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THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION.

This document 1 should be read in conjunction with the accompanying Listing Particulars relating to South Staffordshire Plc which are deemed to be incorporated into this document. If you are in doubt as to the action you should take, you should seek your own personal independent financial advice immediately from your stockbroker, bank manager, solicitor, accountant or other independent financial adviser authorised under the Financial Services and Markets Act 2000. If you have sold or otherwise transferred all your Existing Group Shares, please send this document, together with the accompanying Form of Proxy and Water Group Listing Particulars, as soon as possible to the purchaser or transferee, or to the stockbroker, bank or other agent through whom the sale or transfer was effected, for transmission to the purchaser or transferee. N M Rothschild & Sons Limited and Cazenove & Co. Ltd are acting exclusively for South Staffordshire Group Plc and South Staffordshire Plc in connection with the Demerger, Share Exchange and Share Consolidation, and will not be responsible to any other person other than South Staffordshire Group Plc or South Staffordshire Plc for providing the protections afforded to customers of N M Rothschild & Sons Limited and Cazenove & Co. Ltd or for providing advice in relation to the Demerger, Share Exchange and Share Consolidation or any other matter referred to herein. The Company has been advised that the Water Group Shares to be issued pursuant to the Demerger are not required to be registered under the federal securities laws of the US by virtue of guidance issued by the US Securities and Exchange Commission and, as a consequence, the Water Group Shares to be issued pursuant to the Demerger have not been registered under the US Securities Act of 1933, as amended, or the US Securities Exchange Act of 1934, as amended.

to be renamed

Proposed demerger of South Staffordshire Plc, acquisition of the minority interest in Homeserve, share consolidation, adoption of new incentive plans and change of name from South Staffordshire Group Plc to Homeserve plc
and

Notice of Extraordinary General Meeting


Sponsored by N M Rothschild & Sons Limited and Cazenove & Co. Ltd
The authorised share capital of the Continuing Group on the Demerger and the Share Consolidation becoming effective will be 70,400,000 Continuing Group Shares of 1212 pence each being 8,800,000 and the issued and fully paid share capital of the Continuing Group on the Demerger and the Share Consolidation becoming effective will be not more than 62,853,149 Continuing Group Shares of 1212 pence each being 7,856,644. Your attention is drawn to the letter from the Chairman of the Company, set out in Part I of this document, recommending that you vote in favour of the resolutions to be proposed at the Extraordinary General Meeting. Notice of the Extraordinary General Meeting of the Company, to be held at the registered office of the Company, Green Lane, Walsall WS2 7PD, at 9.00 a.m. on 5 April 2004, is set out at the end of this document. A Form of Proxy for use at the Extraordinary General Meeting is enclosed. The Water Group Listing Particulars, which are deemed to be incorporated into this document, should be read in conjunction with this document. New Shares will only be issued to Richard Harpin and Jeremy Middleton pursuant to the Share Exchange. New Shares will not be made generally available or marketed to the public. Application has been made to the UK Listing Authority and to the London Stock Exchange for the Continuing Group Shares to be admitted respectively to the Official List and to trading on the London Stock Exchanges market for listed securities. Admission to the Official List together with admission to trading on the London Stock Exchanges market for listed securities constitute admission to official listing on a stock exchange. It is expected that Admission of the Continuing Group Shares will become effective and dealings will commence in the Continuing Group Shares at 8.00 a.m. on 6 April 2004. To be valid, Forms of Proxy for the meeting should be completed, signed and returned by post in accordance with the instructions printed on them, to Computershare Investor Services PLC, P.O. Box 1075, The Pavilions, Bridgwater Road, Bristol BS99 3FA, so as to arrive as soon as possible but in any event not later than 9.00 a.m. on 3 April 2004. The completion and return of a Form of Proxy will not prevent you from attending the meeting and voting in person (in substitution for your proxy vote) if you so wish. This document does not constitute an offer or invitation to any person to subscribe for or purchase any securities in the Water Group in any jurisdiction.

CONTENTS
Page Expected timetable of principal events and helpline Directors, secretary and advisers PART I PART II PART III PART IV PART V PART VI Definitions Notice of Extraordinary General Meeting Letter from the Chairman of the Company Further information relating to the Demerger, Share Exchange and Share Consolidation Information on the Continuing Group Financial information on the Existing Group Pro forma financial information on the Continuing Group Additional information 3 4 5 14 22 28 74 87 136 141

EXPECTED TIMETABLE OF PRINCIPAL EVENTS


2004 Latest time and date for receipt of Forms of Proxy for the Extraordinary General Meeting Extraordinary General Meeting Latest time and date for transfers of Existing Group Shares in order for the transferee to be registered for the Demerger Record Time Demerger Record Time Expected effective date of the Demerger, Share Exchange and Share Consolidation, commencement of dealings in Water Group Shares and Continuing Group Shares on the LSE and crediting of Water Group Shares to CREST accounts Despatch of definitive share certificates for Continuing Group Shares and Water Group Shares (other than in respect of shares held through CREST) and any fractional entitlement cheques in respect of Continuing Group Shares and Water Group Shares 9.00 a.m. on 3 April 9.00 a.m. on 5 April by 6.00 p.m. on 5 April 6.00 p.m. on 5 April

8.00 a.m. on 6 April

By 13 April

HELPLINE

A telephone helpline has been provided to answer questions about the Demerger, Share Exchange and the Share Consolidation. Any Existing Group Shareholder with questions about the Demerger, Share Exchange or the Share Consolidation should contact the helpline on 0870 702 0100. The helpline will be available from 10 March 2004, between 8.30 a.m. and 5.30 p.m. until 16 April 2004. Calls will be charged at national rates. For legal reasons, the helpline will not be able to provide advice on the merits of the Demerger, Share Exchange or the Share Consolidation or give any financial advice. Further details of the Demerger for holders of Existing Group Shares who are citizens or residents of countries other than the United Kingdom are set out in paragraph 8 of Part II of this document.

DIRECTORS, SECRETARY AND ADVISERS


The Company Existing Group Directors South Staffordshire Group Plc Lindsay Bury (non-executive chairman) Brian Whitty (chief executive officer) Andrew Belk (finance director) Robert Harley (executive director) Richard Harpin (executive director) Panton Corbett (non-executive director) John Harris (non-executive director) Justin Jewitt (non-executive director) David Sankey (non-executive director) Brian Whitty (executive chairman) Richard Harpin (chief executive officer) Andrew Belk (finance director) Robert Harley (executive director) John Maxwell (senior independent director) Justin Jewitt (non-executive director) Green Lane Walsall WS2 7PD Cable Drive Walsall WS2 7BN N M Rothschild & Sons Limited New Court St Swithins Lane London EC4P 4DU Cazenove & Co. Ltd 20 Moorgate London EC2R 6DA Deloitte & Touche LLP Four Brindleyplace Birmingham B1 2HZ Wragge & Co LLP 55 Colmore Row Birmingham B3 2AS Ashurst Broadwalk House 5 Appold Street London EC2A 2HA Computershare Investor Services PLC P.O. Box 82, The Pavilions Bridgwater Road Bristol BS99 7NH HSBC Bank PLC 130 New Street PO Box 68 Birmingham B2 4JU The Royal Bank of Scotland Group plc 5th Floor 2 St. Phillips Place Birmingham B3 2RB

Continuing Group Directors

Current registered office Registered office following the Demerger Joint financial adviser and joint sponsor

Joint financial adviser, joint sponsor and broker Auditors and reporting accountants

Legal adviser to the Company

Legal adviser to the Sponsors

Registrar and receiving agent

Bankers

PART I LETTER FROM THE CHAIRMAN OF THE COMPANY

Green Lane Walsall WS2 7PD

11 March 2004 Dear Shareholder, Proposed Demerger of South Staffordshire Plc, acquisition of the minority interest in Homeserve, share consolidation, adoption of new incentive plans and change of name from South Staffordshire Group Plc to Homeserve plc 1. Introduction Following a strategic review, your Board today announced proposals to simplify the Existing Group structure and provide a greater focus for both management and its Shareholders. The purpose of this document is to provide details of the Boards proposals, to explain why the Board believes them to be in the interests of the Existing Group and Shareholders, and to ask Shareholders to vote in favour of the proposals and related matters at an Extraordinary General Meeting, which is being convened on 5 April 2004 for this purpose. This document also provides you with information on the Continuing Group business post-Demerger. Your Board proposes to demerge the Water Group, comprising South Staffordshire Water and the closely related Echo, Rapid, Underground Pipeline Services and Aqua Direct businesses, to all Existing Group Shareholders pro rata to their holdings in the Existing Group. The Water Group Shares will be separately listed on the main market of the London Stock Exchange. Due to the size of the Demerger relative to the Existing Group, Shareholder approval is being sought for the Demerger. It is further proposed that, conditional on the approval by the Existing Group Shareholders of the Demerger Resolution, the Consolidation Resolution and the Share Exchange Resolution at the EGM, and on Admission of the Continuing Group Shares and the Water Group Shares, the Existing Group will acquire the 24.98 per cent. minority shareholding in Homeserve in a share for share exchange involving the issue of New Shares. The minority shareholders are deemed to be related parties under the Listing Rules and therefore Shareholder approval is being sought for the Share Exchange. The Demerger is conditional on the Demerger Resolution and the Share Exchange Resolution being approved by Existing Group Shareholders at the EGM, satisfaction of the Finance Condition and Admission of the Water Group Shares. The Continuing Group will retain its existing listing and to reflect the change in business mix intends to change its name to Homeserve plc.

PART I
The Board also proposes a share consolidation to maintain, so far as reasonably practicable, the comparability of historic and future per share data and the current share price and to preserve the value of employee share options. The Share Consolidation is conditional on the Demerger becoming effective, Admission of the Continuing Group Shares and the adoption of the New Articles. Detailed information on the Water Group can be found in the Water Group Listing Particulars, which are deemed to be incorporated in this document, and should be read in conjunction with it. A notice of the Extraordinary General Meeting appears on pages 141 to 144 of this document and a Form of Proxy for use in connection with the EGM is also enclosed. 2. Background to and reasons for the Demerger Over the last 10 years the Existing Group has developed a range of service businesses related to the activities of its regulated water supply operation. These support service offerings have enabled the Existing Group to achieve 13 per cent. compound annual earnings growth since 1995, during which time the regulated water profits have shown 2.3 per cent. compound annual growth. Consequently, regulated water profits now represent less than one third of Existing Group operating profits before goodwill, compared to over 90 per cent. in 1995. The major area of growth has been the domestic service provider, Homeserve. It has shown exceptional organic growth, complemented by acquisitions to broaden its service offering and customer base. Homeserve represented 47 per cent. of Existing Group operating profit before goodwill in the year to 31 March 2003. Your Board believes that separation of the Water Group from the Existing Group will benefit both Existing Group Shareholders and the businesses themselves. It will allow the different business profiles and identities of the two companies to develop independently, provide greater clarity and focus for management, customers and business partners, permit each business to maintain different and appropriate capital structures and dividend policies, and give greater choice to shareholders through the ability to invest in two businesses with distinct investment characteristics. The Existing Group plans to effect the Demerger by declaring a tax free special dividend to be satisfied in specie by the transfer of the entire issued share capital of the Water Group to Existing Group Shareholders pro rata to their holding of Existing Group Shares at the Demerger Record Time. Consequently, Existing Group Shareholders will continue to retain shares in the Existing Group and will also receive shares in the Water Group on the basis of: 1 Water Group Share of nominal value 4212 pence for every 5 Existing Group Shares of nominal value 10 pence held. The Demerger is conditional on the approval by the Existing Group Shareholders of the Demerger Resolution and Share Exchange Resolution at the EGM. The Demerger is also conditional on satisfaction of the Finance Condition and Admission of the Water Group Shares. Further details concerning the Demerger are contained in paragraph 2 of Part II of this document. 3. Background to and reasons for the Share Exchange The Existing Group currently owns 75.02 per cent. of the issued share capital of Homeserve. Richard Harpin (a current Existing Group Director, the current chief executive of Homeserve and the Continuing Groups proposed Chief Executive) and Jeremy Middleton (a non-executive director of Homeserve) hold 19.49 per cent. and 5.49 per cent. of the issued share capital of Homeserve respectively.
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PART I
In order to give the Continuing Group 100 per cent. ownership and full control of the Homeserve business post-Demerger, and to align fully the interests of Richard Harpin and Jeremy Middleton with those of the Continuing Group Shareholders, the Existing Group proposes to acquire the 24.98 per cent. minority shareholding in Homeserve currently held by Messrs. Harpin and Middleton, by issuing 11,600,000 New Shares equivalent to approximately 18.6 per cent. of the enlarged share capital of the Company following the Share Consolidation to Messrs. Harpin and Middleton in exchange for their Homeserve shares. The New Shares issued to Richard Harpin and Jeremy Middleton will not qualify to receive Water Group Shares as part of the dividend in specie declared to effect the Demerger. In addition, the Existing Group proposes to make a one-off payment of 150,000 each to Messrs. Harpin and Middleton in compensation for the loss of certain enhanced dividend rights that they have in relation to Homeserves earnings. The aggregate value of the consideration payable under the Share Exchange is 63.4 million (based on the pro forma information set out in Part V). Further details concerning the Share Exchange are contained in paragraph 3 of Part II of this document. Richard Harpins and Jeremy Middletons current holdings in Homeserve will qualify for any proposed final dividend from Homeserve for the year to 31 March 2004. This dividend has not yet been set or declared, but it has been agreed that the dividend payable to Messrs. Harpin and Middleton will not exceed 3.0 million. The New Shares issued to Messrs. Harpin and Middleton as a result of the Share Exchange will not qualify for a final dividend payment from the Existing Group for the year ended 31 March 2004 and will be subject to restrictions on sale (as detailed in paragraph 3 of Part II), although in all other respects they will rank pari passu with the other issued Continuing Group Shares, with no special rights attaching. Application has been made to the UK Listing Authority for the New Shares to be issued to Messrs. Harpin and Middleton to be admitted to the Official List and to trading on the London Stock Exchanges market for listed securities. The Share Exchange is conditional on the approval by the Existing Group Shareholders of the Demerger Resolution, the Consolidation Resolution and the Share Exchange Resolution at the EGM and on Admission of the Continuing Group Shares and the Water Group Shares. 4. Share Consolidation Conditional on the Demerger becoming effective, the adoption of the New Articles, and Admission of the Continuing Group Shares the enlarged share capital, of the Company will be consolidated to maintain, so far as reasonably practicable, the comparability of historic and future per share data and the current share price and to preserve the value of employee share options since, following the Demerger, the value of the Water Group will no longer be reflected in the value of the Continuing Group. Following the Share Consolidation, Existing Group Shareholders will hold: 4 Continuing Group Shares of nominal value 1212 pence for every 5 Existing Group Shares of nominal value 10 pence held. Further details concerning the Share Consolidation are set out in paragraph 2 of Part II of this document. 5. The Continuing Groups strengths and future strategy Domestic Services On a pro forma basis as set out in Part V of this document, turnover for the current Homeserve division of the Continuing Group was 121 million and operating profit pregoodwill and exceptional items was 25.2 million in the year to 31 March 2003.

PART I
Shareholders should read the whole document and not just rely on key or summarised information. Homeserve is a leader in the expanding UK market for insured repair solutions for domestic customers with 2.6 million policies for plumbing, electrical wiring, gas boiler breakdown and 1.8 million extended furniture warranty policies in place at 30 September 2003. Homeserve works with the majority of the UK water and sewerage companies, as well as power companies, retailers, household insurers and appliance manufacturers, providing both assistance products and the related repair services to their customer base. Homeserves experienced management team has a track record of delivering strong operating profit growth in its core business Home Service. Home Service provides plumbing and drainage, electrical wiring and gas boiler breakdown policies to domestic customers. Policies are renewable annually. Home Service develops the policies, undertakes direct marketing to domestic households using direct mail and targeted outbound telesales and administers the issue of policy documents to households. Through its Home Hotline subsidiary, Home Service also handles claims and deploys tradesmen. All policies are affinity partner branded and Home Service pays commission to affinity partners. Additional products are cross-sold to existing customers, with the average product holding per customer being 1.5 policies. The core plumbing and electrical cover products in Home Service still have organic growth to deliver in the UK. Scottish Water recently signed up as an affinity partner with a new potential market of 1.4 million households. Additional growth is being achieved through product line extensions, such as water and gas supply pipe cover, to cross-sell to existing members and to recruit new members. Further growth is planned in Home Services gas boiler breakdown policies following the acquisition of Servowarm in March 2003 and its national network of directly employed CORGI engineers and training facilities, which will enhance the service delivery underlying the gas policy product. There are also opportunities for Home Service to grow overseas. The business has made a positive start to its international expansion in France, and test marketing has now commenced in the USA which is currently at an early stage. The company writes off development costs as incurred. Regency was acquired in May 2002 and provides underwritten furniture warranty and repair services on behalf of retailers. All policies are affinity branded, typically have a three or five year term and are sold in store by the retailer. A key strength of Regency is its ability to train the retailers sales staff on warranty sales, using a national team of field-based trainers. In addition, repairs are carried out using its own network of directly employed upholstery repairers which are essential to provide a high quality of service. Its directly employed network for upholstery repair and cleaning is achieving increased workload from both retailers and manufacturers as well as building a working relationship with household insurance companies. Regency has the opportunity to increase warranty penetration with existing retailers as well as developing warranty programmes with new retailers. Highway was acquired in July 2002 and provides emergency glass, frame, lock and garage door repair and replacement services to leading household insurers. Its key strength is the ability to offer a broad range of products through a national network using an employed operative model. Highway currently has 28 household insurers as customers, to which a 24 hour emergency service is offered. Highway plans to increase insurance leads generated from existing insurers, particularly those taken on in the last 12 months. In conjunction with Home Service it has developed

PART I
a nationwide network of directly employed and sub-contracted plumbing and drainage engineers, which is now starting to work with household insurance companies. Commercial Outsourcing On a pro forma basis, as set out in Part V of this document, turnover for the Commercial Outsourcing operations of the Continuing Group was 77 million and operating profit pregoodwill was 4.5 million in the year to 31 March 2003. Shareholders should read the whole document and not just rely on key or summarised information. The OnSite and Middleton Doorman businesses provide a comprehensive range of infrastructure maintenance services. They operate under long-term partnerships or contractual arrangements with their major clients, which include the water utilities, Metronet and Tubelines (operators for London Underground), and a wide range of commercial and industrial clients, in particular covering the retail and financial sectors. The businesses have won new regional and national contracts, but have experienced reduced margins reflecting the competitive market in which they operate. They have an enhanced opportunity for growth, if they can capitalise on the increased waste water infrastructure spend expected following the next water industry regulatory review in 2005 and increased demand for maintenance services under national contracts, which complement the Highway commercial business. Mail Solutions provides a complete direct mail service including envelope manufacturing, laser print and insertion, design and leaflet printing. Home Service represents 16 per cent. of Mail Solutions turnover and external clients are predominantly in the financial sector or other mailing houses. The division has been operating in an increasingly competitive market over recent years, but has had some success in developing its capacity for transactional work, particularly in the financial and telecom sectors, where it believes there is greater opportunity for growth and added value services. 6. Current trading and future prospects Homeserve Home Service has experienced a good response to its winter marketing campaigns and overall policy renewal rates continue to be in excess of 87 per cent. The water supply pipe product introduced in the year to 31 March 2003 is achieving high take up rates. Home Service recently won Scottish Water as a new affinity partner and the first mailings were distributed in January. Initial take-up rates are encouraging. Outgoing telephone marketing continues to perform well and the capability has been increased. The average number of policies per customer has increased to 1.5 and the proportion of customers paying by direct debit has increased to 80 per cent. Home Service has also added a new partner to its manufacturer warranty business, Applied Energy, which includes the Creda, Redring and Xpelair brands. The joint venture in France is continuing to see strong demand for its plumbing products and results of initial test marketing in the USA, branded as Philadelphia Water, are encouraging. Regency is performing in line with last year despite the withdrawal of mandatory structural warranties by one of its largest customers. This has now been replaced by an optional three year extended warranty. Whilst some retailers are reporting reduced furniture sales, Regency is experiencing increased warranty penetration with certain clients. Highways main focus has been improving operational efficiency in order to enhance its longer-term profitability. Although Highway has experienced a slow build-up of volumes from new accounts, the number of insurance leads is now increasing as Highway enters its seasonally busy period.

PART I
The deferred consideration payable in 2006 on the Highway acquisition is based on the profitability of Highway in the year ending 31 March 2006 and was provided for at 13.5 million up to 30 September 2003. As the Directors now expect that profits are unlikely to have grown sufficiently by 2006 to trigger this level of payment, this provision has been reduced to 4.0 million thereby reducing the annual goodwill charge by approximately 0.5 million. Commercial Outsourcing Commercial Outsourcing comprises the OnSite and Mail Solutions divisions, both of which have continued to experience increased margin pressure as we reported in our interim results. OnSite has experienced inconsistent workloads on a number of its larger contracts, although volumes are now increasing in their seasonally busy period of the year. They have recently secured additional water industry contract work for the next financial year. Mail Solutions has also secured additional contract work for its data processing, print and distribution offering. Regulated Water Supply South Staffordshire Water continues to perform satisfactorily despite the increased operating costs brought about by the particularly dry summer period. The more normal weather patterns of the first quarter of 2004 have ensured that all water resources have now been fully replenished. The investment and efficiency programme for the current regulated period to March 2005 remains on target. It was particularly pleasing to achieve a rating of second in the industry for water operating cost efficiency in 2002/3 in a recent Ofwat report. Ofwat ratings for customer service and water quality remain at the highest levels. The activities of the Homeserve and Commercial Outsourcing businesses continue to be heavily weighted towards the second half of the financial year and overall, the Directors remain confident in the financial and trading prospects of the Existing Group for the full year to 31 March 2004. Consequently the Directors remain confident in the financial and trading prospects of the Continuing Group for the full year to 31 March 2004. As outlined in the Water Group Listing Particulars, the Directors remain confident in the financial and trading prospects of the Water Group as a stand alone business for the full year to 31 March 2004. If the Demerger is approved, the Directors may decide to draw up consolidated accounts for the Company for the current financial year to a date not more than seven days after 31 March 2004, pursuant to section 223(3) of the Act. 7. Dividend policy The Continuing Group expects to declare a final dividend for the year ended 31 March 2004 that, combined with the expected dividend from the Water Group, will be in line with the final dividend that the Existing Group would declare were the Demerger not taking place. Final dividends for both companies will be announced with the final results in May and paid in July 2004. The Board of the Continuing Group intends to maintain a progressive dividend policy, recognising the cash generative nature of the Continuing Groups businesses. Further information regarding the proposed Water Group dividend policy is outlined in the Water Group Listing Particulars.

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PART I
8. The Continuing Groups proposed board The Directors believe that the proposed composition of the Continuing Group Board will deliver a good balance of experience and independence. Brian Whitty, currently group chief executive and an Existing Group Director, will become executive chairman of the Continuing Group. Richard Harpin, currently chief executive of Homeserve and an Existing Group Director, will become chief executive of the Continuing Group. Andrew Belk, currently finance director of the Existing Group, will be finance director of the Continuing Group. Robert Harley, currently an executive director of the Existing Group, will become an executive director of the Continuing Group. In addition to the four executive directors, there will be three non-executive directors of the Continuing Group: John Maxwell, who will be appointed to the board of the Continuing Group at Demerger (as senior independent director), Justin Jewitt, a non-executive director of the Existing Group, and one other who is currently in the process of being recruited. Paragraph 2 of Part III of this document gives further information on the Continuing Groups proposed board and senior management. 9. Taxation Certain information on United Kingdom taxation of capital gains and dividends, stamp duty and stamp duty reserve tax is set out in paragraph 6 of Part II of this document.

10. New incentive schemes It is proposed that the Continuing Group adopts new incentive schemes as a result of the Demerger. Details of these proposals are contained in paragraph 7 of Part VI of this document. 11. The proposed name change, amendment of memorandum of association and adoption of New Articles To reflect the new business mix and to update constitutional documents to reflect current legislation, the Company is proposing to change its name to Homeserve plc, to adopt the New Articles and to amend its memorandum of association. Details of the New Articles and amendments to its memorandum of association are set out in paragraph 6 of Part VI of this document. 12. Extraordinary General Meeting An Extraordinary General Meeting is being convened at the registered office of the Existing Group on 5 April at 9.00 a.m. for the purpose of seeking shareholder approval for the Resolutions. The EGM notice convening the EGM can be found on pages 141 to 144 of this document. The Extraordinary General Meeting will consider 8 resolutions: (1) Resolution 1 (which is conditional on the approval by shareholders at the EGM of Resolution 2 and is conditional on Admission of the Water Group Shares) is proposed to approve the Demerger of the Water Group business to be effected by the Existing Group declaring a dividend in specie on the Existing Group Shares. The dividend will be satisfied by the distribution of Water Group Shares to the Existing Group Shareholders on the Existing Group Share Register at the Demerger Record Time; (2) Resolution 2 (which is conditional on the approval by shareholders at the EGM of Resolution 1) is proposed to approve the Share Exchange;

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PART I
(3) Resolution 3 (which is conditional on the Demerger becoming effective, the adoption of the New Articles and Admission of the Continuing Group Shares) is proposed to approve the Share Consolidation; (4) Resolution 4 (which is conditional on the Demerger becoming effective) is proposed to approve the Continuing Group LTIP; (5) Resolution 5 (which is conditional on the Demerger becoming effective) is proposed to approve the Continuing Group SIP; (6) Resolution 6 (which is conditional on the passing of Resolution 2) is proposed to change the name of South Staffordshire Group Plc to Homeserve plc; (7) Resolution 7 (which is conditional on the Demerger becoming effective) is proposed to amend the memorandum of association by the deletion of the provision in the objects clause which provides for the acquisition of South Staffordshire Water; (8) Resolution 8 (which is conditional on the Demerger becoming effective) is proposed to adopt the New Articles (the principal differences of which are outlined in paragraph 6 (b) of Part VI of the document) wholly to the exclusion of the existing articles of association. The majority required for the passing of resolutions 6 to 8 is not less than 75 per cent. of the votes cast at the meeting (in person or by proxy) by the Existing Group Shareholders. The majority required for the passing of resolutions 1 to 5 is more than 50 per cent. of the votes cast at the EGM (in person or by proxy) by the Existing Group Shareholders. 13. Action to be taken Whether or not you propose to attend the EGM in person, you are urged to complete and return the Form of Proxy. Completed Forms of Proxy should be returned as soon as possible but in any event so as to be received no later than 9.00 a.m. on 3 April 2004 by Computershare Investor Services PLC, P.O. Box 1075, The Pavilions, Bridgwater Road, Bristol BS99 3FA. Completion and return of a Form of Proxy will not prevent you from attending the Extraordinary General Meeting and voting in person if you so wish. 14. Additional information Your attention is drawn to the information set out in Parts II to VI of this document, and also to the Water Group Listing Particulars which have been sent to you with this document. Copies of the Water Group Listing Particulars are available, free of charge, from the Existing Groups registered office and will be available, for inspection only, during normal business hours at the document viewing facility at the Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS. 15. Recommendation The Directors have received financial advice from Rothschild and Cazenove in relation to the Demerger, Share Exchange and Share Consolidation. In giving their financial advice Rothschild and Cazenove have each taken account of the Directors commercial assessment of the transactions. The Directors (with the exception of Richard Harpin in respect of the Share Exchange Resolution) consider the Resolutions to be in the best interests of Existing Group Shareholders as a whole. Accordingly, the Directors (with the exception of Richard Harpin in respect of the Share Exchange Resolution) unanimously recommend that you vote in favour of the

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PART I
Resolutions to be proposed at the Extraordinary General Meeting, as they intend to do (with the exception of Richard Harpin in respect of the Share Exchange Resolution) in respect of their own beneficial holdings which, excluding the beneficial holdings of Richard Harpin, amount to 721,157 Existing Group Shares representing 1.1 per cent. of the existing issued ordinary share capital of the Existing Group and, including Richard Harpins beneficial holdings of 1,101,522 Existing Group Shares, amount to 1,822,679 Existing Group Shares, representing 2.9 per cent. of the existing issued ordinary share capital of the Existing Group. Richard Harpin, by virtue of his position as an Existing Group Director and a director of the existing Homeserve, is considered a related party under the Listing Rules with respect to the Share Exchange. Accordingly, he has not taken part in the recommendation of the Share Exchange Resolution. Jeremy Middleton is also a related party under the Listing Rules since he is a director of the existing Homeserve. Together, Messrs. Harpin and Middleton are interested in 2,657,340 Existing Group Shares which in aggregate represent 4.2 per cent. of the current issued ordinary share capital of the Company. Messrs. Harpin and Middleton will abstain from voting, and have undertaken to take all reasonable steps to ensure that their respective associates will abstain from voting at the meeting, on Resolution 2 to be proposed at the Extraordinary General Meeting. The Independent Directors, who have been so advised by Rothschild and Cazenove, consider the terms of the Share Exchange to be fair and reasonable so far as the Existing Group Shareholders are concerned. In providing their financial advice, Rothschild and Cazenove have each taken account of the Independent Directors commercial assessment of the Share Exchange. The Independent Directors unanimously recommend that you vote in favour of Resolution 2, to be proposed at the Extraordinary General Meeting, as they intend to do in respect of their own beneficial holdings which in aggregate amount to 721,157 Existing Group Shares, representing 1.1 per cent. of the existing issued ordinary share capital of the Existing Group. Yours sincerely,

Lindsay Bury Chairman

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PART II FURTHER INFORMATION RELATING TO THE DEMERGER, SHARE EXCHANGE AND SHARE CONSOLIDATION
1. Summary description of the Water Group TheWater Group owns regulated and non-regulated operations in the water sector together with complementary non-regulated businesses. South Staffordshire Water is the principal subsidiary. Its main activity is the regulated supply of potable water, but not sewerage services (which are separately provided to its customers by Severn Trent Water Ltd). South Staffordshire Water supplies water to a population of nearly 1.25m in both urban and rural areas covering 1,500 km2 and to commercial customers in the Midlands. Of the 22 water companies in England and Wales, South Staffordshire Water has the second lowest average annual household bill (some 20 per cent. below the industry average), the second highest levels of service for the year to 31 March 2003, as measured by Ofwat in its overall performance assessment, and its operating cost base is one of the most efficient, ranked second in the industry in 2002/3 by Ofwat. The Water Groups principal non-regulated businesses are Echo, Rapid, Underground Pipeline Services and Aqua Direct. Echo provides outsourced customer contact management and billing activities for South Staffordshire Water and a number of other external water utility and non-water industry customers. Rapid provides development and implementation of customer contact and billing systems for the UK water industry. Underground Pipeline Services repairs, maintains and replaces water mains, together with small diameter mains laying. Aqua Direct is a spring and mineral water business. As set out in the Accountants Report in Part VI of the Water Group Listing Particulars, the Water Group had net assets of 18.9 million at 30 September 2003, and profit on ordinary activities after taxation of 12.4 million for the year to 31 March 2003. More detailed information can be found in the Water Group Listing Particulars. 2. Details of the Demerger and Share Consolidation Demerger via dividend in specie The Demerger is conditional on the approval by the Shareholders of the Company of the Demerger Resolution and the Share Exchange Resolution at the EGM, satisfaction of the Finance Condition and on Admission of the Water Group Shares. The Existing Group plans to effect the Demerger by declaring a tax free special dividend, to be satisfied in specie by the transfer of the entire issued share capital of the Water Group to Existing Group Shareholders pro rata to their holding of Existing Group Shares at the Demerger Record Time. Consequently Existing Group Shareholders will continue to retain shares in the Existing Group (to be renamed Homeserve plc) and will also receive shares in the Water Group on the basis of: 1 Water Group Share of nominal value 4212 pence for every 5 Existing Group Shares of nominal value 10 pence held For any Existing Group Shareholder whose holding of Existing Group Shares at the Demerger Record Time is not exactly divisible by 5, the resultant number of Water Group Shares of nominal value 4212 pence that such Existing Group Shareholder receives will be rounded down to the nearest whole number and a fractional entitlement to a Water Group Share will arise. Fractional entitlements will be dealt with in accordance with the paragraph below headed Fractional entitlements. The Existing Group will be subscribing for further Water Group Shares to reflect any increase in the issued share capital of the Existing Group prior to the Demerger Record Time. Although the exact cost of this cannot be determined at this stage, it is unlikely to exceed 50,000. In any event the Water Group will pay the Existing Group further dividends which reflect this cost.
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PART II
Share Consolidation Conditional on the Demerger becoming effective, the adoption of the New Articles and Admission of the Continuing Group Shares, the share capital of the Continuing Group will be consolidated to maintain, so far as reasonably practicable, the comparability of historic and future per share data and the current share price and to preserve the value of employee share options, since following the Demerger the value of the Water Group will no longer be reflected in the value of the Continuing Group Shares. As a result of the Share Consolidation, Existing Group Shareholders will hold: 4 Continuing Group Shares of nominal value 1212 pence for every 5 Existing Group Shares of nominal value 10 pence held. For any Existing Group Shareholder whose holdings of Existing Group Shares at the Demerger Record Time is not exactly divisible by 5, the resultant number of Continuing Group Shares that such Existing Group Shareholder will hold following the Share Consolidation will be rounded down to the nearest whole number and a fractional entitlement to a Continuing Group Share will arise. Fractional entitlements will be dealt with in accordance with the paragraph below headed Fractional entitlements. Fractional entitlements Individual fractional entitlements to Water Group Shares, and Continuing Group Shares will be aggregated and sold in the market. The Continuing Group will retain the aggregate proceeds of such sales unless the aggregate amount to which any shareholder would be entitled (net of any commissions, dealing costs and administrative expenses) is 1 or more in which case that entitlement will be distributed to such shareholder proportionately to their entitlement, with cheques for such proceeds expected to be despatched to those entitled (at their risk) by 13 April 2004. Combined effect of the Demerger and Share Consolidation The combined effect of the Demerger and Share Consolidation on Existing Group Shareholders is that each Existing Group Shareholder will hold: 4 Continuing Group Shares of nominal value 1212 pence and 1 Water Group Share of nominal value 4212 pence for every 5 Existing Group Shares of nominal value 10 pence held at the Demerger Record Time. and, if applicable, the proceeds from the sale of their aggregate fractional entitlements to Continuing Group Shares and Water Group Shares over 1, net of expenses. 3. Details of the Share Exchange The Share Exchange is conditional on the approval by the Existing Group Shareholders of the Demerger Resolution, the Consolidation Resolution, and the Share Exchange Resolution at the EGM and on Admission of the Continuing Group Shares and the Water Group Shares. The Existing Group currently owns 75.02 per cent. of the issued share capital of Homeserve. 19.49 per cent. of the issued share capital of Homeserve is held by Richard Harpin, a current Existing Group Director, the current chief executive of Homeserve (and the proposed chief executive of the Continuing Group post Demerger) and the remaining 5.49 per cent. by Jeremy Middleton (a non-executive director of Homeserve). Jeremy Middleton and Richard Harpin came to own their shares in Homeserve as follows: On 26 April 1995 Jeremy Middleton and Richard Harpin subscribed for 24,000 ordinary shares of 1 each in Fastfix Plumbing and Heating Limited (representing 48 per cent. of the

15

PART II
issued share capital). Fastfix Plumbing and Heating Limited subsequently changed its name to Home Service (GB) Ltd. On 27 April 1998 6,000 shares were purchased from each of Jeremy Middleton and Richard Harpin in accordance with the original subscription agreement. On 31 March 2000 12,000 shares were purchased from Jeremy Middleton and 6,000 shares from Richard Harpin pursuant to a share exchange agreement. Consideration for the shares was ordinary shares in the Existing Group. On 3 September 2001 the trustees of Home Service (GB) Ltd transferred 9,300 ordinary shares of 1 each to Richard Harpin in consideration of Richard Harpin releasing, waiving and surrendering his rights to the bonus scheme which he had been entitled to benefit from under the terms of the 1995 agreement. On 4 September 2002 Homeserve Ltd (subsequently re-registered as a public limited company) acquired all the minority shareholdings in Home Service (GB) Ltd (including those of Jeremy Middleton and Richard Harpin) in exchange for new shares in itself. In order to give the Continuing Group 100 per cent. ownership and full control of the Homeserve business post Demerger, and to align fully the interests of Richard Harpin and Jeremy Middleton with those of the Continuing Group Shareholders, the Existing Group proposes to acquire the 24.98 per cent. minority shareholding in Homeserve in exchange for the issue to Richard Harpin and Jeremy Middleton of 11,600,000 New Shares, credited as fully paid, equivalent to 18.6 per cent. of the Continuing Groups enlarged issued share capital after consolidation. Richard Harpin would receive 9,050,550 New Shares, which combined with his existing holdings of 1,101,522 Existing Group Shares would result in him holding approximately 15.9 per cent. of the Continuing Groups enlarged issued share capital after consolidation. Jeremy Middleton would receive 2,549,450 New Shares, which combined with his existing holdings of 1,555,818 Existing Group Shares would result in him holding approximately 6.1 per cent. of Continuing Groups enlarged issued share capital after consolidation. The actual market price of the New Shares cannot be known until completion of the Demerger. However, based on the price per share of 4.35 (pre-Share Consolidation) estimated for the purposes of the pro forma financial information in Part V of this document, the New Shares that would be issued to Messrs. Harpin and Middleton would have an aggregate value of 63.1 million. Shares to be issued by the Company do not require authority for the disapplication of the statutory pre-emption rights pursuant to section 89 of the Act as the consideration for the New Shares is the minority shareholdings in Homeserve. It is proposed to effect the Share Exchange immediately after the Demerger and the Share Consolidation. Consequently the New Shares issued to Richard Harpin and Jeremy Middleton would not qualify to receive Water Group Shares via the Demerger and would not be subject to the Share Consolidation Richard Harpins and Jeremy Middletons current holdings in Homeserve will qualify for any proposed final dividend from Homeserve for the year to 31 March 2004. This dividend has not yet been set or declared, but it has been agreed that the dividend payable to Messrs. Harpin and Middleton will not exceed 3.0 million. The New Shares issued to Messrs. Harpin and Middleton as a result of the Share Exchange will not qualify for a final dividend payment from the Existing Group for the year ended 31 March 2004 and will be subject to restrictions on sale (as detailed below), although in all other respects they will rank pari passu with the other issued Continuing Group Shares, with no special rights attaching. The New Shares will be issued to Richard Harpin and Jeremy Middleton in certificated form and no temporary documents of title will be issued.

