Annual Report & Accounts 2002 National provider of facilities and support services Contents 1 Corporate Statement & Financial Highlights 2 Mears at a Glance 4 Chairman’s Statement 7 Financial Review 8 Board of Directors & Advisers 9 Report of the Directors 11 Corporate Governance 13 Report of the Auditors 14 Principal Accounting Policies 16 Consolidated Profit & Loss Account 17 Consolidated Balance Sheet 18 Company Balance Sheet 19 Consolidated Cash Flow Statement 20 Notes to the Financial Statements 31 Notice of the Annual General Meeting Financial Calendar Annual General Meeting Record date for final dividend Dividend warrants posted to shareholders Interim results announced 4 June 2003 6 June 2003 1 July 2003 2 September 2003 Mears Group PLC | Annual Report & Accounts 2002 1 Corporate Statement & Financial Highlights Our mission is to become the leading Company providing a range of support services profitably to a wide range of customers in the public and private sector. Profit before tax up44% Normalised earnings per share up37% Dividends per share up25% 3,606 4.51 1.00 2,508 1,928 1,069 821 3.30 2.64 1.63 1.56 0.80 0.65 0.50 0.40 98 99 00 01 02 profit before tax £’000 98 99 00 01 02 earnings per share p 98 99 00 01 02 dividends per share p 2 Mears Group PLC | Annual Report & Accounts 2002 Mears at a Glance Type of service public sector services Service description The majority of the Group’s business continues to be in the provision of a range of maintenance services in the social housing sector on a national basis. Our work involves forging long-term relationships and developing the business through partnership arrangements. mechanical and electrical services The business operates in the housing, education and healthcare sectors providing primarily fast-track mechanical and electrical fit-out services to private and public sector customers. Brand providing service Mears Social Housing Haydon and Company Mears Group PLC | Annual Report & Accounts 2002 3 facility management Type of service Service description The business provides a total building management service to its customers where we manage a large range of services. vehicle collection and delivery United Fleet Distribution (UFD) provides a vehicle collection and delivery service for commercial customers who typically own a large vehicle fleet. The customers who comprise leasing companies, utility companies and fleet managers require that their end of lease vehicles be collected and delivered to either auction houses or motor retailers. UFD operates in excess of 500 trade plated drivers who collect and deliver vehicles on a national basis. United Fleet Distribution Mears Facility Management Brand providing service 4 Mears Group PLC | Annual Report & Accounts 2002 Chairman’s Statement I am again pleased to announce record profits for the year ended 31 December 2002. Profits before tax and amortisation were up 43.1% at £3,764,507 (2001: £2,631,153) on turnover up 15.0% at £78,833,997 (2001: £68,579,597). Earnings per share before amortisation increased by 35.7% to 4.79p (2001: 3.53p assuming a full tax charge). Net profit margins rose to 4.57% up from 3.66% in the previous year and have increased in each of the last three years. The Board recommends a final dividend of 0.75p per share making a total dividend for the year of 1.0p per share, an increase of 25% from the previous year (2001: 0.8p per share). The final dividend is payable on 1 July 2003 to shareholders on the register on 6 June 2003. Trading review The Group has enjoyed significant opportunities for growth at improved rates where customers have bought a quality ‘value for money’ service. We continue to develop long-term partnership strategies with our customers and have strengthened further our relationships in all the core markets in which we operate. Each of the divisions of the Group traded ahead of expectations, and the non-cyclical nature of the core business is underpinned by long-term contracts which provide highly visible and robust revenues and earnings. The order book currently stands at £300 million which includes £165 million of future revenues at fixed net margins. The Group continues to enjoy buoyant trading conditions in most areas. In the public sector from where the majority of turnover derives, the central government initiatives to improve the condition of the social housing stock continue to bring significant opportunities. During the year the Group was awarded contracts by Wigan and Leigh Housing, Elmbridge Housing Trust, Warwickshire County Council and Stonebridge Housing Action Trust demonstrating our ability to win long-term partnership arrangements where the quality of the service provided is paramount. It should be remembered that the Group provides ‘essential support services’ and is not subject in the core business to any aspect of discretionary spending from its customers. Cash continued to be managed well with the generation of £3.0 million of net cash inflow in the period. The Group has no borrowings and had cash in the bank of £5.6 million at the end of the year. Operations The Group operates principally in four sectors. Public sector services By far the largest part of the Group is the provision of a range of maintenance services to the social housing and central government sectors. The sector provides us with significant long-term contracts with local authorities, registered social landlords, housing associations and government. The Group provides a mixture of both rapid response and planned maintenance services on long-term contracts, to deliver a total quality outsourced building maintenance service. The contracts are let on a basis where the Group does not compete with any other service provider and the customer simply utilises a growing amount of services throughout the contract period. As the contracts near the end of their duration the Group has demonstrated an excellent record of contract retention and renewal. The Government has committed significant resources to improve the country’s social housing stock and the Group is in “Order book stands at £300 million” Mears Group PLC | Annual Report & Accounts 2002 5 negotiations with a number of local authorities regarding service provision. Mechanical and electrical services The business provides mechanical and electrical services in the housing, education and healthcare sectors. The business operates as Haydon and Company Limited and has been in existence for 120 years building on excellent relationships with its customers. The expansion of the business into school and hospital works has broadened the sector involvement away from the reliance upon housing. Whilst the London based housing business has performed excellently, we are confident that any downturn in the housing market would be compensated by the ability of Haydon to expand into the other sectors in which it operates. Facility management The business provides a total building management service to its customers where we manage a large range of services. The Company which was a start up in September 2001 has performed in line with expectations in the year. The Company was loss making but was successful in building a solid customer base from where to develop a robust profitable contribution to the Group. The Company is expected to break-even in the current year. Vehicle collection and delivery United Fleet Distribution (UFD) provides a vehicle collection and delivery service for commercial customers who typically own a large vehicle fleet. The customers who comprise leasing companies, utility companies and fleet managers require that their end of lease vehicles be collected and delivered to either auction houses or motor retailers. UFD operates in excess of 500 trade plated drivers who collect and deliver vehicles on a national basis. UFD holds some of the largest contracts in the UK for these services and operates from eight locations which provide storage and vehicle inspection services. The business is the market leader for trade plated driver services in the UK and has enjoyed significant growth in 2002. Strategy and expansion In the year the Group invested in FITE IT Limited (FITE) an Information Technology (IT) maintenance business buying 49% of FITE, a central London based Company who provide IT response maintenance to small businesses. Nick Lawrence and the team are to be