rather than eliminate risk offailure to achieve business objectives and canprovide reasonable, but not absolute, assuranceagainst material misstatement and loss.

Corporate governance report (continued)


41

The Board confirms that there is a continuingprocess for identifying, evaluating and managing therisks faced by the Group and that a process hasbeen in place for the majority of the year underreview. The Board’s continued commitment towardsrisk management and internal controls has resultedin the appointment of a head of group riskmanagement and internal audit. This process coversall of the Group’s subsidiaries.

The Audit Committee has reviewed the operationand effectiveness of the Group’s internal controls,which operated during the period covered by thefinancial statements, up to and including the dateof approval by the Board.

Key features on the system of the Group’s internalcontrol are as follows:

Group, organisation and cultureBy its statements and actions the Boardemphasises a culture of integrity, competence,fairness and responsibility.

The Board focusses mainly on strategic issues,senior management and financial performance. TheExecutive Committee concentrates on operationalperformance, operational decision-making and theformulation of strategic proposals to the Board. Themanaging directors of the business divisionsmanage their businesses with the support of seniormanagers. The Board determines how the ExecutiveCommittee and the individual businesses operatewithin a framework of delegated authorities.

Control environmentThe Group’s management systems include financialpolicies and procedures, business quality assurancemanuals and corporate health and safetyprocedures. These procedures are subject toongoing review and improvement.

Financial reportingThe Board approves annual budgets for individualbusiness divisions and the Group. The financialperformance of individual business divisions isreported regularly and compared to annual budgets.The Group reports to shareholders on a half-yearlybasis. Forecasts for the Group are updated andreviewed by the Board regularly.

Individual business controlsIndividual businesses and central corporatefunctions complete an annual self-certificationstatement. Responsible managers personallyconfirm the review of their systems of internalcontrol to manage significant risks identified withintheir divisional risk register and compliance withregulations. The statement also requires thereporting of any significant control issues that haveemerged so that areas of Group concern may beidentified, addressed and experience shared.

Businesses who undertake activities regulated bythe FSA have compliance officers within thedivisions. These officers undertake a programme ofcompliance reviews to ensure that the higheststandards are maintained. Where agents have beenappointed, the compliance teams undertake sitevisits to ensure appointed representatives adhere toFSA requirements. During the year the Group paidparticular attention to improving the corporategovernance arrangements within the insurancebusiness.

Functional speciality reportingThe Board assesses the risks facing the business onan ongoing basis and has identified a number ofother key areas, which are subject to regularreporting to the Board such as financialperformance, acquisition reports, human resources,and compliance.

Risk management reviewThe Board is committed to improving riskmanagement and internal control across the Group,and therefore will be establishing a Group RiskCommittee. The group risk management frameworkrequires divisions to record formally all significantrisks facing their businesses and detail the stepsbeing taken to avoid or mitigate those risks. Asummary of the key risks facing the Group will beplaced in risk registers, which will be reviewedregularly by the Board.

The Group maintains insurance policies to provideprotection from losses arising through claims fromclients. The Executive Committee reviews theadequacy of the Group’s insurance cover annually.

AcquisitionsThe Group operates a sound system of internalcontrols over business acquisitions. This is achievedthrough due diligence of the target Company andbusiness cases presented to the Board.

Following acquisitions, the Board is presented withan integration plan and financial and non-financialtargets are set for the newly acquired business.Performance is monitored and reported to the Boardas normal.



Internal auditThe internal audit function undertakes a programmeto address internal control, compliance and riskmanagement processes with particular reference tothe Turnbull report. Its conclusions arecommunicated to the relevant level of management.The function has a direct reporting responsibility tothe Audit Committee acting on behalf of the Board.

Investor relations The Board gives communication with allshareholders a high priority. The Annual and InterimReports are sent to all shareholders and allshareholders are invited to the Company’s AGM,which is attended by the full Board.

The Group’s website contains information on currentactivities, including press releases and changes inDirectors’ shareholdings during the year.

The Board welcomes the views of all shareholders.The Chief Executive and the Executive Directors holdregular investor meetings to ensure that investorsare aware of the performance and goals of theGroup. Separately, both the Chairman and theSenior Independent Non Executive Director willmake themselves available to shareholders ifrequested.

Throughout the year the Chief Executive and theExecutive Directors make presentations to investorson the Group’s performance. All such presentationsare available on the Group’s website to ensure thatthe Group’s stakeholders are kept informed aboutthe current and proposed performance of theGroup.

The Chief Executive and the Executive Directorsmeet with city and regional analysts and brokers.These meetings cover a wide range of relevantissues including strategy, performance,management and corporate governance. NonExecutive Directors are kept informed of the viewsof shareholders by the Chief Executive and theExecutive Directors as appropriate.

The Chief Executive and the Executive Directorsprovide regular reports to the Non ExecutiveDirectors on investor meetings. The Company’sbrokers provide briefings to the Board onshareholder movements.

The Annual Report is designed to present abalanced and understandable view of the Group’sactivities and prospects. The Chairman’s statement,and Group review provide a fair assessment of theGroup’s affairs and position.

Corporate governance report (continued)


43

The Remuneration Committee is responsible forsetting the level of executive remuneration and itscosts. The policy of the Remuneration Committee isto provide sufficient levels of remuneration toattract, retain and motivate Executive Directors, butto avoid paying more than is necessary for thispurpose. Each Executive Director’s remunerationpackage is reviewed annually and amended in linewith that individual’s performance, together withchanging market rates for similar roles incomparable companies. Lord Razzall (SeniorIndependent Non Executive Director) is Chairman ofthe Remuneration Committee. The other Committeemembers are Nicholas Fry and Keith Peraux. TheChairman and Chief Executive also attend theRemuneration Committee meetings by invitation.

The main elements of the Executive Directors’remuneration package are as follows:

• Executive Directors’ remuneration

Basic salaryThis is determined by the Committee by taking intoaccount the position and performance of theindividual, together with the performance of theGroup and the median comparative salaries incomparable companies.

Performance bonusesThe Executive Directors receive performancebonuses based upon the annual performance ofthat individual, their trading division whereappropriate and the Group as a whole. Theperformance measures used cover a range of areas,but are principally related to profitability andearnings per share growth over a twelve monthperiod. The Executive Directors’ bonus schemes for2006 will be capped at a maximum of 70% of basesalary for that year, and will have broadly similarperformance criteria as those noted below for2005.

Summaries of bonuses to be paid to the ExecutiveDirectors are as follows:

Neil Bellis Chief ExecutiveNeil will be paid a total bonus in respect of 2005 of£150,000. This represented 60% of his base salarycompared with a maximum bonus entitlement of60%. The bonus was payable in respect of thefinancial performance of the Group during 2005(40% paid compared to a maximum amountachievable of 40%) and non-financial matters (20%paid compared to a maximum amount payable of20%).

Lucy Cummings Commercial DirectorLucy will be paid a total bonus in respect of 2005of £129,000. This represented 60% of her basesalary compared with a maximum bonus entitlementof 60%. The bonus was payable in respect of thefinancial performance of the Group during 2005(40% paid compared to a maximum amountachievable of 40%) and non-financial matters (20%paid compared to a maximum amount payable of20%).

Michael Pearson Finance DirectorMichael will be paid a total bonus in respect of2005 of £61,600. This represented 44% of hisbase salary compared with a maximum bonusentitlement of 60%. The bonus was payable inrespect of the financial performance of the Groupduring 2005 (30% paid compared to a maximumamount achievable of 40%) and non-financialmatters (14% paid compared to a maximumamount payable of 20%).

Nigel Davis Chief Operating OfficerNigel will be paid a total bonus in respect of 2005of £78,000. This represented 50% of his basesalary compared with a maximum bonus entitlementof 60%. The bonus was payable in respect of thefinancial performance of the Group during 2005(40% paid compared to a maximum amountachievable of 40%) and non-financial matters (10%paid compared to a maximum amount payable of20%).

Directors’ remuneration reportfor the year ended 31 December 2005



The table on page 46 sets out a summary of theremuneration for the Executive Directors.

All Directors are able to participate in the Groupstakeholder pension and the Group medicalinsurance scheme, but this is by way of salarysacrifice; the Company makes no contribution toany Director’s pension scheme. The Company doesnot provide a company car to any Director.

• Erinaceous Group plc 2005 Long TermIncentive Plan

PolicyDuring the year the Remuneration Committeereviewed its share incentive policy and concludedthat the interests of shareholders and executiveswould be better aligned through the award of wholeshares rather than options. In order to effect thischange in policy the Erinaceous Group plc 2005Long Term Incentive Plan (“LTIP”) was approved byshareholders at the EGM in September 2005.

Under the rules of the LTIP, Executive Directors andcertain senior management are entitled to beconsidered for a grant of awards under the LTIP. Theeligible executives are awarded a conditional rightover a whole number of shares (“LTIP Award”) withthe release being dependent on the extent to which(if it all) the challenging performance conditions setby the Remuneration Committee at the time theLTIP Award is made are satisfied. The maximumannual LTIP Award is 100% of salary. Executives arealso entitled to receive a further award of matchingshares of up to 25% of salary, if they retain anyshares released under the LTIP or the optionscheme.

The performance condition for the grant of awardsunder the LTIP is set out below:

Level of Comparative TSR %age ofPerformance against FTSE all share LTIP Awardsupport services sector Released*

Median 25%

Upper Quartile 100%

*Straight line vesting between points.

In addition, no LTIP Awards will vest unless theCompany’s real average EPS growth over theperformance period is at least 5% per annum. Forthe first LTIP Awards, the base period fordetermining EPS growth over the three yearperformance period will be 13.9p, being theproforma earnings for 2004.

The Remuneration Committee believes thatcomparative total shareholder return (“TSR”) is themost appropriate measure to align shareholders’and executives’ interests. Comparative TSR wasselected as the performance condition for LTIPAwards by the Remuneration Committee as itensures that, before being entitled to receive any oftheir LTIP Awards, the executives outperformcompanies in the FTSE all share support servicesector over the measurement period in deliveringvalue irrespective of general market conditions.

In order to encourage the retention of shares at theend of the three year performance period, anyshares which are held for a further two years fromthe date of release of any LTIP Award may bematched subject to the satisfaction of the followingrequirements:

• continued employment throughout the two yearholding period; and

• the satisfaction of additional performancerequirements.

One matching share will be awarded for each fourshares retained where the Company’s comparativeTSR is at or above the median of the companies inthe FTSE all share support services sector over thetwo year period. Where performance is belowmedian then there will be no match.

Grants during the year The table on page 47 sets out the number of LTIPAwards granted to Directors during the year.

Directors’ remuneration report (continued)


45

• Erinaceous Group plc Share Option Scheme

Executive Directors and certain senior managementare entitled to participate in the Company’s shareoption scheme and options are granted at thediscretion of the Remuneration Committee. Allshare options granted during the year are subject toperformance related vesting conditions that requireearnings per share of the Group to out-growinflation by 7% per annum. This earnings per sharegrowth is tested throughout the vesting periodallowing options that would not vest under theseconditions in the initial years to subsequently vest inlater years.

Granting of share options throughout 2005 andgoing forward has been restricted to the £30,000limit per individual available under the InlandRevenue Approved scheme. The Committee nowuses Long Term Incentive Plans instead of shareoptions where more substantial long term equityplans are considered desirable.

The table on page 47 sets out the options held byDirectors at 31 December.

• Inland Revenue Approved Erinaceous ShareIncentive Plan (SIP)

The SIP was approved by the Company at theAnnual General Meeting held on 22 April 2005.

The Board is keen to give all employees theopportunity to invest in the Company.

The Company is currently offering eligibleemployees, including Executive Directors and seniormanagement, the opportunity of purchasing £1,500of shares per annum out of pre-tax salary, andproviding additional matching shares on a onematching share for every four shares purchasedbasis.

These matching shares will normally be releasedthree years after they have been awarded providedthat the associated shares purchased by theemployee have been retained, and provided that theemployee is still employed by a Group company atthe time.

Details of shares held in the SIP by ExecutiveDirectors are set out on page 48.

• Inland Revenue Approved ErinaceousSharesave Plan

The Sharesave plan was approved by the Companyat the Annual General Meeting held on 22 April2005.

One invitation has been made to eligible employeesin 2005 to apply for options under the scheme tobe paid for by way of monthly contributions from theemployee’s post-tax salary.

Details of Directors who participate in theSharesave plan are set out in the table on page 48.

• Executive directors’ contracts

All Executive Directors have rolling contracts withtwelve month notice provisions.

• Appointment of Directors

The appointment of any Executive or Non ExecutiveDirector is subject to the approval of theNomination Committee. Any Director appointed issubject to re-appointment by shareholders at thenext Annual General Meeting following theirappointment.

• Non Executive Directors

Non Executive Directors are paid annual fees set bythe Board as a whole. All Non Executive Directorsare subject to three month notice provisions. Theirremuneration is as shown in the table on page 46.



• Performance graph

The graph below shows the Group’s total shareholder returns compared to the FTSE all share support servicesindices with the latter rebased to the Group’s share price on its flotation in November 2003.

Audited information

• Directors’ remuneration

Salary and Salary andfees Holiday pay Bonus Total fees Bonus Total

2005 2005 2005 2005 2004* 2004* 2004*£’000 £’000 £’000 £’000 £’000 £’000 £’000

ExecutiveN Bellis 250 14 150 414 133 63 196L Cummings 215 13 129 357 125 52 177N Davis 156 – 78 234 33 36 69M Pearson 140 1 62 203 87 47 134

Non ExecutiveN Fry (1) 28 – – 28 – – –K Peraux 30 – – 30 13 – 13Lord Poole (1) 20 – – 20 – – –Lord Razzall 30 – – 30 19 – 19N Turnbull 82 – – 82 32 20 52

Former DirectorsJ Gooding (2) – – – – 36 – 36K Hackney (3) 76 – – 76 104 10 114D Innes (4) 88 – 23 111 102 11 113

1,115 28 442 1,585 684 239 923

(1) Appointed during the year(2) Resigned 25 January 2005(3) Resigned 15 March 2005(4) Resigned 15 March 2005* nine month period

The Company makes no contribution to Directors’ pension schemes and does not provide a company car.

28/2/06

2004 2005

80

100

120

140

160

180

200

220

240

260

280

300

FTSE ALL SHARE SUPPORT SVS £ - TOT RETURN IND (~£ )ERINACEOUS - TOT RETURN IND (~£ )

Source: Thomson Datastream



47

• Erinaceous Group plc 2005 Long Term Incentive Plan

Market price No. of No. ofDate of at date of Vesting Awards as Granted Awards as atAward Award period at 01/01/05 during year 31/12/2005

N Bellis 05-Sep-05 £2.63 3-10 years – 95,147 95,147 L Cummings 05-Sep-05 £2.63 3-10 years – 81,826 81,826 N Davis 05-Sep-05 £2.63 3-10 years – 59,372 59,372 M Pearson 05-Sep-05 £2.63 3-10 years – 53,282 53,282

• Erinaceous Group plc Share Option Scheme

No. of options as at

No. of Granted/ 31/12/2005Date of Exercise Exercise options as Exercised (Lapsed) or date of

grant price period at 01/01/05 during year during year resignation

N Bellis 06-Apr-03 £1.00 3-10 years 170,000 – – 170,000 31-Jul-03 £1.00 3-10 years 30,000 – – 30,000

L Cummings 06-Apr-03 £1.00 3-10 years 170,000 – – 170,000 31-Jul-03 £1.00 3-10 years 30,000 – – 30,000

N Davis (1) 30-Oct-04 £0.29 1-8 years 200,421 – – 200,421 30-Oct-04 £0.80 1-8 years 98,235 – – 98,235 30-Oct-04 £1.85 1-8 years 45,644 – – 45,644

J Gooding (1)(2) 30-Oct-04 £0.88 1-8 years 109,150 – – 109,150K Hackney (3) 06-Apr-03 £1.00 3-10 years 200,000 – – 200,000 D Innes (4) 06-Apr-03 £1.00 3-10 years 170,000 – – 170,000

31-Jul-03 £1.00 3-10 years 30,000 – – 30,000 M Pearson 06-Apr-03 £1.00 3-10 years 200,000 – – 200,000

(1) The options issued to N Davis and J Gooding were issued under the roll-over provisions offered to holders of existing Hercules PropertyServices plc share options following its acquisition. As a result their terms mirror those Hercules share options in having no performancevesting conditions and they are exercisable at an earlier date. N Davis also potentially holds a total of 12,677 shares under the HerculesAESOP plan.