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PART II
For a period of two years from completion of the Share Exchange, Richard Harpin will commit not to dispose of any New Shares issued to him in accordance with the Share Exchange. Similarly, Jeremy Middleton will commit not to dispose of any New Shares issued to him from 26 May 2004 until 2 June 2004. These lock-ups will not apply, however, to any disposal made: (a) in acceptance of any take over offer made by a third party for the entire issued share capital of the Continuing Group in accordance with the City Code on Takeovers and Mergers once unconditional as to acceptances; (b) by personal representatives of Messrs. Harpin or Middleton in the event of their respective deaths during the lock-up period; (c) where the disposal is in connection with any commitment or arrangement providing for the acquisition of more than 50 per cent. of the Continuing Groups share capital pursuant to paragraph 425 of the Act; or (d) where the disposal is in connection with any sale or arrangement pursuant to paragraph 110 of the Insolvency Act 1986. Additionally, subject to him satisfying various conditions, Richard Harpin will be entitled to grant a security interest in respect of his New Shares during the lock-up period referred to above. Richard Harpin and Jeremy Middleton currently have certain minority protection rights and they each have the right, so long as both continue to hold their minority shareholding in Homeserve, to additional dividend payments equivalent to 1.83 per cent. of any dividend declared by Homeserve. Therefore, in total, their 24.98 per cent. minority shareholding in Homeserve has the right to 28.64 per cent. of any dividend declared by Homeserve. As part of the Share Exchange these minority protection rights and additional dividend rights will cease. In consideration for the loss of the additional dividend rights Richard Harpin and Jeremy Middleton will each receive a one-off cash payment from the Existing Group of 150,000, to be paid on completion of the Share Exchange. The aggregate value of the consideration payable under the Share Exchange is 63.4 million based on the pro forma information set out in Part V. The Share Exchange is expected to be earnings enhancing pre-goodwill for the Continuing Group on a per share basis in the year to 31 March 2005. Nothing in this paragraph 3 of Part II should be construed as a profit forecast or be interpreted to mean that the earnings of the Continuing Group for the current year or future years will necessarily match or exceed historical, published or pro forma earnings for the Existing Group or the Continuing Group. Approval from Existing Group Shareholders for the Share Exchange is being sought because, inter alia, Richard Harpin, as an Existing Group Director and a director of Homeserve and Jeremy Middleton as a director of Homeserve, are considered related parties (as defined under the Listing Rules) with respect to the Share Exchange. 4. Pre Demerger reorganisation To effect the Demerger, a number of reorganisation steps within the Existing Group were required, as follows:

(a) On 22 December 2003 the Existing Group sold the entire issued ordinary share capital
of Echo and Rapid to the Water Group, at the net book value of their net assets of 2.26 million, initially left on inter-company account.

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PART II (b) On 27 February 2004 Underground Pipeline Services, a wholly owned subsidiary of the
Water Group, acquired the trade and net operating assets of the underground pipeline services business from a fellow subsidiary (Onsite Central Limited) of the Existing Group for a consideration of 2.0 million, initially left on inter-company account. (c) On 27 February 2004 the construction costs incurred by the Existing Group in respect of a property occupied by Echo were transferred to the Water Group at their book value of 2 million, initially left on inter-company account.

(d) On 3 March 2004 the Water Group issued 30,744 new ordinary shares to the Existing
Group for 12.26 million. The proceeds of the share issue were applied in part to repay the inter-company balances arising from the above steps totalling 6.26 million, in part to repay certain other inter-company funding balances due to the Existing Group totalling 1.223 million, and in part to pay the Existing Group 1.842 million being the amount accrued in the books of the Water Group in respect of the estimated difference between the market value and exercise price of share options in the Existing Group to be exercised by Water Group employees after the Demerger. The net cash injection by the Existing Group into the Water Group as a result of the above steps was 2.935 million. (e) By ordinary resolution passed on 3 March 2004 the authorised share capital of the Water Group was increased to 20,000,000 divided into 20,000,000 ordinary shares of 1 each by the creation of 14,626,789 ordinary shares of 1 each ranking pari passu in all respects with the existing shares of the company. (f) By ordinary resolution passed on 3 March 2004 each ordinary share of 1 each in the capital of the Water Group was subdivided into 40 ordinary shares of 212p each and then every 17 such ordinary shares of 212p each were consolidated into 1 ordinary share of 4212p.

5.

Separation and continuing arrangements between the Continuing Group and the Water Group Following the Demerger, the Water Group and the Continuing Group will each operate as separate publicly listed companies and neither the Water Group nor the Continuing Group will retain any shareholding in the other. In order to achieve this separation, the following has been or is in the process of being implemented: (a) current Existing Group functions will be split to achieve operational independence for both the Water Group and the Continuing Group from June 2004 and in most cases from 6 April 2004. Some ongoing sharing of information technology facilities will be required for disaster recovery purposes; (b) additional Continuing Group costs will arise, principally in duplicating listed company and head office costs and separating information technology facilities. Reassignment of Existing Group staff (principally within information technology) between the Water Group and the Continuing Group and the recruitment of a small number of additional staff is required; (c) existing pension arrangements are to be replicated in each of the Continuing Group and the Water Group and a small number of employees transferred into the new arrangements. See paragraph 11 of Part VI giving details of the new schemes; (d) employees transferring to the Water Group will have an opportunity to exercise existing options. New option and long term incentive schemes are being established for both the Continuing Group and the Water Group. It is proposed that the terms of the new schemes for the Water Group are finalised following the Demerger. See paragraph 7 of Part VI giving details of new share option schemes;
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PART II
(e) appropriate insurance cover is being negotiated for both the Continuing Group and the Water Group and is expected to commence by 5 April and be on a basis consistent with the existing cover for the Existing Group; and (f) new bank facilities will be in place for both the Existing Group and the Water Group. A summary of the terms of these facilities is included in paragraph 14 of Part VI of this document.

Implementation of the Demerger and the relationship between the Continuing Group and the Water Group after the Demerger are principally regulated by a Demerger Agreement entered into on 11 March 2004. The Demerger Agreement provides that all professional costs of the Water Group and the Continuing Group in respect of the Demerger will be borne by the Continuing Group. The Demerger Agreement also covers the provision by the Continuing Group of certain limited head office and related services to the Water Group and by the Water Group to the Continuing Group of certain services. These services will be provided on an arms length and temporary basis pursuant to the Demerger Agreement (or pursuant to other ongoing agreements and arrangements). For a fuller description of the Demerger Agreement, see paragraph 14 of Part VI of this document. In general, any business arrangement between any member of the Continuing Group and any member of the Water Group after the Demerger has been or will be entered into on an arms length basis. The taxation consequences of the Demerger are set out in paragraph 6 of this Part II. The Demerger Agreement contains provisions dealing with the separation of the taxation affairs of the two groups. It also provides for either group to recover any tax it has been assessed to which is primarily the liability of the other group from that other group. 6. UK Taxation The comments below are of a general nature and are based on the Existing Groups understanding of United Kingdom law and practice. They are not exhaustive. They relate only to the position of persons who are the absolute beneficial owners of their Existing Group Shares and may not apply to certain classes of person such as dealers. Existing Group Shareholders and prospective shareholders who are in any doubt as to their tax position or who may be subject to tax in a jurisdiction outside the United Kingdom should consult their professional advisers. The Existing Group has applied to the Inland Revenue and obtained clearance under section 213 ICTA 1988 that the dividend in specie of the Water Group Shares is exempt. Consequently, no income tax arises on the receipt of the Water Group Shares by UK resident individuals. Companies are generally exempt from corporation tax on dividends paid by UK resident companies. There is no tax credit associated with the dividend in specie. No capital gains tax arises on the Demerger or Share Consolidation. Under section 136 TCGA 1992 an Existing Group Shareholders new holdings in the Continuing Group and the Water Group inherit the capital gains tax base cost of the original Existing Group Shares. This base cost will be apportioned in accordance with their market value on the first day of trading following the Demerger. Any cash received in respect of the fractional entitlement to Water Group Shares will reduce the base cost of Water Group Shares. For the purposes of taper relief, the new holdings in the Continuing Group and the Water Group will be treated as being held from the time the original Existing Group Shares were acquired and will be treated as business assets for that period if the original Existing Group Shares were treated as business assets. The Existing Group has applied for and received clearance that certain anti avoidance provisions will not prevent these provisions from applying.
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PART II
Following the Share Consolidation, sections 127-131 TCGA 1992 apply to deem the consolidated holdings of the Continuing Group to acquire the base cost and taper relief history of the the Continuing Group holdings as calculated pre-consolidation. The base cost is reduced by any cash received in respect of a fractional entitlement. No stamp duty or SDRT is payable by Existing Group Shareholders on the receipt of Water Group Shares. No capital gain arises in the Existing Group as a result of the disposal of the Water Group by way of a distribution in specie due to the substantial shareholdings exemption in schedule 7AC TCGA 1992. The Existing Group has applied for and received confirmation from the Inland Revenue that the substantial shareholdings exemption will apply in this circumstance. Stamp duty of 0.5 per cent. will be payable by the Existing Group on the value of shares acquired from Messrs. Harpin and Middleton. 7. Listing, dealings and certificates Admission Applications have been made for the Admission of the Water Group Shares and Continuing Group Shares to the Official List and to trading on the London Stock Exchanges market for listed securities. It is expected that Admission of the Water Group Shares and Continuing Group Shares to the Official List will become effective and that dealings will commence at 8.00 a.m. on 6 April 2004. Dealings For a transferee to be a registered holder of Existing Group Shares by the Demerger Record Time, and so be eligible to receive Water Group Shares, notice of a transfer of Existing Group Shares must be recorded on the Existing Group Share Register by the Registrars by 6.00 p.m. on 5 April 2004. Share certificates Holders of Existing Group Shares on the Existing Group Share Register at the Demerger Record Time will constitute the opening Water Group Share Register. The entitlement to receive Water Group Shares pursuant to the Demerger is not transferable save to satisfy valid market claims. It is expected that definitive certificates in respect of Water Group Shares will be issued to entitled holders of Water Group Shares (who hold their shares in certificated form). As appropriate, new definitive share certificates will also be issued to holders of Existing Group Shares (who hold their shares in certificated form), to reflect the Share Consolidation and the Existing Groups proposed change of name. Certificates will be posted to shareholders at their registered address on the Existing Group Share Register no later than 13 April 2004 and will replace Existing Group share certificates which will become void. Temporary documents of title will not be issued. Pending despatch of the certificates, transfers will be certified against the share register by the Registrar. Share certificates will be despatched to shareholders at their own risk. CREST CREST is a paperless settlement system enabling shares to be evidenced otherwise than by a certificate and transferred otherwise than by a written instrument. The articles of association of the Continuing Group will permit the holding of Continuing Group Shares under the CREST system.

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PART II
Holders of Existing Group Shares on the Existing Group Share Register at the Demerger Record Time who hold their Existing Group Shares in uncertificated form through CREST will receive uncertificated Water Group Shares into the same CREST accounts immediately following Admission of the Water Group Shares and have their CREST accounts adjusted to reflect their entitlement to Continuing Group Shares immediately following Admission of the Continuing Group Shares. Dividend mandates Existing dividend mandates to bank or building society accounts given in relation to dividends paid by the Existing Group will continue to apply to the Continuing Group and will also be applied automatically to Water Group Shares arising as a result of the Demerger. 8. Overseas shareholders The implications of the Demerger for overseas shareholders may be affected by the laws of their respective jurisdictions. Such overseas shareholders should inform themselves about and observe all applicable legal requirements. It is the responsibility of each overseas shareholder to satisfy himself or herself as to the full observance of the laws of the relevant jurisdiction in connection with the Demerger, including the obtaining of any governmental, exchange control or other consents which may be required and/or the compliance with other necessary formalities which are required to be observed and the payment of any issue, transfer or other taxes due in such jurisdiction. In any case, where the Existing Group is advised that the allotment and issue of Water Group Shares to a holder of Existing Group Shares with a registered address outside the United Kingdom would or may infringe the laws of any jurisdiction outside the United Kingdom, or necessitate compliance with any special requirement, the Directors may determine that such Water Group Shares shall not be issued to such holder, and the overseas shareholders entitlement to Water Group Shares, pursuant to the Demerger, shall be sold on behalf of such overseas shareholder as soon as reasonably practicable thereafter at the best price which can reasonably be obtained at the time of sale, with the net proceeds of sale being remitted to the overseas shareholder. This document has been prepared for the purposes of complying with English law and the Listing Rules and the information disclosed may not be the same as that which would have been disclosed if this document had been prepared in accordance with the laws of any jurisdictions outside the United Kingdom. 9. PEPs and ISAs Existing Group Shareholders who hold Existing Group Shares in general or single company PEPs or ISAs are advised that the Continuing Group Shares and Water Group Shares should be qualifying investments for PEPs and should be qualifying investments for the stocks and shares component of ISAs (subject to the terms and conditions of your PEP or ISA). Your PEP and/or ISA manager will be able to provide you with further details. Existing Group Shareholders who do not currently hold their Existing Group Shares in either a PEP or an ISA are advised that the Continuing Group Shares and Water Group Shares which they receive will be eligible for inclusion in the stocks and shares component of an ISA.

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PART III INFORMATION ON THE CONTINU ING GROUP


1. Description of the Group The Existing Group currently comprises:

Homeserve, including Home Service, Home Hotline, Servowarm, Regency and Highway, and the OnSite, Middleton Doorman and Mail Solutions commercial outsourcing businesses; and the Water Group which will be separately listed and no longer part of the Existing Group following the Demerger.

Continuing Group Strategy The Continuing Groups strategy for its domestic market focused businesses is to become the worlds leading provider of insured repair solutions to customers via major business partners. Services are offered through business partners in the utilities, manufacturing, retail and household insurance sectors. Homeserve can deliver a complete solution from marketing and telesales of policies to customer administration, claims handling and deployment of employed and subcontract repairers. Opportunities exist for significant further organic growth based around the existing business. The Continuing Group will continue to deliver its strategy by:

Working with business partners to acquire, retain and cross sell to their customers; Using specialist expertise to develop high performing marketing and sales programmes for their partners; Managing specialist household repair networks nationally to partners customers; and Reinforcing partners brand values by delivering outstanding service to their customers.

The commercially focussed businesses will continue to operate largely under long-term partnerships or contractual arrangements with major clients. Home Service Home Service was established in 1993 as a subsidiary of the Existing Group. It successfully grew its plumbing and drainage policy base using an affinity branded model signing the majority of the UK water and sewerage companies as partners, together with leading gas boiler manufacturers and electricity companies. Regency, Highway and Servowarm were subsequently acquired to broaden the range of domestic emergency services provided into the home. Home Service provides plumbing and drainage, electrical wiring and gas boiler breakdown cover to the domestic market. At 30 September 2003, Home Service had 2.6 million policies in place. Home Service develops the policies, undertakes direct marketing to domestic households using direct mail and targeted outbound telesales and administers the issue of policy documents to households. Through its Home Hotline subsidiary Home Service also handles claims and deploys a network of subcontracted tradesmen, supported by its own employed network for gas and plumbing trades. Home Service pays commission to affinity partners for use of their brand and data and cross sells products to existing customers, with the average product holding per customer being 1.5. Policies are affinity partner branded. The core plumbing and drains policy is an annual policy. Cover includes the cost of material and labour for repairs to fix an emergency such as a burst pipe or blocked drain. The targeted service standard is for a tradesman to be at the home within 2 hours of the policy holders telephone call for emergency assistance.

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PART III
The water supply pipe policy is an annual policy and covers repairs to the supply pipe between the boundary to the home and the home, also with a targeted 2 hour response time for emergencies. The electrical wiring policy covers repairs to fix an emergency such as damaged wiring. The gas boiler breakdown policy covers boiler repairs but excludes repairs to radiators and annual services. The Home Service policies are underwritten by AXA Assistance, which then in turn reinsures fifty per cent. of each policy with Home Services wholly owned Guernsey based reinsurance company, Affinity Partners Limited. Therefore Home Service bears fifty per cent. of the underwriting exposure on its policies. Home Service has established experience of claims rates and repair costs and by sharing in the underwriting is able to monitor underwriting margins and share in underwriting returns. Home Service is also developing a manufacturer warranty operation. Customers already include Mira Showers, Ideal Boilers and Applied Energy (Creda, Redring and Xpelair brands). Home Service uses its marketing expertise to design the free guarantee registration forms that accompany the appliance on delivery to the home with the objective of maximising the number that are completed and returned by the customer. This maximises the database size to sell an extended warranty to continue after the expiry of the manufacturers free guarantee, which is normally one year. The Home Service strategy is to manage extended warranty policies and claims on behalf of the manufacturer and deploy to the manufacturers network for repairs. This business is currently at an early stage of development. International Development The Home Service business in France is operated through a joint venture with Gnrale des Eaux Services a subsidiary of Veolia Water, and offers supply pipe, plumbing and drains, electrical emergency and gas boiler cover. Home Service owns 40 per cent. of the joint venture. The French business has been operating for two years and had 100,000 policies as at 30 September 2003. This business is still at an early stage and is therefore currently loss making. Home Service is currently carrying out initial test marketing campaigns in the USA through its recently established, wholly owned subsidiary Home Service USA Corp. The product is underwritten by Mapfre Assistance who are also responsible for developing and managing the network of tradesmen. The initial test is branded as Philadelphia Water and is in partnership with Aqua America (previously called Philadelphia Suburban Corporation) a water utility, who are paid a commission on the sale of each policy. Home Hotline Home Hotline manages the claims handling and job deployment on behalf of Home Service to a national network of subcontracted tradesmen as well as to the Highway and Servowarm employed operative networks. Home Hotline also operates claims handling and job deployment on behalf of external customers including Norwich Union and Direct Line for its Home Response 24 product and runs the helpline for 1.6 million Direct Line Household insurance policy holders. Servowarm The acquisition of Servowarm in March 2003 provides Homeserve with a UK wide emergency repair, annual service and replacement boiler installation business to support existing and future boiler breakdown policy sales. One of the primary objectives for Servowarm is to assist Home Service to improve customer satisfaction through the

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PART III
operation of a well managed network and grow its gas boiler policy base. The business has been established for 40 years and now employs 120 CORGI approved gas engineers providing UK coverage and operates its own training centre to ensure a future supply of engineers, currently a scarce resource. The Regency Group Homeserve acquired Regency in May 2002. Regency provides underwritten furniture warranty policies on behalf of retailers, supported by a national upholstery repair service. The warranty product range provides structural furniture and soft furnishings cover following the expiry of the manufacturers guarantee, together with accidental damage cover for furniture and soft furnishings against rips, tears, burns and stains for treated and untreated fabric upholstery, leather and beds. Policies are affinity branded and are sold in store by the retailer. Regencys largest retailers include: Courts, Harveys, Littlewoods, Furnitureland and Land of Leather. Regency designs the policies, administers policy issue and handles claims and job deployment to its employed upholsterer network. Policies are fully underwritten by a panel of underwriters. Regency sources and supplies the chemical stain resistance treatments which are incorporated within many of the warranty products and in most cases are applied as a condition of the warranty. In addition fabric and leather upholstery care kits are supplied to retailers. Regency formed Regency at Home Limited in April 2001, a directly employed national network of repairers for soft furnishings and now has 101 employed operatives. Regency at Home Limited offers support to retailers and manufacturers to enable them to respond quickly to customers who have complained about a fault with a new piece of furniture as well as supporting the underwritten furniture warranties. Regency at Home Limited now undertakes all of the repair work on behalf of Regency. Highway Emergency Services Highway was acquired in July 2002. Highway provides emergency glass, frame, lock, and garage door repairs and replacement services to household insurers. Highway operates from its Norwich head office which houses a call centre that operates 24 hours a day, every day of the year. The business has 463 service engineers, operating from 36 branches providing UK-wide coverage. Highway is developing its plumbing and drains offering to household insurers to complement its existing range of services using a combination of employed and subcontract operatives and currently provides this service to Home Service. Barriers to entry include the range of trades and Highways network of employed operatives, together with supply arrangements with many UK household insurers. Commercial Outsourcing OnSite provides a range of infrastructure services including water and wastewater services covering the entire water cycle (for example asset management, process management and water treatment). OnSite positions itself as a specialist contractor, working with the customer to identify problems and deliver solutions. OnSites customers include most of the UKs water and sewerage companies, as well as a large number of other commercial and industrial customers. Middleton Doorman was acquired in August 2002 and provides specialist maintenance and electrical services and automatic door access maintenance to commercial and public sector clients. The business provides a broad range of services from a combination of both employed and sub-contract networks. The Mail Solutions businesses comprise print, envelope manufacture and fulfillment

24

PART III
operations, performing work for a broad range of customers, in addition to providing services to Home Service on an arms length basis. 2. Management, Board and corporate governance Board and senior management of the Continuing Group In addition to the Continuing Group Board, the Continuing Group will operate an Executive Committee to manage the day-to-day operations and financial performance of the Continuing Group. The Executive Committee will comprise the executive directors together with the managing directors of certain of the operations. Each subsidiary has it own board and management team with full profit responsibility for operations and financial control and reporting. Reliance on centralised functions will be restricted to treasury and in certain cases, information technology, and payroll. The Continuing Group will also operate a dedicated internal audit function. It is proposed that the following individuals shall comprise the Continuing Group Board. The Continuing Groups proposed executive directors are highly experienced and comprise the same individuals who have been instrumental in managing the Existing Group businesses in recent years. The Directors believe that the proposed composition of the Continuing Group Board will deliver a good balance of experience and independence. Continuing Group Directors Brian Whitty (50), FCA executive chairman Chairman of Homeserve and chief executive of the Existing Group since July 1998, following three years as group finance director. Previously finance director of ACT Group plc. Richard Harpin (39), BA (Hons), CdipAF chief executive Chief executive of Homeserve, having founded Home Service in conjunction with the Existing Group in 1993. Appointed to the Existing Group Board in May 2001. Previously worked as a brand manager with Procter & Gamble, followed by management consultancy with Deloitte and his own company. Andrew Belk (40), BSc (Hons), ACA finance director Group finance director of the Existing Group since September 2002, having previously been commercial director of Homeserve. Previously chief executive officer of a UK telecoms company and a corporate finance director with Andersen. Robert Harley (50) executive director Appointed to the Board in May 2001. Also managing director of Onsite. Previously coowner of Insight Surveys which was acquired by the Existing Group in 1997. John Maxwell (59), CA, CCMI senior independent director To be appointed to the Continuing Group Board conditional on the Demerger. Previously director general/chief executive of The Automobile Association and an executive director of Prudential Corporation plc. Currently a non-executive director of a number of companies including Royal & Sun Alliance plc, Provident Financial plc and The Big Food Group plc. Professor Justin Jewitt (49), BA(Hons) non executive director Appointed to the Existing Board in 2003. Currently chief executive of Nestor Healthcare Group plc. Previously managing director of two of BETs business services companies, prior

25

PART III
to which he worked for Thorn EMI and Mobil Oil. He is also visiting professor of healthcare at Glamorgan University. The Existing Board is currently in the process of recruiting a further independent nonexecutive director and expects to have made the appointment before the Demerger becomes effective on 6 April 2004. Subsidiary Company Directors on Executive Committee Ian Carlisle (42) chief operating officer of Homeserve and chief executive officer, Highway Appointed chief operating officer of Homeserve plc and chief executive of Highway Emergency Services in June 2003. Previously managing director of Autoglass plc, prior to which he was divisional commercial director at Marks & Spencer plc. Jonathan King (43), BSc (Hons) managing director, Home Service Managing director of Home Service since October 2001 having joined in October 2000 as business development director. Previously he worked in retail marketing within The Boots Company as group brand manager for No.7 Cosmetics. Craig Wright (35), BA (Hons), ACA managing director, Regency Managing director of The Regency Group since June 2003. Previously commercial director of Homeserve. Before joining the Existing Group he was chief executive of a UK specialist component and product manufacturer and, prior to that, a mergers and acquisitions specialist at KPMG. Simon Hancox (37), BA (Hons), ACII managing director, Home Hotline Joined Home Hotline in November 2001 from AXA, where he worked in Assistance. Previously at CGU in London, having joined Commercial Union as a graduate management trainee where he subsequently moved through many of the functional disciplines. Rachael Hughes (33), BA (Hons) managing director, Domeo S.A. Managing director of Homeserves joint venture with Gnrale des Eaux Services in France since launch in June 2001. Previously managing director of CHEP Argentina SA, following a total of seven years with CHEP Equipment Pooling Systems in North and South America and GKN Group in the UK. Corporate governance In previous years, the Existing Group has been consistent in applying the principles of good governance and codes of best practice set out in the Combined Code with flexibility and common sense. This approach will be followed by the Continuing Group, although initially the Continuing Group will not fully comply with the Combined Code. The Continuing Group Board will comprise four executive directors and (following the appointment of an additional non-executive director) three independent non-executive directors, including the newly appointed senior independent director, John Maxwell. Brian Whitty is not independent within the meaning of the Combined Code due to his position as the executive chairman. However, the Continuing Group Directors are satisfied that there is a clear division of responsibility between the Chairman and the chief executive and that the Continuing Group Board structure proposed provides the appropriate mixture of skills and experience for the Continuing Groups development. The Continuing Group
26

PART III
Directors are committed to an appropriate balance between executive and independent directors and will continue to review the balance of the Continuing Group Board. The Continuing Group Board will meet 10 times a year with additional meetings to be held as necessary. The Continuing Group Board will be responsible for monitoring the performance of the Continuing Group and for setting its strategy and development programmes for the long term. The Executive Committee will meet once a month and will be responsible for implementing strategy and reviewing the operational and financial performance of the Continuing Groups businesses. The Continuing Group Board has established audit, remuneration and nomination committees, each of which will have responsibilities and duties formally delegated by the Board. The audit committee will comprise the three independent non-executive directors of the Continuing Group, and will meet at least twice a year. The committee will be responsible, inter alia, for reviewing and monitoring the integrity of the financial statements of the Continuing Group, including changes to accounting policy, reviewing financial reporting procedures and risk management systems, reviewing and approving internal audit functions, recommending the appointment of the external auditor and monitoring the latters independence, and approving the nature and scope of external and internal audits. The remuneration committee will comprise the same individuals as the audit committee and will meet annually or more often if required. This committee will be responsible for setting and approving remuneration policies and amounts, including share options and share incentive plans, for senior executives including the executive directors of the Continuing Group. The committee will also advise on the form of contract for the Continuing Group executive directors including contract termination terms. The nomination committee will comprise John Maxwell, Brian Whitty and Justin Jewitt, the majority of whom are independent non-executive directors, and will lead the process for new appointments to the Continuing Group Board and for making recommendations regarding succession plans for both executive and non-executive directors. The committee will meet on an ad hoc basis as required. 3. New incentive and share option schemes Following the Demerger it is recognised that the remuneration policy for the executive directors and key senior executives of the Continuing Group will need to be closely aligned with the Continuing Groups strategic direction and long term aims. The long term incentive arrangements will play a principal role in achieving this and will take two forms: (i) Homeserve Executive Share Option Plan (the 2001 Executive Share Option Plan); and (ii) Homeserve Long Term Incentive Plan (the LTIP). The remuneration committee anticipates that it will use the 2001 Executive Share Option Plan as the primary incentive mechanism. However, the remuneration committee believes that to align effectively the interest of the senior executives of the Continuing Group with those of shareholders it is also necessary to make awards under a new LTIP. A detailed summary of both schemes is set out in paragraph 7 of Part VI.

27

PART IV FINANCIAL INFORMATION ON THE EXISTING GROUP A. Financial information for the three years ended 31 March 2003
The financial information contained in this Section A of Part IV has been extracted without material adjustment from the audited consolidated statutory accounts of the Existing Group for each of the three financial years ended 31 March 2003. The financial information is presented on the basis of the accounting policies applied in the three years ended 31 March 2003. The Existing Group adopted Financial Reporting Standard 19 Deferred Taxation (FRS 19) in the year ended 31 March 2002, and presented restated figures for the year ended 31 March 2001 in its Report and Accounts for the year ended 31 March 2002. The restated figures for the year ended 31 March 2001 have been presented within this financial information and reflect an additional tax charge for that year of 898,000, and an additional deferred tax provision as at 31 March 2001 of 5,743,000. The financial information contained in this Part IV does not constitute statutory accounts within the meaning of section 240 of the Act. The statutory accounts for the Existing Group for each of the three years ended 31 March 2003 have been delivered to the Registrar of Companies in England and Wales pursuant to section 242 of the Act. The auditors reports on these statutory accounts were unqualified and did not contain a statement under sections 237(2) or (3) of the Act. The Existing Groups auditors for the year ended 31 March 2003 were Deloitte & Touche, Birmingham. The auditors in respect of the two years ended 31 March 2002 were Arthur Andersen, Birmingham.

28

PART IV CONSOLIDATED PROFIT AND LOSS ACCOUNTS FOR THE THREE YEARS ENDED 31 MARCH
Continuing Operations 000 201,980 (4,456) 197,524 3 6 (154,647) 634 43,511 (408) 2 44,331 (1,228) 2 43,103 2003 Acquisitions 000 63,814 63,814 (62,354) (45) 1,415 6,160 (4,745) 1,415 000 265,794 (4,456) 261,338 (217,001) 589 44,926 (408) 50,491 (5,973) 44,518 (5,962) 44,529 (5,973) 38,556 8 (12,789) 25,767 (1,780) 9 25 10 10 10 10 23,987 (11,340) 12,647 38.2p 45.9p 37.9p 45.5p 2002 000 177,090 (676) 176,414 (139,926) 834 37,322 (259) 38,319 (1,256) 37,063 (611) (1,912) 36,407 (1,256) (611) 34,540 (9,844) 24,696 (1,886) 22,810 (10,097) 12,713 36.6p 39.6p 36.1p 39.0p 2001 000 150,499 150,499 (118,789) 557 32,287 33,530 (1,243) 32,287 (1,967) 31,563 (1,243) 30,320 (8,641) 21,679 (1,601) 20,078 (9,030) 11,048 32.4p 34.4p 32.1p 34.1p

Note Turnover Less share of joint ventures turnover Group turnover Operating costs including goodwill amortisation Other operating income Operating profit Group operating profit Share of joint ventures operating loss Total operating profit before goodwill Goodwill amortisation Total operating profit: Group and share of joint ventures Exceptional costs loss on disposal of subsidiary Net interest payable Profit before tax, goodwill and exceptional costs Goodwill amortisation Exceptional costs loss on disposal of subsidiary Profit on ordinary activities before taxation Taxation on profit on ordinary activities Profit on ordinary activities after taxation Minority shareholders equity interests Profit for the financial year Dividends paid and proposed Retained profit for the year Earnings per share Basic Basic excluding goodwill and exceptional costs Diluted Diluted excluding goodwill and exceptional costs 2

A statement of movements in reserves is given in note 25. The results above are derived from continuing operations.

29

PART IV CONSOLIDATED BALANCE SHEETS AS AT 31 MARCH


Note Fixed assets Goodwill Tangible assets Investments 11 12 15 2003 000 127,363 171,122 298,485 Current assets Stocks Debtors Cash at bank and in hand Creditors amounts falling due within one year Borrowings Other creditors 2002 000 21,579 153,379 20 174,978 2001 000 23,306 133,458 128 156,892

16 17

6,103 76,527 10,792 93,422

3,062 54,440 6,967 64,469 (30,313) (73,360) (103,673) (39,204) 135,774

3,601 42,360 5,587 51,548 (24,869) (66,050) (90,919) (39,371) 117,521

18 19

(22,892) (99,050) (121,942)

Net current liabilities Total assets less current liabilities Creditors amounts falling due after more than one year Borrowings Other creditors

(28,520) 269,965

18 19

(91,021) (21,473) (112,494)

(5,233) (5,233) (7,043) (8,354) 115,144

(5,904) (5,904) (5,743) (6,422) 99,452

Provisions for liabilities and charges Accruals and deferred income Net assets Capital and reserves Share capital Share premium Capital redemption reserve Profit and loss account Equity shareholders funds Minority shareholders equity interests

21 23

(9,218) (18,454) 129,799

24 24 25

6,315 16,520 1,200 101,606 125,641 4,158 129,799

6,280 15,046 1,200 89,477 112,003 3,141 115,144

6,221 11,990 1,200 78,501 97,912 1,540 99,452

30

PART IV SUPPLEMENTARY STATEMENTS FOR THE THREE YEARS ENDED 31 MARCH


Consolidated Statement of Total Recognised Gains and Losses
2003 Note Profit for the financial year Total recognised gains and losses relating to the year 000 23,987 23,987 2002 000 22,810 22,810 2001 000 20,078 20,078

Reconciliation of Movements in Consolidated Shareholders Funds


Profit for the financial year Dividends Redemption of preference shares New share capital subscribed Net additions to shareholders funds Opening shareholders funds Closing shareholders funds 23,987 (11,340) 12,647 991 13,638 112,003 125,641 22,810 (10,097) 12,713 1,378 14,091 97,912 112,003 20,078 (9,030) 11,048 (1,200) 247 10,095 87,817 97,912

24

31

PART IV CONSOLIDATED CASH FLOW STATEMENTS FOR THE THREE YEARS ENDED 31 MARCH
Note Net cash inflow from operating activities Returns on investments and servicing of finance: Interest received Interest paid Interest element of finance lease and hire-purchase rental payments Dividends paid to minority interests Preference dividends paid Net cash outflow from returns on investments and servicing of finance Taxation: Corporation tax paid Capital expenditure and financial investment: Purchase of tangible fixed assets Investment in joint ventures (Purchase)/sale of own shares Sale of tangible fixed assets Capital contributions received Net cash outflow from capital expenditure and financial investment Acquisitions and disposals: Investment in subsidiary undertakings Net cash outflow from acquisitions and disposals Equity dividends paid Financing: Issue of ordinary share capital Proceeds from bond issue Redemption of preference shares Repayment of loan notes Capital element of finance lease and hire-purchase rental payments Net cash inflow/(outflow) from financing Increase/(decrease) in cash 2003 000 000 2002 000 000 2001 000 000

(a)

66,584

49,471

47,906

235 (3,532)

194 (1,661)

157 (1,621)

(428) (2,293)

(445) (1,293)

(503) (872) (27)

(6,018)

(3,205)

(2,866)

(12,958)

(9,403)

(9,041)

(31,755) (100) (32) 1,070 4,795

(38,912) (314) 19 1,191 6,001

(28,657) (183) 990 4,711

(26,022)

(32,015)

(23,139)

(78,929) (78,929) (10,481)

(9,344)

(5,693) (5,693) (8,466)

991 83,712 (3,364)

1,378 (219)

247 (1,200) (36)

(1,285) 80,054 12,230

(1,053) 106 (4,390)

(1,285) (2,274) (3,573)

32

PART IV NOTES TO THE CASH FLOW STATEMENTS FOR THE THREE YEARS ENDED 31 MARCH
(a) Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities
000 Total operating profit: Group and share of joint ventures Amortisation of goodwill Depreciation and amortisation (non-infrastructure assets) Depreciation and amortisation (infrastructure assets) Profit on disposal of assets Provision against investments Share of operating loss in joint ventures Decrease/(increase) in stocks Decrease/(increase) in debtors (Decrease)/increase in creditors 2003 000 44,518 5,973 555 50,491 11,718 5,016 (84) 52 555 16,702 408 112 1,784 (2,913) 555 (1,017) Net cash inflow from operating activities 66,584 334 (12,082) 9,452 555 (2,296) 49,471 8,880 4,599 (379) 89 555 13,189 259 (512) (4,505) 6,983 555 1,966 47,906 2002 000 000 37,063 1,256 555 38,319 8,145 4,458 (281) 88 555 12,410 000 2001 000 32,287 1,243 555 33,530

(b) Reconciliation of Movement in Net Debt


2003 000 Increase in cash Decrease/(increase) in bank overdraft Debt repayments Debt issued in respect of acquisitions Assets purchased under finance leases Debt in companies acquired Index-linked bond - proceeds from issue - indexation Increase in net debt in year Net debt brought forward Net debt carried forward 3,825 8,405 12,230 4,649 (3,761) (788) (1,455) (83,712) (1,705) (74,542) (28,579) (103,121) 2002 000 1,380 (5,770) (4,390) 1,272 (275) (3,393) (25,186) (28,579) 2001 000 2,294 (5,867) (3,573) 1,321 (250) (504) (505) (3,511) (21,675) (25,186)

(c) Analysis of Net Debt


Balance at 1 April 2001 000 Cash at bank and in hand and bank overdraft Irredeemable debenture stock Index-linked bond Obligations under finance leases and hire-purchase contracts Loan notes Net debt (15,937) (1,633) Balance at 1 April 2002 000 (20,327) (1,633) Cash flow 000 12,230 (83,712) Acquisitions 000 Other non cash changes 000 (1,705) Balance at 31 March 2003 000 (8,097) (1,633) (85,417)

(5,373) (2,243) (25,186)

(4,595) (2,024) (28,579)

1,285 3,364 (66,833)

(1,455) (3,761) (5,216)

(788) (2,493)

(5,553) (2,421) (103,121)

33

PART IV NOTES TO THE ACCOUNTS


1. Statement of Accounting Policies The principal accounting policies are summarised below. They have all been applied consistently throughout the three years ended 31 March 2003 with the exception of Financial Reporting Standard 19 Deferred Tax (FRS 19) which became effective for the year ended 31 March 2002 (see (m) below). The financial information for the year ended 31 March 2001 has been restated to be presented on a consistent basis as the 2001 comparatives in the 2002 Report and Accounts. (a) Basis of Accounting The accounts have been prepared under the historical cost convention and in accordance with the requirements of the London Stock Exchange and applicable UK accounting standards. (b) Basis of Consolidation The Group accounts consolidate the accounts of South Staffordshire Group Plc and its subsidiary undertakings made up to 31 March each year. The results of subsidiaries acquired or sold are consolidated for the periods from or to the date on which control passed. The Group makes full provision for the minority interests share of net liabilities in subsidiary undertakings. Acquisitions are accounted for under the acquisition method. (c) Joint Ventures The Groups share of turnover and profit or loss of joint ventures is included in the consolidated profit and loss account. The Groups share of their net assets or liabilities is included in the consolidated balance sheet. (d) Turnover and profit recognition Homeserve turnover includes amounts receivable from the sale of policies, stated net of underwriting, commissions payable and Insurance Premium Tax. Turnover is recognised on sale of the policy except where an obligation exists to provide future services where an appropriate proportion of monies received in advance are treated as deferred income and recognised over the relevant period. Member acquisition costs are recognised in full on sale of the policy. Turnover in commercial outsourcing represents amounts receivable, excluding VAT, from the sale of goods and services. Regulated Water turnover includes amounts billed together with an estimation of amounts unbilled at the year end. (e) Goodwill Goodwill arising on acquisitions, represents the excess of the fair value of the consideration given over the fair value of the identifiable assets and liabilities acquired. From the year ended 31 March 1999 goodwill has been capitalised on the balance sheet and amortised over its estimated useful life of up to 20 years. Prior to this period goodwill was written off to reserves in accordance with the accounting standard then in force. This would be charged to the profit and loss account in the event of the disposal of the relevant business. (f) Tangible Fixed Assets and Depreciation Tangible fixed assets comprise infrastructure assets (consisting of water mains, impounding and pumped raw water storage reservoirs and dams), operational structures (being pumping stations, treatment stations, boreholes and service reservoirs) and other assets. Infrastructure Assets Infrastructure assets comprise a network of systems that, as a whole, is intended to be maintained in perpetuity at a specified level of service by the continuing replacement and refurbishment of its components. Expenditure on infrastructure assets relating to increases in capacity or enhancements of the networks and on maintaining the operating capability of the network in accordance with defined standards of service are treated as additions which are included at cost.

