Mears Group PLC annual report and accounts 2005 Mears Group PLC 1390 Montpellier Court Gloucester Business Park Brockworth Gloucester GL3 4AH Tel: 01453 511 911 www.mearsgroup.co.uk IMPROVING HOMES, IMPROVING NEIGHBOURHOODS, IMPROVING LIVES M e a r s G r o u p P L C a n n u a l r e p o r t a n d a c c o u n t s 2 0 0 5 designed & produced by T H E D E S I G N P O R T F O L I O a member of the flathill communications group plc www.flathillplc.com Mears’ commitment to environmental issues is reflected in this annual report which has been printed on Revive Uncoated, 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 this production has been recycled. The printer is a Carbon Neutral® company. Both the printer and the paper mill are registered to ISO 14001. Mears Group PLC annual report and accounts 2005 Mears Group PLC annual report and accounts 2005 Who we are We are the leading social housing repairs and maintenance provider in the UK. We achieve the highest levels of financial performance and innovation in our sector. 2,300 people work at Mears. Together with our clients, we maintain, repair and upgrade people’s homes. We carry out more than 3,000 repairs each day to 500,000 houses nationwide. Our customer service philosophy is simple: we want to make tenants smile. Our results in 2005 underline the financial and operational strengths of this Group. Our vision Our purpose is to make a positive difference to the communities we serve by improving homes, improving neighbourhoods and improving lives. We do this by constantly striving to achieve the highest levels of customer satisfaction, efficiency and effectiveness in the social housing sector. Our approach is based on the development of outstanding partnerships with employees, clients, tenants and the wider community. Success enables us to create great opportunities for our employees and sustainable value for our shareholders. What we do Every day our people support clients and tenants by: Maintaining and improving homes, buildings and communities. Carrying out a planned programme of Decent Homes improvements. Fixing damage and responding to other urgent tenant needs. We work hard to improve people’s quality of life wherever we operate. How we do it We listen carefully to people’s needs and we always try to find better ways to do things. We believe tenants should be involved at all stages and always put their needs at the heart of what we do. We call our approach the One Mears Way. Through this we capture the best ideas, processes and methods and share them with colleagues so all stakeholders can understand and follow the right way to do things – every single day. Why we do it Helping our clients to meet their objectives enables us to grow the scale and profitability of our business so as to provide improving service levels. That means we can create great opportunities for our employees and sustainable value for our shareholders. Success also enables us to support a wide range of community projects, from breakfast clubs for schoolchildren to skills training centres for potential employees. Annual General Meeting Record date for final dividend 7 June 2006 16 June 2006 Dividend warrants posted to shareholders 3 July 2006 Interim results announced 22 August 2006 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 noon on 7 June 2006 when the following ordinary business will be considered: 1. To receive and adopt the accounts for the year ended 31 December 2005, together with the reports of the Directors and auditors thereon. 2. To declare a final dividend of 1.9p 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 R Holt as a Director who, in accordance with the Articles of Association, retires by rotation. 5. To re-appoint D J Robertson as a Director who, in accordance with the Articles of Association, retires by rotation. And the following special business: Ordinary resolution 6. 7. THAT the report of the Board in relation to remuneration policy and practice (as referred to on pages 20 and 21 of the annual report and accounts for the year ended 31 December 2005) be approved. THAT in substitution for the authority to allot relevant securities conferred on the Directors by the ordinary resolution passed on 1 June 2005, 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 £272,738 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 8. THAT: (a) the Directors be authorised to allot securities of the Company (pursuant to the authority conferred on the Directors by resolution 7 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 £29,414. (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 (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 2006 1390 Montpellier Court Gloucester Business Park Brockworth Gloucester GL3 4AH Notes 1. A member entitled to attend and vote at the Meeting may appoint a proxy to attend and, on a poll, to vote instead of him. A proxy need not also be a member of the Company. 2. 3. 4. 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 2 June 2006 shall be entitled to attend or vote at the Meeting in respect of the numbers of shares registered in their name on that date. 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: the Register of members; the Register of Directors’ interests in the share capital of the Company; the Memorandum and Articles of Association; details of proxies received; and copies of the Directors’ Contracts of Service with the Company or its subsidiaries. 49 N o t i c e o f t h e A n n u a l G e n e r a l M e e t i n g Mears Group PLC annual report and accounts 2005 Highlights Profit before tax* £’000 Diluted earnings per share** pence Dividend per share pence +38.0% +35.0% +36.8% ������ ������ ������ ����� ����� ����� ����� ����� ����� ����� ����� ����� ����� ����� ����� ����� ����� ����� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� Before share option charges * ** Full tax, before share option charges Social housing turnover up 38.4% to £144.1m (2004: £104.1m). ����� ����� ����� Order book £1 billion (2004: £815m). ��� ��� ��� Net cash inflow of £4.1m (2004: £0.9m). ��� ��� ��� ����� ����� ����� ����� ����� ����� ����� ����� ����� ��� ��� Margins increased across all business segments. ��� ��� ��� ��� ��� ��� ��� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� 01 01 i i R R e e v v e e w w o o f f t t h h e e y y e e a a r r Who we are IFC Financial calendar IFC Highlights 01 Our business and values 02 Our market 03 Chairman’s statement 04 Operating and financial review 06 Corporate social responsibility 12 Board of Directors 16 Shareholder and corporate information 17 Report of the Directors 18 Corporate governance 20 Group accounts 22 Report of the independent auditors – Group 23 Principal accounting policies – Group 24 Consolidated income statement 27 Consolidated balance sheet 28 Consolidated statement of recognised income and expense 29 Consolidated cash flow statement 30 Notes to the financial statements – Group 31 Company accounts 43 Report of the independent auditors – Company 44 Principal accounting policies – Company 45 Parent Company balance sheet 46 Notes to the financial statements – Company 47 Notice of the Annual General Meeting 49 ����� ����� ����� ����� ����� ����� ����� ����� ����� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ��� ��� ��� ��� ��� ��� ��� ��� ��� ��� ��� ��� ��� ��� ��� ��� ��� ��� �� �� �� �� �� �� ������ ������ ������ ������� ������� ������� �� �� �� �� �� �� ��� ��� ��� �� �� �� �� �� �� ������� ������� ������� ������������ ������������ ������������ ���� ���� ���� ���� ���� ���� ���� ���� ���� ��� ��� ��� ��� ��� ��� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� Our business Mears Group PLC annual report and accounts 2005 5.4m the number of social homes in the UK 500,000 homes supported every day by Mears Our values Mears is a community in its own right. What we say and do creates our reputation – as individuals and as an organisation – and this drives our success. We have introduced a set of values to guide us. These help to make us more effective and efficient – and they help to make Mears a great place to work. 02 i R e v e w o f t h e y e a r We value our customers and communities, putting the needs of our clients and tenants at the heart of everything we do. We value teamwork, supporting each other, sharing ideas and never excluding others. We value personal responsibility, setting and achieving consistently high standards in our work and our conduct, and never adopting a negative attitude. We value innovation, being inventive in our approach and never allowing conventional thinking or bureaucracy to get in the way. Mears Group PLC annual report and accounts 2005 Our market Social housing is a buoyant market with lots of potential for further growth. We meet the need for both ongoing repairs and maintenance work and the capital works required to upgrade housing to meet the Decent Homes Standard. All local authorities are required 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. Central Government is investing around £3.5 billion each year on Decent Homes Standard works and we expect this commitment to last well beyond 2010, probably until 2015. We believe the repairs and maintenance area will provide us with an addressable market of at least £5 billion each year. This market area is growing and the key trend is a move towards larger, longer term contracts. More and more local authority clients want to work with suppliers able to develop and implement innovative partnership models. We expect the market share of larger service providers to increase in both Decent Homes and repair and maintenance as an increasing number of local authorities, arms-length management organisations and housing associations seek to develop long term partnerships with a smaller number of providers. ������ ����� ����� ����� ����� ����� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ����� ��� ��� ��� ����� ����� ����� ��� ��� Group turnover £m ���� ���� ���� ���� ���� ���� ���� ���� ���� +17.2% ����� ����� ����� ���� ���� ���� ���� ���� ���� ���� 01 ��� ��� Key ��� Mears locations ��� ��� ��� �� �� ������ ������� �� �� ��� �� �� ������� ������������ ���� ���� ���� ��� ��� ���� ���� ���� ���� ���� 03 i R e v e w o f t h e y e a r Mears opens and runs offices at the heart of the communities we serve. We are a local business on a national scale. Mears Group PLC annual report and accounts 2005 “We’re now moving into a period of particularly rapid growth. There are enormous opportunities ahead – the greatest ever for Mears. I remain absolutely committed to the Group and I’m looking forward to leading the team that takes Mears to the next level.” 04 i R e v e w o f t h e y e a r Chairman’s statement Bob Holt Mears was listed on the Alternative Investment Market (AIM) of the London Stock Exchange in October 1996. We had 83 employees and turnover of £12m. Since then we have achieved an average annual compound growth rate in profits of 42%. In 2005 our performance was recognised with the Decade of Excellence and Best Performing Share Over 5 Years awards at the AIM Awards. It’s taken a lot of effort to achieve our results and the team deserves accolades like these. We’ve continued our strong growth this year. In line with market expectations, turnover was up 17.2%, operating profit before share option charges was up 37.1% and dividend was up 36.8%. We now employ 2,300 people and we have an order book in excess of £1 billion. It’s another very strong, very consistent set of results that stand out in our sector. Consistent qualities We’ve been through enormous changes over ten years but the same four qualities have remained: We have strong financial management across the entire business. We have an open and honest approach to partnership – with clients, with tenants, with suppliers and with advisers. We know how to work together effectively. We are not afraid of hard work. The £1 billion order book is an important indicator of our strengths. Yes, the quantity of future revenue involved is impressive, but I believe it’s the quality of those orders that’s most significant. These are long term agreements with clients based on the right key performance indicators. We have never taken on short term contracts simply to create more flattering figures. We’re building a robust business here, a business based on real partnerships. The big challenge – the right people One of the questions I am always asked is ‘Can you continue to manage growth?’ I’ve been asked that every year since I became Chairman. I think our figures demonstrate we meet our challenges head on. We’re now moving into a period of particularly rapid growth and I’m sure we will, once again, manage change successfully. The key is to recruit early and bring in the right people before you need them. We also need to have the right number of excellent people in place, even though there is a skills shortage. We’re developing innovative training, development and apprenticeship schemes to meet that challenge. For example, in 2006 every tradesperson within the Company will have the opportunity to study towards a professional qualification – a first for Mears. Over the last 12 months Stuart Black has had an immediate effect as Chief Operating Officer and we’ve recognised this by appointing him as Chief Executive. Stuart is enhancing the professionalism of the Group and is introducing a wide range of measures based on strong processes. It’s exactly what we need. The finance team has continued its excellent work – how many companies can achieve earnings growth of around the 40% mark and still generate cash? In addition, Stuart has introduced an experienced management team across areas such as IT, Marketing and HR. Mears Group PLC annual report and accounts 2005 2,300 people work within Mears ������ ����� ����� ����� ����� ����� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� Growth in average employee numbers ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ����� ��� ��� ��� +21.8% ����� ����� ����� ��� ��� ���� ���� ���� ���� ���� ���� ���� ���� ���� 03 ����� ����� ����� ���� ���� Summary The trend for larger, longer term contracts continues and plays to our strengths ���� ���� ���� ���� ���� as the leader in our market. We are very strong in the buoyant repairs and maintenance market and see no difficulty in continuing to build the emphasis of our business as Decent Homes ends. ��� ��� Corporate social responsibility is at the heart of this business. ��� ��� Improving communities is part of our DNA Corporate social responsibility is not just a set of policies here – it’s at the heart of this Group. I believe our work should help to improve daily life for people. I say our job is to make tenants smile. That belief runs through our repairs and refurbishments work and the additional projects we’re involved in. Our 100 Days in the Community programme included 120 separate projects where Mears employees used their time, skills and energy to make a difference. We’ll do even more in 2006. �� �� ������ ������� Many of our employees come from the communities they serve and through apprenticeship schemes we’re helping to increase employment and opportunity in deprived areas. We’re planning to make our workforce even more reflective of our communities, employing more elderly people to work with elderly people. Our community work has a real effect on people’s lives. For example, Mears employees have been helping the Whitechapel Homeless Mission in East London by renovating part of the building and carrying out volunteer work. I am also personally supporting the Clean-up London campaign against anti-social behaviour and Mears branches are involved in everything from graffiti removal to supporting youth sports schemes. A strong position in a great market There are excellent prospects in social housing. We’re continuing to see a trend for larger, longer term contracts and that plays to our strengths as the leader in our market. We can maximise our advantages in terms of quality of service, scale, innovation and our proven commitment to working in partnership. ��� 05 i R e v e w o f t h e y e a r ��� I see no signs that change in the political climate will affect our market significantly. The Decent Homes initiative was scheduled ��� to end in 2010 – though we expect that to stretch to 2015. We are very strong in the buoyant repairs and maintenance market and see no difficulty in continuing to build the emphasis of our business as Decent Homes ends. I’ve been in support services for 25 years and it has always surprised me that there has been relatively little consolidation in social housing. It remains a relatively fragmented sector, with competitors and �� �� potential entrants showing no real appetite for merger so far. Mears ��� is in a good position in terms of any future consolidation. We have robust organic growth, but we are also well placed to make acquisitions if and when the right opportunities emerge. �� �� ������� ������������ Looking ahead I would like to thank everyone at Mears for their commitment ���� and hard work in 2005. My hope for 2006 is that the excellent team here will raise their game once again. I want everyone within this Group to get the most from the career opportunities they have and to be ambitious for themselves and the business. ���� ���� There are enormous opportunities ahead – the greatest ever for Mears. I remain absolutely committed to this Group and I’m looking forward to leading the team that takes Mears to the next level. ��� ���� ���� ���� ���� ���� Bob Holt bob.holt@mearsgroup.co.uk Chairman 18 April 2006 Mears Group PLC annual report and accounts 2005 “The social housing market is robust. The forward order book is extremely healthy both in terms of ” quantity and quality of future work. Operating and financial review Stuart Black (CE), David Robertson (FD) 06 i R e v e w o f t h e y e a r We carry out 3,000 repairs every day We describe ourselves as the leader in the social housing market. What defines leadership for us? We continually demonstrate thought leadership and innovation. We have the most repair and maintenance contracts in our sector. We have the best margins in our sector. We have the strongest cash generation in our sector. We believe our strong financial performance in 2005 underlines our strengths and demonstrates once again that we are able to deliver impressive and sustainable growth. Before we review our performance we would like to note that we now prepare accounts in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The comparatives in the results below have been restated to reflect this change. Turnover In 2005 we grew turnover to £203.5m (2004: £173.7m), an increase of 17.2%. Within this overall figure social housing turnover was up 38.4%, reflecting a strong performance in winning new business. Operating result We achieved an operating result before share option charges of £10.3m (2004: £7.5m) – a 37.1% increase. We increased operating margins in our social housing activities to 5.5% (2004: 5.2%) despite major increases in the operational demands placed on us by new work from contracts secured in late 2004 and 2005. Mears Group PLC annual report and accounts 2005 Key strategic progress this year: Quality £1 billion order book. Acquisitions integrated into core business. Risk management processes strengthened. Capacity increased ahead of market demand. Senior management and business processes enhanced. Company-wide training and development. ������ ����� ����� ����� ����� ����� ���� ���� ���� ���� ���� ���� ���� ���� ���� Order book growth £m ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� +22.7% ����� ��� ��� ��� ����� ����� ����� ��� ��� ���� ���� ���� ���� ���� ���� ���� ���� ���� ����� ����� ����� ���� ���� Summary Social housing turnover up 38.4%. Margin increases across all business segments. ���� ���� ���� ���� ���� 90.8% of EBITDA converted into operating cash flow. Order book stands at £1 billion. ��� ��� Our mechanical and electrical division also achieved an improvement in margins at 3.8% (2004: 2.8%). United Fleet Distribution increased its operating margin to 4.8% (2004: 4.2%). Our ongoing investment in Group infrastructure provides scope for better margins and even greater customer satisfaction. Share option charges The share option charge for 2005 was £0.5m, up from £0.3m in 2004. There is no cash impact from this new expense which arises from the adoption of IFRS. Finance The Group again maintained its broadly neutral cash position throughout 2005 and incurred a net finance charge of £0.02m (2004: £0.07m). Tight working capital control remains paramount given the tremendous scale of growth we’re generating. Tax expense £2.5m has been provided for corporation tax (2004: £1.8m). The effective rate in 2005 of 26.1% (2004: 24.7%) is low due to the impact of a corporation tax deduction received on the exercise of share options and the utilisation of tax losses. Earnings per share Normalised diluted earnings per share (EPS) before share option charges increased 35.0% to 11.41p (2004: 8.45p). This is calculated after applying a full tax charge. We consider this to be the fairest method of consistently evaluating the performance of Mears management. 07 i R e v e w o f t h e y e a r Dividend The dividend increase is in line with our earnings growth. A final dividend of 1.9p per share is proposed which combined with the 0.7p interim dividend gives a total dividend of 2.6p per share (2004: 1.9p). In accordance with IFRS, the final dividend has not been recognised within the financial statements as it did not represent an obligation at the balance sheet date. ��� ��� ��� ��� The dividend is payable on 3 July 2006 to shareholders on the register on 16 June 2006. �� �� ��� �� �� ������ ������� Cash flow The cash flow position continues to underline our strength as a business. A net cash inflow of £4.1m was achieved in the year (2004: £0.9m inflow). The Group converted 90.8% of EBITDA into operating cash flow (2004: 77.6%). A net £2.8m was invested in new technology and operational bases, with ten new sites opened in the year. The settlement of deferred consideration on previous acquisitions absorbed £0.8m of cash. Our net cash position at 31 December 2005 was £6.9m, ���� up from £2.8m a year ago. �� �� ������� ������������ Acquisitions The painting businesses we have acquired are now integrated into our social housing division and are focused on developing the significant growth opportunities in this sector. ���� ���� Excellent market opportunities in social housing mean that organic growth is likely to fuel our momentum, but we continue to seek out quality businesses with the potential to help us further our strategic objectives and improve or broaden our services. ��� ��� ���� ���� ���� ���� ���� Mears Group PLC annual report and accounts 2005 Mears Client Partnership Group Mears believes significant procurement efficiencies can be made by bringing clients together on both response and Decent Homes work. The Mears Client Partnership Group currently includes 14 clients. The aim of the Group is to identify products that will both improve the service for tenants and reduce the long term cost of repair and maintenance work. The Group takes account of the full cost of the product when selecting items. This means allowing for both the product life cycle and the long term cost of product maintenance. Peter Sharman from Welwyn and Hatfield Council states, “I believe there is much to be gained from Mears and clients working together to improve the long term value of response and maintenance work, through the joint selection of key products.” Order book The visibility of our earnings continues to improve. £315m of new work was secured in the year from 14 customers. Our order book now stands at £1 billion (2004: £815m). The element of market forecast turnover secured for 2006 is 87%. We continue to 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. Total equity Total shareholders’ equity value rose by £8.2m in the year, up from £19.9m to £28.1m at 31 December 2005. Within this overall increase, £1.4m is due to the recognition under IFRS of the deferred tax asset in relation to share options. Major contract wins We achieved a number of major successes, winning contracts valued at £315m in total. Highlights included: Brighton and Hove City Council Five year gas servicing and repair contract. London Borough of Greenwich Five year Decent Homes contract. Kensington Housing Trust Five year responsive repair and voids contract. London Borough of Kingston upon Thames Seven year response and voids maintenance contract. Operating and financial review Continued 08 i R e v e w o f t h e y e a r ������ ����� ����� ����� ����� ����� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ����� ��� ��� ��� ����� ����� ����� ��� ��� ���� ���� ���� ���� ���� ���� ���� ���� ���� Mears Group PLC annual report and accounts 2005 ����� ����� ����� ���� ���� Operating margin (pre share-based payments) % ���� ���� ���� ���� ���� ��� ��� ��� ��� ��� ��� �� �� ������ ������� �� �� ��� �� �� ������� ������������ ���� ���� “ We hold a healthy mix of Decent Homes and repairs and maintenance work, giving us a well balanced position in the social housing market that is not reliant on clients’ future discretionary spending.” ���� ��� ��� Leeds City Homes Five year Decent Homes contract. Nottingham City Homes Five year Decent Homes contract. Portsmouth City Council Three year response and maintenance contract. Shoreline Housing Partnership Five year Decent Homes contract. Thames Valley Housing Trust Five year responsive repair and voids contract. Wakefield and District Housing Five year Decent Homes contract. Risks The two most significant risks we face are damage to our reputation as a result of a service failure and a shortage of appropriately skilled employees placing limits on our growth. In response, we have upgraded our risk practices in line with the growth of the business and invested significant time and resources in strengthening our approach to risk. Of course, the risk of service failure is best mitigated through a very strong focus on service delivery and innovation and this is embedded in our operational approach – the One Mears Way. A skills shortage is best addressed through innovative recruitment and development programmes and an excellent working environment with great rewards and opportunities. We talk about our approach in more detail on pages 12 to 15. ���� ���� ���� ���� ���� Our market We address two main market areas within social housing: ongoing repairs and maintenance contracts with local authorities and contracts for capital programmes generated by the Decent Homes Standard. Central Government is committing at least £3.5 billion per annum to achieve the Decent Homes Standard and we believe this commitment is likely to last until 2015. More than one million homes do not yet meet the Standard. 