congratulated for their excellent start to life as part of the Mears Group. I look forward to bringing you news of the progress of FITE in the future. In December the Group acquired M&T Group Limited (M&T) and in turn welcomed back into the business Mike Turl, one of the founders of Mears. Those who know the history of the Group will be aware that Mike left the Group in 1998 to pursue other interests. In April 1999 M&T acquired FWA (Southern) Limited and later certain contracts from Mears following our purchase of Haydon in September 1999. We have acquired Mike’s business on an earn-out basis, with the consideration linked to future levels of profitability. In addition Mike is to help build a national painting and decorating services business where the Group has identified significant growth opportunities. I look forward to bringing you news in the future of the regional acquisition strategy we have planned. Throughout the Group we operate a reward based culture with bonus and incentive arrangements in place at all levels. Every employee is encouraged to contribute to a better and “Net cash inflow of £3 million” 6 Mears Group PLC | Annual Report & Accounts 2002 Chairman’s Statement (continued) more cost effective way of working. In the year we increased greatly our commitment to wider social responsibility, sponsoring in excess of 30 local sports clubs, teams and or individuals, living in those communities in which we operate or intend operating in the future. It is our intention to extend our community involvement and in conjunction with the organisation Business in the Community we commenced a paired reading scheme where employees of the Group visit a local school and are paired with a schoolchild spending up to an hour a week with a child to improve that child’s reading skills. This is the first of a number of initiatives to extend our community based social involvement. In a joint venture with a local based national charity we have committed to send each year six of our junior managers on a sponsored walk of the Great Wall of China to both raise much needed funding whilst at the same time giving the managers a once in a lifetime experience. This initiative is seen as a vital part of the Mears management development program. Through the success of our Group wide accreditation for both Investors in People and the ISO 9002 Quality Management system, there have been national training and development initiatives for all employees. Again, the number of training days recorded in the year exceeded previous years. The Group has a proven, robust and sustainable business model upon which to expand both the size of the Group and the range of services provided. The demand for our services has never been stronger and we continue to seek out those customers who are looking to forge long-term relationships. Our future earnings are highly visible whilst the excellent generation of cash from our operations continues. The record order book demonstrates a commitment to building a long-term business in stable market sectors. This commitment would not be possible without the positive approach to business that our team ethos engenders and all levels of staff are to be commended. Again I should like to express publicly my most sincere congratulations to all those involved in the progress of the Group to date and to applaud those employees who have invested in our third Save As You Earn Share Option Scheme, and given their firm commitment to the future success of the Group – well done. The Board remains optimistic about the future and continues to create an environment where there is good investor interest in the Group. The strategy is simple, we have a business where the attention to detail is paramount. We have demonstrated each and every year that the Group has a robust business model with a conservative and prudent management team who are very capable of growing the earnings year on year. The Group’s biggest assets are its employees and its customers. We are committed to creating a long-term partnership ethos with them. Our Business in the Community initiative and our recent long-term reward schemes for staff demonstrate this commitment. I commend the commitment of staff at all levels and I look forward to being able to report another excellent year of progress in twelve months time. Bob Holt Chairman and Chief Executive 1 April 2003 “The demand for our services has never been stronger” Mears Group PLC | Annual Report & Accounts 2002 7 The profit targets which have been set for M&T Group are achievable with effort and the Group is confident that the acquisition will prove to be earnings enhancing. During 2002 the Group established an Enterprise Management Incentive scheme for the benefit of employees across the Group and the continued contribution by key staff employees remains a cornerstone of the Group’s financial performance. David J Robertson Finance Director 1 April 2003 Financial Review Turnover in the year to 31 December 2002 was up 15%. The growth was spread throughout the Group. It was pleasing to note that both the gross and net margins improved, particularly net margin which increased from 3.7% to 4.6%. This was achieved having absorbed the loss of £0.4 million in Mears Facility Management Ltd. We look forward to further increasing this element of our business and have targeted it to break-even in 2003. The net margin improvement reflects our continued investment in financial control with a greater internal audit presence and a large spend on computer hardware and software. Both these elements are essential tools to control a high volume, low value business. Margins have benefited from the greater incidence of open book contracts with guaranteed margins. The Group’s focus on cash continues unabated. The Group maintained a positive cash position from the end of January 2002 rising to a net funds position at the year end of £5.6 million. This reflects in the interest credit in 2002 and I am pleased to report that the Group still holds a healthy positive cash position. The Group is now paying corporation tax at the full rate of 30% as the losses which were generated by Haydon and Company Limited in 1999 and early 2000 have now been fully utilised. The net assets of the Group now stand at £9.5 million with the net current assets rising by £1.3 million to £4.6 million. The acquisition of M&T Group Limited resulted in a net cash outflow of £0.4 million within an overall Group inflow in 2002 of £3.0 million. The integration of M&T Group is progressing extremely well with new market opportunities being explored. “Margins have benefited from the greater incidence of open book contracts with guaranteed margin” 8 Mears Group PLC | Annual Report & Accounts 2002 Board of Directors & Advisers Bob Holt (48) Chairman and Chief Executive Bob was appointed Chairman in February 1996 prior to flotation in October 1996. He has a background in developing support service businesses. He has operated in the service sector since 1981 initially in a financial capacity then moving into general management. He is a member of the Audit and Remuneration Committees. Registered office The Leaze Salter Street Berkeley Gloucestershire GL13 9DB Tel: 01453 511911 www.mearsgroup.co.uk He is also Chairman of Staffing Ventures plc and Wyatt Group PLC. Company registration number 3232863 David J Robertson (47) Finance Director After attending Edinburgh University, David qualified as a Scottish Chartered Accountant in 1979. He spent time in Imperial Tobacco and Lloyds Bank before joining MITIE Group PLC in 1991, where he was Finance Director of MITIE Cleaning for over six years during a period of rapid expansion. He joined the Group in 1997 as Finance Director and is a member of the Audit Committee. Phillip L Molloy (33) Executive Director Phillip has a background in recruitment where he worked as a consultant for an employment agency in the early 90’s. Most of Phillip’s working life has been as Managing Director of United Fleet Distribution (UFD) which under his control and ownership became the leading provider of driven vehicle delivery services. He joined Mears in 1998 upon the acquisition of UFD and heads up the Group’s marketing activities. Michael A Macario (65) Non-Executive Director Michael is a Chartered Accountant and a director of a number of public and private companies. He joined Mears in 1996 