(2) J Gooding resigned from the Board on 25 January 2005 and on 15 March 2005 exercised an option over 109,150 shares and sold all ofthe shares at a price of £2.40 per share, giving rise to a gain of £165,908.

(3) Resigned 15 March 2005.

(4) D Innes resigned from the Board on 15 March 2005 and on 7 July 2005 exercised an option over 200,000 shares and sold all of theshares at a price of £2.49 per share, giving rise to a gain of £298,000.

For all Directors except N Davis the share options issued will only vest fully if earnings per share growth exceedsRPI plus 7% per annum from the base figures for the year ended 31 March 2003.



• Inland Revenue Approved Erinaceous Share Incentive Plan (SIP)

Operated from July 2005No. of Partnership (1) No. of Matching (2) Total no. of Partnership Total no. of Matching shares purchased to shares awarded to shares held at the shares held at the

31/12/05 31/12/05 date of this report date of this report

N Bellis 217 54 285 71 L Cummings 217 54 285 71 N Davis 217 54 285 71

(1) Partnership shares are ordinary shares of the Company purchased on a monthly basis (at prices from £2.75 to £2.98)

(2) Matching shares are ordinary shares of the Company awarded on a monthly basis (at prices from £2.75 to £2.98) in conjunction withshare purchases.

• Inland Revenue Approved Erinaceous Sharesave Plan

No. of Granted/ No. ofDate of Exercise Exercise options as Exercised (Lapsed) options as at

grant price period at 01/01/05 during year during year 31/12/2005

N Bellis 07-Jul-05 £2.15 5 years – – 7,686 7,686 L Cummings 07-Jul-05 £2.15 5 years – – 7,686 7,686 N Davis 07-Jul-05 £2.15 5 years – – 7,686 7,686

• Directors’ interests in shares

Ordinary shares Ordinary sharesat 31/12/05 at 31/12/04

or date of or date ofresignation appointment

N Bellis Personal shareholding 7,920,340 7,920,340Close family shareholding 972,752 972,752

L Cummings 7,912,840 7,910,340N Davis 5,927 3,427N Fry 20,000 –K Hackney (1) 653,986 653,986D Innes (1) 7,001,116 7,001,116M Pearson 76,300 76,300K Peraux 1,467,908 1,467,908D Poole – –Lord Razzall Controlled company 9,400 9,400N Turnbull Personal shareholding 47,170 47,170

Close family shareholding 5,000 –Controlled company 40,266 40,266

(1) Resigned 15 March 2005



49

There have been no changes in Directors’ interests between the year end (31 December 2005) and the date ofthis report save for the following:

(i) On 10 January 2006 K Peraux sold 750,000 shares at a price of 310p per share.

(ii) N Bellis, L Cummings and N Davis each acquired a beneficial interest in further shares purchased under theSIP.

The current Directors’ interests in shares as at the date of this report are therefore as disclosed in the abovetable with the exception of K Peraux who has a shareholding of 717,908 shares.

The market price of an ordinary share of 0.5p in the Company at 31 December 2005 was 308.8p(31 December 2004: 196.5p) and the highest and lowest market prices during the year were 316p and 185p.

This report has been approved by the Board of Directors and has been signed on behalf of the Board by:

Lord RazzallChairman of the Remuneration Committee15 March 2006



We have audited the Group financial statements ofErinaceous Group plc for the year ended 31December 2005 which comprise the Consolidatedbalance sheet, the Consolidated cash flowstatement, the Consolidated statement of changesin equity and notes 1 to 39. These Group financialstatements have been prepared under theaccounting policies set out therein.

We have reported separately on the parentCompany financial statements of Erinaceous Groupplc for the year ended 31 December 2005 and theinformation in the Directors’ remuneration reportthat is described as having been audited.

This report is made solely to the Company’smembers, as a body, in accordance with Section235 of the Companies Act 1985. Our audit workhas been undertaken so that we might state to theCompany’s members those matters we are requiredto state to them in an auditors’ report and for noother purpose. To the fullest extent permitted bylaw, we do not accept or assume responsibility toanyone other than the Company and the Company’smembers as a body, for our audit work, for thisreport, or for the opinions we have formed.

• Respective responsibilities of Directors andauditors

The Directors’ responsibilities for preparing theAnnual Report and the Group financial statementsin accordance with United Kingdom law andInternational Financial Reporting Standards (IFRSs)as adopted by the European Union are set out inthe statement of Directors’ responsibilities.

Our responsibility is to audit the Group financialstatements in accordance with relevant legal andregulatory requirements and International Standardson Auditing (UK and Ireland).

We report to you our opinion as to whether theGroup financial statements give a true and fair viewand whether the Group financial statements havebeen properly prepared in accordance with theCompanies Act 1985 and Article 4 of the IASRegulation. We also report to you if, in our opinion,the Directors’ report is not consistent with theGroup financial statements, if we have not receivedall the information and explanations we require forour audit, or if information specified by lawregarding director’s remuneration and othertransactions is not disclosed.

We review whether the Corporate governance reportreflects the Company’s compliance with the nineprovisions of the 2003 FRC Combined Codespecified for our review by the Listing Rules of theFinancial Services Authority, and we report if it doesnot. We are not required to consider whether theBoard’s statements on internal control cover allrisks and controls, or form an opinion on theeffectiveness of the Group’s corporate governanceprocedures or its risk and control procedures.

We read other information contained in the AnnualReport and consider whether it is consistent withthe audited Group financial statements. The otherinformation comprises only the Financial highlights,the Directors’ report, the Chairman’s statement, theGroup review, the Business stream overview, Ourlocations, Directors and officers. Corporate andsocial responsibility report, the Corporategovernance report, the Directors’ remunerationreport, and the Five year summary. We consider theimplications for our report if we become aware ofany apparent misstatements or materialinconsistencies with the Group financial statements.Our responsibilities do not extend to any otherinformation.

Report of the independent Auditor on theconsolidated accountsto the Members of Erinaceous Group plc


51

• Basis of audit opinion

We conducted our audit in accordance withInternational Standards on Auditing (UK and Ireland)issued by the Auditing Practices Board. An auditincludes examination, on a test basis, of evidencerelevant to the amounts and disclosures in theGroup financial statements. It also includes anassessment of the significant estimates andjudgments made by the Directors in the preparationof the Group financial statements, and of whetherthe accounting policies are appropriate to theGroup’s circumstances, consistently applied andadequately disclosed.

We planned and performed our audit so as toobtain all the information and explanations whichwe considered necessary in order to provide us withsufficient evidence to give reasonable assurancethat the Group financial statements are free frommaterial misstatement, whether caused by fraud orother irregularity or error. In forming our opinion wealso evaluated the overall adequacy of thepresentation of information in the Group financialstatements.

• Opinion

In our opinion:

• the Group financial statements give a true andfair view, in accordance with IFRSs as adopted bythe European Union, of the state of the Group’saffairs as at 31 December 2005 and of its profit forthe year then ended; and

• the Group financial statements have beenproperly prepared in accordance with theCompanies Act 1985 and Article 4 of the IASRegulation.

• Separate opinion in relation to IFRSs

As explained in Note 1 to the Group financialstatements, the Group in addition to complying withits legal obligation to comply with IFRSs as adoptedby the European Union, has also complied with theIFRSs as issued by the International AccountingStandards Board.

In our opinion the Group financial statements give atrue and fair view, in accordance with IFRSs, of thestate of the Group’s affairs as at 31 December2005 and of its profit for the year then ended.

Grant Thornton UK LLPRegistered AuditorsChartered AccountantsLondon Thames Valley OfficeSlough15 March 2006

Note: The maintenance and integrity of theErinaceous Group plc website is the responsibility ofthe Directors. The work carried out by the auditorsdoes not involve consideration of these mattersand, accordingly, the auditors accept noresponsibility for any changes that may haveoccurred to the financial statements since they wereinitially presented on the website.

Legislation in the United Kingdom governing thepreparation and dissemination of the financialstatements may differ in other jurisdictions.



Consolidated income statementfor the year ended 31 December 2005

Year Nine monthsended ended2005 2004

Notes £m £m

Revenue 2 151.8 67.5Cost of sales (44.0) (21.8)

Gross profit 107.8 45.7Administrative expenses - general (80.0) (39.3)

Adjusted profit from operations 27.8 6.4Profit on sale of non-current assets 3 0.7 –Restructuring costs 4 (1.6) (4.1)

Profit from operations 2,4 26.9 2.3Finance costs 6 (4.2) (0.8)Investment income 7 0.5 0.1

Profit before taxation 23.2 1.6Income tax expense 8 (5.8) (0.4)

Profit for the period 17.4 1.2

Earnings per shareBasic earnings per share (pence) 9 18.1p 2.3p

Diluted earnings per share (pence) 9 17.4p 2.2p

DividendsProposed dividend per share (pence) 10 4.25p 2.25p

Proposed dividend (£m) 10 4.4 2.0

Dividend paid during the period (pence) 10 6.75p 1.75p

Dividend paid during the period (£m) 10 6.4 0.8

The accompanying accounting policies and notes form an integral part of these financial statements.


Consolidated balance sheetfor the year ended 31 December 2005

2005 2004Notes £m £m

Non-current assetsGoodwill 11 206.2 118.7Property, plant and equipment 12 22.3 22.0Long term financial assets 13 0.5 1.1

229.0 141.8

Current assetsInventories 14 4.2 4.6Trade and other receivables 15 47.4 34.5Cash and cash equivalents 16 23.8 17.8

75.4 56.9

Total assets 304.4 198.7

Current liabilitiesTrade and other payables 17 59.7 50.1Borrowings 18 10.3 4.1Tax liabilities 6.8 1.6

76.8 55.8

Non-current liabilitiesOther payables 19 22.8 7.8Borrowings 20 69.6 39.4Retirement benefit obligation 21 0.3 0.1Other provisions 22 1.3 –Deferred tax 23 0.1 0.3

94.1 47.6

Total liabilities 170.9 103.4


Equity attributable to equity holders of the parentShare capital 24 0.5 0.5Share premium 25 17.6 16.5Shares to be issued 25 0.9 1.6Treasury shares 25 (2.2) –Other reserves 25 101.2 74.9Retained earnings 25 15.5 1.8

Total equity 133.5 95.3

These financial statements on pages 52 to 90 were approved by the Board of Directors and authorised forissue on 15 March 2006, and are signed on its behalf by:

Neil BellisDirector


53



Consolidated statement of changes in equityfor the year ended 31 December 2005

Share Share Shares to Treasury Other Retainedcapital premium be issued shares reserves earnings Total

£m £m £m £m £m £m £m

Balance at 31 March 2004– as originally stated 0.2 15.4 – – 10.0 3.5 29.1– changes in accounting policy

relating to first-time application of IFRS (note 1b) – – 0.2 – – 0.5 0.7

0.2 15.4 0.2 – 10.0 4.0 29.8

Fair value adjustment in respect of available for sale financial assets – – – – – (0.6) (0.6)

Net costs recognised directly in equity – – – – – (0.6) (0.6)

Profit for the period – – – – – 1.2 1.2

Total recognised income and expense for the period – – – – – 0.6 0.6

Dividends – – – – – (2.8) (2.8)Issue of share capital 0.3 0.5 – – 64.9 – 65.7Equity share options issued – 0.6 0.4 – – – 1.0Shares to be issued – – 1.0 – – – 1.0

Balance at 31 December 2004 0.5 16.5 1.6 – 74.9 1.8 95.3

Release of fair value adjustment in respect of available for sale financial assets – – – – – 0.6 0.6

Net income recognised directly in equity – – – – – 0.6 0.6

Profit for the period – – – – – 17.4 17.4

Total recognised income and expense for the period – – – – – 18.0 18.0

Dividends – – – – – (4.3) (4.3)Issue of share capital – – (1.0) – 27.7 – 26.7Cost of issue of shares – – – – (1.4) – (1.4)Equity share options issued – – 0.3 – – – 0.3Equity share options exercised – 1.1 – – – – 1.1Treasury shares purchased – – – (2.2) – – (2.2)

Balance at 31 December 2005 0.5 17.6 0.9 (2.2) 101.2 15.5 133.5



Consolidated cash flow statementfor the year ended 31 December 2005


Notes £m £m

Cash flows from operating activitiesProfit from operations 26.9 2.3Adjustments for:

Depreciation 2.3 1.5Restructuring costs 1.6 4.1Share option costs provided for 0.3 0.4

Decrease/(increase) in inventories 3.0 (0.1)(Increase)/decrease in debtors (4.5) 0.1Decrease in creditors (3.6) (1.0)Cash outflow in respect of restructuring costs and exceptional items (4.1) (1.7)

Cash generated from operations 21.9 5.6Income taxes paid (3.3) (1.8)Interest paid (4.2) (0.8)

Net cash from operating activities 14.4 3.0

Cash flows from investing activitiesInterest received 0.5 0.1Proceeds of disposal of property, plant and equipment 6.9 0.1Purchases of property, plant and equipment 12 (3.8) (2.1)Deferred consideration payments (3.2) (3.2)Acquisition of subsidiaries (48.6) (7.4)

Net cash used in investing activities (48.2) (12.5)

Cash flows from financing activitiesDividends paid 10 (6.4) (0.8)Repayments of bank borrowings (10.4) (31.8)New bank loans raised 41.0 42.5Issue of shares 24 14.5 1.0Purchase of treasury shares (2.2) –Receipts in respect of subsidiary share options – 6.2

Net cash from financing activities 36.5 17.1

Net increase in cash and cash equivalents 2.7 7.6Cash and cash equivalents at beginning of period 16.8 9.2

Cash and cash equivalents at end of period 29 19.5 16.8

This format represents the indirect method of determining operating cash flow.


55


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Notes to the consolidated financial statementsfor the year ended 31 December 2005

Note 1a. Presentation of financial statementsThe financial statements have been prepared in accordance with International Financial Reporting Standards(IFRS) as adopted by the EU.

The financial statements are presented in Great British pounds since this is the currency in which themajority of the Group’s transactions are denominated.

The consolidated financial statements of the Group have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS) as developed and published by the International Accounting StandardsBoard (IASB).

Note 1b. First-time adoption of International Financial Reporting StandardsIn the current year, the Group has adopted International Accounting and Financial Reporting Standards forthe first time in its consolidated financial statements. The change from UK GAAP to IFRS was mandatory for31 December 2005, to comply with the listing rules in the UK for all listed groups.

The Group has applied IFRS 1 First time adoption of International Financial Reporting Standards to provide astarting point for reporting under International Financial Reporting Standards. The date of transition toInternational Financial Reporting Standards was selected as 1 April 2004 and all comparative information inthese financial statements has been restated to reflect the Group’s adoption of International FinancialReporting Standards.

The transition to IFRS reporting has resulted in a number of changes in the reported financial statements,notes thereto and accounting policies compared to previous annual reports.



