Mears Group Annual Report 2004

FY2004 Annual Report · Mears Group

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ANNUAL REPORT & ACCOUNTS 2004

IMPROVING HOMES, IMPROVING NEIGHBOURHOODS, IMPROVING LIVES

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OUR VISION... TO CONTINUALLY
STRENGTHEN OUR POSITION AS
MARKET LEADER IN TRANSFORMING
THE SOCIAL HOUSING ENVIRONMENT
BY IMPROVING HOMES, IMPROVING
NEIGHBOURHOODS AND
IMPROVING LIVES.

Mears is the largest social housing repairs and maintenance
provider in the UK. We work in partnership with clients to
manage, maintain, repair and upgrade people’s homes.
We believe tenants should be treated as partners and
always put their needs at the heart of what we do.

More than 2,000 Mears people are out there supporting
our clients and helping tenants to enjoy a better quality
of life. Together, we look after more than 400,000 homes
and carry out more than one million repairs a year.

We listen carefully to the needs of our partners,
we work hard to provide truly excellent services
and we constantly try to find better ways to do things.
Our excellent results in 2004 underline the financial
and operational strengths of this Group and our desire
to be the recognised leader in our market.

01 2004 Highlights and Financial Calendar
04 Chairman’s Statement
08 Operating and Financial Review
16 Directors and Advisers
18 Report of the Directors
21 Corporate Governance
23 Corporate and Social Responsibility
25 Report of the Independent Auditors

26 Principal Accounting Policies
28 Consolidated Profit and Loss Account
29 Consolidated Balance Sheet
30 Company Balance Sheet
31 Consolidated Cash Flow Statement
32 Notes to the Financial Statements
47 Notice of the Annual General Meeting

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Social Housing – Market Overview

The Decent Homes Standard, launched by the Government in 2000, is the
major force behind the very strong growth in this market. The initiative has
increased annual investment in public housing from £1.5bn (1997/8) to
£4bn (2003/4) and requires all local authorities to bring social housing
stock up to a decent standard by 2010. A decent home is defined as a
property that is wind and weather tight, warm and has modern facilities.

Many local authorities have turned to the private sector for support
in meeting Decent Homes targets and this has created excellent
opportunities for service providers such as Mears. A number of authorities
have also created arms-length management organisations (ALMOs) to run
their housing programmes, giving them scope to unlock additional funding
from Government. We work direct with local authorities and with a wide
range of ALMOs and housing associations.

Social housing: The opportunity

This remains a fragmented market, however, with the ten largest providers
serving just 13% of the market. We expect the market share of larger
service providers to increase as local authorities and housing organisations
seek to develop long-term partnerships with a smaller number of providers.
The recent contract awards in Sheffield point the way forward, with five
main service providers – including Mears – sharing the total contract
budget of £1bn.

Although originally planned for completion by 2010, we expect the Decent
Homes Standard to run into the next decade and believe investment may
continue until 2015. We also believe Decent Homes has strengthened the
repairs and maintenance market, as clients invest to maintain the standards
achieved by improvements. This, together with the Government’s focus on
the construction of affordable housing, suggests the social housing sector
may remain buoyant for at least a decade and possibly well beyond.

Mears’ commitment to environmental issues is reflected in this annual report which has been printed on Revive Silk, a recycled paper

stock. It contains 75% de-inked post consumer waste and 25% combination mill broke and virgin fibres.

This document was printed by Beacon Press using their environmental print technology which minimises the impact of printing on the

environment. All energy used comes from renewable sources, vegetable based inks have been used and 85% of all waste associated with
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Turnover – continuing
£m

54.7%

173.7

1.35

112.3

0.80

1.00

78.8

66.9
0.65

68.6

Profit before tax*
£’000

+41.9%

7,438

5239
5,239

3764

3,764

2631

2,631

2051
2,051

Earnings per share**
pence

+39.7%

9.04

6.47
6.47

4.79

4.23

3.74

2004 Highlights

(cid:1) Turnover up 54.7% to £173.7m
(cid:1) Profits* up 41.9% to £7.4m
(cid:1) Earnings per share** up 39.7% to 9.04p

Annual General Meeting

Record date for final dividend

Dividend warrants posted to shareholders

Interim results announced

1 June 2005

10 June 2005

1 July 2005

30 August 2005

* Pre-goodwill amortisation
** Full tax, pre-goodwill amortisation

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

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IMPROVING HOMES… IN EAST LONDON
WE HANDLE EVERYTHING FROM BASIC
PLUMBING TO BUILDING WORK AND
DAY-TO-DAY LIAISON WITH TENANTS.
WE’RE WORKING TO ADDRESS LOCAL ISSUES
TOO, LIKE SKILLS TRAINING AND TRUANCY.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

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Mosaic Homes – East London

Formerly known as New Islington & Hackney Housing Association, Mosaic Homes is an
innovative manager and developer of social housing in the East London and Essex area.

In December 2004 Mosaic awarded us a five-year, £7.5m a year maintenance and repairs
contract for 6,000 of its homes. We now look after everything from a multilingual call centre
for tenants to inspections. We repair and maintain anything from a tap washer to a roof.

We will soon be opening a skills training centre where members of the local community
can develop housing maintenance expertise and we intend to offer employment to many
of those who graduate.

We also co-fund and help to run breakfast clubs at three schools in the area. Each school
is opened at 7am and pupils are offered a nutritious meal – in some cases this is the only
opportunity they have to receive a hot meal. Absenteeism has dropped by 60% at one
school and a number of other schools are keen to join the scheme.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

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EXCELLENT RESULTS... ONCE AGAIN MEARS
HAS PRODUCED AN EXCELLENT SET OF
FIGURES. THE STRATEGY FOR FURTHER
GROWTH IS CLEAR AND THE SPIRIT WITHIN
THE GROUP IS BETTER THAN EVER.

Chairman’s Statement

Look at our performance this year:

(cid:1) Profit before tax and goodwill

amortisation up 41.9%

(cid:1) Turnover up 54.7%

(cid:1) Cash inflow of £0.9m after
absorbing strong growth

(cid:1) Contract wins valued at £526m

(cid:1) Order book up by £265m

(cid:1) Normalised earnings per share

pre-goodwill amortisation up 39.7%

(cid:1) Dividend up 40.7%

These are the results we have achieved
with a group of talented people who are
committed to Improving Homes, Improving
Neighbourhoods, Improving Lives.
Our team is consistently delivering results
that stand out in our sector. Why?
Because we are passionate about what
we do and where we can take this Group.
This applies not only in social housing but
across all the divisions of Mears.

Clarity and ambition
We are the market leader in social housing.
What defines ‘leadership’ in this sector?
For me it’s about excellent and sustainable
financial performance; consistent, high quality,
tenant-focused services, delivered in close
partnership with good clients; and a genuinely
innovative approach that makes a real
difference to people’s lives. I believe our
job is to make tenants smile.

The opportunity has never been bigger
Social housing is clearly the right market
for us. It is a fragmented sector with relatively
few large service providers. Yet the
outsourcing argument has been won.
More and more Local Government clients
are exploring the benefits to be gained
by working with private sector providers
and in developing long-term partnerships
with a smaller number of large service
providers. We see an addressable market
opportunity in recurring repairs and
maintenance of around £5bn a year.

The available spend from Central Government
is also very healthy, with at least £3.5bn to
be committed annually to the Decent Homes
Standard. Although due to end in 2010,
we believe the Decent Homes commitment
is likely to last until 2015.

It’s not just about the numbers though.
There is a strong client commitment to
quality and to community in this sector and
that plays to our strengths. Clients recognise
that Mears people work extremely hard
to meet their needs and the needs of their
tenants. We are problem-solvers: We are
always looking to find better ways to do
things and to create long-term benefits
and that approach resonates with those
who care about the local community.

Our work with Wigan & Leigh Housing
is a great example of how our approach
achieves satisfaction and savings. We’ve
been working with this client for six years
now and in 2003 we were awarded a £5m

a year contract for repairs, maintenance
and refurbishment with these services to be
provided until 2020. Last year the scheme
reduced overall repair costs by 15% and
tenant satisfaction with work quality was
at 98%. We’re working on the 2%.

Community – at the heart of everything
Physical repairs and refurbishments are
just one part of what makes a good
neighbourhood tick. Communities are about
people and I believe our work should set out
to improve daily life in the neighbourhoods
we serve. Our apprenticeship schemes
demonstrate what can be achieved when
service providers think beyond the obvious
and really put the community at the heart
of what they do. Through these schemes we
employ and train people so they can manage
and maintain housing in their area. This gives
a boost to local employment and makes
Mears part of the fabric of everyday life.

We are always looking for new ways to
support the local community. Take our
sponsorship of breakfast clubs in Hackney.
Our teams open schools buildings up at 7am
and help to serve a meal to pupils. This is
improving school attendance and the general
wellbeing of children for the benefit of the
entire community. Visiting these clubs was
definitely one of the highlights of my year.
Everyone at Mears has the opportunity to
contribute to schemes such as this in their
day-to-day work. Through our 100 Days in
the Community programme they can also
contribute time and resource to any locally
based community initiative.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

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Summary
(cid:1) Strong growth in pre-tax profit,

turnover and order book

(cid:1) Robust market with excellent

addressable market opportunities

(cid:1) Strengthened management team
and a renewed commitment to
quality and passion

Bob Holt

Doing things the right way
As Mears grows it is increasingly important
for us to recruit, develop and manage people
to a consistently high standard. Our services
are delivered at a local level and we must
ensure that everyone within Mears is
committed to providing truly excellent service.