upon flotation and is Chairman of the Group’s Audit Committee. Reginald B Pomphrett (59) Company Secretary and Non-Executive Director Reg has been involved in corporate finance for over 30 years and is director of a number of companies. He is a Chartered Secretary and a member of the Securities Institute. He joined Mears in 1996 and is Chairman of the Group’s Remuneration Committee. Bankers Barclays Bank PLC 18 Southgate Street Gloucester GL1 2DJ Tel: 01452 365353 Solicitors BPE St James’s House St James’ Square Cheltenham GL50 3PR Tel: 01242 224433 Auditors Grant Thornton Registered Auditors Chartered Accountants The Quadrangle Imperial Square Cheltenham GL50 1PZ Tel: 01242 633200 Nominated adviser and stockbroker Arbuthnot Old Mutual Place 2 Lambeth Hill London EC4 4GG Tel: 020 7002 4600 Mears Group PLC | Annual Report & Accounts 2002 9 Report of the Directors The Directors present their report together with consolidated financial statements for the year ended 31 December 2002. Principal activities The principal activities of the Group are the provision of maintenance, mechanical and electrical services and motor vehicle distribution. The principal activity of the Company is to act as a holding company. Business review An overall review of the business is given in the Chairman’s statement and Financial review. The consolidated profit for the year after taxation and minority interests amounted to £2,529,268 (2001: £2,140,055). The Directors recommend dividends absorbing £565,325 (2001: £444,131), leaving £1,963,943 (2001: £1,695,924) retained. Directors The present membership of the Board is set out below. R B Pomphrett and D J Robertson retire by rotation and, being eligible, offer themselves for re-election. The base salaries and beneficial interests of the Directors in the shares of the Company at 31 December 2002 and at 1 January 2002 were as follows: R Holt D J Robertson P L Molloy M A Macario R B Pomphrett Salary Ordinary shares 31 December 2002 £ 31 December 2001 £ 31 December 2002 Number 1 January 2002 Number 125,000 110,000 5,200,000 5,200,000 95,000 85,000 300,000 200,000 130,000 123,600 4,400,000 4,722,615 15,000 15,000 12,000 12,000 200,000 200,000 200,000 200,000 R Holt and D J Robertson participate in a bonus scheme based on the inflation adjusted growth in earnings per share. The percentage growth is applied to their base salaries. P L Molloy participates in a bonus scheme based on individual performance against budget. The maximum bonus potential is set at 50% of base salary. No Director had, during or at the end of the year, a material interest in any contract which was significant in relation to the Group’s business. The Company has granted options to Directors. Details of these options are given in note 15 to the financial statements. Directors’ responsibilities for the financial statements United Kingdom company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. In preparing those financial statements, the Directors are required to: ! select suitable accounting policies and then apply them consistently; ! make judgements and estimates that are reasonable and prudent; ! state whether applicable accounting standards have been followed, 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 Group will continue in business. The Directors are responsible for maintaining proper accounting records, for safeguarding the assets of the Group and for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for ensuring that the Directors’ report and other information included in the annual report is prepared in accordance with company law in the United Kingdom. 10 Mears Group PLC | Annual Report & Accounts 2002 Report of the Directors Directors’ responsibilities for the financial statements (continued) The maintenance and integrity of the web site is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the information contained in the financial statements since they were initially presented on the web site. 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. Payment policy The Company acts purely as a holding company and as such is non-trading. Accordingly no payment policy has been defined. However, the policy for Group trading companies is to set the terms of payment with suppliers when agreeing the terms of the transaction, to ensure suppliers are aware of these terms so that they abide by them. Group trade creditors during the year amounted to 48 days (2001: 54 days) of average supplies for the year. Substantial shareholdings On 21 March 2003 the following shareholders held 3% or more of the issued share capital of the Company: Unicorn Asset Management Limited R Holt P L Molloy Newton Investment Management Limited Close Investment Limited Gartmore Investment Management Rathbone Brothers & Company Limited Standard Life Investments Limited Orbis Trustees Guernsey Limited Number of ordinary shares Percentage of issued ordinary shares 7,127,370 5,200,000 4,400,000 4,101,651 2,352,575 2,329,018 2,317,180 2,300,000 1,750,000 12.6% 9.2% 7.8% 7.3% 4.2% 4.1% 4.1% 4.1% 3.1% In addition to the above shareholdings, a total of 2,223,267 ordinary 1p shares representing 3.9% of the issued share capital are held by other employees of the Group. The Group actively encourages wider share ownership by its employees and the Group’s Save As You Earn (SAYE) share scheme share option plans have been well received. Disabled employees Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. It is the policy of the Group that the training, career development and promotion of disabled persons should, as far as possible, be identical to that of other employees. Employee consultation The Group has received recognition under the Investors in People Award. The Group continues to involve its staff in the future development of the business. The Group operates a Stakeholder Pension Plan available to all employees. The Group operates a SAYE scheme, an Executive Share Option scheme and an Enterprise Management Incentive scheme, details of which are given in note 15 to the financial statements. CREST Mears Group PLC share dealings have been settled on CREST since 1997. CREST is the computerised system for the settlement of share dealings on the London Stock Exchange. CREST reduces the amount of documentation required and also makes the trading of shares faster and more secure. CREST enables shares to be held in an electronic form instead of the traditional share certificates. CREST is voluntary and shareholders can keep their share certificates if they wish, this may be preferable for shareholders who do not trade in shares on a frequent basis. Auditors Grant Thornton, who have been the Group’s auditors since 1994, offer themselves for reappointment as auditors in accordance with Section 385 of the Companies Act 1985. On behalf of the Board R B Pomphrett Director and Secretary 1 April 2003 Mears Group PLC | Annual Report & Accounts 2002 11 Corporate Governance Introduction The Board of Mears Group PLC is committed to achieving good standards of corporate governance, integrity and business ethics for all activities. Under the rules of the Alternative Investment Market, the Group is not required to comply with the Combined Code. However, the Group has taken steps to comply with the Combined Code in so far as it can be applied practically, given the size of the Group and the nature of its operations. Board of Directors The Board of Directors, comprising three Executive Directors and two independent Non-Executive Directors, meets regularly throughout the year. They also meet on a regular basis with Directors of the subsidiary companies. This forum provides the principal format for directing the business of the Group. It is the opinion of the Board that the Non-Executive Directors are independent of management and free from any business or other relationships which could materially interfere with the exercise of their independent judgement. The Non-Executive Directors provide a strong independent element to the Board and bring experience at a senior level of business operations and strategy. All Directors have access to the Company Secretary, who is responsible for ensuring that Board procedures and applicable rules and regulations are observed. Board Committees The Board has delegated authority to two Committees. The Chairman of each Committee provides a report of any meeting of