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Note 1b. First-time adoption of International Financial Reporting Standards – continued

Reconciliation of equity at 1 April 2004The effect of the changes to the Group’s accounting policies on the equity of the Group at the date oftransition, 1 April 2004 were as follows:

As reported Effect ofunder previous transition to

GAAP IFRS IFRSItem £m £m £m

Goodwill 1 25.4 0.3 25.7Property, plant and equipment 9.8 – 9.8

Total non-current assets 35.2 0.3 35.5

Trade and other receivables 12.4 – 12.4Cash and cash equivalents 9.2 – 9.2

Total current assets 21.6 – 21.6

Total assets 56.8 0.3 57.1

Trade and other payables 2 18.0 (0.8) 17.2Borrowings 0.8 – 0.8Tax liabilities 1.5 – 1.5

Total current liabilities 20.3 (0.8) 19.5

Other payables 2.5 – 2.5Borrowings 4.8 – 4.8Retirement benefit obligation 3 – 0.1 0.1Deferred tax 4 0.1 0.3 0.4

Total non-current liabilities 7.4 0.4 7.8

Total liabilities 27.7 (0.4) 27.3

Net assets 29.1 0.7 29.8

Share capital 0.2 – 0.2Share premium 15.4 – 15.4Shares to be issued 5 – 0.2 0.2Other reserves 10.0 – 10.0Retained earnings 6 3.5 0.5 4.0

Total equity 29.1 0.7 29.8

Notes to the reconciliation of equity at 1 April 2004

1. Deferred tax adjustment in respect to property revaluation of £0.3m.

2. Reversal of dividend accrual of £0.8m.

3. A pension liability of £0.1m is recognised under IFRS, but was not recognised under previous GAAP, which used acontributions payable basis.


5. Inclusion of costs in respect of share options as required under IFRS of £0.2m.

6. The adjustments to retained earnings are as follows:

Reverse dividend accrual (note 2) £0.8mShare option cost provision (note 5) £(0.2)mPension liability (note 3) £(0.1)m

—————Total adjustment to retained earnings £0.5m—————


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Reconciliation of equity at 31 December 2004The effect of the changes to the Group’s accounting policies on the equity of the Group at the date oftransition, 31 December 2004 were as follows:



Goodwill 1 115.3 3.4 118.7Property, plant and equipment 22.0 – 22.0Long term financial assets 1.1 – 1.1

Total non-current assets 138.4 3.4 141.8

Inventories 4.6 – 4.6Trade and other receivables 34.5 – 34.5Cash and cash equivalents 17.8 – 17.8

Total current assets 56.9 – 56.9

Total assets 195.3 3.4 198.7

Trade and other payables 2 51.9 (1.7) 50.2Borrowings 4.0 – 4.0Tax liabilities 1.6 – 1.6

Total current liabilities 57.5 (1.7) 55.8

Other payables 7.8 – 7.8Borrowings 39.4 – 39.4Retirement benefit obligation 3 – 0.1 0.1Deferred tax 4 – 0.3 0.3

Total non-current liabilities 47.2 0.4 47.6

Total liabilities 104.7 (1.3) 103.4

Net assets 90.6 4.7 95.3

Share capital 0.5 – 0.5Share premium 16.5 – 16.5Shares to be issued 5 0.9 0.7 1.6Other reserves 74.9 – 74.9Retained earnings 6 (2.2) 4.0 1.8

Total equity 90.6 4.7 95.3

Notes to the reconciliation of equity at 31 December 2004

1. Reverse goodwill amortisation for the period of £3.1m. Deferred tax adjustment in respect to property revaluation of £0.3m.

2. Reversal of dividend accrual of £1.7m.

3. A pension liability of £0.1m is recognised under IFRS, but was not recognised under previous GAAP, which used acontributions payable basis.


5. Inclusion of costs in respect of share options as required under IFRS of £0.7m.

6. The adjustments to retained earnings are as follows:

Goodwill amortisation (note 1) £3.1mReverse dividend accrual (note 2) £1.7mShare option cost provision (note 5) £(0.7)mPension liability (note 3) £(0.1)m

—————Total adjustment to retained earnings £4.0m—————



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Reconciliation of income statementfor the period ended 31 December 2004



Revenue 67.5 – 67.5 Cost of sales (21.8) – (21.8)

Gross profit 45.7 – 45.7 Administrative expenses – general 1 (42.0) 2.7 (39.3)Restructuring costs (4.1) – (4.1)

Profit from operations (0.4) 2.7 2.3 Finance costs (0.8) – (0.8)Investment income 0.1 – 0.1Investments – fair value adjustment 2 (0.6) 0.6 –

Profit before taxation (1.7) 3.3 1.6 Income tax expense (0.4) – (0.4)

(Loss)/profit for the period (2.1) 3.3 1.2

Earnings per shareBasic earnings per share (pence) (3.7)p 6.0p 2.3p

Diluted earnings per share (pence) (3.7)p 5.9p 2.2p

Notes to the reconciliation of income statement to 31 December 2004

1. Reverse goodwill amortisation for the period of £3.1m. Inclusion of costs in respect of share options as required under IFRSof £0.4m.

2. Reclassification of fair value adjustment in respect of available for sale financial assets to equity movement of £0.6m.

Reconciliation of cash flow statementUnder IFRS, the consolidated cash flow statement reconciles the movements in cash and cash equivalents,whereas in the last audited UK GAAP financial statements it reconciled the movements in cash only. Thereare no material differences between the IFRS and UK GAAP cash flow statements. There has been anumber of minor reclassifications, for example interest paid is now classified in net cash from operatingactivities, under UK GAAP it was reported in returns on investments and servicing of finance, equitydividends are now classified in cash flows from financing activities under UK GAAP it was reportedseparately.

Statement of complianceThe transition to IFRS has been prepared in accordance with the requirements of IFRS 1 – First timeadoption of International Financial Reporting Standards.

The Group has prepared its first full set of IFRS financial statements for the year ended 31 December 2005.The change from UK GAAP to IFRS was mandatory on this date to comply with security exchange regulationsof the UK for all listed groups. The date of transition to IFRS for the Group was 1 April 2004. A summary ofthe accounting policies applied in the preparation of these financial statements is given below. Thesepolicies have been consistently applied to all the periods presented. The impact of the transition from UKGAAP to IFRS is explained in the notes to the financial statements.

Basis of preparationThe financial statements have been prepared on the historical cost basis and in accordance with therequirements of International Financial Reporting Standard 1, First time adoption of International FinancialReporting Standards, IFRS 1 requires full retrospective application on all applicable accounting standards,but exemptions are permitted in specific areas. The Group has elected to make use of the followingexemptions:


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Business combinationsThe Group has elected not to apply IFRS 3 – Business Combinations retrospectively to businesscombinations prior to 1 April 2004.

Share based paymentThe Group has applied IFRS 2 – Share Based Payment retrospectively to equity instruments granted after 7November 2002 and vesting on or after 1 January 2005.

Note 1c. Summary of significant accounting policiesThe significant accounting policies that have been used in the preparation of these consolidated financialstatements are summarised below.

The consolidated financial statements have been prepared on the historical cost basis except for therevaluation of certain properties and certain financial assets and liabilities. The measurement bases aremore fully described in the accounting policies.

It should be noted that accounting estimates and assumptions are used in preparing the financialstatements. Although these estimates are based on management’s best knowledge of current events andactions, actual results may ultimately differ from those estimates.

Note 1c – 1 Basis of consolidationThe consolidated financial statements incorporate the financial statements of the Company and entitiescontrolled by the Company (its subsidiaries) made up to 31 December each year. Control is achieved wherethe Company has the power to govern the financial and operating policies of an investee entity so as toobtain benefits from its activities. The Group obtains and exercises control through voting rights.

On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fairvalues at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiablenet assets acquired is recognised as goodwill. Subsidiaries are accounted for under the purchase method.

All intra Group transactions, balances, income and expenses are eliminated on consolidation.

IFRS 3 Business Combinations has been applied to all acquisitions after the transitional date but not to anyacquisitions made prior to that date. This applies to all acquisitions made in the current financial year,please refer note 31 for complete details.

Note 1c – 2 GoodwillGoodwill on acquisitions is initially measured at cost being the excess of the cost of the businesscombination over the Group’s interest in the provisional fair value of the identifiable net assets. Goodwill isrecognised as an asset of indefinite economic life. Goodwill is not amortised and is reviewed for impairmentat least annually.

Where at the date of acquisition, a full and reliable fair value exercise cannot be completed, those fairvalues will be deemed provisional, and the Group may reassess those fair values within 12 months of theacquisition date.

Deferred consideration on acquisitions is provided based on the Directors’ best estimate of the liability atthe balance sheet date. The liability is discounted and an imputed interest charge is included in the incomestatement.

On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profitor loss on disposal.

Goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous UKGAAP amounts subject to being tested for impairment at that date.



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Note 1c. Summary of significant accounting policies – continued

Note 1c – 3 ImpairmentAt each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assetswith finite lives to determine whether there is any indication that those assets have suffered an impairmentloss. If any such indication exists, the fair value of the assets is estimated in order to determine the extentof the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individualasset, the Group estimates the recoverable amount of the cash-generating unit to which the goodwillbelongs.

Goodwill arising on acquisition is allocated to cash-generating units. The recoverable amount of the cash-generating unit to which goodwill has been allocated is tested for impairment annually, or on such otheroccasions that events or changes in circumstances indicate that it might be impaired.

Any impairment is recognised immediately in the profit and loss account as part of other operating expensesand is not subsequently reversed.

Note 1c – 4 Other intangible fixed assetsFor acquisitions of businesses, the Group recognises separately from goodwill, intangible assets providedthey are separable, or arise from contractual or other legal rights and their fair value can be measuredreliably. Where the intangible assets recognised have finite lives their fair value is amortised on a straightline basis over those lives, subject to reviews for impairment when events or change of circumstanceindicate that the carrying value may not be recoverable using cash flow projections. To the extent carryingvalues exceed fair values, an impairment is recognised and charged to the profit and loss account in thatperiod.

Note 1c – 5 Revenue recognitionRevenue is measured at the fair value of the consideration received or receivable and represents amountsreceivable for services provided in the normal course of business, net of discounts, VAT and other salesrelated taxes.

Revenue in the residential property services division comprises fees for building consultancy, propertymanagement fees in respect of the public and private sectors, fees for facilities services delivery, incomefrom products and services supplied to the residential lettings agent industry and commissions on otherservices provided where these relate principally to residential properties together with rent and rental incomeincluding in respect of owned properties.

Revenue in the commercial property services division comprises fees for building consultancy, propertymanagement fees in respect of the public and private sectors, fees for facilities services delivery,commissions on other services provided and other transactional services where these relate principally tocommercial properties.

Revenue in both the residential and commercial property services divisions is recorded on an accruals basis.Revenue is accrued for services provided by the accounting date but not invoiced and deferred if servicesare invoiced but not fully provided by the accounting date. Revenue on term projects and on-goingmanagement is spread over the period in which the services are being provided.

Revenue in the property insurance services division comprises brokering and insurance commissionsrecognised on the date the policy commences, risk management and other consulting services recognisedwhen the services are provided, and ongoing service provision (including claims handling) which is deferredover the period services are being provided.


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Note 1c – 6 Property, plant and equipmentProperty, plant and equipment are stated at cost less accumulated depreciation and any recognisedimpairment loss.

Depreciation is calculated to write down the cost less estimated residual value of all property, plant andequipment other than freehold land by equal annual instalments over their expected useful life. The ratesgenerally applicable are:

Freehold buildings 2%Freehold improvements 2%Leasehold improvements 10%Motor vehicles 25%Fixtures and fittings 20%Computer equipment 33%

The gain or loss arising on the disposal or retirement of an asset is determined as the difference betweenthe sales proceeds and the carrying amount of the asset and is recognised in profit from operations.

Note 1c – 7 Finance leasesAssets held under finance leases and hire purchase contracts are capitalised at their fair value on theinception of the leases and depreciated over their estimated useful life. The finance charges are allocatedover the period of the lease in proportion to the capital amount outstanding.

Note 1c – 8 Operating leasesCosts in respect of operating leases are charged on a straight-line basis over the lease term.

Note 1c – 9 TaxationThe tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit asreported in the income statement because it excludes items of income or expense that are taxable ordeductible in other years and it further excludes items that are never taxable or deductible. The Group’sliability for current tax is calculated using tax rates that have been enacted or substantively enacted by thebalance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amountsof assets and liabilities in the financial statements and the corresponding tax bases used in the computationof taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities aregenerally recognised for all taxable temporary differences and deferred tax assets are recognised to theextent that it is probable that taxable profits will be available against which deductible temporary differencescan be utilised. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initialrecognition of an asset or liability unless the related transaction is a business combination or affects tax oraccounting profit.

Deferred tax is calculated at the tax rates enacted or substantially enacted at the balance sheet date thatare expected to apply in the period when the liability is settled or the asset realised.

Note 1c – 10 Borrowing costsBorrowing costs attributable to the acquisition, construction or production of qualifying assets (which areassets that necessarily take a substantial period of time to get ready for their intended use or sale) areadded to the cost of those assets until such time as the assets are substantially ready for their intendeduse or sale. Investment income earned on the temporary investment of specific borrowings pending theirexpenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

All other borrowing costs are recognised in the period in which they are incurred.



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Note 1c – 11 Retirement benefit costsThe Group operates a defined benefit pension scheme, which requires contributions to be made toseparately administered funds. The cost of providing benefits under the scheme is determined using theprojected unit valuation method. Actuarial gains and losses are not recognised as an expense unless thetotal unrecognised gain or loss exceeds 10% of the greater of the obligation and the related plan assets.The amount exceeding this 10% corridor is charged or credited to the income statement, over the expectedaverage remaining working lives of the employees participating in the plans. Actuarial gains and losseswithin the 10% corridor are disclosed separately. Past service costs are recognised immediately in theincome statement, unless the changes to the pension plan are conditional on the employees remaining inservice for a specified period of time (the vesting period). In this case, the past service costs are amortisedon a straight line basis over the vesting period.

The contributions recognised in respect of defined contribution plans are expensed as they fall due.Liabilities and assets may be recognised if underpayment or prepayment has occurred and are included incurrent liabilities or current assets as they would be of a short nature.

Note 1c – 12 Cash and cash equivalentsCash and cash equivalents, for the purpose of the cash flow statement, comprises cash in hand anddeposits repayable on demand, less bank overdrafts, as well as short term highly liquid investments, thathave insignificant risk of change in value.

Note 1c – 13 Client monies and Insurance Broking Financial statements (“IBA”) cashThe Group manages certain client monies as part of its residential management activities. These moniesbelong to clients, but the Group has operational control over the monies in order to perform itsmanagement services. In common with other property services companies these monies are not recognisedin the Group balance sheet.

In addition the Group holds IBA cash in respect of its insurance activities. The use of this IBA cash isrestricted to the settlement of applicable insurance creditors. These are included as an asset on the balancesheet in common with insurance industry accounting practice.

Note 1c – 14 Share based paymentThe Group has applied the requirements of IFRS 2 – Share based payment. In accordance with thetransitional provisions IFRS 2 has been applied to all grants of equity instruments after 7 November 2002that were unvested as of 1 January 2005. All share based payments are equity settled.

All employee services received in exchange for the grant of any share-based remuneration are measured attheir fair values. These are indirectly determined by reference to the fair value of the share options awarded.Their value is appraised at the grant date and excludes the impact of any non-market vesting conditions (forexample, profitability and sales growth targets).