58 of the scheduled 192 local authorities missed the Government’s deadline of July 2005 to start the process by submitting options appraisals. Clearly, there is still plenty of opportunity, including long term partnership agreements involving joint venture agreements or TUPE transfer. 09 i R e v e w o f t h e y e a r The repair and maintenance market is thriving and we have identified an addressable market opportunity of around £5 billion a year. The trend is for larger and longer term contracts with clients looking to form partnerships with suppliers able to provide innovative business and service models. Everything from full-scale outsourcing to joint ventures is on the agenda. We believe these contracts play to our strengths as a market leader with a flexible and innovative approach. Authorities in some of the larger conurbations in the North of England and the Midlands are now considering the option of joint working arrangements with the private sector for repair and maintenance work. We are also seeing interest in our repair and maintenance services from clients in Scotland and Wales – two relatively early-stage markets with great potential. Local authorities are experiencing greater scrutiny from Central Government with the Audit Commission paying particular attention to the delivery of repair and maintenance services. A new key line of enquiry has been introduced focusing on the value for money and efficiency of maintenance services. Mears Group PLC annual report and accounts 2005 Mears Joins Public Partnerships to Support London Clean-up Initiative Bob Holt, Mears Group Chairman stood alongside Home Office minister, Rt Hon. Hazel Blears MP to launch the London Clean-Up campaign at London’s City Hall on 7 March 2006. The campaign is the latest complement to the Government’s “Respect Agenda” which aims to clean up London’s streets from litter and reduce the amount of crime and anti-social behaviour. Research shows that this type of anti-social behaviour often makes residents feel intimidated and fearful of being victims of crime. Bob was invited to speak at the launch to illustrate how local businesses like Mears can do so much to keep the communities in which they are based crime and grime free. Mears currently works in seven London boroughs including Croydon, Hackney, Islington, Richmond and Brent. Through these partnership contracts we have worked on the following: Working with local youths and our Registered Social Landlord partners, we paint over areas prone to graffiti. We provide a handyman service in a number of boroughs where local residents (usually the elderly or infirm) can gain access to a skilled tradesman to carry out those day to day jobs around the home. We are providing a range of training and mentoring schemes aimed at both young people and parents. We are working on estate-wide football coaching schemes which lead to wider Urban Academy initiatives. Operating and financial review Continued 10 i R e v e w o f t h e y e a r Our market continued In response we’re helping individuals within the sector to share their insight and experiences through our Thought Leader conferences, the first of which looked at the Efficiency Agenda. Our strategy Social housing continues to offer the biggest and best long term growth opportunities. Our focus is firmly on this sector, with particular emphasis on larger, longer term contracts and other forms of innovative partnerships. We enhanced our operating units Our operating units are three regional social housing operating units covering the North and Scotland, the Midlands and Wales, and the South; Haydon, our mechanical and electrical business; and United Fleet Distribution. Each operating unit now has its own dedicated Managing Director who is part of the Group Executive. This integrated management structure has created opportunities for cross-selling Haydon’s services within social housing, generating excellent new business for Haydon outside its established London market. Our specific strategic priorities are: We further strengthened the senior team To recruit, retain and develop excellent people. To develop close partnerships with clients and communities. To constantly search for new and better ways to support clients and help tenants. In 2005 we strengthened our approach across all areas of the business in line with our strategy. Here are some examples: We established a Group Executive Set up in March, the Group Executive is responsible for all day-to-day operations. The members of this team are drawn from our key operational units and our support functions. The team is responsible to the PLC Board for delivering the Group’s strategic business objectives and reports every month. We made senior appointments in Marketing and Sales, HR, IT, Procurement and Operations. This has increased the breadth of our management team and is a major step forward in terms of introducing experienced management and robust processes across all areas of the business. We linked incentives to performance The rewards for our management teams are based on a clear set of performance criteria. These include progress against the achievement of defined financial and strategic objectives, including customer and employee satisfaction levels. We integrated our acquisitions We are very pleased with the progress of recently acquired businesses. We have now integrated Scion and the smaller painting companies into our core activities. Scion operates as part of Haydon and the painting companies are now part of our social housing team. We improved our support infrastructure We introduced a number of new systems and processes in HR, Finance, Sales and IT helping us to manage and support growth and generate more effective and efficient ways of working. ������ ����� ����� ����� ����� ����� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ���� ����� ��� ��� ��� ����� ����� ����� ��� ��� ���� ���� ���� ���� ���� ���� ���� ���� ���� Mears Group PLC annual report and accounts 2005 ����� ����� ����� ���� ���� ���� ���� ���� ���� ���� ��� ��� ��� ��� ��� ��� Net assets £m �� �� ������ ������� �� �� ��� �� �� ������� ������������ +41.2% ���� ���� ���� ��� ��� ���� ���� ���� ���� ���� “ Our belief that community should be at the heart of Mears is stronger than ever. You can see it in the way we recruit, the way we carry out work and the time we all give to supporting community projects.” 11 i R e v e w o f t h e y e a r People — our most valuable differentiator We said this last year and we will say it again: what really sets us apart as a business is the quality and spirit of our people. We have opportunities for strong organic growth and growth through acquisition. The Mears appetite for hard work is as strong as ever. We believe we are in good shape and we are looking forward to another year of Improving Homes, Improving Neighbourhoods, Improving Lives. Stuart Black stuart.black@mearsgroup.co.uk Chief Executive 18 April 2006 David Robertson david.robertson@mearsgroup.co.uk Finance Director 18 April 2006 This is extremely important for two key reasons. First, Mears people are face-to-face with clients, tenants and the wider community each day, so our work makes an immediate and lasting impression. Second, there is a skills shortage and it is vital that we can attract new people, retain good people and have the training and development programmes in place to turn good people into great people. In 2005 we started an initiative whereby our 1,500 tradespeople can all now train for a professional qualification. We also launched a national programme of employee development, together with structured work experience and training for prospective employees. Most of our employees live in the community they support. Recruiting locally enables us to grow quickly, to attract people with local understanding and to give something back to our communities, many of which have profound unemployment problems. Our belief that community should be at the heart of Mears is stronger than ever. You can see it in the way we recruit, the way we carry out work and the time we all give to supporting community projects. Outlook The social housing market is robust. The forward order book is extremely healthy both in terms of quantity and quality of future work. Our relationships with clients are excellent. We are a powerful competitor for all new contracts, especially those based on scale, quality and innovation. We have a well-balanced business involved in Decent Homes and repairs and maintenance work. Mears Group PLC annual report and accounts 2005 Our communities We work in some of the most socially deprived areas of the country. Along with our professional commitment to tenants, we feel a strong sense of responsibility towards the wider community and we work towards achieving three specific aims: To support and strengthen the communities in which we work. To recruit employees locally whenever we can. To encourage employees to volunteer their time and skills to specific community projects. Helping a local community to thrive increases the quality of life for tenants and makes our job that little bit easier. It’s also rewarding for our employees, especially as 90% of our people live in the community they support. Helping the community In 2005 we carried out 120 projects designed to improve a local community. We pay for our employees to devote 16 hours a year to community work – here are some examples of that in action: Whirlow Farm, Sheffield Few of the children in inner city social housing communities get to experience rural life. Mears employees in Sheffield and Barnsley volunteered to improve the facilities at Whirlow Farm, a working farm with educational facilities, and then paid for children from our communities to have a week’s holiday on the farm. Reading and breakfast clubs Mears employees in the South have volunteered to go into schools to support reading schemes and prepare breakfast for children. We know from our work with similar initiatives that these clubs help to get more children to school, reducing truancy and the problems associated with truancy. Caring for different generations of the community in Wigan and Leigh. Corporate social responsibility 12 12 R C e o v r p i e o w r a o t e f t s h o e c y a e a r e r s p o n s i b l i i l i t y Helping to improve facilities at Howe Lodge flats in Richmond. Mears Group PLC annual report and accounts 2005 Top 20in Europe for employment growth Supporting good causes Our commitment to the community is recognised in Mears attaining the Business in the Community ’Percent Standard’. This benchmark measures the contributions made by companies though cash donations, staff time, gifts in kind and management time, calculated as a percentage of pre-tax profit. The Percent Club recognises those companies who put the equivalent of at least 1% of their pre-tax profit into community work. In 2005 we contributed 3.9%. Towards the end of 2005 we developed new relationships with two charities involved in housing, agreeing a major national partnership programme with Shelter and joining Crash (Construction and Property Industry Charity for the Homeless). These organisations help those in greatest need when it comes to accommodation. Homelessness, together with projects that address education and skills development, will be the main focus of our community work in 2006. Our workplace We are one of the fastest growing companies in Europe in terms of employee numbers. During the year the Group was recognised as one of the top 20 companies within the European Union for employment growth over the last three years. We want to become a recognised ‘Employer of Choice’ within our sector with a workforce that fully reflects the communities we serve. To help us achieve this, we have three key aims: To develop a culture of good communication and trust within the business, so every employee shares the same values and works towards the same business objectives. To manage change in a fast-growing, high-performance organisation by anticipating the people and resources we will need well before they are needed. To encourage our employees to work together effectively in all situations. Wigan and Leigh Housing Partnership Mears’ kitchen replacement programme for Wigan and Leigh Housing will be completed 18 months ahead of schedule in June 2006. This performance has been achieved through an innovative approach to all aspects of the work from planning through to cost management. Tenant customer satisfaction levels of 99% were achieved. Customer care was at the heart of the operation with clear, friendly communication being supported by innovative support mechanisms such as comfort homes. Mears success in Wigan continues as we handle some 500 responsive repairs per week for 11,500 homes in the area. Working to help improve life for homeless people at the Whitechapel Mission. 