that Committee at the next Board meeting, and the Chairmen of each Committee are present at the Annual General Meeting to answer questions from shareholders. Brief details are set out below. Audit Committee The Audit Committee comprises R Holt and D J Robertson and is chaired by M A Macario. The purpose of the Committee is to ensure the preservation of good financial practices throughout the Group; to monitor that controls are in force to ensure integrity of financial information; to review the interim and annual financial statements; and to ensure compliance with accounting standards and generally accepted accounting principles. In addition, the fees and objectivity of the Group’s auditors are considered by the Committee. Detailed presentations to the Committee are made by the Group’s auditors. The presence of other senior Executives from the Group may be requested. Remuneration Committee The Remuneration Committee comprises both Non-Executive Directors and is chaired by R B Pomphrett. The Committee is responsible for the Executive Directors’ remuneration and other benefits and terms of employment, including performance related bonuses and share options. The Company and its shareholders The Board remains committed to ongoing dialogue with its shareholders. The Group has continued to increase its awareness to the investing public at large and was represented at a series of Investor Relations exhibitions, where shareholders welcomed the opportunity to both meet the management team and improve their understanding of the Group. The principal methods of communication with private investors remain the Annual Report and Accounts, the Interim Statement, the Annual General Meeting, the quarterly newsletter and the Group’s web site. Internal control and risk management The Board is ultimately responsible for the Group’s system of internal control and for reviewing its effectiveness. Such systems are designed to manage rather than eliminate risks, and can only provide reasonable and not absolute assurance against misstatement or loss. The Group has established procedures for all business units to operate appropriate and effective risk management. They place clear responsibility for risk management and the Company endeavours to ensure that the appropriate controls, systems and training are in place. A comprehensive budgetary process is completed once a year and is reviewed and approved by the Board. The Group’s results as compared to the budget and prior year are reported to the Board on a monthly basis, with remedial action taken when appropriate. The Board routinely reviews the effectiveness of the system of internal control and risk management to ensure controls react to changes in the Group’s overall risk profile. The Group maintains appropriate insurance cover and reviews the adequacy of the cover regularly. There are clearly defined procedures for reviewing and approving all bids, acquisitions and capital expenditure within the Group. 12 Mears Group PLC | Annual Report & Accounts 2002 Corporate Governance Social responsibility The Group recognises the importance of supporting the communities around its branches together with its environmental responsibilities. In the year, the Group increased greatly its commitment to local communities, sponsoring in excess of thirty local sports clubs and or individuals. Remuneration policy The remuneration policy is set by the Remuneration Committee and is described below. Individual remuneration packages are determined by the Board within the framework of the following policy. The Directors’ remuneration packages comprise the following components: ! Annual salary – the actual salary for each of the Executive Directors is determined by the Remuneration Committee; these salaries reflect experience and sustained performance of the individuals to whom they apply, also taking into account market competitiveness. ! Annual bonus – the Chairman and Finance Director are entitled to bonuses related solely to the achievement of the targeted performance of earnings per share. The other Executive Director is entitled to an annual bonus related to achievement of targeted measures relevant to his particular area of responsibility. In addition the grant of share options is supervised by the Remuneration Committee which also determines whether any performance targets will apply to the grant and/or exercise of options. ! Defined contribution pension schemes. ! Benefits in kind – such as car and health benefits. The Directors emoluments in 2002 are disclosed within the Directors’ report and note 3 of the financial statements. The UK Directors’ Remuneration Report regulations 2002 require the inclusion in the Annual Review of a graph showing Total Shareholder Return (TSR) over a five year period in respect of a holding of the Company’s shares, plotted against the total shareholder return in respect of a hypothetical holding of shares of a similar kind. The graph set out below uses the AIM index as the benchmark. The Group is not required to comply with the regulations, however the Group has taken steps to comply where possible. Historical TSR performance Growth in value of a hypothetical £100 holding in Mears Group PLC shares over five years Mears Group PLC | Annual Report & Accounts 2002 13 Report of the Auditors We have audited the financial statements of Mears Group PLC for the year ended 31 December 2002 which comprise the principal accounting policies, the consolidated profit and loss account, the balance sheets, the consolidated cash flow statement and notes 1 to 25. 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 Directors and auditors The Directors’ responsibilities for preparing the Annual Report and the financial statements in accordance with United Kingdom law and accounting standards are set out in the statement of Directors’ responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and United Kingdom auditing standards. 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 Directors’ report 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 and transactions with the Company is not disclosed. We read other information contained in the Annual Report including the corporate governance statement and consider whether it is consistent with the audited financial statements. This other information comprises only the Directors’ report, the Chairman’s statement, the Financial review and the corporate governance statement. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion as to the effectiveness of the Group’s corporate governance procedures or its risks and control procedures. Our responsibilities do not extend to any other information. Basis of opinion We conducted our audit in accordance with United Kingdom auditing standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements give a true and fair view of the state of the affairs of the Company and the Group as at 31 December 2002 and of the profit for the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985. Grant Thornton Registered Auditors Chartered Accountants Cheltenham 1 April 2003 14 Mears Group PLC | Annual Report & Accounts 2002 Principal Accounting Policies Basis of preparation The financial statements have been prepared in accordance with applicable United Kingdom accounting standards and under the historical cost convention. The principal accounting policies of the Group are set out below. They remain unchanged from the previous year. Basis of consolidation The Group financial statements consolidate those of the Company and its subsidiary undertakings (see note 10) drawn up to 31 December 2002. Acquisitions of subsidiaries are dealt with by the acquisition method of accounting. The Company is entitled to merger relief offered by section 131 of the Companies Act 1985 in respect of the consideration received in excess of the nominal value of the equity shares issued in connection with the acquisition of Mears Building Contractors Limited, an acquisition made in the year ended 31 December 1996. Associates The Group financial statements incorporate the associate under the equity method of accounting. In the consolidated balance sheet the investment in associate is stated at the Group’s share of net assets including goodwill less amounts written off. The Company balance sheet shows the investment in the associate at cost. Goodwill Goodwill arising on