All share-based remuneration is ultimately recognised as an expense in the income statement with acorresponding credit to shares to be issued reserve, net of deferred tax where applicable. If vesting periodsor other vesting conditions apply, the expense is allocated over the vesting period, based on the bestavailable estimate of the number of share options expected to vest. Non-market vesting conditions areincluded in assumptions about the number of options that are expected to become exercisable. Estimatesare subsequently revised, if there is any indication that the number of share options expected to vest differsfrom previous estimates. No adjustment is made to expenses recognised in prior periods if fewer shareoptions ultimately are exercised than originally estimated.

Upon exercise of share options, the proceeds received net of any directly attributable transaction costs up tothe nominal value of the shares issued are allocated to share capital with any excess being recorded asadditional paid-in capital.

Fair value is measured by use of the Monte Carlo model. The expected life, volatility and dividend yield usedin the model has been derived based on management’s best estimate taking into account relevant factors.


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Note 1c – 15 InvestmentsAvailable for sale financial assets consist of investments in ordinary shares and therefore have no fixedmaturity date or interest rate and are re-measured to their fair value at the reporting date. Gains and lossesarising from securities classified as available for sale are recognised in the income statement when they aresold or when the investment is impaired, fair value movements are recognised as an equity movement.

In the case of impairment, any loss previously recognised in equity is transferred to the income statement.Losses recognised in the income statement on equity investments are not reversed through the incomestatement.

Note 1c – 16 InventoriesStock of ground rent properties, are stated at the lower of cost and net realisable value. Disposals arerecognised on completion; profits and losses arising are recognised through the income statement.

Stock of materials, are stated at the lower of cost and net realisable value.

Note 1c – 17 EquityShare capital is determined using the nominal value of shares that have been issued.

Share premium account includes any premiums received on the initial issuing of the share capital, unlessmerger relief is available. Any transaction costs associated with the issuing of shares are deducted fromadditional paid in capital, net of any related income tax benefits.

Retained earnings include all current and prior period results as disclosed in the income statement.

Shares to be issued reserve represents all share-based remuneration is ultimately recognised as an expensein income statement with a corresponding credit to shares to be issued reserve

Other reserves is the difference between total consideration satisfied by issue of shares and the nominalvalue of shares that have been issued, in respect of acquisitions where UK merger relief is available.

Note 1c – 18 ProvisionsProvisions are recognised when the Group has a present obligation as a result of a past event which it isprobable will result in an outflow of economic benefits that can be reasonably estimated

Note 1c – 19 Financial assetsFinancial assets include cash and financial instruments. Financial assets, other than hedging instruments,can be divided into the following categories: loans and receivables, financial assets at fair value through theincome statement, available-for-sale financial assets and held-to-maturity investments. Financial assets areassigned to the different categories by management on initial recognition, depending on the purpose forwhich the investments were acquired. The designation of financial assets is re-evaluated at every reportingdate at which a choice of classification or accounting treatment is available. All financial assets arerecognised on their settlement date. All financial assets that are not classified as at fair value throughincome statement are initially recognised at fair value, plus transaction costs.

Derecognition of financial instruments occurs when the rights to receive cash flows from the investmentsexpire or are transferred and substantially all of the risks and rewards of ownership have been transferred.An assessment for impairment is undertaken at least at each balance sheet date whether or not there isobjective evidence that a financial asset or a Group of financial assets is impaired.

Non-compounding interest and other cash flows resulting from holding financial assets are recognised in theincome statement when received, regardless of how the related carrying amount of financial assets ismeasured.



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Note 1c – 19 Financial assets – continuedHeld-to-maturity investments are non-derivative financial assets with fixed or determinable payments and afixed date of maturity. Investments are classified as held-to-maturity if it is the intention of the Group’smanagement to hold them until maturity. Held-to-maturity investments are subsequently measured atamortised cost using the effective interest method. In addition, if there is objective evidence that theinvestment has been impaired, the financial asset is measured at the present value of estimated cashflows. Any changes to the carrying amount of the investment are recognised in the income statement.

Financial assets at fair value through the income statement include financial assets that are either classifiedas held for trading or are designated by the entity to be carried at fair value through the income statementupon initial recognition. Subsequent to initial recognition, the financial assets included in this category aremeasured at fair value with changes in fair value recognised in the income statement. Financial assetsoriginally designated as financial assets at fair value through the income statement may not subsequentlybe reclassified. Available-for-sale financial assets include non-derivative financial assets that are eitherdesignated to this category or do not qualify for inclusion in any of the other categories of financial assets.All financial assets within this category are subsequently measured at fair value, unless otherwise disclosed,with changes in value recognised in equity, net of any effects arising from income taxes. Gains and lossesarising from securities classified as available-for-sale are recognised in the income statement when they aresold or when the investment is impaired.

In the case of impairment, any loss previously recognised in equity is transferred to the income statement.Losses recognised in the income statement on equity instruments are not reversed through the incomestatement.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are notquoted in an active market. They arise when the Group provides money, goods or services directly to adebtor with no intention of trading the receivables. Loans and receivables are subsequently measured atamortised cost using the effective interest method, less provision for impairment. Any change in their valueis recognised in the income statement. Trade receivables are provided against when objective evidence isreceived that the Group will not be able to collect all amounts due to it in accordance with the originalterms of the receivables. The amount of the write-down is determined as the difference between the asset’scarrying amount and the present value of estimated future cash flows.

Note 1c – 20 Financial liabilitiesThe Group’s financial liabilities include bank loans and overdrafts, trade and other payables and financeleasing liabilities. They are included in balance sheet line items ‘borrowings’ and ‘trade and other payables’.

Financial liabilities are recognised when the Group becomes a party to the contractual agreements of theinstrument. All interest related charges are recognised as an expense in finance cost in the incomestatement.

Bank loans are raised for support of long term funding of the Group’s operations. They are recognised atproceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement orredemption and direct issue costs, are charged to the income statement on an accrual basis using theeffective interest method and are added to the carrying amount of the instrument to the extent that they arenot settled in the period in which they arise.

Finance lease liabilities are measured at initial value less the capital element of lease repayments (see note1c – 7).

Trade payables are recognised initially at their nominal value and subsequently measured at amortised costless settlement payments.

Dividend distributions to shareholders are included in ‘other short term financial liabilities’ when thedividends are approved by the shareholders’ meeting, prior to the balance sheet date.


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Note 1c – 21 Financial risk managementThe Group uses financial instruments comprising bank loans, cash, term deposits and finance leases,together with various items such as trade debtors and trade creditors that arise directly from its operations.

The main risks arising from the financial instruments are interest rate risk and liquidity risk. The Boardreviews and agrees policies for managing these risks as detailed below.

Term deposits are structured so as to enable cash to be available when required. Most are in fixed interestrates. No transactions in derivatives are undertaken.

Note 1c – 22 Interest rate riskThe Group finances its operations through a mixture of shareholders’ funds and bank loans and overdrafts.The Group accepts the risk attached to interest rate fluctuations as interest remains a low proportion ofoperating profits.

Note 1c – 23 Liquidity riskThe Group manages liquidity risk by a combination of controls including:

– regular reviews at full board level of cash flow projections and headroom position in respect of bankingfacilities;

– maintaining sensible gearing levels across the Group; and

– ensuring excess facilities are readily available for future use.

Note 1c – 24 Currency riskThe Group does not operate in overseas markets nor (to any material extent) does it pay suppliers in non-sterling currencies. Hence management do not envisage any significant currency risk attached to the Groupfor all financial short term instruments (including debtors and creditors).

Note 2. Business and geographic segments – year ended 2005Residential Commercial Property

property property insurance Unallocated/services services services corporate Total

£m £m £m £m £m

Revenue 74.2 55.2 22.4 – 151.8

Adjusted profit/(loss) from operations 13.0 7.6 11.3 (4.1) 27.8Profit on sale of non-current assets – – – 0.7 0.7Restructuring costs – – – (1.6) (1.6)

Profit from operations 13.0 7.6 11.3 (5.0) 26.9Net interest – – – (3.7) (3.7)Tax expense – – – (5.8) (5.8)

Profit/(loss) for the period 13.0 7.6 11.3 (14.5) 17.4

Balance sheet analysis:Consolidated total assets 67.0 78.7 138.5 21.0 305.2Consolidated total liabilities (26.9) (11.5) (16.5) (116.8) (171.7)

Consolidated net assets/(liabilities) 40.1 67.2 122.0 (95.8) 133.5

Property, plant and equipment analysis:Additions 1.5 0.1 0.3 1.9 3.8

Depreciation 0.9 0.4 0.3 0.7 2.3



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Note 2. Business and geographic segments – nine months ended 2004Residential Commercial Property

property property insurance Unallocated/services services services corporate Total

£m £m £m £m £m

Revenue 38.4 20.5 8.6 – 67.5

Adjusted profit/(loss) from operations 5.6 1.0 3.2 (3.4) 6.4Restructuring costs – – – (4.1) (4.1)

Profit/(loss) from operations 5.6 1.0 3.2 (7.5) 2.3Net interest – – – (0.7) (0.7)Tax expense – – – (0.4) (0.4)

Profit/(loss) for the period 5.6 1.0 3.2 (8.6) 1.2

Balance sheet analysis:Consolidated total assets 33.3 35.5 110.3 19.6 198.7Consolidated total liabilities (11.5) (9.6) (22.3) (60.0) (103.4)

Consolidated net assets/(liabilities) 21.8 25.9 88.0 (40.4) 95.3

Property, plant and equipment analysis:Additions 0.8 0.1 0.1 1.1 2.1

Depreciation 0.5 0.2 0.1 0.7 1.5

The Group’s primary basis of segmental reporting is by business segment.

All business operations are carried out solely within the United Kingdom.

The Group operates three business segments, residential, commercial and insurance property services, detailsof which are in the Group review. All inter segment transfers are priced and carried out at arms length.

Note 3. Profit from operationsProfit from operations has been arrived at after charging (crediting):

Nine monthsYear ended ended

2005 2004£m £m

Inventories:– Cost of inventories recognised as an expense (included in cost of sales) 4.4 –Depreciation of property, plant and equipment:– Owned assets 2.1 1.5– Under finance leases 0.2 –Operating lease rentals:– Plant and machinery 1.3 –– Property 0.6 –Share & share option costs 0.3 0.4Auditors remuneration:– Audit services 0.3 0.2– Non-audit services* 0.1 –

Profit on disposal of property (1.0) –Loss on disposal of assets held for resale 0.3 –

Profit on disposal of non-current assets (0.7) –

* The non-audit services for both periods noted above relate to work in respect of RICS audit work and Company lawrequirements on a number of acquisitions. In addition the auditors received £0.1m (2004: £0.2m) in respect of reportingaccountants’ fees, which have been added to the cost of investments in 2004 and deducted from share premium.


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Note 4. Restructuring costsThe charge for the period is as follows:


2005 2004£m £m

Compensation for loss of office to acquired entities board members and senior management 0.5 1.5

Central London onerous property and leases costs – 1.0Back office re-organisations 1.1 1.6

1.6 4.1

Note 5. Directors and employeesStaff costs during the period were as follows:


2005 2004£m £m

Wages and salaries 67.2 33.6Social security costs 6.5 3.3Other pension costs:– defined benefit plans 0.7 0.3– defined contribution plans 0.2 0.2

74.6 37.4

The average number of employees of the Group during the period to 31 December 2005 was 2,692 (2004:710).

Details in respect of the Directors’ emoluments are included within the Directors’ remuneration report.

Note 6. Finance costNine months

Year ended ended2005 2004

£m £m

Bank loans 3.2 –Bank overdrafts 0.8 0.8Discount unwind in respect of deferred consideration 0.2 –

4.2 0.8

Note 7. Investment incomeNine months


£m £m

Interest on bank deposits 0.5 0.1

0.5 0.1



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Note 8. Income tax expenseNine months


£m £m

Current tax – domestic – current year 5.4 0.9Current tax – domestic – prior year 0.6 (0.4)Deferred tax – current year 0.2 (0.1)Deferred tax – prior year (0.4) –

5.8 0.4

Factors affecting tax charge for the periodNine months


£m £m

Profit before taxation 23.2 1.6

Profit before taxation multiplied by the standard rate of corporation tax in the United Kingdom 30% (2004: 30%) 7.0 0.5

Net profit on disposal of investments not credited for tax purposes (1.6) –Amortisation/impairment of goodwill deductible for tax purposes 0.2 (0.3)Expenses not deductible for tax purposes (0.4) 0.6Adjustments made in respect of prior periods 0.6 (0.4)

5.8 0.4

Note 9. Earnings per shareNine months


pence pence

Basic earnings per share 18.1 2.3

Diluted earnings per share 17.4 2.2

Basic adjusted earnings per share 19.2 9.7

Diluted adjusted earnings per share 18.5 9.5

The calculations of basic and diluted earnings per share are based on the following data:


2005 2004£m £m

EarningsProfit for the period 17.4 1.2

Earnings for the purpose of basic and diluted earnings per share 17.4 1.2


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Note 9. Earnings per share – continuedNine months


Number Number

Number of sharesWeighted average number of ordinary shares 96,314,973 54,617,494Effect of dilutive potential ordinary shares:

Share options and LTIP’s 3,602,941 997,804

Diluted weighted average number of shares 99,917,914 55,615,298

Basic earnings per share is based on profit for the period and on weighted average number of ordinaryshares. Diluted earnings per share is based on profit for the period and on diluted weighted average numberof ordinary shares.

Adjusted earnings per shareAdjusted earnings per share is presented to show the earnings per share after removing any one-offrevenues or costs. The calculations use the same numbers for weighted average number of shares. Thecalculations use the earnings data noted below:


2005 2004£m £m

EarningsProfit for the period 17.4 1.2Remove restructuring costs 1.6 4.1Remove profit on sale of non-current assets (0.7) –Remove imputed interest charge 0.2 -

Earnings for the purpose of basic and diluted adjusted earnings per share 18.5 5.3

Note 10. DividendsDuring the year, dividends of 6.75p (2004: 1.75p) per share, totalling £6.4m (2004: £0.8m) were paid toshareholders.

The Directors proposed that a dividend of 4.25p per share will be paid on 28 April 2006 to the shareholderson the Register of Members on 7 April 2006. This dividend is subject to approval by shareholders at theAnnual General Meeting and has not been included as a liability in these financial statements. The totalestimated dividend to be paid is £4.4m.

Note 11. Goodwill2005 2004

£m £m

CostAt 1 January 2005 (1 April 2004) 122.2 29.2Additions 87.5 93.0

At 31 December 2005 209.7 122.2

AmortisationAt 1 January 2005 (1 April 2004) 3.5 3.5Provided in the year – –

At 31 December 2005 3.5 3.5

Net book value at 31 December 206.2 118.7



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Note 11. Goodwill – continuedAdditions to goodwill have resulted from the following acquisitions:

2005£m

Mount Street 57.5Millar Kitching 9.8Leach Rhodes Walker 8.5Entente 7.6PPH 4.0Others 0.1

87.5

Impairment tests for cash-generating units containing goodwill and other intangible assets.The Group’s impairment testing is based on fair value less cost to sell.

The fair value of each of the Group’s cash-generating units is based on value in use calculations. Thosecalculations use cash flow projections based on actual operating profits and following years’ budgets (theseare approved by the Board). Cash flows for a further 3 years are extrapolated using a five per cent growthrate, which is appropriate because of the organic growth trends achieved by the Group over the last threeyears. A pre-tax discount rate of 9.5% (based on the Group’s weighted average cost of capital) has beenused in discounting the projected cash flows.

The intangible assets acquired in 2005 have been impairment tested, using as cash generating units thebusiness entities acquired as disclosed in the table above. As these entities are fully integrated into theGroups three divisional structure, and in respect of prior period intangible assets which have already beenfully integrated into this divisional structure, future impairment testing will be based upon the three cashgenerating units of residential property services, commercial property services and property insuranceservices.