The One Mears Way plays an effective role
in enabling current and new employees
to understand and follow the right way
to do things. We have built our success
on these principles and everyone within the
management team is dedicated to ensuring
that our passion and standards continue
to unite us as we grow.

Management team strengthened
The quality of our management team was
recognised by a number of industry bodies
in 2004. In the Quoted Company Awards,
for example, David Robertson was named
Finance Director of the Year. David deserves
this recognition for his excellent work.

We made a number of significant new
appointments in 2004 to further strengthen
the business, including the appointment
of Stuart Black as Chief Operating Officer
in November. Stuart is highly experienced
and will really help the business to meet
its operational challenges over the next few
years. We have also appointed talented
individuals to the jobs of Group HR Director
and Group IT Director. With these additional
specialists in place we have a well-balanced
executive team with real strength in depth.

Looking ahead
I would like to thank everyone at Mears for
their hard work in 2004 and to congratulate
them on the success they have achieved.
The excellent figures reported are down
to them and they should also take great
satisfaction from the way their work has
helped to improve the lives of others.

Many of you will know that I sold two million
Mears shares recently and may wonder what
this signifies. I did this to satisfy demand from
a number of institutional investors. I remain
absolutely committed to Mears and intend
to play a central role in the team that will take
this Group to the next stage and beyond.

There is a fantastic opportunity for everyone
at Mears to be part of something special.
If we can all rise to the challenges ahead
we can achieve an enormous amount –
together. This is a very exciting time; I hope
everyone at Mears will join me in working
to strengthen our position as an outstanding
leader in the social housing sector

Bob Holt

bob.holt@mearsgroup.co.uk

Chairman

21 March 2005

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

Growth in average
employee numbers

+32.0%

1,846

1,398
5239

2631
960

3764

898

825

2051

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IMPROVING NEIGHBOURHOODS… RAPID
RECRUITMENT IS CRITICAL IN OUR BUSINESS.
IN RICHMOND WE HAD JUST SIX WEEKS TO
ESTABLISH A TEAM OF SKILLED PEOPLE
ABLE TO REPAIR AND MAINTAIN 8,500
HOMES ON BEHALF OF TENANTS.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

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Richmond Housing Partnership – South West London

In 2002 we secured a ten-year, £13m a year contract to provide repairs and maintenance
services to the partnership’s 8,500 homes. The challenge here was all about time: we had
just six weeks to set up a new office and communications and recruit 120 people.

Everything was in place at the start of the contract and we have now completed more than
50,000 individual jobs for tenants in this area. We’ve worked closely with local people and
that has helped us to achieve tenant satisfaction levels well above 90%.

Getting the right people in place remains critical and we have worked closely with our client
to recruit, train and employ local residents. Ten places on this scheme are reserved for members
of tenants’ families. We are also providing work placement experience to around 100 local,
long-term unemployed people through the Government’s Back to Work programme.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

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EXCEPTIONAL GROWTH... 2004 WAS ALL
ABOUT DELIVERING EXCELLENT SERVICES
AND MAINTAINING EXCEPTIONAL LEVELS
OF GROWTH, WHILE BRINGING EVEN GREATER
FOCUS TO WHAT WE DO AND HOW WE DO IT.

Operating and Financial Review

We believe our performance underlines that
Mears is the strongest company in the social
housing sector and is able to deliver impressive
and sustainable growth.

Turnover
In 2004 we grew turnover to £173.7m
(2003: £112.3m), an increase of 54.7%.
Organic growth was the main driver.
This significant growth reflects our ability
to win, retain and extend major contracts
in a very active social housing market.

Profit before taxation and
goodwill amortisation
We achieved profit before taxation and
goodwill amortisation of £7.4m (2003: £5.2m),
a 41.9% increase. Operating margins in our
social housing activities held up well at 4.9%,
despite major growth in new work from
contracts secured in late 2003 and 2004.
United Fleet Distribution (UFD) achieved
a 4.2% operating margin, unchanged from
2003. Scion’s operating margin was 1.0%,
as anticipated.

We believe there is room for further margin
improvement where we share the potential
risks and benefits of service performance
with our clients. We are also able to find
operational efficiencies as contracts mature.
Our investments in infrastructure – particularly
Group-wide improvements in IT – provide
scope for better margins and even greater
customer satisfaction.

Acquisitions
We are pleased to confirm that we have
completed the turnaround of Scion Group
Limited, the multi-disciplinary facility services
group we acquired in 2003. This business
is now focused on growing its margin.

We are continuing to build a national painting
and decorating business by acquisition.
The businesses we have acquired are now
integrated and are focused on developing
significant growth opportunities in the
public sector.

Goodwill amortisation at £0.7m (2003: £0.4m)
reflects the full year effect of acquisitions
in 2003 and two small painting business
acquisitions in 2004.

Excellent market opportunities in social
housing mean that organic growth is likely
to maintain our momentum. Having said
that, we are able and willing to make
significant acquisitions that further our
strategic ends and enable us to improve
or broaden our services.

Interest
This year’s modest charge of £0.07m
(2003: £0.08m receipt) reflects our broadly
neutral cash position throughout the year.
Our constant emphasis on improving the
management of working capital has paid
off and has been particularly valuable given
the scale of growth we achieved in the year.

Earnings per share and dividend
Basic Earnings Per Share (EPS) before goodwill
increased 49.8% to 9.69p (2003: 6.47p). Tax
was lower at 27.4% (2003: 32.6%) due
mainly to a tax deduction for share option
exercises and utilisation of tax losses. Even
after applying a full tax charge, EPS is still
up 39.7% at 9.04p (2003: 6.47p).

The dividend increase is in line with our
earnings growth. A final dividend of 1.4p
per share is proposed, making 1.9p for the
full year – up 40.7% on 2003. The final
dividend is payable on 1 July 2005 to
shareholders on the register on 10 June 2005.

Cash flow
Once again, the cash flow position underlines
our strength as a business. A net cash inflow
of £0.9m was achieved in 2004 (2003: £3.7m
outflow). The Group converted 77.6% of
EBITDA into operating cash flow (2003: 80.1%).
This was achieved against a backdrop of 41.0%
organic growth, which was contained at £3.9m
of additional working capital. Some £2.5m was
invested in new technology and operational
bases, with 12 new sites opened in the year.
Acquisitions absorbed £1.1m of cash.

Order book
The visibility of our earnings has never been
better. £526m of new work was secured
in 2004 from 18 contracts. Our order book
now stands at £815m. The element of
consensus forecast turnover secured for
2005 is 81%, with some 60% of 2006
and 48% of 2007.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

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Summary
(cid:1) Order book up £265m to £815m

(cid:1) £526m revenue secured in 2004

(cid:1) £0.9m cash inflow, despite strong

organic growth of 41.0%

Stuart Black

David Robertson

We take a conservative approach to
quantifying our order book and place great
emphasis on winning good quality contracts
that can provide clear and sustainable
margins. We also hold a healthy mix of
Decent Homes and repairs and maintenance
work, giving us a balanced position in the
social housing market that is not reliant
on clients’ future discretionary spending.

(cid:1) Leeds

A five-year £3m contract to carry out
responsive repairs and voids work for
3,300 houses.

(cid:1) Crawley

A five-year, £2m a year contract to
undertake responsive repairs and voids
work in 8,500 homes.

Net assets
Asset value had risen from £12.3m to £16.4m
at year-end. Net current assets within this
improved by £2.3m to £4.5m.

(cid:1) Hackney

A five-year £7.5m a year contract covering
responsive repairs, void properties and
planned maintenance for 6,000 homes.

Major contract wins
We achieved a number of major successes,
winning contracts valued at £526m in total.
Highlights included:

(cid:1) Sheffield

A one-fifth share of the largest contract
placed to date. In total £1bn is to be spent
over seven years to service 55,000 houses.

(cid:1) Ealing

A five-year, £27m partnership contract
to provide response maintenance services,
void repairs and decoration services to
7,500 homes.

(cid:1) Newcastle

A six-year, £60m Decent Homes Standard
contract covering 32,000 homes. The
client’s total spend is £500m for all service
providers, so we have secured more than
10% of the total contract value.

Risks
We believe the most significant risk we face
is damage to our reputation as a result of a
service failure. We mitigate this through our
very strong focus on service delivery and a
constant emphasis on innovation. The One
Mears Way approach helps to ensure that
the standards we – and our customers –
expect are clear to everyone within Mears
and are part of everything we do.

We also recognise that a significant
skills shortage would represent a risk to
growth. We are mitigating this risk through
investment in innovative recruitment and
development programmes, such as our
highly successful apprenticeship schemes.
We intend to further strengthen our reputation
as a highly attractive employer that offers
rewarding jobs, good rates, consistent
income, opportunities for career and personal
development and a great working culture.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

Order book growth
£m

+48.2%

815

550

300

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IMPROVING LIVES… BY UPGRADING
HOMES IN STOCKTON-ON-TEES WE'RE
HELPING PEOPLE TO ENJOY A BETTER
QUALITY OF LIFE, BUT WE’RE ALSO
PROVIDING JOB OPPORTUNITIES, WITH
SKILLED LOCAL PEOPLE AND APPRENTICES
JOINING OUR TEAMS.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

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Tristar Homes – North East England

Tristar Homes has looked after the day-to-day running of Stockton-on-Tees Borough
Council’s homes since 2003. Its challenge is to ensure thousands of homes meet the
Decent Homes Standard by 2010.