consolidation and purchased goodwill, representing the excess of the fair value of the consideration given over the fair values of the identifiable net assets acquired, is capitalised and is amortised on a straight line basis over its estimated useful economic life of 20 years. Tangible fixed assets and depreciation Tangible fixed assets are included at cost, net of depreciation. Depreciation is calculated to write down the cost less estimated residual value of all tangible fixed assets, other than freehold land, over their estimated useful economic lives. The rates generally applicable are: Freehold buildings Leasehold improvements Plant and machinery Fixtures, fittings and equipment Motor vehicles – 2% per annum, straight line – over the period of the lease, straight line – 25% per annum, reducing balance – 25% per annum, reducing balance – 25% per annum, reducing balance Investments Investments are included at cost. Stocks Stocks and work in progress are stated at the lower of cost and net realisable value. Cost includes materials and direct labour. Long-term contracts The attributable profit on long-term contracts is recognised once their outcome can be assessed with reasonable certainty. The profit recognised reflects the proportion of work completed to date on the project. Costs associated with long-term contracts are included within stock to the extent that they cannot be matched with contract work accounted for as turnover. Full provision is made for losses on any contracts or work in progress in a period that a loss is first foreseen. Mears Group PLC | Annual Report & Accounts 2002 15 Deferred taxation Deferred tax is recognised on all timing differences where the transactions or events that give the Group an obligation to pay more tax in the future, or a right to pay less tax in the future, have occurred by the balance sheet date. Deferred tax assets are recognised where it is more likely than not that they will be recovered. Deferred tax is measured using rates of tax that have been enacted or substantively enacted by the balance sheet date. Turnover Turnover is the total amount receivable by the Group for goods supplied and services provided, and contract work completed during the year, excluding VAT and trade discounts. Retirement benefits The pension costs charged against profits are the contributions payable to individual policies in respect of the accounting period. Leased assets All leases are operating leases and the total payments made under them are charged to the profit and loss account on a straight line basis over the lease term. Financial instruments Income and expenditure arising on financial instruments is recognised on an accruals basis, and credited or charged to the profit and loss account in the financial period to which it relates. Interest differentials, under which the amounts and periods for which interest rates on borrowings are varied, are reflected as adjustments to interest payable. 16 Mears Group PLC | Annual Report & Accounts 2002 Consolidated Profit & Loss Account for the year ended 31 December 2002 Turnover Continuing operations Acquisitions Cost of sales Gross profit Continuing operations Acquisitions Administrative expenses Operating profit Continuing operations Acquisitions Share of operating profit in associate Net interest Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit on ordinary activities after taxation Equity minority interests Profit for the financial year Dividends Profit retained Earnings per share Basic Basic – normalised Diluted Note 2002 £ 2002 £ 2001 £ 2001 £ 1 78,535,297 298,700 68,579,597 — 78,833,997 (58,758,960) 68,579,597 (51,638,639) 20,028,667 46,370 16,940,958 — 20,075,037 (16,562,778) 16,940,958 (14,362,652) 3,512,259 — 2,578,306 — 3,512,259 7,609 3,519,868 86,321 3,606,189 (1,112,007) 2,494,182 35,086 2,529,268 (565,325) 1,963,943 4.51p 4.51p 4.36p 2 1 4 5 6 16 7 7 7 2,578,306 — 2,578,306 (69,908) 2,508,398 (378,500) 2,129,898 10,157 2,140,055 (444,131) 1,695,924 4.00p 3.30p 3.61p There were no recognised gains or losses other than the profit for the financial year. All activities are continuing. The accompanying accounting policies and notes form an integral part of these financial statements. Consolidated Balance Sheet at 31 December 2002 Fixed assets Intangible assets Tangible assets Investments – associates Investments – other Current assets Stocks Debtors Cash at bank and in hand Creditors: amounts falling due within one year 13 (18,129,054) Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year 14 Capital and reserves Called up share capital Share premium account Profit and loss account Equity shareholders’ funds Equity minority interests 15 16 16 17 The financial statements were approved by the Board of Directors on 1 April 2003. Mears Group PLC | Annual Report & Accounts 2002 17 Note 2002 £ 2002 £ 2001 £ 2001 £ 8 9 10 10 5,433,006 1,641,095 36,944 61,927 11 1,266,334 12 15,919,547 5,565,728 22,751,609 2,243,136 1,360,633 — 55,677 7,172,972 3,659,446 1,232,170 15,739,056 4,576,203 21,547,429 (18,194,870) 4,622,555 11,795,527 (2,260,000) 9,535,527 565,405 2,969,684 6,023,673 9,558,762 (23,235) 9,535,527 3,352,559 7,012,005 — 7,012,005 537,352 2,397,851 4,059,730 6,994,933 17,072 7,012,005 R Holt Director D J Robertson Director The accompanying accounting policies and notes form an integral part of these financial statements. 18 Mears Group PLC | Annual Report & Accounts 2002 Company Balance Sheet at 31 December 2002 Fixed assets Investments Current assets Debtors Note 10 2002 £ 2002 £ 2001 £ 2001 £ 9,181,903 5,286,513 12 2,368,558 2,368,558 Creditors: amounts falling due within one year 13 (4,393,005) Net current liabilities Total assets less current liabilities Creditors: amounts falling due after more than one year 14 Capital and reserves Called up share capital Share premium account Profit and loss account Equity shareholders’ funds 15 16 16 The financial statements were approved by the Board of Directors on 1 April 2003. 3,347,618 3,347,618 (5,215,046) (2,024,447) 7,157,456 (2,260,000) 4,897,456 565,405 2,969,684 1,362,367 4,897,456 (1,867,428) 3,419,085 — 3,419,085 537,352 2,397,851 483,882 3,419,085 R Holt Director D J Robertson Director The accompanying accounting policies and notes form an integral part of these financial statements. Mears Group PLC | Annual Report & Accounts 2002 19 Consolidated Cash Flow Statement for the year ended 31 December 2002 Net cash inflow from operating activities Returns on investments and servicing of finance Interest received Interest paid Net cash inflow/(outflow) from returns on investments and servicing of finance Taxation paid Capital expenditure Purchase of tangible fixed assets Sale of tangible fixed assets Purchase of investment Net cash outflow from capital expenditure Acquisitions Purchase of subsidiary undertakings Net cash acquired with subsidiary undertakings Net cash outflow from acquisitions Equity dividends paid Financing Issue of shares Repayment of borrowings Net cash inflow/(outflow) from financing Increase in cash The financial statements were approved by the Board of Directors on 1 April 2003. Note 2002 £ 2001 £ 18 4,743,346 4,288,850 86,109 3,112 (3,158) (76,617) 82,951 (73,505) (537,920) (104,912) (730,616) (665,169) 17,000 38,373 (36,250) — (749,866) (626,796) (836,780) 478,657 (358,123) — — — (478,683) (373,771) 251,276 111,275 — (1,100,040) 251,276 (988,765) 19 2,952,981 2,121,101 20 Mears Group PLC | Annual Report & Accounts 2002 Notes to the Financial Statements for the year ended 31 December 2002 1. Turnover and profit on ordinary activities before taxation Turnover and profit on ordinary activities before taxation are attributable to the following activities carried out entirely within the UK. Turnover Profit before taxation Net assets 2002 £ 2001 £ 2002 £ 2001 £ 2002 £ 2001 £ Maintenance, mechanical and electrical services 62,915,818 59,775,925 2,530,601 1,914,434 8,207,580 5,925,985 Vehicle collection and delivery 15,918,179 8,803,672 1,075,588 593,964 1,327,947 1,086,020 78,833,997 68,579,597 3,606,189 2,508,398 9,535,527 7,012,005 Profit on ordinary activities is stated after: Auditors’ remuneration – audit services – non-audit services Amortisation of goodwill Depreciation Hire of plant and machinery Other operating lease rentals 2. Net interest On bank loans and overdrafts Other interest receivable