The allocation of intangible assets in 2005 for impairment testing is as follows:

2005£m

Residential property services 27.6Commercial property services 25.4Property insurance services 65.72005 acquisitions (see split per table above) 87.5

206.2

The fair value of each of the Group’s cash-generating units, significantly exceed the respective carrying valueof the unit including goodwill.


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Note 12. Property, plant and equipmentMotor

Freehold Leasehold vehicles,land and improve- fixtures Computerbuildings ments and fittings equipment Total

£m £m £m £m £m

CostAt 1 January 2005 17.3 1.0 4.9 5.9 29.1Additions – 0.6 0.8 2.4 3.8On acquisition – 1.6 2.9 4.7 9.2Disposals (5.3) – (0.8) (0.7) (6.8)

At 31 December 2005 12.0 3.2 7.8 12.3 35.3

DepreciationAt 1 January 2005 0.4 0.3 3.3 3.1 7.1Provided in the year 0.1 0.2 0.4 1.7 2.4On acquisition – 0.9 1.5 2.5 4.9Disposals (0.2) – (0.8) (0.4) (1.4)

At 31 December 2005 0.3 1.4 4.4 6.9 13.0

Net book value at 31 December 2005 11.7 1.8 3.4 5.4 22.3

Freehold land and buildings includes £4.2m of land, which is not being depreciated.

MotorFreehold Leasehold vehicles,land and improve- fixtures Computerbuildings ments and fittings equipment Total

£m £m £m £m £m

CostAt 1 April 2004 7.2 0.9 1.5 2.3 11.9Additions 0.3 – 0.5 1.3 2.1On acquisition 10.0 0.1 4.2 2.5 16.8Disposals (0.2) – (1.3) (0.2) (1.7)

At 31 December 2004 17.3 1.0 4.9 5.9 29.1

DepreciationAt 1 April 2004 0.1 0.1 0.9 1.0 2.1Provided in the period 0.1 0.1 0.7 0.7 1.6On acquisition 0.3 0.1 2.7 1.6 4.7Disposals (0.1) – (1.0) (0.2) (1.3)

At 31 December 2004 0.4 0.3 3.3 3.1 7.1


Freehold land and buildings includes £4.2m of land, which is not being depreciated.

Assets held under finance leases have the following net book value:

2005 2004£m £m

Cost 0.8 –Aggregate depreciation (0.4) –

Net book value 0.4 –

Included in assets held under finance leases are vehicles £0.4m (2004: £nil).



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Note 13. Long term financial assetsAvailable forsale assets Investment Total

£m £m £m

At 1 January 2005 1.1 – 1.1Addition – 0.5 0.5Disposal (1.1) – (1.1)

At 31 December 2005 – 0.5 0.5

Long term financial assets consist of unlisted investments and loans to those investments.

Note 14. Inventories2005 2004

£m £m

Stock of properties – 4.4Stock of materials 0.2 0.2Work in progress 4.0 –

4.2 4.6

The Group consumed £4.4m (2004: £nil) of inventories during this period.

Note 15. Trade and other receivables2005 2004

£m £m

Trade receivables 36.1 25.0Allowance for specific doubtful debts (3.3) (2.2)

Net trade receivables 32.8 22.8Other receivables 4.7 7.8Prepayments and accrued income 9.9 3.9

47.4 34.5

Trade receivables comprise amounts receivable from the sale of goods and provision of services.

The average credit period taken on sale of goods and provision of services is 50 days. An allowance hasbeen made for estimated irrecoverable amounts from the sale of goods and provision of services. Thisallowance has been determined by reference to past default experience and the current economicenvironment.

The Group’s credit risk is primarily attributable to its trade receivables.

The fair value of these short term financial assets is not individually determined as the carrying amount is areasonable approximation of fair value.


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Note 16. Cash and cash equivalents2005 2004

£m £m

IBA cash 11.2 8.4Other cash and cash equivalents 12.6 9.4

23.8 17.8

The Group holds IBA cash in respect of its insurance activities, held principally in respect of insurance tradecreditors.

Note 17. Trade and other payables: current liabilities2005 2004

£m £m

Trade payables 20.4 21.2Other payables 6.0 2.7Deferred purchase consideration 13.4 3.5Social security and other taxes 6.2 6.4Accruals and deferred income 13.7 14.3Dividends approved at AGM – 2.0

59.7 50.1

Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs.The average credit period taken for trade purchases is 46 days (2004: 45).

The fair values of trade and other payables has not been disclosed as, due to their short duration, theDirectors consider the carrying amounts recognised in the balance sheet to be a reasonable approximationof their fair value.

Deferred purchase consideration represents the outstanding payments due in respect of completedacquisitions. All such deferred purchase consideration bears no interest and is unsecured. Deferredconsideration includes amounts totalling £1.2m, in respect of variable earn-out based payments, and£12.2m that can be settled by either cash or shares at the company’s option.

Note 18. Borrowings: current liabilities2005 2004

£m £m

Bank overdrafts 4.3 1.0Bank loans – secured 5.6 3.1Finance lease obligations 0.4 –

10.3 4.1

The bank overdrafts of the Group are secured by a fixed and floating charge over all the assets of the Group.

The bank overdrafts bear interest at 1.0% above base rate.

Finance lease obligations are secured on the relevant asset.



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Note 19. Other payables: non-current liabilities2005 2004

£m £m

Deferred purchase consideration – gross 22.8 7.7Discount (0.5) –

Deferred purchase consideration – net 22.3 7.7Other payables 0.5 0.1

22.8 7.8

Deferred purchase consideration represents the outstanding payments due in respect of completedacquisitions. All such deferred purchase consideration bears no interest and is unsecured. Deferredconsideration includes amounts totalling £7.6m, in respect of variable earn-out based payments, and£15.2m that can be settled by either cash or shares at the company’s option.

Note 20. Borrowings: non-current liabilities2005 2004

£m £m

Bank loans – secured 69.2 39.4Finance lease obligations 0.4 –

69.6 39.4

The bank loans of the Company and its subsidiaries are secured by a fixed and floating charge over all theassets of the Group.

Bank loan facilities comprise the following:

• Bank overdraft of £6m. Margin (base plus) 1%;

• 14 year property loan of £5.6m margin 1% capital repayments over the term (quarterly paymentstotalling £0.2m p.a. for nine years then £0.4 p.a for five years then £1.8m bullet payment). Fullydrawn-down;

• £10m four year RCF bullet repayment in full at the end of the term. Margin 1.25%-1.5% (current actual1.5%). Fully drawn-down;

• £8m ten year loan – capital repayments not commencing until 2008. Not drawn-down at year end(available for property acquisition and development). Margin 1.5%;

• £16.8m four year facility repayments: £3.8m bullet after 18 months (or when a specified property issold if earlier); quarterly payments totalling £3m p.a. for three years, £4m in final year. Fully drawn-down. Margin 1.25%;

• £40m five year facility. Margin 1.5%. No repayments in 2006 then quarterly payments totalling £10mp.a. for the next four years. Fully drawn-down; less

The issue costs of the loans, which are deducted from gross proceeds according to International AccountingStandard 39 and interest computed on the carrying amount.

Total facilities at year end amounted to £86.4m.


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Note 20. Borrowings: non-current liabilities – continuedLong-term liabilities are repayable as follows:

2005 2004£m £m

After one and within two yearsBank loans 13.2 3.2Finance leases 0.3 –Deferred purchase consideration 8.3 3.7Other payables 0.5 0.1

After two and within five yearsBank loans 50.8 21.6Finance leases 0.1 –Deferred purchase consideration 13.3 3.3

After five yearsBank loans 5.2 14.6Deferred purchase consideration 0.7 0.7

92.4 47.2

Interest rate riskThe Group does not hedge its interest rate exposure, as it accepts the risk attached as interest remains alow proportion of operating profits.

Interest ratesThe effective interest rates at the balance sheet dates were as follows:

2005 2004£m £m

Bank overdraft 5.75% 6.00%

Bank loans 6.00% 6.25%

Fair valuesThe fair values of the Group’s financial instruments is considered to approximate to their book value.

Note 21. Retirement obligations

Defined benefit schemesHaywards Property Services Ltd, a subsidiary undertaking, operates one defined benefit pension scheme inthe United Kingdom in respect of certain current and ex-employees. The assets of the scheme areadministered by trustees in a fund independent from those of the Company.

The scheme is part of a multi-employer scheme, with separate assets for each employer’s section. The lastfull actuarial valuation of the full scheme was carried out as at 3 March 2003. The value of the scheme hasbeen assessed as at 31 December 2005 using the projected unit method by a qualified independentactuary.

A schedule of contributions was put in place with effect from 1 April 2003. A contribution rate of 14% ofpensionable salaries was agreed.



77


Note 21. Retirement obligations – continuedThe main assumptions used by the actuary for the valuation were as follows:


2005 2004% %

Rate of increase in salaries 4.0 3.8Rate of increase for pensions in payment 3.0 2.8Discount rate 4.7 5.3Expected rate of return on plan assets 6.3 6.9Inflation 3.0 2.8

The assets in the scheme and the expected rate of return (net of investment management expenses) were:

2005 2004£m £m

Equities 1.3 0.8Government Bonds 0.1 0.1

Total market value of assets 1.4 0.9Actuarial value of liabilities (1.7) (1.0)

Net pension liability (0.3) (0.1)

The amounts recognised in the income statement are as follows:


2005 2004£m £m

Current service cost 0.2 0.2Interest cost 0.1 0.1Expected return on plan assets (0.1) (0.1)

Total included within staff costs (note 5) 0.2 0.2

Analysis of the movement in the deficit in the balance sheet:

2005 2004£m £m

Deficit in the scheme at beginning of the period (0.1) (0.1)Current service cost (0.2) (0.1)Contributions 0.3 0.1Actuarial loss (0.3) –

Deficit at end of period (0.3) (0.1)

Defined contribution schemesContributions payable to various defined contribution schemes in respect of the accounting period havebeen charged against profits.


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Note 22. Other provisions2005

£m

As at 1 January 2005 –Acquisition 1.3

As at 31 December 2005 1.3

Other provisions arise from recent acquisitions of the Group and are provided against potential legal andother claims.

Usually, these claims are settled within 2 years from initiation, depending on the procedures used fornegotiating the claims. As the timing of settlement of these claims is to a large extent dependent on thepace of negotiation with various counterparties and legal authorities, the Group cannot reliably estimate theamounts that will eventually be paid in settlement after more than 12 months from the balance sheet date.Thus, the whole amount was classified as non-current.

Note 23. Deferred tax2005 2004

£m £m

As at 1 January 2005 0.3 0.4Charge to profit and loss (0.2) (0.1)

As at 31 December 0.1 0.3

Analysis of deferred tax:

Timing differences on property, plant and equipment 0.3 0.3Provisions (0.2) –

0.1 0.3

The Group has tax losses of approximately £1.8m to carry forward and use against the profits of the sametrade.

Note 24. Share capital2005 2004

£m £m

Authorised:200,000,000 (2004: 200,000,000) Ordinary shares of 0.5p each 1.0 1.0

Issued and fully paid:105,079,221 (2004: 94,373,015) Ordinary shares of 0.5p each 0.5 0.5

As at 1 January 2005 (1 April 2004) 0.5 0.2Issue in respect of acquisitions – 0.3


2005 2004Number Number

of shares of shares

As at 1 January 2005 (1 April 2004) 94,373,015 44,582,764Issue of share options 981,313 919,164Issue in respect of acquisitions 9,974,024 48,871,087Cancellation of treasury shares (249,131) –

As at 31 December 105,079,221 94,373,015



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Note 24. Share capital – continued

Allotments during the yearThe Company made an allotment of 5,101,828 0.5p ordinary shares in November 2005 as a vendorplacement totalling £14,795,301, and 2,827,074 directly in respect of the Mount Street acquisition (seenote 31). The difference of £22,954,170 between the total consideration of £22,993,815 and the nominalvalue has been credited to other reserves account.

The Company made an allotment of 1,053,538 0.5p ordinary shares in November 2005 in respect of theMillar Kitching acquisition (see note 31). The difference of £3,101,932 between the total consideration of£3,107,200 and the nominal value has been credited to other reserves.

The Company made an issue from cancelled treasury shares of 175,400 0.5p ordinary shares in September2005 in respect of the Leach Rhodes Walker acquisition (see note 31). The difference of £499,013between the total consideration of £499,890 and the nominal value has been credited to other reserves.

The Company made an issue from cancelled treasury shares of 73,731 0.5p ordinary shares in October2005 in respect of the PPH acquisition (see note 31). The difference of £199,442 between the totalconsideration of £199,811 and the nominal value has been credited to other reserves.

The Company also allotted a total of 742,453 ordinary shares of 0.5p each at the beginning of the year inorder to complete the acquisition of the entire issued share capital in Hercules Property Services plc. Thedifference of £998,000 between the total consideration of £992,712 and the nominal value has beencredited to other reserves.

The Company made an allotment of 981,313 ordinary shares of 0.5p in 2005 in respect of share optionsexercised by staff leaving the Group or entitled to exercise rolled over Hercules share options (as fromSeptember 2005). The difference of £1,087,233 between the total consideration of £1,095,852 and thenominal value has been credited to share premiuim account.

Note 25. ReservesProfit

Share Shares to Treasury Other and losspremium be issued shares reserves account

£m £m £m £m £m

At 31 December 2004 16.5 1.6 – 74.9 1.8Dividends – – – – (4.3)Issue of share capital – (1.0) – 27.7 –Cost of issue of shares – – – (1.4) –Equity share options issued – 0.3 – – –Equity share options exercised 1.1 – – – –Treasury shares purchased – – (2.2) – –Release of provision in respect of

available for sale financial assets – – – – 0.6Retained profit for the year – – – – 17.4

At 31 December 2005 17.6 0.9 (2.2) 101.2 15.5


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Note 26. Share based paymentDuring the period ended 31 December 2005, the Company had three share-based payment arrangements,which are described below.

Type of arrangement Date granted Option price Number granted

Share option scheme 11 Dec 2000 £1.93 149,6489 May 2001 £2.50 273,196

11 May 2001 £2.30 92,8717 Jul 2001 £2.69 40,715

29 Oct 2001 £1.86 45,64411 Dec 2001 £2.55 115,98618 Mar 2002 £1.55 170,92513 Dec 2002 £0.33 279,65321 Feb 2003 £0.22 7,64019 Oct 2003 £0.64 145,16912 Dec 2003 £0.80 98,23520 Feb 2004 £0.99 135,88818 May 2004 £0.99 54,575

6 Apr 2003 £1.00 1,703,50031 Jul 2003 £1.00 94,00020 Jul 2004 £1.41 639,50022 Apr 2005 £2.42 810,229

Sharesave 6 Jul 2005 £2.15 359,2906 Jul 2005 £2.15 254,061

Long term incentive plan 23 Sep 2005 £2.63* 472,301

5,943,026

* Market price at date of award

During the year the Remuneration Committee reviewed its share incentive policy and concluded that theinterests of shareholders and executives would be better aligned through the award of whole shares ratherthan options. In order to effect this change in policy the Erinaceous Group plc 2005 Long Term IncentivePlan (“LTIP”) was approved by shareholders at the EGM in September 2005.

Under the rules of the LTIP, all senior executives are entitled to be considered for a grant of awards under theLTIP. The eligible executives are awarded a conditional right over a whole number of shares (“LTIP Award”) withthe release being dependent on the extent to which (if at all) the challenging performance conditions set bythe Remuneration Committee at the time the LTIP Award is made are satisfied. The maximum annual LTIPAward is 100% of salary. Executives are also entitled to receive a further award of matching shares of up to25% of salary, if they retain any shares released under the LTIP or the option scheme.