In 2003 we were awarded a partnering contract to provide new kitchens, bathrooms,
windows, roofs and other improvements for 5,000 homes. We recruited local people to
join our experienced teams and have developed their skills through mentoring and training.
We are also introducing a local apprenticeship training scheme and we use local supply
partners wherever possible.

The risk of fire is a significant problem in this area, with a high proportion of incidents
caused by unattended chip pans. Working with our client and risk specialists Risksmart,
we introduced a ‘Chip Pan Amnesty’ for tenants. Anyone willing to hand over an old chip
pan was given a free deep fat fryer in return. 175 fire safety checks were also carried out
for tenants.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

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Operating and Financial Review continued

Market outlook
The social housing market provides us with
excellent opportunities in both Decent
Homes and repairs and maintenance work.

The Government’s Decent Homes Standard
capital programme is likely to be extended
to 2015 and is yet to address 1.2m homes that
still do not meet the Decent Homes Standard.
We expect continued Decent Homes-related
expenditure of around £3.5bn a year.

The repairs and maintenance market is
also thriving and we believe expenditure of
around £5bn a year through to 2020 is likely.

Despite the substantial budgets of local
authorities, social housing is a fragmented
market. The ten largest service providers
currently account for just 13% of the total
market. We believe this will change, with the
larger service providers increasing their share.
Market consolidation is being driven by wider
client recognition of the benefits of outsourcing.
An increasing number of clients also prefer to
work with a smaller number of service
providers for a longer period of time.
We expect these market developments to
increase the addressable opportunities for
large, proven service providers such as Mears.

Our strategy
Social housing offers the biggest and best
long-term growth opportunities for Mears and
our focus is now firmly on this sector. In other
words, our work is all about Improving
Homes, Improving Neighbourhoods,

Improving Lives.

There are two particularly important aspects
of our strategy:

(cid:1) Innovation

We are constantly searching for new and
better ways to support clients and help
tenants. For example, our mobile show
homes enable tenants to see the options
available in terms of new colour schemes
and fixtures and fittings and to discuss
their preferences with us before any work
is carried out. We also provide mobile
comfort homes when work is in progress
and we give tenants a video to explain
how the repairs process might affect them.

(cid:1) Partnership

We are committed to developing close
relationships with clients and communities
and delivering tangible, long-term
improvements. We have discontinued bids
where we felt the client did not share our
commitment to partnership. We believe
this makes good business sense, as strong
client relationships enable us to do better
work, increase the scale and scope of
existing contracts and achieve sustainable
margins and clear visibility of future earnings.

We are now broadening our service offerings
with key clients. In Richmond, for example,
we are working very closely with our client
to jointly offer white and blue-collar services.
Our collaborative approach also enables us
to work effectively with our peers. In Sheffield,
for example, we are developing a common
supply chain with the four other partners.

Group structure
We have a lean corporate centre that is
efficient, agile and flexible. We try to avoid
bureaucracy whenever and wherever we
can. The centre of the Group drives strategy,
best practice and controls; the individual
businesses drive delivery, client relationships
and local innovation.

We are not yet achieving the right levels
of synergy between our businesses and that
is an area we are addressing. Our investment
in a Group-wide IT system is a major step
forward and will offer an excellent return
on investment as we grow.

Our focus on social housing has driven
the development of our core businesses.
Haydon, for example, has rapidly developed
from a largely private sector mechanical and
electrical services contractor into a more
dedicated social housing contractor.

UFD is clearly outside the scope of our focus
on housing and we expect this mature
business to become less significant in terms
of Group turnover and profit over time.
We are happy to have UFD within the Group,
however. It is a profitable, well-managed
business with highly motivated people and
leads its sector in terms of service delivery
and market share.

People – our greatest differentiator
What really sets us apart as a business is the
quality and spirit of our people. As we grow
we must give our employees the support
they need to do a fantastic job for clients

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

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Summary
(cid:1) Balanced portfolio of Decent

Homes and repairs and
maintenance contracts

(cid:1) Clear strategic and operational

focus on social housing

(cid:1) One Mears Way strengthened

by values

and tenants. In 2004 we further strengthened
our management team to ensure this
happens, appointing a Chief Operating
Officer and making senior appointments in
human resources, finance, IT and marketing.

We also invested in attracting a strong
mix of new employees and put particular
emphasis on recruiting local people. Local
recruitment is an effective way to compete
for talent and ensure we can grow quickly
to meet clients’ needs. We have innovative
local recruitment initiatives in place to attract
the best talent available. Many Mears people
don’t just serve the local community, they
live in the area and are part of it. These
close connections between Mears and local
neighbourhoods are invaluable, not least
because they help us to understand the
real needs of the people we serve.

Retention of good people is very important
and our excellent Save As You Earn (SAYE)
schemes underline our belief that employees
should have the opportunity to share in the
Group’s success. Currently, 229 employees
are involved in SAYE schemes.

At our Group Management Conference in
January 2005 we spent time discussing the
values that have made Mears successful and
will help us to thrive in the future. The values
we agreed are: Commitment; Customer focus;
Teamwork; Reliability; Integrity; and Innovation.
These values will become a central part of
the One Mears Way and will guide everything
we do.

If we are to succeed in realising our
ambitions for the Group we will need to
recruit many new people over the next few
years. It is absolutely vital that those who join
– at all levels – share the same spirit, values
and drive as Mears people today. The entire
management team is dedicated to making
this happen. We know that the passion and
commitment that has taken Mears to this
point can take us a very long way indeed.

David Robertson

david.robertson@mearsgroup.co.uk

Finance Director

21 March 2005

Stuart Black

stuart.black@mearsgroup.co.uk

Chief Operating Officer

21 March 2005

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

Dividend per share
pence

+40.7%

1.90

1.35

1.00

0.80

0.65

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MEETING THE STANDARD… IN WIGAN
AND LEIGH OUR CHALLENGE IS TO ENSURE
33,000 KITCHENS MEET THE DECENT HOMES
STANDARD BEFORE 2008. DESPITE STRICT
QUALITY CONTROLS, WE'RE WELL AHEAD
OF THE PROGRAMME AND SATISFYING OUR
ULTIMATE CUSTOMERS – THE TENANTS.

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Wigan & Leigh Housing – North West England

Our client must ensure all 33,000 of its homes meet the Decent Homes Standard before
2008. The kitchen is a vital part of any home and in January 2003 we were commissioned to
carry out a kitchen replacement programme (a £5m a year, five-year contract) and also handle
quick response repairs.

To meet the scale of this challenge we recruited 80 people from the local community to join
our existing team of tradespeople. We’ve also saved a significant amount of management time
for our client by agreeing an average price payment structure for the work we carry out.

By year-end 2004 we were 18 months ahead of the agreed programme milestones and we
currently hand over 50 new kitchens to tenants each week. Each refurbishment is completed
according to stringent key performance indicators. But most important, 98% of tenants say
they are completely satisfied with the work we’ve carried out.

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Directors and Advisers

Bob Holt (50)
Chairman and Chief Executive
Bob acquired a controlling interest in
Mears 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 Committee.

Stuart J Black (40)
Chief Operating Officer
Stuart joined the Board on 15 November
2004 as an Executive Director and
is responsible for the day-to-day
operational activity of Mears. Stuart
previously held the position of Group
Business Development Director
with Mouchel Parkman plc. He has a
successful track record of over 20 years
in support services organisations at
different stages of the business cycle.

David J Robertson (49)
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.

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Phillip L Molloy (35)
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.

Reginald B Pomphrett (61)
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.

Michael A Macario (67)
Non-Executive Director
Michael is a Chartered Accountant and
a director of a number of companies.
He joined Mears in 1996 upon flotation
and is Chairman of the Group’s
Audit Committee.

Registered office
The Leaze
Salter Street
Berkeley
Gloucestershire GL13 9DB
Tel: 01453 511911
www.mearsgroup.co.uk

Company registration number
3232863

Bankers
Barclays Bank PLC
18 Southgate Street
Gloucester GL1 2DJ
Tel: 01452 365353

Advisers
Zeus Capital
3 Ralli Courts
West Riverside
Manchester M3 5FT
Tel: 0161 831 1512

Registrars
Neville Registrars
Neville House
18 Laurel Lane
Halesowen
West Midlands B63 3DA
Tel: 0121 585 1131

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: 0845 026 1250

Nominated adviser and stockbroker
Arbuthnot
Arbuthnot House
20 Ropemaker Street
London EC2Y 9AR
Tel: 020 7012 2000

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

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Report of the Directors

The Directors present their report together with the consolidated financial statements for the year ended 31 December 2004.

Principal activities
The principal activities of the Group are the provision of a range of outsource services to the public and private sectors. 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 Operating and Financial Review.

The consolidated profit for the year after taxation and minority interests amounted to £4.91m (2003: £3.25m). The Directors recommend
dividends absorbing £1.11m (2003: £0.77m), leaving £3.81m (2003: £2.48m) retained.

Directors
The present membership of the Board is set out below. M A Macario and R B Pomphrett retire by rotation and, being eligible, offer themselves
for re-election. S J Black retires having been appointed since the last Annual General Meeting and offers himself for re-election.