13 C o r p o r a t e s o c a i l r e s p o n s i b i l i t y Supporting community football activities in Richmond. Mears Group PLC annual report and accounts 2005 In our market we have constantly been innovative: Introduction of greater choice for tenants with mobile show homes. Provision of translation services for tenants. Producing videos for tenants explaining the repairs process. Provision of mobile comfort homes during repairs and refurbishments. Daily rubbish clearance to keep worksites safe. Paperless systems for clients and tenants. National apprenticeship schemes for local people. We have responded to the skills shortages in housing maintenance and repair trade by offering local tenants the opportunity to develop new capabilities. Corporate social responsibility Continued 14 C o r p o r a t e s o c a i l r e s p o n s i b i l i t y Our workplace continued Training and development We are an established Investor in People and we’re meeting the challenge of the skills shortage in our sector through a comprehensive national programme of employee development, together with structured work experience and training programmes for prospective employees. Support for employees In 2005 we introduced a free 24 hour, 365 days per year confidential helpline called Mears Assist. This provides employees with advice on a wide range of personal and work-related matters and is available to their immediate families. We see Mears as a community in its own right and initiatives such as this are intended to help people get the most from their life while working here. During 2005, we started an initiative whereby all 1,500 tradespeople will have the opportunity to train for a professional qualification – an NVQ in a trade based skill. We opened the first Mears Training Foundation in 2005 in Hackney. This provides a base for people on a structured work experience programme who are considering a career in one of the trades. We also use the space to train existing Mears staff to improve their range of skills. Culture and diversity For us diversity is about having a group of employees who reflect the community they serve. It’s about having the right blend of age, sex, race and cultural background required to understand the needs of the people we support. We strive to make our workforce reflect the communities in which we work. We operate in a sector that has been very male-orientated for many years, but we’re addressing that imbalance. Women now have roles within Mears from apprentice to executive director, but we have more work to do in this area. We will continue to address the issues involved and support the Women in Construction programme. Our market We are the market leader in the social housing sector and we believe we have a responsibility to help improve knowledge, understanding and the overall performance of our market. In particular, we set out: To find and work with partners who share our values. To help clients and other organisations meet and learn from one another. To look for innovative ways to improve efficiency and effectiveness – for the benefit of clients, tenants, local communities and tax payers. Thought leadership In 2005 we launched the first in a series of Thought Leader conferences designed to bring key players in the social housing market together to debate topics important to the sector. The first conference focused on the Efficiency Agenda and you can see the very useful results of this event at www.thoughtleader.org.uk. More Thought Leader conferences are planned for 2006. Procurement policies In 2005 we established a National Procurement Group. This team is developing a set of consistent practices related to suppliers that are based on our Mears Values and is working in partnership with our Corporate Social Responsibility Group to help manage every aspect of the supply chain. Mears Group PLC annual report and accounts 2005 Safe as Houses – Launch of Mears New Health and Safety Initiative In March, Mears launched its new health and safety initiative for children at Manchester City Stadium. The Mears guide to health and safety booklets are aimed at children aged five to seven years. The booklets teach kids about the dangers of handling tools that they might see in their home during repairs and maintenance visits by Mears tradespeople. The new pack also features Mears’ new health and safety mascot – Menda. Menda comes complete with his own tool kit and shows children how to be safe through puzzles, pictures and word searches. Menda is a fun character with a serious message and helps children to understand the dangers in an informative and educational way. Local schools from Manchester and Stockport, who took part in the Mears health and safety competition, attended the launch event and were awarded prizes for their schools by Children’s BBC presenters – Dick and Dom. The Mears health and safety guide is also endorsed by the Children’s Safety Education Foundation and supported by the Royal Society for the Prevention of Accidents. Health and safety Safety in the workplace is paramount. We are committed to providing the highest standards possible for our employees and subcontractors and we expect them to meet those same standards in their work. We are pleased with the very low rates of accidents experienced by Mears employees, with an average per employee figure 42% lower than the average in our industry (Source HSE). In 2005 we obtained the RoSPA Gold Award – a terrific recognition of the commitment of our health and safety management team. 15 C o r p o r a t e s o c a i l r e s p o n s i b i l i t y Our environment We take our environmental performance very seriously and work continuously to improve our practices. Our aims are: To have a positive effect where we work, always trying to improve a location. To minimise waste and follow good environmental practice throughout the business, from our work in people’s homes and neighbourhoods to the way we run our offices. In 2005 we launched a pilot programme moving us towards achievement of ISO 14001. This sets high standards for improved waste management, greater efficiency and better reporting. We intend to achieve ISO 14001 on a national level by December 2006. Achieving ISO 14001 certification has many potential benefits. It further reduces the already limited potential risk of us damaging the environment through our operations and that reduces the risks associated with environmental prosecution, litigation and adverse publicity. It also enables us to make financial gains through responsible resource management and avoidance of costs. Specifically, it will enable us to: Help to create a cleaner and safer environment. Reduce our impact on the natural environment. Demonstrate responsible environmental management to existing and future clients. Reduce our environmental and social liabilities. Enhance our industry and public reputation. Help the UK Government reach its environmental improvement targets for industry. Board of Directors Mears Group PLC annual report and accounts 2005 From left to right: Reginald B Pomphrett, Robert Holt, Stuart J Black, David J Robertson, Michael A Macario 16 C o r p o r a t e g o v e r n a n c e Robert Holt (51) Chairman 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 (41) Chief Executive Stuart joined the Board in 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 (50) 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. Reginald B Pomphrett (62) 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 (68) Senior Independent 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. Mears Group PLC annual report and accounts 2005 Shareholder and corporate information Internet The Group operates a website which can be found at www.mearsgroup.co.uk. This site is regularly updated to provide information about the Group. In particular all of the Group’s press releases and announcements can be found on the site. Registrar Any enquiries concerning your shareholding should be addressed to the Company’s Registrar: Neville Registrars Neville House 18 Laurel Lane Halesowen West Midlands B63 3DA Tel: 0121 585 1131 The Registrar should be notified promptly of any change in a shareholder’s address or other details. Payment of dividend The final dividend on ordinary shares in respect of the year ended 31 December 2005 will be payable on 3 July 2006 to shareholders on the register at 16 June 2006. Investor relations For further copies of the annual report and accounts or other investor relations enquiries, please contact: The Company Secretary 1390 Montpellier Court Gloucester Business Park Brockworth Gloucester GL3 4AH Tel: 01453 511 911 www.mearsgroup.co.uk 17 C o r p o r a t e g o v e r n a n c e Registered office 1390 Montpellier Court Gloucester Business Park Brockworth Gloucester GL3 4AH Tel: 01453 511 911 www.mearsgroup.co.uk Company registration number 3232863 Bankers Barclays Bank 18 Southgate Street Gloucester GL1 2DJ Tel: 01452 365353 Solicitors BPE St James’s House St James’ Square Cheltenham GL50 3PR Tel: 01242 224433 Auditors Grant Thornton Registered Auditors Chartered Accountants The Quadrangle Imperial Square Cheltenham GL50 1PZ Tel: 0845 026 1250 Nominated adviser and stockbroker Arbuthnot Arbuthnot House 20 Ropemaker Street London EC2Y 9AR Tel: 020 7012 2000 Advisers Zeus Capital 3 Ralli Courts West Riverside Manchester M3 5FT Tel: 0161 831 1512 Registrar Neville Registrars Neville House 18 Laurel Lane Halesowen West Midlands B63 3DA Tel: 0121 585 1131 Report of the Directors Mears Group PLC annual report and accounts 2005 The Directors present their report together with the consolidated financial statements for the year ended 31 December 2005. 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. Transition to International Financial Reporting Standards (IFRS) The Group has adopted IFRS for the first time in these financial statements. Details of the transition to IFRS are presented in the principal accounting policies and in note 1. 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 £7.21m (2004: £5.36m). The Directors recommend dividends absorbing £1.53m (2004: £1.11m). The final dividend of 1.9p per share has not been included within the Group financial statements as no obligation existed at 31 December 2005. Directors The present membership of the Board is set out below. R Holt and D J Robertson retire by rotation and, being eligible, offer themselves for re-election. The beneficial interests of the Directors in the shares of the Company at 31 December 2005 and 31 December 2004 are detailed below. The Directors’ emoluments are detailed on page 21. R Holt S J Black D J Robertson M A Macario R B Pomphrett Ordinary shares 31 December 2005 Number 31 December 2004 Number 500,000 100,000 100,000 200,000 200,000 5,209,687 — 200,000 200,000 200,000 18 C o r p o r a t e g o v e r n a n c e P L Molloy resigned as a Director on 10 June 2005. 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 6 to the Group financial statements. Directors’ responsibilities for the financial statements The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and IFRS as adopted by the European Union in respect of the Group and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) for the Company. 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 Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Mears Group PLC annual report and accounts 2005 Financial risk management The Group’s financial risk management is based upon sound economic objectives and good corporate practice. 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. The Group does not undertake any trading activity in financial instruments. All activities are transacted in Sterling. The Group does not engage in any hedging activities. The Group reviews the credit quality of customers and limits credit exposures accordingly. The credit risk on trade receivables within the mechanical and electrical division are insured. 