The performance condition for the grant of awards under the LTIP is set out below:• Level of Comparative TSR Performance against FTSE all share support services sector – %age of Award

Released• Median – 25% of LTIP Award Released*• At Upper Quartile – 100% of LTIP Award Released*

* Straight line vesting between points.

In addition, no LTIP Awards will vest unless the Company’s real average EPS growth over the performanceperiod is at least 5% per annum. For the first LTIP Awards, the base period for determining EPS growth overthe three year performance period will be 13.9p, being the proforma earnings for 2004.

In order to encourage the retention of shares at the end of the three year performance period, any shareswhich are held for a further two years from the date of release of any LTIP Award or exercise of an optionmay be matched subject to the satisfaction of the following requirements:• continued employment throughout the two year holding period; and• the satisfaction of additional performance requirements.



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Note 26. Share based payment – continuedOne matching share will be awarded for each four shares retained where the Company’s comparative TSR isat or above the median of the companies in the FTSE all share support services sector over the two yearperiod. Where performance is below median then there will be no match.

Share optionsCertain senior management and directors are entitled to participate in the Company’s share option schemeand options are granted at the discretion of the Remuneration Committee. All share options granted duringthe year are subject to performance related vesting conditions that require earnings per share of the Groupto out-grow inflation by 7% per annum. This earnings per share growth is tested throughout the vestingperiod allowing options that would not vest under these conditions in the initial years to subsequently vest inlater years.

In respect of senior executives, the granting of share options throughout 2005 and going forward has beenrestricted to the £30,000 limit per individual available under the Inland Revenue Approved scheme. TheCommittee now uses Long Term Incentive Plans instead of share options where more substantial long-termequity plans are considered desirable.

The estimated fair value of each option granted in the general employee share option plan is £1.10. Thiswas calculated by applying a Monte Carlo option pricing model. The model inputs were the share price grantdate, exercise price, contractual life of ten years, and a risk-free interest rate of five per cent. To allow forthe effects of early exercise, it was assumed that the employees would exercise the options after vestingdate when the share price was twice the exercise price.

Further details of the share option plans are as follows.

2005 2004Number of Number of

options options

Outstanding at start of year 5,028,458 5,376,775Granted 1,932,360 639,500Lapsed (36,479) (68,653)Exercised (981,313) (919,164)

Outstanding at end of year 5,943,026 5,028,458

Weighted average exercise price (pence) 161.2p 125.2p

Exercisable at end of year 1,605,145 –

2005 2004£m £m

Expense arising from share and share option plans 0.4 0.4

Note 27. Reconciliation of net cash flow to movement in debt2005 2004

£m £m

Increase in cash and cash equivalents in the period 2.7 7.6Cash inflow from debt financing (31.5) (10.4)

Change in net debt resulting from cash flows (28.8) (2.8)Debt acquired with subsidiary (1.6) (26.5)

Movement in net debt in the period (30.4) (29.3)Net debt at 1 January 2005 (1 April 2004) (25.7) 3.6

Net debt at 31 December (56.1) (25.7)


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Note 28. Analysis of changes in net debtAt At

1 January Group 31 December2005 cash flow Acquisitions* 2005

£m £m £m £m

Cash in hand and at bank 17.8 6.0 – 23.8Bank overdraft (1.0) (3.3) – (4.3)

16.8 2.7 – 19.5Debt falling due within one year (3.1) (1.7) (0.8) (5.6)Debt falling due after one year (39.4) (29.8) – (69.2)Finance leases – – (0.8) (0.8)

(25.7) (28.8) (1.6) (56.1)

* Acquisitions exclude cash and overdrafts.

Note 29. Reconciliation of cash and cash equivalents to net debt2005 2004

£m £m

Analysis per balance sheet headings:IBA cash 11.2 8.4Other cash and cash equivalents 12.6 9.4Bank overdrafts (included within bank loans and overdrafts) (4.3) (1.0)

Cash and cash equivalents 19.5 16.8Finance leases (0.8) –Bank loans (74.8) (42.5)

Net debt (56.1) (25.7)

Net debt excluding IBA cash (67.3) (34.1)

Note 30. Major non-cash transactionsPart of the consideration for the purchase of interests in subsidiary undertakings and unincorporatedbusinesses comprise shares and deferred payments. Further details of these major non-cash transactionsare given below in note 31 below.

Note 31. AcquisitionsAll intangible assets were recognised at their respective fair values. The residual excess over the net assetsacquired is recognised as goodwill in the financial statements.

A. Mount Street On 23 November 2005 the Group acquired 100% of the issued capital of Mount Street. The businessacquired provides property services. Total consideration for the acquisition was provisionally £51.2mcomprising:

• 3,997,868 ordinary 0.5p shares issued as vendor placement at 290 pence per share (£14.8m)2,827,074 ordinary 0.5p shares issued at a premium of 290 pence per share (£8.2m);

• Cash and settlement of liabilities of £11.5m; and

• Further share issues, loan notes and cash payments outstanding at 31 December 2005 of £17.2m.

The goodwill arising on the acquisition of Mount Street is principally attributable to the workforce, certaincustomer relationships which do not meet the criteria for separate recognition as an intangible asset, andthe anticipated future operating synergies from the combination of the business with the Groups’ existingbusinesses.



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Note 31. Acquisitions – continued

A. Mount Street – continuedProvisional goodwill arising on the acquisition of £57.5m has been capitalised. The provisional fair valueanalysis has attributed a value of £nil in respect of intangible assets surrounding customer relationships,pending a detailed review in 2006.

The purchase of Mount Street has been accounted for by the acquisition method of accounting.

The assets and liabilities acquired and provisional fair value adjustments were as follows:

Unadjusted Provisional Provisionalacquired Fair value Fair value

balance sheet adjustments balance sheet£m £m £m

Non-current assetsProperty, plant and equipment 3.4 – 3.4Goodwill 3.7 (3.7) –Long term financial assets 6.4 (6.4) –Current assetsInventories 1.3 – 1.3Trade and other receivables 15.0 – 15.0

Total assets 29.8 (10.1) 19.7

LiabilitiesBorrowings 10.9 – 10.9Trade and other payables 14.1 – 14.1Provisions – 0.5 0.5

Total liabilities 25.0 0.5 25.5

Fair value of net assets on acquisition (5.8)Purchased goodwill 57.5

51.7

The outflow of cash and cash equivalents on this acquisition is calculated as follows:Issue of shares – vendor placement 14.8Issue of shares – acquisition 8.2Cash and payment of liabilities 11.5Loan notes 11.9Deferred consideration 5.3

51.7

The following provisional fair value adjustments comprise: Removal of goodwill of £3.7m from the MountStreet acquired balance sheet, write off of investments totalling £6.4m, and provisions £0.5m relating topotential legal claims (being provisional best estimate at balance sheet date). The fair values are provisionalbecause the Mount Street acquisition occurred late in 2005.

The provisional deferred consideration is dependent on future profitability over the next four years, in respectof a division of MSH.

B. Millar KitchingOn 23 November 2005 the Group acquired 100% of the issued capital of Millar Kitching. The businessacquired provides property services. Total consideration for the acquisition was provisionally £10.1mcomprising:

• 1,053,538 ordinary 0.5p shares issued at a premium of 295 pence per share (£3.1m);


• Further share issues and cash payments outstanding at 31 December 2005 of £2.4m.


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B. Millar Kitching – continuedThe goodwill arising on the acquisition of Millar Kitching is principally attributable to the workforce, certaincustomer relationships which do not meet the criteria for separate recognition as an intangible asset, andthe anticipated future operating synergies from the combination of the business with the Groups’ existingbusinesses.

Goodwill arising on the acquisition of £9.8m has been capitalised. The purchase of Millar Kitching has beenaccounted for by the acquisition method of accounting.

The assets and liabilities acquired and provisional fair value adjustments were as follows:

Unadjusted Provisional Provisionalacquired Fair value Fair value


Non-current assetsProperty, plant and equipment 0.2 – 0.2Current assetsTrade and other receivables 3.2 – 3.2

Total assets 3.2 – 3.2

LiabilitiesTrade and other payables 2.9 – 2.9

Total liabilities 2.9 – 2.9

Fair value of net assets on acquisition 0.3Purchased goodwill 9.8

10.1

The outflow of cash and cash equivalents on this acquisition is calculated as follows:Issue of shares 3.1Cash and payment of liabilities 4.6Deferred consideration 2.4

10.1

The fair values are provisional because the Millar Kitching acquisition occurred late in 2005.

The provisional deferred consideration is dependent on future profitability and future realisation of certainassets held at acquisition date over the next three years.

C. Leach Rhodes WalkerOn 6 September 2005 the Group acquired 100% of the issued capital of Leach Rhodes Walker. Thebusiness acquired provides property services. Total consideration for the acquisition was £9.2m comprising:

• 175,400 ordinary 0.5p shares issued at a premium of 285 pence per share (£0.5m);


• Further share issues and cash payments outstanding at 31 December 2005 of £4.0m.

The goodwill arising on the acquisition of Leach Rhodes Walker is principally attributable to the workforce,certain customer relationships which do not meet the criteria for separate recognition as an intangibleasset, and the anticipated future operating synergies from the combination of the business with the Groups’existing businesses.

Goodwill arising on the acquisition of £8.5m has been capitalised. The purchase of Leach Rhodes Walkerhas been accounted for by the acquisition method of accounting.



85



C. Leach Rhodes Walker – continuedThe assets and liabilities acquired and provisional fair value adjustments were as follows:

Unadjustedacquired Fair value Fair value


Non-current assetsProperty, plant and equipment 0.2 – 0.2Current assetsInventories 0.6 – 0.6Trade and other receivables 1.9 (0.2) 1.7

Total assets 2.7 (0.2) 2.5




9.2

The outflow of cash and cash equivalents on this acquisition is calculated as follows:Issue of shares 0.5Cash and payment of liabilities 4.7Deferred consideration 4.0

9.2

The following fair value adjustments comprise:

• Inclusion of provisions totalling £0.2m in respect of doubtful debtors.

The provisional deferred consideration is dependent on future profitability over the next three years.

D. EntenteIn August 2005 the Group acquired 100% of the issued capital of Entente. The business acquired providesproperty services. Total consideration for the acquisition was £7.6m comprising:


• Further cash payments and loan notes outstanding at 31 December 2005 of £2.7m.

The goodwill arising on the acquisition of Entente is principally attributable to the workforce, certaincustomer relationships which do not meet the criteria for separate recognition as an intangible asset, andthe anticipated future operating synergies from the combination of the business with the Groups’ existingbusinesses.

Goodwill arising on the acquisition of £7.6m has been capitalised. The purchase of Entente has beenaccounted for by the acquisition method of accounting.


86



D. Entente – continuedThe assets and liabilities acquired and fair value adjustments were as follows:



Non-current assetsProperty, plant and equipment 0.1 – 0.1Goodwill 1.1 (1.1) –Current assetsInventories 0.7 – 0.7Trade and other receivables 1.8 – 1.8

Total assets 3.7 (1.1) 2.6



Fair value of net assets on acquisition –Purchased goodwill 7.6

7.6

The outflow of cash and cash equivalents on this acquisition is calculated as follows:Cash and payment of liabilities 4.9Deferred consideration 0.2Loan notes 2.5

7.6

The following fair value adjustments comprise:

• Removal of goodwill of £1.1m from the Entente acquired balance sheet.


E. PPHOn 7 October 2005 the Group acquired the trade and assets of PPH. The business acquired providesproperty services. Total consideration for the acquisition was £4.5m comprising:

• 73,731 ordinary 0.5p shares issued at a premium of 271 pence per share (£0.2m);


• Further cash payments and loan notes outstanding at 31 December 2005 of £3.2m.

The goodwill arising on the acquisition of PPH is principally attributable to the workforce, certain customerrelationships, which do not meet the criteria for separate recognition as an intangible asset, and theanticipated future operating synergies from the combination of the business with the Groups’ existingbusinesses.

Goodwill arising on the acquisition of £4.0m has been capitalised. The purchase of PPH has beenaccounted for by the acquisition method of accounting.



87



E. PPH – continuedThe assets and liabilities acquired and fair value adjustments were as follows:



Non-current assetsProperty, plant and equipment 0.1 – 0.1Current assetsTrade and other receivables 0.4 – 0.4Cash and cash equivalents 0.2 – 0.2

Total assets 0.7 – 0.7




4.5

The outflow of cash and cash equivalents on this acquisition is calculated as follows:Issue of shares 0.2Cash and payment of liabilities 1.1Deferred consideration 0.6Loan notes 2.6

4.5


The Group’s acquisitions recorded the following results in the year:

Period fromacquisition to

Period up to 31 Decemberacquisition 2005 Total

£m £m £m

RevenueMount Street 28.7 2.8 31.5Millar Kitching 4.6 1.6 6.2Leach Rhodes Walker 3.5 2.9 6.4Entente 3.1 2.5 5.6PPH 2.0 0.3 2.3

41.9 10.1 52.0

Profit before taxMount Street 0.8 0.4 1.2Millar Kitching 1.5 0.7 2.2Leach Rhodes Walker 0.9 0.8 1.7Entente 0.8 0.2 1.0PPH 0.8 (0.1) 0.7

4.8 2.0 6.8


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Note 32. Capital commitmentsThe Group had no outstanding capital commitments.

Note 33. Contingent assets and liabilitiesThe Group had no outstanding contingent assets or liabilities, except for any adjustments required to the fairvalue of provisions included in note 22.

Note 34. Obligations under finance leasesMinimum Present value of

lease payments lease payments2005 2004 2005 2004

£m £m £m £m

Amounts payable under finance leasesWithin one year 0.4 – 0.4 –In the second to fifth years inclusive 0.5 – 0.4 –

0.9 – 0.8 –Less: future finance charges (0.1) – (0.1) –

Present value of lease obligations 0.8 – 0.7 –

Less: Amount due for settlement within 12 months (shown under current liabilities) 0.4 –

Amount due for settlement after 12 months 0.3 –

It is the Group’s policy to lease certain of its plant and equipment under finance leases. The average leaseterm is 2 years. For the year ended 31 December 2005, the average effective borrowing rate was 5.5%.Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangementshave been entered into for contingent rental payments.

The fair value of the Group’s finance lease obligations approximates their carrying value.

The Group’s obligations under finance lease are secured by the lessor’s charge over the leased assets.

Note 35. Operating lease commitments – minimum lease paymentsThe Group’s minimum operating lease payments are as follows:

Year Year Nine months Nine monthsended ended ended ended2005 2005 2004 2004

Land & Land &buildings Other buildings Other

£m £m £m £m

Within one year 0.2 0.4 0.2 0.2Between one and five years 0.8 0.8 1.6 1.7In more than five years 4.8 – 6.5 –

5.8 1.2 8.3 1.9

Operating lease payments recognised as an expense during the period amounted to £1.8m (2004: £2.6m)



89


Note 36. Related party transactionsJuliet Bellis and Co, Solicitors, is a related party by virtue of the close family relationship between JMSBellis, the senior partner of the firm of Juliet Bellis and Co, and NG Bellis, a director of the Company.

Juliet Bellis & Co is an independent two partner firm of solicitors which renders legal services to the Group.The firm employs four qualified solicitors, one licensed conveyancer, two legal executives, sixteen para legalsand one secretary. The firm carries out most of the legal work for the Group including all employmentmatters, debt collection and other litigation, small acquisitions and property sales and purchases. The firmalso carries out work for third party clients who are independent of the Group.

JMS Bellis herself is company secretary to all companies within the Group.

