Group Accounts 2006

GROUP FINANCIAL STATEMENTS 2005-06

EAST THAMES GROUP LIMITED

Contents

Financial Statements

Board members, senior staff and advisors Report of the Board Operating and financial review Statement of the responsibilities of the Board Report of the auditors Consolidated income and expenditure account Consolidated balance sheet Consolidated cash flow statement Parent income and expenditure account Parent balance sheet Parent cash flow statement Notes to the financial statements Mission, key aims and values

FOR THE YEAR ENDED 31 MARCH 2006

3 4-6 6-11 12 13 14 15 16 17 18 18 19-41 43

East Thames Group Limited Board members, senior staff and advisors

Board

Registered office

Chairman – Mr R. Chilton

3 Tramway Avenue, Stratford, London E15 4PN

Vice-Chair – Mr J. Mallender Treasurer – Mr C. Villiers

Auditors Other members Mr O. Olanrewaju

RSM Robson Rhodes LLP, Daedalus House, Station Road, Cambridge CB1 2RE

Mr B. Robertson Mr J. Norman

Solicitors

Mr G. McLeary

Devonshires, Salisbury House, London Wall, London EC2M 5QY

Mr C. Dankwa Mr D. Edwards Mr D. Goodman Mr A. Bridgwater (resigned January 2006) Mrs L. Perham (appointed March 2006)

Trowers and Hamlins, Sceptre Court, 40 Tower Hill, London EC3N 4DX

Senior staff

Bankers

Group Chief Executive – Ms J. Barnes

Barclays Bank plc, Business Banking, PO Box 544, 1st Floor, 54 Lombard Street, London EC3V 9EX

Deputy Chief Executive – Mr M. Heys Group Director of Development – Mr S. Tarry (resigned April 2006) Group Director of Corporate Services – Ms D. Boakye Group Director of Business Services – Ms J. Kutner Group Company Secretary – Mr H. Potter

Registered Charity 1084952 Registered under the Companies Act 1985 4091100 Registered by the Housing Corporation No. LH 4309

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Report of the Board

The Board presents its report and audited financial statements for the year ended 31 March 2006.

Legal status East Thames Group Limited is a charity, registered under the Companies Act 1985 and is a Registered Social Landlord under the Housing Act 1996. On 1 April 2001 it assumed responsibility as the parent company for four main operating subsidiaries, East Homes Limited, East Living Limited, East Choice Limited, and East Potential. On 31 December 2001, it assumed responsibility as the parent company for East Street Services Limited, a company established to undertake the Group’s non-charitable activities. On 10 February 2003 East Regen Limited and East Treasury Limited were incorporated as wholly-owned subsidiaries within the Group. East Regen Limited commenced trading on 1 April 2005 and East Treasury Limited on 18 March 2006. On 6 April 2006 East Choice Limited transferred its assets and liabilities to East Homes Limited.

Principal activities The parent company’s principal activities are the provision of central services to its operating subsidiaries. The four main operational subsidiaries are East Homes Limited which provides social housing, East Choice Limited which provides low-cost home ownership, East Living Limited which provides care and supported housing and East Potential which manages foyers on behalf of the Group. Three other subsidiaries provide services for the Group. East Street Services Limited undertakes commercial activities, East Regen Limited provides management and development services and East Treasury Limited

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raises finance and provides treasury services.

Going concern

Review of the year

The Board has a reasonable expectation that the Group and the company has adequate resources to continue in operational existence for the foreseeable future, being a period of 12 months from the date on which the report and financial statements were signed.

The year again saw significant growth. During the year the Group has added 357 units of accommodation to its portfolio of properties which at 31 March 2006 totalled 11,658 units.

During the year, the Group spent £101.2 million acquiring and developing its housing stock and an additional £5.2 million (including improvements on housing for rent, aids and adaptations and estate improvements) on its continuing substantial programme of rehabilitating, modernising and repairing its housing stock. It is the intention to fully upgrade each property at least every 25 years.

Performance for the year The Group achieved a surplus for the year of £4.0 million (2005: £4.3 million) before breakage costs of £2.3 million (2005: £ Nil) incurred in refinancing the loans portfolio. This has resulted in a surplus for the year of £1.7 million (2005: £4.3 million) which following transfers from the revaluation and designated reserves of £1.9 million (2005: £0.4 million) has resulted in increasing revenue reserves to £53.8 million (2005: £50.2 million). Restricted, designated, and consolidated reserves total £5.1 million (2005: £5.5 million).

Following the revaluation of the Group’s properties the revaluation reserve now stands at £220.6 million (2005: £209.3 million).

Post balance sheet events Apart from the transfer of assets, mentioned above, there have been no other events since the year end that have had a significant effect on the Group’s or company’s financial position.

Disabled employees Applications for employment from disabled persons are given full and fair consideration for all vacancies, having regard to their particular aptitude and abilities. In the event of employees becoming disabled, every effort is made to retain them in order that their employment within the organisation may continue. It is the policy of the Group that training, career development and promotion opportunities should be available to all employees.

Health and safety The Group takes its responsibilities for Health and Safety very seriously and has established a training and implementation programme, led by a health and safety committee dedicated to this topic.

Employee involvement One of the strengths of the Group lies in the quality of its employees. One of the key factors in its ability to meet its objectives and its commitments to its tenants in an effective and efficient manner is the contribution of its employees. The Group has continued its practice of consulting and keeping employees informed on matters affecting them and on the progress of the Group. This is carried out in a number of ways including a formal forum for consultation, departmental meetings and a variety of newsletters.

Donations The Group made charitable donations during the year of £4,306. No donations were given to charities of which Board members are Trustees.

Pensions The Chief Executive is an ordinary member of the pension scheme and has a contractual arrangement covering additional voluntary contributions (AVCs).

There are no other enhanced pension arrangements to which East Thames Group Limited or any members of the Group make a contribution.

Internal controls The Board has overall responsibility for establishing and maintaining the whole system of internal control and for reviewing its effectiveness. This applies to all companies within the East Thames Group.

The Board recognises that no system of internal control can provide absolute assurance or eliminate all risk. The system of internal control is designed to manage risk and to provide reasonable assurance that key business objectives and expected outcomes will be achieved.

It also exists to give reasonable assurance about the preparation and reliability of financial and operational information and the safeguarding of the Group’s assets and interests.

In meeting its responsibilities, the Board has adopted a risk-based approach to internal controls which are embedded within the normal management and governance process. This approach includes the regular evaluation of the nature and extent of risks to which the Group is exposed and is consistent with Turnbull principles as incorporated in the Housing Corporation’s circular R2-25/01: Internal Controls Assurance.

The process adopted by the Board in reviewing the effectiveness of the system of internal control, together with some of the key elements of the control framework includes: Identification and evaluation of key risks Management responsibility has been clearly defined for the identification, evaluation and control of significant risks. The Group has an overall risk management strategy which is reviewed annually and produces Group and individual subsidiary risk maps which identify key risks linked to our strategic plan. These risks are scored in terms of impact (including reputational image) and probability both in terms of the initial risk and the residual risk once adequate control measures are in place.

There is a formal and ongoing process of management review in each area of the Group’s activities. The process is co-ordinated through a quarterly reporting framework to the Group Risk Management and Audit Committee/ Boards which review changes to the risk map on an ongoing basis.

The Group Executive and Officer Risk Management Panel regularly consider reports on significant risks facing the Group. The Group Chief Executive/ relevant Managing Director is responsible for reporting to the respective Board(s) any significant changes affecting key risks.

Monitoring and corrective action A process of control self-assessment and regular management reporting on control issues provides hierarchical assurance to successive levels of management and to the Board. This process continues to be developed to ensure a rigorous approach and includes action for ensuring that

corrective action is taken in relation to any significant control issues.

Control environment and control procedures The Board retains responsibility for a defined range of issues covering strategic, operational, financial and compliance issues including treasury strategy and new investment projects. The Board has adopted the National Housing Federation 2004 Code of Governance – ‘Competence and Accountability’. This is used as a basis for the Group’s policies with regard to quality, integrity and ethics. It is supported by a framework of policies and procedures, with which employees must comply. These cover issues such as delegated authority, segregation of duties, accounting, treasury management, health and safety, data and asset protection and fraud prevention and detection.

Information and financial reporting systems Financial reporting procedures include detailed budgets for the year ahead and forecasts for subsequent years. These are reviewed and approved by the Board. The Board also regularly reviews key performance indicators to assess progress towards the achievement of key business objectives, targets and outcomes. There has been a review of performance management information during 2005–06 which has seen the implementation of new systems, including the introduction of a balanced scorecard approach, designed to measure the critical success factors of the business.

The internal control framework and the risk management process are subject to regular review

by Internal Audit who are responsible for providing independent assurance to the Board via its Group Risk Management and Audit Committee. The

5

Report of the Board (continued)

Operating and financial review

committee considers internal control and risk regularly during the year.