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 entering into a transaction and to ensure suppliers are aware of these terms. Group trade creditors during the year amounted to 42 days (2004: 41 days) of average supplies for the year. Substantial shareholdings On 5 April 2006 the Company has been notified of, or is aware of, the following shareholders holding 3% or more of the issued share capital of the Company: AEGON Asset Management UK P L Molloy Unicorn Asset Management Standard Life Investment Management Old Mutual Asset Management Rathbone Number of ordinary shares (m) Percentage of issued ordinary shares % 8.11 3.48 2.56 2.49 2.44 1.95 13.8 5.9 4.3 4.2 4.2 3.3 A total of 2.39m ordinary 1p shares representing 4.1% of the issued share capital are held by 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. Charitable donations During the year the Group made charitable donations of £0.03m (2004: £0.02m). Further details relating to the Group’s commitment to the community and good causes is detailed on pages 12 to 15. 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 website and the intranet to ensure that employees are kept well informed of the performance and objectives of the Group. 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 and senior employees. 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. CREST Mears Group PLC share dealings have been settled on CREST since 1997. CREST is the computerised system for the settlement of share dealings on the London Stock Exchange. CREST reduces the amount of documentation required and also makes the trading of shares faster and more secure. CREST enables shares to be held in an electronic form instead of the traditional share certificates. CREST is voluntary and shareholders can keep their share certificates if they wish. This may be preferable for shareholders who do not trade in shares on a frequent basis. Auditors Grant Thornton UK LLP, who have been the Group’s auditors since 1994, offer themselves for re-appointment as auditors in accordance with Section 385 of the Companies Act 1985. 19 C o r p o r a t e g o v e r n a n c e On behalf of the Board R B Pomphrett Director and Secretary 18 April 2006 Corporate governance Mears Group PLC annual report and accounts 2005 Introduction The Board 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 as set out in the Combined Code and the Revised Combined Code. However, the Group has taken steps to comply 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 comprises three Executive Directors and two Non-Executive Directors. The Non-Executive Directors are considered by the Board to be independent of management and free from any relationship which might materially interfere with the exercise of 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. During the year, S J Black was appointed as Chief Executive. Separating the roles of Chairman and Chief Executive has ensured 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 fulfil their responsibilities effectively. The Board meets regularly throughout the year as well as on an ad hoc basis, as required by time critical business needs. 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. 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 M A Macario and R B Pomphrett, its Chairman. 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 R B Pomphrett, M A Macario and R Holt. The Committee meets two 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: Number of meetings R Holt S J Black D J Robertson M A Macario R B Pomphrett Board Audit Committee Nomination Committee Remuneration Committee 6 6 6 6 6 6 2 2 — — 2 2 2 2 — — 2 2 1 — — — 1 1 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. 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 website (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. 20 C o r p o r a t e g o v e r n a n c e Mears Group PLC annual report and accounts 2005 Internal control and risk management continued 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: annual salary and fees – the actual salary for each of the Executive Directors is determined by the Remuneration Committee; these salaries reflect experience and sustained performance of the individuals to whom they apply, also taking into account market competitiveness; annual incentive payments – the Chairman, Chief Executive and Finance Director are entitled to bonuses related solely to the real increase in earnings per share. 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; benefits in kind – such as car and health benefits; and defined contribution pension schemes. The Directors’ emoluments in 2005 are detailed below: Annual salary and fees Annual incentive payments Benefits in kind and other emoluments Total R Holt S J Black D J Robertson M A Macario R B Pomphrett P L Molloy 2005 £’000 250 200 165 24 24 30 693 2004 £’000 220 20 145 24 24 160 593 2005 £’000 2004 £’000 85 51 56 — — — 81 8 52 — — 18 192 159 2005 £’000 109 27 42 — — 4 182 2004 £’000 98 4 41 — — 24 2005 £’000 444 278 263 24 24 34 167 1,067 2004 £’000 399 32 238 24 24 202 919 In addition to the emoluments detailed above, P L Molloy received £196,800 in respect of payment in lieu of notice and termination. Details of share options issued to Directors are included within note 6 to the Group 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 Group. Historical total shareholder return performance Growth in value of a hypothetical £100 holding in Mears Group PLC shares over five years plotted against the AIM Index. 21 C o r p o r a t e g o v e r n a n c e Group accounts 22 i F n a n c a i l i n f o r m a t i o n Mears Group PLC annual report and accounts 2005 Report of the independent auditors – Group To the members of Mears Group PLC We have audited the Group financial statements of Mears Group PLC for the year ended 31 December 2005 which comprise the principal accounting policies, the consolidated income statement, the consolidated balance sheet, the consolidated statement of recognised income and expense, the consolidated cash flow statement and notes 1 to 25. These Group financial statements have been prepared under the accounting policies set out therein. We have reported separately on the Parent Company financial statements of Mears Group PLC for the year ended 31 December 2005 that is described as having been audited. 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 Directors and auditors The Directors’ responsibilities for preparing the annual report and the Group financial statements in accordance with United Kingdom law and International Financial Reporting Standards (IFRS) as adopted by the European Union are set out in the statement of Directors’ responsibilities. Our responsibility is to audit the Group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the Group financial statements give a true and fair view and whether the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you if, in our opinion, the Directors’ report is not consistent with the Group financial statements, 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 other transactions is not disclosed. We read other information contained in the annual report and accounts and consider whether it is consistent with the audited Group financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the Group 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 Group 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 Group financial statements. Opinion In our opinion: the Group financial statements give a true and fair view, in accordance with IFRS as adopted by the European Union, of the state of the Group’s affairs at 31 December 2005 and of its profit for the year then ended; and the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. Grant Thornton UK LLP Registered Auditors Chartered Accountants Cheltenham 18 April 2006 23 i F n a n c a i l i n f o r m a t i o n Principal accounting policies – Group Mears Group PLC annual report and accounts 2005 Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as developed and published by the International Accounting Standards Board and as adopted by the European Union and under the historical cost convention. Mears Group PLC has adopted IFRS for the first time in its consolidated financial statements for the year ended 31 December 2005. The transition to IFRS has resulted in a number of changes in the reported financial statements, notes thereto and accounting principles compared to previous annual reports which were prepared under applicable United Kingdom Generally Accepted Accounting Principles (UK GAAP). The comparative information has been restated in accordance with IFRS. Note 1 provides further details on the transition from UK GAAP to IFRS. The date of transition to IFRS was 1 January 2004 (transition date). The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenditure during the reported period. In the preparation of these consolidated financial statements, estimates and assumptions have been made by management concerning the selection of useful lives of fixed assets, provisions necessary for certain liabilities, when to recognise revenue on long term contracts, actuarial assumptions, discount rates used within impairment reviews, the underlying share price volatility for valuing equity-based payments and other similar evaluations. Actual amounts could differ from those estimates. IFRS 1 exemptions IFRS 1, ‘First-time Adoption of International Financial Reporting Standards’, permits those companies adopting IFRS for the first time to take some exemptions from the full requirements of IFRS in the transition period: business combinations – any business combinations prior to the transition date have not been restated on an IFRS basis; employee benefits – all cumulative actuarial gains and losses have been recognised in equity at the transition date; and share-based payments – IFRS 2, ‘Share-based Payments’ applies to equity instruments. This has been applied to all share options granted since 7 November 2002. All cumulative charges have been recognised in equity at the transition date. Basis of consolidation The consolidated balance sheet includes the assets and liabilities of the Company and its subsidiaries and is made up to 31 December 2005. Entities over which the Group has the ability to exercise control are accounted for as subsidiaries. Control is obtained and exercised through voting rights so as to obtain benefits from its activities. Interests acquired in entities are consolidated from the effective date of acquisition and interests sold are consolidated up to the date of disposal. Business combinations are accounted for using the purchase method. Balances between Group companies are eliminated; no profit is taken on sales between Group companies. 24 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. i F n a n c a i l i n f o r m a t i o n Goodwill Goodwill arises on the acquisition of subsidiaries and represents any excess of the cost of the acquired entity over the Group’s interest in the fair value of the entity’s identifiable assets and contingent liabilities acquired and is capitalised as a separate item. Goodwill is recognised as an intangible asset. Under the business combinations exemption of IFRS 1, goodwill previously written off direct to reserves under UK GAAP is not recycled to the income statement on calculating a gain or loss on disposal. Impairment Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. An impairment loss is recognised to the extent that an asset’s carrying value exceeds its recoverable amount, which represents the higher of the asset’s fair value less costs to sell and its value in use. The recoverable amount of goodwill is determined by reference to the discounted future cash flows expected to be derived from the cash-generating unit to which it is allocated. Impairment losses are recognised in the income statement. Property, plant and equipment Items of property, plant and equipment are included at cost, net of depreciation. Depreciation is calculated to write down the cost less estimated residual value of all property, plant and equipment, other than freehold land, over their estimated useful economic lives. The rates generally applicable are: Freehold buildings – 2% per annum, straight line Leasehold improvements – over the period of the lease, straight line Plant and machinery – 25% per annum, reducing balance Fixtures, fittings and equipment – 25% per annum, reducing balance Motor vehicles – 25% per annum, reducing balance The carrying value of property, plant and equipment is reviewed for impairment in the period if events or changes in circumstances indicate the carrying value may not be recoverable. Mears Group PLC annual report and accounts 2005 Inventories Inventories are stated at the lower of cost and net realisable value. Cost includes materials and direct labour. Cash and cash