34

PART IV
The depreciation charge for infrastructure assets is the level of annual expenditure required to maintain the operating capability of the network which is based on the Companys independently certified asset management plan. Operational Structures and Other Assets Operational structures and other assets are stated at cost less accumulated depreciation and any provision for impairment. Depreciation is provided on a straight line basis to write off the cost less estimated residual value over the estimated useful lives of the assets, with the exception of land which is not depreciated. The estimated useful lives of assets are as follows: Buildings and Service Reservoirs Boreholes Fixed Plant Meters Mobile Plant Motor Vehicles Office Equipment Envelope and Mailing Equipment (g) Capital Contributions Capital contributions, which arise in the regulated water business, are treated as deferred income and amortised over the estimated useful lives of the assets concerned, except in the case of contributions towards the cost of infrastructure assets. This departure from the requirements of the Companies Act 1985 is, in the opinion of the Directors, necessary for the financial statements to show a true and fair view as it is not possible to amortise contributions to the profit and loss account over the lives of the fixed assets concerned, as infrastructure assets do not have determinable finite lives. (h) Leased Assets Assets financed by leasing and hire-purchase arrangements which transfer substantially all the risks and rewards of ownership to the Group are included in tangible fixed assets, and the net obligation to pay future rentals is included in creditors. Rentals are apportioned between finance charges and a reduction of the outstanding liability for future rentals so as to produce a constant charge to the profit and loss account based upon the capital outstanding. Operating lease rentals are charged to the profit and loss account on a straight line basis. (i) Investments Investments held as fixed assets are stated at cost less amounts written off and any provision for impairment. (j) Stocks Stocks are valued at the lower of cost and net realisable value. Cost includes an appropriate element of overheads. Provision is made for obsolete, slow moving or defective items where appropriate. (k) Pensions For the defined benefit scheme the cost of pension contributions is charged to the profit and loss account on a systematic basis over the average service lives of the employees, in accordance with the advice of an independent actuary. For defined contribution schemes the amount charged to the profit and loss account is the contributions payable in the year. (l) Research and Development Research and development expenditure is charged to the profit and loss account in the year in which it is incurred. (m) Taxation Corporation tax payable is provided on taxable profits at the current rate. Deferred tax is provided in respect of capital allowances in excess of depreciation and all other timing differences that have originated but not reversed at the balance sheet date using the current rate of tax. The liability is discounted, using the yield to maturity on government gilts, to reflect the time value of money over the period between the balance sheet date and the date on which the timing differences are expected to reverse. 50-80 years 100 years 2030 years 15 years 5 years 3-7 years 5-7 years 7-10 years

35

PART IV
The deferred tax accounting policy was changed during the year ended 31 March 2002 in line with the requirements of FRS 19. The financial information for the year ended 31 March 2001 has been restated to be presented on a consistent basis as in the 2001 comparatives in the 2002 Report and Accounts. (n) Index-linked bond The index-linked bond is carried in the balance sheet at an amount equal to the sum of the proceeds received on issue and indexation to date, less issue costs. The premium/discount and costs of issue are amortised over the life of the bond and included in net interest payable in the profit and loss account, together with interest paid for the period and indexation.

2.

Segmental Information
Turnover 2003 Continuing Operations 000 Homeserve Commercial outsourcing Inter-division Support services Regulated water supply 76,668 84,811 (18,335) 143,144 58,836 201,980 Acquisitions 000 44,599 19,215 63,814 63,814 Total 000 121,267 104,026 (18,335) 206,958 58,836 265,794 2002 Total 000 60,281 77,852 (20,168) 117,965 59,125 177,090 2001 Total 000 45,516 60,023 (13,388) 92,151 58,348 150,499

Inter-division turnover relates wholly to commercial outsourcing. Operating Profit 2003 Continuing Operations 000 Homeserve Commercial outsourcing Support services Regulated water supply Amortisation of goodwill 19,301 8,516 27,817 16,514 44,331 (1,228) 43,103 Acquisitions 000 4,696 1,464 6,160 6,160 (4,745) 1,415 Total 000 23,997 9,980 33,977 16,514 50,491 (5,973) 44,518 2002 Total 000 14,117 8,015 22,132 16,187 38,319 (1,256) 37,063 2001 Total 000 10,799 7,224 18,023 15,507 33,530 (1,243) 32,287

Within Homeserve, acquisitions during 2003 include the results of Regency Financial Holdings Limited (turnover 13,040,000 and operating profit 4,017,000) and Highway Emergency Services Limited (turnover 30,899,000 and operating profit 679,000).

36

PART IV
Net Operating Assets 2003 000 Homeserve Commercial outsourcing Support services Regulated water supply Net debt Deferred consideration Goodwill Own shares held Proposed dividend Corporation tax Provisions for liabilities and charges Net assets 8,296 27,641 35,937 121,365 157,302 (103,121) (26,367) 127,363 (9,239) (6,921) (9,218) 129,799 2002 000 8,973 24,987 33,960 110,858 144,818 (28,579) 21,579 20 (8,960) (6,691) (7,043) 115,144 2001 000 236 21,364 21,600 100,531 122,131 (25,186) 23,306 128 (7,883) (7,301) (5,743) 99,452

Substantially all turnover, operating profit and net operating assets arise in the United Kingdom.

3.

Operating Costs
2003 Continuing Operations 000 Raw materials and consumables Manpower costs (note 4) Depreciation (infrastructure assets) Depreciation (non-infrastructure assets) Amortisation of goodwill Other operating costs 20,501 53,256 5,016 10,516 1,228 64,130 154,647 Acquisitions 000 19,843 25,635 1,410 4,745 10,721 62,354 2002 2001

000 40,344 78,891 5,016 11,926 5,973 74,851 217,001

000 20,791 47,255 4,599 9,029 1,256 56,996 139,926

000 20,639 39,795 4,458 8,283 1,243 44,371 118,789

Other operating costs include 4,357,000 (2002: 1,457,000) in respect of operating lease rentals which relate principally to land and buildings and motor vehicles. Other operating costs in 2003 in respect of the major acquisitions include: Regency Financial Holdings Plc 000 Raw materials and consumables Manpower costs Depreciation (non-infrastructure assets) Other operating costs 1,607 4,843 519 2,039 Highway Middleton Emergency Maintenance Services Ltd Services Ltd 000 000 8,745 13,759 431 7,273 9,374 6,707 458 1,193

Auditors remuneration, included within other operating costs, comprised 159,000 for statutory audit (2002: 80,000; 2001: 81,000) and 117,000 for other services (2002: 134,000; 2001: 67,000). Remuneration for 2003 was paid to Deloitte & Touche and for 2002 and 2001 to Arthur Andersen.

37

PART IV
Results for the year ended 31 March 2001 analysed between continuing operations and acquisitions were as follows: Continuing operations 000 Turnover Raw materials and consumables Manpower costs Depreciation (infrastructure assets) Depreciation (non-infrastructure assets) Amortisation of goodwill Other operating costs Other operating income Operating profit 143,074 16,495 37,449 4,458 7,825 1,076 44,125 111,428 510 32,156 2001 Total 000 150,499 20,639 39,795 4,458 8,283 1,243 44,371 118,789 577 32,287

Acquisitions 000 7,425 4,144 2,346 458 167 246 7,361 67 131

4.

Staff Costs
2003 000 Wages and salaries Social security costs Pension costs 70,575 6,334 1,982 78,891 2003 Number Average number of employees Homeserve Commercial outsourcing Regulated water supply 1,579 1,227 318 3,124 2002 000 42,016 3,765 1,474 47,255 2002 Number 488 979 374 1,841 2001 000 34,949 3,179 1,667 39,795 2001 Number 325 693 542 1,560

5.

Directors Emoluments
2003 000 Emoluments Contributions to money purchase pension schemes Value of shares vested under restricted share plan Gain on exercise of SAYE options 1,192 213 175 20 2002 000 1,077 213 54 2001 000 719 81 111

There were 7 Directors accruing benefits under defined benefit schemes and 6 Directors accruing benefits under money purchase schemes (2002: 7 and 6 respectively; 2001: 7 and 4 respectively). The highest paid Director received emoluments of 300,000 (2002: 287,000; 2001: 244,000). He is a member of a defined benefit pension scheme which provided for accrued pension of 9,400 (2002: 7,998; 2001: 6,549) and accrued lump sum of 28,200 (2002: 23,994; 2001: 19,646). In addition, the cost of providing benefits under the South Staffordshire Group Funded Unapproved Retirement Benefit Scheme on his behalf was 80,000 (2002: 75,000; 2001: 25,000).

38

PART IV
Directors Emoluments Year ended 31 March 2001
Basic Salary 000 Executive B. H. Whitty A. P. Page D. M. Penna Non-Executive L. C. N. Bury R. P. Corbett J. R. Harris W. S. R. Kenyon-Slaney H. B. Meynell D. B. Sankey Total 168 89 155 412 Fees 000 37 17 17 17 17 17 122 Benefits 000 17 12 16 45 Bonus 000 59 31 50 140 Total Emoluments 000 244 132 221 37 17 17 17 17 17 719

Directors Pensions
Details of the pensions earned by the Directors are as follows: Total accrued annual pension at 31 March 2001 000 7 11 29 7 9 9 9 Contributions to money purchase scheme during the year 000 25 8 39 9

Increase in accrued annual pension during the year 000 B. H. Whitty A. P. Page D. M. Penna L. C. N. Bury R. P. Corbett W. S. R. Kenyon-Slaney H. B. Meynell D. B. Sankey 1 1 2 1

Transfer value of increase 000 15 8 27 12

The accrued annual pension entitlement is the amount that would be paid annually on retirement based on service to the end of the current year. The increase in accrued pension during the year excludes any increase for inflation.

Directors Emoluments Year ended 31 March 2002


Basic Salary 000 Executive B. H. Whitty R. I. Harley* R. D. Harpin* A. P. Page D. M. Penna Non-Executive L. C. N. Bury R. P. Corbett J. R. Harris W. S. R. Kenyon-Slaney H. B. Meynell D. B. Sankey Total *Appointed 18 May 2001 188 87 118 103 134 42 19 19 19 4 19 752 Retired 22 June 2001 Benefits 000 21 14 16 13 17 81 Bonus 000 78 31 47 36 52 244 Total Emoluments 000 287 132 181 152 203 42 19 19 19 4 19 1,077

39

PART IV
Directors Pensions
Details of the pensions earned by the Directors are as follows: Total accrued annual pension at 31 March 2002 000 8 4 16 33 9 10 10 Contributions to money purchase scheme during the year 000 75 4 8 29 87 10

Increase in accrued annual pension during the year 000 B. H. Whitty R. I. Harley R. D. Harpin A. P. Page D. M. Penna L. C. N. Bury R. P. Corbett W. S. R. Kenyon-Slaney D. B. Sankey 1 1 1 3 2 1 1

Transfer value of increase 000 17 10 10 45 17 14 7

The accrued annual pension entitlement is the amount that would be paid annually on retirement based on service to the end of the current year. The increase in accrued pension during the year excludes any increase for inflation.

Directors Emoluments Year ended 31 March 2003


Basic Salary 000 Executive B. H. Whitty A. J. Belk* R. I. Harley R. D. Harpin D. M. Penna A. P. Page** Non-Executive L. C. N. Bury R. P. Corbett J. R. Harris D. B. Sankey W. S. R. Kenyon-Slaney Total *Appointed 2 September 2002 **Resigned 2 September 2002 Retired 28 June 2002 203 73 111 146 137 46 55 20 20 20 5 836 Benefits 000 22 10 17 20 21 8 98 Bonus 000 75 25 39 53 50 16 258 Total Emoluments 000 300 108 167 219 208 70 55 20 20 20 5 1,192

40

PART IV
Directors Pensions
Seven Directors were members of the Companys defined benefit pension scheme. The following Directors had accrued entitlements under the scheme as follows: Accrued Increase Accrued pension in accrued pension Transfer 31 March annual pension 31 March value of 2003 in the year 2002 increase 000 000 000 000 B. H. Whitty R. D. Harpin D. M. Penna R. P. Corbett D. B. Sankey A. P. Page* W. S. R. Kenyon-Slaney* 9 5 35 10 10 17 10 1 1 2 1 1 8 4 33 9 10 16 10 14 9 36 12 2 4 3

The following table sets out the transfer value of the Directors accrued benefits under the scheme calculated in a manner consistent with Retirement Benefit Scheme Transfer Values (GN 11) published by the Institute of Actuaries and the Faculty of Actuaries. Increase in transfer value in the year net of contributions 000 4 5 30 14 (4) (5)

Transfer value Contributions 31 March made by the 2003 Directors 000 000 B. H. Whitty R. D. Harpin D. M. Penna R. P. Corbett D. B. Sankey A. P. Page* W. S. R. Kenyon-Slaney* 107 36 546 97 63 115 135

Transfer value 31 March 2002 000 103 31 516 83 67 120 135

The transfer values disclosed above do not represent a sum paid or payable to the individual Director. Instead they represent a potential liability of the pension scheme. Six Directors were members of money purchase schemes. Contributions paid by the Company in respect of such Directors were as follows: 2003 000 B. H. Whitty A. J. Belk R. I. Harley R. D. Harpin D. M. Penna L. C. N. Bury A. P. Page* *To date of resignation/retirement 80 15 8 10 87 13

41

PART IV
Directors Options and Long-Term Incentives Year ended 31 March 2001
Details of the maximum number of shares receivable from conditional awards made under the Restricted Share Plan are as follows: Awarded Lapsed Vested 31 March during during during 31 March 2001 year year year 2000 B. H. Whitty A. P. Page D. M. Penna 38,971 21,515 33,325 21,260 11,785 18,180 2,378 2,180 16,642 15,260 36,731 9,730 32,585

The market price of the Companys shares on the day the shares vested was 3.4712. Details of the share options held by Directors under SAYE schemes are as follows: Granted Exercised 31 March during during 31 March 2001 year year 2000 B. H. Whitty A. P. Page D. M. Penna 6,570 6,570 6,570 6,570 6,570 6,570

Option price 262.2p 262.2p 262.2p

Date granted 9.1.98 9.1.98 9.1.98

SAYE Scheme options are exercisable at the end of a 5 year savings period. Details of the share options held by Directors under Executive Share Option Schemes are as follows: Granted Exercised 31 March during during 31 March Option Date 2001 year year 2000 price granted B. H. Whitty 150,000 B. H. Whitty 30,000 A. P. Page 12,500 A. P. Page 50,000 A. P. Page 20,000 D. M. Penna 125,000 D. M. Penna 25,000 30,000 20,000 25,000 150,000 12,500 50,000 125,000 366.5p 377.5p 366.5p 407.5p 377.5p 366.5p 377.5p 3.6.98 23.6.00 3.6.98 30.7.99 23.6.00 3.6.98 23.6.00

Executive Share Options are exercisable between 3 and 10 years from the date of grant. The market price of Swans shares at 30 March 2001 was 5.121/2 (2000: 3.421/2). During the year the price ranged from 3.171/2 to 5.50.

Directors Options and Long-Term Incentives Year ended 31 March 2002


Details of the maximum number of shares receivable from conditional awards made under the Restricted Share Plan are as follows: Awarded Lapsed Vested 31 March during during during 31 March 2002 year year year 2001 B. H. Whitty A. P. Page D. M. Penna 38,971 11,785 33,325 9,730 38,971 21,515 33,325

The market price of the Companys shares on the day the shares vested was 5.50.

42

PART IV
Details of the share options held by Directors under SAYE schemes are as follows: Granted Exercised 31 March during during 31 March 2002 year year 2001 B. H. Whitty R. I. Harley R. D. Harpin A. P. Page D. M. Penna 6,570 5,430 5,144 6,570 6,570 6,570 5,430* 5,144* 6,570 6,570

Option price 262.2p 310.4p 328.0p 262.2p 262.2p

Date granted 9.1.98 18.12.98 21.12.00 9.1.98 9.1.98

SAYE Scheme options are exercisable at the end of a 5 year savings period. *At date of appointment Details of the share options held by Directors under Executive Share Option Schemes are as follows: Granted Exercised 31 March during during 31 March Option Date 2002 year year 2001 price granted B. H. Whitty 150,000 B. H. Whitty 30,000 B. H. Whitty 72,500 R. I. Harley 12,500 R. I. Harley 50,000 R. I. Harley 36,000 R. D. Harpin 49,000 A. P. Page 12,500 A. P. Page 50,000 A. P. Page 20,000 A. P. Page 40,000 D. M. Penna 125,000 D. M. Penna 25,000 D. M. Penna 49,000 72,500 36,000 49,000 40,000 49,000 150,000 30,000 12,500* 50,000* * * 12,500 50,000 20,000 125,000 25,000 366.5p 377.5p 550.0p 366.5p 407.5p 550.0p 550.0p 366.5p 407.5p 377.5p 550.0p 366.5p 377.5p 550.0p 3.6.98 23.6.00 17.7.01 3.6.98 30.7.99 17.7.01 17.7.01 3.6.98 30.7.99 23.6.00 17.7.01 3.6.98 23.6.00 17.7.01

Executive Share Options are exercisable between 3 and 10 years from the date of grant. *At date of appointment The market price of the Companys shares at 29 March 2002 was 5.75 (2001: 5.1212). During the year the price ranged from 4.35 to 6.29.

Directors Options and Long-Term Incentives Year ended 31 March 2003


Details of the share options held by Directors under SAYE schemes are as follows: Granted Exercised 31 March during during 31 March Option 2003 year year 2002 price B. H. Whitty B. H. Whitty A. J. Belk R. I. Harley R. D. Harpin D. M. Penna D. M. Penna A. P. Page 3,524 2,027 5,430 5,144 2,027 6,570 3,524 2,027 2,027 6,570 6,570 6,570 * 5,430 5,144 6,570 6,570 262.2p 466.0p 466.0p 310.4p 328.0p 262.2p 466.0p 262.2p Date granted 9.1.98 10.12.02 10.12.02 18.12.98 21.12.00 9.1.98 10.12.02 9.1.98 Date exercisable from 1.2.03 1.2.08 1.2.06 1.2.04 1.2.05 1.2.03 1.2.06 1.2.03

SAYE Scheme options are exercisable for a 6 month period from the date shown. The market price of the Companys shares on the day the options were exercised was 4.1612. *At date of appointment At date of resignation

43

PART IV
Details of the share options held by Directors under Executive Share Option Schemes are as follows: Granted Exercised 31 March during during 31 March Option Date 2003 year year 2002 price granted B. H. Whitty B. H. Whitty B. H. Whitty B. H. Whitty A. J. Belk A. J. Belk A. J. Belk R. I. Harley R. I. Harley R. I. Harley R. I. Harley R. D. Harpin R. D. Harpin D. M. Penna D. M. Penna D. M. Penna D. M. Penna A. P. Page A. P. Page A. P. Page A. P. Page A. P. Page 150,000 30,000 72,500 65,000 12,500 17,500 36,000 12,500 50,000 36,000 33,000 49,000 44,000 125,000 25,000 49,000 44,000 12,500 50,000 20,000 40,000 17,500 65,000 36,000 33,000 44,000 44,000 17,500 150,000 30,000 72,500 12,500* 17,500* * 12,500 50,000 36,000 49,000 125,000 25,000 49,000 12,500 50,000 20,000 40,000 366.5p 377.5p 550.0p 589.0p 550.0p 589.0p 466.0p 366.5p 407.5p 550.0p 589.0p 550.0p 589.0p 366.5p 377.5p 550.0p 589.0p 366.5p 407.5p 377.5p 550.0p 589.0p 3.6.98 23.6.00 17.7.01 8.7.02 17.7.01 8.7.02 13.11.02 3.6.98 30.7.99 17.7.01 8.7.02 17.7.01 8.7.02 3.6.98 23.6.00 17.7.01 8.7.02 3.6.98 30.7.99 23.6.00 17.7.01 8.7.02

Executive Share Options are exercisable between 3 and 10 years from the date of grant. Details of the maximum number of shares receivable from conditional awards made under the Restricted Share Plan are as follows: Awarded Lapsed Vested 31 March during during during 31 March 2003 year year year 2002 B. H. Whitty D. M. Penna A. P. Page 21,260 18,180 11,785 17,711 15,145 38,971 33,325 11,785

The shares that vested in the year were provisionally awarded on 30 July 1999. The market price on award was 4.0712 and on vesting was 5.3212. *At date of appointment At date of resignation The market price of the Companys shares at 31 March 2003 was 3.8912 (2002: 5.75). During the year the price ranged from 3.7112 to 6.1112

6.

Other Operating Income


2003 000 Profit on disposal of tangible fixed assets Rental income 84 505 589 2002 000 379 455 834 2001 000 281 296 577

44

PART IV
7. Net Interest Payable
2003 000 Interest payable and similar charges Index-linked bond Bank overdraft and other interest Finance charges in respect of finance leases and hire-purchase contracts Debentures Share of joint venture interest payable 3,614 2,075 428 67 13 6,197 Interest receivable on short-term deposits (235) 5,962 2002 000 1,594 445 67 2,106 (194) 1,912 2001 000 1,554 503 67 2,124 (157) 1,967

Net interest payable in 2003 includes 2,953,000 in Homeserve and 4,728,000 in the regulated water business.

8.

Taxation
2003 000 Current tax Corporation tax Adjustment in respect of prior years Deferred tax Origination and reversal of timing differences Increase in discount Adjustment in respect of prior years 12,016 (1,030) 10,986 1,890 (242) 155 1,803 12,789 2002 000 9,184 (391) 8,793 1,651 (600) 1,051 9,844 2001 000 8,227 (484) 7,743 1,180 (282) 898 8,641

The overall rate of tax for the Group for 2003, including deferred tax, based on profit before tax excluding goodwill and exceptional costs was 28.7 per cent. (2002: 27.0 per cent. 2001: 27.4 per cent.). The principal differences between the current corporation tax rate for the Group, based on profit before tax (after goodwill and exceptional costs), and the standard rate of corporation tax are as follows: 2003 Standard rate of corporation tax Goodwill not deductible for tax purposes Other expenses not deductible for tax purposes Capital allowances in excess of depreciation Adjustments in respect of prior years Current corporation tax rate for the year 30.0% 4.5% 1.4% (4.7%) (2.7%) 28.5% 2002 30.0% 1.1% 0.5% (5.0%) (1.1%) 25.5% 2001 30.0% 1.0% (3.9%) (1.6%) 25.5%

45

PART IV
9. Dividends Paid and Proposed
2003 000 Equity interests Interim dividend paid of 5.6p (2002: 5.0p; 2001: 4.5p) per share Proposed dividend of 12.4p (2002: 11.1p; 2001: 10.0p) per share Non-equity interests Preference dividends paid 3,516 7,824 11,340 2002 000 3,132 6,965 10,097 2001 000 2,799 6,204 27 9,030

A nominal dividend of 0.01 pence per share is proposed in respect of 48,963 (2002: 75,911; 2001: 91,574) shares held by the South Staffordshire Water Employee Trust in accordance with a Deed of Waiver dated 31 December 1992.

10. Earnings per Share


The calculation of earnings per share is based on profit after tax and minority interests divided by the weighted average number of shares in issue during the financial period. Diluted earnings per share takes into account the dilution effect of the full exercise of all share options granted by the Company by comparing the difference between the weighted average exercise price of exercisable share options with the average share price over the period. Adjusted earnings per share has been calculated by excluding the amortisation of goodwill and exceptional costs. This is considered to be a better indicator of performance by the Company. The calculations of earnings per share are based on the following profits and numbers of shares: 2003 000 Profit for the financial year Amortisation of goodwill total relating to minority shareholders Exceptional costs Profit for adjusted earnings per share 23,987 5,973 (1,145) 28,815 2003 Number of shares Weighted average number of shares For basic and adjusted earnings per share Exercise of share options For diluted earnings per share 62,772,234 546,703 63,318,937 2002 000 22,810 1,256 611 24,677 2002 Number of shares 62,346,645 924,894 63,271,539 2001 000 20,078 1,243 21,321 2001 Number of shares 62,040,987 508,682 62,549,669

46

PART IV
11. Goodwill
000 Cost At 1 April 2001 Acquisitions Disposal of subsidiary undertaking At 31 March 2002 Acquisitions At 31 March 2003 Amortisation At 1 April 2001 Charge for the year Disposal of subsidiary undertaking At 31 March 2002 Charge for the year At 31 March 2003 Net Book Value At 31 March 2003 At 31 March 2002 25,066 173 (694) 24,545 111,757 136,302 1,760 1,256 (50) 2,966 5,973 8,939 127,363 21,579

At 31 March 2003 the cumulative amount of goodwill written off directly to reserves amounted to 11,826,000 (2002: 11,826,000).

47

PART IV
12. Tangible Fixed Assets
Land and Buildings 000 Cost At 1 April 2001 20,291 Additions 4,619 Capital contributions received Disposals (53) Disposal of subsidiaries At 31 March 2002 24,857 Acquisitions 2,976 Additions 1,002 Capital contributions received Disposals (26) At 31 March 2003 28,809 Infrastructure Assets 000 87,815 13,456 (4,773) (417) 96,081 13,475 (3,961) (492) 105,103 51,385 4,599 (417) 55,567 5,016 (492) 60,091 Operational Structures 000 20,484 545 21,029 2,062 23,091 3,811 348 4,159 341 4,500 Fixed Plant 000 49,632 8,716 (1,341) 57,007 6,947 (482) 63,472 18,458 2,623 (979) 20,102 2,789 (342) 22,549 Mobile Plant & Equipment 000 58,156 11,851 (2,304) (107) 67,596 9,114 9,057 (3,375) 82,392 26,927 5,712 (1,906) (54) 30,679 4,821 8,155 (2,543) 41,112 Total 000 236,378 39,187 (4,773) (4,115) (107) 266,570 12,090 32,543 (3,961) (4,375) 302,867 102,920 13,628 (3,303) (54) 113,191 5,001 16,942 (3,389) 131,745

Depreciation At 1 April 2001 2,339 Charge for the year 346 Disposals (1) Disposal of subsidiaries At 31 March 2002 Acquisitions Charge for the year Disposals At 31 March 2003 Net Book Value At 31 March 2003 Owned Leased At 31 March 2002 Owned Leased 2,684 180 641 (12) 3,493

25,316 25,316 22,173 22,173

40,785 4,227 45,012 36,287 4,227 40,514

18,174 417 18,591 16,448 422 16,870

37,852 3,071 40,923 33,364 3,541 36,905

38,671 2,609 41,280 35,746 1,171 36,917

160,798 10,324 171,122 144,018 9,361 153,379

Infrastructure renewals expenditure and the charge to the profit and loss account have been included within infrastructure assets cost and accumulated depreciation. The net book value of infrastructure assets is stated net of capital contributions. Previously, capital contributions were shown as a deduction from the cost of the assets on the face of the balance sheet. The brought forward cost and net book value of infrastructure assets have been restated accordingly. The balance of capital contributions at 31 March 2003 and movements in the year are set out in note 14 below. Tangible fixed assets financed by leasing and hire-purchase amounted to 14,338,000 (2002: 12,513,000) less accumulated depreciation of 4,014,000 (2002: 3,152,000). Depreciation charged to the profit and loss account for the year in respect of leased assets amounted to 881,000 (2002: 618,000). Tangible fixed assets include freehold land of 2,085,000 (2002: 1,883,000) which is not subject to depreciation.

48

PART IV
13. Capital Commitments
Capital commitments outstanding at 31 March 2003 were 9,431,000 (2002: 11,487,000).

14. Capital Contributions


Infrastructure Assets 000 Balance at 1 April 2001 Capital contributions received Disposals Amortised in year Balance at 31 March 2002 Capital contributions received Disposals Amortised in year Balance at 31 March 2003 43,966 4,773 (208) 48,531 3,961 (248) 52,244 Other Assets 000 2,647 1,228 (149) 3,726 834 (208) 4,352

Capital contributions in respect of other assets are included in accruals and deferred income (note 23).

15. Investments
Own shares 000 Cost At 1 April 2001 Disposals At 31 March 2002 Additions Disposals At 31 March 2003 Provision At 1 April 2001 Charge for the year Disposals At 31 March 2002 Charge for the year Disposals At 31 March 2003 Net Book Value At 31 March 2003 At 31 March 2002 267 (38) 229 32 (80) 181

139 89 (19) 209 52 (80) 181

20

In accordance with UITF Abstract 13, shares in the Company held by the South Staffordshire Water Employee Trust are shown as investments. At 31 March 2003 the Trust held 48,963 shares in the Company (2002: 75,911). There are no unallocated shares. The market value of the shares at 31 March 2003 was 190,711 (2002: 436,488). The cost of shares conditionally allocated to employees is written off over the period to which the performance criteria relate. As stated in note 9, dividends have been waived by the Trust. Any costs of administration are included in the profit and loss account as they accrue. The Companys principal subsidiary undertakings and joint ventures at 31 March 2003, all of which have only ordinary shares in issue, except Highway which has preference shares in issue, are as follows:

49

PART IV
Proportion of Shares Held Direct Indirect South Staffordshire Water PLC Homeserve Homeserve plc Home Service (GB) Ltd Home Hotline Ltd Highway Emergency Services Ltd Regency Financial Holdings Ltd Regency Warranties Ltd Servotomic Ltd Domeo S.A. Customer Solutions Echo Managed Services Ltd Echo South West Ltd Mail Solutions Ltd Rapid Systems Ltd OnSite OnSite Resources Ltd OnSite Central Ltd OnSite South Ltd Middleton Maintenance Services Ltd 100% Nature of Business Water supply

75% 75% 75% 75% 75% 75% 75% 40%

Intermediate holding company Plumbing, heating and electrical home assistance Claims handling Emergency glazing & door repair Intermediate holding company Furniture warranties & repairs Warranties service and repair for domestic boilers Plumbing home assistance joint venture registered in France Customer management Customer management joint venture Mailing services Development and sale of software

100% 50% 100% 100%

100% 100% 100% 100%

Water & wastewater services Water treatment, distribution and sewerage network services Wastewater services Building infrastructure maintenance Intermediate holding company Intermediate holding company

South Staffordshire Enterprises Ltd South Staffordshire Water Holdings Ltd Affinity Partners Ltd

100% 100% 75%

Insurance captive registered in Guernsey

50

PART IV
16. Stocks
2003 000 Stores and raw materials Work in progress Finished goods 4,133 1,851 119 6,103 2002 000 2,460 545 57 3,062

17. Debtors
2003 000 Amounts recoverable within one year Trade debtors Other debtors Amounts owed by joint ventures Prepayments and accrued income Amounts recoverable after more than one year Other debtors 54,546 16,342 784 4,782 76,454 73 76,527 2002 000 37,487 12,322 304 4,230 54,343 97 54,440

18. Borrowings
2003 000 Amounts falling due within one year Bank loans and overdrafts Obligations under finance leases and hire purchase contracts Loan notes 18,889 1,582 2,421 22,892 Amounts falling due after more than one year Index-linked bonds Irredeemable debenture stock (note 20) Obligations under finance leases and hire-purchase contracts: Payable between one and two years Payable between two and five years Payable after five years 2002 000 27,294 995 2,024 30,313

85,417 1,633 1,446 2,323 202 91,021

1,633 886 1,931 783 5,233

South Staffordshire Water PLC issued 85,000,000 3.75 per cent. Retail Price Index-linked unsecured bonds, 75,000,000 on 22 August 2002 and 10,000,000 on 26 September 2002. The bonds are repayable in 2025. The bonds are included in the balance sheet at an amount equal to the sum of the proceeds received on issue and indexation to date, less issue costs. The obligations under finance leases and hire purchase contracts are secured on the assets to which they relate.

51

PART IV
19. Other Creditors
2003 000 Amounts falling due within one year Trade creditors Payments received in advance Other creditors Deferred consideration in respect of acquisitions Proposed dividends Proposed dividends payable to minority interests Corporation tax payable Other taxation and social security 46,195 6,868 22,573 4,894 7,824 1,415 6,921 2,360 99,050 Amounts falling due after more than one year Deferred consideration in respect of acquisitions Deferred consideration includes 13,500,000 payable after 31 March 2006. 2002 000 30,782 5,647 20,015 6,965 1,995 6,691 1,265 73,360

21,473

20. Irredeemable Debenture Stock


2003 000 312% 4% 5% Net premium on irredeemable debenture stock 476 627 500 1,603 30 1,633 2002 000 476 627 500 1,603 30 1,633

21. Provisions for Liabilities and Charges


Deferred tax 000 At 1 April 2001 Profit and loss account charge At 31 March 2002 Acquisitions Profit and loss account charge Investment in the period At 31 March 2003 5,743 1,051 6,794 51 1,803 8,648 Share of joint venture net liabilities 000 249 249 421 (100) 570 Total 000 5,743 1,300 7,043 51 2,224 (100) 9,218

The Groups share of gross assets and gross liabilities in joint ventures was 1,010,000 (2002: 406,000) and 1,580,000 (2002: 655,000) respectively. An analysis of deferred tax is set out in note 22.

52

PART IV
22. Deferred Tax
2003 000 Deferred tax is provided as follows: Accelerated capital allowances Other timing differences Undiscounted provision for deferred tax Discount Discounted provision for deferred tax 16,576 (132) 16,444 (7,796) 8,648 2002 000 14,566 (218) 14,348 (7,554) 6,794

23. Accruals and Deferred Income


2003 000 Capital contributions (note 14) Other deferred income 4,352 14,102 18,454 2002 000 3,726 4,628 8,354

Other deferred income relates to policy receipts from members in respect of which the Group has an obligation to provide future services.

24. Called up Share Capital


2003 000 Authorised 88,000,000 Ordinary shares of 10p each Issued and fully paid 63,151,756 (2002: 62,804,758) Ordinary shares of 10p each 8,800 2002 000 8,800

6,315 Ordinary Share Capital 000

6,280 Share Premium 000 11,990 1,319 1,737 15,046 956 518 16,520

Balance at 1 April 2001 Shares issued in the year Transfer from profit and loss reserve Balance at 31 March 2002 Shares issued in the year Transfer from profit and loss reserve Balance at 31 March 2003

6,221 59 6,280 35 6,315

During the year ended 31 March 2003 321,998 Save As You Earn (SAYE) scheme options were exercised for which external consideration of 894,000 was received, including a share premium of 862,000. 25,000 Executive Share Option Scheme (ESOS) options were also exercised for which external consideration of 97,000 was received, including a share premium of 94,000. During the year ended 31 March 2002 555,915 Save As You Earn (SAYE) scheme options were exercised for which external consideration of 1,231,000 was received, including a share premium of 1,176,000. 40,000 Executive Share Option Scheme (ESOS) options were also exercised for which external consideration of 147,000 was received, including a share premium of 143,000. During the year ended 31 March 2001 94,613 Save As You Earn (SAYE) scheme options were exercised for which external consideration of 247,000 was received, including a share premium of 237,000.

53

PART IV
Options
Details of outstanding share options as at 31 March 2003 are shown below: Date of Grant 9.1.98 3.6.98 18.12.98 30.7.99 22.12.99 22.12.99 23.6.00 29.9.00 30.11.00 21.12.00 21.12.00 17.7.01 9.1.02 16.1.02 16.1.02 8.7.02 13.11.02 10.12.02 10.12.02 Date Exercisable Number of Shares 1.2.03 5,320 3.6.01 372,500 1.2.04 170,020 30.7.02 127,500 1.2.03 8,777 1.2.05 85,289 23.6.03 280,000 29.9.03 12,500 30.11.03 62,500 1.2.04 155,864 1.2.06 144,069 17.7.04 579,000 9.1.05 20,000 1.2.05 168,187 1.2.07 149,834 8.7.05 658,500 13.11.05 36,000 1.2.06 151,306 1.2.08 172,159 Exercise Price 2.622 3.665 3.104 4.075 3.000 3.000 3.775 3.425 4.100 3.280 3.280 5.500 5.915 4.760 4.760 5.890 4.660 4.660 4.660

SAYE Scheme Executive Scheme SAYE Scheme Executive Scheme SAYE Scheme SAYE Scheme Executive Scheme Executive Scheme Executive Scheme SAYE Scheme SAYE Scheme Executive Scheme Executive Scheme SAYE Scheme SAYE Scheme Executive Scheme Executive Scheme SAYE Scheme SAYE Scheme

Options granted under the SAYE Scheme are exercisable for a six month period from the date indicated which is at the end of either a 3 year or 5 year savings period. Executive Scheme options are exercisable between 3 and 10 years from the date of grant. Details of options granted to Directors are included in Note 5. Restricted Share Plan As at 31 March 2003, the remuneration committee of the Board has conditionally allocated 51,225 shares under this Plan.

25. Profit and Loss Account


000 At 1 April 2001 Transfer to share premium reserve Retained profit for the year Balance at 31 March 2002 Transfer to share premium reserve Retained profit for the year Balance at 31 March 2003 78,501 (1,737) 12,713 89,477 (518) 12,647 101,606

54

PART IV
26. Acquisitions and disposals
Year ended 31 March 2001 During the year ended 31 March 2001 the Group acquired three companies for a total consideration of 5,060,000. The analysis below shows the main components of the calculation of the goodwill arising on these acquisitions. Mailing OnSite Division Division Total 000 000 000 Book value of net assets acquired Tangible fixed assets Stocks Debtors Cash Creditors due within one year Creditors due after more than one year Fair value adjustments Fair value of net assets acquired 2,029 524 2,634 (1,062) (2,650) (247) 1,228 (190) 1,038 77 3 87 73 (109) (9) 122 (25) 97 2,106 527 2,721 (989) (2,759) (256) 1,350 (215) 1,135

The fair value adjustments related principally to fixed assets with the adoption of depreciation policies consistent with those of the Group. Goodwill arising on acquisition Fair value of consideration: Cash and loan note consideration Acquisition costs Cost of subsidiaries acquired Fair value of net assets acquired Goodwill on acquisition

4,510 214 4,724 (1,038) 3,686

550 13 563 (97) 466

5,060 227 5,287 (1,135) 4,152

The consolidated cash flow statement for the year ended 31 March 2001 includes the following in respect of the subsidiary undertakings acquired during the year. 000 Operating cash flow 859 Returns on investments and servicing of finance (58) Taxation (254) Capital expenditure and financial investment (945) Financing (176) Net cash outflow The net cash outflow in respect of the acquisitions comprises: 000 Cost of subsidiaries acquired Equity shares issued Loan notes issued Investment by minority shareholders Overdraft/(bank balance) within acquired subsidiaries Cash outflow 5,287 (250) (333) 989 5,693 2000 000 21,963 (5,900) (166) (319) 15,578 (574)

At 31 March 2001 the cumulative amount of goodwill written off directly to reserves amounted to 11,826,000 (2000: 11,826,000).