and similar income 3. Directors and employees Staff costs during the year were as follows: Wages and salaries Social security costs Other pension costs The average number of employees of the Group during the year was: Site workers Office & management 2002 £ 2001 £ 47,900 22,560 158,318 451,669 467,735 40,800 11,800 122,755 328,643 403,707 2,496,121 2,033,570 2002 £ 2001 £ (788) (73,334) 87,109 3,426 86,321 (69,908) 2002 £ 2001 £ 18,021,462 16,312,189 1,688,754 1,448,627 366,728 212,904 20,076,944 17,973,720 2002 580 318 898 2001 539 286 825 Mears Group PLC | Annual Report & Accounts 2002 21 3. Directors and employees (continued) Remuneration in respect of Directors was as follows: Emoluments Gains made on the exercise of share options Pension contributions to personal pension schemes The amounts set out above include remuneration in respect of the highest paid Director as follows: Emoluments Gains made on the exercise of share options Pension contributions to personal pension schemes 2002 £ 513,054 1,222,250 67,825 2001 £ 458,755 114,500 65,561 1,803,129 638,816 2002 £ 2001 £ 161,070 157,747 1,134,000 — 37,950 33,396 During the year contributions were paid to personal pension schemes for three Directors (2001: three). During the year two Directors (2001: one) exercised share options. 4. Tax on profit on ordinary activities The tax charge represents: United Kingdom corporation tax at 30% (2001: 15.9%) Share of tax charge of associate Adjustments in respect of prior years Total current tax Origination and reversal of timing differences Tax on profit on ordinary activities 2002 £ 2001 £ 1,111,007 405,000 1,000 — — (20,000) 1,112,007 385,000 — (6,500) 1,112,007 378,500 The tax assessed for the year is higher than the standard rate of corporation tax in the United Kingdom of 30% (2001: 30%). The differences are explained as follows: Profit on ordinary activities before tax Profit on ordinary activities multiplied by standard rate of corporation tax in the United Kingdom of 30% (2001: 30%) Effect of: Expenses not deductible for tax purposes Capital allowances in excess of depreciation Utilisation of tax losses Adjustments in respect of prior periods Current tax for the year 2002 £ 2001 £ 3,606,189 2,508,398 1,081,857 752,519 77,295 46,826 (47,145) (22,360) — — (371,985) (20,000) 1,112,007 385,000 22 Mears Group PLC | Annual Report & Accounts 2002 Notes to the Financial Statements for the year ended 31 December 2002 5. Profit for the financial year The Parent Company has taken advantage of section 230 of the Companies Act 1985 and has not included its own profit and loss account in these financial statements. The Group profit for the year includes a profit of £1,443,810 (2001: £512,699) which is dealt with in the financial statements of the Company. 6. Dividends Ordinary shares – interim dividend of 0.25p (2001: 0.20p) per share paid – proposed final dividend of 0.75p (2001: 0.60p) per share 2002 £ 2001 £ 141,272 424,053 106,720 337,411 565,325 444,131 7. Earnings per share Basic earnings per share is based on equity earnings of £2,529,268 (2001: £2,140,055) and 56,132,881 (2001: 53,538,267) ordinary shares at 1p each, being the average number of shares in issue during the year. For diluted earnings per share the average number of shares in issue is increased to 58,030,209 (2001: 59,232,325) to reflect the potential dilution effect of employee share schemes. The earnings in 2001 had benefited from the utilisation of tax losses generated by Haydon and Company Limited in 1999 and 2000. A full tax earnings per share, shown as normalised, is disclosed in order to show performance undistorted by this effect. The normalised earnings per share in 2001 was based on equity earnings of £1,766,036, which had been subjected to a notional corporation tax charge of 30%. Earnings per share Effect of full tax adjustment Normalised earnings per share 8. Intangible fixed assets The Group Cost At 1 January 2002 Additions At 31 December 2002 Amortisation At 1 January 2002 Provided in the year At 31 December 2002 Net book amount At 31 December 2002 At 31 December 2001 Basic Diluted 2002 p 4.51 — 4.51 2001 p 4.00 (0.70) 3.30 2002 p 4.36 — 4.36 Goodwill arising on consolidation £ Purchased goodwill £ 2001 p 3.61 (0.63) 2.98 Total £ 2,347,872 280,000 2,627,872 3,347,523 — 3,347,523 5,695,395 280,000 5,975,395 343,903 143,653 40,833 14,000 384,736 157,653 487,556 54,833 542,389 5,207,839 225,167 5,433,006 2,003,969 239,167 2,243,136 Additions to goodwill arising on consolidation relate to acquisitions as detailed in note 21. Mears Group PLC | Annual Report & Accounts 2002 23 Freehold land and buildings £ Leasehold improvements £ Plant and machinery £ Fixtures, fittings and equipment £ Motor vehicles £ Total £ 59,995 401,206 692,953 1,750,683 169,610 3,074,447 1,870 31,658 635,670 4,177 24,884 61,418 40,290 730,616 69,351 — (10,820) (43,500) (54,320) — — 213,418 559,716 41,507 — — 25,375 3,000 840,381 363,859 21,574 96,699 1,713,814 18,173 20,000 451,669 44,574 — (7,274) (23,784) (31,058) 6,355 254,925 588,091 1,218,540 111,088 2,178,999 53,640 148,151 140,697 1,181,877 116,730 1,641,095 — — — 3,600 2,755 — — 9. Tangible fixed assets The Group Cost At 1 January 2002 Additions Acquisition of subsidiary undertaking Disposals Depreciation At 1 January 2002 Provided in the year Acquisition of subsidiary undertaking Eliminated on disposals At 31 December 2002 Net book amount At 31 December 2002 At 31 December 2002 59,995 403,076 728,788 2,400,417 227,818 3,820,094 At 31 December 2001 56,395 187,788 133,237 910,302 72,911 1,360,633 10. Fixed asset investments The Group Cost At 1 January 2002 Additions Share of profits of associates At 31 December 2002 Amounts written off At 1 January 2002 Provided in the year At 31 December 2002 Net book amount At 31 December 2002 At 31 December 2001 Associated undertakings Share of net assets £ Goodwill £ Total £ — 10,061 7,609 — 19,939 — — 30,000 7,609 17,670 19,939 37,609 — — — — 665 665 — 665 665 17,670 19,274 36,944 — — — The investment in associated undertaking relates to a holding of 49% in the ordinary share capital of FITE IT Limited. Other investments £ 55,677 6,250 — 61,927 — — — 61,927 55,677 £ 5,286,513 3,895,390 9,181,903 The Company Investment in subsidiary undertakings Cost At 1 January 2002 Additions At 31 December 2002 24 Mears Group PLC | Annual Report & Accounts 2002 Notes to the Financial Statements for the year ended 31 December 2002 10. Fixed asset investments (continued) Additions relate to the purchase of 100% of the equity share capital of M&T Group Limited and the purchase of the remaining 0.6% of Mears Building Services Limited. At 31 December 2002 the Group held 20% or more of the equity share capital of the following undertakings: Proportion held The Group The Company Nature of business Subsidiaries: Mears Building Contractors Limited Electrical Contracting Services (UK) Limited Mears Design Services Limited ARV Services Limited United Fleet Distribution Limited — — — — — Transbureau Limited 100% — — — — — 100% 100% 49% Mears Facility Management Limited Mears Social Housing Limited Mears Building Services Limited Haydon and Company Limited M&T Group Limited FWA (Southern) Limited Haydon Building Contractors Limited Associate: FITE IT Limited 11. Stocks The Group Materials and consumables Work in progress 12. Debtors Trade debtors Amounts owed by Group undertakings Amounts recoverable on contracts Other debtors Prepayments and accrued income 100% 76% 100% 100% 100% — 90% 100% 100% 100% Provision of maintenance services Dormant Dormant Dormant Vehicle collection and delivery Provision of facilities management services Provision of facilities management services Provision of maintenance services Provision of maintenance services Provision of maintenance, mechanical and electrical services 100% Dormant — — — Provision of maintenance, mechanical and electrical services Provision of maintenance, mechanical and electrical services Provision of IT support services 2002 £ 2001 £ 329,926 936,408 387,496 844,674 1,266,334 1,232,170 The Group The Company 2002 £ 2001 £ 12,962,200 12,127,444 2002 £ — 2001 £ — — — 2,368,558 3,321,026 2,475,903 3,114,206 78,695 402,749 177,656 319,750 — — — — 26,592 — 15,919,547 15,739,056 2,368,558 3,347,618 Included in Trade Debtors is an amount of £910,295 (2001: £720,575) which is due after more than one