equivalents Cash and cash equivalents include cash at bank and in hand and bank deposits available at less than 24 hours’ notice. Bank overdrafts are presented as current liabilities to the extent that there is no right of offset with cash balances. Money market instruments are financial assets carried at fair value through profit or loss. Accounting for taxes Current tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting period, that are unpaid at the balance sheet date. They are calculated according to the tax rates and tax laws applicable to the fiscal periods to which they relate, based on the taxable profit for the year. Where an item of income or expense is recognised in the income statement, any related tax generated is recognised as a component of tax expense in the income statement. Where an item is recognised directly to equity and presented within the consolidated statement of recognised income and expense, any related tax generated is treated similarly. Deferred taxation Deferred taxation is the tax expected to be repayable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred taxation liabilities are generally recognised on all taxable temporary differences. Deferred taxation assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Deferred taxation is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. The carrying value of deferred taxation assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available against which taxable temporary differences can be utilised. Deferred tax is charged or credited to the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Revenue Social housing and vehicle distribution services – when the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction is recognised by reference to the stage of completion of the transaction at the balance sheet date. The outcome of the transaction is deemed to be able to be estimated reliably when all the following conditions are satisfied: the amount of revenue can be measured reliably; it is probable that the economic benefits associated with the transaction will flow to the entity; the stage of completion of the transaction at the balance sheet date can be measured reliably; and the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. Where a contract for goods or services involves delivery of several different elements and is not fully delivered or performed by the year end, revenue is recognised based on the proportion of the fair value of the elements delivered to the fair value of the overall contract. Construction contracts – revenue from the mechanical and electrical sector reflects the contract activity during the year and is measured at the fair value of consideration received or receivable. When the outcome can be assessed reliably, contract revenue and associated costs are recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the balance sheet date. The stage of completion of the contract at the balance sheet date is assessed by comparing the value of work certified to date with the total value of the contract. Where the outcome of a construction contract cannot be estimated reliably revenue is recognised only to the extent of contract costs incurred that it is probable will be recoverable, and contract costs are recognised as an expense in the period in which they are incurred. In the case of a fixed price contract, the outcome of a construction contract is deemed to be estimated reliably when all the following conditions are satisfied: it is probable that economic benefits associated with the contract will flow to the Group; both the contract costs to complete the contract and the stage of completion at the balance sheet date can be measured reliably; and the contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared with prior estimates. The gross amount due from customers for contract work is presented as an asset for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceed progress billings. The gross amount due to customers for contract work is presented as a liability for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less losses). Full provision is made for losses on all contracts in the year in which the loss is first foreseen. 25 i F n a n c a i l i n f o r m a t i o n Principal accounting policies – Group Continued Mears Group PLC annual report and accounts 2005 Employee benefits Pensions to employees are provided through a defined benefit plan as well as several defined contribution plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into an independent entity. The Group has no legal obligations to pay further contributions after payment of the fixed contribution. The contributions recognised in respect of defined contribution plans are expensed as they fall due. Liabilities and assets may be recognised if underpayment or prepayment has occurred and are included in current liabilities or current assets as they are normally of a short term nature. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The legal obligations for any benefits from this kind of pension plan remain with the Group. The Group has applied the Amendment to IAS 19, ‘Employee Benefits – Actuarial Gains and Losses, Group Plans and Disclosures’, from its date of transition to IFRS. The Group has taken advantage of the exemption in IFRS 1 and has elected to recognise all cumulative actuarial gains and losses at the date of transition to IFRS. Scheme assets are measured at fair values. Scheme liabilities are measured on an actuarial basis using the projected unit method and are discounted at appropriate high quality corporate bond rates that have terms to maturity approximating to the terms of the related liability. Appropriate adjustments are made for past service costs. Past service cost is recognised as an expense on a straight-line basis over the average period until the benefits become vested. To the extent that benefits are already vested the Group recognises past service cost immediately. Actuarial gains and losses are recognised immediately through the statement of recognised income and expense. The net surplus or deficit is presented with other net assets on the balance sheet. Any related deferred tax is shown with other deferred tax balances. A surplus is recognised only to the extent that it is recoverable by the Group. Share-based employee remuneration All share-based payment arrangements that were granted after 7 November 2002 are recognised in the consolidated financial statements. The Group operates equity-settled share-based remuneration plans for its employees. All employee services received in exchange for the grant of any share-based remuneration are measured at their fair values. These are indirectly determined by reference to the fair value of the share options awarded. Their value is determined at the date of grant and is not subsequently remeasured unless the conditions on which the award was granted are modified. The fair value at the date of the grant is calculated using the Binomial Option pricing model and the cost is recognised on a straight-line basis over the vesting period. Adjustments are made to reflect expected and actual forfeitures during the vesting period to satisfy service conditions. All share-based remuneration is ultimately recognised as an expense in the income statement with a corresponding credit to additional paid-in capital, net of deferred tax where applicable. Upon exercise of share options, the proceeds received net of any directly attributable transaction costs up to the nominal value of the shares issued are allocated to share capital with any excess being recorded as additional paid-in capital. Leases In accordance with IAS 17 (rev 2003), the economic ownership of a leased asset is transferred to the lessee if they bear substantially all the risks and rewards related to the ownership of the leased asset. The related asset is recognised at the time of inception of the lease at the fair value of the leased asset or, if lower, the present value of the lease payments plus incidental payments, if any, to be borne by the lessee. A corresponding amount is recognised as a finance leasing liability, irrespective of whether some of these lease payments are payable up-front at the date of inception of the lease. Subsequent accounting for assets held under finance lease agreements, i.e. depreciation methods and useful lives, correspond to those applied to comparable acquired assets. The corresponding finance leasing liability is reduced by lease payments less finance charges, which are expensed to finance costs. Finance charges represent a constant periodic rate of interest on the outstanding balance of the finance lease liability. All other leases are treated as operating leases. Payment on operating lease agreements is recognised as an expense on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred. The Group does not act as a lessor. Financial liabilities/assets The Group’s financial liabilities are overdrafts, trade and other payables and finance leasing liabilities. They are included in the balance sheet line items ‘Short term borrowings and overdrafts’, ‘Long term financial liabilities’ and ‘Trade and other payables’. Financial liabilities are recognised when the Group becomes party to the contractual agreements of the instrument. All interest related charges are recognised as an expense in ‘finance cost’ in the income statement. Finance lease liabilities are measured at initial value less the capital element of lease repayments. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivables. Loans and receivables are subsequently measured at amortised cost using the effective interest method, less provision for impairment. Any change in their value through impairment or reversal of impairment is recognised in the income statement. Provision against trade receivables is made when objective evidence is received that the Group will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the write down is determined as the difference between the asset’s carrying amount and the present value of estimated future cash flows. Equity instruments Share capital is determined using the nominal value of shares that have been issued. Equity settled shared-based employee remuneration is credited to the share-based payment reserve until the related share options are exercised. 26 i F n a n c a i l i n f o r m a t i o n Mears Group PLC annual report and accounts 2005 Consolidated income statement For the year ended 31 December 2005 Sales revenue Cost of sales Gross profit Other administrative expenses Operating result before share-based payments Share option charges Total administrative costs Operating result Share of operating result in associate Finance income Finance costs Result for the year before tax Tax expense Net result for the year Attributable to minority interests Attributable to shareholders of Mears Group PLC Earnings per share Basic Diluted All activities are continuing. Note 2 6 2 4 4 3 7 9 9 2005 £’000 2005 £’000 2004 £’000 (37,417) 7,502 (315) (48,302) 10,287 (515) 203,543 (144,954) 58,589 (48,817) 9,772 — 70 (92) 9,750 (2,540) 7,210 — 7,210 7,210 12.40p 11.45p 2004 £’000 173,685 (128,766) 44,919 (37,732) 7,187 4 16 (84) 7,123 (1,760) 5,363 5 5,358 5,363 9.32p 8.71p The accompanying accounting policies and notes form an integral part of these financial statements. 27 i F n a n c a i l i n f o r m a t i o n Consolidated balance sheet At 31 December 2005 Assets Non-current Goodwill Property, plant and equipment Equity accounted investments Deferred tax asset Current Inventories Trade and other receivables Construction contracts Cash at bank and in hand Total assets Equity Equity attributable to the shareholders of Mears Group PLC Called up share capital Share premium account Share-based payment reserve Retained earnings Minority interests Total equity Liabilities Non-current Long term financial liabilities Other liabilities Current Short term borrowings and overdrafts Trade and other payables Current tax liabilities Pension and other employee benefits Current liabilities Total liabilities Total equity and liabilities Mears Group PLC annual report and accounts 2005 Note 2005 £’000 2004 £’000 10 11 12 18 13 15 14 19 20 20 20 20 17 17 16 24 10,647 5,827 — 3,500 19,974 5,363 29,511 2,341 9,774 46,989 11,069 4,450 49 2,100 17,668 4,628 28,996 1,414 8,078 43,116 66,963 60,784 588 3,960 1,040 22,466 28,054 — 579 3,362 525 15,312 19,778 95 28,054 19,873 — 855 855 2,832 33,215 1,764 243 38,054 38,909 66,963 7 2,953 2,960 5,260 31,184 1,365 142 37,951 40,911 60,784 The financial statements were approved by the Board of Directors on 18 April 2006. S J Black Director D J Robertson Director The accompanying accounting policies and notes form an integral part of these financial statements. 