55

PART IV
Year ended 31 March 2002 On 15 June 2001, the Group disposed of its 52 per cent. interest in Membrane Systems Limited for nil consideration. The loss on disposal of 611,000 included 644,000 unamortised goodwill written off and was calculated as follows: Share of liabilities on disposal Unamortised goodwill written off 000 (33) 644 611 Year ended 31 March 2003 During the year ended 31 March 2003 the group acquired the entire issued share capital of Regency Financial Holdings Plc, Highway Emergency Services Limited, Middleton Maintenance Services Limited and Servotomic Limited. Servotomic Limited was acquired on 3 March 2003. On 1 April 2002, the Group also acquired the 40 per cent. of Home Hotline Limited previously held by other shareholders. The acquisition method of accounting has been adopted in all cases. Details of the consideration, the fair value of the assets and liabilities acquired and any adjustments thereto and the goodwill on these acquisitions are set out below. Regency Financial Holdings Plc Date acquired: Acquired by: 14 May 2002 Homeserve 000 Consideration: Cash including acquisition expenses Loan notes Deferred consideration payable in cash Highway Emergency Services Limited 5 July 2002 Homeserve 000 Middleton Maintenance Services Limited 1 August 2002 OnSite 000 Homeserve 000 000

Others

Total

38,589 6,700 45,289

29,048 19,473 48,521

12,053 3,761 15,814

4,944 194 5,138

84,634 3,761 26,367 114,762

Fair value of net assets acquired: Tangible fixed assets 3,954 Cash at bank and in hand 2,514 Debt (41) Deferred income (6,577) Other net current assets/ (liabilities) (2,592) Minority interests (2,742) Goodwill on acquisition 48,031

1,252 229 (26) 2,593 4,048 44,473

1,625 2,767 (1,388) (848) 2,156 13,658

258 195 (934) (226) 250 (457) 5,595

7,089 5,705 (1,455) (7,511) (1,073) 250 3,005 111,757

Fair value adjustments: Deferred tax Other

125 25 150

94 73 167

149 149

219 247 466

56

PART IV
Goodwill on other acquisitions of 5,595,000 includes 1,645,000 in respect of Home Hotline Limited and 3,400,000 in respect of Servotomic Limited. Other fair value adjustments principally comprised the write-down of fixed assets and additional supplier invoice accruals. Goodwill is being amortised over its estimated useful life of up to 20 years. Summarised profit and loss accounts in respect of the major acquisitions are set out below: Regency Highway Financial Emergency Holdings Services Plc Limited Period: 1 April 2002 to 14 May 2002 000 Turnover Operating profit Goodwill amortisation Net interest receivable/(payable) Profit before taxation Taxation Profit after taxation Period: 1,094 365 10 375 (113) 262 Year ended 31 March 2002 000 Profit before taxation Taxation Profit after taxation 2,672 (794) 1,878 Middleton Maintenance Services Limited

1 April 2002 1 February 2002 to to 5 July 2002 1 August 2002 000 12,382 448 (122) (181) 145 (102) 43 Nine months ended 31 March 2002 000 1,079 (384) 695 000 12,825 1,063 (1) 1,062 (328) 734 Year ended 31 January 2002 000 1,730 (511) 1,219

There were no material recognised gains and losses in the periods above other than the profit on ordinary activities after taxation except in respect of Highway Emergency Services in which there was a prior period adjustment of 239,000 in respect of the adoption of FRS 19 (deferred tax). The net cash outflow in respect of the acquisitions comprised: 000 Cash consideration Less cash balances acquired 84,634 (5,705) 78,929 The increase in debt resulting from the acquisitions comprised: Cash consideration less cash balances acquired Loan notes issued Debt acquired

78,929 3,761 1,455 84,145

57

PART IV
The consolidated cash flow statement for the year ended 31 March 2003 includes the following amounts in respect of the subsidiary undertakings acquired during the year from the respective dates of acquisitions. 000 Operating cash flow Returns on investments and servicing of finance Taxation Capital expenditure and financial investment Financing Net cash outflow The cash flows of the acquisitions are individually not material. 4,082 (56) (2,904) (2,395) (244) (1,517)

27. Operating Lease Commitments


Annual commitments under non-cancellable operating leases at 31 March were as follows: 2003 Land and buildings 000 Leases which expire: Within one year Between two and five years After five years 586 1,029 238 1,853 Other 000 613 2,550 104 3,267 Land and buildings 000 449 108 345 902 2002 Other 000 232 229 96 557

28. Financial Liabilities


The Groups financial liabilities included below comprise borrowings and creditors falling due after more than one year. These do not include short term debtors and creditors. The main purpose of these financial instruments is to raise finance for the Groups operations. It is, and has been throughout the period under review, the Groups policy that no trading in financial instruments shall be undertaken. The Groups policy in respect of cash and borrowings, is to maintain flexibility with a balance between fixed and floating rates and long and short term debt.

Interest Rate Risk Profile


2003 000 Retail Price Index-linked bonds Fixed rate financial liabilities Floating rate financial liabilities Financial liabilities on which no interest is paid 85,417 7,186 21,310 113,913 21,473 135,386 2002 000 6,228 29,318 35,546 35,546 2001 000 7,006 23,767 30,773 30,773

During the year ended 31 March 2003 South Staffordshire Water PLC issued 85,000,000 Retail Price Indexlinked bonds, repayable in 2025. The bonds provide a source of long-term funding for that company. 65,000,000 of the proceeds were used by South Staffordshire Water PLC to improve the capital structure of the water business by buying back its shares from the Group. The Group used the proceeds received to finance in part the acquisitions in the year. The revenues of the regulated water business are linked to the Retail Price Index and provide an effective hedge against the index-linked element of the interest charge on the bonds. Interest rates in respect of the Groups remaining debt were weighted towards floating rates and short-term debt.

58

PART IV
For all debt, assets and liabilities, the book values and fair values are not materially different, except for the 85,000,000 index-linked bonds, the fair value of which based on market value at 31 March 2003 was 89,939,000. Financial Liabilities on which no interest is paid Weighted average period until maturity years 2.8

Fixed rate financial liabilities Weighted Weighted average average period for which interest rate rate is fixed % years 2003 Sterling 2002 Sterling 2001 Sterling 7.9 8.0 8.0 2.9 4.1 5.0

The floating rate financial liabilities comprise sterling denominated loan notes, bank loans and overdrafts that bear interest at rates based on LIBOR and base rate. The Groups cash balances earn interest at floating rates linked to LIBOR.

Maturity of Financial Liabilities


The maturity profile of the Groups financial liabilities at 31 March was as follows: 2003 000 In one year or less, on demand In more than one year, but not more than two In more than two years, but not more than five In more than five years In more than twenty years 22,892 9,397 15,845 202 87,050 135,386

2002 000 30,313 886 1,931 783 1,633 35,546

2001 000 24,869 877 2,041 1,353 1,633 30,773

Borrowing Facilities
The Group has various borrowing facilities available to it. The undrawn committed facilities available at 31 March in respect of which all conditions precedent had been made at that date were as follows: 2003 000 Expiring in one year or less Expiring in more than one year but not more than two years Expiring in more than two years 18,650 8,720 11,000 38,370 2002 000 12,500 1,000 13,500 2001 000 9,860 100 9,960

59

PART IV
29. Pension Retirement Benefits
The Group operates a number of funded pension schemes for the benefit of its employees. The Group participates in the Water Companies Pension Scheme, by way of a separate sub-fund, which provides benefits based on final pensionable pay. The Group also operates a number of defined contribution Money Plan Pension Schemes. The assets of these schemes are held separately from those of the Group, being invested by discretionary fund managers. The contributions to the defined contribution schemes are charged against profits as incurred. The amount charged to the profit and loss account for the defined benefit scheme is the estimated regular cost of providing the benefits accrued in the year, adjusted to reflect variations from that cost. The regular cost of the defined benefit scheme is calculated so that it represents a substantially level percentage of current and future pensionable payroll. Variations from regular cost are charged or credited to the profit and loss account over 13 years, being the estimated average remaining working life of Scheme members. The regular cost and the variations are determined by a qualified actuary on the basis of triennial valuations, using the current unit method for death in service benefits and the projected unit method for other benefits. The most recent actuarial valuation at 1 April 2002 showed the market value of the Groups sub-fund as 121.3 million, and that the actuarial value of those assets represented 113 per cent. of the benefits that had accrued to members after allowing for expected future increases in earnings. As required by SSAP 24, the figures included in the accounts in respect of the defined benefit pension scheme are based on the 1 April 2002 actuarial valuation. This does not take into account any impact on the fall in general stock market values since that date. Any such impact will be reflected in the next SSAP 24 triennial valuation as at 1 April 2005 based upon which subsequent pension costs will be determined until the adoption of FRS 17. The assumptions which have the most significant effect on the results of the valuation are those relating to the rate of return on investments and the rates of increase in salaries, wages and pensions. The valuation at 1 April 2002 assumed that equity returns would be 7.2 per cent. per annum, that salary and wage increases would average 4.8 per cent. per annum and that present and future pensions would increase at the rate of 2.8 per cent. per annum. In accordance with the recommendations of the actuary, the amount charged to the profit and loss account for the defined benefit scheme in 2003 was 1,189,000 (2002: 1,106,000; 2001: 1,145,000) representing an employers contribution rate of 9.6 per cent. (2002: 7.5 per cent.; 2001: 7.5 per cent.). The amount charged to the profit and loss account for the various defined contribution schemes in 2003 was 793,000 (2002: 368,000; 2001: 522,000).

Financial Reporting Standard 17


Additional disclosures regarding the Groups defined benefit pension scheme are required under the transitional provisions of FRS 17 Retirement benefits and these are set out below. The disclosures relate to the second year of the transitional provisions. They provide information which will be necessary for full implementation of FRS 17 in due course. The Accounting Standards Board has delayed the mandatory full implementation of the Standard, which will not now be required before 2005. The actuarial valuation described above has been updated at 31 March 2003 by a qualified actuary using revised assumptions that are consistent with the requirements of FRS 17. Investments have been valued for this purpose at market value. The major assumptions used were as follows: 31 March 2003 % Rate of increase in salaries Rate of increase in pensions Discount rate Inflation 4.5 2.5 5.6 2.5 31 March 2002 % 4.8 2.8 6.1 2.8

60

PART IV
The market value of the assets in the scheme, the present value of the liabilities in the scheme and the expected rate of return at the balance sheet date were: 2003 Expected rate of return per annum % Equities Bonds/gilts Corporate bonds Property Cash Market value of assets Present value of scheme liabilities (Deficit)/surplus in the scheme Related deferred tax assets/(liability) (Deficit)/surplus after deferred tax 7.5 4.5 5.6 6.0 3.8 Expected rate of return per annum % 8.3 5.2 6.1 6.7 5.2 2002

Valuation 000 38,702 61,050 5,046 1,172 4,116 110,086 (121,186) (11,100) 3,330 (7,770)

Valuation 000 40,047 76,847 2,309 1,506 830 121,539 (106,179) 15,360 (4,608) 10,752

Had FRS 17 been implemented in full throughout the financial year the following amounts would have been charged to the profit and loss account: 2003 000 Amounts included within operating profit: Current service cost Past service cost Amounts included as other finance income: Expected return on scheme assets Interest on scheme liabilities 2,500 1,400 3,900 7,500 (6,400) 1,100 In addition the following amounts would have been recognised in the statement of total recognised gains and losses: 2003 000 Actual return less expected return on scheme assets Experience gain on scheme liabilities Effect of changes in assumptions relating to the present value of scheme liabilities Actuarial loss The movement in the scheme surplus/(deficit) during the year was as follows: 2003 000 Surplus in the scheme brought forward Current service cost Contributions Past service cost Finance income Actuarial loss Deficit in the scheme carried forward 15,360 (3,100) 1,640 (1,400) 1,100 (24,700) (11,100) (15,200) 1,000 (10,500) (24,700)

61

PART IV
The impact of FRS 17, if implemented in full throughout the financial year, would have been to increase the amount charged to the profit and loss account by 1,611,000 and to reduce the reserves of the Group at 31 March 2003 by 7,770,000. The following disclosures, relating to amounts charged in the statement of total recognised gains and losses, will be built up over time as a five year history: 2003 % of scheme assets/(liabilities) Actual return less expected return on scheme assets Experience gains on scheme liabilities Actuarial loss (14) 1 (20)

000 (15,200) 1,000 (24,700)

30. Related Party Transaction


On 3 September 2001, Home Service (GB) Limited agreed with Richard Harpin to issue him with 9,300 new ordinary shares thereby reducing the Groups shareholding in Home Service from 82 per cent. to 75 per cent. At the same time Mr. Harpins bonus right to a share of Home Services profit was cancelled.

62

PART IV B. Interim results for the first six months ended 30 September 2003

The following is the full text of the interim results for the six months ended 30 September 2003 which were published on 25 November 2003: CHAIRMANS STATEMENT Interim Results In the six months ended 30 September 2003 the Groups turnover increased by 30 per cent. to 145.5m (2002: 111.7m). Operating profits have increased 20 per cent. to 21.0m (2002: 17.4m) and profit before tax and goodwill by 14 per cent. to 17.5m (2002: 15.3m). Earnings per share before goodwill have increased by 5 per cent. to 18.0p (2002: 17.1p) incorporating a 1 per cent. increase in the effective tax rate to 29.5 per cent. and an increase in the minority charge before goodwill to 0.9m (2002: 0.2m). The Board has approved an interim dividend of 6.1p (2002: 5.6p), an increase of 9 per cent. Net debt at 30 September 2003 was 106m (31 March 2003: 103m) of which 99m was within the Water Company. HomeServe HomeServes turnover increased by 63 per cent. in the period to 70.9m (2002: 43.6m) representing organic growth of 18 per cent. and the full six months contribution from Regency and Highway, which were acquired in the first half of last year. Home Service has grown its turnover by 33 per cent. to 37.6m (2002: 28.3m) and operating profit by 141 per cent. to 6.5m (2002: 2.7m). In the first half of the last financial year Home Service increased its marketing expenditure to acquire additional new policies, which reduced trading profits in that period. The benefit of these additional polices renewing, together with an increase in overall renewal rates to just over 87 per cent., has provided the basis for the strong performance reported for the six months to 30 September 2003. The number of Home Service policies has increased to 2.6m (31 March 2003: 2.4m), up 27 per cent. from 30 September 2002 (2.04m policies). The most substantial area of policy growth has been in the recently introduced supply pipe cover product. This product provides a full emergency repair service to customers water supply pipes with a targeted two-hour response time. This product has been sold primarily to existing members with 286,000 policies held as at 30 September 2003, an increase of 129,000 in the last six months. We have secured an agreement with Scottish Water to market the plumbing and drainage product in its area of supply. Scottish Water was formed from the merger of the three former water authorities in Scotland and supplies water and wastewater services to 2 million customers. This now provides us with full coverage across Great Britain. The number of gas boiler breakdown policies has increased to 100,000 as a result of taking over policies from Zurich Warranty Management Services earlier in the year and the acquisition in March 2003 of Servowarm. We have developed a low cost boiler breakdown product which has achieved encouraging take-up in tests in the summer and is currently being rolled out with a number of our water and power company partners. We have made progress in the development of our manufacturer warranty operation. Over 77,000 customers have already registered their appliances on our Mira Showers and Ideal Boiler warranty programmes. Registration and mailing take-ups, on both of these schemes, are well ahead of those achieved by our partners with their previous providers. We have recently secured agreement with Applied Energy, to run their warranty programmes for Creda Heating, Redring Shower and Xpelair Fan brands.

63

PART IV
Home Service and Home Hotline, our claims handling and network management operation, won a joint tender to manage Home Emergency business on behalf of Norwich Union Direct, for which marketing has recently begun. Under this agreement, Home Service handles the policy administration whilst Home Hotline handles claims and deploys jobs to its contractor network. Home Hotline was also recently appointed by Royal Bank of Scotland to manage a Home Emergency product for 550,000 premier bank account holders. We have made progress in developing an employed network of plumbing and drainage specialists to work alongside our subcontract network. The service, which is operated under the Highway brand, supports Home Service but is now extending its customer base and offering to Household Insurers, undertaking major drainage repairs. Customers now include both Prudential and Royal and Sun Alliance. Regency achieved an operating profit of 2.1m consistent with 2.1m for the full six months to 30 September 2002. This is a good performance against the background of the downturn in the retail furnishings market over the summer period. Additionally, the results reflect the successful replacement of the structural warranty product operated for Harveys with an alternative extended warranty product. Regency is continuing to develop its high quality upholstery repair and cleaning operation, which works on behalf of retailers and manufacturers and has recently secured a number of new accounts. In addition, Regency has started to trial upholstery repair and cleaning on behalf of a number of household insurers, including Nationwide, Legal and General and Fortis. Regency is confident that there will be strong demand for a national service, which can demonstrate substantial savings for insurers from repair rather than cash settlement of accidental damage. Highway made an operating loss of 0.2m compared to a profit of 0.2m for the full six months to 30 September 2002 in a period that is seasonally quiet for this business. Highway has made significant operational advances over the last few months, although this is not yet reflected in the trading performance. The strengthening of the management team in the summer has proved to be a successful catalyst for a number of initiatives, which should improve profitability in the longer term. We have already seen the impact of improved operational management over the last few months, examples include increased conversion of insurance leads and improving levels of productivity. Other initiatives include the development of new systems, which will automate workflow and invoicing to allow reductions in overheads. In addition, changes in procurement methods are realising cost reductions with our major suppliers. Highway is also now seeing the benefit of the new Royal and Sun Alliance account, which commenced in September 2003, and is already the third largest customer. Our business in France, which is operated through a joint venture with Veolia Environnement and branded as General des Eaux Services, now has over 100,000 policies compared to 9,000 twelve months ago and the plumbing product will continue to be rolled out into new regions within France. Commercial Outsourcing The Groups outsourcing businesses, which comprise OnSite and Customer Solutions, increased turnover by 15 per cent. to 54.1m (2002: 47.3m) reflecting the full six months contribution from Middleton/Doorman, which was acquired in August 2002. Operating profits have reduced to 4.5m (2002: 5.5m) primarily due to the absence of a large Rapid software licence sale and implementation. The trading results for Commercial Outsourcing, excluding Rapid, show net margins reducing from 9.6 per cent. to 9 per cent. with no organic growth in turnover. This result reflects the competitive nature of the market. The individual businesses have continued to develop their own

64

PART IV
niche offerings with some success, but these are yet to reflect in a significant increase in profitability. The Customer Solutions division has been developing its capability for transactional work particularly in the financial and telecom sectors. Examples include data processing, printing and distribution of billing documents on behalf of financial services customers as well as customer contact management and sales order processing. The OnSite and Middleton/Doorman businesses have been affected by inconsistent workload from major contracts as a result of customer internal re-organisations and the exceptionally dry summer period reducing reactive drainage work. However Middleton/Doorman have been successful in winning national and regional contracts through facilities management providers for both Shell and HSBC. Additionally, OnSite has started new contract work for Anglian Water and Scottish Water who both have substantial future requirements. Regulated Water Supply Turnover from Regulated Water Supply increased by 3 per cent. to 30.1m (2002: 29.3m) with operating profits increasing to 8.1m (2002: 8.0m). OFWAT has again ranked South Staffordshire Water as the second highest in the industry for levels of service with the annual average household bill for water supply continuing to be the second lowest in the industry. South Staffordshire Water submitted its draft business plan to OFWAT on 15 August 2003, as part of OFWATs price review for the five years 2005 to 2010. The draft business plan requests a real term price increase over the five-year period of 12.8 per cent. As part of the business plan, the company proposes to increase the rate of mains renewal by 40 per cent. in response to the increasing level of bursts in recent years. The Company will however be able to reduce investment in water quality and environmental projects following the successful completion of the large programme of works in these areas in the current five-year review period. The Companys draft business plan contains a capital expenditure investment programme of 118m before capital contributions of 15m, broadly consistent with the current five-year period. South Staffordshire Water continues to be one of the most efficient operations in the industry. The Company will continue to seek efficiency improvements over the five years 2005 to 2010. The business has successfully achieved the targeted 14 per cent. real reduction in operating costs imposed by OFWAT for the five-year period to 2005, with the result that further large savings are not achievable. The draft business plan confirms our intention to deliver the best value for money services combining high levels of service and low prices. Although the summer and autumn have been particularly dry, the Company has a wide variety of water resources available and does not foresee the need to interrupt its 25 year record of avoiding supply restrictions. Water can be drawn from deep boreholes, from our impounding reservoir at Blithfield or from the River Severn, itself backed by reservoir storage controlled by the Environment Agency. Nevertheless, arrangements have been put in place to conserve Blithfield, which is currently half-full and it is expected that normal winter rainfall will adequately recharge the reservoir by the spring. Prospects The Groups activities will continue to be heavily weighted towards the second half of the financial year, reflecting increased levels of activity in most of our service businesses across the winter months. Home Service is currently experiencing a good response to its autumn marketing campaigns, Regency has seen some early signs of improvement in the retail furnishings market and Highway is expected to benefit from the positive impact of the recent changes made. Commercial
65

PART IV
Outsourcing should benefit from its new service offerings. The Regulated Water Supply business is expected to continue to demonstrate very high levels of performance and service. The Directors remain confident in the prospects for the year.

Lindsay Bury 25 November 2003

66

PART IV CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2003
Six months ended 30 September 2003 000 Six months ended 30 September 2002 000 Year ended 31 March 2003 000 265,794 (4,456)

5555
Turnover Turnover Less share of joint ventures turnover Group turnover Operating profit Operating profit before goodwill Goodwill amortisation

Note 2

5555

5555

5555

5555 5555
3

145,526 (2,269) 143,257

5555 5555

111,689 (2,000) 109,689

5555

261,338 5555 50,491 (5,973) 44,518 (5,962) 5555 44,529 (5,973) 38,556 (12,789) 5555 25,767 (1,780) 5555 23,987 (11,340) 5555 12,647 5555 5555 38.2p 45.9p 37.9p 45.5p 18.0p

5555
17,369

20,998 (3,629)

5555

17,432 (2,416) 15,016

5555

Net interest payable Profit before tax and goodwill Goodwill amortisation Profit on ordinary activities before taxation Taxation on profit on ordinary activities Profit on ordinary activities after taxation Minority shareholders equity interests Profit for the financial period Dividends paid and proposed Retained profit Earnings per share Basic Adjusted basic excluding goodwill Diluted Diluted excluding goodwill Dividend per share 6 4

(3,536) 5555 17,462 (3,629) 13,833 (5,151) 5555 8,682 (221) 5555 8,461 (3,859) 5555 4,602 5555 5555 5 5 5 5 6 13.4p 18.0p 13.3p 17.9p 6.1p

(2,097) 5555 15,335 (2,416) 12,919 (4,370) 5555 8,549 190 5555 8,739 (3,516) 5555 5,223 5555 5555 13.9p 17.1p 13.8p 16.9p 5.6p

67

PART IV CONSOLIDATED BALANCE SHEET AT 30 SEPTEMBER 2003


30 September 2003 000 30 September 2002 (Restated) 000 31 March 2003 000 127,363 171,122

5555

5555

5555

Fixed assets Goodwill Tangible assets Investments

5555 5555
297,833

121,192 176,641

5555 5555

126,696 168,310 19

5555

295,025

298,485 5555 6,103 76,527 10,792

Current assets Stocks Debtors Cash at bank and in hand

5555 5555
90,820

7,034 74,977 8,809

5555 5555

5,440 70,925 9,649 86,014

5555

93,422 5555

Creditors amounts falling due within one year Borrowings Other creditors

5555

(23,871) (97,124)

5555

(34,671) (90,018)

5555

(22,892) (99,050)

(120,995) Net current liabilities Total assets less current liabilities Creditors amounts falling due after more than one year Borrowings Other creditors deferred consideration (30,175) 5555 267,658

(124,689) (38,675) 5555 256,350

(121,942) (28,520) 5555 269,965

5555

(91,306) (13,521)

5555

(90,167) (23,473)

5555

(91,021) (21,473)

(104,827) Provisions for liabilities and charges Accruals and deferred income Net assets Capital and reserves Share capital Share premium Capital redemption reserve Profit and loss account Equity shareholders funds Minority shareholders equity interests (10,125) (17,819) 5555 134,887 5555 5555 6,324 16,776 1,200 106,208 130,508

(113,640) (7,885) (15,160) 5555 119,665 5555 5555 6,282 15,110 1,200 94,700 117,292

(112,494) (9,218) (18,454) 5555 129,799 5555 5555 6,315 16,520 1,200 101,606 125,641

5555

5555
2,373 5555

5555
4,158 5555

4,379 5555 134,887 5555 5555

119,665 5555 5555

129,799 5555 5555

68

PART IV CONSOLIDATED CASH FLOW STATEMENT FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2003
Six months ended 30 September 2003 000 Six months ended 30 September 2002 000 Year ended 31 March 2003 000

5555
Net cash inflow from operating activities Operating profit Depreciation and profit on disposals of assets Amortisation of goodwill Share of operating loss in joint ventures Provision against investments Decrease/(increase) in working capital

Note

5555

5555
15,016 7,810 2,416

5555
44,518 16,650 5,973 408 52

17,369 8,723 3,629 296

336

5555
31,117 5555

1,100

5555

(392)

5555

(1,017)

25,186 5555

66,584 5555

Returns on investments and servicing of finance Net interest paid Dividends paid to minority interests

5555 5555

(2,287) (1,415)

5555 5555

(1,534) (1,216) (2,750)

5555

(3,725) (2,293)

(3,702)

(6,018) 5555 (12,958) 5555

Corporation tax paid Capital expenditure and financial investment Purchase of tangible fixed assets Investment in joint ventures Purchase of own shares Sale of tangible fixed assets Capital contributions received

(5,306) 5555

(5,133) 5555

5555 5555

(17,538) 548 2,911

5555 5555

(18,351) (100) (32) 326 2,727

5555

(31,755) (100) (32) 1,070 4,795

(14,079)

(15,430)

(26,022) 5555 (78,929) 5555 (10,481) 5555 5555

Acquisitions and disposals Investment in subsidiary undertakings Equity dividends paid

(2,300) 5555 (7,822) 5555 5555

(76,019) 5555 (6,961) 5555 5555

69

PART IV CONSOLIDATED CASH FLOW STATEMENT FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2003 - (continued)
Six months ended 30 September 2003 000 Six months ended 30 September 2002 000 Year ended 31 March 2003 000 991 83,712 (3,364)

5555
Financing Issue of ordinary share capital Proceeds from bond issue Repayment of loan notes Finance lease and hire purchase payments

Note

5555

5555

5555

265 (144)

66 83,712 (401)

5555

(697)

5555

(181)

5555

(1,285)

(576) 5555 (Decrease)/increase in cash Reconciliation of movement in net debt (Decrease)/increase in cash (Increase)/decrease in bank overdraft Debt in companies acquired Debt issued in respect of acquisitions Assets purchased under finance leases Index-linked bond proceeds from issue Index-linked bond indexation Debt repayments Increase in net debt in period Net debt brought forward Net debt carried forward 9 (2,668) 5555

83,196 5555 2,089 5555

80,054 5555 12,230 5555

5555

(1,983) (685)

5555

2,682 (593)

5555

3,825 8,405

5555 5555 5555 5555

(2,668) (200) (1,220) 841

5555 5555 5555 5555

2,089 (1,455) (3,761) (100) (83,712) (253) 582 (86,610) (28,579)

5555 5555

12,230 (1,455) (3,761) (788) (83,712) (1,705) 4,649

(3,247) (103,121) (106,368)

(74,542) (28,579)

(115,189)

(103,121) 5555 5555

70

PART IV NOTES
1. Financial reporting The groups principal accounting policies are consistent with those adopted in the financial statements for the year ended 31 March 2003 and with those adopted in the interim financial statements for the six months ended 30 September 2002. In line with the accounts at 31 March 2003 the presentation of the balance sheet at 30 September 2002 has been changed to show amounts of 10,922,000 previously included within creditors due within one year under the heading accruals and deferred income. This interim financial information is unaudited and does not constitute statutory accounts. Comparative figures for the year ended 31 March 2003 have been extracted from the latest published accounts which received an unqualified audit report and have been filed with the Registrar of Companies. 2. Turnover Six months ended 30 September 2003 000 Six months ended 30 September 2002 000 Year ended 31 March 2003 000 121,267 104,026 (18,335)

5555

5555

5555

HomeServe Commercial outsourcing Inter division Support services Regulated water supply

5555 5555 5555 5555


145,526 115,424 30,102

70,854 54,189 (9,619)

5555 5555 5555 5555


82,420 29,269

43,600 47,321 (8,501)

5555 5555
206,958 58,836

111,689

265,794 5555 5555

Inter divisional turnover relates wholly to commercial outsourcing. 3. Operating profit Six months ended 30 September 2003 000 Six months ended 30 September 2002 000 Year ended 31 March 2003 000 23,997 9,980

5555 5555 5555 5555 5555 5555


17,369 12,854 8,144

5555 5555 5555 5555 5555 5555


9,470 7,962 3,930 5,540

5555 5555 5555 5555


33,977 16,514

HomeServe Commercial outsourcing Support services Regulated water supply Goodwill amortisation

8,337 4,517

20,998 (3,629)

17,432 (2,416) 15,016

50,491 (5,973)

44,518 5555 5555

Operating profit includes the groups share of losses in joint ventures of 296,000 for the period (six months ended 30 September 2002: 336,000, year ended 31 March 2003: 408,000).
71

PART IV
4. Taxation The tax charge is based on the estimated effective tax rate, calculated on profit before goodwill, for the full year to 31 March 2004 of 29.5 per cent. (six months ended 30 September 2002: 28.5 per cent., year ended 31 March 2003: 28.7 per cent.), including deferred tax. Earnings per share Basic earnings per share is calculated by dividing the profit for the financial period by the weighted average number of ordinary shares in issue during the period. Adjusted earnings per share is calculated excluding goodwill. Six months ended 30 September 2003 000 Six months ended 30 September 2002 000 Year ended 31 March 2003 000 23,987 5,973

5.

5555

5555

5555

Profit for the financial period Amortisation of goodwill total relating to minority shareholders Adjusted profit for the period Weighted average number of shares (000s) Basic Diluted 6.

8,461 3,629

8,739 2,416

5555
11,371 5555 5555

(719)

5555
10,704 5555 5555

(451)

5555
28,815 5555 5555

(1,145)

5555

63,184 63,538

5555

62,746 63,504

5555

62,772 63,319

Dividend per share An interim dividend of 6.1p (2002: 5.6p) per share has been approved and will be paid on 2 January 2004 to shareholders on the register at the close of business on 5 December 2003. The dividend from the regulated water business to the ultimate parent company was 1.48m (2002: 2.05m).

7.

Reconciliation of movements in shareholders funds Six months ended 30 September 2003 000

5555 5555 5555 5555 5555 5555

Six months ended 30 September 2002 000

5555 5555 5555 5555 5555 5555

5555 5555 5555 5555

Year ended 31 March 2003 000 23,987 (11,340) 12,647 991

Profit for the financial period Dividends New share capital subscribed Net additions to shareholders funds Opening shareholders funds Closing shareholders funds

8,461 (3,859) 4,602 265

8,739 (3,516) 5,223 66

4,867 125,641

5,289 112,003

13,638 112,003

130,508

117,292

125,641 5555 5555

72

PART IV
8. Acquisitions Deferred consideration of 2,300,000 was paid in the period in respect of Regency Financial Holdings Plc which was acquired in May 2002. Adjustments to goodwill in the period of 2,542,000 relate to a reduction in the anticipated level of deferred consideration payable. 9. Analysis of net debt 30 September 2003 000 30 September 2002 000 31 March 2003 000 (8,097) (1,633) (85,417) (5,553) (2,421)

5555

5555

5555

Bank overdraft, net of cash at bank and in hand Irredeemable debenture stock Index-linked bond Obligations under finance leases Loan notes Net debt

5555 5555 5555

(10,765) (1,633) (86,637) (5,056) (2,277)

5555 5555 5555

(18,238) (1,633) (83,965) (5,969) (5,384)

5555

(106,368)

(115,189)

(103,121) 5555 5555

The retail price index-linked unsecured bond was issued by South Staffordshire Water PLC and is repayable in 2025. 10. Other information This interim report is being sent to shareholders and further copies will be available from the registered office at Green Lane, Walsall, WS2 7PD.

73

PART V PRO FORMA FINANCIAL INFORMATION ON THE CONTINUING GROUP

The Directors South Staffordshire Group Plc Green Lane Walsall West Midlands WS2 7PD N M Rothschild & Sons Limited St Swithins Lane London EC4P 4DU Cazenove & Co. Ltd 20 Moorgate London EC2R 6DA 11 March 2004 Dear Sirs

Deloitte & Touche LLP Birmingham

South Staffordshire Group Plc (the Company) We report on the unaudited pro forma combined net assets statement at 30 September 2003 and the profit and loss accounts for the year ended 31 March 2003 and the six month period ended 30 September 2003 (the pro forma financial information) set out in this Part V of the Listing Particulars dated 11 March 2004 issued by the Company. The pro forma financial information has been prepared for illustrative purposes only to provide information about how the proposed Demerger of the Water Group (including the pre Demerger reorganisation), the Share Exchange and the Share Consolidation might have affected the financial information presented. Responsibilities It is the responsibility solely of the Directors and Proposed Directors of the Company to prepare the pro forma financial information in accordance with paragraph 12.29 of the Listing Rules of the UK Listing Authority (the Listing Rules). It is our responsibility to form an opinion, as required by the Listing Rules, on the pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the pro forma financial information beyond that owed to those to whom our reports were addressed by us at the dates of their issue. Basis of opinion We conducted our work in accordance with the Statements of Investment Circular Reporting Standards and the Bulletin 1998/8 Reporting on pro forma financial information pursuant to the Listing Rules issued by the Auditing Practices Board in the United Kingdom. Our work, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the pro forma financial information with the Directors and Proposed Directors of the Company.

74

PART V
Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in the United States or other jurisdictions and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices. Opinion In our opinion: (a) the pro forma financial information has been properly compiled on the basis stated; (b) such basis is consistent with the accounting policies of the Company; and (c) the adjustments are appropriate for the purposes of the pro forma financial information as disclosed pursuant to paragraph 12.29 of the Listing Rules.