Activities

Sources of assurance There are a number of internal and external sources of assurance which have been used in compiling this statement some of which are mentioned above. In summary these sources are: • Board/Group Risk Management and Audit Committee oversight of the organisation’s business; • Management assurances; • Management reports on operational and financial matters;

• East Thames Group Limited – a Registered Social Landlord and a registered charity; • East Homes Limited – a Registered Social Landlord and a charitable Industrial and Provident Society;

• Quality management systems such as Charter Mark and Investors in People; and

• East Choice Limited – a Registered Social Landlord and a charitable Industrial and Provident Society. East Choice Limited merged with East Homes Limited on 6 April 2006 following a transfer of engagements;

• Key performance indicators linked to business plans.

• East Living Limited – a charitable Industrial and Provident Society;

The Board has received the Group Chief Executive’s annual report, has conducted its annual review of the effectiveness of the system of internal control and has taken account of any changes needed to maintain the effectiveness of the risk management control process.

• East Potential – a registered charity; and

The Board confirms that there is an ongoing process for identifying, evaluating and managing significant risks faced by the Group. This process has been in place throughout the year under review, up to the date of the annual report, and is regularly reviewed by the Board.

East Thames Group Limited was formed in 1979 following a merger of three housing associations operating in east London. Its first subsidiary, East Choice Limited (then known as Boleyn and Forest Housing Society Limited), was formed in 1981.

Two further subsidiaries, East Living Limited (then Care and Support Services Limited) and East Potential (then Network East Foyers), became subsidiaries in 1995 and 1997 respectively.

• Risk management activity; • Internal audit;

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East Thames Group Limited is a large housing and regeneration group based in east London providing a range of accommodation including general needs, low-cost home ownership, supported housing and regeneration services.

As at 31 March 2006 the Group consisted of:

• East Street Services Limited – a noncharitable company.

There are also a number of smaller companies in the Group.

East Thames Group Limited was formed in 2001 as a new Group parent, with the former parent becoming what is today known as East Homes Limited.

East Homes Limited operates two main businesses, long-term housing for families and single people and temporary short-term housing for those who would otherwise be homeless.

East Choice Limited specialised in the provision of low-cost home ownership homes, particularly shared ownership, an arrangement whereby residents own a share of equity in their home and rent the rest from East Choice Limited.

This activity is now incorporated within East Homes Limited.

East Living Limited provides supported housing and care for those who need additional housing related support, or additional care.

East Potential provides housing management, training and information services to young people. This is achieved through managing five foyers in east London and Essex.

As well as owning and managing over 11,600 units the Group is a major developer of new affordable housing and is one of the associations selected by the Housing Corporation as development partners.

Objectives and strategies Our mission is: “to make a positive and lasting contribution to the neighbourhoods in which we work”. We have five key aims underpinning this mission and key actions have been developed to ensure that we are able to deliver against this strategic plan.

Key aims

Strategies

• To provide high quality homes and services that meet the needs of our customers

• Continue to find innovative solutions to meet specific customer and housing needs and to improve the quality of our current services • Deliver sustainability in the neighbourhoods in which we operate • Help meet the needs of the large and growing child and youth population in east London • Continue to develop a wide range of housing for different income groups, including giving our existing residents more opportunities to move to new homes as their needs change • Identify and pursue strategic opportunities for growth and stock transfer across east London and Essex

• To ensure that our customers can shape our services

• We will improve our performance by giving opportunities to residents to define service standards and priorities, provide better value for money in all our services, set development standards for new homes and the improvement of existing homes, influence our community and economic programmes and make our neighbourhoods a better place to live • Actively seek ways of getting feedback from our residents and service users whose voices are not normally heard • Work with strategic and local agencies to help them achieve their objectives in the neighbourhoods in which we work • Continue to develop effective partnerships, achieving more as a result of these

• To influence local, regional and national thinking, policies and strategies

• • • • •

• Developing well-informed, committed and enthusiastic staff

• We will communicate effectively so staff understand and are aware of what we do, share our future plans and the issues that affect our business • Further develop staff to maximise their skills and creativity in an organisation with a culture of integrity, to be positive agents for change, promote the advantages of working in a multi-cultural area, and learn and innovate using internal and external knowledge and experience • Create a workplace culture that makes staff feel as special as the Group expects them to make our customers feel • Maintain a working environment conducive to attracting and retaining the highest quality staff

We will contribute to key local partnerships and planning forums Target and shape regional and national agendas to benefit our neighbourhoods Build local community networks to inform, shape, and reinforce local agendas Promote innovative solutions using flagship projects, services and research Develop staff and Board members as ambassadors

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Operating and financial review (continued)

Key aims

Strategies

• Actively using our financial and organisational strength

• Optimise the use of Group assets and revenue streams to ensure the most effective investment in new development, our existing stock and services • Improve the manner in which we manage risk while continuing to be risk aware • Exploit the knowledge, skills and experiences from across the Group to deliver our mission • Continue to improve business performance and efficiency • Continue to review our governance structures as appropriate to ensure that they are utilised to best effect • Use our organisational strength to contribute to the success of the 2012 Olympics and its legacy

Performance, development and continuous improvement

Management assurances Annually senior managers complete an internal controls sign off memorandum confirming their understanding of their objectives and compliance with internal control procedures.

The Group Executive and the Board have put in place a comprehensive process to monitor the performance of the Group against a set of key results, critical success factors and key performance indicators. The results are summarised on a Group ‘Master Performance Dashboard.’ The Board agrees targets each year that are designed to manage development and deliver continuous service improvement. The Board receives a performance management pack monthly which indicates the Group’s performance against targets and simply and effectively highlights the current performance and the trend, giving each area a “green”, “amber”, or “red” assessment. Those areas assessed as “red” are monitored closely and are subject to a detailed review by the Board each quarter.

Risks and uncertainties The Group Board and the Group Risk Management and Audit Committee’s oversight of the organisation’s business The Group Board and Group Risk Management and Audit Committee use a number of internal and external processes to manage risk.

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Management reports on operational and financial matters Boards and the Committee receive regular reports on business planning incorporating long-term financial plans and forecasts, treasury management policies and strategies, including cash flow monitoring and control, and interest management.

Policies and strategies have also been considered on a range of issues ranging from human resources and diversity issues to risk management.

Satisfaction survey information derived from residents and employees has also been considered.

Risk management activity During the year the Board considered our comprehensive Group Risk Management Strategy, a Group - wide risk map and individual subsidiary risk maps. The risk maps assess risk on the basis of impact (including reputational risk) and probability. A system of measuring residual risk scores is used (i.e. those scores after controls are in place) and all scores over 100 are reviewed by

the Group Risk Management and Audit Committee and individual Boards on a quarterly basis.

Officer Risk Management Panel An Officer Risk Management Panel is also in place which considers all items of risk in terms of new activity and also any development schemes which fall outside the agreed template.

Financial position Results The results of the key operations are set out below: Turnover

Operating surplus

2006 £m

2005 £m

2006 £m

2005 £m

General needs Special needs accommodation Shared ownership accommodation Temporary accommodation Other

35.8

34.9

11.6

11.8

17.2

14.9

0.2

1.0

4.7

4.6

0.7

0.3

16.1 1.6

16.7 1.5

(0.1) (2.8)

0.1 (3.6)

Total

75.4

72.6

9.6

9.6

The Group income and expenditure account and balance sheet are summarised in the table on page 10 and the following paragraphs highlight key features of the Group’s financial position at 31 March 2006.

Accounting policies The Group’s principal accounting policies are set out on pages 19 to 20 of the financial statements. The policies that are most critical to the financial results relate to accounting for housing properties and include: capitalisation of interest and development administration costs; deduction of capital grant from the cost of assets; housing property depreciation; and treatment of shared ownership properties.

Each of these policies has remained unchanged during the period under review.

Housing properties At 31 March 2006 the Group owned or managed 11,658 housing properties (2005: 11,301). The valuation shown in the balance sheet of properties owned by us (after depreciation and capital grant) was £517,734 million (2005: £445,943 million). The Board appointed professional valuers to value the Group’s housing properties as at 31 March 2006.

Our investment in housing properties this year was funded through a mixture of Social Housing Grant, loan finance and working capital.

The Group treasury management arrangements are considered below.

Pension costs The Group participates in two pension schemes, the Social Housing Pension Scheme (SHPS) and the NHS pension scheme for England and Wales.

Both of these are final salary schemes, offering good benefits for our staff. The Group has

contributed to the schemes in accordance with the required levels set by actuaries of 11.7% and 14% of salaries respectively.

The last actuarial valuation of the SHPS was carried out as at 30 September 2005. The results of the valuation show a deficit of £283 million.

Although the value of scheme assets has increased as anticipated in the last valuation, salary increases in excess of expectations and changes in actuarial assumptions have been contributory factors to higher scheme liabilities and we anticipate that our contributions to the scheme will increase significantly based on present benefits.

The last actuarial valuation of the NHS pension scheme took place on 31 March 2003.

Capital structure and treasury policy During the year new loan arrangements between East Treasury Limited (a member of East Thames Group Limited), Nationwide, Barclays and Barclays Syndicate totalling £400 million were agreed. The facility has been used to refinance our existing loans portfolio and provide significant funds for development and other new business initiatives.

At 31 March 2006 East Homes Limited had borrowed £161 million from East Treasury Limited for this purpose. Interest is payable on the new facility borrowings of £161 million at fixed rates varying from 4.02% to 4.135% on £31 million and at rates linked to LIBOR on the remaining £130 million.