28 i F n a n c a i l i n f o r m a t i o n Mears Group PLC annual report and accounts 2005 Consolidated statement of recognised income and expense For the year ended 31 December 2005 Actuarial losses on defined benefit pension scheme Increase in deferred tax asset Net income recognised directly to equity Profit for the financial period Total recognised income and expense for the period Attributable to: Equity shareholders Minority interests Note 24 18 2005 £’000 (101) 1,270 1,169 7,210 8,379 8,379 — 8,379 2004 £’000 (54) 1,105 1,051 5,363 6,414 6,409 5 6,414 The accompanying accounting policies and notes form an integral part of these financial statements. 29 i F n a n c a i l i n f o r m a t i o n Consolidated cash flow statement For the year ended 31 December 2005 Mears Group PLC annual report and accounts 2005 Operating activities Result for the year before tax Adjustments Change in inventories Change in operating receivables Change in operating payables Cash inflow from operating activities before taxes paid Taxes paid Investing activities Additions to property, plant and equipment Proceeds from disposals of property, plant and equipment Acquisition of subsidiary undertaking, net of cash Interest received Financing activities Proceeds from share issue Discharge of finance lease liability Interest paid Dividends paid Cash and cash equivalents, beginning of year Net increase in cash and cash equivalents Cash and cash equivalents, end of year Cash and cash equivalents is comprised as follows: Cash at bank and in hand Short term borrowings and overdrafts Cash and cash equivalents Note 21 2005 £’000 2004 £’000 9,750 1,974 (735) (1,442) 1,120 10,667 (2,271) 8,396 (3,125) 330 (755) 67 (3,483) 607 (75) (96) (1,225) (789) 2,818 4,124 6,942 9,774 (2,832) 6,942 7,123 1,494 (2,043) (5,235) 5,322 6,661 (1,312) 5,349 (2,540) 11 (1,088) 16 (3,601) 330 (210) (87) (864) (831) 1,901 917 2,818 8,078 (5,260) 2,818 The accompanying accounting policies and notes form an integral part of these financial statements. 30 i F n a n c a i l i n f o r m a t i o n Mears Group PLC annual report and accounts 2005 Notes to the financial statements – Group For the year ended 31 December 2005 1. Transition to International Financial Reporting Standards (IFRS) The transition from United Kingdom GAAP to IFRS has been made in accordance with IFRS 1, ‘First-time Adoption of International Financial Reporting Standards’. The Group’s consolidated financial statements for 2005 and the comparatives presented for 2004 comply with all presentation and disclosure requirements of IFRS applicable for accounting periods commencing on or after 1 January 2005. The following reconciliations and explanatory notes thereto describe the effects of the transition on the IFRS opening balance sheet as at 1 January 2004 and for the financial year 2004. All explanations should be read in conjunction with the IFRS accounting policies of Mears Group PLC as disclosed on pages 24 to 26. Note 1.1 comments on the Group’s new balance sheet structure. The remeasurement of the consolidated balance sheet items at the IFRS opening balance sheet date and at 31 December 2004, together with the reconciliation of the Group’s equity reported under previous UK GAAP to its equity under IFRS as at 1 January 2004 and 31 December 2004, may be summarised as follows: At 1 January 2004 Pension obligation Proposed dividend creditor Deferred tax asset Total adjustment to equity Total equity – UK GAAP Total equity – IFRS At 31 December 2004 Goodwill Equity accounted investments Pension obligation Proposed dividend creditor Deferred tax asset Total adjustment to equity Total equity – UK GAAP Total equity – IFRS Note 1.3 1.4 1.5 1.2 1.2 1.3 1.4 1.5 UK GAAP £’000 Effect of transition £’000 — (573) — 10,406 48 — (815) — (88) 573 900 1,385 12,292 13,677 663 1 (142) 815 2,100 3,437 16,436 19,873 Profit and loss reported under UK GAAP for the year ending 31 December 2004 is reconciled to IFRS as follows: Sales revenue Cost of sales Gross profit Administrative expenses Operating result Share of operating result in associate Finance costs Result for the year before tax Tax expense Net result for the year UK GAAP £’000 173,685 (128,766) 44,919 (38,081) 6,838 4 (68) 6,774 (1,855) 4,919 Goodwill amortisation £’000 Share-based payments £’000 Deferred tax £’000 — — — 664 664 — — 664 — 664 — — — (315) (315) — — (315) — (315) — — — — — — — — 95 95 IFRS £’000 (88) — 900 11,069 49 (142) — 2,100 IFRS £’000 173,685 (128,766) 44,919 (37,732) 7,187 4 (68) 7,123 (1,760) 5,363 1.1 Revised structure of balance sheet and income statement Mears Group PLC has modified its former balance sheet and income statement structure on transition to IFRS. The main change is that assets classified as ‘Amounts recoverable on contracts’ under previous UK GAAP are now presented under the separate balance sheet line item ‘Construction contracts’. 31 i F n a n c a i l i n f o r m a t i o n Notes to the financial statements – Group Continued Mears Group PLC annual report and accounts 2005 1. Transition to International Financial Reporting Standards (IFRS) continued 1.2 Goodwill Under IFRS, goodwill is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired. As required by IFRS 1, ‘First-time Adoption of International Financial Reporting Standards’, goodwill recognised under UK GAAP has been tested for impairment at the transition date of 1 January 2004. No impairment loss was required to be recognised. In accordance with IFRS 1, this amount has been considered the carrying amount of goodwill in the opening IFRS balance sheet. For the year ending 31 December 2004, goodwill is not amortised under IFRS. As a result, the amortisation of goodwill as required under UK GAAP is reversed in the reconciliation from UK GAAP to IFRS with a corresponding reduction in expenses. 1.3 Pension obligation Under IFRS, pension obligations are recognised as a liability in the balance sheet based on the defined benefit obligation at the balance sheet date. In accordance with the transitional provisions of IFRS 1 the deficit has been recognised in the balance sheet at the transition date of 1 January 2004. Under UK GAAP the pension costs charged against profits were designed to spread the anticipated pension costs over the service lives of employees in the scheme. 1.4 Proposed dividend creditor Under IAS 10, ‘Events After the Balance Sheet Date’, dividends approved after the balance sheet date should not be recognised as a liability at the balance sheet date since the liability did not represent a present obligation at that date. Under UK GAAP, proposed dividends were recognised as a liability in the period to which they related. 1.5 Deferred tax asset Under IAS 12, ‘Income Taxes’, deferred tax is provided on temporary differences between the book carrying value and tax base of assets and liabilities (a balance sheet approach). Under UK GAAP, deferred tax was provided on timing differences between the accounting and taxable profit (an income statement approach). 1.6 Share-based payments Under IFRS 2, ‘Share-based Payments’, the cost of employee share schemes, including SAYE schemes, is based on the fair value of the awards. Under UK GAAP, the cost of awards made under the Group’s employee share schemes was based on the intrinsic value of the awards, with the exception of SAYE schemes for which no cost was recognised. 1.7 Cash flow statement The conversion from UK GAAP to IFRS does not change any of the cash flows of the Group. The IFRS cash flow format is similar to UK GAAP but presents various cash flows in different categories and in a different order from the UK GAAP cash flow statement. All of the IFRS adjustments net out within cash generated from operating activities. 2. Segment reporting The Group operates three business segments: social housing, mechanical and electrical (M&E) and vehicle distribution. All of the Group’s activities are carried out within the United Kingdom. 2005 2004 Business segments Social housing £’000 M&E £’000 Vehicle distribution £’000 Total £’000 Social housing £’000 M&E £’000 Vehicle distribution £’000 Total £’000 Revenue 144,086 50,820 8,637 203,543 104,086 58,684 10,915 173,685 Operating result pre share-based payments Share-based payments Operating result Finance costs, net Tax expense 7,964 (400) 7,564 (237) (1,970) 1,908 (75) 1,833 94 (470) 415 (40) 375 121 (100) 10,287 (515) 9,772 (22) (2,540) 5,391 (245) 5,146 (262) (1,270) 1,653 (45) 1,608 88 (380) Net result for the year 5,357 1,457 396 7,210 3,614 1,316 458 (25) 433 110 (110) 433 7,502 (315) 7,187 (64) (1,760) 5,363 Segment assets Segment liabilities Depreciation 44,908 (26,091) 860 18,351 (11,361) 475 3,704 (1,457) 123 66,963 (38,909) 1,458 39,340 (24,807) 610 17,473 (13,846) 375 3,971 (2,258) 97 60,784 (40,911) 1,082 32 i F n a n c a i l i n f o r m a t i o n Mears Group PLC annual report and accounts 2005 3. Result for the year before tax Result for the year before tax is stated after: Auditors’ remuneration – audit services – non-audit services Share option charges Depreciation Hire of plant and machinery Other operating lease rentals 2005 £’000 115 50 515 1,458 780 5,224 2004 £’000 95 55 315 1,082 675 4,233 Included within non-audit services are tax compliance fees of £30,000, tax advice fees of £10,000 and other advice fees of £10,000. 4. Finance income and finance costs Interest charge on overdrafts Finance charges in respect of finance leases Finance costs Interest income resulting from short term bank deposits Finance income 5. 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 Remuneration in respect of Directors was as follows: Emoluments Gains made on the exercise of share options Pension contributions to personal pension schemes Compensation for loss of office 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 three Directors (2004: four). During the year no Director (2004: three) exercised their share options. 2005 £’000 (82) (10) (92) 70 (22) 2005 £’000 56,411 5,398 596 62,405 2005 1,423 826 2,249 2005 £’000 932 — 135 197 1,264 2005 £’000 369 — 75 2004 £’000 (58) (26) (84) 16 (68) 2004 £’000 47,364 4,601 512 52,477 2004 1,233 613 1,846 2004 £’000 813 35 106 — 954 2004 £’000 332 11 67 33 i F n a n c a i l i n f o r m a t i o n Notes to the financial statements – Group Continued Mears Group PLC annual report and accounts 2005 6. Share-based employee remuneration As at 31 December 2005 the Group maintained four share-based payment schemes for employee remuneration. The maximum term of current arrangements under the Executive Share Option Scheme (ESOP), the Enterprise Management Incentive Scheme (EMI) and Unapproved Share Option Scheme ends on 7 April 2015, 9 April 2013 and 24 October 2015 respectively. Upon vesting, each option allows the holder to purchase one ordinary share at the market price determined at grant date. The maximum term of current arrangements under the Save As You Earn Scheme (SAYE) ends on 5 October 2010. Upon vesting, each option allows the holder to purchase one ordinary share at a 20% discount to the market price determined at grant date. All share-based employee remuneration will be settled in equity. The Group has no legal obligation to repurchase or settle the options. Share options and weighted average exercise price are as follows for the reporting periods presented: Outstanding at 1 January Granted Forfeited Exercised Outstanding at 31 December 2005 2004 Weighted average exercise price p 87.5 232.1 95.6 64.7 109.8 Number ‘000 8,217 1,065 (673) (945) 7,664 Weighted average exercise price p 62.9 157.1 44.0 38.5 87.5 Number ‘000 7,479 1,869 (300) (831) 8,217 The options exercised during 2005 resulted in an equal number of ordinary shares (see also note 19). The weighted average share price of these shares at the date of exercise was 64.7p per share. All share options as at 31 December 2005 have been accounted for under IFRS 2. As at 31 December 2005 the Group has granted the following outstanding share options and exercise prices: Exercise date based on maximum term 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Weighted average exercise price p Number ‘000 2005 Weighted average remaining contractual life Months — 177 264 323 178 108 1,123 1,637 1,870 1,240 744 7,664 — 84.6 136.7 166.6 149.0 216.0 50.0 67.5 77.0 160.5 238.5 — 7 21 32 45 57 63 82 87 99 112 Weighted average exercise price p 2004 Weighted average remaining contractual life Months 82.5 86.0 135.5 100.0 149.0 19.3 50.0 67.5 76.1 159.6 — 7 19 33 44 57 63 75 94 99 111 — Number ‘000 171 223 299 141 201 110 1,658 1,776 2,208 1,430 — 8,217 The fair values of options granted were determined using the Binomial Option pricing model. Significant inputs into the calculation include the market price at the date of grant and exercise prices. Furthermore, the calculation takes into account the future dividend yield, the share price volatility rate and the risk-free interest rate. The underlying expected share price volatility was determined by reference to historical data. The Company expects the volatility of its share price to