Yours faithfully

Deloitte & Touche LLP Chartered Accountants

75

PART V
Pro forma financial information on the Continuing Group Introduction The following unaudited pro forma consolidated financial information has been prepared, for illustrative purposes only, to show the effects on the profit and loss accounts of the Existing Group for the year ended 31 March 2003 and the six month period ended 30 September 2003 of the Demerger of the Water Group, the pre Demerger reorganisation, the Share Exchange and the Share Consolidation as if they had become effective on 1 April 2002, and the effect on the net asset statement of the Existing Group as at 30 September 2003 of the Demerger of the Water Group, the pre Demerger reorganisation and the Share Exchange as if they had become effective on 30 September 2003. The unaudited pro forma financial information below has been included for illustrative purposes only and, because of its nature, may not give a true picture of the consolidated results and the financial position of the Continuing Group following the completion of the Demerger, the pre Demerger reorganisation, the Share Exchange and the Share Consolidation. Pro forma consolidated profit and loss account for the Continuing Group for the year ended 31 March 2003 Adjustments Demerger Pro forma 000 Existing of Water Share Other Continuing Group Group Exchange adjustments Group Note (a) (b) (c) (e)

555

555

555

555
1,911 587

555
194,366

Turnover Total operating profit before goodwill amortisation and exceptional items Goodwill amortisation Exceptional items Operating profit Exceptional items Net interest payable Profit before tax, goodwill amortisation and exceptional items Goodwill amortisation Exceptional items Profit before tax Taxation

265,794 50,491 (5,973) 44,518 (5,962)

(73,339) (21,395) (21,395) 4,613

(3,011) (4,800) (7,811)

29,683 (8,984) (4,800) 15,899 (4,000) (1,657)

587 (4,000) (308)

44,529 (5,973) 38,556 (12,789) 25,767

(16,782) (16,782) 4,423

(3,011) (4,800) (7,811)

279 (4,000) (3,721) 92

28,026 (8,984) (8,800) 10,242 (8,274) 1,968

555555555555555555555555555555555555
Profit after tax Minority interest (12,359) (7,811) (3,629) exceptional credit in respect of UITF 17 (note c) other Profit for the financial year

(1,780)

4,800 2,980

(1,200)

4,800

(1,780) 7,780 (1,200) 4,800 555555555555555555555555555555555555

555555555555555555555555555555555555
EPS basic EPS basic, excluding goodwill and exceptional items 38.2p 45.9p
76

23,987

(12,359)

(31)

(4,829)

6,768

10.9p

32.0p

PART V
Analysis of turnover Adjustments Demerger of Water Other Group adjustments (26,590) 12,087 1,911 Pro forma Continuing Group 121,267 77,436 (4,337)

000 Homeserve Commercial outsourcing Inter-division Support services Regulated water supply

5555 5555 5555 5555


121,267 104,026 (18,335)

Existing Group

5555 5555 5555 5555 5555 5555 5555 5555


206,958 58,836 (14,503) (58,836) 1,911

194,366

265,794 (73,339) 1,911 194,366 5555 5555 5555 5555 5555 5555 5555 5555 Analysis of total operating profit before goodwill amortisation and exceptional items Adjustments Demerger Pro forma 000 Existing of Water Other Continuing Group Group adjustments Group

5555 5555 5555 5555 5555 5555 5555 5555 5555 5555 5555 5555
33,977 16,514 (5,367) (16,028) 1,073 (486) 29,683 23,997 9,980 (5,367) 1,200 (127) 25,197 4,486

Homeserve Commercial outsourcing Support services Regulated water supply

50,491 (21,395) 587 29,683 5555 5555 5555 5555 5555 5555 5555 5555

77

PART V
Pro forma consolidated profit and loss account for the Continuing Group for the six month period ended 30 September 2003 Adjustments Demerger Pro forma 000 Existing of Water Share Other Continuing Group Group Exchange adjustments Group Note (a) (b) (c) (e) Turnover Total operating profit before goodwill amortisation Goodwill amortisation Operating profit Net interest payable Profit before tax and goodwill amortisation Goodwill amortisation Profit before tax Taxation 145,526 20,998 (3,629) 17,369 (3,536) 17,462 (3,629) 13,833 (5,151) 8,682 (221) (36,509) (10,097) (10,097) 3,141 (6,956) (6,956) 1,919 (1,506) (1,506) (1,506) (1,506) 1,264 (72) (72) (144) (216) (216) 43 110,281 10,829 (5,135) 5,694 (539) 10,290 (5,135) 5,155 (3,189) 1,966

555555555555555555555555555555555555
Profit after tax Minority interest

555555555555555555555555555555555555
Profit for the financial period

(5,037)

(1,506) 521 (985)

(173) (300)

555555555555555555555555555555555555
EPS basic EPS basic, excluding goodwill and exceptional costs Analysis of turnover Adjustments Demerger of Water Other Group adjustments (13,061) 6,654 1,264 Pro forma Continuing Group 70,854 41,128 (1,701) 13.4p 18.0p 3.2p 11.4p

8,461

(5,037)

(473)

1,966

000 Homeserve Commercial outsourcing Inter-division Support services Regulated water supply

5555 5555 5555 5555


70,854 54,189 (9,619)

Existing Group

5555 5555 5555 5555 5555 5555 5555 5555


115,424 30,102 (6,407) (30,102) 1,264

110,281

145,526 (36,509) 1,264 110,281 5555 5555 5555 5555 5555 5555 5555 5555

78

PART V
Analysis of total operating profit before goodwill amortisation Adjustments Demerger of Water Other Group adjustments (2,202) Pro forma Continuing Group 8,637 2,192

000 Homeserve Commercial outsourcing Support services Regulated water supply

5555 5555 5555 5555 5555 5555 5555 5555 5555 5555 5555 5555
12,854 8,144 (2,202) (7,895) 177 (249) 10,829 8,337 4,517 300 (123)

Existing Group

20,998 (10,097) (72) 10,829 5555 5555 5555 5555 5555 5555 5555 5555

79

PART V
Pro forma net asset statement for the Continuing Group as at 30 September 2003 Adjustments 000 Demerger Pre Demerger Pro forma Existing of Water Share reOther Continuing Group Group Exchange organisation adjustments Group Note (a) (b) (c) (d) (e)

555

555

555
58,996

555

555

555

Fixed assets Goodwill Tangible assets

555 555
297,833

121,192 176,641

(143,010)

555 555

555 555
58,996

555 555

(2,000) (2,000)

555 555

555

180,188 31,631

(143,010) (1,368) (13,972) (1,000) (16,340)

211,819 555 5,666 59,782 7,809

Current assets Stocks Debtors Cash

555 555
90,820

7,034 74,977 8,809

555 555

555 555

555 555

(1,223) (1,223)

555 555

555

73,257 555

Creditors amounts falling due within one year Borrowings Other creditors

555 555 555

(23,871) (97,124)

555 555 555

6,630 31,178

555 555 555

(300)

555 555 555

(2,935)

555 555 555

(4,000) (1,842) (5,842) (5,842)

555

(24,476) (67,788)

(120,995) Net current liabilities Total assets less current liabilities Creditors amounts falling due after one year Borrowings Other creditors (30,175)

37,808 21,468

(300) (300)

(2,935) (4,158)

(92,264) 555

555

(19,007)

555

267,658

(121,542)

555

555

58,696

555

(6,158)

555

(5,842)

555

192,812

555 555

(91,306) (13,521)

555 555
7,567 90,793

90,793

555 555

555 555

555 555

555

(513) (13,521)

(104,827) Provisions for liabilities and charges Accruals and deferred income Net assets

(14,034) 555 (2,558)

(10,125)

555

(17,819)

555
(18,867) 555 555

4,315

555
58,696 555 555

555
(6,158) 555 555

555
(5,842) 555 555

555

(13,504)

134,887 555 555

162,716 555 555

80

PART V
Notes to the pro forma consolidated financial information on the Continuing Group Basis of preparation The unaudited pro forma consolidated financial information has been prepared on a basis consistent with the Existing Groups accounting policies for the year ended 31 March 2003 and the period ended 30 September 2003. a) The Existing Group Consolidated financial information in respect of the Existing Group for the year ended 31 March 2003 has been extracted without material adjustment from the Report and Accounts for the year ended 31 March 2003 and the consolidated financial information for the period ended 30 September 2003 has been extracted without material adjustment from the unaudited Interim Report for the six month period ended 30 September 2003. No account has been taken of trading of any constituent part of the Existing Group since 1 October 2003 for either the profit and loss accounts or net asset statement. b) Demerger of the Water Group The financial information on the Water Group has been extracted without material adjustment from the Accountants Report on the Water Group included in the Water Group Listing Particulars. The Demerger is expected to take the form of a dividend in specie of 100 per cent. of the shares in South Staffordshire Plc owned by South Staffordshire Group Plc. The Water Group will then be a discontinued operation for the Continuing Group. Pro forma profit and loss accounts The pro forma profit and loss accounts set out above reflect this Demerger as if it had occurred on 1 April 2002 by eliminating the results of the Water Group for the year ended 31 March 2003 and the six months ended 30 September 2003. Certain consolidation eliminations are also required to reflect fully the impact of the Demerger of the Water Group on the profit and loss accounts of the Existing Group. These are required to adjust the Existing Group consolidation eliminations in respect of the accounting for share schemes and to correct inter-company turnover and unrealised profit eliminations for the effects of the Demerger. These are included within Other adjustments as set out in note e) below. These adjustments relate to discontinued activities. The Demerger costs of 4 million are included within Other adjustments in note e) below as if they had been incurred on 1 April 2002. It has been assumed that there is no tax effect of this adjustment. The impact on the Groups net interest payable of the Demerger costs of 4 million has been calculated as if the costs were incurred on 1 April 2002, with a resulting increase in the interest payable for the year ended 31 March 2003 of 0.176 million, and for the six months ended 30 September 2003 of 0.082 million, based on the Groups average interest rate for short term debt of 4.4 per cent. and 4.1 per cent. for each respective period. A tax deduction has been calculated on this interest charge at the UK tax rate for the year ended 31 March 2003 and the period ended 30 September 2003 of 30 per cent. The interest and tax effects are included within Other adjustments, summarised in note e) below. Pro forma net asset statement In the pro forma net asset statement as at 30 September 2003 set out above, the Demerger is treated as having occurred on 30 September 2003 and the costs of 4 million incurred on that date (note e)).

81

PART V
Certain consolidation eliminations are also required to fully reflect the impact of the Demerger on the balance sheet of the Existing Group. These are required to adjust the Existing Group consolidation eliminations in respect of the accounting for share schemes. These are included within Other adjustments as set out in note e) below. It has been assumed that there is no tax effect of this adjustment. c) Share Exchange The share issue and cash payment to acquire the 24.98 per cent. minority shareholdings in Homeserve plc, a subsidiary undertaking of the Existing Group, reflects the issue of 11,600,000 New Shares in the Company and the payment of 0.3 million in cash. For the purposes of the pro forma profit and loss accounts and net asset statement, the fair value of the shares to be issued has been calculated as at 30 September 2003 by taking the market capitalisation of the Existing Group at that date, less an estimate of the value of the Water Group, divided by the number of ordinary shares in issue at that date, adjusted for the Share Consolidation. The estimated value of the Water Group at 30 September 2003 for the purpose of this pro forma has been taken as 153.7 million (the simple average of South Staffordshire Waters actual RCV at 31 March 2003 of 146.4 million and its estimated RCV at 31 March 2004 of 161.0 million) plus Echo, Rapid and Underground Pipeline Services, less the Water Groups net debt as at 30 September 2003 taken from the pro forma net asset statement at that date. Echo, Rapid and Underground Pipeline Services have been included at the transfer price paid to the Existing Group by the Water Group for those businesses as part of the pre Demerger reorganisation. For Echo and Rapid, the price paid was equal to their net asset value. The price of the New Shares calculated by the above method is 5.4375 per share giving, for the purposes of the pro forma, a fair value of the shares issued of 63.1 million, and a total fair value of the consideration of 63.4 million. The actual ordinary share price of the Continuing Group at the date of the Share Exchange, being immediately after the Demerger and Share Consolidation, may be different to the price calculated by the above method, and any difference may be material. Goodwill, and related amortisation, has been calculated as follows: Pro forma net assets Pro forma as at profit and loss 30 September accounts 2003 Number of shares issued Share price (see above) Fair value of shares issued Cash consideration Fair value of consideration Minority interest at 1 April 2002/30 September 2003 Goodwill Amortisation for the year ended 31 March 2003 Amortisation for the period ended 30 September 2003

5555 5555

11,600,000 11,600,000 5.4375 5.4375 000 000

5555 5555 5555 5555 5555 5555


(3,011) (1,506) 63,375 (3,141) 63,075 300

63,075 300

63,375 (4,379)

60,234 58,996 5555 5555 5555 5555 n/a n/a

82

PART V
Pro forma profit and loss accounts The acquisition of the minority shareholdings results in the removal of the minority interest balance of 3.141 million as at 1 April 2002 and the minority interest profit and loss account charge prior to UITF 17 adjustments (see below) of 2.98 million for the year ended 31 March 2003 and 0.521 million for the six month period ended 30 September 2003, as if the Share Exchange had occurred on that date. For the purposes of the pro forma profit and loss accounts it is assumed that the goodwill is amortised over 20 years from 1 April 2002 to give a pro forma charge of 3.011 million for the year ended 31 March 2003 and 1.506 million for the six months ended 30 September 2003. No interest effect has been calculated in respect of the cash payment of 0.3 million as if it had been paid on 1 April 2002, as this would not be material. No tax benefit has been included in respect of the additional goodwill charge. For the purposes of the pro forma profit and loss accounts the purchase of the minority interest in Homeserve plc is treated as having occurred on 1 April 2002. Had this been the case, the purchase would have resulted in an exceptional charge to operating profit of 4.8 million to recognise the cost of the original issue of shares to one of the minority shareholders over a shorter period than was expected to be the case (in accordance with UITF 17). If this had occurred, then the actual UITF 17 operating profit charge incurred by the Existing Group in the year ended 31 March 2003 of 1.2 million and in the period ended 30 September 2003 of 0.3 million would not have arisen, and so an adjustment has been made to add them back in the pro forma profit and loss information. 000 Pro forma Pro forma profit and profit and loss account loss account 31 March 30 September 2003 2003

Operating profit UITF 17 charge in respect of share issue Exceptional charge UITF 17 charge in respect of share issue Reduction in operating costs to eliminate actual UITF 17 charge

5555 5555
4,800 (1,200)

(300)

The impact of the minority interest is to adjust for these exceptional and non exceptional charges, such that profit for the financial year and earnings per share are unaffected by UITF 17. The effects of the non exceptional UITF 17 adjustments are included within Other adjustments see note e) below. Pro forma net asset statement For the purposes of the pro forma net asset statement as at 30 September 2003, the share issue, cash payment and goodwill are is recorded as if the Share Exchange had occurred on that date, and no cumulative goodwill amortisation is provided. d) Pre Demerger reorganisation The Adjustments for the pre Demerger reorganisation reflects the following reorganisation steps carried out to prepare for the Demerger:

On 22 December 2003, the Existing Group sold the entire issued ordinary share capital of Echo and Rapid to the Water Group, at the net book value of their net assets of 2.26 million, initially left on inter-company account.
83

PART V
On 27 February 2004, the Water Group acquired the trade and net operating assets of Underground Pipeline Services from a fellow subsidiary of the Existing Group for a consideration of 2.0 million initially left on inter-company account. On 27 February 2004, the construction costs incurred by the Existing Group in respect of a property occupied by Echo were transferred to the Water Group at their net book value of 2.0 million, initially left on inter-company account. On 3 March 2004, the Water Group issued 30,744 new ordinary shares to the Existing Group for 12.260 million. The proceeds of the share issue were applied by the Water Group in part to repay the inter-company balances due to the Existing Group arising from the above steps totalling 6.26 million, in part to repay certain other intercompany funding balances due to the Existing Group totalling 1.223 million, and in part to pay the Existing Group 1.842 million being the amount accrued in the books of the Water Group in respect of the estimated difference between the market value and exercise price of share options in the Existing Group to be exercised by Water Group employees after the Demerger. The net cash injection by the Existing Group into the Water Group as a result of the above steps was 2.935 million.

Pro forma profit and loss accounts The impact on the Existing Groups net interest payable has been calculated as if the net 2.935 million cash outflow for the Existing Group had happened on 1 April 2002, with a resulting increase in the interest payable for the year ended 31 March 2003 of 0.132 million, and for the six months ended 30 September 2003 of 0.062 million based on the Existing Groups average interest rate for short term debt of 4.4 per cent. and 4.1 per cent. for each respective period. A tax credit has been calculated on this reduction in interest expense at the UK tax rate for the year ended 31 March 2003 and the period ended 30 September 2003 of 30 per cent. The interest and tax effects are included within Other adjustments, summarised in note e) below. No adjustment has been recorded in respect of depreciation on the building as the amount is not material. Pro forma net asset statement For the purposes of the pro forma net asset statement as at 30 September 2003, the pre Demerger reorganisation is recorded as if the transactions occurred on that date. The net effect of the pre Demerger reorganisation as at 30 September 2003 would have been to reduce tangible fixed assets by 2 million, to reduce debtors by 1.223 million and to increase borrowings due within one year by 2.935 million giving an overall decrease in pro forma Continuing Group net assets of 6.158 million.

84

PART V
e) Other adjustments The other adjustments can be summarised as follows:

Pro forma profit and loss account for the year ended 31 March 2003 000 Interest Costs of UITF 17 effect Consolidation Demerger charge (net) Eliminations Note (b) (c) (b),(d) (b)

Total other adjustments

5555
Turnover

5555

5555

5555

5555
1,911

5555
1,911 5555 5555 587

5555 5555

5555 5555
1,200

5555 5555

5555 5555
(613)

Total operating profit before goodwill and exceptional items Exceptional items after operating profit Net interest payable Taxation Minority interest Profit for the financial period

5555 5555 5555

(4,000) (4,000)

5555 5555 5555

(1,200)

5555 5555 5555

(308) 92

5555 5555 5555

5555 5555 5555

(4,000) (308) 92 (1,200) (4,829)

(216)

(613)

Pro forma profit and loss account for the six month period ended 30 September 2003 000 UITF 17 Interest effect Consolidation Total other charge (net) Eliminations adjustments Note (c) (b),(d) (b)

5555
Turnover

5555

5555

5555

5555

5555 5555 300 (300)

5555 5555 (144) 43

1,264 5555 5555 (372) (372)

1,264 5555 5555 (72) (144) 43 (300)

Total operating profit before goodwill and exceptional items Net interest payable Taxation Minority interest Profit for the financial period

5555 5555 5555

5555 5555 5555

5555 5555 5555

5555

(101)

(473) 5555 5555

Pro forma net asset statement as at 30 September 2003 000 Costs of Consolidation Demerger Eliminations (b) (b) Total other adjustments

Note

5555
Borrowings due within one year Other creditors Net assets

5555

5555

5555 5555
(4,000) (1,842)

5555 5555 5555

(4,000)

5555 5555 5555

(1,842) (1,842)

(4,000)

(5,842) 5555 5555

85

PART V
f) Earnings per share and Share Consolidation The calculation of earnings per share is based on the profit after tax and minority interests divided by the weighted average number of shares in issue during the financial period. The weighted average number of shares in issue for the year ended 31 March 2003 and the period ended 30 September 2003 have been extracted without material adjustment from the Report and Accounts for the year ended 31 March 2003 and the Interim Report for the six months ended 30 September 2003. The weighted average number of shares in issue has been adjusted to reflect the Share Exchange and the Share Consolidation as if they had both occurred on 1 April 2002. Adjusted earnings per share have been calculated by excluding the amortisation of goodwill and exceptional items. This is considered to be a better indicator of performance by the Existing Group Directors. Year ended Period ended 31 March 30 September 2003 2003

5555 5555 5555 5555 5555

5555 5555 5555 5555 5555

Actual weighted average number of shares Effect of 4 for 5 Share Consolidation Adjustment for effect of Share Exchange Pro forma weighted average number of shares

62,772,234 (12,554,447) 50,217,787 11,600,000 61,817,787

63,184,000 (12,636,800)

50,547,200 11,600,000 62,147,200

000 5555 Pro forma profit for basic EPS Pro forma exceptional items Pro forma goodwill amortisation Less pro forma minority interest credit in respect of exceptional UITF 17 charges Pro forma profit for basic adjusted EPS 6,768 8,800 8,984

000 5555 1,966 5,135

5555
19,752 5555 5555

(4,800)

5555
7,101 5555 5555

86

PART VI ADDITIONAL INFORMATION


1. Responsibility Statements The Existing Group Directors, whose names appear in paragraph 2(a) below, and the Proposed Directors, whose names appear in paragraph 2(b) below accept responsibility for the information contained in this document. To the best of the knowledge and belief of the Existing Group Directors and the Proposed Directors (who have taken all reasonable care to ensure that such is the case) the information contained in this document is in accordance with the facts and does not omit anything likely to affect the import of such information.

2. Directors (a) The Existing Group Directors and their functions are as follows: Name Lindsay Claude Neils Bury Brian Howard Whitty Andrew John Belk Robert Ian Harley Richard David Harpin (Richard) Panton Corbett John Richard Harris Justin Allan Spaven Jewitt David Baldwin Sankey Function Chairman and non-executive director Group chief executive Group finance director Executive director Executive director Non-executive director Non-executive director Non-executive director Non-executive director

The business address of each of the Existing Group Directors is Green Lane, Walsall, West Midlands, WS2 7PD. (b) The Continuing Group Directors are as follows: Name Brian Howard Whitty Richard David Harpin Andrew John Belk Robert Ian Harley John Hunter Maxwell* Justin Allan Spaven Jewitt Function Executive chairman Chief executive Group finance director Executive director Senior independent director Non-executive director

will change his function from group chief executive to executive chairman on completion of the Demerger. will change his function from executive director to chief executive on completion of the Demerger. * will be appointed to the Continuing Group Board on completion of the Demerger. The business address of each of the Continuing Group Directors will be Cable Drive, off Green Lane, Walsall, West Midlands, WS2 7BN. (c) In addition to their directorships of the Company, the Existing Group Directors hold or have held the following directorships, and are or were members of the following partnerships, over or within the past five years:

87

PART VI
Name Lindsay Bury Current directorships/ partnerships CASEwise Systems Ltd Aberdeen Electric & General Investment Company PLC Fauna & Flora Preservation Society Millichope Management Ltd The Sage Group Plc STF Trustee Ltd SEV Holdings Ltd STF Nominees Ltd STF Management Ltd SUMIT Trustee Ltd SUMIT Enterprise Ltd Newhall EV Ltd SUMIT Equity Ventures Ltd SUMIT Nominees Ltd SEV Investments Ltd Sapphire International Ltd Services Power Technologies plc Bango.Net Ltd Service Power Business Solutions Ltd Echo Managed Services Ltd Echo South West Ltd Homeserve plc Mail Solutions Ltd Onsite Resources Ltd Rapid Systems Ltd South Staffordshire Enterprises Ltd South Staffordshire Water Plc Previous directorships/ partnerships Jura Cold Store Ltd Moor Park Charitable Trust Ltd Sapphire Holdings Ltd The Roxboro Group Ltd

Brian Whitty

Home Service (GB) Ltd Water UK Ltd

Andrew Belk

Highway Emergency Highwayone Group Ltd Services Ltd Highwayone Corporation Ltd Home Hotline Ltd Home Service (GB) Ltd Homeserve plc Onsite Resources Ltd Regency Financial Holdings Ltd Regency Warranties Ltd Domeo S.A. Home Service USA Corp

88

PART VI
Name Robert Harley Current directorships/ partnerships ICC (Sixteen) Ltd Middleton Maintenance Services Ltd Onsite Resources Ltd Harpin Ltd Highway Emergency Services Ltd Home Hotline Ltd Home Service (GB) Ltd Homeserve plc Regency Financial Holdings Ltd Domeo S.A. Home Service USA Corp 65 Quarrendon Street Ltd Haynes Publishing Group Plc SPG Media Group Plc Tex Group Holdings Plc Benedicta Management Ltd Brintons Ltd Wallis Group Ltd Wockhardt PLC Nestor Healthcare Group plc Nestor Medical Personnel Ltd Nestor Primecare Ltd Eliza Tinsley Group plc Aberdeen Murray Johnstone Private Equity Ltd James Beattie plc Newhall EV Ltd Old Hall School Trust Ltd STF Nominees Ltd STF Trustee Ltd SUMIT Enterprise Ltd SUMIT Equity Ventures Ltd SUMIT Nominees Ltd SUMIT Trustee Ltd The Water Companies (Pension Fund) Trustee Company Ltd Webtech Interactive Ltd Dowding & Mills Plc APD Body Panels Ltd Britalco Ltd Castors International Ltd Roberlo Ltd Saltofix Ltd Saltofix Parts Ltd Saltofix Pressing Ltd Veng Ltd Previous directorships/ partnerships Westmoor Homes Ltd

Richard Harpin

Amsys Rapid Prototyping and Tooling Ltd Key FS Ltd Professional Properties Ltd

Panton Corbett

None

John Harris

British Fittings Group PLC Lilleshall plc

Justin Jewitt

David Sankey

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(d) The Continuing Group Directors hold or have held the following directorships, and are or were members of the following partnerships, over or within the past five years: Name Brian Whitty Richard Harpin Andrew Belk Robert Harley John Maxwell Current directorships/ Partnerships See paragraph (c) above See paragraph (c) above See paragraph (c) above See paragraph (c) above Royal & Sun Alliance plc Chandlers Reach Residents Limited Institute of Advanced Motorists Provident Financial Ltd Royal Ballet School The Big Food Group plc Parity Group plc See paragraph (c) above Previous directorships/ Partnerships See paragraph (c) above See paragraph (c) above See paragraph (c) above See paragraph (c) above Wellington Underwriting plc The Automobile Association Limited Atlantic Telecom Group plc Cedemo Limited Cognito Limited

Justin Jewitt

See paragraph (c) above

(e) At the date of this document, other than as detailed at the end of this paragraph 2(e), none of the Existing Group Directors or Proposed Directors: (i) has any unspent convictions in relation to indictable offences; (ii) has been declared bankrupt or entered into an individual voluntary arrangement; (iii) was a director with an executive function of any company at the time of or within the 12 months preceding any receivership, compulsory liquidation, creditors voluntary liquidation, administration or company voluntary arrangements of that company or any composition or arrangement with its creditors generally or any class of its creditors; (iv) was a partner in a partnership at the time of or within the 12 months preceding any compulsory liquidation, administration or partnership voluntary arrangement of such partnership; (v) has had his assets the subject of any receivership or was a partner in a partnership at the time of or within the 12 months preceding any assets thereof being the subject of a receivership; or (vi) has been the subject of any public criticisms by any statutory or regulatory authorities (including any designated professional bodies) nor has ever been disqualified by a court from acting as a director of a company or from acting in the management or conduct of the affairs of any company. Andrew Belk was a director of Highwayone Corporation Limited when in 2001 it became subject to an administration order and then became subject to a company voluntary arrangement. Since incorporation in 1996 Highwayone Corporation Limited had traded at a loss, and was largely funded by loans from Highwayone AG, the ultimate parent company, incorporated in Germany. The administration has now been discharged but the company voluntary arrangement is still ongoing. Although preferential creditors have been paid in full, unsecured creditors have only received 1,607,315 out of a total amount owed to them of 35,718,109. It is estimated that these unsecured creditors will receive a further 535,772. Therefore it is estimated that the total shortfall for unsecured creditors will be 33,575,022.
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3. Further information on the Existing Group (a) The Existing Group was incorporated and registered in England and Wales on 24 September 1991 with registered number 2648297 under the Companies Act 1985 as a public company limited by shares with the name of Sharereserve Public Limited Company. On 7 November 1991, the Existing Groups name was changed to South Staffordshire Water Holdings plc and on 25 June 1999 the Existing Groups name was changed to South Staffordshire Group Plc. (b) The registered office, head office and principal place of business in the United Kingdom of the Existing Group is at Green Lane, Walsall, West Midlands, WS2 7PD. (c) The principal legislation under which the Company operates is the Companies Act 1985. 4. Subsidiaries (a) South Staffordshire Group Plc is the holding company of the Existing Group, the principal activities of which are to provide a range of complementary services from the Companys core skills in both domestic and commercial markets. The Company operates in three main business areas: Homeserve, Commercial Outsourcing and regulated and unregulated Water Supply. (b) South Staffordshire Group Plc has the following principal subsidiary undertakings all of which are owned, either directly or indirectly, by the Company and consolidated into the annual financial statements of the Company: Name and Principal Proportion of Registered Office Activities capital held Home Service (GB) Limited Plumbing, heating 75% (Indirect) Green Lane, Walsall, West and electrical Midlands, WS2 7PD, home assistance England South Staffordshire Water supply 100% Water Plc* Green Lane, Walsall, West Midlands, WS2 7PD, England *This company is to become part of the Water Group post Demerger Issued and fully paid share capital 109,300 ordinary shares of 1 each

2,123,210 ordinary shares of 1 each

(c) Set out below are the details of those companies in which the Company either directly or indirectly holds at least 10 per cent. of the issued share capital: Proportion of capital held by Name Registered office the Company Homeserve plc Green Lane, Walsall, 75% (Indirect) West Midlands, WS2 7PD, England Home Service (GB) Ltd Green Lane, Walsall, 75% (Indirect) West Midlands, WS2 7PD, England Home Hotline Ltd Green Lane, Walsall, 75% (Indirect) West Midlands, WS2 7PD, England Highway Emergency Green Lane, Walsall, 75% (Indirect) Services Ltd West Midlands, WS2 7PD, England
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Proportion of capital held by the Company 75% (Indirect)

Name Regency Financial Holdings Ltd Regency Warranties Ltd

Servowarm Ltd

Domeo S.A.

Home Service USA Corp

Mail Solutions Ltd

Middleton Maintenance Services Ltd OnSite Resources Ltd

OnSite Central Ltd

OnSite South Ltd

South Staffordshire Enterprises Ltd Affinity Partners Ltd

South Staffordshire Plc

South Staffordshire Water Plc* Echo Managed Services Ltd*

Registered office Green Lane, Walsall, West Midlands, WS2 7PD, England Green Lane, Walsall, West Midlands, WS2 7PD, England Green Lane, Walsall, West Midlands, WS2 7PD, England 75 Cours Albert Thomas, 69447 Lyon Cedex 03, France 3401 NW 82 Ave. Suite 220 Miami Fl 33122 USA Green Lane, Walsall, West Midlands, WS2 7PD, England Green Lane, Walsall, West Midlands, WS2 7PD, England Green Lane, Walsall, West Midlands, WS2 7PD, England Green Lane, Walsall, West Midlands, WS2 7PD, England Green Lane, Walsall, West Midlands, WS2 7PD, England Green Lane, Walsall, West Midlands, WS2 7PD, England PO Box 34, St Martins House, Le Bordage, St Peter Port, Guernsey, GY1 4AU Green Lane, Walsall, West Midlands, WS2 7PD, England Green Lane, Walsall, West Midlands, WS2 7PD, England Green Lane, Walsall, West Midlands, WS2 7PD, England
92

75% (Indirect)

75% (Indirect)

40% (Indirect)

75% (Indirect)

100% (Indirect)

100% (Indirect)

100% (Indirect)

100% (Indirect)

100% (Indirect)

100% (Direct)

75% (Indirect)

100% (Direct)

100% (Indirect)

100% (Indirect)

PART VI
Proportion of capital held by the Company 50% (Indirect)

Name Echo South West Ltd*

Rapid Systems Ltd*

Registered office Peninsula House, Rydon Lane, Exeter, Devon, EX2 7HR Green Lane, Walsall, 100% (Indirect) West Midlands, WS2 7PD, England

*This company is to become part of the Water Group post Demerger This company is the holding company of the Water Group 5. Share Capital (a) The authorised and issued ordinary share capital of the Company immediately following the Demerger, Share Exchange and Share Consolidation is expected to be as follows, assuming no options over Existing Group Shares are exercised prior to 1 April 2004: Authorised amount Existing Group Shares of 10 pence each 8,800,000.00 Post Demerger, Share Exchange and Share Consolidation Continuing Group Shares of 1212 pence each 8,800,000.00 No shares are held in Treasury. Up to approximately 465,500 further Existing Group Shares may be issued in order to satisfy entitlements to Existing Group Shares arising from the exercise of options over Existing Group Shares in the period up to the Demerger Record Time and up to 4 further Existing Group Shares may be issued in the period up to the Demerger Record Time in order to ensure that the Companys issued share capital is exactly divisible by 1212p being the nominal value of the Continuing Group Shares after the Share Consolidation. (b) At 24 September 1991 the authorised share capital of the Company was 100,000 divided into 100,000 ordinary shares of 1 each (of which 2 had been issued fully paid or credited as fully paid). Since then there have been the following changes in the authorised and issued share capital of the Company: (i) by a special resolution passed on 13 November 1991 the authorised share capital of the Company was increased to 10,000,000 divided into 8,800,000 ordinary shares of 1 each and 1,200,000 cumulative redeemable preference shares of 1 each; Authorised number Issued and fully paid amount Issued and fully paid number 63,601,089

88,000,000 6,360,108.90

70,400,000 7,810,108.875

62,480,871

(ii) on 25 June 1999 the Company resolved by special resolution to sub-divide each issued and unissued ordinary share of 1.00 each into 10 ordinary shares of 10 pence each; and (iii) on 1 July 2000 all cumulative redeemable preference shares were redeemed at a nominal value of 1 per share. (c) By an ordinary resolution passed at the annual general meeting of the Company on 27 June 2003, the Directors were authorised, pursuant to section 80 of the Companies Act to allot

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relevant securities (as defined in section 80(2) of the Companies Act) up to an aggregate nominal value of 2,420,319 for a period expiring on the date of the Annual General Meeting in 2004 or, if earlier, on 26 September 2004 (save that the Directors may allot relevant securities pursuant to this authority at a later date where such allotment is pursuant to an offer or agreement made by the Company before the expiry of this authority). Since 27 June 2003, allotments have been made to the amount of 39,648.90 leaving a remaining authority pursuant to section 80 of the Companies Act of the right to allot relevant securities up to an aggregate nominal value of 2,380,670.10. (d) Following Admission of the Continuing Group Shares, the Company will be subject to the continuing obligations of the UKLA with regard to the issue of securities for cash and the provisions of section 89 of the Companies Act (which, to the extent not disapplied pursuant to section 95 of the Companies Act, confers on Shareholders rights of pre-emption in respect of the allotment of equity securities which are, or are to be, paid up in cash) which will apply to the balance of the authorised but unissued share capital of the Company. (e) Save as disclosed in this Part VI and Part II: (i) since 24 September 1991 there has been no issue of share or loan capital of the Company and no material issue of share or loan capital of any subsidiary undertaking (otherwise than intra-Group issues by wholly-owned subsidiary undertakings and pro rata issues by partly-owned subsidiary undertakings) for cash or other consideration;

(ii) since 24 September 1991 no commissions, discounts, brokerages or other special terms have been granted by the Company or any subsidiary undertaking in connection with the issue, conversion or sale of any share or loan capital of the Company or any of its subsidiary undertakings; and (iii) no share or loan capital of the Company or any of its subsidiary undertakings is under option or is agreed conditionally or unconditionally to be put under option; (iv) no persons have preferential subscription rights over the Existing Group Shares or the Continuing Group Shares. (f) Application has been made to the UK Listing Authority for the Continuing Group Shares to be admitted to the Official List and for the admission of the Continuing Group Shares to trading on the London Stock Exchanges market for listed securities. Upon Admission of the Continuing Group Shares it is expected that the unconditional dealings will commence in the Continuing Group Shares at 8.00 a.m. on 6 April 2004.

(g) The Continuing Group Shares will be in registered form. The articles of association of the Company permit the holding of its shares through CREST. The Directors will apply for the Continuing Group Shares to be admitted to CREST with effect from Admission of the Continuing Group Shares. Accordingly, arrangements will be put in place for those who hold their shares in uncertificated form to hold their Continuing Group Shares in uncertificated form and effect settlement of transactions in Continuing Group Shares within the CREST system. (h) Those who hold share certificates in respect of their Existing Group Shares will receive share certificates in respect of their Continuing Group Shares. Share certificates are expected to be dispatched by the Registrar by 13 April 2004. CREST accounts will be credited on Admission of the Continuing Group Shares. Temporary documents of title will not be issued, and all transfers between the date on which dealings in Continuing Group Shares begin and the date on which share certificates in respect of Continuing Group Shares are dispatched, will be certified against the register of the Company. Share certificates will not be renounceable.

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6. Memorandum and New Articles (a) The Existing Group is proposing to amend the objects clause of the memorandum to reflect the deletion of the principal objects relating to the supply of water pursuant to section 4 of the Companies Act. The objects in the amended memorandum allow the Company to carry on business as a holding Company and to co-ordinate the policy and administration of any companies which are or may be in any manner controlled by or connected with the Company. The objects of the Company are set out in clause 4 of the proposed amended memorandum of association which is available for inspection at the office of Wragge & Co LLP, 3 Waterhouse Square, 142 Holborn, London, EC1N 2SW from the date of this document until the date of the EGM and for at least fifteen minutes prior to and during the Extraordinary General Meeting. The object clause to be deleted is objects clause 4.1.1 which states to acquire by such method and upon and subject to such terms and conditions as the directors shall think fit all or any part of the issued share capital of South Staffordshire Water plc. (b) The Continuing Group is proposing to adopt new articles of association wholly to the exclusion of the existing articles of association. The New Articles will be suitable for a listed public company, to reflect current legislation and corporate governance best practice and to remove provisions in the current articles of association which are no longer relevant. The New Articles to be adopted will replace in their entirety the existing articles of association. Key provisions of the existing articles of association which will be amended are: (i) under the New Articles there will be one class of ordinary shares, and dividends will be paid in proportion to the amounts paid up thereon respectively. Dividends shall be paid out of the profits of the Company available for distribution but no dividend shall be payable in excess of the amount recommended by the directors and dividends shall be paid on such dates as the directors think fit. All references to cumulative redeemable preference shares in the existing articles of association will be omitted and the reference to dividends being payable half yearly on 2 January and 1 July in each year is omitted;

(ii) the New Articles contain a maximum of fifteen and a minimum of two directors where the existing articles of association do not contain a maximum number and contain a minimum of two; and (iii) the New Articles contain additional expanded definitions of adjusted capital and reserves compared with the existing articles of association. Full copies of the amended objects clause of the memorandum of association and the current articles of association, and the New Articles are available for inspection at the office of Wragge & Co LLP, 3 Waterhouse Square, 142 Holborn, London, EC1N 2SW from the date of this document until the date of the EGM and for at least 15 minutes prior to and during the Extraordinary General Meeting. The New Articles contain provisions to the following effect: (i) Voting Rights Subject to any restrictions imposed by or pursuant to the New Articles, on a show of hands every member personally present (or, being a corporation, present by a duly appointed representative) shall have one vote only, and in case of a poll, every member present in person or by proxy shall have one vote for every share held by him.