The final instalments are due for repayment in the period 2006 to 2037.

A HACO £25 million bond is due to be repaid in 2006-07 as part of the refinancing of existing loans. Interest is fixed at 10.625%.

THFC loans totalling £20 million are due to be repaid in 2006-07 as part of the refinancing of existing loans, the interest rates payable range from 5.05% to 5.57%.

A £1.25 million THFC Bond is fixed at 12.97% and is due to be repaid in 2019.

2006

2005

£m

£m

Within one year Between one and two years Between two and five years After five years

0.7 1.3 2.5 246.2

13.5 1.6 19.2 147.1

Total

250.7

181.4

Maturity

Statement of compliance In preparing this Operating and Financial Review, the Board has followed the principles set out in Part 3 of the SORP ‘Accounting by Registered Social Landlords’ (Update 2005).

A consolidated loan from the Royal Bank of Scotland is repaid in half-yearly instalments over the estimated life of the scheme on which the loan is secured, at a fixed interest rate of 10.65%.

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Operating and financial review (continued)

Group highlights, five-year summary

For the year ended 31 March

2005

2004

2003

2002

Group income and expenditure account (£’000) Total turnover Income from lettings Operating surplus Exceptional item – Breakage costs

75,409 73,837 9,574 (2,340)

72,584 71,071 9,563 –

66,700 63,758 10,555 –

55,521 53,550 11,896 –

49,414 43,210 14,677 –

Surplus for the year transferred to reserves

1,703

4,269

8,128

4,644

5,834

Group balance sheet (£’000) Housing properties, net of depreciation SHG and other capital grants

966,025 (448,291)

885,217 (439,274)

828,183 (424,544)

696,464 (411,860)

621,554 (380,491)

Housing properties, net of depreciation and grants Other fixed assets

517,734 15,158

445,943 11,709

403,639 8,515

284,604 5,806

241,063 6,132

Fixed assets net of capital grants and depreciation

532,892

457,652

412,154

290,410

247,195

9,593

(14,909)

(4,495)

17,726

22,218

Total assets less current liabilities

542,485

442,743

407,659

308,136

269,413

Loans (due over one year) Provision for liabilities and charges Other long - term liabilities

249,115 100 13,828

167,361 100 10,234

153,734 100 11,045

165,513 100 7,792

165,891 197 7,302

Reserves : restricted : designated : revenue : revaluation : total

1,784 3,011 54,031 220,616 279,442

1,791 3,492 50,432 209,333 265,048

2,912 1,953 45,779 192,136 242,780

3,240 2,069 37,185 92,237 134,731

3,772 2,084 29,673 60,494 96,023

542,485

442,743

407,659

308,136

269,413

Net current assets/(liabilities)

10

2006

Accommodation figures

For the year ended 31 March

2006

2005

2004

2003

2002

10,064 1,594

9,798 1,503

9,769 1,421

9,551 1,436

9,178 1,415

11,658

11,301

11,190

10,987

10,593

Surplus for the year as % of turnover 5.4% Surplus for the year as % of income from lettings 5.5% Rent losses (voids and bad debts as % of rent and service charges receivable) 3.4% Rent arrears (gross arrears as % of rent and service charges receivable) 6.5% Interest cover (surplus before interest payable divided by interest payable and capitalised interest) 1.4 Liquidity (current assets divided by current liabilities) 1.4 Gearing (total loans as % of capital grants plus reserves) 34.4%

6.5%

12.2%

8.4%

11.8%

6.6%

12.7%

8.7%

13.5%

3.8%

3.7%

5.5%

3.6%

6.6%

7.6%

11.5%

9.3%

1.3

1.9

1.4

1.5

0.6

0.8

2.0

2.4

25.7%

23.0%

28.4%

29.5%

£27,517

£24,903

£13,775

£9,757

Total housing stock owned or managed at year end (number of dwellings): Social housing Non-social housing

Statistics

Total reserves per home owned

£30,267

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Statement of the responsibilities of the Board

The Board is responsible for preparing the report and financial statements in accordance with applicable law and United Kingdom Generally Accepted Accounting Practice.

The Companies Act 1985 and Registered Social Landlord legislation in the United Kingdom require the Board to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Group and the company at the end of the year and of the surplus or deficit of the Group and the company for the year then ended.

In preparing those financial statements the Board is required to: • select suitable accounting policies and apply them consistently; • make judgements and estimates that are reasonable and prudent; • follow applicable United Kingdom Accounting Standards and the Statement of Recommended Practice: “Accounting by registered social landlords” (Update 2005), subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The Board is responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and the company and

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enable it to ensure that the financial statements comply with the Companies Act 1985, paragraph 16 of Schedule 1 to the Housing Act 1996 and the Accounting Requirements for Registered Social Landlords General Determination 2000. It is also responsible for safeguarding the assets of the Group and the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Board is responsible for ensuring that the Report of the Board is prepared in accordance with the Statement of Recommended Practice: “Accounting by registered social landlords” (Update 2005).

The Board is responsible for the maintenance and integrity of the corporate and financial information on the Group’s website. Legislation in the United Kingdom governing the preparation and dissemination of the financial statements and other information included in annual reports may differ from legislation in other jurisdictions.

Disclosure of information to auditors At the date of making this report the members and directors, as set out on page 3, confirm the following: • so far as each member and director is aware, there is no relevant information needed by the Group's auditors in connection with preparing their report of which the Group's auditors are unaware; and • each member and director has taken all the steps that they ought to have taken as a member or director in order to make themselves

aware of any relevant information needed by the Group’s auditors in connection with preparing their report and to establish that the Group's auditors are aware of that information.

Auditors RSM Robson Rhodes LLP were appointed auditors during the year and a resolution to re-appoint them will be proposed at the forthcoming Annual General Meeting.

The report of the Board was approved by the Board on 1 August 2006 and signed on its behalf by

Henry Potter Group Company Secretary

Independent auditors’ report to the members of East Thames Group Limited

We have audited the financial statements on pages 14 to 41. These financial statements have been prepared under the accounting policies set out therein.

This report is made solely to the company’s members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of the Board and Auditors The Board’s responsibilities for preparing the financial statements in accordance with applicable law and United Kingdom Accounting Standards are set out in the statement of the responsibilities of the Board.

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the report of the Board is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and

explanations we require for our audit, or if information specified by law regarding directors’ remuneration is not disclosed.

We read the other information accompanying the financial statements and consider whether it is consistent with the audited financial statements.

The other information comprises only the Report of the Board and the Operating and Financial Review. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

We report to you whether in our opinion the information given in the Report of the Board is consistent with the financial statements.

Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Board in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group's and the company's circumstances, consistently applied and adequately disclosed.

from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

Opinion In our opinion: • the financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of affairs of the Group and parent company as at 31 March 2006 and of the surplus of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985, the Housing Act 1996 and the Accounting Requirements for registered social landlords General Determination 2000; and • the information given in the Report of the Board is consistent with the financial statements.

RSM Robson Rhodes LLP Chartered Accountants and Registered Auditors Cambridge, England

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free

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Consolidated income and expenditure account for the year ended 31 March 2006

Note 2 2

2006 £’000 75,409 (65,835)

Restated 2005 £’000 72,584 (63,021)

Operating surplus: continuing activities Surplus on property disposals Net interest payable and similar charges

4 7

9,574 4,357 (9,888)

9,563 4,156 (9,450)

Surplus for the year before exceptional item Exceptional item – Breakage costs

7

4,043 (2,340)

4,269 –

1,703 1,408 (58) 546 – 3,599 50,169 53,768

4,269 801 – (1,538) 1,121 4,653 45,516 50,169

Turnover: continuing activities Operating costs

Surplus for the year after exceptional item Transfer from revaluation reserve Transfer to restricted reserves Transfer from/(to) designated reserves Transfer from restricted reserves Unallocated surplus Revenue reserves brought forward Revenue reserves carried forward

Consolidated statement of total recognised surpluses and deficits for the year ended 31 March 2006

Surplus for the year Unrealised surplus on revaluation of housing properties Total recognised surpluses for the year

Note of historical cost surpluses and deficits for the year ended 31 March 2006 Reported surplus on ordinary activities Excess of actual depreciation over historical cost depreciation Realisation of property revaluation surpluses Historical cost surplus on ordinary activities before taxation Historical cost surplus for the year after taxation and Gift Aid

Reconciliation of movements in Group’s funds for the year ended 31 March 2006 Opening total funds Total recognised surpluses and deficits relating to the year Closing total funds

14

22 22 22 22

22

2006 £’000 1,703 12,691 14,394

Restated 2005 £’000 4,269 17,999 22,268

2006 £’000 1,703 488 920 3,111 3,111

Restated 2005 £’000 4,269 255 546 5,070 5,070

2006 £’000

Restated 2005 £’000

265,048 14,394 279,442

242,780 22,268 265,048

Consolidated balance sheet at 31 March 2006

2006 £’000

2005 £’000

10 11

517,734 15,158 532,892

445,943 11,709 457,652

Investments Cost of HomeBuy Less: Social Housing Grant

10

39,290 (39,290) –

38,766 (38,766) –

Current assets Investments Stock Debtors Cash at bank and in hand

12 13 14

1,685 18,924 6,662 7,634 34,905

1,724 11,409 7,805 4,398 25,336

Creditors: amounts falling due within one year Net current assets/(liabilities) Total assets less current liabilities