The base salaries and beneficial interests of the Directors in the shares of the Company at 31 December 2004 and at 1 January 2004 were
as follows:

R Holt

D J Robertson

S J Black

P L Molloy

M A Macario

R B Pomphrett

Salary

Ordinary shares

31 December
2004
£

1 January
2004
£

31 December
2004
Number

1 January
2004
Number

220,000

145,000

150,000

160,000

24,000

180,000

120,000

—

5,209,687

5,200,000

200,000

—

150,000

3,559,687

4,000,000

18,000

200,000

R Holt, D J Robertson and S J Black 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 the inflation adjusted growth in earnings per share combined with the individual
performance of a subsidiary undertaking against budget.

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 16 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:

(cid:1) select suitable accounting policies and then apply them consistently;

(cid:1) make judgements and estimates that are reasonable and prudent;

(cid:1) state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial

statements; and

(cid:1) prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business.

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Directors’ responsibilities for the financial statements continued
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 Report of the Directors and other information included in the Annual Report is prepared in
accordance with company law in the United Kingdom. They are also responsible for ensuring that the Annual Report includes information
required by the Alternative Investment Market (AIM) rules.

The maintenance and integrity of the Group’s web site is the responsibility of the Directors. 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 transaction, to ensure suppliers are aware
of these terms. Group trade creditors during the year amounted to 41 days (2003: 45 days) of average supplies for the year.

Substantial shareholdings
On 15 March 2005 the following shareholders held 3% or more of the issued share capital of the Company:

Unicorn Asset Management Limited

Fidelity Investments

P L Molloy

Newton Investment Management Limited

R Holt

AEGON Asset Management UK

Old Mutual Asset Management

Orbis Trustees Guernsey Limited

Diageo Pension Fund

Number of
ordinary shares
(m)

Percentage
of issued
ordinary shares
%

5.57

3.93

3.56

3.48

3.21

2.95

2.07

1.75

9.6

6.8

6.1

6.0

5.5

5.1

3.6

3.0

In addition to the above shareholdings, a total of 2.67m ordinary 1p shares representing 4.6% 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 schemes have been well received.

Transition to International Financial Reporting Standards (IFRS)
The Group is continuing the process of preparing to convert to IFRS in time for application to the 2005 results. A project team began the
process of identifying the effects of differences between UK and IFRS GAAP in 2003. This process is currently being finalised and will continue
as new standards and amendments to existing standards evolve. It is anticipated Mears Group PLC will adopt IFRS for the year ended
31 December 2005.

The principal differences between IFRS and current UK standards which affect the Group arise in the accounting for share options, the treatment
of goodwill and segmental reporting. These and other changes will affect reported profits and net asset values.

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Report of the Directors continued

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 information and 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. Information is provided to employees through a quarterly newsletter, the Group web site and the Intranet.

The Group operates a stakeholder pension plan available to all employees. The Group operates a personal pension plan and contributes to the
pension schemes of certain Directors. The Group also contributes to defined benefit schemes on behalf of a number of 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 16 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.

Going concern
After making enquiries, the Directors have formed a judgement that there is reasonable expectation that the Group has adequate resources
to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis
in preparing the financial statements.

Auditors
On 1 July 2004, the Grant Thornton partnership, who have been the Group’s auditors since 1994, transferred its business to a limited liability
partnership, Grant Thornton UK LLP. Under section 26(5) of the Companies Act 1989 the Directors consented to extend the audit appointment
to Grant Thornton UK LLP from 1 July 2004.

On behalf of the Board

R B Pomphrett
Director and Secretary

21 March 2005

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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 AIM, the Group is not required to comply with the Principles of Good Governance and Code of Best Practice
(the Combined Code 2003). 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 four 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 Board does not consider the Non-Executive
Directors’ shareholdings to impinge on their independence. The Non-Executive Directors provide a strong independent element to the Board
and bring experience at a senior level of business operations and strategy.

The Board has appointed M A Macario as the Senior Independent Non-Executive Director. The Board appointed S J Black as Chief Operating
Officer in November 2004. It is anticipated that S J Black will be appointed as Chief Executive. Separating the roles of Chairman and Chief
Executive will ensure a balance of responsibility and authority at the head of the Group.

All Directors have access to the Company Secretary, who is responsible for ensuring that Board procedures and applicable rules and regulations
are observed. Any Director, on appointment and throughout their service, is entitled to receive any training they consider necessary to fulfill
their responsibilities effectively.

Board Committees
The Board has delegated authority to three Committees. The Chairman of each Committee provides a report of any meeting of that Committee
at the next Board meeting. 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 is chaired by M A Macario and also comprises R Holt and R B Pomphrett. 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.

Nomination Committee
The Nomination Committee comprises two Non-Executive Directors and the Chairman. The Committee meets four times a year and is responsible
for succession planning within the Group and for the recommendation of appointments to the Board for Executive and Non-Executive Directors.

Meeting attendance
All Directors are encouraged to attend all Board meetings and meetings of Committees of which they are members.

Current Directors’ attendance at Board meetings and Committee meetings is shown in the following table:

Actual meeting attendance

Maximum possible

R Holt

D J Robertson

S J Black

P L Molloy

M A Macario

R B Pomphrett

The Company and its shareholders
The Board remains committed to ongoing dialogue with its shareholders. This commitment was recognised by the AIM Best Communications
Award 2001 and 2004 and AIM Company of the Year Award 2003. The Group has continued to increase its awareness to the investing
public at large and is represented at a series of Investor Relations exhibitions, where shareholders have welcomed the opportunity to both
meet the management team and improve their understanding of the Group.

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Corporate Governance continued

The Company and its shareholders continued
The principal methods of communication with private investors remain the Annual Report and Accounts, the interim statement, the Annual
General Meeting, the quarterly newsletters and the Group’s web site (www.mearsgroup.co.uk).

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 Group endeavours to ensure that the appropriate controls, systems and training are in place.

The Group has also established procedures to routinely test internal control systems. The Board has reviewed these procedures and considers
them appropriate given the nature of the Group’s operations.

A comprehensive budgetary process is completed on a quarterly basis and is reviewed and approved by the Board. The Group’s results as
compared to both 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.

Remuneration policy
The remuneration policy is set by the Remuneration Committee and is designed to deliver the Group’s objectives of creating real increases
in shareholder value by attracting and retaining the most capable and committed people. Individual remuneration packages are determined
by the Board within the framework of the following policy.

The Directors’ remuneration packages comprise the following components:
(cid:1) 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;

(cid:1) annual bonus – the Chairman, Chief Operating Officer and Finance Director are entitled to bonuses related solely to the real increase in earnings per
share. The other Executive Director is entitled to an annual bonus related to both the real increase in earnings per share and to the achievement of
targeted measures relevant to United Fleet Distribution Limited, 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;

(cid:1) defined contribution pension schemes; and
(cid:1) benefits in kind – such as car and health benefits.

The Directors’ emoluments in 2004 are disclosed within the Report of the Directors and note 3 of the financial statements.

The Managing Directors of the operating subsidiaries are rewarded by basic salaries and bonuses determined by the achievement of exceeding
performance targets for their individual business units. The value of overdue work in progress and debtors is deducted in arriving at profit
for bonus purposes.

All employees are eligible to participate in one or more of the share incentive arrangements operated by the Board.

The Group has voluntarily included in the Annual Report 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 TSR 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 plotted against the AIM Index.

(cid:1)(cid:2)(cid:3)(cid:4)(cid:4)

(cid:1)(cid:2)(cid:5)(cid:4)(cid:4)

(cid:1)(cid:2)(cid:4)(cid:4)(cid:4)

(cid:6)(cid:4)(cid:4)

(cid:7)(cid:4)(cid:4)

(cid:3)(cid:4)(cid:4)

(cid:5)(cid:4)(cid:4)

(cid:4)

Mears Group PLC

AIM Index

(cid:8)(cid:9)(cid:10)(cid:11)(cid:12)(cid:4)(cid:4)

(cid:8)(cid:9)(cid:10)(cid:11)(cid:12)(cid:4)(cid:1)

(cid:8)(cid:9)(cid:10)(cid:11)(cid:12)(cid:4)(cid:5)

(cid:8)(cid:9)(cid:10)(cid:11)(cid:12)(cid:4)(cid:13)

(cid:8)(cid:9)(cid:10)(cid:11)(cid:12)(cid:4)(cid:3)

(cid:8)(cid:9)(cid:10)(cid:11)(cid:12)(cid:4)(cid:14)

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Corporate and 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 a large number of local sports clubs and
individuals. The Group is looking to embrace an even wider corporate social responsibility (CSR) ethos by its commitment to improving
homes, improving neighbourhoods and improving lives. All of the recent initiatives are working well. The Group has recently formalised
its CSR approach with the formation of a Committee, chaired by R Holt, and represented throughout the Group with employees from all
business units. In addition the Group continues to support a large number of community based schemes on a national basis with the
emphasis on improving the local community for all.

Social responsibility
The Group is totally committed to ensuring the way in which it runs its business adds positive impact to the community, the environment
and society generally. It is the intention to achieve the business objectives through embracing values that align with those of society whilst
ensuring a strategy is in place that encapsulates risk management, contingency planning and diversity.

The Group is embracing an even wider Corporate Social Responsibility (CSR) ethos, having established a formal Committee, with
representatives from across the Group. The aim is to ensure that CSR becomes an integral part of our culture, running hand in hand with
our day to day business activities, becoming the very DNA of our organisation. With our core work being conducted in the heart of the
community we believe that we can continue to make sustainable improvements in each of the communities in which we work. We are
passionate about improving lives with a strong commitment to encourage, enable and engage our employees to contribute positively
to the community, striving to maximise the opportunity for each of us to become personally socially responsible.