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No holder of a share shall, unless the directors otherwise determine, be entitled (save as proxy for another member) to be present or vote at a general meeting either personally or by proxy if: (A) any call or such other sum as is presently payable by him to the Company in respect of that share remains unpaid; or (B) he or any other person who appears to be interested in that share has been duly served, pursuant to section 212(1) of the Companies Act 1985 (the Act) or any other statutory provision concerning the disclosure of interests in voting shares, with a notice requiring the provision to the Company of information regarding that share, and is in default in complying with such notice. (ii) Variation of class rights Whenever the share capital is divided into different classes of shares, all or any of the rights attached to any class (unless otherwise provided by the terms of issue of the shares of that class) may be modified, varied, extended, abrogated or surrendered either in such manner (if any) as may be provided by such rights or (in the absence of any such provision) with the written consent of the holders of at least three-quarters in nominal value of the issued shares of that class or with the sanction of an extraordinary resolution passed at a separate general meeting of the holders of such shares. At every separate general meeting of the holders of a particular class of shares the provisions of the New Articles relating to general meetings shall (mutatis mutandis) apply except that: (A) no member shall be entitled to receive notice of such meeting or to attend it unless he is a holder of shares of the class in question and no vote shall be given except in respect of a share of that class; (B) the necessary quorum shall be two persons at least present in person and holding or representing by proxy at least one-third in nominal amount of the issued shares of the class in question; (C) if any such separate general meeting shall be adjourned by reason of there being no quorum present and at the adjourned meeting a quorum as defined above shall not be present within fifteen minutes after the time appointed for such adjourned meeting, one holder of shares of the class in question present in person or by proxy shall be a quorum; (D) any holder of shares of the class in question who is present in person or by proxy and entitled to vote may demand a poll; and (E) on a poll every holder of shares of the class in question who is present in person or by proxy shall have one vote for every share of that class held by him. (iii) Alteration of capital Without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, any shares in the capital of the Company for the time being may be allotted with such special rights, privileges or restrictions as the Company may by ordinary resolution (before the allotment of such shares) from time to time determine. The Company may from time to time by ordinary resolution increase its capital by the creation of new shares. The Company may from time to time by ordinary resolution: (A) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; or

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(B) cancel any shares which at the date of the passing of the relevant resolution have not been taken or agreed to be taken by any person and diminish the amount of its share capital by the nominal amount of the shares so cancelled; or (C) by sub-division of its existing shares, or any of them, divide its capital, or any part thereof, into shares of smaller amount. The Company may from time to time by special resolution reduce its share capital, any capital redemption reserve and any share premium account. The Company may from time to time purchase its own shares (including any redeemable shares) but no contract for such a purchase shall be entered into unless the purchase has previously been sanctioned by an extraordinary resolution passed at a separate meeting of the holders of any class of securities issued by the Company which are listed and convertible into shares which are of the same class as those proposed to be purchased. (iv) Transfer of shares A member may transfer all or any of his shares by an instrument of transfer in writing in any usual form or in such other form as the Board may approve. The instrument of transfer shall be executed by or on behalf of the transferor and, in the case of the transfer of a share which is not fully paid, by or on behalf of the transferee. A member may transfer all or any of his uncertificated shares in accordance with the CREST Regulations. Subject to the provisions of the CREST regulations, the transferor shall remain the holder of the shares concerned until the name of the transferee is entered in the register of members in respect of it. Subject to the New Articles the shares are free from any restriction on transfer. Subject to the requirements of the Listing Rules, the directors may in their absolute discretion and without giving any reason, refuse to register the transfer of a certificated share which is not fully paid up. The directors may also, in their absolute discretion and without giving any reason therefore, refuse to register the transfer of a certificated share unless the following conditions are satisfied: (a) it is in respect of one class of share only; (b) it is in favour of a single transferee or not more than four joint transferees; (c) it is duly stamped (if required); and (d) it is delivered for registration to the registered office or such other place as the directors may decide, accompanied (except in the case of a transfer by a recognised financial institution where a certificate has not been issued) by the share certificates to which it relates and such other evidence as the directors may require to prove title of the transferor and the due execution of the transfer by him, or, if the transfer is executed by some other person on his behalf, the authority of that person. The directors may also refuse to register a transfer in the event of non compliance with any statutory notice requiring disclosure of the beneficial ownership in those shares except in certain defined circumstances. The Company shall register a transfer of title to any uncertificated share in accordance with the CREST regulations but so that the directors may refuse to register such transfer in any circumstances permitted by the CREST regulations. (v) Directors Save as provided in the New Articles, a director shall not vote as a director in respect of any contract, transaction or arrangement or proposed contract, transaction or arrangement or any

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other proposal whatsoever in which he has any interest which (together with any interest of any person connected with him) is to his knowledge a material interest (otherwise than by virtue of an interest in shares or debentures or other securities of or otherwise in or through the Company), and if he shall do so his vote shall not be counted, nor in relation thereto shall he be counted in the quorum present at the meeting. A director shall (in the absence of some other material interest than is indicated below) be entitled to vote (and be counted in the quorum) in respect of any resolution relating to any of the following matters namely:(A) the giving of any security, guarantee or indemnity in respect of money lent or obligations incurred by him or by any other person at the request of or for the benefit of the Company or any of its subsidiary undertakings or its parent company (if any) or any other subsidiary undertaking of any such parent company; or (B) the giving of any security, guarantee or indemnity in respect of a debt or obligation of the Company or any of its subsidiary undertakings for which the director himself has assumed responsibility in whole or in part under a guarantee or indemnity or by the giving of security; or (C) an offer of shares or debentures or other securities of or by the Company or any of its subsidiary undertakings or its parent company (if any) or any other subsidiary undertaking of any such parent company for subscription or purchase in which offer he is or is to be or may be entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which he is to participate; or (D) any other company in which he or any person connected with him is interested, directly or indirectly, whether as an officer or shareholder or otherwise howsoever, provided that he and any persons connected with him are not to his knowledge the holder (otherwise than as a nominee for the Company or any of its subsidiary undertakings or its parent company (if any) or any other subsidiary undertaking of any such parent company) of or beneficially interested in one per cent. or more of any class of the equity share capital of such company (or of any third company through which his interest is derived) or of the voting rights available to members of the relevant company (any such interest being deemed for the purpose of this article to be a material interest in all circumstances); or (E) an arrangement for the benefit of the employees of the Company or any of its subsidiary undertakings which does not award him any privilege or benefit not generally awarded to the employees to whom such arrangement relates; or (F) the purchase and/or maintenance of any insurance policy for the benefit of directors or for the benefit of persons including directors. Fees may be paid out of the funds of the Company to directors who are not managing or executive directors at such rates as the directors may from time to time determine provided that such fees do not in the aggregate exceed the sum of 500,000 per annum (exclusive of value added tax if applicable) or such other figure as the Company may by ordinary resolution from time to time determine. Any director who devotes special attention to the business of the Company, or otherwise performs services which in the opinion of the directors are outside the scope of the ordinary duties of a director, may be paid such additional remuneration as the directors or any committee authorised by the directors may determine. A director may hold any other office or place of profit under the Company (other than the office of auditor) in conjunction with his office of director for such period and on such terms

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(as to remuneration and otherwise) as the directors may determine, and no director or intending director shall be disqualified by his office from entering into any contract, arrangement, transaction or proposal with the Company either with regard to his tenure of any other such office or place of profit or as vendor, purchaser or otherwise, nor shall any such contract, arrangement, transaction or proposal or any contract, arrangement, transaction or proposal entered into by or on behalf of the Company in which any director or any person connected with him is in any way interested (whether directly or indirectly) be liable to be avoided, nor shall any director who enters into any such contract, arrangement, transaction or proposal or who is so interested be liable to account to the Company for any profit realised from any such contract, arrangement, transaction or proposal by reason of such director holding that office or of the fiduciary relationship thereby established, but his interest shall be disclosed by him in accordance with the Act. The remuneration and other terms and conditions of appointment of a director appointed to any executive office or employment under the Company shall from time to time (without prejudice to the provisions of any agreement between him and the Company) be fixed by the directors, and may (without limitation) be by way of fixed salary, lump sum, commission on the dividends or profits of the Company (or of any other company in which the Company is interested) or other participation in any such profits or otherwise or by any or all or partly by one and partly by another or others of those modes. Subject to the provisions of the New Articles the directors may exercise all the powers of the Company to borrow or raise money and to mortgage or charge its undertaking, property, assets and uncalled capital or any part thereof, and to issue debentures and other securities, whether outright or as collateral security for any debt, liability or obligation of the Company or its holding company (if any) or any subsidiary of the Company or its holding company or of any third party. The directors shall restrict the borrowings of the Company and exercise all voting and other rights or powers of control exercisable by the Company in relation to its subsidiaries (if any) so as to secure (as regards subsidiaries so far as by such exercise they can secure) that the aggregate amount for the time being remaining undischarged of all moneys borrowed by the Group (which expression in the relevant New Articles means and includes the Company and all its subsidiaries for the time being) and for the time being owing to persons outside the Group shall not without the previous sanction of an ordinary resolution of the Company exceed an amount equal to five times the Adjusted Capital and Reserves as defined in the New Articles. The certificate of the Auditors for the time being as to the amount of the Adjusted Capital and Reserves at any time shall be conclusive and binding upon all concerned. Each director shall retire from office pursuant to section 293 of the Act at the conclusion or adjournment of the annual general meeting commencing next after he attains the age of 70 years and, subject to the provisions of section 293(5) of the Act, shall be eligible for reappointment. (vi) Dividends The Company may by ordinary resolution declare dividends out of the profits of the Company available for distribution but no dividend shall be payable in excess of the amount recommended by the directors. The directors may pay interim dividends of such amounts and on such dates as they think fit. There is no fixed date on which entitlement to dividends arises. (A) Subject to any rights or privileges for the time being attached to any shares having preferential or special rights in regard to dividend, the profits of the Company which it shall from time to time be determined to distribute by way of dividend shall be

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applied in payment of dividends upon the shares in proportion to the amounts paid up thereon respectively otherwise than in advance of calls. If any share is issued upon terms providing that it shall rank for dividend as from or after a particular date, or be entitled to dividends declared after a particular date, such share shall rank for or be entitled to dividend accordingly. Dividends may be paid in any currency. (B) The directors may retain any dividend payable on or in respect of a share on which the Company has a lien or (except in the circumstances specified in the Articles) if (a) a notice has been duly served in respect of that share pursuant to section 212(1) of the Act or any other statutory provision concerning the disclosure of interests in voting shares, (b) the share or shares which are the subject of that notice represent in aggregate at least 0.25 per cent of that class of share and (c) the notice has not been complied with within the period stipulated in the notice (which must not be less than 14 days). (C) Any dividend remaining unclaimed after a period of 12 years from the date such dividend becomes due for payment shall be forfeited and shall revert to the Company. (vii) Distribution of assets on a liquidation Subject to any special rights for the time being attached to any class of shares, on a return of assets on liquidation or otherwise the surplus assets remaining after payment of the Company's liabilities shall be distributed in proportion to the amounts paid up or deemed to be paid up on the shares of the Company then in issue. (viii) CREST The Articles are consistent with CREST membership and, among other things, allow for the holding and transfer of shares in uncertificated form. The Company has applied for the Continuing Group Shares to be admitted to CREST and it is expected that the Continuing Group Shares will be so admitted and accordingly enabled for settlement in CREST, shortly after Admission of the Continuing Group Shares. 7. Share Schemes The employee share schemes operated by the Existing Group and the impact of the Demerger upon them are set out below. Existing Share Option Schemes The Existing Group has adopted the following employee share option schemes: (i) 2001 and 1991 Executive Share Option Plans (together the Existing Group Executive Share Option Plans); and

(ii) 2002 and 1992 Savings Related Share Option Schemes (together the Existing Group SAYE Schemes). Existing Group Executive Share Option Plans Set out below is a summary of the rules of the 2001 Executive Share Option Plan adopted by the Existing Group on 4 July 2001 and the rules of the 1991 Executive Share Option Plan adopted by the Existing Group in November 1991 as amended in June 1998 and July 1992. The number of Existing Group shares subject to outstanding options under the Existing Group executive share option plans on 10 March 2004 was 2,746,500 at option prices ranging from 3.66 to 5.92 and with exercise dates extending up to 1 July 2006.

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(a) General The Executive Share Option Plans consist of Inland Revenue Approved Share Option Plans with unapproved sections. This allows options over shares worth up to 30,000 (valued at the time of grant) to be granted under the Approved Share Option Plans. The Unapproved Share Option Plans, which are not approved by the Inland Revenue, allow the grant of options in excess of this limit. (b) Eligibility Any person (including full-time executive directors) employed by the Existing Group or any of its subsidiaries are eligible to participate in the Existing Group Executive Share Option Plans. (c) Grant of Options Options to acquire shares may be granted 42 days following the day on which the Existing Group announces its financial results for any period, or 42 days following the commencement of an eligible employees employment within the Existing Group. Options may be granted at other times in circumstances that the remuneration committee considers to be exceptional. No options may be granted more than ten years after the Existing Group Executive Share Option Plans were adopted. Options granted may not be transferred by the eligible employee to whom they are granted. No consideration is payable for the grant of the option. (d) Option Price Options entitle the holders to acquire fully paid ordinary shares in the Existing Group at a price determined by the remuneration committee being not less than the greater of: (i) the market value of such shares on the dealing day immediately preceding the date of grant (or, the average market values on the three days immediately preceding the date of grant, if the remuneration committee so determines); and (ii) if subscribed, their nominal value. (e) Level of Award and Performance Conditions In any year options cannot be granted to an individual over shares with a value greater than 2 x annual remuneration (being annual basic salary at the date of grant and any bonus or commission paid or payable in respect of the preceding financial year). Generally, options will be exercisable three years after their grant, subject to achievement of performance conditions set at the time of grant. The remuneration committee may vary or waive the performance conditions in certain circumstances, subject to their replacement with equally stretching conditions. Outstanding options under the 2001 Executive Share Option Plan become exercisable based on a sliding scale as follows: Performance Condition Annual Average EPS Growth RPI + 4% RPI + 6% RPI + 8% RPI + 10% % of Award Vesting 25% 50% 75% 100%

If none of these conditions are met at the end of year 3, re-testing of performance conditions is possible in years 4 and 5 following grant, but performance will continue to be measured

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from a fixed date. Re-testing from a fixed date is also possible where performance is sufficient for part of the award to vest, provided that no options from that grant have been exercised. (f) Holding Requirement In order to participate in the 2001 Executive Share Option Plan, participants may be required to acquire a shareholding equivalent of up to 1 times annual remuneration. Exercise of Options Subject to satisfying the performance conditions and shareholding requirements, options will normally be exercisable three years from the date of grant and will lapse if not exercised ten years after the date of grant. An option will normally lapse if the option holder ceases to be employed within the Existing Group. If an option holder dies his personal representative may exercise all options within 12 months of the death of the option holder. Where an option holder ceases to be employed as a result of redundancy, retirement, injury, disability, the company or the business which employs him ceasing to be under the control of the Existing Group or in other circumstances at the discretion of the remuneration committee, he may exercise his options within six months of the date of cessation or in the case of the approved part only, at the discretion of the remuneration committee, 42 months from the later of the date of grant and the last occasion the individual exercised an approved option under approved circumstances. (h) Takeover, reconstruction and winding-up Where the control of the Existing Group changes as a result of a general offer to acquire the whole issued ordinary share capital of the Existing Group or there is a reconstruction or amalgamation involving the Existing Group or a voluntary winding-up of the Existing Group, options granted under the Existing Group Executive Share Option Plans will vest, but generally only if the performance conditions at that date attaching to the options have been met unless the remuneration committee determines otherwise. Options that become exercisable in this way may be released (to the extent that they have not lapsed) in consideration for new options, which are equivalent to the original options but over shares in the acquiring company. (i) Plan Limits The number of shares that may be issued under the Existing Group Executive Share Option Plans and all other employees share schemes of the Existing Group shall not exceed 10 per cent. of the issued ordinary share capital of the Existing Group in any 10 years. The number of shares that may be issued under the Existing Group Executive Share Option Plans shall not exceed 5 per cent of the ordinary share capital of the Existing Group in any 10 years. (j) Variation of Capital In the event of any rights or capitalisation issue, subdivision, consolidation, reduction or other similar variation of share capital, the Board may make such adjustments to the number of shares subject to options and the price payable on the exercise of options as they consider appropriate provided the auditors confirm that in their opinion the adjustments are fair and reasonable and in the case of the approved part that the adjustments are approved by the Inland Revenue.

(g)

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(k) Alterations to the Plan The Board cannot alter the provisions of the Existing Group Executive Share Option Plans to the advantage of participants or eligible employees without the approval of the Existing Group in general meeting unless such alterations are minor or to benefit the administration of the Existing Group Executive Share Option Plans, to take account of changes in legislation or to obtain or maintain a favourable taxation, exchange control or regulatory treatment for a group company, participant or eligible employee. Alterations and amendments to the approved part of the Existing Group Executive Share Option Plans are subject to the approval of the Inland Revenue. Existing Group SAYE Schemes Set out below is a summary of the rules of the 2002 Savings Related Share Option Scheme adopted by the Existing Group on 26 June 2002 and the rules of the 1992 Savings Related Share Option Scheme adopted by the Existing Group in February 1992 as amended in March 1998 and July 2001. The number of Existing Group Shares subject to outstanding options under the Existing Group SAYE Scheme on 10 March 2004 was 751,961 at option prices ranging from 3.00 to 4.76 and with exercise dates extending up to 1 February 2008. (a) General The Existing Group SAYE Schemes are governed by rules which are approved by the Inland Revenue. (b) Eligibility All employees and full-time executive directors of the Existing Group and any of its subsidiaries who are resident and ordinarily resident in the UK for tax purposes and who have the requisite minimum period of continuous employment are eligible to be granted options under the Existing Group SAYE Schemes. (c) Grant of Options The Board may issue invitations to eligible employees to apply for options within the period of six weeks of the dealing day following any of the announcements by the Existing Group of its final or interim results for any period; or at any time when the Board determines that exceptional circumstances have arisen. No options may be granted more than 10 years after the Existing Group SAYE Schemes were adopted. Options granted may not be transferred by the eligible employee to whom they are granted. No consideration is payable for the grant of the option. (d) Option Price Options will entitle the holder to acquire ordinary shares in the Existing Group, at a price per share determined by the Board. The option price will not be less than eighty per cent of the middle-market quotation of an Existing Group Share, derived from the London Stock Exchanges Daily Official List, on the dealing day immediately preceding the date of invitation. (e) Savings Contract Participants may at the discretion of the Board, be invited to apply for three or five year options. All options must be linked to a contractual savings scheme with the savings institute nominated by the Board and approved by the Inland Revenue. The Board may determine the minimum contribution (currently being not more than 5 per month) and

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the maximum contribution (currently being not more than 250 per month) which participants must save, such sums to be deducted from the participants pay. Participants may withdraw from their savings contract at any time, though their options may then lapse, and are not obliged to exercise their options when the contract matures. (f) Exercise of Options In normal circumstances, participants may only exercise an option during the six months commencing on maturity (that is the bonus date) of the savings contract. Former employees may exercise their options early within a six month period following cessation of employment, only where their employment ceases on account of injury or disability, redundancy or retirement on reaching 65 or any other age at which the employee is bound to retire in accordance with the terms of his or her contract of employment. Options will also become exercisable for a limited period on an employee attaining the age of 65 if he or she should continue in employment, on disposal of the participating subsidiary or the business in which the option holder is employed, and on a change of control or reconstruction or winding-up of the Existing Group. The personal representative(s) of a deceased Option Holder may exercise an option for a period of one year following his death. (g) Takeover, Reconstruction and Liquidation If there is a change of control, a reconstruction or amalgamation or a voluntary winding-up of the Existing Group, options granted under the Existing Group SAYE Schemes will become exercisable for a limited period. On a change of control or reconstruction of the Existing Group, options may, with the agreement of the acquiring company, be released in consideration for the grant of equivalent options over the acquiring companys shares.

(h) Scheme Limits The number of shares that may be issued under the Existing Group SAYE Schemes and all other employees share schemes of the Existing Group shall not exceed 10 per cent of the issued ordinary share capital of the Existing Group in any 10 years. (i) Variation of Capital In the event of any rights or capitalisation issue, subdivision, consolidation, reduction or other similar variation of share capital, the Board shall make such adjustments to the number of shares subject to options and the price payable on the exercise of options as they consider appropriate provided the auditors confirm that in their opinion the adjustments are fair and reasonable and the adjustments are approved by the Inland Revenue. Alterations to the Scheme The Board cannot alter the provisions of the Existing Group SAYE Schemes to the advantage of participants or eligible employees without the approval of the Existing Group in general meeting unless such alterations are minor or to benefit the administration of the Existing Group SAYE Schemes, to take account of changes in legislation or to obtain or maintain a favourable taxation, exchange control or regulatory treatment for a group company or participant. No amendment to a key feature of the Existing Group SAYE Scheme shall take effect whilst the Existing Group SAYE Schemes are approved until such amendment has been approved by the Inland Revenue.

(j)

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Effect of the Demerger on Existing Group Share Plans Existing Group Executive Share Option Plans For employees of the Continuing Group, outstanding options granted under the Existing Group Executive Share Option Plans will continue unaffected by the Demerger. Options held by employees of the Water Group and its subsidiaries under the 2001 Executive Share Option Plan will be exercisable for a period of six months following the Demerger (to the extent that any performance conditions attached to the options have been satisfied), after which they will lapse. Options held by employees of the Water Group and its subsidiaries under the 1991 Executive Share Option Plan will be exercisable for a period of 12 months following the Demerger (to the extent that any performance conditions attached to the options have been satisfied), after which they will lapse. Existing Group SAYE Schemes For employees of the Continuing Group, outstanding options granted under the Existing Group Executive Share SAYE Schemes will continue unaffected by the Demerger. Options held by employees of the Water Group and its subsidiaries under the Existing Group SAYE Schemes will be exercisable for a period of six months following the Demerger (to the extent of the available proceeds of the relevant savings contract), after which they will lapse. As an alternative to the exercise of options, employees can continue to save until the end of their savings contracts or can withdraw their savings in the normal way. Proposed New Continuing Group Incentive Plans Following the Demerger it is recognised that the remuneration policy for the executive directors and key senior executives of the Continuing Group will need to be closely aligned with the Continuing Groups strategic direction and long term aims. The long term incentive arrangements will play a principal role in achieving this and will take two forms: (i) Homeserve Executive Share Option Plan (the 2001 Executive Share Option Plan); and

(ii) Homeserve Long Term Incentive Plan (the LTIP) The remuneration committee anticipates that it will use the 2001 Executive Share Option Plan as the primary incentive mechanism, a detailed summary of which is provided in this paragraph 7 of Part VI. However, the remuneration committee believes that to align effectively the interest of the senior executives of the Continuing Group with those of shareholders it is also necessary to make awards under a new LTIP, a detailed summary for which is set out below. It may make awards under both the 2001 Executive Share Option Plan and the LTIP in the same year but, other than for 2004, the face value of these combined awards will not exceed twice the annual remuneration of the participant, other than in exceptional circumstances. For the current year only, the remuneration committee may make up to the maximum award under the 2001 Executive Share Option Plan. In addition, it may make the maximum award under the LTIP. The awards under the 2001 Executive Share Option Plan are part of the annual remuneration arrangements of the executives with targets attached which focus on the delivery of stretching EPS performance over the next three years. The awards under the LTIP are being made to incentivise the executives towards a further very specific goal reflecting the Continuing Groups strategic goal over the next five years for delivery of exceptional shareholder value.

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In order for any awards to vest (i) a minimum TSR target of 130 per cent. must be achieved for a minimum period of three consecutive months during the five year period following the grant of awards; and (ii) the annual average earnings per share growth in the five consecutive years beginning in the year in which the award is made must exceed the change in RPI by at least 10 per cent. In addition, it is the intention of the Board to introduce the Homeserve Share Incentive Plan (the SIP). Detailed summaries of the SIP and the LTIP are set out below. Homeserve Share Incentive Plan (the SIP) (a) General The Board believe it is in the interests of employees to be given the opportunity to own shares in the Continuing Group and to encourage this by taking advantage of any favourable tax treatment available for employee shareholdings. Following the Demerger, it is therefore proposed that the Continuing Group should adopt the Homeserve Share Incentive Plan (the SIP). The SIP will be governed by rules which are to be submitted for approval by the Inland Revenue. The terms of the SIP are set out in full in its Rules. Its principal features are as follows: (b) Eligibility All employees and full-time executive directors of the Continuing Group and the participating subsidiaries are eligible to participate in the SIP. The Board does not have the power to exclude any employees from participating unless they have less than the minimum period of employment (determined by the Board but not exceeding 18 months) or if they are not resident and ordinarily resident in the UK for tax purposes. (c) Award of Shares The Board will decide whether and when the Continuing Group will make awards under the SIP. The Board may operate the SIP in a number of ways. They can: (i) make an award of Free Shares; and/or

(ii) give employees the opportunity to acquire Partnership Shares using pre-tax salary; and (iii) make an award of Matching Shares to those employees who have acquired Partnership Shares (Free Shares, Partnership Shares and Matching Shares together called Plan Shares); and/or (iv) allow or require employees to reinvest any dividends paid on their Plan Shares in further shares in the Continuing Group (Dividend Shares). These are addressed in turn below: (i) Free Shares The Continuing Group may award free shares, up to a maximum annual value of 3,000 each per year (or such other limit as set from time to time by the Inland Revenue). The Board may allocate these shares on the basis of remuneration, length of service or other similar factors, or on the basis of performance. The Board may decide to set performance targets based on the performance of the group as a whole, or of individual business units.

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(ii) Partnership Shares The Continuing Group may offer participants the opportunity to acquire shares in the Continuing Group from their pre-tax salary. If the Board decides to operate this part of the SIP, then it may set an annual investment limit of up to 1,500 per participant (or such other limit as set from time to time by the Inland Revenue). (iii) Matching Shares The Continuing Group may award additional free shares to those participants who choose to acquire Partnership Shares. If the Board decides to operate this part of the SIP, it must award these shares on a fixed ratio. The ratio of Matching Shares to Partnership Shares cannot exceed two for one (or such other limit as set from time to time by the Inland Revenue). (iv) Dividend Shares The Continuing Group may allow or require participants to invest the dividends they receive on their Free Shares, Partnership Shares and/or Matching Shares in additional shares in the Continuing Group, up to a maximum amount of 1,500 per annum (or such other limit as set from time to time by the Inland Revenue). (d) Acquisition of Shares A trust will hold all the shares awarded through the SIP on behalf of the participants. Participants may not withdraw their Free Shares or Matching Shares from the trust until the end of a holding period, unless they terminate employment. The Board will decide the length of the holding period, which will be at least three years but not more than five years. The Board may provide for Free Shares or Matching Shares to be forfeited if a participant ceases employment with the Group within three years from the date on which the shares were allocated unless the employment ceases because of injury or disability, redundancy, retirement, death or on a change of control of the Continuing Group or on a disposal of a participating company or the business in which the participant is employed. (e) Voting Rights The Plan will provide that the voting rights attributable to shares awarded through the SIP may not be exercised whilst the shares are held in the SIP trust. Plan Limits The number of shares that may be issued under the SIP and all other employees share schemes of the Continuing Group shall not exceed 10 per cent of the issued ordinary share capital of the Continuing Group in any 10 years. Variation of Capital In the event of a general offer being made to the shareholders or a rights or capitalisation issue, participants will be able to direct the trustees how to act on their behalf.

(f)

(g)

(h) Alterations to the Plan The Board cannot alter the provisions of the SIP to the advantage of current or prospective participants without approval of the Continuing Group in general meeting unless such alterations are minor and to benefit the administration of the SIP, to take account of a change in legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment for option holders, or for the Continuing Group, or for members of the Continuing Group, or to obtain or retain the approval of the SIP by the Inland Revenue. Alterations to the SIP will require Inland Revenue approval.

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Benefits under the SIP are not pensionable. Full copies of the SIP are available for inspection at the office of Wragge & Co LLP, 3 Waterhouse Square, 142 Holborn, London EC1N 2SW from the date of this document until the date of the EGM and for at least 15 minutes prior to and during the Extraordinary General Meeting. Homeserve Long Term Incentive Plan (LTIP) (a) General Following the Demerger it is the intention of the Continuing Group to introduce the LTIP for executive directors and key senior executives. The principal terms of the Homeserve Long Term Incentive Plan (the LTIP) are outlined below. (b) Eligibility Employees and executive directors of the Continuing Group and its subsidiaries are eligible to participate in the LTIP provided they are more than six months from their anticipated date of retirement. Awards cannot be granted to employees and directors within six months of their anticipated date of retirement unless the remuneration committee, in its absolute discretion, determines that exceptional circumstances exist which justify the grant of awards. (c) Grant of Long Term Incentive Awards The choice of which individuals are to participate in the LTIP is at the discretion of the remuneration committee (for executive directors) or an appropriate Continuing Group Board committee (for other participants). It is intended to invite the executive directors, along with such other key senior executives as the remuneration committee may determine to participate in the grant of long term incentive awards under the LTIP. The remuneration committee intends to restrict the award to be made in 2004 to no more than 10 participants. Long term incentive awards granted to eligible employees will take the form of nil cost share options. Awards can be granted during the 42 days following: (i) the adoption of the LTIP by the Continuing Group; or (ii) the announcement by the Continuing Group of its final or interim results for any period; or (iii) the announcement or introduction of any relevant alteration to tax legislation; or (iv) the commencement of an eligible employees employment with a participating company; or (v) any day on which the remuneration committee or Continuing Group Board (as appropriate) determines that exceptional circumstances have arisen. No awards may be granted more than 10 years after the LTIP is adopted. Awards granted under the LTIP may not be transferred without the prior written agreement of the remuneration committee or Continuing Group Board (as appropriate). No consideration is payable for the grant of the award. Benefits under the LTIP are not pensionable. (d) Acquisition Price Awards will be granted with a nominal, or nil, award price or at such other price as the remuneration committee may determine at the date of grant.

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(e) Level of Award and Performance Conditions In any year awards cannot be granted to an individual over shares with a value greater than twice annual remuneration (being the higher of the annual rate of remuneration at the date of grant including bonuses and commissions; or the remuneration, including bonuses and commissions, paid or payable in respect of the 12 months immediately preceding the date of grant). This limit can only be exceeded in exceptional circumstances at the discretion of the remuneration committee. Awards are exercisable at the end of the vesting period subject to the achievement of performance conditions set at the time of grant. The remuneration committee may waive the performance conditions in certain circumstances, subject to their replacement with equally stretching conditions. Generally, the vesting period will be three years from the date of grant. It is intended that for the 2004 award grant, awards will become exercisable after five years based on the following performance conditions: The 2004 award will vest in full after the fifth anniversary of the date of grant if: (i) total shareholder return (TSR) measured during the performance period is at least 180 per cent.; and (ii) the annual average earnings per share growth during the performance period exceeds the change in RPI by at least 10 per cent. The performance period will be the five years following the date of grant of the award. However, if TSR is maintained at 180 per cent. or above, for a minimum of three consecutive months at any time during the performance period following the fourth anniversary of the date of grant the performance period will end and the award will vest in full but not until the fifth anniversary (provided that the annual average earnings per share growth in the five consecutive years beginning in the year in which the award is made exceeds the change in RPI by at least 10 per cent.). The remuneration committee will retain discretion to waive the award if the financial performance of the Continuing Group is such, in the period following TSR of 180 per cent. being achieved and the fifth anniversary of the date of grant, that it considers it inappropriate for the awards to vest. If TSR of 180 per cent. has not been achieved following the fifth anniversary of the date of grant, awards will vest within the following straight line sliding scale (provided that the annual average earnings per share growth in the five consecutive years beginning in the year in which the award is made exceeds the change in RPI by at least 10 per cent.): Absolute TSR Growth 180 per cent. 130 per cent. below 130 per cent. % of Award Vesting 100 per cent. 35 per cent. 0 per cent.

In addition to the performance conditions described above, the remuneration committee will expect participants in the 2004 award to build up a required shareholding before their awards vest. This shareholding has yet to be determined by the remuneration committee. (f) Exercise of Awards Subject to satisfying the performance conditions awards will normally be exercisable five years from the date of grant and will lapse if not exercised ten years after its grant. An award will normally lapse if the award holder ceases to be employed within the Group. However, there is discretion to allow awards to be exercised in exceptional circumstances at the discretion of the remuneration committee within one month of cessation, subject to the satisfaction of the relevant performance conditions (unless the remuneration committee determines otherwise).

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An award may be exercised in the twelve months following the death of a participant by his personal representatives subject to the satisfaction of the relevant performance conditions (unless the remuneration committee determines otherwise). (g) Takeover, Reconstruction and Winding-Up Where the control of the Continuing Group changes as a result of a general offer to acquire the whole issued ordinary share capital of the Continuing Group or there is a reconstruction or amalgamation involving the Continuing Group or a voluntary winding-up of the Continuing Group, participants can exercise such proportion of their awards as reflects performance over the shortened performance period (unless the remuneration committee determines otherwise). Awards that become exercisable in this way may be released (to the extent that they have not lapsed) in consideration for new awards, which are equivalent to the original awards but over shares in the acquiring company.

(h) Plan Limits The number of shares that may be issued under the LTIP and all other employees share schemes of the Continuing Group shall not exceed 10 per cent of the issued ordinary share capital of the Continuing Group in any 10 years. The number of shares that may be issued under the LTIP and all other executive share schemes of the Continuing Group shall not exceed five per cent of the issued ordinary share capital of the Continuing Group in any 10 years. (i) Variation of Capital In the event of any rights or capitalisation issue, subdivision, consolidation, demerger, reduction, other variation of share capital, or other exceptional event, the Board may make such adjustments to the number of shares subject to awards and the price payable on the exercise of awards as they consider appropriate. Alterations to the Plan The Board cannot alter the provisions of the LTIP to the advantage of participants or eligible employees without the approval of the Continuing Group in general meeting unless such alterations are minor and are to benefit the administration of the LTIP, to take account of changes in legislation or to obtain or maintain a favourable taxation, exchange control or regulatory treatment for a group company, participant or eligible employee. The Board reserve the right to make changes to the rules of the LTIP up to the date of the EGM provided that changes are not material. Full copies of the LTIP are available for inspection at the office of Wragge & Co LLP, 3 Waterhouse Square, 142 Holborn, London EC1N 2SW from the date of this document until the date of the EGM and for at least 15 minutes prior to and during the Extraordinary General Meeting. Proposed Water Group Incentive Plans The Board notes that the Directors and Proposed Directors of the Water Group intend to introduce new incentive plans at the next annual general meeting of the Water Group in June 2004 and details of these proposals will be circulated to Water Group Shareholders after the Demerger is effective. 8. Directors and Other Interests (a) The interests (all of which are beneficial save, as noted in the table below) in the Existing Group Shares of the Company which: (a) have been notified to the Company pursuant to sections 324 and 328 of the Companies Act, (b) are required to be entered in the register of

(j)

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directors interests maintained by the Company pursuant to section 325 of the Companies Act or (c) are the interests of a connected person (within the meaning of section 346 of the Companies Act) of a Director which would, if the connected person were a Director, be required to be disclosed under (a) or (b) above, and the existence of which is known to or could with reasonable diligence be ascertained by that Director as at 10 March 2004 (being the latest practicable date prior to the publication of this document) and as they will be immediately following Admission of the Continuing Group Shares, will be as follows:
As at 10 March 2004 No. of Existing Group Shares 55 % of existing issued share capital 55 No. of Continuing Group Shares 55 Post Share Exchange and Share Consolidation % of new issued share Total capital 55 55

No. of options 55 Total 55

No. of options 55

Name 55

David Sankey

John Harris Lindsay Bury Brian Whitty Robert Harley Richard Harpin Andrew Belk Panton Corbett John Maxwell Justin Jewitt

5,770 plus 20,000 nonbeneficial 26,330 600,000 73,627 15,430 1,101,522

25,770

0.04

20,616

20,616

0.03

26,330 600,000 401,024 474,651 177,500 192,930 158,144 1,259,666 118,027 118,027

0.04 21,064 21,064 0.03 0.94 480,000 480,000 0.77 0.75 58,901 401,024 459,825 0.74 0.30 12,344 177,500 189,844 0.30 1.98 9,931,767 158,144 10,089,911 16.15 0.19 118,027 116,027 0.19

Further detail relating to the options held by the above Directors can be found at paragraph (b) below. (b) On 10 March 2004 (being the last practicable date prior to the publication of this document), the Directors held the following options (disclosed in aggregate in the table above) over Existing Group Shares under the ESOS and SAYE. Existing Group SAYE Scheme Date of grant Existing Group Shares 3,524 2,027 5,144 Option price () 4.660 4.660 3.280 Date exercisable from 1.2.08 1.2.06 1.2.06

Name of Director B. H. Whitty A. J. Belk R. D. Harpin

5555555

5555 5555 5555 5555 5555


SAYE SAYE SAYE 10.12.02 10.12.02 21.12.00

Scheme

SAYE Scheme options are exercisable for a six month period from the date shown.

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Existing Group ESOS Scheme Date of grant Existing Group Shares Option price () Date exercisable from 3.6.01 23.6.03 17.7.04 8.7.05 1.7.06 17.7.04 8.7.05 13.11.05 1.7.06 3.6.01 30.7.02 17.7.04 8.7.05 1.7.06 17.7.04 8.7.05 1.7.06

5555555
B. H. Whitty

Name of Director

5555 5555 5555 5555 5555


ESOS 3.6.98 23.6.00 17.7.01 8.7.02 1.7.03 17.7.01 8.7.02 13.11.02 1.7.03 3.6.98 30.7.99 17.7.01 8.7.02 1.7.03 17.7.01 8.7.02 1.7.03 150,000 30,000 72,500 65,000 80,000 12,500 17,500 36,000 50,000 12,500 50,000 36,000 33,000 46,000 49,000 44,000 60,000 3.665 3.775 5.500 5.890 4.700 5.890 5.500 4.660 4.700 3.665 4.075 5.500 5.890 4.700 5.500 5.890 4.700

Scheme

A. J. Belk

ESOS

R. I. Harley

ESOS

R. D. Harpin

ESOS

Executive share options are exercisable between 3 and 10 years from the date of grant. (c) Save as disclosed in this paragraph 8 of Part VI, none of the Directors nor persons connected with them (within the meaning of section 346 of the Companies Act) will have at Admission of the Continuing Group Shares any interest, beneficial or non-beneficial, in the share capital of the Company or any of its subsidiaries. (d) Details of all outstanding employee share options are shown below: Date of Grant Existing Group Shares Option Price Date exercisable from 3.6.01 30.7.02 1.2.05 23.6.03 30.11.03 1.2.04 1.2.06 17.7.04 9.1.05 1.2.05 1.2.07 8.7.05 13.11.05 1.2.06 1.2.08 1.7.06 30.9.06

55555
Executive Scheme Executive Scheme SAYE Scheme Executive Scheme Executive Scheme SAYE Scheme SAYE Scheme Executive Scheme Executive Scheme SAYE Scheme SAYE Scheme Executive Scheme Executive Scheme SAYE Scheme SAYE Scheme Executive Scheme Executive Scheme

Scheme

55555 55555 55555 55555


3.6.98 30.7.99 22.12.99 23.6.00 30.11.00 21.12.00 21.12.00 17.7.01 9.1.02 16.1.02 16.1.02 8.7.02 13.11.02 10.12.02 10.12.02 1.7.03 30.9.03 332,500 112,500 69,765 232,500 62,500 1,062 122,379 496,500 10,000 140,387 124,808 546,000 36,000 126,751 166,809 930,500 15,000 3.665 4.075 3.000 3.775 4.100 3.280 3.280 5.500 5.915 4.760 4.760 5.890 4.660 4.660 4.660 4.700 5.375

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Executive options are exercisable for a seven year period from the date shown. SAYE options are exercisable for a six month period from the date shown. (e) The following table shows the interests in the Existing Group Shares, amounting to 3 per cent. or more of the Companys issued share capital both as at 10 March 2004 (being the last practicable date prior to the publication of this document) and as expected immediately following Admission of the Continuing Group Shares: Post Share Exchange As at 10 March 2004 and Share Consolidation No. of % of No. of % of issued Existing issued Existing Continuing Continuing Group Group share Group Group share Shareholder Shares capital Shares capital

55555

55555 55555 55555 55555


4,404,005 3,545,177 3,017,161 2,510,715 2,485,025 2,387,007 2,278,409 1,555,818 1,101,522 6.92 5.57 4.74 3.95 3.91 3.75 3.58 2.45 1.73 3,523,204 2,836,141 2,413,728 2,008,572 1,988,020 1,909,605 1,822,727 3,794,104 9,931,767

Fidelity International Limited HBOS PLC Barclays PLC Wesleyan Assurance Society Standard Life Group Legal & General Group Plc Aviva Plc Jeremy Middleton Richard Harpin

5.64 4.54 3.86 3.21 3.18 3.06 2.92 6.07 15.90

Save as disclosed above, the Directors are not aware of any person who is interested, directly or indirectly, in 3 per cent. or more of the issued ordinary share capital of the Company. (f) The Directors are not aware of any person who could, directly or indirectly, jointly or severally, exercise control over the Company.