16

(25,312) 9,593 542,485

(40,245) (14,909) 442,743

Creditors: amounts falling due after more than one year Provision for liabilities and charges

17 20

262,943 100 263,043

177,595 100 177,695

Capital and reserves Share capital Revenue reserve Designated reserve Restricted reserve Consolidation reserve Revaluation reserve Consolidated funds

21 22 22 22 22 22

– 53,768 3,011 1,784 263 220,616 279,442 542,485

– 50,169 3,492 1,791 263 209,333 265,048 442,743

Note Tangible fixed assets Housing properties at valuation Other fixed assets

The financial statements were approved by the Board on 1 August 2006 and signed on its behalf by:

Robert Chilton Chairman

Charles Villiers Treasurer

Henry Potter Group Company Secretary

15

Consolidated cash flow statement for the year ended 31 March 2006

Net cash flow from operating activities

Note

2006 £’000

2005 £’000

25

5,277

4,972

1,105 (13,614) (2,340) (14,849)

169 (10,153) – (9,984)

(101,629) (4,852) 26,643 381 – 11,056 – 11,459 – – (56,942)

(59,179) (4,206) 12,769 – (1,679) 18,187 1,072 8,629 34 2,784 (21,589)

(66,514)

(26,601)

197,342 (128,032) 69,310

31,489 (5,906) 25,583

Returns on investments and servicing of finance Interest received Interest paid Breakage costs paid Net cash outflow on servicing of finance Capital expenditure and financial investments Purchase and construction of housing properties Purchase of other fixed assets Social Housing Grant received Other capital grants received Other capital grants repaid Proceeds of first tranche sales Proceeds of HomeBuy Sales of housing properties Sales of other fixed assets Sales of investments Cash outflow from investing activities Cash outflow before financing

16

Financing Housing loans received Housing loans repaid Cash inflow from financing

26

Corporation tax Increase/(decrease) in cash in the period

26

2 2,798

– (1,018)

Parent income and expenditure account for the year ended 31 March 2006

Turnover: continuing activities Operating costs Operating surplus: continuing activities Net interest receivable Surplus on ordinary activities Transfer from designated reserves Unallocated surplus Revenue reserves brought forward Revenue reserves carried forward

Note 2 2 7 22

2006 £’000 14,764 (12,595) 2,169 – 2,169 546 2,715 713 3,428

2005 £’000 12,427 (11,865) 562 – 562 (529) 33 680 713

The financial statements were approved by the Board on 1 August 2006 and signed on its behalf by:

Robert Chilton Chairman

Charles Villiers Treasurer

Henry Potter Group Company Secretary

17

Parent balance sheet at 31 March 2006

2006 £’000 12,483

2005 £’000 3,676

14 16

38,289 (45,659) (7,370) 5,113

7,420 (8,152) (732) 2,944

22 22 22

3,428 1,685 – 5,113

713 1,750 481 2,944

Note 11

Tangible fixed assets Current assets Debtors Creditors: amounts falling due within one year Total assets less current liabilities Capital and reserves Revenue reserves Restricted reserves Designated reserves

The financial statements were approved by the Board on 1 August 2006 and signed on its behalf by:

Robert Chilton Chairman

Parent cash flow statement for the year ended 31 March 2006

Charles Villiers Treasurer

Net cash flow from operating activities

Henry Potter Group Company Secretary

Note

2006 £’000

2005 £’000

25

2,424

(727)

Capital expenditure and financial investments Purchase of fixed assets Capital grant received

(Decrease) in cash in the period

18

26

(2,939) 381 (2,558)

(3,397) – (3,397)

(134)

(4,124)

Notes to the financial statements 31 March 2006

1. Accounting policies

(a) Basis of accounting The financial statements of the parent company and the Group are prepared under the historical cost convention (as amended by the revaluation of the Group’s housing assets) in accordance with the Companies Act 1985 and the Housing Act 1996 and comply with Accounting Requirements for Registered Social Landlords General Determination 2000. Applicable accounting standards and statements of recommended practice have been followed.

Basis of consolidation The Group financial statements consolidate the financial statements of East Thames Group Limited and its operating subsidiaries: East Homes Limited, East Choice Limited, East Street Services Limited, East Living Limited, East Potential, East Regen Limited and East Treasury Limited. (b) Turnover Turnover represents rental and service charge income from tenants, management fees, sales of properties developed for other registered social landlords and certain revenue grants. (c) Housing properties Housing properties represent the Group’s investment in properties for rent and properties subject to shared ownership leases.

Completed housing properties held for letting are stated at Existing Use Value for Social Housing (EUV-SH). Shared ownership properties are stated at Existing Use Value for Social Housing (EUV-SH) less the Net Present Liability to repay Social Housing Grant (SHG). Housing properties

under construction are stated at cost less related SHG and other capital grants.

Cost comprises the cost of acquiring land and buildings, development costs, rehabilitation costs, attributable interest charges incurred during the development period and the capital element of expenditure incurred in respect of the major repair programmes of stock modernisation and estate improvement.

Development and modernisation costs include the capitalisation of the Group’s own directly related employee costs from the direct labour force involved in the development process and directly attributable development management costs and other direct costs. The cost of shared ownership properties is stated net of proceeds of first tranche sales. Land donated by public authorities is brought into cost at market value at the time of the donation. (d) Depreciation of housing properties Freehold land, shared ownership properties and assets held in the course of completion are not depreciated. Depreciation is charged so as to write down the value of freehold housing properties other than freehold land to their estimated residual value on a straight line basis over their remaining expected useful economic lives as follows: Houses Low level flats Blocks over four floors

100 to 150 years 100 to 150 years 60 years

These useful economic lives apply equally to the Group’s rented, shared ownership and care stock of housing properties.

(e) Social Housing Grant Social Housing Grant (SHG) is payable by the Housing Corporation and is utilised to reduce the capital costs of a scheme to a value which may be supported by rental income. Where SHG is received in advance of aggregate expenditure it is disclosed as a short-term creditor.

When the SHG is retained following the disposal of property, it is shown under the disposal proceeds or recycled capital grant funds in creditors. SHG is repayable in certain circumstances. When SHG becomes repayable it is included as a current liability until it is repaid.

The repayment of SHG is generally subordinated to the repayment of housing loans, as agreed with the Housing Corporation. (f)

Other grants

Other grants include grants from local authorities and other organisations, primarily the London Docklands Development Corporation. Capital grants are treated in the same way as SHG and include amounts attributable to land donated by public authorities. Grants in respect of revenue expenditure are included in the income and expenditure account in the same period as the expenditure to which they relate. (g) Stock Stock is valued at the lower of cost and net realisable value. (h) Other tangible fixed assets Service charge assets and other fixed assets, such as office buildings, are stated at cost less depreciation. Depreciation is provided evenly on the cost of service charge assets and other

19

Notes to the financial statements 31 March 2006

1. Accounting policies (continued)

tangible fixed assets to write them down to their estimated residual values over their expected useful lives on a straight line basis at the following rates: Freehold offices Lifts

4% 4%

Office furniture and improvements

14.3%

Service equipment

20%

Motor vehicles

25%

Computer equipment Major software (i)

33.3% 10%

Pensions

The Group participates in the Social Housing Pension Scheme which is a final salary pension scheme and retirement benefits to Group employees are funded by contributions from all participating employers and employees in the

20

scheme. Payments are made to a fund operated by the Pensions Trust, an independent trust providing superannuation benefits for employees of voluntary organisations. These payments are made in accordance with periodic calculations by consulting actuaries and are based on pensions costs applicable across the various participating associations taken as a whole. (j)

Agency managed hostels

The Group has brought into its financial statements only income and expenditure under its direct control in respect of agency managed hostels. (k) Taxation East Thames Group Limited is a registered charity and is registered under the Companies Act 1985 and is not generally subject to corporation tax.

(l)

HomeBuy

A subsidiary of the Group, East Choice Limited participates in the HomeBuy scheme. Purchasers are given a grant of 25% of the value of their home by the company which is in turn reimbursed by the Housing Corporation by way of Social Housing Grant. No rent is payable to the company.

The company receives an allowance for handling the transaction, paid by way of further grant. (m) Restatement of revaluation surplus on property disposals Last year’s comparative figures for the realisation of the revaluation surplus on property disposals have been restated. The impact of the restatement is to decrease the reported surplus for the period by £429k with a corresponding increase in the revaluation surplus for the period. There is no impact on the Group’s reported funds or the cash flow statement.