Work in the community
Our commitment to improve communities and the environment is an extension of our desire for improving homes, improving neighbourhoods
and improving lives. We have already completed a number of projects in our communities through practical refurbishments on behalf of
different community groups utilising the skills of our workforce and providing financial support. These include renovating a school playground,
refurbishing a community centre, sponsoring breakfast clubs for schools, reading buddy schemes and providing financial and practical support
to a working farm in Sheffield.

We are committed to significantly increase our efforts this year through a 100 day community challenge. We have asked our employees to
apply their creativity and local knowledge to identify projects in their community that will challenge the skills of our employees and provide
opportunities for volunteering. Engaging in the community also enhances our understanding of diverse communities and provides us with
personal development opportunities and team working. We are continually looking to improve our training program and recognise that we
can provide creative and innovative training programmes through work in the community. The benefits to be gained from contributing in
this way are far reaching as one small positive action can lead to other indirect benefits. Employees benefit from personal development
and may also benefit from being a community recipient where sustainable improvement has been given by Mears employees. Through
these activities we can demonstrate our commitment to the community through visual and tangible improvements. This presents
opportunities for development and growth which will provide more local employment opportunities and development opportunities
for our staff. Consulting and involving our staff in this way assists us to ensure our internal working practices are effective.

Our 100 day challenge is an ideal opportunity for us to work in partnership with our staff, our clients and our community groups. We wish
to work as one large team, striving for full participation, sharing experiences so we can celebrate in our achievements. We recognise the
strength in working in partnership and we have already been involved in projects involving local education, councils and public services.
We have also recently developed a partnership with Oxfam where we have been giving support through resource of employees, materials,
storage space and vehicles. We encourage our employees to take an active part in nationally organised charitable events such as
Macmillan Coffee Day, Wear It Pink and Red Nose Day.

We recognise the benefits to be gained through our community activities; for our employees, for the community and for our business.

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Corporate and Social Responsibility continued

Environment
We are also very aware of the threat to society through bad environmental practices and we are constantly striving to improve our own
policies and processes to counteract potential damage. It is our belief that a large amount of bad environmental deluge is caused through
ignorance, lack of thought and complacency. We promote the welfare of the environment both in the workplace, through compliance with
legislation and best practice, and in our personal lives through face to face contact and communications with our Community Affairs Group.

Health and Safety
It is the firm policy of the Group to take all practicable steps to safeguard the health, safely and welfare of all employees, clients,
sub-contractors and the public.

The Group employs a full time Health and Safety Manager who works with regional teams team to liaise both internally and externally on
Health and Safety issues. As part of their function they carry out spot audits. The Group also subscribes to a number of Health and Safety
Services who provide advice on all safety matters.

Any accidents are thoroughly investigated internally and procedures modified where appropriate. We are always seeking to reduce the risk
of accidents.

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Report of the Independent Auditors

to the members of Mears Group PLC

We have audited the financial statements of Mears Group PLC for the year ended 31 December 2004 which comprise the principal accounting
policies, the consolidated profit and loss account, the balance sheets, the consolidated cash flow statement and notes 1 to 27. 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 in the Report of the Directors.

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 Report of the Directors 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 Report of the Directors, the Chairman’s Statement,
the Operating and 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 2004 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 UK LLP

Registered Auditors

Chartered Accountants

Cheltenham

21 March 2005

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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 and continue to be the
most appropriate.

Basis of consolidation
The Group financial statements consolidate those of the Company and its subsidiary undertakings (see note 10) drawn up to 31 December 2004.
Acquisitions of subsidiaries are dealt with by the acquisition method of accounting.

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
value of the identifiable net assets acquired, is capitalised and is amortised on a straight line basis over its estimated useful economic life.
The period of amortisation is assessed on an acquisition by acquisition basis and is set based on the expected period that the assets acquired
will contribute to the Group’s results. The rate applicable to all goodwill currently included in the balance sheet is 5% per annum.

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 and work in progress
Stocks and work in progress are stated at the lower of cost and net realisable value. Cost includes materials and direct labour. Provision
is made for any foreseeable losses when appropriate.

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 stocks and work in progress to the extent that they cannot be matched with
contract work accounted for as turnover.

Full provision is made for losses on any contracts in the period that a loss is first foreseen.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

_0MEA_arb06.qxd 06/05/2005 12:09 Page 27

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, trade discounts and retentions where appropriate. The particular policies applied are:

(cid:1) response maintenance – turnover includes work in respect of jobs where the benefit of the work completed has been transferred

to the customer;

(cid:1) long-term contract work and planned maintenance – turnover reflects the contract activity during the year and represents the proportion

of total contract value for which the benefit of work completed has been transferred to the customer; and

(cid:1) vehicle movements – turnover includes work in respect of movements completed during the year.

Retirement benefits
Defined contribution pension scheme
The pension costs charged against profits are the contributions payable to individual policies in respect of the accounting period.

Defined benefit pension scheme
The pension costs charged against profits are based on actuarial methods and assumptions designed to spread the anticipated pension costs
over the service lives of the employees in the scheme so as to ensure that the regular pension cost represents a substantially level percentage
of the current and expected future pensionable payroll. Variations from regular costs are spread over the remaining service lives of current
employees in the scheme.

Leased assets
Assets held under finance leases are capitalised in the balance sheet and depreciated over their estimated useful economic lives. The interest
element of leasing payments represents a constant proportion of the capital balance outstanding and is charged to the profit and loss account
over the period of the lease. All other leases are regarded as 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.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

_0MEA_arb06.qxd 06/05/2005 12:09 Page 28

Consolidated Profit and Loss Account

for the year ended 31 December 2004

Turnover

Continuing operations

Acquisitions

Cost of sales

Continuing operations

Acquisitions

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, pre-amortisation

Diluted

Diluted – normalised, pre-amortisation

Note

2004
£’000

2003
£’000

172,078

1,607

112,271

—

173,685

112,271

(127,456)

(1,310)

(83,268)

—

(128,766)

(83,268)

29,003

—

4,727

—

44,622

297

6,747

44,919

(38,081)

6,838

6,842

(68)

6,774

(1,855)

4,919

(5)

4,914

(1,105)

3,809

8.54p

9.04p

7.98p

8.45p

29,003

(24,276)

4,727

4,736

4,814

(1,571)

3,243

3,250

(773)

2,477

5.72p

6.47p

5.48p

6.20p

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.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

_0MEA_arb06.qxd 06/05/2005 12:09 Page 29

Consolidated Balance Sheet

at 31 December 2004

Note

2004
£’000

2003
£’000

10,406

4,450

—

4,628

30,410

8,078

43,116

(38,624)

12,273

3,093

14,904

15,473

2,487

24,875

3,408

30,770

(28,600)

4,492

19,396

(2,960)

16,436

579

3,362

12,310

16,341

16,436

2,170

17,643

(5,351)

12,292

570

3,041

8,501

12,202

12,292

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

Net current assets

Total assets less current liabilities

Creditors: amounts falling due after more than one year

Capital and reserves

Called up share capital

Share premium account

Shares to be issued

Profit and loss account

Equity shareholders’ funds

Equity minority interests

The financial statements were approved by the Board of Directors on 21 March 2005.

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 2004

_0MEA_arb06.qxd 06/05/2005 12:09 Page 30

Company Balance Sheet

at 31 December 2004

Note

2004
£’000

2003
£’000

5,500

—

5,500

(5,653)

12,767

14,296

2,081

2,100

(5,091)

(153)

12,614

(2,243)

10,371

579

3,362

6,340

10,371

(2,991)

11,305

(5,090)

6,215

570

3,041

2,514

6,215

Fixed assets

Investments

Current assets

Debtors

Cash at bank and in hand

Creditors: amounts falling due within one year

Net current liabilities

Total assets less current liabilities

Creditors: amounts falling due after more than one year

Capital and reserves

Called up share capital

Share premium account

Shares to be issued

Profit and loss account

Equity shareholders’ funds

The financial statements were approved by the Board of Directors on 21 March 2005.

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 2004

_0MEA_arb06.qxd 06/05/2005 12:09 Page 31

Consolidated Cash Flow Statement

for the year ended 31 December 2004

Note

2004
£’000

2003
£’000

6,661

4,691

(61)

(26)

(71)

103

(8)

(14)

(1,312)

(1,543)

(2,540)

(2,529)

(829)

(826)

(1,176)

(2,037)

(3,351)

(1,088)

(5,388)

(864)

(623)

330

(210)
—

120

917

(97)

(36)

(57)

(3,665)

Net cash inflow from operating activities

Returns on investments and servicing of finance

Interest received

Interest paid

Finance lease interest paid

Net cash (outflow)/inflow from returns on investments and
servicing of finance

Taxation paid

Capital expenditure

Purchase of tangible fixed assets

Sale of tangible fixed assets

Net cash outflow from capital expenditure

Acquisitions

Purchase of subsidiary undertakings

Net cash/(overdraft) acquired with subsidiary undertakings

Net cash outflow from acquisitions

Equity dividends paid

Financing

Issue of shares

Capital element of finance lease rentals

Repayment of borrowings

Net cash inflow/(outflow) from financing

Increase/(decrease) in cash

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

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

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Notes to the Financial Statements

for the year ended 31 December 2004

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

2004
£’000

162,770

10,915

2003
£’000

99,574

12,697

173,685

112,271

2004
£’000

6,206

568

6,774

2003
£’000

4,193

621

4,814

2004
£’000

14,702

1,734

2003
£’000

10,693

1,599

16,436

12,292

Included within non-audit services are tax compliance fees of £30,000, tax advice fees of £13,000 and other advice fees of £12,000.