(g) No Director has or has had any interest in any transaction which is or was unusual in its nature or conditions or is or was significant to the business of the Company or the Existing Group and which was effected by any member of the Existing Group in the current or immediately preceding financial year of the Company or which was effected during an earlier financial year and remains in any respect outstanding or unperformed. (h) There are no outstanding loans granted by any member of the Existing Group to any Director, nor has any guarantee been provided by any member of the Existing Group for their benefit. None of the Directors have waived or agreed to waive any future emoluments and none of the Directors have been a partner in any partnership in the last five years. 9. Directors Service Agreements and Terms of Appointment (a) Executive Directors (i) Brian Whitty entered into a service agreement with the Company on 28 March 1996. The contract is terminable on 1 years written notice by the Company or Brian Whitty. The Company has the option on termination to pay a sum equivalent to the amount of the basic salary, the value of the Companys annual bonus scheme and the equivalent cost to the Company of the provision of the benefits in kind and the pension contributions payable by the Company, in lieu of notice. The employment will automatically determine on Brian Whitty attaining the retirement age of 60 years. Brian Whittys current basic salary is 300,000 per annum plus an additional basic salary of 31,865 per annum (not treated as pensionable remuneration), pursuant to a variation of the service agreement dated 31 July 2003. The annual bonus scheme is based on the achievement of profit related targets. Under the terms of this scheme, Brian Whitty is entitled to a maximum sum equivalent to 50 per

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cent. of his salary, which he may elect to receive in cash or in shares (up to 60 per cent. of the bonus may be taken in shares). Brian Whitty is entitled, by way of benefits, to a car, with all associated expenses being paid by the Company, a telephone, permanent sickness insurance and private health scheme insurance for himself and his family. The Company will also reimburse Brian Whitty all reasonable out-of pocket expenses. Pension benefits are provided through the Water Companies Pension Scheme on a non-contributory basis, and through the funded unapproved retirement benefit scheme under which the Company shall pay to the Trustees of the Scheme by way of an employers contribution such contributions or other sums as the actuary to the Scheme shall certify in writing. The pension benefits also include the provision of death in service benefits of five times pensionable salary. Brian Whitty is entitled to 32 working days holiday in each year. Brian Whitty is subject to noncompetition, non-dealing and non-solicitation restrictions for 12 months following termination of his employment, and to a confidentiality undertaking without limit of time. It is proposed that Brian Whittys service agreement will be amended with effect from the completion of the Demerger so that, following the Demerger, he will be known as executive chairman. (ii) Richard Harpin entered into a service agreement with the Company on 18 January 2002 whereby the Company employed Richard Harpin as chief executive of Homeserve. The contract is terminable on 1 years written notice by the Company or Richard Harpin. The Company has the option on termination to pay a sum equivalent to the amount of the basic salary, the full value of the annual bonus scheme and the cost to the Company of the provision of the benefits in kind and the pension contributions payable by the Company, in lieu of 12 months notice. The employment will automatically determine on Richard Harpin attaining the retirement age of 60 years. Richard Harpins current basic salary is 225,000 per annum pursuant to a variation of service agreement dated 31 July 2003. Richard Harpin is eligible to participate in the Companys executive share option plan and annual bonus scheme. The annual bonus scheme is based on the achievement of profit related targets. Under the terms of this scheme, Richard Harpin is entitled to a maximum sum equivalent to 50 per cent. of his salary, which he may elect to receive in cash or in shares (up to 60 per cent. of the bonus may be taken in shares). Richard Harpin is entitled, by way of benefits, to a car with all associated expenses being paid by the Company (or a cash back alternative in the sum of 11,500 per annum together with comprehensive insurance provided under the Companys insurance policy), and private health scheme insurance for himself and his family. The Company will also reimburse Richard Harpin all reasonable out-of pocket expenses. Pension benefits are provided through the Water Companies Pension Scheme on a non-contributory basis. If Richard Harpins pensionable salary exceeds the earnings cap, he may elect to accept a cash sum of 20 per cent. of the amount by which his basic salary exceeds the earnings cap so long as he undertakes to invest that cash sum in a pension arrangement. Richard Harpin is also entitled to a death in service benefit of five times his basic salary. Richard Harpin is entitled to 32 days holiday in each year. Richard Harpin is subject to non-competition, non-dealing, non-enticement and non-solicitation restrictions for 12 months following termination of his employment, and to a confidentiality undertaking without limit of time. It is proposed that Richard Harpins service agreement will be amended with effect from the completion of the Demerger so that, following the Demerger, he will be known as chief executive. (iii) Andrew Belk entered into a service agreement with the Company on 20 December 2002 whereby the Company employed him as group finance director with effect from 1 September 2002. The contact is terminable on 1 years written notice by the Company or

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Andrew Belk. The Company has the option on termination to pay a sum equivalent to the amount of the basic salary, the full value of the annual bonus scheme and the cost to the Company of the provision of the benefits in kind and the pension contributions payable by the Company, in lieu of notice. The employment will automatically determine on Andrew Belk attaining the retirement age of 60 years. Andrew Belks current basic salary is 165,000 per annum pursuant to a variation of the service agreement dated 31 July 2003. Andrew Belk is eligible to participate in the Companys executive share option plan and annual bonus scheme. The annual bonus scheme is based on the achievement of profit related targets. Under the terms of this scheme, Andrew Belk is entitled to a maximum sum equivalent to 50 per cent. of his salary, which he may elect to receive in cash or in shares (up to 60 per cent. of the bonus may be taken in shares). Andrew Belk is entitled, by way of benefits, to a car with all associated expenses being paid by the Company (or a cash back alternative in the sum of 11,500 per annum together with comprehensive insurance provided under the Companys insurance policy), permanent sickness insurance and private health scheme insurance for himself and his family. The Company will also reimburse Andrew Belk all reasonable out-of pocket expenses. Pension benefits are provided through the South Staffordshire Money Plan on a non-contributory basis with the Company making contributions of 20 per cent. of pensionable remuneration. If Andrew Belks pensionable salary exceeds the earnings cap, he may elect to accept a cash sum equal to 20 per cent. of the amount by which his basic salary exceeds the earnings cap so long as he undertakes to invest that cash sum in a pension arrangement. Andrew Belk is also entitled to a death in service benefit of five times his basic salary. Andrew Belk is entitled to 32 days holiday in each year. Andrew Belk is subject to non-competition, non-dealing, non-enticement and non-solicitation restrictions for 12 months following termination of his employment, and to a confidentiality undertaking without limit of time. It is proposed that Andrew Belks service agreement will continue following the Demerger. (iv) Robert Harley entered into a service agreement with the Company on 15 July 2002 whereby the Company employed Robert Harley as managing director of Onsite. The contract is terminable on one years written notice by the Company or Robert Harley. The Company has the option on termination to pay a sum equivalent to the amount of the basic salary, the full value of the annual bonus scheme and the cost to the Company of the provision of the benefits in kind and the pension contributions payable by the Company, in lieu of notice. The employment will automatically terminate on Robert Harley attaining the retirement age of 60 years. Robert Harleys current basic salary is 135,000 per annum pursuant to a variation of the service agreement dated 31 July 2003. Robert Harley is eligible to participate in the Companys executive share option plan and annual bonus scheme. The annual bonus scheme is based on the achievement of profit related targets. Under the terms of this scheme, Robert Harley is entitled to a maximum sum equivalent to 50 per cent. of his salary, which he may elect to receive in cash or in shares (up to 60 per cent. of the bonus may be taken in shares). Robert Harley is entitled, by way of benefits, to a car with all associated expenses being paid by the Company (or a cash back alternative in the sum of 11,500 per annum together with comprehensive insurance provided under the Companys insurance policy), permanent sickness insurance and private health scheme insurance for himself and his family. The Company will also reimburse Robert Harley for all reasonable out-of pocket expenses. Pension benefits are provided through the South Staffordshire Money Plan on a non-contributory basis with the Company making contributions of six per cent. of pensionable remuneration. If Robert Harleys pensionable salary exceeds the earnings cap, he may elect to accept a cash sum equal to 20 per cent. of the amount by which his basic salary exceeds the earnings cap so long as he undertakes to invest that cash sum in a pension arrangement. Robert Harley is also entitled to a death in service benefit of three
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times his basic salary. Robert Harley is entitled to 32 days holiday in each year. Robert Harley is subject to non-competition, non-dealing, non-enticement and non-solicitation restrictions for 12 months following termination of his employment, and to a confidentiality undertaking without limit of time. It is proposed that Robert Harleys service agreement will continue following the Demerger. (b) Non-Executive Directors Pursuant to a letter confirming terms of appointment dated 3 October 2003, Panton Corbett was appointed as a non-executive director of the Company for an initial term of 3 years commencing 27 June 2003 (continuing thereafter if agreed by both the Company and Panton Corbett). If the appointment is terminated early, such termination will be subject to 12 months notice with liquidated damages of the prevailing annual fees being payable. The annual fee is 25,000, payable quarterly in arrears. The Company will also pay any reasonable travelling expenses incurred by Panton Corbett. Pension benefits are provided through the Water Companies Pension Scheme, whereby, upon retirement at or after age 65, and having completed not less than 5 years as a director, Panton Corbett will receive a pension not exceeding one half of his annual fee paid in the 12 month period immediately preceding retirement. A pension not exceeding two thirds of the pension to which Panton Corbett was or would have been entitled is payable to his widow. Panton Corbett is also a member of the audit, nomination and remuneration committees of the Board. Pursuant to a letter confirming terms of appointment dated 3 October 2003, Justin Jewitt was appointed as a non-executive director of the Company for an initial term of 3 years commencing 1 September 2003 continuing thereafter if agreed by both the Company and Justin Jewitt. If the appointment is terminated early, such termination will be subject to 12 months notice with liquidated damages of the prevailing annual fee being payable. The appointment will not be renewed more than twice. The annual fee is 25,000 payable quarterly in arrears. The Company will also pay any reasonable travelling expenses incurred by Justin Jewitt. Justin Jewitt is also a member of the audit and remuneration committees of the Board. Pursuant to a letter confirming terms of appointment dated 3 October 2003, John Harris was appointed as a non-executive director of the Company for an initial term of 3 years commencing 1 July 2001 continuing thereafter if agreed by both the Company and John Harris. If the appointment is terminated early, such termination will be subject to 12 months notice with liquidated damages of the prevailing annual fee being payable. The annual fee is 25,000 payable quarterly in arrears. The Company will also pay any reasonable travelling expenses incurred by John Harris. John Harris is also a member of the remuneration committee of the Board. Pursuant to a letter confirming terms of appointment dated 3 October 2003, Lindsay Bury was appointed as a non-executive director of the Company for an initial term of 3 years commencing 22 June 2001 continuing thereafter if agreed by both the Company and Lindsay Bury. If the appointment is terminated early, such termination will be subject to 12 months notice with liquidated damages of the prevailing annual fee being payable. The annual fee is 85,000 payable quarterly in arrears. The Company will also pay any reasonable travelling expenses incurred by Lindsay Bury. Lindsay Bury is also a member of the nomination and remuneration committees of the Board. Pursuant to a letter confirming terms of appointment dated 3 October 2003, David Sankey was appointed as a non-executive director of the Company for an initial term of 3 years commencing 27 June 2003 continuing thereafter if agreed by both the Company and David Sankey. If the appointment is terminated early, such termination will be subject to 12

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months notice with liquidated damages of the prevailing annual fees being payable. The annual fee is 25,000, payable quarterly in arrears. The Company will also pay any reasonable travelling expenses incurred by David Sankey. Pension benefits are provided through the Water Companies Pension Scheme, whereby, upon retirement at or after age 65, and having completed not less than 5 years as a director, David Sankey will receive a pension not exceeding one half of his annual fee paid in the 12 month period immediately preceding retirement. A pension not exceeding two thirds of the pension to which David Sankey was or would have been entitled is payable to his widow. David Sankey is also a member of the audit and remuneration committees of the Board. John Maxwell will be appointed as a non-executive director of the Continuing Group for an initial term of three years effective from 6 April 2004 continuing thereafter if agreed by both the Existing Group and John Maxwell. The appointment will not be renewed more than once. If the appointment is terminated early following a takeover or reorganisation, such termination will be subject to 12 months notice with liquidated damages of the prevailing annual fee being payable. The annual fee is, with effect from 6 April 2004, 35,000 payable quarterly in arrears and they are reviewed annually. The Company will also pay any reasonable travelling expenses incurred by John Maxwell. John Maxwell is also a member of the audit, remuneration and nomination committees of the Board. The Continuing Group has directors and officers liability insurance which will be maintained for the duration of John Maxwells employment. It is proposed that Justin Jewitt will remain as a non-executive director of the Continuing Group under the provisions of the letter of appointment detailed above. It is proposed that David Sankey and Panton Corbett will resign as directors of the Existing Group with effect from and conditional upon the completion of the Demerger and will become directors of the Water Group with effect from and conditional upon the completion of the Demerger. No termination payment is payable to David Sankey or Panton Corbett. John Harris and Lindsay Bury will be retiring from the Board with effect from and conditional upon the completion of the Demerger and will receive 25,000 and 85,000 in termination payment pursuant to their letters of appointment respectively. (c) Copies of the service agreements of the executive directors and the letters of appointment of the non-executive directors will be available for inspection at the address specified in paragraph 17 of this Part VI. (d) Save as set out in this Part VI, there are no existing service agreements between any Director and any member of the Existing Group other than agreements expiring or terminable by the employing company without payment of compensation (other than statutory compensation) within one year and no such contracts are proposed. (e) The aggregate remuneration paid including the bonuses referred to above, pension fund contributions made and benefits in kind granted to the Directors (executive and nonexecutive) during the financial year ended 31 March 2003 was 1.4 million.

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10. Principal Establishments The principal establishments owned or occupied by the Existing Group and the Continuing Group are: (a) Pre-Demerger Location Expiry of Term Rent per Approximate Annum Area N/A 9.1 acres

5555
Green Lane, Walsall, West Midlands, WS2 7PD Cable Drive, Walsall, West Midlands, WS2 7BN

5555 5555 5555 5555


Freehold Freehold N/A N/A Expiry of Term

Tenure

N/A 58,651 sq. ft Rent per Approximate Annum Area N/A 58,651 sq. ft

(b) Post Demerger Location

5555
Cable Drive, Walsall, West Midlands, WS2 7BN Alpha House, Sunnyside Road North, Weston-Super-Mare, BS23 3PZ Cathedral House, 16 Cathedral Street, Norwich, NR1 1LX

5555 5555 5555 5555


Freehold N/A

Tenure

Freehold Leasehold

N/A September 2004

N/A 14,087 sq. ft 57,500 11,927 sq. ft

11. Pensions There are two pension schemes within the Existing Group. Water Companies Pension Scheme The Existing Group participates in the Water Companies Pension Scheme which is an industry wide final salary scheme. South Staffordshire Water plc is the designated employer of a separate sub fund within that Scheme. Home Service (GB) Ltd, Home Hotline Ltd, Mail Solutions Ltd, OnSite Resources Ltd, Rapid Systems Ltd, Echo Managed Services Ltd and South Staffordshire Group Plc also participate. The scheme provides for a pension of one eightieth of final pensionable remuneration for every year of service, plus a lump sum of three times that amount. It also provides a pension in the event of ill health, a spouse's pension on death and life assurance. As at 31 October 2003 there were 453 active members, 259 deferred members and 624 pensioners. Valuation The last actuarial valuation of the South Staffordshire Water sub fund (the Fund) as at 1 April 2002 reported a surplus of 4.9 million. At 31 March 2003 the Fund had a deficit of 11.1 million on a FRS17 basis. This deficit reflected the decline in equity markets and increased life expectancy. An interim actuarial valuation of the Fund as at 30 November 2003 reported estimated assets of 120 million (of which 69 million were index-linked gilts) and a deficit of 2.9 million on an ongoing actuarial basis. At the same date on a FRS17 basis the Fund had a deficit of 1.5 million.

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The current employer contribution rate into the Fund is 9.6 per cent. and the employee contribution rate is 6 per cent. The employer rate reflects the historic surplus and is to increase to 16.3 per cent. from 1 April 2004. Proposals for the Water Companies Pension Scheme on Demerger A separate sub fund is being established within the Water Companies Pension Scheme for the Continuing Group. The rules and the benefit basis for employees are to be replicated for the new sub fund. The Continuing Group will be the designated employer. Active members employed in the companies remaining with the Continuing Group will be transferred into the new fund, as will any deferred members who were previously employed in those companies. All pensioners will remain in the existing South Staffordshire Water sub fund. 71 active members will be transferred to the new sub fund along with 58 deferred members. The assets will first be allocated to pensioner liabilities and then allocated in proportion to the non-pensioner liabilities. Using asset values as at 30 November 2003 the new sub fund will receive 7.6 million of assets and 0.4 million of the deficit leaving the South Staffordshire Water sub fund with 112.6 million of assets and 2.5 million of the deficit. Both companies will contribute at a rate of 16.3 per cent. and employees will continue to contribute 6 per cent. Inland Revenue approval was received on 26 January 2004 for the Continuing Group to join the Water Companies Pension Scheme. The establishment of the new sub fund is subject to trustee approval but legal and actuarial advice has been received in support of the proposal. It is intended that assets and liabilities will be valued on 31 March 2004 and the fund split as soon as practicable after that date. South Staffordshire Money Plan The South Staffordshire Money Plan is a funded defined contribution occupational pension scheme. It provides a contribution rate of between 3 and 5 per cent. matched by the Company (with the ability to provide up to 10 per cent. on a matched basis for senior executives). It also provides life assurance, permanent health insurance and spouses pension on death. It is proposed to establish a new plan for the employees of South Staffordshire Plc, which will exactly mirror the existing plan in terms of its rules and benefits. This plan is to be called the South Staffordshire Money Plan and the existing plan will become the Homeserve Money Plan. The deed and rules of the new plan have been drawn up and Inland Revenue approval is awaited. 36 active members will be transferring to the new plan on 6 April 2004. 12. Significant changes There has been no significant change in the financial or trading position of the Existing Group since 30 September 2003, the date for which the last interim financial statements were published. There has been no significant change in the financial or trading position of the Continuing Group since 30 September 2003, the date for which the Existing Groups last interim financial statements were published.

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There has been no significant change in the financial or trading position of the Water Group since 30 September 2003, the date to which the Accountants Report in Part VI of the Water Group Listing Particulars was made up. 13. Litigation Neither the Existing Group nor any of its subsidiary undertakings is or has been engaged in any legal or arbitration proceedings by or against the Existing Group or any other member of the Existing Group which may have, or have had during the 12 months preceding the date of this document, a significant effect on the Existing Groups financial position nor, so far as the Existing Group is aware, are any such proceedings pending or threatened by or against the Existing Group or any such other member of the Existing Group. Neither the Continuing Group (excluding the Water Group) nor any of its subsidiary undertakings is or has been engaged in any legal or arbitration proceedings by or against the Continuing Group or any other member of the Continuing Group which may have, or have had during the 12 months preceding the date of this document, a significant effect on the Continuing Groups financial position nor, so far as the Continuing Group is aware, are any such proceedings pending or threatened by or against the Continuing Group or any such other member of the Continuing Group. Neither the Water Group nor any of its subsidiary undertakings is or has been engaged in any legal or arbitration proceedings by or against the Water Group or any other member of the Water Group which may have, or have had during the 12 months preceding the date of this document, a significant effect on the Water Groups financial position nor, so far as the Existing Group is aware, are any such proceedings pending or threatened by or against the Water Group or any such other member of the Water Group. 14. Material Contracts The contracts listed at sub paragraphs (a), (b), (c), (d), (e), (f), (g), (h), (i), (j), (k) and (l) (not being contracts entered into in the ordinary course of business) have been entered into (or may be entered into in the case of the Share Exchange in paragraph 14 (b) below) by the Existing Group, or any other members of the Existing Group within two years immediately preceding the date of this document and are, or may be, material or have been entered into at any time by any member of the Existing Group and contain provisions under which any member of the Existing Group has an obligation or entitlement which is, or may be, material to the Existing Group as at the date of this document. The contracts listed at sub paragraphs (a), (b), (c), (d), (e), (f), (g), (i), (j), (k) and (l) (not being contracts entered into in the ordinary course of business) have been entered into (or may be entered into in the case of the Share Exchange in paragraph 14 (b) below) by the Continuing Group within two years immediately preceding the date of this document and are, or may be, material or have been entered into at any time by any member of the Continuing Group and contain provisions under which any member of the Continuing Group has an obligation or entitlement which is, or may be, material to the Continuing Group as at the date of this document. The contracts listed at sub paragraphs (a), (c), (h), (i), (j), (k) and (l) (not being contracts entered into in the ordinary course of business) have been entered into by the Water Group within two years immediately preceding the date of this document and are, material or have been entered into at any time by any member of the Water Group and contain provisions under which any member of the Water Group has an obligation or entitlement which is, or may be, material to the Water Group as at the date of this document.

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(a) Demerger Agreement This agreement applies to the Existing Group, the Continuing Group and the Water Group. A Demerger Agreement was entered into on 11 March 2004 between the Existing Group and the Water Group to effect the Demerger and govern the relationship between the the Continuing Group and the Water Group following the Demerger. The Demerger Agreement is conditional on the approval by Existing Group Shareholders of the Demerger Resolution and the Share Exchange Resolution at the EGM, satisfaction of the Finance Condition and Admission of the Water Group Shares. The agreement provides that the Demerger will be effected by way of a dividend in specie which is described in further detail in Part II of this document. The Demerger Agreement sets out how cross-group guarantees (if any) will be dealt with following the Demerger. Where relevant, the beneficiary of such a guarantee will use its reasonable endeavours to obtain the guarantors release from the guarantors obligations thereunder, and during the interim period will indemnify the guarantor against all liabilities arising under such guarantee. Pursuant to the Demerger Agreement the Continuing Group has agreed to be responsible for all of the Water Groups professional costs relating to the Demerger. Both the Continuing Group and the Water Group will be permitted access to each others records for a period of six years following the Demerger. In addition, both the Continuing Group and the Water Group have agreed to co-operate fully in connection with the preparation of both parties annual report and accounts for the year ending 31 March 2004 and to provide access to such documentation as is necessary to facilitate such co-operation. The parties have also agreed that the Continuing Group will not publish its results for the financial period ending 31 March 2004 until after the Water Group has done so. Provision is made in the Demerger Agreement to ensure that where one party holds assets which should have been transferred to the other (prior to or on the Demerger), the present holder will take certain reasonable steps to ensure that such assets are transferred to the other party. The Demerger Agreement contains provisions dealing with the separation of the taxation affairs of the two groups. All tax liabilities of the Water Group arising solely in connection with it leaving the Existing Group as a result of the Demerger, or arising solely as a result of the pre-Demerger reorganisation described in paragraph 4 of Part II of this document, will be borne by the Continuing Group. It also provides for either group to recover any tax it has been assessed to which is primarily the liability of the other group from that other group. The parties have covenanted for a period of 3 years from the Demerger not to employ, solicit or entice away employees of the other partys group. In addition, both the Continuing Group and the Water Group have agreed a liquidated damages clause in relation to the nonsolicitation clause pursuant to which the party not in default will receive compensation equal to twice the gross annual salary of the relevant employee whose solicitation constituted a breach. The parties have also agreed to keep certain information of the other group confidential subject to certain exceptions (for instance if disclosure is required by law). The Demerger Agreement also provides for the provision of transitional services by the Continuing Group to the Water Group and the Water Group to the Continuing Group. The parties have agreed that the transitional services will be re-charged on a quarterly basis. Both the Continuing Group and the Water Group irrevocably and unconditionally waive any claims they may have against the other relating to any breaches in the provision of any service provided by the Continuing Group to the Water Group or the Water Group to the Continuing Group, prior to the Demerger.
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Prior to the Demerger certain IT equipment that was used by the Existing Group was purchased by the Water Group and charged as an annual rental to the Existing Group. After the Demerger the Continuing Group will continue to use and pay for the equipment at the rate of 108,000 per annum payable annually in advance and once the rental period for each piece of equipment has expired it will be sold to the Continuing Group for 1. The Demerger Agreement sets out the arrangements that the parties have made in relation to these ongoing payments. The Demerger Agreement also provides for the provision of Health and Safety Consultancy advice by the Continuing Group to the Water Group for a period of 12 months after completion of the Demerger Agreement at the rate of 11,000 for the 12 months plus VAT, the provision by each party to the other of ongoing disaster recovery support in the form of housing/hosting of IT equipment of the other party within each partys computer room and joint maintenance of an underground cable and microwave link. The agreement also obliges the parties to co-operate fully with a view to implementing the split of their IT infrastructure and stipulates that the Continuing Group will operate the payroll system of the Water Group (free of charge) until the split of the two payroll systems is achieved. Pursuant to the Demerger Agreement the Continuing Group warrants and represents to the Water Group that it has full power and authority to enter into and perform the Demerger Agreement and that the Continuing Group has obtained all permissions and consents necessary to implement the Demerger. The Water Group warrants and represents to the Continuing Group that it has full power and authority to enter into and perform the Demerger Agreement. In addition, the agreement provides that the Water Group will grant a three month licence for a nominal fee in respect of the Continuing Groups continued operation of the Water Groups premises at Green Lane, Walsall, WS2 7PD. Both parties potential liability under the Demerger Agreement is capped at 1,000,000 (save in respect of claims that relate to taxation which are not capped). No claim can be brought against either the Continuing Group or the Water Group in respect of any breach of the warranties and representations contained in the Demerger Agreement after the first anniversary of the Demerger. (b) Share Exchange Agreement This agreement applies to the Existing Group and the Continuing Group. If the Share Exchange Resolution and the Demerger Resolution are approved at the EGM then it is proposed that the Share Exchange Agreement be entered into on 5 April 2004 between by Richard Harpin, Jeremy Middleton, South Staffordshire Group, Home Service (GB) Ltd, Homeserve and South Staffordshire Enterprises Limited. The agreement will be conditional on the passing of the Consolidation Resolution and on Admission of the Continuing Group Shares and the Water Group Shares. If the conditions are not satisfied by 30 June 2004 then the agreement terminates, and no party shall have any claim under it, save in respect of a breach that existed at the time of termination. The agreement provides for the purchase by the Existing Group (immediately after the conditions referred to above have been fulfilled) of Richard Harpins 19.49 per cent holding in Homeserve and Jeremy Middletons 5.49 per cent holding in Homeserve, in exchange for the issue to Richard Harpin of 9,050,550 New Shares and the issue to Jeremy Middleton of 2,549,450 New Shares. Richard Harpin and Jeremy Middleton give standard warranties regarding title to their shares and the Existing Group gives a standard warranty regarding its

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power to enter into the Share Exchange Agreement. Other than these standard warranties, there are no warranties or indemnities. The New Shares to be issued pursuant to the agreement will rank pari passu in all respects with the Existing Group Shares save that the shares will not carry any dividend rights in respect of the financial period of the Existing Group ended 31 March 2004. However, Messrs. Harpin and Middleton will be entitled to participate in any Homeserve dividend declared for the year ending 31 March 2004. The agreement also provides that Messrs. Harpin and Middleton will each receive a cash payment of 150,000 (being an aggregate payment of 300,000) as compensation for the loss of their enhanced rights over Homeserve dividends. Pursuant to the agreement Mr Harpin and Mr. Middleton will agree to enter into lock-in arrangements in respect of their New Shares issued to them in exchange for their holdings in Homeserve (the Restricted Shares). Subject to certain exceptions outlined in paragraph 3 of Part II, such lock-in arrangements will prevent Mr Harpin from disposing of his Restricted Shares for a period of two years after the Demerger, and Mr. Middleton from disposing of his Restricted Shares from 26 May 2004 until the ex-dividend date of 2 June 2004. (c) Sponsorship Agreement This agreement applies to the Existing Group, the Continuing Group and the Water Group. Under a Sponsorship Agreement dated 11 March 2004 and made between the Existing Group, the Water Group, Rothschild and Cazenove, (the Sponsorship Agreement), Rothschild and Cazenove (together the Sponsors) have agreed to act as joint sponsors to the Water Group with respect to its application for Admission of the Water Group Shares and to the Existing Group with respect to its application for Admission of the Continuing Group Shares. The Sponsorship Agreement contains warranties given by each of the Existing Group and the Water Group to the Sponsors which are customary for an agreement of this sort. In addition, it contains indemnities from the Existing Group and the Water Group in favour of the Sponsors in respect of certain potential liabilities connected with the Demerger, Admission of the Water Group Shares and Admission of the Continuing Group Shares, which again are customary for an agreement of this sort. These warranties and indemnities are not capped and do not have any contractual time limits. No consideration is payable by any party pursuant to the Sponsorship Agreement. The terms of the Sponsorship Agreement do not preclude the application of the Listing Rules. The Water Group has agreed that, it will not at any time prior to the date of the announcement of the results of the Water Group for the year ending 31 March 2005 (i) issue any shares or any other options over, or rights (whether contingent or otherwise) to acquire shares (other than (a) pursuant to and in accordance with employee share schemes whether existing or as otherwise described in the Water Group Listing Particulars and (b) issues of shares in or rights over shares in subsidiaries to wholly owned subsidiaries or to directors or employees of subsidiaries pursuant to contractual obligations existing at the date of the Sponsorship Agreement); (ii) enter into any commitment or agreement or arrangement which, as a class 2 or class 1 transaction, gives rise to an obligation to make an announcement in accordance with the Listing Rules or the Admission and Disclosure Standards; (iii) make any public announcement, public statement or public communication regarding the Water Group or any subsidiary or any associated undertaking thereof which is material in relation to the trading in the shares of the Water Group, whether in response to

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enquiries or otherwise; or (iv) issue or publish any public document relating to the Demerger or any amendment or supplement to any document issued or published in connection with the Demerger without (i) in the case of any action before the announcement of the interim results of the Water Group for the period ending 30 September 2004 the prior express consent of the Sponsors, such consent not to be unreasonably witheld or delayed (save that consultation shall be sufficient in the case of any action in the ordinary course of business) and (ii) in the case of any action falling after the announcement of the interim results of the Water Group for the period ending 30 September 2004 first consulting with the Sponsors. In addition any public announcement, statement or communication which the Water Group is required to make by the London Stock Exchange or any other stock exchange or securities regulatory authority or under any applicable laws or by any provision of the Sponsorship Agreement or the Demerger Agreement shall not be released before Admission of the Water Group Shares unless the contents and manner of making thereof have first been approved by the Sponsors, such consent not to be unreasonably withheld or delayed. The Water Group has also undertaken to the Sponsors that neither it nor any of its subsidiary undertakings will between the date of the Sponsorship Agreement and Admission of the Water Group Shares enter into any commitment or agreement or arrangement or knowingly do or, to the extent reasonably within its control, permit to be done any other act or thing which, in any such case: (a) constitutes a significant change in a matter contained in the Water Group Listing Particulars or this document, other than in the ordinary course of business, a significant new matter capable of affecting assessment of the securities to be listed in accordance with section 81 of the Financial Services and Markets Act 2000; or (b) would otherwise give rise to any obligation to make any announcement in accordance with the Listing Rules or the Admission and Disclosure Standards or any other regulatory body in each case without prior consultation with the Sponsors. The Existing Group has agreed that, it will not at any time prior to Admission of the Continuing Group Shares (i) issue any shares or any options over, or rights (whether contingent or otherwise) to acquire, shares (other than (a) pursuant to and in accordance with employee share option schemes, whether existing or pursuant to the proposed Homeserve Share Incentive Plan or the proposed Homeserve Long Term Incentive Plan and (b) issues of shares in or rights over shares in subsidiaries to wholly-owned subsidiaries or to directors or employees of subsidiaries pursuant to contractual obligations existing as at the date of the Sponsorship Agreement); (ii) enter into any commitment or agreement or arrangement which, as a class 2 or class 1 transaction, gives rise to an obligation to make an announcement in accordance with the Listing Rules or the Admission and Disclosure Standards; (iii) make any public announcement, public statement or public communication regarding the Continuing Group or the Water Group or any subsidiary or associated undertaking thereof which is material in relation to the trading in the shares of the Continuing Group or the Water Group whether in response to enquiries or otherwise; or (iv) issue or publish any public document relating to the Demerger or any amendment or supplement to any of the documents issued in connection with the Demerger without the prior express consent of the Sponsors. In addition, any public announcement, statement or communication which the Existing Group is required to make by the London Stock Exchange or the UK Listing Authority or any other stock exchange or securities regulatory authority or under any applicable laws or by any provision of the Sponsorship Agreement or the Demerger Agreement shall not be released during the period referred to above unless the contents and manner of making thereof have first been approved by the Sponsors (such consent not to be unreasonably withheld or delayed). The Existing Group has also undertaken to the Sponsors that neither it nor any of its subsidiary undertakings will between the date of the Sponsorship Agreement and Admission
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of the Continuing Group Shares enter into any commitment or agreement or arrangement or knowingly do or to the extent reasonably within its control permit to be done any other act or thing which, in any such case: (a) constitutes a significant change in a matter described in the Water Group Listing Particulars or this document other than in the ordinary course of business, a significant new matter capable of affecting assessment of the securities to be listed in accordance with section 81 of the Financial Services and Markets Act 2000; or (b) would otherwise give rise to any obligation to make any announcement in accordance with the Listing Rules or the Admission and Disclosure Standards or any other regulatory body in each case without prior consultation with the Sponsors. If at any time prior to Admission of the Water Group Shares the Existing Group Board resolves not to proceed with the Demerger, the Existing Group must notify the Sponsors and either the Existing Group or the Sponsors have the right to terminate the Sponsorship Agreement. In addition, each of the Sponsors may terminate the Sponsorship Agreement in certain specified circumstances (including: if the conditions in the Demerger Agreement have become incapable of satisfaction, if any statement contained in the Water Group Listing Particulars is or has become in any material respect untrue, if any of the warranties contained in the Sponsorship Agreement was untrue or misleading in any material respect as at the date of the Sponsorship Agreement and/or Admission of the Water Group Shares, or if either the Existing Group or the Water Group has not complied or cannot comply in any material respect with its obligations under the Sponsorship Agreement). (d) This agreement applies to the Existing Group and the Continuing Group. A Share Purchase Agreement (the Share Purchase Agreement) dated 3 March 2003 and made between South Humberside Engineering and Fabrication Services Limited (the Seller), Homeserve, a subsidiary of the Existing Group (the Buyer) and Groupe Fabricom S.A. (the Guarantor) for the sale and purchase of the entire issued ordinary share capital of Servotomic Limited (the Company), trading as Servowarm for a net consideration of 2,350,000 to be satisfied by payment in cash on completion. The sale and purchase of the Company includes its subsidiary, United Heating Services Limited. Any payment by the Seller and/or Guarantor in respect of a breach of the warranties or the tax covenant or any other payment made in respect of the Agreement shall be deemed pro tanto a reduction in the price paid for the shares. The Sellers provided customary warranties to the Buyer against which certain disclosures were made. Any claim under the warranties may be made up until the second anniversary of completion save for the tax warranties and covenants which can be made up until the sixth anniversary of completion. No claims under the warranties have been made to date. The Seller is subject to certain standard non-competition, non-dealing, non-solicitation, non-interference and non-enticement provisions under the terms of the Share Purchase Agreement for the period of two years and 11 months from completion as regards the carrying on of certain business in a specified area, the contractual and other trade relations of the Company or subsidiary, key employees or other employees which were in existence during a specified time prior to completion. The Seller is subject to a confidentiality undertaking and an undertaking not to use any names, logos, email addresses or domain names associated with the Company, without limit of time. No party is entitled to assign the benefit of the Share Purchase Agreement without the prior written consent of the other parties provided that, the Buyer is entitled to assign the benefit of the Share Purchase Agreement to South Staffordshire Group Plc or any subsidiary of the Existing Group.