2. Particulars of turnover, cost of sales, operating costs and operating surplus

GROUP Income and expenditure from lettings Housing accommodation Special needs accommodation Temporary social housing Shared ownership accommodation Other income and expenditure Regeneration and development services Grants received Other Total

PARENT Other income and expenditure Regeneration and development services Grant from subsidiary Group recharge Donation received from Group member Other donations Other Total

2006 Operating Operating surplus/ Turnover costs (deficit) £’000 £’000 £’000

Restated 2005 operating surplus/ (deficit) £’000

35,836 17,241 16,052 4,708 73,837

24,201 17,013 16,161 4,058 61,433

11,635 228 (109) 650 12,404

11,839 977 41 345 13,202

411 – 1,161 1,572 75,409

292 – 4,110 4,402 65,835

119 – (2,949) (2,830) 9,574

(37) 123 (3,725) * (3,639) 9,563

2006 2005 Operating Operating Operating surplus/ surplus/ Turnover costs (deficit) (deficit) £’000 £’000 £’000 £’000 – – 11,056 3,000 6 702 14,764

– – 12,462 – – 133 12,595

– – (1,406) 3,000 6 569 2,169

(36) 123 (1,763) 1,770 – 468 562

* From 2005-06, Group Overheads have been allocated over the operating areas rather than being shown as Other Expenditure. The figures for the year to 31 March 2005 have been restated on the same basis.

21

Notes to the financial statements 31 March 2006

3. Particulars of income and expenditure from lettings Care and supported housing GROUP Housing accommodation

Supported housing

Residential care homes

Temporary social housing

Shared ownership

2006

Restated 2005

£’000

£’000

£’000

£’000

£’000

£’000

£’000

30,880 1,477 32,357

2,204 4,137 6,341

448 – 448

14,486 – 14,486

3,614 690 4,304

51,632 6,304 57,936

49,506 6,249 55,755

(1,431)

(1,595)

Income from lettings Rent receivable net of identifiable service charges Service charges receivable Gross rents receivable Less: Rent losses from voids

(769)

(209)

(23)

(430)

Net rents receivable

31,588

6,132

425

14,056

4,304

56,505

54,160

Revenue grants from local authorities and other agencies Support charges – fixed contract Other grants Other income Total income from lettings

3,992 – 3 253 35,836

1,506 1,898 – 868 10,404

6,241 171 – – 6,837

– – 480 1,516 16,052

– – – 404 4,708

11,739 2,069 483 3,041 73,837

10,559 1,725 911 3,716 71,071

527 6,798 – 204 – 21 – – 124 7,674

8 13,932 1,078 1,029 – 114 – – – 16,161

63 541 2,251 342 – – – – 861 4,058

3,016 33,964 10,770 6,736 3,613 521 827 1,000 986 61,433

2,909 30,425 10,952 * 6,992 2,719 524 1,107 1,000 1,241 57,869

(109)

650

12,404

13,202

Expenditure on letting activities Services 1,364 Management 7,699 Overhead allocation 5,163 Routine maintenance 4,122 Planned maintenance 3,613 Rent losses from bad debts 413 Revenue element of major repairs expenditure 827 Housing properties depreciation 1,000 Other costs – Total expenditure on lettings 24,201

1,054 4,994 2,278 1,039 – (27) – – 1 9,339

Operating surplus on letting activities

1,065

11,635

(837)

* From 2005-06, Group Overheads have been allocated over the operating areas rather than being shown as Other Expenditure. The figures for the year to 31 March 2005 have been restated on the same basis.

22

–

4. Surplus on property sales GROUP

Sales of older and shared ownership properties HomeBuy Sales of properties developed for sale

Sales proceeds £’000

Cost of sales £’000

2006 surplus £’000

2005 surplus £’000

10,198

6,212

3,986

3,842

1,165

794

371

314

11,152

11,152

–

–

22,515

18,158

4,357

4,156

5. Units of accommodation in management Self contained rental stock

GROUP

Total

Hostels and shared housing

Managed by East Thames

Managed by others

Supported housing stock

Managed by East Thames

Managed for others

Managed by others

Selfcontained units

Hostels/ shared housing bedspaces

Temporary social housing

Shared ownership

1 April 2005

11,301

7,114

392

159

180

265

291

21

1,376

1,503

31 March 2006

11,658

7,920

271

162

199

252

87

21

1,152

1,594

23

Notes to the financial statements 31 March 2006

6. Operating surplus This is arrived at after charging: Depreciation of housing properties Depreciation of tangible fixed assets Profit or loss on sale of other fixed assets Operating leases on land and buildings Auditors’ remuneration – for audit services – for non audit services

7. Net interest payable and similar charges Interest receivable Interest payable on loans and leases: – repayable wholly within five years – repayable in more than five years Interest recoverable from other RSLs Interest payable capitalised on housing properties under construction Interest receivable transferred to the capital grant recycling fund

Group 2006 £’000

Group 2005 £’000

Parent 2006 £’000

Parent 2005 £’000

1,000 1,022 – 13,150

1,000 946 31 13,582

– 946 – –

– 462 – –

58 2

63 20

9 –

9 –

Group 2006 £’000

Group 2005 £’000

Parent 2006 £’000

Parent 2005 £’000

127

169

–

–

– (12,966) (12,839) 329

– (11,094) (10,925) 479

– – – –

– – – –

3,232

1,548

–

–

(610) (9,888)

(552) (9,450)

– –

– –

Exceptional item Breakage costs on refinancing the loans portfolio During the year the Group refinanced £197 million out of the total of £251 million of the loans portfolio and incurred £2.3 million of breakage costs which have been charged to the income and expenditure account in the current year.

24

Group 2006

Group 2005

Parent 2006

Parent 2005

511 429 51 4 995

446 317 54 6 823

141 – – – 141

154 – – – 154

Group 2006

Group 2005

Parent 2006

Parent 2005

Number of employees expressed in full time equivalents Administration 517 Care staff 450 Direct labour 47 Wardens, caretakers, cleaners 3 1,017

446 368 56 3 873

122 – – – 122

151 – – – 151

Group 2006 £’000

Group 2005 £’000

Parent 2006 £’000

Parent 2005 £’000

24,111 2,242 1,093 27,446

21,491 1,899 993 24,383

4,033 389 246 4,668

5,269 496 374 6,139

8. Employees Average number of employees Administration Care staff Direct labour Wardens, caretakers, cleaners

Staff costs Wages and salaries Social security costs Other pension costs

25

Notes to the financial statements 31 March 2006

8. Employees (continued)

Social Housing Pension Scheme (SHPS) East Thames Group Limited participates in the Social Housing Pension Scheme (SHPS). SHPS is a multi-employer defined benefit scheme.

The Scheme is funded and is contracted out of the state scheme.

The Trustee commissions an actuarial valuation of the Scheme every three years. The main purpose of the valuation is to determine the financial position of the Scheme in order to determine the level of future contributions required so that the Scheme can meet its pension obligations as they fall due.

The actuarial valuation assesses whether the Scheme’s assets at the valuation date are likely to be sufficient to pay the pension benefits accrued by members as at the valuation date. Asset values are calculated by reference to market levels.

Accrued pension benefits are valued by discounting expected future benefit payments using a discount rate calculated by reference to the expected future investment returns.

During the accounting period East Thames Group Limited paid contributions at the rate of 11.7%.

Group contributions to the scheme in the period amounted to £1,093k (2005: £993k). Member contributions varied between 3.1% and 6.1% depending on their age.

At the balance sheet date there were 311 active members of the Scheme employed by East Thames Group Limited and it continues to offer membership of the Scheme to its employees.

It is not possible in the normal course of events to identify the share of underlying assets and liabilities belonging to individual participating employers.

26

Accordingly, due to the nature of the Plan, the accounting charge for the period under FRS17 represents the employer contribution payable.

The last formal valuation of the Scheme was performed as at 30 September 2002 by a professionally qualified actuary using the “projected unit credit” method. The market value of the Scheme’s assets at the valuation date was £650 million. The valuation revealed a shortfall of assets compared to liabilities of £117 million (equivalent to past service funding level of 85%).

East Thames Group Limited has subsequently been notified of the preliminary results of the triennial valuation carried out on 30 September 2005. This indicates an increase in the assets of the Scheme to £1,278 million and an increase in the shortfall of assets compared with liabilities to £283 million. This valuation, and any consequent alteration to future contribution rates, is currently the subject of consultation with participating employers and members. The outcome of the consultation will be made known in September 2006, and any consequent changes to contribution rates applied from 1 April 2007. The following notes therefore relate to the formal valuation of September 2002.

The financial assumptions underlying the valuation as at 30 September 2002 were as follows: Rate Rate Rate Rate Rate

of of of of of

return on future contributions return on accumulated assets salary increases pension increases price inflation

% pa 6.6 7.2 4.5 2.5 2.5

The long-term joint contribution rate required from employers and members to meet the cost of future benefit accrual was assessed at 15.0% of pensionable salaries.

Following consideration of the results of the actuarial valuation it was agreed that, with effect from 1 April 2004: a) The standard employer contribution rate would be increased from 10.6% to 11.7% of pensionable salaries. b) Member contributions would also be increased by 1.1% from 2.0-5.0% to 3.1-6.1% of pensionable salaries depending on age.

Employers that participate in the Scheme on a non-contributory basis pay a joint contribution rate (i.e. a combined employer and employee rate).

This rate was increased from 15.0% to 17.3% of pensionable salaries with effect from 1 April 2004.