year. Mears Group PLC | Annual Report & Accounts 2002 25 13. Creditors: amounts falling due within one year Bank overdraft Payments received on account Trade creditors The Group The Company 2002 £ 2001 £ 2002 £ 2001 £ — 1,963,456 1,198,520 1,907,557 3,796,506 4,208,530 7,634,255 8,081,717 — — — — Amounts owed to Group undertakings — — 1,980,051 2,696,171 Corporation tax Social security and other taxes Proposed dividend Other creditors Accruals and deferred income 14. Creditors: amounts falling due after more than one year Other creditors 1,032,156 367,817 335,007 85,000 1,830,422 1,835,611 — 424,053 337,411 424,053 425,000 7,945 425,000 2,986,662 1,392,383 30,374 — 337,411 188,907 — 18,129,054 18,194,870 4,393,005 5,215,046 The Group The Company 2002 £ 2001 £ 2002 £ 2,260,000 — 2,260,000 2001 £ — Included in other creditors for the Company and Group is £2,685,000, of which £425,000 falls due within one year, that relates to deferred consideration on the acquisition of M&T Group Limited. This is payable by instalments over a four year period as detailed in note 21. The bank overdraft facility is secured by a fixed and floating charge over the Company and Group’s assets. The bank balances of the individual subsidiaries have been set off within the consolidated balance sheet. The net funds position at the year end is disclosed within current assets. Interest receivable/(payable) is calculated daily on the balance of net funds. The Group uses financial instruments comprising borrowings, some cash and liquid resources, and various items such as trade debtors and trade creditors that arise directly from its operations. The main purpose of these financial instruments is to raise finance for the Group’s operations. The main risks arising from the Group’s financial instruments are interest rate risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. These policies have remained unchanged from previous years. Short-term debtors and creditors Short-term debtors and creditors have been excluded from all the following disclosures. Interest rate risk The Group finances its operations through a mixture of retained profits and bank borrowings. The fair value of the financial instruments is not materially different to the book value. 26 Mears Group PLC | Annual Report & Accounts 2002 Notes to the Financial Statements for the year ended 31 December 2002 14. Creditors: amounts falling due after more than one year (continued) The interest rate exposure of the financial liabilities of the Group as at 31 December 2002 was: Financial liabilities – 2002 Financial liabilities – 2001 Fixed — — Interest rate Floating Zero — 2,260,000 Total — 1,963,456 — 1,963,456 The floating rate borrowings bear interest at rates based on LIBOR. Liquidity risk The Group seeks to manage financial risk, to ensure sufficient liquidity is available to meet the identifiable needs of the Group and to invest cash assets safely and profitably. Short-term flexibility is achieved through the use of the bank overdraft facilities. 15. Share capital Authorised 100,000,000 ordinary shares of 1p each Allotted, called up and fully paid 2002 £ 2001 £ 1,000,000 1,000,000 56,540,515 (2001: 53,735,199) ordinary shares of 1p each 565,405 537,352 During the year, 2,444,062 ordinary shares of 1p each were issued for consideration of £251,276, as a result of share options being exercised. A further 361,254 ordinary shares of 1p each were issued in consideration for the remaining 0.6% of the share capital of Mears Building Services Limited. The difference between the nominal value of £28,053 and the total consideration of £599,886 has been credited to the share premium account. At 31 December 2002, the following ordinary shares were subject to options: Executive Share Option scheme Unapproved Options Enterprise Management Incentive scheme Save As You Earn scheme Date of grant 1998 1998 1999 2000 2001 2001 2002 2001 2002 1998 2001 2002 Number 50,000 25,000 300,000 585,000 407,250 110,000 922,000 1,415,000 870,316 35,526 453,891 328,514 Exercise price Exercise dates 12.25p 11.75p 14.25p 19.25p 50p 50p 67.5p 50p 67.5p 9.50p 50p 82.5p 2001–2008 2001–2008 2002–2009 2003–2010 2004–2011 2004–2011 2005–2012 2004–2011 2005–2012 2004 2004/2006 2005/2007 Mears Group PLC | Annual Report & Accounts 2002 27 15. Share capital (continued) Included above are the following options granted to Directors: Director D J Robertson P L Molloy 1 January 2002 100,000 100,000 9,687 208,000 Number of options during the year Granted Exercised 31 December 2002 — — — — 100,000 — — — — — — — — 100,000 9,687 208,000 200,000 9,687 5,757 142,857 — 200,000 9,687 — — — 5,757 142,857 R Holt 1,800,000 — 1,800,000 — — 9,687 — 9,687 Exercise price 11.75p 14.25p 50p 50p 67.5p 50p 82.5p 67.5p 10p 50p Market price at the date of exercise 100p Exercise dates — — 2002–2009 — 2004 — 2004–2011 — 2005–2012 — — 2004 2005 — 2005–2012 73p — — 2004 No options lapsed during the year. The market price at 31 December 2002 was 70p and the range during 2002 was 58p to 104p. 16. Share premium account and reserves The Group At 1 January 2002 Issue of shares Retained profit for the year At 31 December 2002 The Company At 1 January 2002 Issue of shares Retained profit for the year At 31 December 2002 Share premium account £ Profit and loss account £ 2,397,851 4,059,730 571,833 — — 1,963,943 2,969,684 6,023,673 Share premium account £ Profit and loss account £ 2,397,851 483,882 571,833 — — 878,485 2,969,684 1,362,367 The balance on the share premium account may not be legally distributed under section 264 of the Companies Act 1985. 17. Reconciliation of movements in equity shareholders’ funds The Group Profit for the financial year Dividends Issue of shares Net increase in equity shareholders’ funds Equity shareholders’ funds at 1 January 2002 Equity shareholders’ funds at 31 December 2002 2002 £ 2001 £ 2,529,268 2,140,055 (565,325) (444,131) 1,963,943 1,695,924 599,886 246,900 2,563,829 1,942,824 6,994,933 5,052,109 9,558,762 6,994,933 28 Mears Group PLC | Annual Report & Accounts 2002 Notes to the Financial Statements for the year ended 31 December 2002 18. Net cash inflow from operating activities Operating profit Depreciation and amortisation Loss/(profit) on disposal of fixed assets (Increase)/ decrease in stocks Decrease in debtors Increase in creditors Net cash inflow from operating activities 19. Reconciliation of net cash flow to movement in net funds Increase in cash in the year Cash outflow from financing Change in net funds resulting from cash flows Net funds at 1 January 2002 Net funds at 31 December 2002 20. Analysis of changes in net funds Cash at bank and in hand Overdrafts 2002 £ 2001 £ 3,512,259 2,578,306 609,987 451,398 6,262 (2,178) (29,164) 504,983 574,931 69,071 473,620 282,721 4,743,346 4,288,850 2002 £ 2001 £ 2,952,981 2,121,101 — 1,100,040 2,952,981 3,221,141 2,612,747 (608,394) 5,565,728 2,612,747 At 1 January 2002 £ Cash flow £ At 31 December 2002 £ 4,576,203 989,525 5,565,728 (1,963,456) 1,963,456 — 2,612,747 2,952,981 5,565,728 21. Acquisitions On 27 May 2002 the Company and Group acquired the remaining six ordinary shares of £1 each, being 0.6% of the equity share capital of Mears Building Services Limited for £348,610, settled by 361,254 ordinary 1p shares in the Company. The shares were valued at 96.5p at the time of the transaction, being the fair value of the shares on that day. On 11 December 2002 the Company and Group acquired 350,004 ordinary shares of £1 each, being the entire issued share capital of M&T Group Limited (M&T) for £3,546,780 (including acquisition costs), satisfied by £861,780 in cash and deferred consideration of £2,685,000. The deferred consideration is payable by annual instalments over a four year period commencing in April 2003. The consideration has been agreed on the basis of targeted levels of post tax profits for the financial years ending 31 December 2002 to 31 December 2005. The consideration is subject to claw back if the target profits for the four year period are not achieved. In addition each instalment is subject to a claw back on a proportionate basis if annual post tax profit targets for each of the relevant financial years are not met. The maximum total consideration payable, including acquisition costs, is £3,546,780. Goodwill arising on the acquisition of M&T has been capitalised. The purchase has been