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(e) This agreement applies to the Existing Group and the Continuing Group. A Sale and Purchase Agreement (the Sale and Purchase Agreement) dated 1 August 2002 made between the parties being Codegest SA, Sherbourne Investments Limited, Bruce Empson Swayne, Stephen Michael Ravenscroft, Mark David Nicklin, William Henry Parsons, Jenny Parsons, Robert John Williams, Christopher Gooch, Ray Relf, Neil Florey, Sandra Harris and John Grout (together, the Sellers), Onsite Resources (the Buyer) and the Existing Group (the Guarantor) for the acquisition by the Buyer of the entire issued ordinary share capitals of Middleton Maintenance Services Limited (Middleton) and Jiverent Limited (Jiverent) (together the Sale Shares). The acquisition also included the purchase by the Buyer from Bruce Swayne (one of the Sellers) for a consideration of 1, two wholly owned dormant companies, Doorman Services Limited and Property Rescue Limited. The total consideration payable by the Buyer to the Sellers is 15,421,149. This is made up as follows: (i) the payment on completion in cash of the sum of 10,263,738;

(ii) the issue of 1,109,264 option holder loan stock (fixed rate unsecured loan stock 2002 to 2005 created by a loan stock instrument entered into at completion); (iii) the issue of the Codegest fixed rate unsecured loan stock 2002 of 2,652,147; and (iv) the payment to the warrantors defined in the Sale and Purchase Agreement as the Seller (apart from Harris, Gooch, Relf and Florey) of so much of the retention sum (1,396,000) as may be released to them in accordance with schedule 9 of the Sale and Purchase Agreement. The warrantors provided customary warranties to the Buyer against which certain disclosures were made. The seller of Jiverent made certain additional standard warranties specific to Jiverent only as opposed to Middleton. The Sellers all provided customary tax warranties in relation to the sale shares against which certain disclosures were made. Any claim under the warranties may be made up until the date two years from the date of the Agreement save for the tax warranties which can be made up until the sixth anniversary of completion. Claims under the warranties are subject to various standard limitations including a limitation in respect of claims under the warranties and indemnities whereby the Sellers cannot be liable in respect of a claim unless any single claim exceeds 5,000 and together with all single claims exceeding 5,000, exceed 140,000. The maximum aggregate liability of each Seller shall not exceed the consideration received by him. No claims under the warranties have been made to date. The Sellers are (with certain specified exceptions) subject to standard: (i) non-competition covenants in relation to businesses which is or about to be involved in the supply of the restricted services (as defined in the Agreement) in the prohibited area (as defined in the Agreement) in competition with any group company (as defined in the Agreement);

(ii) non-solicitation and non-dealing covenants in relation to any customers or potential customers of the restricted services of the group company; (iii) non-enticement and non-solicitation covenants in relation to any director, manager, salesman or senior employee of the group company; and (iv) non-solicitation covenants in relation to any person employed by a group company at the completion date or during the preceding twelve months and is likely to be in the possession of any business information (as defined in the Agreement).
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Each of the above covenants shall apply for the period from the completion date to the first anniversary of the completion date in relation to each Seller (save that in relation to certain specified Sellers, the covenants will cease to apply from the time that their employment contract with the Company is terminated for any reason other than gross misconduct). The covenants will further apply to particular Sellers (as detailed in the Agreement) firstly from the first anniversary of the completion date to the second anniversary of the completion date and again from the second anniversary of the completion date until the third anniversary. Certain Sellers, bound by the covenants for the period from the first anniversary to the second anniversary will no longer be bound if their contract of employment with the Company is terminated for any reason other than gross misconduct. In addition to the above covenants, each Seller must not and shall procure that its related companies shall at any time after completion comply with other covenants relating to companies with certain trading names, the indication of association with the group companies and with certain exceptions the disclosure of any Business Information. The parties to the Agreement must comply with certain confidentiality obligations at all times after the date of the Agreement. None of the parties shall be entitled to assign the benefit of any rights under the Agreement save that the benefit of the Agreement (including the Warranties) and the Tax Deed shall be freely assignable by the Buyer to any company which is and remains a subsidiary of the Guarantor. (f) This agreement applies to the Existing Group and the Continuing Group. A Share Purchase Agreement dated 5 July 2002 for the acquisition by Home Service (GB) Limited of the entire issued share capital of Highway Emergency Services Limited, made between ECI Ventures, Ronald Hunter Lamb, Rosemary Elizabeth Lamb, Juliet Rosemary Emily Lamb, Emily Charlotte Isobel Lamb, Benjamin Ronald Alexander Lamb, Amelia Ruth Jenny Campbell-Walter, Philip Milburn, Stephen Gaastra, Moray Stuart Duguid, John Francis Hill, Philip Bowry, Brian Bush, Ian Hogarth, John Smith, Nigel Smith, Simon Hopkins, Tony Ives, Anthony Molt, Sean Gilvey, Tara Jackson, Stephen White, Ian Price, Donald McNeill, Carl Wyatt, Nigel Wittred, Rachel Whittaker, Christopher Moyse, Stephen Lee, Patricia Baish, Stephen Melton, Michaela Canham, James Ewles and Terry Looker (together, the Sellers), Home Service (GB) Limited (the Buyer) and the Existing Group (the Guarantor). Home Service (GB) Limited paid an initial cash consideration of 27.6 million (including assumed debt). In addition the management were bought out under an earnout based upon growth in their business plan of significantly in excess of 20 per cent. per annum. This earnout is payable in loan notes issued by the Buyer to the Sellers in two tranches based upon profit performance in the year to 31 March 2004 and the year to 31 March 2006. The first payment under the earnout is calculated based on the profits of Highway for the year ended 31 March 2004 at a post tax price earnings ratio of 15 with a minimum payment of 3.8 million and a maximum payment of 12 million once profits reach 7.6 million. The second payment is calculated on the profits for the year ended 31 March 2006 at a post tax price earnings ratio of 15 once profits for 2006 reach 7.7 million, being 25 per cent. per annum compound growth compared to annualised 2002 profits. The payment is capped at 26.5 million once profits for 2006 reach 16 million being 50 per cent. per annum compound growth. There are certain provisions within the agreement relating to the conduct of the business post completion whereby the Buyer and the Guarantor have covenanted with some of the Sellers (the Management Sellers) that, for the purpose of protecting their entitlements under the earnout it will do and/or refrain from doing certain things without the prior

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consent of the warrantors up until such time as all loan notes to be issued pursuant to the earnout have been issued. Some of the Sellers (Stephen Gaastra, Ronald Hunter Lamb and Philip Milburn) (together the Warrantors) provided customary warranties to the Buyer against which certain disclosures were made. Any claim under the warranties may be made up until the second anniversary of completion save for the tax warranties and covenants which can be made up until the sixth anniversary of completion. Claims under the warranties are subject to various standard limitations. The maximum aggregate liability of each Warrantor under the warranties is limited to the aggregate amount of consideration received by that Warrantor. The Warrantors are under no obligation to make any payment in respect of any claim under the warranties unless details are given within a period of two years from 5 July 2002 for any claim except claims relating to tax and for claims relating to tax within a period of six years from 5 July 2002. No claims under the warranties have been made to date. The warrantors are subject to certain standard non-competition, non-dealing, nonsolicitation, non-interference and non-enticement provisions under the terms of the sale and purchase agreement for the period of three years from completion. The Warrantors are also prohibited from carrying on any trade or business using the name Highway Emergency Services or HES or Highway Glass or Fixzit or Highway Windscreens or Advanced Aluminium. The Management Sellers, with the prior written consent of the Buyer, are entitled to assign the benefit of their rights to receive Loan notes to any privileged relation or to family trusts. Privileged relation means the father or mother or husband or wife of the management seller, any lineal descendant of such father, mother, husband or wife or any person who is or has been married to any such lineal descendant or any stepchild or adopted child of the management seller or of such father, mother, husband or wife or lineal descendant. Family Trusts mean any trust established under which no immediate beneficial interest is vested in any person other than the Management Seller and or any of his privileged relations. The benefit of the agreement is freely assignable by the Buyer to any other company in the Guarantors group. (g) This agreement applies to the Existing Group and the Continuing Group. A share transfer agreement dated 14 May 2002 and made between Kerry Michael (the Vendor), Home Service (GB) Limited (the Purchaser) and the Existing Group (the Guarantor) for the acquisition of the entire issued ordinary share capital of Regency Financial Holdings Plc (the Company) for an aggregate consideration of the cash consideration, the deferred consideration and an earn-out amount. The sale and purchase of the Company includes its subsidiaries (as defined in the share transfer agreement) but not certain excluded subsidiaries (as defined in the share transfer agreement). The cash consideration shall be satisfied firstly by the payment by the Purchaser on completion of 38,136,071 to the Vendor and secondly the payment of 2,635,795 directly to Regency Financial Holdings Plc and Regency Warranties Limited in settlement of amounts due to them from AGM Holdings Limited and the Vendor under the terms of an asset sale agreement as defined in the share transfer agreement. The deferred consideration shall be satisfied firstly by the payment of 2m 18 months after the completion date and secondly by the payment of 2m on the second anniversary of the Completion Date. The first payment was to be made unless before the date 18 months after the completion date the Vendors employment with Regency Warranties Limited has terminated as a result of his resignation or the Vendors employment was terminated by

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Regency Warranties Limited for specific reasons set out in his service agreement or the Vendor has been constructively dismissed by Regency Warranties Limited. The earnout amount is 8.71 for each 1 that the 2003 profit before interest and taxation (PBIT) of certain subsidiaries is greater than 250,000 but does not exceed 560,000. The maximum aggregate amount of the earn-out amount and the liability of the Purchaser to pay the earn-out amount is 2.7m. The 2003 PBIT is defined in the share transfer agreement as being the aggregate profit before interest and tax of the Companies (as defined in the Agreement) for the earn-out period (1 April 2002 to 31 March 2003) as shown in the 2003 accounts (as defined in the Agreement) calculated and agreed in accordance with schedule 7 of the agreement. Any earn-out amount will be satisfied in cash or by bank transfer. The Vendors provided customary warranties to the Purchaser against which certain disclosures were made. Any claim under the warranties may be made up until the second anniversary of Completion save for the tax warranties and covenants which can be made up until the sixth anniversary of completion. Claims made under the warranties are subject to a de minimus of 10,000 and in respect of the tax covenant (as defined in the share transfer agreement) such claim must exceed 5,000. The maximum liability of the Vendor for any claims in respect of a breach of warranty (tax or general) is the aggregate of 38,000,000, the deferred consideration of 4,000,000 and the earn out amount (as detailed above). No claims under the warranties have been made to date. The Vendor is subject to certain standard non-competition, non-dealing, non-solicitation, non-interference and non-enticement provisions under the terms of the share transfer agreement for the period of 2 years and 11 months from completion as regards customers, suppliers, directors and employees (unless otherwise specified in the share transfer agreement), other like business of the Company or the subsidiaries in existence during a specified time prior to completion. Save as is permitted in schedule 8 (shared services) and clause 6.8 of the share transfer agreement, the Vendor is subject to an undertaking not to use any names, logos, email addresses or domain names associated with the Company, without limit of time. The Vendor is subject to a confidentiality undertaking without limit of time as regards the confidential information (as defined in the share transfer agreement). (h) This agreement applies to the Existing Group and the Water Group. A Joint Venture Agreement dated 29 January 2002 and made between South West Water Limited (First Venturer), Echo Managed Services Limited (Second Venturer) (together the Venturers) and Echo South West Managed Services Limited (The Joint Venture Company or JVC). The Venturers acquired 1 A Share of 1 and 1 B Share of 1 respectively and subscribed for 99,999 A Shares of 1 each and 99,999 B Shares of 1 each for cash at par respectively. The Venturers have agreed to participate in and operate the JVC to carry on the business of the provision of call centre facilities for others including facilities and staff and billing services for others including collections and debt recovery. The board of the JVC is authorised to borrow in aggregate up to 800,000 from the Venturers, to be advanced by the Venturers pari passu at such times and in such tranches as the board of the JVC requires. If additional finance is needed, each Venturer shall lend or procure that a member of its group lends further monies pro rata to the aggregate nominal value of the shares held by their respective groups at the time, or subscribe in cash for further shares pro rata to the number of shares respectively held by each of them, or each provide a guarantee for any loans obtained from third parties. The liabilities of the Venturers under such guarantees will be pro rata to the aggregate nominal amount of the shareholdings in the JVC of their respective groups at the relevant time, or, if required by the lender, joint and several. If a joint and several guarantee is given, each Venturer shall keep the other

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indemnified to the extent that any liability arising out of that guarantee arises other than pro rata to the aggregate nominal value of the shareholdings in the JVC of their respective groups at the relevant time. The management board of the JVC will consist of two representatives nominated by each Venturer. A general manager (who is not a director) will be appointed by the board of the JVC to run the business day to day on the direction and guidance of the managing director of the Second Venturer and report to and comply with the decisions and directions of the board of the JVC. No Shareholder shall sell, transfer, mortgage, charge, encumber or otherwise dispose of any Share unless such Shares are transferred in the circumstances and in accordance with the provisions detailed in the Joint Venture Agreement. Each Venturer is subject to certain confidentiality undertakings without limit of time. Each Venturer is also subject to certain non-competition and non-solicitation undertakings for so long as it or a member of its group owns any Shares in the JVC and for twelve months after it ceases to own such Shares. The Joint Venture Agreement will remain in force for a minimum period of two years and shall continue thereafter unless six months notice is given by either Venturer. (i) This agreement applies to the Existing Group, the Continuing Group and the Water Group. On 22 December 2003 the Existing Group sold the entire issued ordinary share capital of Echo and Rapid to the Water Group for a cash consideration of 2.26 million. (j) This agreement applies to the Existing Group, the Continuing Group and the Water Group. On 27 February 2004 Underground Pipeline Services, a wholly owned subsidiary of the Water Group, acquired the trade and net operating assets of the underground pipeline services business from a fellow subsidiary (Onsite Central Limited) of the Existing Group for a consideration of 2.0 million, initially left on intercompany account. (k) This agreement applies to the Existing Group, the Continuing Group and the Water Group. On 27 February 2004 the construction costs incurred by the Existing Group in respect of a property occupied by Echo were transferred to the Water Group at their net book value of 2.0 million. (l) Bank Facilities On completion of the Demerger the Continuing Group will have available aggregate facilities amounting to 54 million pursuant to the following facility agreements: (i) A 19,000,000 sterling facility agreement dated 2 March 2004, between the Continuing Group as borrower and HSBC Bank plc as lender, pursuant to which the lender agreed to make available to the Continuing Group, upon satisfaction of certain conditions precedent which are not unusual for a facility of this nature, a 19,000,000 short term sterling facility until 1 March 2005 with an option for the borrower, during such period, to convert the facility, into a term loan expiring 30 September 2005. The interest rate payable in respect of this facility is Libor plus a margin of 0.6 per cent. plus mandatory costs (if any). Covenants contained within the facility agreement stipulate a minimum earnings before interest, tax, depreciation and amortisation (EBITDA) to net interest ratio of 4 and a maximum net debt to EBITDA ratio of 2.5.

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This facility agreement contains indemnities and warranties from the borrower, and imposes certain restrictive covenants on the borrower which, in each case, are not unusual for a facility of this nature. This facility agreement also contains certain events of default, which are again not unusual for a facility of this nature, and which give the lender the right to demand repayment of amounts drawn down under the facility agreement and/or the right to refuse to make an advance. The obligation on the lender to make the facility available is subject to the satisfaction of various customary conditions precedent including the completion of certain corporate formalities (including the provision of cross guarantees from other members of the Continuing Group), the provision of satisfactory evidence to the lender that the new facilities will be used to repay amounts outstanding under the certain existing facilities of the Existing Group, namely (i) an 8,000,000 revolving credit facility pursuant to a facility letter from the lender dated 23 February 1998; (ii) a 5,000,000 sterling dealing line facility pursuant to a facility letter from the lender dated 9 December 2002; and (iii) a 1,000,000 net sterling overdraft limit and 250,000 foreign cheques for negotiation limit pursuant to a facility letter from the lender dated 9 December 2002, and that such facilities have been cancelled and evidence that the Demerger has completed. (ii) A 15,000,000 sterling facility agreement dated 2 March 2004 between the Continuing Group as borrower and Royal Bank of Scotland plc as lender, pursuant to which the lender agreed to make available to the Continuing Group, upon satisfaction of certain conditions precedent which are not unusual for a facility of this nature, a 15,000,000 364 day revolving advances facility until 1 March 2005 with an option for the borrower to extend the facility until 30 September 2005. The interest rate payable in respect of this facility is Libor plus mandatory costs (if any) plus a margin of 0.5 per cent. subject to increase to 0.6 per cent. if the net debt to EBITDA ratio exceeds 1 and to 0.75 per cent. if such ratio exceeds 2. Covenants contained within the facility agreement stipulate a minimum profit before interest tax, depreciation and amortisation (PBITDA) to net interest ratio of 5, a maximum net debt to EBITDA ratio of 2.5 and a maximum net debt to shareholders funds ratio of 100 per cent. This facility agreement contains indemnities and warranties from the borrower, and imposes certain restrictive covenants on the borrower which, in each case, are not unusual for a facility of this nature. This facility agreement also contains certain events of default, which are again not unusual for a facility of this nature, and which give the lender the right to demand repayment of amounts drawn down under the facility agreement and/or the right to refuse to make an advance. The obligation on the lender to make the facility available is subject to the satisfaction of various customary conditions precedent including the completion of certain corporate formalities (including the provision of cross guarantees from other members of the Continuing Group), and the provision of satisfactory evidence to the lender that the new facilities will be used to repay amounts outstanding under the certain existing facilities of the Existing Group, namely (i) a 10,000,000 364 day revolving credit facility pursuant to a facility agreement with the lender dated 31 July 2002 (as amended), and (ii) a 20,000,000 three year revolving credit facility pursuant to a facility agreement with the lender dated 31 July 2002, and that such facilities have been cancelled.

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(iii) A 20,000,000 sterling Libor facility agreement dated 2 March 2004 between the Continuing Group as borrower and Royal Bank of Scotland plc as lender, pursuant to which the lender agreed to make available to the Continuing Group, upon satisfaction of certain conditions precedent which are not unusual for a facility of this nature, a 20,000,000 sterling Libor facility until 2 March 2007. The interest rate payable in respect of this facility is Libor plus mandatory costs (if any) plus a margin of 0.6 per cent. subject to increase to 0.7 per cent. if the net debt to EBITDA ratio exceeds 1 and to 0.85 per cent. if such ratio exceeds 2. Covenants contained within the facility agreement stipulate a minimum PBITDA to net interest ratio of 5, a maximum net debt to EBITDA ratio of 2.5 and a maximum net debt to shareholders funds ratio of 100 per cent. This facility agreement contains indemnities and warranties from the borrower, and imposes certain restrictive covenants on the borrower which, in each case, are not unusual for a facility of this nature. This facility agreement also contains certain events of default, which are again not unusual for a facility of this nature, and which give the lender the right to demand repayment of amounts drawn down under the facility agreement and/or the right to refuse to make an advance. The obligation on the lender to make the facility available is subject to the satisfaction of various customary conditions precedent including the completion of certain corporate formalities (including the provision of cross guarantees from other members of the Continuing Group), and the provision of satisfactory evidence to the lender that the new facilities will be used to repay amounts outstanding under the certain existing facilities of the Existing Group, namely (i) a 10,000,000 364 day revolving credit facility pursuant to a facility agreement with the lender dated 31 July 2002 (as amended), and (ii) a 20,000,000 three year revolving credit facility pursuant to a facility agreement with the lender dated 31 July 2002, and that such facilities have been cancelled. On completion of the Demerger the Water Group will have available aggregate facilities amounting to 30 million pursuant to the following facility agreements: (i) A 10,000,000 sterling Libor revolving credit facility agreement dated 2 March 2004 between South Staffordshire Water as borrower and HSBC Bank plc as lender, pursuant to which the lender agreed to make available to South Staffordshire Water, upon satisfaction of certain conditions precedent which are not unusual for a facility of this nature, a 10,000,000 revolving Libor facility until 22 December 2005. The interest rate payable in respect of this facility is Libor plus a margin of 0.55 per cent. plus mandatory costs (if any). Covenants contained within the facility agreement stipulate a minimum EBITDA to net interest ratio of 2.5, a maximum net debt to EBITDA ratio of 4.5 and a maximum net debt to RCV ratio of 75 per cent. This facility agreement contains indemnities and warranties from the borrower, and imposes certain restrictive covenants on the borrower which, in each case, are not unusual for a facility of this nature. This facility agreement also contains certain events of default, which are again not unusual for a facility of this nature, and which give the lender the right to demand repayment of amounts drawn down under the facility agreement and/or the right to refuse to make an advance. The obligation on the lender to make the facility available is subject to the satisfaction of various customary conditions precedent including the completion of certain
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corporate formalities, the provision of satisfactory evidence to the lender that the new facilities will be used to repay an existing 10,000,000 revolving Libor facility originally granted on 9 December 2002 and that such facility has been cancelled and evidence that the Demerger has completed. (ii) A 10,000,000 sterling Libor revolving credit facility agreement dated 2 March 2004 between South Staffordshire Water as borrower and HSBC Bank plc as lender, pursuant to which the lender agreed to make available to South Staffordshire Water, upon satisfaction of certain conditions precedent which are not unusual for a facility of this nature, a 10,000,000 revolving Libor facility until 2 March 2007. The interest rate payable in respect of this facility is Libor plus a margin of 0.5 per cent. plus mandatory costs (if any). Covenants contained within the facility agreement stipulate a minimum EBITDA to net interest ratio of 2.5, a maximum net debt to EBITDA ratio of 4.5 and a maximum net debt to RCV ratio of 75 per cent. This facility agreement contains indemnities and warranties from the borrower, and imposes certain restrictive covenants on the borrower which, in each case, are not unusual for a facility of this nature. This facility agreement also contains certain events of default, which are again not unusual for a facility of this nature, and which give the lender the right to demand repayment of amounts drawn down under the facility agreement and/or the right to refuse to make an advance. The obligation on the lender to make the facility available is subject to the satisfaction of various customary conditions precedent including the completion of certain corporate formalities, and the provision of satisfactory evidence to the lender that the new facilities will be used to repay all amounts outstanding under an 8,000,000 sterling dealing line facility made available to South Staffordshire Water pursuant to a facility letter from the lender dated 9 December 2002 and that such sterling dealing line has been cancelled and evidence that the Demerger has completed. (iii) A new 10,000,000 sterling Libor revolving credit facility agreement dated 2 March 2004 between South Staffordshire Water as borrower and Royal Bank of Scotland plc as lender, pursuant to which the lender agreed to make available to South Staffordshire Water, upon satisfaction of certain conditions precedent which are not unusual for a facility of this nature, a 10,000,000 revolving Libor facility until 2 March 2007. The interest rate payable in respect of this facility is Libor plus a margin of 0.5 per cent. plus mandatory costs (if any) subject to increase if South Staffordshire Waters credit rating with S & P decreases below A-, to a maximum increase of 0.2 per cent. if such credit rating is reduced to BBB-. Covenants contained within the facility agreement stipulate a minimum PBITDA to net interest ratio of 2.5, a maximum net debt to EBITDA ratio of 4.5 and a maximum net debt to RCV ratio of 75 per cent. This facility agreement contains indemnities and warranties from the borrower, and imposes certain restrictive covenants on the borrower which, in each case, are not unusual for a facility of this nature. This facility agreement also contains certain events of default, which are again not unusual for a facility of this nature, and which give the lender the right to demand repayment of amounts drawn down under the facility agreement and/or the right to refuse to make an advance.

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The obligation on the lender to make the facility available is subject to the satisfaction of various customary conditions precedent including the completion of certain corporate formalities. 15. General (a) Deloitte & Touche LLP has given and has not withdrawn its written consent to the inclusion of its Pro Forma letter and the references to that letter and its name in the form and context in which they are respectively included and has authorised the contents of that letter for the purposes of Regulation 6(1)(e) of the Financial Services and Markets Act 2000 (Official Listing of Securities) Regulations 2001. (b) N M Rothschild & Sons Limited and Cazenove & Co. Ltd have given and have not withdrawn their written consent to the issue of these listing particulars with the references to their names in the form and context in which they are included. (c) The financial information relating to the Existing Group contained in this document does not constitute statutory accounts within the meaning of section 240(5) of the Companies Act. Full individual accounts of the Company and each of its subsidiary undertakings for each financial year to which the financial information relates and on which the auditors gave unqualified reports have been delivered to the Registrar of Companies in England and Wales. The consolidated financial statements of the Company in respect of the year ended 31 March 2003 were reported on by Deloitte & Touche, Four Brindleyplace, Birmingham, B1 2HZ, Chartered Accountants. Deloitte & Touche LLP, Four Brindleyplace, Birmingham B1 2HZ are now the auditors of the Company within the meaning of section 235 of the Companies Act 1985. The consolidated financial statements of the Company in respect of the two years ended 31 March 2002 were reported on by Arthur Andersen, Four Brindleyplace, Birmingham, B1 2HZ. (d) A copy of this document has been delivered to the Registrar of Companies in England and Wales for registration in accordance with section 83 of the Financial Services and Markets Act 2000. (e) The expenses relating to the Demerger, Share Exchange, Share Consolidation and admissions of the Continuing Group Shares and the Water Group Shares (which include stamp duty and stamp duty reserve tax, UKLA listing fees, printing and other expenses) which are payable by the Existing Group are estimated to amount to approximately 4 million (excluding VAT). This amount represents the maximum estimated amount of expenses relating to the above transactions. 16. Working Capital In the Companys opinion, taking into account bank and other facilities available to the Continuing Group, the working capital available to the Continuing Group is sufficient for the Continuing Groups present requirements, that is, for at least the next 12 months following the date of this document. 17. Documents Available for Inspection Copies of the following documents may be inspected at the offices of Wragge & Co, 3 Waterhouse Square, 142 Holborn, London EC1N 2SW during usual business hours on any weekday (Saturdays, Sundays and public holidays excepted) for a period from the date of this document until the date of the EGM: (a) the Existing Group articles, the amended memorandum of association and the new articles association of the Company;

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PART VI
(b) the audited consolidated accounts of the Company and its subsidiary undertakings for the two years ended 31 March 2003; (c) the pro forma report referred to in Part V; (d) the Statement of Adjustments for the Water Group; (e) the rules of the share schemes referred to in paragraph 7 of this Part VI; (f) the trust deeds relating to the pension schemes referred to in paragraph 11 of this Part VI;

(g) all documents relating to the new incentive plans referred to at Resolutions 4 and 5 of the notice of EGM; (h) the service agreements and letters of appointment referred to in paragraph 9 of this Part VI; (i) (j) the material contracts referred to in paragraph 14 of this Part VI; the written consents referred to in paragraph 15 of this Part VI;

(k) Ofwats water and sewerage service unit costs and relative efficiency 2002-2003 report; (l) Actuarial valuations of Water Companies Pension Scheme;

(m) this document, including the EGM Notice; and (n) the Water Group Listing Particulars. Dated 11 March 2004

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DEFINITIONS
The following definitions apply throughout this document unless the context requires otherwise. Accountants Report the accountants report relating to the Water Group, including the letter and related notes thereto, set out in Part VI of the Water Group Listing Particulars; the Companies Act 1985, as amended; the admission of the Continuing Group Shares or Water Group Shares as the case may be, to the Official List and to trading on the London Stock Exchanges market for listed securities becoming effective in accordance with, respectively, the Listing Rules and the Admission and Disclosure Standards; the requirements contained in the publication Admission and Disclosure Standards dated April 2002 containing, inter alia, the admission requirements to be observed by companies seeking admission to trading on the London Stock Exchanges market for listed securities; Aqua Direct Limited which trades under an agency agreement as a division of South Staffordshire Water;

Act or Companies Act Admission

Admission and Disclosure Standards

Aqua Direct

Board or Existing Group Board or the board of directors of the Existing Group Directors or Existing Group Directors comprising Lindsay Bury, Brian Whitty, Andrew Belk, Robert Harley, Richard Harpin, Panton Corbett, John Harris, Justin Jewitt, and David Sankey each of which is a Director or Existing Group Director; Cazenove Circular Combined Code Cazenove & Co. Ltd; this document; the principles of good governance and best practice prepared by the Committee on Corporate Governance, as chaired by Sir Ronald Hampel, published in June 1998 and revised in July 2003 as derived from a review of the role and effectiveness of non-executive directors by Derek Higgs and a review of audit committees by a group led by Sir Robert Smith and appended to, but not forming part of, the Listing Rules; the resolution numbered 3 as set out in the EGM Notice; the Existing Group post Demerger; ordinary shares of nominal value 1212p each in the Continuing Group arising as a result of the Share Consolidation and including, for the avoidance of doubt, the New Shares; the holders of Continuing Group Shares;

Consolidation Resolution Continuing Group Continuing Group Shares

Continuing Group Shareholders

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DEFINITIONS
CORGI CREST the Council for Registered Gas Installers; the Relevant System in respect of which CRESTCo Limited is the operator (each as defined in the CREST Regulations); CRESTCo Limited, a company incorporated under the laws of England and Wales and the operator of CREST; the Uncertificated Securities Regulations 2001 (SI 2001 No. 01/3755); the demerger of the Water Group from the Existing Group as described in this document pursuant to the Demerger Agreement; the agreement dated 11 March 2004 between South Staffordshire Group and South Staffordshire Plc relating to the Demerger as described in more detail in paragraph 14 of Part VI of this document; 6.00 p.m. on 5 April 2004; the resolution numbered 1 as set out in the EGM Notice; Echo Managed Services Ltd; the notice of the Extraordinary General Meeting which appears on pages 141 to 144 of this document; the committee which manages the day-to-day operations and financial performance of the Continuing Group comprising Brian Whitty, Richard Harpin, Andrew Belk, Robert Harley, Ian Carlisle, Jonathan King, Craig Wright, Simon Hancox and Rachael Hughes; the extraordinary general meeting of the Existing Group convened at the registered office of South Staffordshire Group Green Lane, Walsall WS2 7PD for 9.00 a.m. on 5 April 2004, notice of which appears on pages 141 to 144 of this document; South Staffordshire Group Plc, whose registered office is at Green Lane, Walsall, West Midlands WS2 7PD and where the context requires, its subsidiaries and associated undertakings; the register of members of the Existing Group; the holders of Existing Group Shares; ordinary shares of 10p each in the Existing Group;

CRESTCo

CREST Regulations Demerger

Demerger Agreement

Demerger Record Time Demerger Resolution Echo EGM Notice Executive Committee

Extraordinary General Meeting or EGM

Existing Group or the Company

Existing Group Share Register Existing Group Shareholders or Shareholders Existing Group Shares

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DEFINITIONS
Finance Condition confirmation from Royal Bank of Scotland plc and HSBC Bank plc respectively that the facilities referred to in the facility agreements described in paragraph 14(1) of part VI of this document will be available on Admission of the Water Group Shares; means the form of proxy enclosed with this document; Financial Reporting Standard 17, Retirement Benefits; Highway Emergency Services Limited; the current Homeserve plc (company number 3763084); the Income and Corporation Taxes Act 1988; the Directors excluding Richard Harpin, that is Lindsay Bury, Brian Whitty, Andrew Belk, Robert Harley, Panton Corbett, John Harris, Justin Jewitt and David Sankey each of whom is an Independent Director; the London Interbank Offered Rate; the listing rules of the UK Listing Authority; the rules and regulations made by the UK Listing Authority under Part VI of the Financial Services and Markets Act 2000, as amended from time to time; London Stock Exchange plc; the Model Code for Securities Transactions by Directors for the time being adopted; the new articles of association of the Continuing Group described in more detail in paragraph 6(b) of Part VI of this document; the Continuing Group SIP and Continuing Group LTIP as described in paragraph 7 of Part VI of this document; the new ordinary shares of 1212p each in the Company proposed to be issued to Messrs. Harpin and Middleton under the Share Exchange; the Official List of the UK Listing Authority; the Office of Water Services; OnSite Resources Limited and subsidiary undertakings; the directors of the Continuing Group comprising Brian Whitty, Richard Harpin, Andrew Belk, Robert Harley, Justin Jewitt and John Maxwell; Rapid Systems Limited;

Form of Proxy FRS 17 Highway Homeserve ICTA Independent Directors

Libor or LIBOR Listing Rules

London Stock Exchange or LSE Model Code New Articles

New Continuing Group Incentive Plans New Shares

Official List Ofwat OnSite Proposed Directors and Continuing Group Board and Continuing Group Directors Rapid

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DEFINITIONS
RCV Regency Registrars Resolutions Regulatory Capital Value, being the basis on which Ofwat values regulated water businesses; Regency Financial Holdings Limited and subsidiary undertakings; Computershare Investor Services PLC; the resolutions numbered 1 to 8 to be proposed to the Extraordinary General Meeting as set out in the EGM Notice; N M Rothschild & Sons Limited; retail price index; the Secretary of State for the Environment; the consolidation of the Existing Group Shares as described in paragraph 2 of Part II of this document; the proposed share exchange described in paragraph 3 of Part II of this document; the resolution numbered 2 as set out in the EGM Notice; Standard & Poors, a division of The McGraw-Hill Companies, Inc; South Staffordshire Water plc, a subsidiary of the Water Group; an agreement dated 11 March 2004 between South Staffordshire Group Plc, South Staffordshire Plc, Rothschild and Cazenove relating to Rothschild and Cazenove acting as joint sponsors in connection with the Admission of the Water Group Shares and the Continuing Group Shares described in more detail in paragraph 14 of Part VI of this document; as defined in section 736 of the Act; as defined in section 258 of the Act; the Financial Services Authority acting in its capacity as the competent authority for the purpose of Part VI of the Financial Services and Markets Act 2000 and in exercise of its function in respect of the admission of securities to the Official List; Underground Pipeline Services Limited; United States of America; South Staffordshire Plc whose registered office is Green Lane, Walsall, West Midlands, WS2 7PD and, where the context requires, its subsidiaries and associated undertakings including South Staffordshire Water, Echo and Rapid, Underground Pipeline Services and Aqua Direct;

Rothschild RPI Secretary of State Share Consolidation Share Exchange Share Exchange Resolution S&P South Staffordshire Water Sponsorship Agreement

subsidiary subsidiary undertaking UKLA or UK Listing Authority

Underground Pipeline Services USA or US Water Group

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DEFINITIONS
Water Group Listing Particulars Water Group Shareholders Water Group Shares Water Group Share Register Water Companies Pension Scheme the listing particulars of South Staffordshire Plc dated 11 March 2004; the holders of Water Group Shares; ordinary shares of 4212p each in the Water Group; the register of shareholders of the Water Group; and as referred to in paragraph 11 of Part VI.

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SOUTH STAFFORDSHIRE GROUP PLC


(Registered in England and Wales No. 2648297)

NOTICE OF EXTRAORDINARY GENERAL MEETING


NOTICE IS HEREBY GIVEN that an Extraordinary General Meeting of South Staffordshire Group Plc (the Company) will be held at Green Lane, Walsall, WS2 7PD on 5 April 2004 at 9.00 a.m. for the purpose of considering and if thought fit, passing the following Resolutions, of which Resolutions numbered 6 to 8 will be proposed as Special Resolutions and Resolutions numbered 1 to 5 will be proposed as Ordinary Resolutions: Ordinary Resolutions Resolution 1 THAT upon the recommendation of the directors of the Company and conditional on (i) the approval of Resolution 2 by the shareholders of the Company and (ii) the ordinary shares of 4212 pence each (Water Group Shares) in South Staffordshire Plc (Water Group) being admitted to the Official List of the UK Listing Authority and to trading on the London Stock Exchanges market for listed securities: (a) the demerger of the Water Group (the Demerger) as defined in the circular to shareholders of the Company dated 11 March 2004 of which this notice forms part (the Circular), be and is hereby approved; (b) a dividend on the ordinary shares of 10p each in the Company (Existing Group Shares) equal to the book value of the Companys interest in the Water Group be and is hereby declared payable to the holders of Existing Group Shares whose names appear on the register of members of the Company at 6.00 p.m. (London time) on 5 April 2004 (or such other time or date as the directors of the Company may determine) such dividend to be satisfied by the distribution of Water Group Shares to such shareholders on the basis of one Water Group Share for every five Existing Group Shares then held by such shareholders and the directors of the Company be and are hereby instructed to exercise their authority under the articles of association of the Company to settle any difficulty in regard to such distribution as they think expedient and in particular (but without limitation) to determine as they think expedient that entitlements to Water Group Shares will be rounded down to the nearest whole Water Group Share and fractions resulting from rounding down will be aggregated into Water Group Shares and sold and the aggregate proceeds (net of costs and expenses) shall either be retained by the Company or remitted to the relevant shareholder on the basis set out in the Circular; and (c) the directors of the Company be and are hereby authorised to do or procure to be done all such acts and things on behalf of the Company and any of its subsidiaries as they consider necessary or desirable for the purposes of effecting the Demerger provided no such act or thing is materially inconsistent with the information described in the Circular. Resolution 2 THAT conditional on the approval of Resolution 1 by the shareholders of the Company and in accordance with the requirements of: (a) paragraph 11.4 of the Listing Rules of the UK Listing Authority; and (b) section 320 of the Companies Act 1985, the proposed share for share exchange agreement and lock in agreement between (1) Richard Harpin and Jeremy Middleton (2) the Company (3) Home Service (GB) Limited (4) Homeserve

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plc and (5) South Staffordshire Enterprises Limited (in a form produced to the meeting and initialled for identification purposes by the Chairman of the meeting) (the Share Exchange Agreement) be and is hereby approved and the directors of the Company be and are hereby authorised to cause the Share Exchange Agreement and all matters provided for therein or related thereto to be implemented and, at their discretion, to amend, waive, vary or extend any terms of such agreement in whatever manner they consider necessary or desirable, provided that any such amendment, waiver, variation or extension is not material. Resolution 3 THAT conditional on (1) the Demerger becoming effective; (2) the adoption of the new articles of association pursuant to Resolution 8; and (3) admission of the new ordinary shares of 1212p each in the capital of the Company referred to in sub paragraphs (a) and (b) of this resolution to the Official List of the UK Listing Authority and to trading on the London Stock Exchanges market for listed securities becoming effective (Admission); and simultaneously with Admission (a) every 1 ordinary share of 10 pence in the capital of the Company then in issue shall be sub-divided into 4 ordinary shares of 21/2 pence each in the capital of the Company (each a Sub-divided Ordinary Share) and forthwith upon such sub-division every 5 Sub-divided Ordinary Shares shall be consolidated into 1 ordinary share of 1212 pence in the capital of the Company (each a Consolidated Ordinary Share) provided that no shareholder shall be entitled to a fraction of a Consolidated Ordinary Share, all fractional entitlements arising from such sub-division and consolidation shall be aggregated into Consolidated Ordinary Shares and sold and the aggregate proceeds (net of costs and expenses) shall either be retained by the Company or remitted to the relevant shareholder on the basis set out in the Circular; (b) all of the authorised but unissued Existing Group Shares at that time shall be consolidated into one undesignated share of a nominal value equal to the aggregate nominal amount of the unissued Existing Group Shares so consolidated and forthwith on such consolidation the said undesignated share shall be sub-divided into such number of ordinary shares of 1212 pence as is equal to the nominal value of such undesignated share divided by 121/2 pence (each an Unissued Consolidated Share), provided that any fraction of an Unissued Consolidated Share arising from such subdivision shall be cancelled and the Consolidated Ordinary Shares and the Unissued Consolidated Shares shall have the rights and be subject to the obligations of the articles of association to be adopted pursuant to Resolution 8. Resolution 4 THAT conditional on and immediately after the Demerger has become effective: (a) the Homeserve Long Term Incentive Plan (the Homeserve LTIP), a summary of the principal terms of which is set out in paragraph 7 of Part VI of the Circular and the rules of which are submitted to the meeting and signed by the Chairman by way of identification, be and is hereby approved; and (b) the directors of the Company be and they are hereby authorised to do all acts and things which they may consider necessary or expedient for the purpose of establishing and carrying

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the Homeserve LTIP into effect and make such changes to the rules of the LTIP up to the date of this EGM provided the changes are not material. Resolution 5 THAT conditional on and immediately after the Demerger has become effective: (a) the Homeserve Share Incentive Plan (the Homeserve SIP), a summary of the principal terms of which is set out in the Circular and the rules of which are submitted to the meeting and signed by the Chairman by way of identification, be and is hereby approved; and (b) the directors of the Company be and they are hereby authorised to do all acts and things which they may consider necessary or expedient for the purpose of establishing and carrying the Homeserve SIP into effect including making any non-material subsequent changes to the rules of the Homeserve SIP as may be required to obtain the approval of the Board of Inland Revenue therefore under the provisions of Schedule 2 to the Income Tax (Earnings and Pensions) Act 2003. Special Resolutions Resolution 6 THAT conditional on the passing of Resolution 2 the name of the Company be and is hereby changed from South Staffordshire Group Plc to Homeserve plc. Resolution 7 THAT conditional on and immediately after the Demerger has become effective the memorandum of association of the Company be amended by deleting objects clause 4.1.1 which reads to acquire by such method and upon and subject to such terms and conditions as the directors shall think fit all or any part of the issued share capital of South Staffordshire Water PLC and consequentially renumbering the remaining subclauses in clause 4 of the memorandum of association to reflect this deletion. Resolution 8 THAT conditional on the Demerger becoming effective the articles of association contained in the printed document submitted to this meeting and for the purposes of identification signed by the Chairman be and are hereby approved and adopted as the articles of association of the Company in substitution for and wholly to the exclusion of the existing articles of association.

By the order of the Board Adrian Page Secretary Registered Office: Green Lane, Walsall, West Midlands WS2 7PD 11 March 2004

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Notes (1) A member entitled to attend and vote at the meeting is entitled to appoint one or more proxies to attend and on a poll vote instead of him/her by completing and returning the proxy form enclosed. A proxy need not be a member of the Company. Only those shareholders registered in the register of members of the Company as at 9.00 a.m. on 3 April 2004 shall be entitled to attend or vote at the meeting in respect of the number of shares in their names at that time (regulation 41 of the Uncertificated Securities Regulations 2001). In the case of joint holders the signature of any one of them will suffice, but the names of all joint holders should be shown, and the vote of the senior holder who tenders a vote whether in person or by proxy shall be accepted to the exclusion of the other joint holder(s) and for this purpose seniority shall be determined by the order in which the names appear in the register of members in respect of their joint holding. The form of proxy should be in writing under the hand of the appointer or his/her agent duly authorised in writing. In the case of a corporation the form must be under seal or under the hand of a duly authorised agent or officer of the corporation whose authority should be stated. Any alteration made to the form of proxy should be initialled by the person signing it. To be effective the instrument appointing a proxy, and, if appropriate, the authority under which it is signed or an office or certified copy thereof, must be deposited at the office of Computershare Investor Services PLC, PO Box 1075, The Pavilions, Bridgwater Road, Bristol BS99 3FA by not later than 9.00 a.m. on 3 April 2004. There will be available for inspection at the registered office of the Company during normal business hours on any weekday (public holidays excepted) from the date of this notice until the date of the extraordinary general meeting and for 15 minutes prior to and during the extraordinary general meeting: 7.1 7.2 7.3 7.4 (8) (9) the register of directors interests in the ordinary share capital of the Company; the service contracts and letters of appointment of all of the directors of the Company; all rules of the share schemes to be approved at the extraordinary general meeting; and the existing articles of association and the proposed new articles of association.

(2)

(3)

(4)

(5) (6)

(7)

Appointment of a proxy will not prevent a member from attending and voting at the extraordinary general meeting should he/she decide so to do. The form of proxy confers authority to demand or join in demanding a poll.

Typeset and Printed by Corporate Commercial Printing Limited L12485 http://www.cc-print.co.uk

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