Employers that have closed the Scheme to new members are required to pay an additional employer contribution loading of 3.0% to reflect the higher costs of a closed arrangement.

A small number of employers are required to contribute at a different rate to reflect the amortisation of a surplus or deficit on the transfer of assets and past service liabilities from another pension scheme into the SHPS Scheme.

New employers that joined the Scheme after 30 September 2002 without any past service liability pay an employer contribution rate of 9.4% of pensionable salaries. This rate will apply until 1 April 2007, after which it will change to the standard employer contribution rate per the actuarial valuation due to take place as at 30 September 2005.

Following a change in legislation in September 2005 there is a potential debt on the employer that could be levied by the Trustee of the Scheme.

The debt is due in the event of the employer ceasing to participate in the Scheme or the Scheme winding up.

The debt for the Scheme as a whole is calculated by comparing the liabilities for the Scheme (calculated on a buyout basis i.e. the cost of securing benefits by purchasing annuity policies from an insurer, plus an allowance for expenses) with the assets of the Scheme. If the liabilities exceed assets there is a buy-out debt.

The leaving employer’s share of the buy-out debt is the proportion of the Scheme’s liability attributable to employment with the leaving employer compared to the total amount of the Scheme’s liabilities (relating to employment with all the currently participating employers). The leaving employer’s debt therefore includes a share of any ‘orphan’ liabilities in respect of previously participating employers. The amount of the debt therefore depends on many factors including total Scheme liabilities, Scheme investment performance, the liabilities in respect of current and former employees of the employer, financial conditions at the time of the cessation event and the insurance buy-out market. The amounts of debt can therefore be volatile over time.

East Thames Group Limited has not been notified by the Pensions Trust of the estimated employer debt on withdrawal from the Plan based on the financial position of the Scheme as at 30 September 2005. As of this date the estimated employer debt for East Thames Group is yet to be ascertained by the Pensions Trust.

Pension Trust – Growth Plan

the expected future investment returns.

East Thames Group Limited participates in the Pensions Trust’s Growth Plan. The Growth Plan is a multi-employer pension plan which is in most respects a money purchase arrangement but it has some guarantees. Contributions paid into the Growth Plan up to and including September 2001 were converted to defined amounts of pension payable from Normal Retirement Date. From October 2001 contributions were invested in personal funds which have a capital guarantee and which are converted to pension on retirement, either within the Growth Plan or by the purchase of an annuity.

East Thames Group Limited offers the Growth Plan as an AVC investment option for members of the Social Housing Pension Scheme. The members pay contributions at a rate of their choice. East Thames Group Limited does not normally pay any contributions to the Growth Plan.

The Plan is funded and is not contracted out of the state scheme. The rules of the Growth Plan allow for the declaration of bonuses and/or investment credits if this is within the financial capacity of the Plan assessed on a prudent basis.

Bonuses/investment credits are not guaranteed and are declared at the discretion of the Plan’s Trustee.

The Trustee commissions an actuarial valuation of the Growth Plan every three years. The main purpose of the valuation is to determine the financial position of the Plan and so determine the future prospects for discretionary bonuses and/or investment credits.

The actuarial valuation assesses whether the Plan’s assets at the valuation date are likely to be sufficient to pay the pension benefits accrued by members as at the valuation date. Asset values are calculated by reference to market levels.

Accrued pension benefits are valued by discounting expected future benefit payments using a discount rate calculated by reference to

It is not possible in the normal course of events to identify the share of underlying assets and liabilities belonging to individual participating employers.

Accordingly, due to the nature of the Plan, the accounting charge for the period under FRS17 represents the employer contribution payable.

The last formal valuation of the Plan was performed at 30 September 2002 by a professionally qualified actuary. The market value of the Plan’s assets at the valuation date was £418 million. The financial assumptions underlying the valuation were as follows: Rate of return on accumulated assets Bonuses on accrued benefits Rate of price inflation

% pa 6.7 0 2.5

The valuation revealed that the assets of the Plan broadly equalled the accrued liabilities as at the valuation date.

The next actuarial valuation will be carried out as at 30 September 2005. The results of the valuation will be available before the end of September 2006.

East Thames Group Limited has not been notified by the Pensions Trust of the estimated employer debt on withdrawal from the Plan based on the financial position of the Plan as at 31 March 2005.

As of this date the estimated employer debt for

27

Notes to the financial statements 31 March 2006

8. Employees (continued)

East Thames Group Limited is yet to be ascertained by the Pensions Trust.

NHS Pension Scheme The NHS Pension Scheme is an unfunded, defined benefit scheme that covers NHS employers, General Practices and other bodies, allowed under the direction of Secretary of State, in England and Wales. As a consequence it is not possible for East Thames Group Limited to identify its share of the underlying scheme liabilities. Therefore, the scheme is accounted for as a defined contribution scheme and the cost of the scheme is equal to the contributions payable to the scheme for the accounting period.

Employers pension costs contributions are charged to operating expenses as and when they become due. Employer contribution rates are reviewed every four years following a scheme valuation carried out by the Government Actuary. On advice from the actuary the contribution may be varied from time to time to reflect changes in the scheme’s liabilities. At the last valuation on which contribution rates were based (31 March 1999) employer contribution rates from 2003–04 were set at 14% of pensionable pay. (Until 2002–03 HMT paid the Retail Price Indexation costs of the NHS Pension scheme direct but as part of the Spending Review Settlement, these costs have been devolved in full. For 2003–04 the additional funding was retained as a Central Budget by DH and was paid direct to the NHS Pension Scheme, whilst the employers’ contribution remained at 7%. From 2004-05 this funding was devolved in full to NHS Pension Scheme employers and the employers’ contribution rate rose to 14%.) The 2004 valuation of the Scheme is currently being prepared.

28

The total employer contribution payable in 200506 was £784k (£602k for 2004-05). In addition employees who are members of the Scheme pay contributions of 6% (manual staff 5%) of their pensionable pay.

In addition the Scheme is subject to a full valuation for FRS17 accounting purposes every four years.

The last valuation on this basis took place as at 31 March 2003. Between valuations, the Government Actuary provides an update of the scheme liabilities on an annual basis. The latest assessment of the liabilities of the Scheme is contained in the Scheme Actuary report, which forms part of the NHS Pension Scheme (England and Wales) Resource Account, published annually.

The Scheme is a “final salary” scheme. Annual pensions are normally based on 1/80th of the best of the last three years pensionable pay for each year of service. A lump sum normally equivalent to three years pension is payable on retirement. Annual increases are applied to pension payments at rates defined by the Pensions (Increase) Act 1971, and are based on changes in retail prices in the twelve months ending 30 September in the previous calendar year. On death, a pension of 50% of the member’s pension is normally payable to the surviving spouse.

Early payment of a pension, with enhancement, is available to members of the Scheme who are permanently incapable of fulfilling their duties effectively through illness or infirmity.

The Scheme also provides for death benefits, with a death gratuity of twice final year pensionable pay for death in service, and up to five times the annual pension for death after retirement payable.

The Scheme provides the opportunity to members to increase their benefits through money purchase Additional Voluntary Contributions (AVCs) provided by an approved panel of life companies.

Under the arrangement the employee can make contributions to enhance their pension benefits.

The benefits payable relate directly to the value of the investments made.

Except for where the retirement is due to illhealth, additional pension liabilities arising from early retirements are met by the Scheme and recharged to the employees former employer.

The full amount of the liability for the additional costs is charged to the Operating Cost Statement at the time the Authority commits itself to the retirement, regardless of the method of payment.

9. Directors, members and senior staff emoluments

The Directors of the parent company as defined under the Accounting Requirements for Registered Social Landlords General Determination 2000 are its Management Board, the Chief Executive and any other person who is a member of the senior management team.

Basic salary £’000

Benefits in kind £’000

Pension contributions £’000

Total 2006 £’000

Total 2005 £’000

Chief Executive June Barnes

123

1

14

138

130

Deputy Chief Executive Martin Heys

102

1

–

103

99

Managing Director – East Homes Ltd Victor da Cunha

88

–

10

98

89

Managing Director – East Living Ltd Martin Van Tol

80

1

9

90

85

Managing Director – East Potential David Chesterton

72

–

9

81

62

Group Director – Development Steven Tarry Frank Vickery Keith Carter

87 – –

1 – –

10 – –

98 – –

39 96 99

Group Director – Corporate Services Davina Boakye

73

1

8

82

77

Group Director – Business Services Jacky Kutner

72

1

8

81

73

Company Secretary Henry Potter

50

–

6

56

51

The Chief Executive is an ordinary member of the pension scheme and has a contractual arrangement with East Thames Group Limited covering additional voluntary contributions (AVC's).

There are no other enhanced pension arrangements to which East Thames Group or any of its subsidiaries make a contribution.

Remuneration paid to committee members for the year amounts to £122,000 (2005: £ Nil).

Expenses paid during the year to members of the Board amounts to £54,937 (2005: £38,804).

No payments of benefits, other than those permitted, were made to the persons referred to in Part 1, Schedule 1 of the Housing Act 1996.