Maintenance, mechanical and electrical services

Vehicle collection and delivery

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

Finance charges in respect of finance leases

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 and management

2004
£’000

664

1,082

675

4,233

2004
£’000

(58)

(26)

(68)

2003
£’000

425

697

510

3,887

2003
£’000

(8)

(14)

100

2004
£’000

47,364

4,601

512

2003
£’000

30,924

2,976

391

52,477

34,291

2004

1,233

613

1,846

2003

985

413

1,398

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

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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

During the year contributions were paid to personal pension schemes for four Directors (2003: three).

During the year three Directors (2003: one) exercised share options.

4. Tax on profit on ordinary activities
The tax charge represents:

United Kingdom corporation tax at 30% (2003: 30%)

Share of tax charge of associate

Total current tax

Reversal of timing differences

Tax on profit on ordinary activities

2004
£’000

813

106

954

2004
£’000

332

2004
£’000

1,855

—

1,855

—

1,855

2003
£’000

652

812

2003
£’000

266

—

2003
£’000

1,285

1,286

285

1,571

The tax assessed for the year is lower than the standard rate of corporation tax in the United Kingdom of 30% (2003: 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% (2003: 30%)

Effect of:

Expenses not deductible for tax purposes

Depreciation in excess of capital allowances

Tax relief on exercise of share options

Utilisation of tax losses

Current tax for the year

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

2004
£’000

6,774

2003
£’000

4,814

2,032

1,444

178

(237)

(132)

111

138

(106)

(301)

1,855

1,286

_0MEA_arb06.qxd 06/05/2005 12:09 Page 34

Notes to the Financial Statements continued

for the year ended 31 December 2004

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 £4.93m (2003: £1.93m) which is dealt with in the financial
statements of the Company.

6. Dividends

Ordinary shares

– interim dividend of 0.50p (2003: 0.35p) per share paid

– final dividend of 1.40p (2003: 1.00p) per share proposed

2004
£’000

290

815

1,105

2003
£’000

200

573

773

7. Earnings per share
Basic earnings per share is based on equity earnings of £4.91m (2003: £3.25m) and 57.57m (2003: 56.78m) 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 61.56m (2003: 59.29m) to reflect the potential dilution
effect of employee share schemes.

A normalised pre-amortisation earnings per share is disclosed in order to show performance undistorted by amortisation, the tax effect of
the exercise of share options and the utilisation of tax losses acquired. The normalised pre-amortisation earnings per share is based on equity
earnings (after adding back amortisation) of £5.20m (2003: £3.68m).

Earnings per share

Effect of eliminating amortisation

Effect of full tax adjustment

Normalised, pre-amortisation earnings per share

8. Intangible fixed assets

The Group

Cost

At 1 January 2004

Additions

Revisions to prior year acquisition

At 31 December 2004

Amortisation

At 1 January 2004

Provided in the year

At 31 December 2004

Net book amount

At 31 December 2004

At 31 December 2003

Basic

Diluted

2004
p

8.54

1.15

(0.65)

9.04

2003
p

5.72

0.75

—

6.47

2004
p

7.98

1.08

(0.61)

8.45

Goodwill
arising on
consolidation
£’000

Purchased
goodwill
£’000

12,677

708

(1,912)

11,473

893

634

1,527

9,946

11,784

562

—

562

102

460

489

2003
p

5.48

0.72

—

6.20

Total
£’000

13,239

708

(1,912)

12,035

966

663

1,629

10,406

12,273

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

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8. Intangible fixed assets continued
Additions to goodwill arising on consolidation and purchased goodwill relate to acquisitions as detailed in note 22.

Scion Group was acquired in August 2003; the Group accounts for the year ended 31 December 2003 included a provisional estimate of
£5.8m for the goodwill arising on this transaction. During the current year the review of the fair values of assets and liabilities acquired has
been completed and the estimated fair value of liabilities acquired of £2.2m has been revised upwards by £0.4m. The contingent consideration
is payable over a two year period commencing in 2005 by annual instalments and is based on a multiple of pre-tax profits for the financial
years ending 31 December 2004 and 31 December 2005. The contingent consideration included with the financial statements represents the
Directors’ best estimate of contingent consideration payable. The estimated deferred consideration payable has been revised downwards by
£2.3m to £0.5m. No deferred consideration will fall due for payment in 2005. The impact of the adjustment to fair values and to deferred
consideration has been to reduce the value of goodwill arising in respect of this acquisition by £1.9m to £3.9m.

9. Tangible fixed assets

The Group

Cost

At 1 January 2004

Additions

Acquisition of subsidiary undertakings

Disposals

At 31 December 2004

Depreciation

At 1 January 2004

Provided in the year

Acquisition of subsidiary undertakings

Eliminated on disposals

At 31 December 2004

Net book amount

At 31 December 2004

At 31 December 2003

Freehold
land and
buildings
£’000

Leasehold
improvements
£’000

Plant and
machinery
£’000

Fixtures,
fittings and
equipment
£’000

Motor
vehicles
£’000

—

520

141

—

(30)

631

346

—

(25)

391

240

174

2,368

213

(116)

3,651

2,072

—

(593)

2,543

5,130

1,394

226

(94)

2,109

651

—

(456)

1,590

2,304

953

974

2,826

1,542

846

147

241

(275)

959

495

135

129

(171)

588

371

351

Total
£’000

7,445

2,573

328

(1,014)

9,332

4,352

1,082

194

(746)

4,882

4,450

3,093

Included within disposals is a cost of £0.80m and elimination of depreciation of £0.61m relating to the revision downwards of the fair value
of net assets acquired in the acquisition of Scion Group in August 2003.

The figures stated above include assets held under finance leases as follows:

Net book amount

At 31 December 2004

At 31 December 2003

Depreciation provided in the year

Plant and
machinery
£’000

353

495

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

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Notes to the Financial Statements continued

for the year ended 31 December 2004

10. Fixed asset investments

The Group

Cost

At 1 January 2004

Share of profits of associate

Disposals

At 31 December 2004

Amounts written off

At 1 January 2004

Provided in the year

At 31 December 2004

Net book amount

At 31 December 2004

At 31 December 2003

Associated undertaking

Share of
net assets
£’000

Goodwill
£’000

Total
£’000

Other
investments
£’000

—

(62)

—

£’000

14,296

768

(2,297)

12,767

The investment in associated undertaking relates to a holding of 49% in the ordinary share capital of FITE IT Limited.

On 1 March 2005 the Group disposed of its entire investment in FITE IT Limited.

The Company

Investment in subsidiary undertakings

Cost

At 1 January 2004

Additions

Revisions to prior year acquisition

At 31 December 2004

Additions relate to the purchase of 99.99% of the equity share capital of Mears Insurance Captive Limited.

Scion Group was acquired in August 2003, the accounts for the year ended 31 December 2003 included a provisional estimate of £3.6m
for the consideration payable on the acquisition. During the current year the estimated deferred consideration payable has been revised
downwards as detailed in note 8.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

_0MEA_arb06.qxd 06/05/2005 12:09 Page 37

10. Fixed asset investments continued
The principal undertakings, where the Group held 20% or more of the equity share capital at 31 December 2004, are shown below:

Proportion held

The Group

The Company

Nature of business

Subsidiaries:

Mears Limited

United Fleet Distribution Limited

Mears Facility Management Limited

Mears Building Services Limited

Haydon Mechanical & Electrical Limited

Powersave Limited

Mears Decorating Services Limited

Scion Group Limited

Mears Insurance Captive Limited

Associate:

FITE IT Limited

—

100%

90%

Provision of maintenance services

Vehicle collection and delivery

Provision of facility management services

100%

—

Provision of maintenance services

—

100%

99%

100%

Provision of maintenance, mechanical and electrical services

Provision of heating and air conditioning services

Provision of painting and decorating services

Provision of maintenance, mechanical, electrical, grounds
and facility management services

99.99%

Provision of insurance services

49%

—

Provision of IT support services

With the exception of Mears Insurance Captive Limited, all subsidiary undertakings prepare accounts to 31 December and are registered
in England and Wales. Mears Insurance Captive Limited prepares accounts to 31 December and is registered in Guernsey. FITE IT Limited
prepares accounts to 31 March and is registered in England and Wales.

A full list of subsidiary undertakings is available from the Company Secretary upon request.