accounted for by the acquisition method of accounting. The profit after taxation of M&T for the period from 1 January 2002, the beginning of the subsidiary’s financial year to the date of acquisition was £218,561. The profit after taxation for the year ended 31 December 2001 was £32,848. Mears Group PLC | Annual Report & Accounts 2002 29 21. Acquisitions (continued) The assets and liabilities of M&T acquired were as follows: Fixed assets Tangible assets Current assets Stocks and work in progress Debtors Bank and cash Total assets Creditors Trade creditors Other creditors Accruals Corporation tax Total liabilities Fair value of net assets acquired Goodwill capitalised Satisfied by: Cash Deferred consideration Book and fair value £ 24,777 5,000 754,422 478,657 1,262,856 498,060 59,427 72,470 90,252 720,209 542,647 3,004,133 3,546,780 861,780 2,685,000 3,546,780 The subsidiary undertakings acquired during the year made the following contribution to, and utilisation of, Group cash flow. Net cash outflow from operating activities Returns on investment and servicing of finance Capital expenditure Decrease in cash Analysis of net outflow in respect of the purchase of the subsidiary undertakings: Cash at bank and in hand acquired Cash consideration 2002 £ (101,455) 1,011 (9,250) (109,694) 2002 £ 478,657 (836,780) (358,123) 30 Mears Group PLC | Annual Report & Accounts 2002 Notes to the Financial Statements for the year ended 31 December 2002 22. Capital commitments Neither the Group nor Company had any capital commitments at 31 December 2002 or at 31 December 2001. 23. Contingent liabilities The Group has guaranteed that it will complete the contracts it has commenced with 23 (2001: 24) Local Authorities. At 31 December 2002 these guarantees amounted to £2,387,693 (2001: £2,070,162). The Group and Company had no other contingent liabilities at 31 December 2002 or at 31 December 2001. 24. Pensions The Company operates a defined contribution Group personal pension scheme for the benefit of certain Directors and employees. The Group operates a stakeholder pension plan available to all employees. 25. Leasing commitments The Group Operating lease payments amounting to £1,308,341 (2001: £1,142,153) are due within one year. The leases to which these relate expire as follows: In one year or less Between one and five years In five years or more 2002 2001 Land and buildings £ Other £ Land and buildings £ Other £ 43,156 112,226 84,284 70,246 103,497 884,275 209,415 693,019 165,188 — 85,189 — 311,841 996,501 378,888 763,265 Mears Group PLC | Annual Report & Accounts 2002 31 Notice of the Annual General Meeting Notice is hereby given that the Annual General Meeting of Mears Group PLC will be held at the offices of Arbuthnot, Old Mutual Place, 2 Lambeth Hill, London, EC4 4GG at 11.30am on 4 June 2003 when the following ordinary business will be considered: 1. To receive and adopt the Accounts for the year ended 31 December 2002, together with the reports of the Directors and auditors thereon. 2. To declare a final dividend of 0.75p per share on the ordinary share capital of the Company. 3. To re-appoint Grant Thornton as auditors and authorise the Directors to determine their remuneration. 4. To re-appoint R B Pomphrett as a Director who, in accordance with the Articles of Association, retires by rotation. 5. To re-appoint D J Robertson as a Director who, in accordance with the Articles of Association, retires by rotation. And the following special business: Ordinary resolution 6. THAT in substitution for the authority to allot relevant securities conferred on the Directors by the ordinary resolution passed on 29 May 2002, the Directors be and are hereby generally and unconditionally authorised for the purposes of section 80 of the Companies Act 1985 to exercise all the powers of the Company to allot relevant securities (within the meaning of section 80(2) of the Companies Act 1985) of the Company with an aggregate nominal amount of up to £243,743 provided that the authority hereby conferred shall expire five years from the date of this resolution unless previously renewed, varied or revoked by the Company in General Meeting and so that the Company may at any time before such expiry make an offer or agreement which would or might require relevant securities of the Company to be allotted after such expiry and the Directors may allot relevant securities in pursuance of such agreements as if the authority hereby conferred had not expired. In relation to the grant of any rights to subscribe for, or to convert any security into, shares in the Company, the reference in this paragraph to the maximum amount of relevant securities that may be allotted is to the maximum amount of shares which may be allotted pursuant to such rights. Special resolution 7. THAT: (a) (b) (c) in connection with any rights issue; and the Directors be authorised to allot securities of the Company (pursuant to the authority conferred on the Directors by resolution 6 above) at any time up to the conclusion of the Company’s next Annual General Meeting following the date of the passing of this resolution or, if earlier, the expiry of 15 months from the date of the passing of this resolution as if section 89(1) of the Companies Act 1985 did not apply to any such allotment, provided that such power shall be limited to the allotment of equity securities: (i) (ii) otherwise than under sub-paragraph (a) (i) of this resolution, with an aggregate nominal amount of up to £28,270. such power shall permit and enable the Company to make an offer or agreement before the expiry of such power which would or might require equity securities to be allotted after such expiry and shall permit the Directors to allot such securities pursuant to any such offer or agreement as if such power had not expired; and in this resolution: (i) "rights issue" means an offer of equity securities open for acceptance for a period fixed by the Directors to holders of ordinary shares on the register on a fixed record date in proportion to their respective holdings of such shares or in accordance with the rights attached thereto (but subject to such exclusion or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or legal or practical problems under the laws of, or the requirements of any regulatory body or any stock exchange in, any territory); the nominal amount of any securities should be taken to be, in the case of a right to subscribe for or convert any securities into shares of the Company, the nominal amount of the shares which may be allotted pursuant to such right; and (ii) (iii) words and expressions defined in or for the purposes of sections 89 to 96 inclusive of the Companies Act 1985 shall bear the same meanings. By Order of the Board R B Pomphrett ACIS, MSI Secretary 6 May 2003 The Leaze Salter Street Berkeley Gloucestershire GL13 9DB 32 Mears Group PLC | Annual Report & Accounts 2002 Notice of the Annual General Meeting Notes: 1. A member entitled to attend and vote at the Meeting may appoint a proxy to attend and, on a poll, to vote instead of him. A proxy need not also be a member of the Company. 2. A form of proxy is enclosed. Completion of the proxy does not preclude a shareholder from attending the Meeting and voting in person. Proxies must be received by the Company, The Leaze, Salter Street, Berkeley, Gloucestershire GL13 9DB not less than 48 hours before the time fixed for the Meeting. 3. In accordance with Regulation 34 of Uncertified Securities Regulations 1995, only those members entered on the register of members of the Company on 2 June 2003 shall be entitled to attend or vote at the Meeting in respect of the numbers of shares registered in their name on that date. 4. There will be available for inspection at the Company’s registered office during normal business hours from the date of this notice to the date of the Annual General Meeting and for 15 minutes prior to and during the Meeting the following: (a) (b) the Register of Directors’ interest in the share capital of the Company; and copies of the Directors’ Contracts of Service with the Company or its subsidiaries. designed & produced by T H E D E S I G N P O R T F O L I O a member of the flathill communications group plc www.flathillplc.com Mears Group PLC The Leaze Salter Street Berkeley Gloucestershire GL13 9DB Tel: 01453 511911 Fax: 01453 511914 www.mearsgroup.co.uk