29

Notes to the financial statements 31 March 2006 Housing Housing properties properties held for under letting construction

10. Tangible fixed assets – housing properties Valuation At 1 April 2005 Additions Improvements Interest capitalised Schemes completed Disposals Valuation adjustment At 31 March 2006 Depreciation and impairment At 1 April 2005 Depreciation charged in year Valuation adjustment At 31 March 2006

£’000 334,113 6,124 7,252 50 14,699 (1,527) 3,571 364,282

£’000 42,450 43,611 – 1,484 (14,699) – – 72,846

– 1,065 (1,065) –

Social housing and other grants At 1 April 2005 – Additions 3,330 Schemes completed 6,337 Disposals (449) Valuation adjustment (9,218) At 31 March 2006 – Net book value At 31 March 2006 364,282 At 31 March 2005 334,113

Shared Shared ownership ownership properties properties held for under letting construction £’000 £’000 69,971 41,696 6,050 38,476 – – (127) 1,773 24,013 (24,013) (18,671) – (2,958) – 78,278 57,932

– – – –

– 1,065 (1,065) –

– (474) 4,986 (2,717) (1,795) –

8,810 10,510 (4,986) – – 14,334

42,287 27,496 – (3,166) (11,013) 55,604

31,576 8,973

78,278 69,971

43,598 32,886

517,734 445,943

2006 £’000 7,252 827 8,079

2005 £’000 3,768 1,107 4,875

448,291 – 448,291

439,274 – 439,274

517,379 355 517,734

445,588 355 445,943

Total accumulated capital and revenue social grant receivable Capital grants Revenue grants

30

– – – –

33,477 14,130 (6,337) – – 41,270

Expenditure on works to existing properties Amount capitalised Amounts charged to income and expenditure account

Housing properties comprise: Freehold land and buildings Long leasehold land and buildings

– – – –

Total £’000 488,230 94,261 7,252 3,180 – (20,198) 613 573,338

Completed housing properties held for letting are stated at Existing Use Value for Social Housing (EUV-SH) and shared ownership properties are stated at EUV-SH less the Net Present Liability to repay Social Housing Grant. Housing properties have been valued by professional valuers, FPD

Savills, Chartered Surveyors. The last valuation of completed housing properties was prepared as at 31 March 2006 in accordance with the Appraisal and Valuation Manual of the Royal Institution of Chartered Surveyors. This has resulted in a positive valuation adjustment as follows: £’000

Completed properties at valuation East Homes Limited East Choice Limited

360,260 82,580 442,840

Housing properties under construction at cost East Homes Limited East Choice Limited

51,259 79,239 573,338

In the valuing of housing properties, discounted cash flow methodology was adopted and key assumptions included Discount rate Annual inflation rate Level of annual rent increase

6.0% 2.5% 0.5%

The carrying value of the housing properties that would have been in the financial statements had the assets been carried forward at historical costs less SHG and depreciation is as follows:

Historical cost Social Housing Grant Other capital grants Depreciation and impairment

Investment in HomeBuy: Long term investment in properties (HomeBuy) Less Grants received Grants recycled Decrease in investment in properties

2006 £’000 703,592 (397,011) (51,280) (4,874) 250,427

2005 £’000 680,245 (389,386) (49,888) (4,362) 236,609

2006 £’000 40,794 (40,794) 1,504 (1,504) –

2005 £’000 39,498 (39,498) 732 (732) –

31

Notes to the financial statements 31 March 2006

11. Tangible fixed assets – other

GROUP

Cost At 1 April 2005 Additions Capital grants received

Plant Freehold equipment office & furniture £’000 £’000

Motor vehicles £’000

Total £’000

11,421 3,600 (381) 14,640

7,381 1,252 – 8,633

131 – – 131

18,933 4,852 (381) 23,404

Depreciation At 1 April 2005 Charged in year At 31 March 2006

(3,002) (368) (3,370)

(4,105) (650) (4,755)

(117) (4) (121)

(7,224) (1,022) (8,246)

Net book value At 31 March 2006 At 31 March 2005

11,270 8,419

3,878 3,276

10 14

15,158 11,709

Cost At 1 April 2005 Transferred from East Homes Limited Additions Capital grants received At 31 March 2006

1,319 9,599 1,789 (381) 12,326

2,819 3,808 1,151 – 7,778

– – – – –

4,138 13,407 2,940 (381) 20,104

Depreciation At 1 April 2005 Transfer from East Homes Limited Charged in year At 31 March 2006

– (2,942) (364) (3,306)

(462) (3,271) (582) (4,315)

– – – –

(462) (6,213) (946) (7,621)

Net book value At 31 March 2006 At 31 March 2005

9,020 1,319

3,463 2,357

– –

12,483 3,676

PARENT

32

12. Investments and related party transactions

Passmore Urban Renewal Limited Fixed term treasury deposit Total

2006 £’000 450 1,235 1,685

2005 £’000 450 1,274 1,724

East Homes Limited, together with three other registered social landlords and the London Borough of Newham, has invested in Passmore Urban Renewal Limited. This Industrial and Provident Society has been set up for the promotion of urban regeneration in the London Borough of Newham. At 31 March 2002, East Homes Limited had invested £450,000 in this project. Following the declared intention of the London Borough of Newham to acquire Passmore Urban Renewal Limited and repay the outstanding investment to the other parties at par the investment has been shown at cost.

housing and residential care homes. The parent company has entered into trust arrangements with the members of East Living Limited which require it to classify it as a subsidiary.

The parent company owns one £1 nominal share in East Choice Limited whose main activity is developing and managing shared ownership schemes. The parent company has entered into trust arrangements with the members of East Choice Limited which require it to classify it as a subsidiary. East Choice Limited is a registered social landlord with charitable status, registered with the Housing Corporation.

East Treasury Limited was incorporated on 10 February 2003 to be used as a vehicle for raising Group finance. It commenced trading on 18 March 2006 and has borrowed £197 million on behalf of the Group.

The parent company has a 100% shareholding in East Street Services Limited whose main activity is to undertake property management services for other associations and to deal with other noncharitable housing activities.

East Homes Limited has entered into a lease and leaseback arrangement for the Stratford (Focus E15) Foyer with East Potential, a fellow subsidiary, for a period of 25 years. The net margin passing to East Potential amounts to £5,000 per annum.

The parent company has entered into trust arrangements with the members of East Potential which require it to classify it as a subsidiary. The principal activity of East Potential is the provision of housing management services at the Stratford (Focus E15), Harlow, Redbridge and Drapers Foyers and First Step Assessment Centre and related training and information services to young people in east London and Harlow.

East Regen Limited commenced trading on 1 April 2005 and has provided management and development services for the Group during the year.

The parent company owns one £1 nominal share in East Living Limited whose main activity is providing care and housing management for supported

33

Notes to the financial statements 31 March 2006

13. Stock and work in progress Completed properties for sale to other Registered Social Landlords Properties for sale to other Registered Social Landlords under construction net of Social Housing Grant

14. Debtors Due within one year: Arrears of rent and service charges Less: Provision for bad and doubtful debts Other debtors Prepayments and accrued income Amounts due from group companies (net of provisions)

15. Cash at bank and in hand

34

Group 2006 £’000

Group 2005 £’000

4,700

8,385

14,224 18,924

3,024 11,409

Group 2006 £’000

Group 2005 £’000

Parent 2006 £’000

Parent 2005 £’000

3,762 (1,934) 1,828 3,717 1,117 – 6,662

3,672 (1,827) 1,845 4,495 1,465 – 7,805

– – – 677 172 37,440 38,289

– – – 497 184 6,739 7,420

Included in cash at bank and in hand are amounts totalling Group: £200,000 (Parent Company: £ Nil) 2005 Group: £200,000 (Parent Company: £ Nil) which are subject to restrictions and are not freely available for general use.

16. Creditors: Amounts falling due within one year Loans (note 18) Bank overdraft Rent and service charges received in advance Social Housing Grants received in advance Amount due to group companies Taxation and social security Accruals and deferred income Other creditors Capital Grant Recycling Fund Disposal Proceeds Fund

Group 2006 £’000

Group 2005 £’000

Parent 2006 £’000

Parent 2005 £’000

666 3,580 1,906 2,739 – 170 9,905 5,661 – 685 25,312

13,546 3,142 1,272 – – 396 4,352 12,440 3,997 1,100 40,245

– 3,276 – – 39,526 (352) 502 2,707 – – 45,659

– 3,142 – – – (75) 789 4,296 – – 8,152

Social Housing Grant received in advance will be utilised against capital expenditure in 2006 - 07.

Payments to creditors The Group’s policy is to pay invoices within 30 days of receipt, or earlier if alternative payment terms have been agreed. The following information has been extracted from the Group’s creditor payment system.

Average number of days between receipt and payment of purchase invoices

17. Creditors: Amounts falling due after more than one year Loans (note 18) Deferred income Capital Grant Recycling Fund Disposal Proceeds Fund Other

Group 2006

Group 2005

9

13

Group 2006 £’000 249,115 1,281 9,883 932 1,732 262,943

Group 2005 £’000 167,361 1,344 6,148 1,213 1,529 177,595

Deferred income represents the premium on the HACO loan, net of issue costs.