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

2004
£’000

601

4,027

4,628

2003
£’000

690

1,797

2,487

The Group

The Company

2004
£’000

23,747

—

5,369

321

973

2003
£’000

17,489

—

5,746

518

1,122

2004
£’000

—

5,500

—

30,410

24,875

5,500

2003
£’000

—

1,900

—

181

—

2,081

Included in trade debtors is an amount of £0.7m (2003: £1.03m) which is due after more than one year and represents retention balances.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

_0MEA_arb06.qxd 06/05/2005 12:09 Page 38

Notes to the Financial Statements continued

for the year ended 31 December 2004

13. Creditors: amounts falling due within one year

The Group

The Company

Bank overdraft

Payments received on account

Trade creditors

Amounts owed to Group undertakings

Corporation tax

Social security and other taxes

Proposed dividend

Other creditors

Accruals and deferred income

Amounts due under finance lease contracts

14. Creditors: amounts falling due after more than one year

Other creditors

Amounts due under finance lease contracts

2004
£’000

5,260

3,027

17,643

—

1,365

3,846

815

635

5,919

114

2003
£’000

1,507

4,455

12,451

—

793

3,021

574

867

4,717

215

2004
£’000

1,984

—

2003
£’000

—

2,141

3,726

815

550

129

—

574

706

—

38,624

28,600

5,653

5,091

The Group

The Company

2004
£’000

2,953

2,960

2003
£’000

5,265

5,351

2004
£’000

2,243

—

2,243

2003
£’000

5,090

—

5,090

Included in other creditors for the Company and Group is £2.79m (2003: £5.80m), of which £0.55m (2003: £0.71m) falls due within one year,
relating to deferred consideration on the acquisitions of M&T Group Limited, Scion Group Limited and Powersave Limited. These are payable
by instalments over a three year period.

Also included in other creditors for the Group is £0.71m (2003: £0.18m) which relates to deferred consideration on the acquisition of the trade
and assets of Sheffield Décor Services and the acquisition of R Carter & Sons Limited.

Amounts due under finance lease contracts shown above fall due between one and two years and are secured on the assets to which they relate.

The bank overdraft facility is secured by a fixed and floating charge over the Company and Group’s assets.

15. Financial instruments
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.

Fair values of financial assets and financial liabilities
The fair value of the Group’s financial assets and financial liabilities is not materially different to the book value.

Short-term debtors and creditors
Short-term debtors and creditors have been excluded from all the following disclosures.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

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15. Financial instruments continued
Interest rate risk
The Group finances its operations through a mixture of retained profits and bank borrowings.

The interest rate exposure of the financial liabilities of the Group as at 31 December 2004 was:

Financial liabilities – 2004

Financial liabilities – 2003

Interest rate

Fixed
£’000

121

301

Floating
£’000

5,260

1,782

Zero
£’000

3,503

5,696

Total
£’000

8,884

7,779

Included above in floating interest rate exposure is £5.3m bank overdraft. The interest rate risk on this liability is directly offset by cash at bank
of £8.1m.

The floating rate borrowings bear interest at rates based on LIBOR. The fixed rate borrowings relate to finance leases.

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.

Strategy
The Group seeks to manage long-term financing of acquisitions and organic growth through retained profits. Short-term financing is managed
through the use of a bank overdraft and the above short-term borrowing facility.

16. Share capital

Authorised

100,000,000 ordinary shares of 1p each

Allotted, called up and fully paid

57,883,146 (2003: 56,997,627) ordinary shares of 1p each

2004
£’000

2003
£’000

1,000

579

570

During the year 885,519 ordinary shares of 1p each were issued for consideration of £330,198 as a result of share options being exercised.
The difference between the nominal value of £8,855 and the total consideration of £330,198 has been credited to the share premium account.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

_0MEA_arb06.qxd 06/05/2005 12:09 Page 40

Notes to the Financial Statements continued

for the year ended 31 December 2004

16. Share capital continued
At 31 December 2004, the following ordinary shares were subject to options:

Executive Share Option scheme

Unapproved Options

Enterprise Management Incentive scheme

Save As You Earn scheme

Included above are the following options granted to Directors:

Date of grant

Number

Exercise price

Exercise dates

1998

2000

2001

2004

2001

2002

2003

2004

2001

2002

2003

2001

2002

2003

2004

25,000

110,000

133,000

570,934

15,463

110,000

1,136,000

1,470,130

659,066

184,537

1,415,000

640,316

192,857

544,870

62,570

231,894

301,353

439,181

11.75p

19.25p

50p

154p

194p

2001–2008

2003–2010

2004–2011

2007–2014

50p

2004–2011

67.5p

2005–2012

77p

154p

194p

2006–2013

2007–2014

50p

2004–2011

67.5p

2005–2012

67p

77p

2006–2013

50p

82.5p

100p

149p

2004/2006

2005/2007

2006/2008

2007/2009

Number of options
during the year

Granted

Exercised

31 December
2004

Exercise
price

Market price
at the date
of exercise

Exercise
dates

Director

D J Robertson

P L Molloy

R Holt

S J Black

1 January
2004

9,687

208,000

200,000

4,612

—

50,000

9,687

142,857

5,757

100,000

—

50,000

9,687

435,000

—

50,000

200,000

9,687

—

9,687

—

9,687

—

208,000

200,000

4,612

50,000

—

142,857

5,757

100,000

50,000

—

435,000

50,000

200,000

50p

67.5p

77p

100p

154p

50p

67p

82.5p

77p

154p

50p

77p

154p

194p

167p

2004

—

2004–2011

2005–2012

2006–2013

2006

2007–2014

178p

2004

—

2005–2012

2005

2006–2013

2007–2014

167p

2004

—

2006–2013

2007–2014

No options lapsed during the year. The market price at 31 December 2004 was 206.5p and the range during 2004 was 126p to 208p.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

_0MEA_arb06.qxd 06/05/2005 12:09 Page 41

17. Share premium account and reserves

The Group

At 1 January 2004

Issue of shares

Retained profit for the year

At 31 December 2004

The Company

At 1 January 2004

Issue of shares

Retained profit for the year

At 31 December 2004

Share
premium
account
£’000

3,041

321

—

3,362

Share
premium
account
£’000

3,041

321

—

3,362

Shares
to be
issued
£’000

—

Shares
to be
issued
£’000

—

The balance on the share premium account may not be legally distributed under section 264 of the Companies Act 1985.

18. Reconciliation of movements in equity shareholders’ funds

The Group

Profit for the financial year

Dividends

Shares to be issued

Issue of shares

Net increase in equity shareholders’ funds

Equity shareholders’ funds at 1 January 2004

2004
£’000

4,914

(1,105)

3,809

—

330

4,139

12,202

Profit
and loss
account
£’000

8,501

—

3,809

12,310

Profit
and loss
account
£’000

2,514

—

3,826

6,340

2003
£’000

3,250

(773)

2,477

2,643

9,559

Equity shareholders’ funds at 31 December 2004

16,341

12,202

19. Net cash inflow from operating activities

Operating profit

Depreciation and amortisation

Loss on disposal of fixed assets

Increase in stocks

Increase in debtors

Increase in creditors

2004
£’000

6,838

1,746

(2,043)

(5,235)

5,322

2003
£’000

4,727

1,122

(1,069)

(3,461)

3,333

Net cash inflow from operating activities

6,661

4,691

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

_0MEA_arb06.qxd 06/05/2005 12:09 Page 42

Notes to the Financial Statements continued

for the year ended 31 December 2004

20. Reconciliation of net cash flow to movement in net funds

Increase/(decrease) in cash in the year

Cash outflow from financing

Change in net funds resulting from cash flows

Loans and finance leases acquired with subsidiaries

Net funds at 1 January 2004

2004
£’000

917

210

1,127

(30)

1,600

2003
£’000

(3,665)

133

(3,532)

(434)

5,566

Net funds at 31 December 2004

2,697

1,600

21. Analysis of changes in net funds

Cash at bank and in hand

Overdraft

Finance leases

At
1 January
2004
£’000

3,408

(1,507)

1,901

(301)

1,600

Cash
flow
£’000

4,582

(3,753)

829

210

1,039

Acquisitions
£’000

At
31 December
2004
£’000

—

(30)

8,078

(5,260)

2,818

(121)

2,697

22. Acquisitions
On 30 April 2004 the Group acquired the entire issued share capital of R Carter & Son (Painting Contractors) Limited for a maximum
consideration of £0.83m (including acquisition costs), satisfied by £0.42m cash, and contingent consideration of £0.41m. The contingent
consideration is payable over a three year period commencing in 2005, by annual instalments and is based on post tax profits for the accounting
years ending 30 April 2005, 30 April 2006 and 30 April 2007. The contingent consideration included represents the Directors’ best estimate of
contingent consideration payable. On 21 May 2004 the Group acquired the entire issued share capital of Chas. A. Critchley (General Contractor)
Limited for £0.16m (including acquisition costs), satisfied by £0.16m cash.

Both purchases have been accounted for by the acquisition method of accounting.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

_0MEA_arb06.qxd 06/05/2005 12:09 Page 43

22. Acquisitions continued
The assets and liabilities acquired were as follows:

Book value
£’000

Adjustments
£’000

Fair value
£’000

Fixed assets

Tangible assets

Current assets

Stocks and work in progress

Debtors

Cash at bank

Total assets

Creditors

Bank overdraft

Trade creditors

Other creditors

Accruals

Corporation tax

Total liabilities

Fair value of net assets acquired

Goodwill capitalised

Satisfied by:

Cash

Deferred consideration

214

108

238

107

667

113

260

(80)

(10)

—

(90)

—

134

238

107

577

113

280

297

690

987

577

410

987

Provisional fair value adjustments represent the write off of a revaluation of tangible fixed assets totalling £0.08m and other adjustments of £0.03m.

The losses after taxation for the period from the beginning of the financial years of the acquired companies to the dates of acquisition in
aggregate were £0.01m. The profit after taxation for the financial year prior to acquisition of the companies acquired was £0.14m in aggregate.

During the year the Group and Company paid £0.58m in respect of contingent consideration relating to acquisitions in prior periods.