Juliet Bellis and Co rendered legal and Company secretarial services to the Group amounting to £0.6m(2004: £0.3m). Juliet Bellis & Co’s fees were subject to scrutiny and approval by the Directors’Remuneration Committee. The Company also received rental income amounting to £60,000 (2004:£45,000) from Juliet Bellis and Co.

No monies were outstanding to or due from any related party at the year end. None of the transactionsincorporate special terms and conditions.

Note 37. Post balance sheet eventsThere have been no material post balance sheet events since the period end to the date of signing thisreport and financial statements.

Note 38. Principal subsidiariesAt 31 December 2005 the Group held 20% or more of the equity of the following:

Proportion held Principal subsidiary undertakings Nature of business by the Group

CPM Asset Management Ltd Property management 100%Dunlop Haywards (DHL) Ltd Consultant surveyors 100%Dunlop Haywards (ISGO) Ltd Property services 100%Dunlop Haywards Ltd Property services 100%Entente Group Ltd Property services 100%Eurica Property Services Ltd Maintenance services 100%Eurica! Services Ltd Contractor of support services 100%Farr plc Insurance brokers 100%Hanover Park Commercial Ltd Insurance services 100%Hanover Park Services plc Residential lettings services 100%Harman Healy Ltd Auction house 100%Hercules Property Services plc Holding Company 100%HLR Holdings Ltd Property holding Company 100%Johnson Cooper Ltd Property management 100%Jordan’s Residential Lettings Ltd Residential lettings services 100%Leach Rhodes Walker Ltd Property services 100%Mainguild Ltd Auction house 100%Salisbury Maintenance Ltd Maintenance services 100%Spring Grove Property Maintenance plc Residential lettings services 100%Stockley Park Haywards Estate Management Ltd Joint venture 49%

Core BPO Ltd Business process outsourcing 50% + 1 shareWhich owns 100% of:Core (BPO) India Ltd (registered in India) Business process outsourcing 50%


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Note 39. Other Group subsidiariesIn addition the Group held either directly or indirectly 100% of the equity (unless otherwise stated) in thefollowing companies that are not trading at 31 December 2005:

Berkeley Simmons Davis Ltd, Berkeley Simmons Davis Rent Reviews Ltd, Cadogan Insurance Services Ltd,Christchurch Estates Ltd, CPAM Commercial Property Asset Management Ltd, CPM Lettings Ltd, CurzonStreet Management Ltd, Erinaceous Group (Ireland) Ltd (registered in Ireland), Deacon Insurance ServicesLtd, Eurica! Management Ltd, Gross Fine, Interior Furniture Services Ltd, ISGC Ltd, Millar Kitching Ltd,Mount Street Holdings plc, Propgen Ltd (registered in Ireland), Simmonds & Partners Ltd, Square Mile RealEstate Services Ltd, Taskfine Management Ltd, The Hanover Park Group plc, Walker Packman Ltd, H WatersLtd, Vita Insurance & Financial Products Ltd, Wood Managements Ltd, David Glass Associates plc, GOSWorldwide Ltd and Core IT & T Ltd (50%).

In addition the Group held whether directly or indirectly 100% of the equity in the following companies thatare dormant at 31 December 2005:

Care Services Ltd, Care International Ltd, Care Services Group Ltd, Care Combined Services Ltd, CareFacilities Management Services Ltd, Cecil Square Cleaning Company Ltd, Deacon Insurance Services(Holdings) Ltd, DOR (Northern) Ltd, Dunlop Heywood Lorenz Executive Board Ltd, Dunlop HeywoodResidential Ltd, Farr Holdings Ltd, FIIB Ltd, DuoQuote Ltd, Georgian House Cleaning Company Ltd, GrossFine (Holdings) Ltd, Gross Fine Management Ltd, Gross Fine Services Ltd, The London Silver Vaults &Chancery Lane Safe Deposit Co Ltd, Hercules Telecom Ltd, Heritage Insurance Services Ltd, HPS PropertyLtd, Michael Courcier & Partners Ltd, Resident Association Management Ltd, Wood Insurance Brokers Ltd,Wood Management Trustees Ltd, Wood & Co (Surveyors) Ltd, Wood Group Trustees Ltd, Wood Trustees Ltd,Wood Carewell Managements Ltd, Wood Managements Group Ltd, Haywards Property Services (KennedyHaywards) Ltd, Haywards Property Services (WMS Haywards) Ltd, Let Guard Ltd, Longmint Management Ltd,For Tenants ltd, Kennedy Woodward Allen Ltd, Paragon Collections Ltd, For Landlords Ltd, Rent Collect Ltd,Haywards Insurance Services Ltd, Truckinsure Ltd, JSSP Ltd, HPS (No. 1) Ltd, HPS (No. 2) Ltd, HPS (No. 3)Ltd, HPS (No. 4) Ltd, Blackhawk Estates Ltd, Ivyglade Ltd, Gladelane Investments Ltd, Diverse Services Ltd,Property Connection Ltd, EP 2 Management Resources Ltd, ABCDEFG plc, Balancegrove Homes Ltd, DunlopHaywards Residential Ltd, Caroline Registrars Ltd, Francis Graves Ltd, Graves Holdings Ltd, LRW InteriorDesign Ltd, Leach Rhodes Walker CDM Ltd, Mesh Media Ltd, CPM Asset Management (Northern) Ltd, ParkStreet Holdings Ltd, Francis Maintenance Ltd, Phoenix Home Services Ltd, Robert Hawkins (Contractors)Ltd, Emergency Repairs plc, Hertford Company Secretaries Ltd, Morrison Street Management Ltd, HavenVillages (Sheltered Housing) Ltd, GOS Worldwide Ltd, Millar Kitching Management Ltd, Millar KitchingManagement (Bloomsbury) Ltd, Millar Kitching Management Services Ltd, Alexander Millar Kitching Ltd, andLea Valley Business Centres Ltd

All the subsidiary undertakings are registered in England and Wales, except where otherwise indicated.

All of the subsidiary undertakings have been consolidated in the Group financial statements.

In addition the Group holds an interest in one cell of a captive insurance underwriting vehicle, PremiumSecurities (Bermuda) (SAC) Ltd, in Bermuda.



91

Report of the independent Auditor on theCompany’s accountsto the members of Erinaceous Group plc

We have audited the parent company financial statements of Erinaceous Group plc for the year ended31 December 2005, which comprise the Balance sheet, Statement of total recognised gains and lossesand notes 1 to 21. These parent company financial statements have been prepared under the accountingpolicies set out therein. We have also audited the information in the Directors’ remuneration report that isdescribed as having been audited.

We have reported separately on the consolidated financial statements of Erinaceous Group plc for the yearended 31 December 2005.

This report is made solely to the company’s members, as a body, in accordance with Section 235 of theCompanies Act 1985. Our audit work has been undertaken so that we might state to the company’smembers those matters we are required to state to them in an auditors’ report and for no other purpose. Tothe fullest extent permitted by law, we do not accept or assume responsibility to anyone other than thecompany and the company’s members as a body, for our audit work, for this report, or for the opinions wehave formed.

Respective responsibilities of directors and auditorsThe directors’ responsibilities for preparing the Annual Report, the Directors’ remuneration report and theparent company financial statements in accordance with United Kingdom law and Accounting Standards(United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors’Responsibilities.

Our responsibility is to audit the parent company financial statements and the part of the Directors’remuneration report to be audited in accordance with relevant legal and regulatory requirements andInternational Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the parent company financial statements give a true and fairview and whether the parent company financial statements and the part of the Directors’ remunerationreport to be audited have been properly prepared in accordance with the Companies Act 1985. We alsoreport to you if, in our opinion, the Directors’ report is not consistent with the parent company financialstatements, if the company has not kept proper accounting records, if we have not received all theinformation and explanations we require for our audit, or if information specified by law regarding directors’remuneration and other transactions is not disclosed.

We read other information contained in the Annual Report and consider whether it is consistent with theaudited parent company financial statements. The other information comprises only the Financial highlights,the Directors’ report, the Chairman’s statement, the Group review, the Business stream overview, Ourlocations, Directors and officers, Corporate and social responsibility report, the Corporate governance report,the Directors’ remuneration report, and the Five year summary. We consider the implications for our report ifwe become aware of any apparent misstatements or material inconsistencies with the parent companyfinancial statements. Our responsibilities do not extend to any other information.

Basis of audit opinionWe conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued bythe Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to theamounts and disclosures in the parent company financial statements and the part of the Directors’remuneration report to be audited. It also includes an assessment of the significant estimates andjudgments made by the directors in the preparation of the parent company financial statements, and ofwhether the accounting policies are appropriate to the company’s circumstances, consistently applied andadequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which weconsidered necessary in order to provide us with sufficient evidence to give reasonable assurance that theparent company financial statements and the part of the Directors’ remuneration report to be audited arefree from material misstatement, whether caused by fraud or other irregularity or error. In forming ouropinion we also evaluated the overall adequacy of the presentation of information in the parent companyfinancial statements and the part of the Directors’ remuneration report to be audited.


92

Report of the independent Auditor on theCompany’s accountsto the members of Erinaceous Group plc

OpinionIn our opinion:

• the parent company financial statements give a true and fair view, in accordance with United KingdomGenerally Accepted Accounting Practice, of the state of the company’s affairs as at 31 December2005; and

• the parent company financial statements and the part of the Directors’ remuneration report to beaudited have been properly prepared in accordance with the Companies Act 1985.

GRANT THORNTON UK LLPREGISTERED AUDITORSCHARTERED ACCOUNTANTSLONDON THAMES VALLEY OFFICESLOUGH

15 March 2006

Note: The maintenance and integrity of the Erinaceous Group plc website is the responsibility of the Directors. The work carriedout by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for anychanges that may have occurred to the financial statements since they were initially presented on the website.

Legislation in the United Kingdom governing the preparation and dissemination of the financial statements may differ in otherjurisdictions.



93

Company balance sheetAs at 31 December

2005 2004(restated)

Notes £m £m

Fixed assetsTangible assets 6 5.5 4.2Investments 7 156.5 102.2

162.0 106.4

Current assetsDebtors 8 63.6 19.1Cash at bank and cash in hand 3.2 1.0

66.8 20.1

Current liabilitiesCreditors: amounts falling due within one year 9 19.3 7.9Bank loans 10 0.2 0.3

19.5 8.2

Net current assets 47.3 11.9

Non-current liabilitiesCreditors: amounts falling due after more than one year 11 20.8 7.7Bank loans 12 55.3 15.4Provisions for liabilities and charges 13 – 0.3

76.1 23.4


Capital and reservesShare capital 14 0.5 0.5Share premium 15 17.6 16.5Shares to be issued 15 0.9 1.6Treasury shares 15 (2.2) –Other reserves 15 101.2 74.9Profit and loss account 15 15.2 1.4

Shareholders’ funds 133.2 94.9

These financial statements on pages 93 to 102 were approved by the Board of Directors and authorised forissue on 15 March 2006, and are signed on its behalf by:

Neil BellisDirector



94

Company statement of total recognised gains and lossesfor the year ended 31 December 2005


£m £m

Profit for the period attributable to shareholders 18.1 3.0

Total recognised gains and losses for the period 18.1 3.0Prior year adjustment (as explained in note 3) 1.1 –

Total recognised gains and losses since last Annual Report 19.2 3.0




95

Notes to the Company’s financial statementsfor the year ended 31 December 2005

Note 1. Principal accounting policies

Basis of preparationThe financial statements have been prepared in accordance with applicable United Kingdom accountingstandards and under the historical cost convention.

The principal accounting policies of the Company are set out below. The Directors have reviewed theprincipal accounting policies of the Company and consider they remain the most appropriate for theCompany. The accounting policies have remained unchanged from the previous year, with the exception ofthe adoption of Financial Reporting Standard (FRS) 21 – Events after balance sheet date.

In preparing the financial statements for the current year, the company has adopted Financial ReportingStandard 21.

The adoption of FRS 21 has resulted in a change in accounting policy in respect to proposed equitydividends. If the Company declares dividends to the holders of equity instruments after balance sheet date,the Company does not recognise those dividends as a liability at the balance sheet date. Previously wherethese equity dividends were proposed after the balance sheet date but before authorisation of the financialstatements they were recorded as liabilities at the balance sheet date. The aggregate amount of equitydividends proposed before approval of the financial statements, which have not been shown as liabilities atthe balance sheet date, are disclosed in the notes to the financial statements. The financial effect of thischange in accounting policy is set out in note 3.

Cash flowUnder FRS1 – Cash flow statement (revised 1996) the Company is exempt from the requirement ofcompleting a cash flow statement.

DepreciationDepreciation is calculated to write down the cost less estimated residual value of all tangible fixed assetsother that freehold land by equal annual instalments over their expected useful life. The rates generallyapplicable are:

Freehold buildings 2%Freehold improvements 2%Leasehold properties 5%Leasehold improvements 10%Motor vehicles 25%Fixtures and fittings 20%Computer equipment 33%

Investments in Group subsidiariesInvestments are included at cost less amounts written off.

Interest capitalised on fixed assetsFinance costs are capitalised as incurred in the period of construction/development of properties prior to therelevant assets being available for use. Where applicable the tax effect of this treatment is matched with theresulting depreciation of the relevant assets.

Contributions to pension schemes – Defined contribution schemeThe pension costs charged against profits represent the amount of the contributions payable to the schemein respect of the accounting period.

Deferred taxDeferred tax is recognised on all timing differences where the transactions or events that give the Companyan obligation to pay more tax in the future, or the right to pay less tax in the future have occurred by thebalance sheet date. Deferred tax assets are recognised when it is more likely than not that they will berecovered. Deferred tax is measured using rates of tax that have been enacted or substantively enacted atthe balance sheet date.


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Note 2. Profit for the financial periodThe parent Company has taken advantage of section 230 of the Companies Act 1985 and has not includedits own profit and loss account in these financial statements. The Group profit for the year includes a profitof £18.1m (2004: £3.0m) which is dealt with in the financial statements of the Company.

Note 3. Prior year adjustmentFRS 21 – Events after balance sheet date, has been adopted with effect from 1 January 2005. The effectof restating the prior year comparatives is as follows:

2004£m

Profit and loss accountIncrease in retained profit for the year 1.1

Balance sheetIncrease in retained profit for the year 1.1

Increase shareholders’ funds 1.1

Dividends are disclosed as appropriations of profit in note 21, and the fair value adjustment in respect ofavailable for sale financial assets is disclosed as an equity movement in note 21.

Note 4. Profit from ordinary activitiesProfit from operations has been arrived at after charging (crediting):


£m £m

Auditors remuneration:– Non-audit services * 0.1 –

* The non-audit services for both periods noted above relate to work in respect of RICS audit work and Company lawrequirements on a number of acquisitions. In addition the auditors received £0.1m (2004: £0.2m) in respect of reportingaccountants’ fees, which have been added to the cost of investments and deducted from share premium.

Audit fee for the Company was £15,000 (2004: £15,000).

The Directors’ emoluments are presented in the Directors’ remuneration report.

Note 5. Directors and employeesStaff costs during the period were as follows:


£m £m

Wages and salaries 3.2 1.4Social security costs 0.4 1.0

3.6 2.4

The average number of employees of the Company during the period to 31 December 2005 was 108(2004: 73).

Details in respect of the Directors’ emoluments are included within the Directors’ remuneration report.