35

Notes to the financial statements 31 March 2006

18. Debt analysis Due within one year: Bank overdraft Bank loans Royal Bank of Scotland (originally the Housing Corporation) loans Other loans

Due after more than one year: Bank loans Royal Bank of Scotland (originally the Housing Corporation) loans Barclays Bank Nationwide Building Society HACO Other loans Capitalised costs

Loans are repayable as follows: Within one year Between one and two years Between two and five years After more than five years

36

Group 2006 £’000

Group 2005 £’000

Parent 2006 £’000

Parent 2005 £’000

3,580 –

3,142 908

3,276 –

3,142 –

28 638 4,246

29 12,609 16,688

– – 3,276

– – 3,142

Group 2006 £’000

Group 2005 £’000

Parent 2006 £’000

Parent 2005 £’000

260

114,717

–

–

5,812 80,884 116,458 25,000 21,614 (913) 249,115

5,839 – – 25,000 22,281 (476) 167,361

– – – – – – –

– – – – – – –

Group 2006 £’000

Group 2005 £’000

Parent 2006 £’000

Parent 2005 £’000

4,246 1,309 2,501 246,217 254,273

16,688 1,603 19,161 147,073 184,525

3,276 – – – 3,276

3,142 – – – 3,142

18. Debt analysis (continued)

During the year new loan arrangements between East Treasury Limited (a member of East Thames Group Limited), Nationwide, Barclays and Barclays Syndicate totalling £400 million were agreed. This facility has been used to refinance our existing loan portfolio and provide significant additional funds for development and other new business initiatives.

At 31 March 2006 East Homes Limited had borrowed £161 million from East Treasury Limited for this purpose. Interest is payable on the new facility borrowings of £161million at fixed rates varying from 4.02% to 4.135% on £31 million and at rates linked to LIBOR on the remaining £130 million.

The consolidated loan from Royal Bank of Scotland is repaid in half-yearly instalments over

the estimated life of the scheme on which the loan is secured, at fixed interest rate of 10.65%.

The final instalments are due for repayment in the period 2006 to 2037.

The HACO £25 million bond is due to be repaid in 2006-07 as part of the refinancing of existing loans. The interest is fixed at 10.625%.

THFC loans totalling £20 million are due to be repaid in 2006-07 as part of the refinancing of existing loans. The interest rates payable range from 5.05% to 5.57%.

The £1.25 million THFC Bond is fixed at 12.97% and is due to be repaid in 2019.

All loans are secured by a combination of fixed and variable charges on individual properties.

19 Annual obligations under operating leases Operating leases on land and buildings which expire: Within one year In the second to fifth years inclusive Over five years

20. Provision for liabilities and charges Dilapidation repair provision

Group 2006 £’000

Group 2005 £’000

2,040 4,109 479

4,184 7,301 1,638

Group 2006 £’000 100

Group 2005 £’000 100

This provision is the estimated cost of restoring properties leased from private landlords to their original condition.

37

Notes to the financial statements 31 March 2006 2006 £

2005 £

Shares of £1 each issued and fully paid At 1 April 2005 Shares issued during the year Shares surrendered during the year

49 2 (4)

49 – –

At 31 March 2006

47

49

21. Non-equity share capital

The shares provide members with the right to vote at general meetings, but do not provide any rights to dividends, redemption of share capital or distribution on winding up.

38

22. Reserves GROUP At 1 April 2005 Surplus for the year Property revaluation adjustment Transfers Utilisations At 31 March 2006

Revaluation £’000 209,333 – 12,691 (1,108) (300) 220,616

PARENT At 1 April 2005 Surplus for the year Transfers Utilisations At 31 March 2006

Restricted reserves comprise: Donations Gift Aid from East Choice Limited to Parent Company East Potential

Designated reserves comprise: Major repairs schemes funded under 1988 legislation Recycled Capital Grant Fund and Disposals Proceeds Fund Gift Aid

Restricted £’000 1,791 – – 58 (65) 1,784

Designated Consolidated £’000 £’000 3,492 263 – – – – (546) – 65 – 3,011 263

Revenue £’000 50,169 1,703 – 1,596 300 53,768

Total £’000 265,048 1,703 12,691 – – 279,442

Restricted Designated £’000 £’000 1,750 481 – – – (546) (65) 65 1,685 –

Revenue £’000 713 2,169 546 – 3,428

Total £’000 2,944 2,169 – – 5,113

Group 2006 £’000 25 1,685 74 1,784

Group 2005 £’000 25 1,750 16 1,791

Parent 2006 £’000 – 1,685 – 1,685

Parent 2005 £’000 – 1,750 – 1,750

Group 2006 £’000 2,068 911 32 3,011

Group 2005 £’000 2,068 911 513 3,492

Parent 2006 £’000 – – – –

Parent 2005 £’000 – – 481 481

The Group plans its financial affairs to ensure that each year revenue income exceeds revenue expenditure. This policy ensures that the Group has a margin of safety to manage unexpected expenditure or shortfalls in income. The annual surpluses ensure that East Thames Group Limited is able to meet its commitment to providers of private finance and continue to provide social housing.

to the income and expenditure account in the current year. The resulting surplus on ordinary activities of £1.7 million and the positive movement on reserves of £1.9 million were added to the reserves brought forward of £50.2 million resulting in £53.8 million being carried forward. The benefits of this refinancing package will be reflected in lower interest and administration costs in future years.

In the year ended 31 March 2006 the Group refinanced £197 million out of a total loan portfolio of £251 million. This refinancing was undertaken to secure the future financing needs of the Group on favourable terms over the next 35 years. The breakage costs of this refinancing arrangement totalling £2.3 million were charged

Unlike commercial organisations the Group's rules prevent the distribution of reserves. Instead these are applied to furthering our aims and objectives.

At 31 March 2006 the Group's reserves were all used in financing investments in social housing.

39

Notes to the financial statements 31 March 2006

23. Financial commitments Capital Commitments Expenditure contracted for but not provided in the accounts Expenditure authorised by the Board but not contracted for

24. Contingent liabilities

Group 2005 £’000

105,860 90,448 196,308

50,649 12,515 63,164

Parent 2005 £’000 562 462 – – – 1,024

The Group had no contingent liabilities at 31 March 2006 (2005: £ Nil)

25. Reconciliation of operating surplus to operating cash flows Operating surplus Depreciation of fixed assets Surplus on sale of other fixed assets Cost of property sales Net increase/(decrease) in provisions Movement in Working Capital Decrease in investments Increase in stock Decrease/(increase) in debtors Increase/(decrease) in creditors Net cash inflow from operating activities

40

Group 2006 £’000

Group 2006 £’000 9,573 2,088 – (10) 107 11,758

Group 2005 £’000 9,564 1,946 31 – (522) 11,019

Parent 2006 £’000 2,169 946 – – – 3,115

39 (7,515) 1,036 (41) 5,277

– (3,991) 1,101 (3,157) 4,972

– – (30,869) 30,178 2,424

– – (6,394) 4,643 (727)

26. Reconciliation of net cash flow to movement in net debt

Increase/(decrease) in cash in the period Cash inflow from increase in debt and lease financing Change in net debt resulting from cash flows Net debt at the start of the period Net debt at the end of the period

27. Analysis of net debt Cash at bank and in hand Bank overdraft Loans due within one year Loans due after more than one year

Group 2006 £’000 2,798 (69,310) (66,512)

Group 2005 £’000 (1,018) (25,583) (26,601)

Parent 2006 £’000 (134) – (134)

Parent 2005 £’000 (4,124) – (4,124)

(180,127) (246,639)

(153,526) (180,127)

(3,142) (3,276)

982 (3,142)

Group 2006 £’000 7,634 (3,580) (666) (250,027) (246,639)

Group 2005 £’000 4,398 (3,142) (13,546) (167,837) (180,127)

Parent 2006 £’000 – (3,276) – – (3,276)

Parent 2005 £’000 – (3,142) – – (3,142)

41

42

Our mission, key aims and values Our mission

Our key aims

To make a positive and lasting contribution to the neighbourhoods in which we work.

We deliver on our mission by: 1 providing high quality homes and services that meet the needs of our customers; 2 ensuring that our customers can influence our services; 3 influencing local, regional and national thinking, policies and strategies; 4 developing well-informed, committed and enthusiastic staff; and 5 actively using our financial and organisational strength.

Our values

We will be customer focused: • responding to what our customers say; • providing excellent and reliable services; and • enabling customer choice.

We will be ambitious: • creating new approaches to service delivery; • producing excellent outcomes; and • striving for excellence in everything we do.

We will be professional: • being straightforward in everything we do; • adopting a flexible approach to delivering services; • demonstrating a respectful approach to our customers; and • being open, reliable and consistent.

We will be leaders: • empowering our staff to act responsibly; • showing creativity in service provision; • inspiring those who work with us; and • campaigning on key issues.

43

Registered Office: 3 Tramway Avenue Stratford London E15 4PN Switchboard: 020 8522 2000 Customer Contact Centre: 0845 600 0830 Minicom: 020 8522 2006 Fax: 020 8522 2001 www.east-thames.co.uk Registered by the Housing Corporation, No. LH4309 Registered under the Companies Act 1985, No 4091100 Registered charity 1084952 Member of the National Housing Federation