The Company also invested £0.77m in Mears Insurance Captive Limited, relating to £0.75m in cost of investment and £0.02m of set-up costs.
This investment resulted in the capitalisation of £0.02m of goodwill on consolidation.

Analysis of net outflow in respect of the purchase of the subsidiary undertakings:

Cash at bank and in hand acquired

Bank overdrafts

Cash consideration

2004
£’000

107

(19)

(1,176)

2003
£’000

(3,356)

(3,351)

(2,037)

(1,088)

(5,388)

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

_0MEA_arb06.qxd 06/05/2005 12:09 Page 44

Notes to the Financial Statements continued

for the year ended 31 December 2004

23. Capital commitments
Neither the Group nor Company had any capital commitments at 31 December 2004 or at 31 December 2003.

24. Contingent liabilities
The Group has guaranteed that it will complete the contracts it has commenced with 14 (2003: 23) local authorities. At 31 December 2004
these guarantees amounted to £1.95m (2003: £2.38m).

The Group and Company had no other contingent liabilities at 31 December 2004 or at 31 December 2003.

25. Pensions
Defined contribution schemes
The Group operates a defined contribution Group personal pension scheme for the benefit of certain employees. The Group contributes
to personal pension schemes of certain Directors and employees. The Group operates a stakeholder pension plan available to all employees.

Defined benefit scheme
The Group contributes to defined benefit schemes on behalf of a number of employees. The Group operates a defined benefit pension
scheme for the benefit of certain employees of Scion Group Limited and its subsidiary undertakings. The assets of the scheme are
administered by trustees in a fund independent from the assets of the Group.

SSAP 24 accounting valuation
Pension costs are assessed in accordance with the advice of a qualified actuary using the projected unit method. The assumptions which
have the most significant effect on the results of the valuation are:

Investment returns per annum
Pension increases per annum
Salary scale increases per annum

7.0%
2.5%
3.0%

The most recent valuation was at 31 March 2003.

The total contributions made in the year ended 31 December 2004 were £0.13m (2003: £0.03m).

The market value of the scheme assets as at 31 March 2003 was £0.27m. The actuarial value of those assets was sufficient to cover 77%
of the benefits that had accrued to members, after allowing for expected future increases in earnings.

FRS 17 Retirement Benefits
Costs and liabilities of the scheme are based on actuarial valuations. The latest full actuarial valuation was carried out at 31 March 2003
and updated to 31 December 2004 by a qualified independent actuary using the projected unit method.

The main assumptions used by the actuary were:

Rate of increase of salaries

Rate of increase for pensions in payment

Discount rate

Inflation

The assets in the scheme and expected rates of return were:

Equities

Bonds

Cash

Group’s estimated asset share

Present value of scheme liabilities

Deficit in scheme

Related deferred taxation asset

Net pension liability

2004
%

3.3

2.8

5.3

2.8

2003
%

8.0

5.0

4.0

2003
%

3.3

2.8

5.5

2.8

2003
£’000

356

442

530

(88)

(62)

2004
%

7.5

4.9

4.8

2004
£’000

522

652

794

(142)

(99)

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

_0MEA_arb06.qxd 06/05/2005 12:09 Page 45

25. Pensions continued
FRS 17 Retirement Benefits continued
If the above amounts had been recognised in the financial statements, the Group’s net assets and profit and loss reserve at 31 December 2004
would be as follows:

Net assets as reported

Net pension liability under FRS 17

Net assets including net pension liability

Profit and loss reserve as reported

Net pension liability under FRS 17

Profit and loss reserve including net pension liability

2004
£’000

16,436

(99)

2003
£’000

12,292

(62)

16,337

12,230

2004
£’000

12,310

(99)

12,211

2003
£’000

8,501

(62)

8,439

On the basis of the above assumptions and in compliance with FRS 17 the amounts that would have been recognised in the consolidated
profit and loss account and the statement of total recognised gains and losses for the year ended 31 March 2004 would be as follows:

Analysis of amounts that would have been charged to operating profit:

Current service cost

Past service cost

Total operating charge

Amount that would have been charged to net interest payable:

Expected return on pension scheme assets

Expected return on pension scheme liabilities

Net finance expense

Amount that would have been charged to profit before taxation on a FRS 17 basis

Amount that would have been charged to the statement of total recognised gains and losses:

Actual return less expected return on pension scheme assets

Experience gains and losses arising on the scheme liabilities

Changes in assumptions underlying the present value of the scheme assets

Actuarial loss recognised

2004
£’000

121

126

(33)

131

2004
£’000

(42)

(32)

(58)

2003
£’000

—

(6)

2003
£’000

(29)

(6)

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

_0MEA_arb06.qxd 06/05/2005 12:09 Page 46

Notes to the Financial Statements continued

for the year ended 31 December 2004

25. Pensions continued
FRS 17 Retirement Benefits continued
The movements in the net pension liability, on a FRS 17 basis, during the year ended 31 December 2004 were:

Deficit at 1 January 2004 (on acquisition)

Current service cost

Contributions

Past service costs

Other finance income

Actuarial loss

Deficit in scheme at end of year

The history of experience gains and losses which would have been recognised under FRS 17 were:

Difference between the expected and actual return on scheme assets:

Amount (£’000)

Percentage of scheme assets

Experience gains and losses on scheme liabilities:

Amount (£’000)

Percentage of the present value of scheme liabilities

Total amount recognised in the statement of total recognised gains and losses:

Amount (£’000)

Percentage of the present value of the scheme liabilities

2004
£’000

(88)

(121)

125

(5)

(58)

(142)

2004
£’000

2.5%

(42)

(5.3%)

(58)

(7.3%)

2003
£’000

(75)

(36)

—

(6)

(88)

2003
£’000

5.0%

0.2%

(6)

1.1%

26. Leasing commitments
The Group
Operating lease payments amounting to £3.23m (2002: £1.88m) 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

2004

2003

Land and
buildings
£’000

727

253

1,072

Other
£’000

263

1,894

—

2,157

Land and
buildings
£’000

170

234

315

719

Other
£’000

261

901

—

1,162

27. Related party transactions
During the year the Group purchased goods to the value of £0.06m (2003: £0.01m) from FITE IT Limited, an associated company.

At 31 December 2004 there was a total loan balance owed by FITE IT Limited £0.05m (2003: £0.05m).

On 1 March 2005 the Group disposed of its entire investment in FITE IT Limited.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

_0MEA_arb06.qxd 06/05/2005 12:09 Page 47

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, Arbuthnot House,
20 Ropemaker Street, London EC2Y 9AR at 12:30pm on 1 June 2005 when the following ordinary business will be considered:

1. To receive and adopt the accounts for the year ended 31 December 2004, together with the Reports of the Directors and Auditors thereon.

2. To declare a final dividend of 1.4p per share on the ordinary share capital of the Company.

3. To re-appoint Grant Thornton UK LLP as auditors and authorise the Directors to determine their remuneration.

4. To re-appoint M A Macario as a Director who, in accordance with the Articles of Association, retires by rotation.

5. To re-appoint R B Pomphrett as a Director who, in accordance with the Articles of Association, retires by rotation.

6. To re-appoint S J Black as a Director who, in accordance with the Articles of Association, retires having been appointed since the last

Annual General Meeting.

And the following special business:

Ordinary resolution

7. THAT the report of the Board in relation to remuneration policy and practice (as referred to on pages 21 and 22 of the Annual Report

and Accounts for the year ended 31 December 2004) be approved.

8. THAT in substitution for the authority to allot relevant securities conferred on the Directors by the ordinary resolution passed on

2 June 2004, 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 £275,365 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

9. THAT:

(a)

the Directors be authorised to allot securities of the Company (pursuant to the authority conferred on the Directors by resolution 8
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)

in connection with any rights issue; and

(ii) otherwise than under sub-paragraph (a) (i) of this resolution, with an aggregate nominal amount of up to £28,941.

(b) 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

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

_0MEA_arb06.qxd 06/05/2005 12:09 Page 48

Notice of the Annual General Meeting continued

Special resolutions continued

(c)

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);

(ii)

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

(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

Secretary

9 May 2005

Notes

The Leaze

Salter Street

Berkeley

Gloucestershire

GL13 9DB

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 at Neville Registrars Limited, Neville House, 18 Laurel Lane, Halesowen, West Midlands B63 3DA
not less than 48 hours before the time fixed for the Meeting.

In accordance with Regulation 34 of Uncertified Securities Regulations 1995, only those members entered on the register of members
of the Company on 27 May 2005 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)

the Register of Directors’ interests in the share capital of the Company; and

(b) copies of the Directors’ Contracts of Service with the Company or its subsidiaries.

Mears Group PLC ANNUAL REPORT & ACCOUNTS 2004

_1cover.qxd 06/05/2005 12:28 Page 2

Social Housing – Market Overview

Mears’ commitment to environmental issues is reflected in this annual report which has been printed on Revive Silk, a recycled paper

stock. It contains 75% de-inked post consumer waste and 25% combination mill broke and virgin fibres.

This document was printed by Beacon Press using their environmental print technology which minimises the impact of printing on the

Both the printer and the paper mill are registered to ISO 14001.

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

_1cover.qxd 06/05/2005 12:26 Page 1

Mears Group PLC
The Leaze
Salter Street
Berkeley
Gloucestershire
GL13 9DB
Tel: 01453 511911
Fax: 01453 511914
www.mearsgroup.co.uk

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