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Note 6. Tangible fixed assetsMotor

Freehold Leasehold vehicles,land and land and fixtures Computerbuildings buildings and fittings equipment Total

£m £m £m £m £m

CostAt 1 January 2005 2.8 0.5 0.2 1.3 4.8Additions – 0.6 0.4 1.3 2.3

At 31 December 2005 2.8 1.1 0.6 2.6 7.1

DepreciationAt 1 January 2005 0.1 0.2 – 0.3 0.6Provided in the year – 0.1 – 0.9 1.0

At 31 December 2005 0.1 0.3 – 1.2 1.6


MotorFreehold Leasehold vehicles,land and land and fixtures Computerbuildings buildings and fittings equipment Total

£m £m £m £m £m

CostAt 1 April 2004 2.6 0.5 0.2 0.7 4.0Additions 0.2 – – 0.6 0.8

At 31 December 2004 2.8 0.5 0.2 1.3 4.8

DepreciationAt 1 April 2004 0.1 0.1 – 0.1 0.3Provided in the period – 0.1 – 0.2 0.3

At 31 December 2004 0.1 0.2 – 0.3 0.6


Note 7. Investments2005

Investments in Group subsidiaries £m

At 1 January 2005 102.3Additions 54.2

At 31 December 2005 156.5

Details of related undertakings are disclosed in notes 38 and 39 in the Group financial statements.

Note 8. Debtors2005 2004

£m £m

Amounts owed by Group undertakings 61.3 18.0Other debtors 0.8 0.7Prepayments and accrued income 1.5 0.4

63.6 19.1


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Note 9. Creditors: amounts falling due within one year2005 2004

£m £m

Deferred purchase consideration 11.1 3.5Trade creditors 1.9 0.8Other creditors 2.4 –Interim dividend declared – 2.0Social security and other taxes 0.6 –Corporation tax 0.8 0.2Accruals and deferred income 2.5 1.4

19.3 7.9

Deferred purchase consideration represents the outstanding payments due in respect of completedacquisitions. All such deferred purchase consideration bears no interest and is unsecured. Deferredconsideration includes amounts totalling £0.6m, in respect of variable earn-out based payments, and£10.5m that can be settled by either cash or shares at the Company’s option.

Note 10. Bank loans: current liabilities2005 2004

£m £m

Bank loans – secured 0.2 0.3

0.2 0.3

Note 11. Creditors: amounts falling due after more than one year2005 2004

£m £m

Deferred purchase consideration – gross 21.3 7.7Discount (0.5) –

20.8 7.7

Deferred purchase consideration represents the outstanding payments due in respect of completedacquisitions. All such deferred purchase consideration bears no interest and is unsecured. Deferredconsideration includes amounts totalling £7.1m, in respect of variable earn-out based payments, and£14.2m that can be settled by either cash or shares at the Company’s option.

Note 12. Bank loans: non-current liabilities2005 2004

£m £m

Bank loans – secured 55.3 15.4

55.3 15.4

The bank overdrafts of the Group are secured by a fixed and floating charge over all the assets of the Group.

Bank loan facilities comprise the following:

• Bank overdraft of £6m. Margin (base plus) 1%;

• 14 year property loan of £5.6m margin 1% capital repayments over the term (quarterly paymentstotalling £0.2m p.a. for nine years then £0.4 p.a for five years then £1.8m bullet payment). Fullydrawn-down;

• £10m four year RCF bullet repayment in full at the end of the term. Margin 1.25%-1.5% (current actual1.5%). Fully drawn-down;

• £8m ten year loan – capital repayments not commencing until 2008. Not drawn-down at year end(available for the Lincoln property acquisition and development). Margin 1.5%;



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Note 12. Bank loans: non-current liabilities – continued• £40m five year facility. Margin 1.5%. No repayments in 2006 then quarterly payments totalling £10m

p.a. for the next four years. Fully drawn-down; less

The issue costs of the loans, which are deducted from gross proceeds according to International AccountingStandards 39 and amortised over the term of the loans.

Total facilities at year end amount to £70.0m.

Long-term liabilities are repayable as follows:

2005 2004£m £m

After one and within two yearsBank loans 10.2 0.2Deferred purchase consideration 8.3 3.7

After two and within five yearsBank loans 40.3 0.6Deferred purchase consideration 7.9 3.3

After five yearsBank loans 4.8 14.6Deferred purchase consideration 0.7 0.7

72.2 23.1

The Company uses financial instruments comprising bank loans, cash, term deposits and finance leases,together with various items such as trade debtors and trade creditors that arise directly from its operations.

The main risks arising from the financial instruments are interest rate risk and liquidity risk. The Boardreviews and agrees policies for managing these risks as detailed below.

Term deposits are structured so as to enable cash to be available when required. Most are in fixed interestrates. No transactions in derivatives are undertaken.

Short term debtors and creditorsShort-term debtors and creditors are excluded from the disclosures below (except foreign currency risks) asallowed by FRS 13.

Interest rate riskThe Company finances its operations through a mixture of shareholders’ funds and bank loans. TheCompany accepts the risk attached to interest rate fluctuations as interest rates remain a very lowproportion of operating profits.

Liquidity riskThe Company manages liquidity risk by a combination of controls including:

• regular reviews at full board level of cash flow projections and headroom position in respect of bankingfacilities;

• maintaining sensible gearing levels across the Group; and

• ensuring excess facilities are readily available for future use.

Currency riskThe Company does not operate in overseas markets nor (to any material extent) does it pay suppliers innon-sterling currencies. Hence management do not envisage any significant currency risk attaches to theCompany for all financial short term instruments (including debtors and creditors).

Fair valuesThe fair value of the Company’s financial instruments is considered to be approximate to their book value.


100


Note 13. Provisions for liabilities and chargesDeferred tax

2005£m

All deferred tax balances relate to accelerated capital allowances.As at 1 January 2005 0.3Charge to profit and loss (0.3)

As at 31 December 2005 –

Note 14. Share capital2005 2004

£m £m

Authorised:200,000,000 (2004: 200,000,000) Ordinary shares of 0.5p each 1.0 1.0

Issued and fully paid:105,079,221 (2004: 94,373,015) Ordinary shares of 0.5p each 0.5 0.5

As at 1 January 0.5 0.2Issue in respect of acquisitions – 0.3


2005 2004Number Number

of shares of shares

As at 1 January 94,373,015 44,582,764Issue of share options 981,313 919,164Issue in respect of acquisitions 9,974,024 48,871,087Cancellation of treasury shares (249,131) –

As at 31 December 105,079,221 94,373,015

Merger relief arises on acquisitions made by the Company where shares are provided as part of thepurchase consideration and is included in Other Reserves. This occurs as Section 131 of the Companies Act1985 does not allow the difference between the fair value and nominal value of such shares being taken tothe Share Premium Account.

Allotments during the yearThe Company made an allotment of 5,101,828 0.5p ordinary shares in November 2005 as a vendorplacement totalling £14,795,301, and 2,827,074 directly in respect of the Mount Street acquisition. Thedifference of £22,954,170 between the total consideration of £22,993,815 and the nominal value hasbeen credited to other reserves account.

The Company made an allotment of 1,053,538 0.5p ordinary shares in November 2005 in respect of theMillar Kitching acquisition. The difference of £3,101,932 between the total consideration of £3,107,200and the nominal value has been credited to other reserves.

The Company made an issue from cancelled treasury shares of 175,400 0.5p ordinary shares in September2005 in respect of the Leach Rhodes Walker acquisition. The difference of £499,013 between the totalconsideration of £499,890 and the nominal value has been credited to other reserves.

The Company made an issue from cancelled treasury shares of 73,731 0.5p ordinary shares in October2005 in respect of the PPH acquisition. The difference of £199,442 between the total consideration of£199,811 and the nominal value has been credited to other reserves.



101


Note 14. Share capital – continuedThe Company also allotted a total of 742,453 ordinary shares of 0.5p each at the beginning of the year inorder to complete the acquisition of the entire issued share capital in Hercules Property Services plc. Thedifference of £998,000 between the total consideration of £992,712 and the nominal value has beencredited to other reserves.

The Company made an allotment of 981,313 ordinary shares of 0.5p in 2005 in respect of share optionsexercised by staff leaving the Group or entitled to exercise rolled over Hercules share options (as fromSeptember 2005). The difference of £1,087,233 between the total consideration of £1,095,852 and thenominal value has been credited to share premiuim account.

Note 15. ReservesProfit

Share Shares to Treasury Other and losspremium be issued shares reserves account

(restated) (restated)£m £m £m £m £m

At 31 December 2004 16.5 1.6 – 74.9 1.4Dividends – paid – – – – (4.3)Issue of share capital – (1.0) – 27.7 –Cost of issue of shares – – – (1.4) –Equity share options issued – 0.3 – – –Equity share options exercised 1.1 – – – –Treasury shares purchased – – (2.2) – –Retained profit for the year – – – – 18.1

At 31 December 2005 17.6 0.9 (2.2) 101.2 15.2

Note 16. Capital commitmentsThe Company had no outstanding capital commitments at 31 December 2004.

Note 17. Contingent liabilitiesAt 31 December 2005 the Company had undertaken to support certain subsidiary undertakings.

The Company has offered a composite guarantee to the Group’s bankers that incorporates a right of set-off ofliquid balances. The aggregate Group liability at 31 December 2005 amounted to £79.1m (2004: £43.5m).

Note 18. Retirement benefitsThe Company has no defined benefit schemes.

Note 19. Related party transactionsJuliet Bellis and Co, Solicitors, is a related party by virtue of the close family relationship between JMSBellis, the senior partner of the firm of Juliet Bellis and Co, and NG Bellis, a director of the Company.

Juliet Bellis & Co is an independent two partner firm of solicitors which renders legal services to the Group.The firm employs four qualified solicitors, one licensed conveyancer, two legal executives, sixteen para legalsand one secretary. The firm carries out most of the legal work for the Group including all employmentmatters, debt collection and other litigation, small acquisitions and property sales and purchases. The firmalso carries out work for third party clients who are independent of the Group.

JMS Bellis herself is company secretary to all companies within the Group.

Juliet Bellis and Co rendered legal and Company secretarial services to the Group amounting to £0.6m(2004: £0.3m). Juliet Bellis & Co’s fees were subject to scrutiny and approval by the Directors’Remuneration Committee. The Company also received rental income amounting to £60,000 (2004:£45,000) from Juliet Bellis and Co.

No monies were outstanding to or due from any related party at the year end. None of the transactionsincorporate special terms and conditions.


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Note 20. Post balance sheet eventsThere have been no material post balance sheet events since the period end to the date of signing thisreport and financial statements.

Note 21. Reconciliation of movement in shareholders’ fundsProfit

Shares to and lossShare Share be issued Treasury Other account Total

capital premium (restated) shares reserves (restated) (restated)£m £m £m £m £m £m £m

Balance at 31 March 2004 0.2 15.4 – – 10.0 1.0 26.6Profit for the period – – – – – 3.0 3.0Dividends – paid – – – – – (2.0) (2.0)Issue of share capital 0.3 0.5 – – 64.9 – 65.7Equity share options issued – 0.6 0.6 – – (0.6) 0.6Shares to be issued – – 1.0 – – – 1.0

Balance at 31 December 2004 0.5 16.5 1.6 – 74.9 1.4 94.9

Profit for the period – – – – – 18.1 18.1Dividends – paid – – – – – (4.3) (4.3)Issue of share capital – – (1.0) – 27.7 – 26.7Cost of issue of shares – – – – (1.4) – (1.4)Equity share options issued – – 0.3 – – – 0.3Equity share options exercised – 1.1 – – – – 1.1Treasury shares purchased – – – (2.2) – – (2.2)

Balance at 31 December 2005 0.5 17.6 0.9 (2.2) 101.2 15.2 133.2



103

Five year summary

Nine monthsYear ended Year ended Year ended ended Year ended31 March 31 March 31 March 31 December 31 December

2002 2003 2004 2004 2005£m £m £m £m £m

UK GAAP UK GAAP UK GAAP IFRS IFRS

RevenueResidential property services 19.1 30.7 38.6 38.4 74.2Commercial property services – – – 20.5 55.2Insurance property services 1.7 3.0 3.6 8.6 22.4Discontinued activities 0.7 – – – –

21.5 33.7 42.2 67.5 151.8

Adjusted operating profit *Residential property services 3.0 5.2 7.2 5.6 13.0Commercial property services – – – 1.0 7.6Insurance property services 0.4 0.7 1.4 3.2 11.3Central overheads (1.4) (1.7) (2.3) (3.4) (4.1)Share of joint venture results – (0.1) (0.1) – –Discontinued activities 0.7 – – – –

Adjusted operating profit * 2.7 4.1 6.2 6.4 27.8

Profit before tax 2.0 2.2 4.3 1.6 23.2

Profit for the period 1.2 1.4 2.8 1.2 17.4

Adjusted profit before tax * 2.4 4.0 6.0 5.7 24.3

Adjusted profit for the period * 1.6 2.9 4.4 5.3 18.5

Adjusted cash flow from operations 2.8 4.7 7.5 5.5 26.0

Net assets 10.5 18.5 29.1 95.3 133.5

Basic earnings per share (pence) 4.4p 4.2p 7.2p 2.3p 18.1p

Adjusted basic earnings per share (pence) * 5.8p 8.4p 11.3p 9.7p 19.2p

* Excludes goodwill amortisation, exceptional items and restructuring costs.


104

Shareholder information and financial calendar

Directors: Nigel Turnbull ChairmanNeil Bellis Chief ExecutiveLucy Cummings Commercial DirectorNigel Davis Chief Operating OfficerMichael Pearson Finance DirectorNicholas Fry Non Executive DirectorKeith Peraux Non Executive DirectorLord Poole Non Executive DirectorLord Razzall Non Executive Director

All of: Phoenix House, 11 Wellesley Road, Croydon, Surrey CR0 2NW

Company secretary: Juliet Bellis

Registered office: Phoenix House11 Wellesley RoadCroydon, Surrey, CR0 2NW

Company number: 03732607

Auditors: Grant Thornton UK LLPChurchill HouseChalvey Road EastSlough, Berks SL1 2LS

Principal bankers: Bank of ScotlandThe MoundEdinburgh, EH1 1YZ

Principal legal advisors: Memery Crystal31 Southampton RowLondon, WC1B 5HT

Brokers: Collins Stewart Limited and Investec Bank (UK) Limited9th Floor 2 Gresham Street88 Wood Street LondonLondon, EC2V 7QR EC2V7QP

Registrars: Capita RegistrarsThe Registry34 Beckenham RoadBeckenham, Kent, BR3 4TU

Investor relations:Website: www.erinaceousir.comEmail: [email protected]

Financial calendar:Annual General Meeting – 26 April 2006Proposed dividend paid – 28 April 2006Interim results announced – September 2006Interim dividend (provisional) – October 2006Full year results announced – March 2007Annual General Meeting – April 2007Proposed dividend paid – April 2007




sterling 76510


2

Erinaceous Group plcAnnual Report & Accounts for the year ended 31 December 2005

Erinaceous provides a ‘one stop shop’ for a broadrange of services related to the management,maintenance, procurement,design, construction andinsurance of property.

Erinaceous provides services and solutions in both the private and publicsectors for residential andcommercial property. We aim to be the provider ofchoice and are well placed to build on our existinginfrastructure and achievemarket leadership.

76510 R&A Cover 22/3/06 1:01 pm Page 3

Erinaceous Group plcPhoenix House11 Wellesley RdCroydonCR0 2NW

T: 0870 703 9898E: [email protected]: www.erinaceous.com

Erinaceous Group plcAnnual Report & Accounts for theyear ended 31 December 2005

Erinaceous Group plc

Report &

Accounts 2005

76510 R&A Cover 22/3/06 1:01 pm Page 1

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Erinaceous Group plc - Investis CMSfiles.investis.com/erinaceous/ir/reports_presentations/reports... · 2 Erinaceous Group plc Annual Report & Accounts for the year ended 31 December