reduce as it matures. The risk-free interest rate was determined by the implied yield available on a zero-coupon government bond at the date of grant. Adjustments are made to reflect expected and actual forfeitures during the vesting period due to failure to satisfy service conditions. In total, £0.5m of employee remuneration expense has been included in the consolidated income statement for 2005 (2004: £0.3m), which gave rise to additional paid-in capital. No liabilities were recognised due to share-based payment transactions. The fair values of options granted during 2005, together with the significant inputs into the calculations, are detailed below: Option scheme ESOP ESOP SAYE SAYE Date of grant Number granted Apr 2005 Oct 2005 Oct 2005 Oct 2005 622,500 150,000 184,711 107,910 Share price at date of grant 231p 268p 269p 269p Exercise price 231p 268p 216p 216p Volatility Risk-free rate Exit rate Vesting conditions 22% 20% 20% 20% 4.75% 4.50% 4.50% 4.50% 20% — 3 years’ service 3 years’ service 30% 3 years’ service 30% 5 years’ service Estimate of option fair value 45p 66p 59p 56p 34 i F n a n c a i l i n f o r m a t i o n Mears Group PLC annual report and accounts 2005 6. Share-based employee remuneration continued The following options have been granted to continuing Directors: Director R Holt S J Black D J Robertson Number of options during the year Granted Exercised 31 December 2005 Exercise price Exercise dates — — — 50,000 150,000 — — — — — 40,000 — — — — — — — — — — — 435,000 50,000 200,000 50,000 150,000 208,000 200,000 200,000 4,612 50,000 40,000 77p 154p 194p 231p 268p 50p 67.5p 77p 100p 154p 231p 2006–2013 2007–2014 2007–2014 2008–2015 2008–2015 2004–2011 2005–2012 2006–2013 2006 2007–2014 2008–2015 1 January 2005 435,000 50,000 200,000 — — 208,000 200,000 200,000 4,612 50,000 — 673,000 options lapsed during the year. The market price at 31 December 2005 was 293p and the range during 2005 was 206p to 312p. 7. Tax expense The tax charge represents: United Kingdom corporation tax effective rate 27.4% (26.0%) Share of tax charge of associate Total current tax Reversal of deferred tax timing differences Tax expense The charge for the year can be reconciled to the income statement as follows: Result for the year before tax Result for the year multiplied by standard rate of corporation tax in the United Kingdom of 30% (2004: 30%) Effect of: Expenses not deductible for tax purposes Depreciation in excess/(deficit) of capital allowances Tax relief on exercise of share options Utilisation of tax losses Actual tax expense, net 8. Dividends The following dividends were declared on ordinary shares in the year: Final 2004 dividend of 1.40p (2004: final 2003 dividend of 1.00p) per share Interim dividend of 0.70p (2004: 0.50p) per share 2005 £’000 2,670 — 2,670 (130) 2,540 2005 £’000 9,750 2004 £’000 1,855 — 1,855 (95) 1,760 2004 £’000 7,123 2,925 2,134 145 (49) (391) (90) 76 14 (332) (132) 2,540 1,760 2005 £’000 815 410 1,225 2004 £’000 573 290 863 The proposed final dividend of 1.9p per share has not been included within the Group financial statements as no obligation existed at 31 December 2005. 35 i F n a n c a i l i n f o r m a t i o n Notes to the financial statements – Group Continued Mears Group PLC annual report and accounts 2005 9. Earnings per share Basic earnings per share is based on equity earnings of £7.21m (2004: £5.36m) and 58.16m (2004: 57.57m) 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 62.97m (2004: 61.56m) to reflect the potential dilution effect of employee share schemes. A normalised pre share-based payments earnings per share is disclosed in order to show performance undistorted by share-based payments and the tax effect of share options. The normalised pre share-based payments earnings per share is based on equity earnings of £7.19m (2004: £5.20m). Earnings per share Effect of eliminating share-based payments Effect of full tax adjustment Normalised pre share-based payments earnings per share 10. Goodwill Gross carrying amount At 1 January 2005 Additions Revision to previous year acquisition At 31 December 2005 Accumulated impairment losses At 1 January 2005 and at 31 December 2005 Carrying amount At 31 December 2005 At 31 December 2004 Basic Diluted 2005 p 12.40 0.66 (0.70) 12.36 2004 p 9.32 0.38 (0.66) 9.04 2005 p 11.45 0.61 (0.65) 11.41 Goodwill arising on consolidation £’000 Purchased goodwill £’000 10,580 30 (452) 10,158 489 — — 489 2004 p 8.71 0.36 (0.62) 8.45 Total £’000 11,069 30 (452) 10,647 — — — 10,158 10,580 489 489 10,647 11,069 Scion Group was acquired in 2003. The contingent consideration included within the Group financial statements represents the Directors’ best estimate of contingent consideration payable. The contingent consideration is based on a multiple of post tax profits generated in 2004 and 2005 less initial consideration paid upon acquisition. The Directors do not consider that any further monies will be payable. The deferred consideration of £0.5m has been released. The impact of this adjustment is to reduce the value of goodwill arising in respect of this acquisition by £0.5m to £3.4m. Additions relate to the purchase of the remaining 10% in Mears Facility Management Limited. The carrying value of goodwill is primarily comprised of the following cash-generating units: Social housing M&E Vehicle distribution Goodwill arising on consolidation £’000 Purchased goodwill £’000 4,197 4,331 1,630 10,158 489 — — 489 Total £’000 4,686 4,331 1,630 10,647 Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. An asset is impaired if its carrying value exceeds the unit’s recoverable amount which is based upon value in use. The value in use is calculated based upon the cash flow projections over ten years discounted at the Mears weighted average cost of capital of 9%. The cash flow projections assumed an annual growth rate of 2.5% for years one to five with no further growth beyond this. The projections assume a corporation tax rate of 30%. 36 i F n a n c a i l i n f o r m a t i o n Mears Group PLC annual report and accounts 2005 11. Property, plant and equipment The Group Gross carrying amount At 1 January 2005 Additions Disposals At 31 December 2005 Depreciation At 1 January 2005 Provided in the year Eliminated on disposals At 31 December 2005 Carrying amount At 31 December 2005 At 31 December 2004 Freehold land and buildings £’000 Leasehold improvements £’000 Plant and machinery £’000 Fixtures, fittings and equipment £’000 Motor vehicles £’000 69 — (60) 9 9 2 (4) 7 2 60 631 1,535 — 2,166 391 205 — 596 1,570 240 2,543 369 (299) 2,613 1,590 215 (180) 1,625 988 953 5,130 1,137 (23) 6,244 2,304 927 (19) 3,212 3,032 2,826 959 84 (279) 764 588 109 (168) 529 235 371 The figures stated above include assets held under finance leases as follows: Total £’000 9,332 3,125 (661) 11,796 4,882 1,458 (371) 5,969 5,827 4,450 Plant and machinery £’000 69 353 51 Net book amount At 31 December 2005 At 31 December 2004 Depreciation provided in the year 12. Equity accounted investments Cost At 1 January 2005 Disposals At 31 December 2005 Amounts written off At 1 January 2005 Disposals At 31 December 2005 Net book amount At 31 December 2005 At 31 December 2004 On 1 March 2005 the Group disposed of its entire investment in FITE IT Limited. 37 i F n a n c a i l i n f o r m a t i o n Associated undertaking Share of net assets £’000 Goodwill £’000 Total £’000 31 (31) — — — — — 31 20 (20) — 2 (2) — — 18 51 (51) — 2 (2) — — 49 Notes to the financial statements – Group Continued Mears Group PLC annual report and accounts 2005 12. Equity accounted investments continued The principal undertakings within the Group where the Parent Company held 20% or more of the equity share capital at 31 December 2005 are shown below: Proportion held Nature of business Mears Limited United Fleet Distribution Limited Haydon Mechanical & Electrical Limited Powersave Limited Scion Group Limited Mears Decorating Services Limited Mears Insurance Captive Limited 100% 100% 100% 100% 100% 100% 99.99% Provision of maintenance services Vehicle collection and delivery Provision of mechanical and electrical services Provision of heating and air conditioning services Provision of maintenance, mechanical, electrical and grounds maintenance Provision of decorating services Provision of insurance services All subsidiary undertakings prepare accounts to 31 December. All subsidiary undertakings are registered in England and Wales with the exception of Mears Insurance Captive Limited which is registered in Guernsey. A full list of subsidiary undertakings is available from the Company Secretary upon request. 13. Inventories Materials and consumables Work in progress 14. Construction contracts Revenue of £35.0m (2004: £35.4m) relating to construction contracts has been included in revenue. Contract costs incurred Recognised gross profits Recognised gross losses 38 i F n a n c a i l i n f o r m a t i o n Balances outstanding comprise: Retentions Due from customers for construction contract work Due to customers for construction contract work 2005 £’000 717 4,646 5,363 2005 £’000 27,274 7,693 — 34,967 1,649 2,341 (2,408) 2004 £’000 601 4,027 4,628 2004 £’000 28,671 6,763 — 35,434 1,578 1,414 (3,027) Retentions will be payable upon acceptance of the work performed by the customer. The amounts due to customers for construction work are included in ‘Trade and other payables’. 15. Trade and other receivables Trade receivables Amounts recoverable on non-construction contracts Other receivables Prepayments and accrued income 2005 £’000 22,900 4,866 — 1,745 2004 £’000 23,747 3,955 321 973 29,511 28,996 Trade receivables are normally due within 30 to 60 days and do not bear any effective interest rate. All trade receivables are subject to credit risk exposure. However, there is no specific concentration of credit risk as the amounts recognised represent a large number of receivables from various customers. Included in trade receivables is an amount of £0.8m (2004: £0.7m) which is due after more than one year and represents retention balances. Mears Group PLC annual report and accounts 2005 16. Trade and other payables Trade payables Accruals and deferred income Social security and other taxes Due to customers for construction contract work Other creditors Amounts due under finance lease contracts 2005 £’000 15,930 7,682 5,556 2,408 1,593 46 33,215 2004 £’000 17,643 5,919 3,846 3,027 635 114 31,184 The fair value of trade payables has not been disclosed as due to their short duration, management considers the carrying amounts recognised in the balance sheet to be a reasonable approximation of their fair value. The amounts due under construction contract work will generally be utilised within the next reporting period. The amounts due under finance lease contracts are secured on the assets to which they relate. 17. Long term financial liabilities Other creditors Amounts due under finance lease contracts 2005 £’000 855 — 855 2004 £’000 2,953 7 2,960 Included in other creditors is £2.2m (2004: £3.5m), of which £1.3m (2004: £0.6m) is included within trade and other payables and falls due within one year, relating to deferred consideration on the acquisitions of M&T Group Limited, Sheffield Décor Services, Powersave Limited and R Carter & Sons Limited. 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 2005 was: Financial liabilities – 2005 Financial liabilities – 2004 Interest rate Fixed £’000 46 121 Floating £’000 2,832 5,260 Zero £’000 2,175 3,503 Total £’000 5,053 8,884 39 i F n a n c a i Included above in floating interest rate exposure is a £2.8m bank overdraft. The interest rate risk on this liability is directly offset by cash at bank of £9.8m. The floating rate borrowings bear interest at rates based on LIBOR. The fixed rate borrowings relate to finance leases. The bank overdraft facility is secured by a fixed and floating charge over the Group’s assets. 18. Deferred taxation The Group asset for deferred tax as at 31 December 2005, which relates entirely to share-based payments, is £3.5m (2004: £2.1m). l i n f o r m a t i o n At 1 January 2005 Credit to income statement Credit to consolidated statement of recognised income and expense 2005 £’000 2,100 130 1,270 3,500 2004 £’000 900 95 1,105 2,100 In accordance with IFRS 2, ‘Share-based Payments’, the Group has recognised an expense for the consumption of employee services received as consideration for share options granted. A tax deduction will not arise until the options are exercised. The tax deduction in future periods is dependent upon the Company’s share price at the date of exercise. The estimated future tax deduction is based on the options’ intrinsic value at the balance sheet date. The cumulative amount credited to the income statement is limited to the tax effect of the associated cumulative share-based payment expense. The excess has been credited directly to equity. This is presented in the consolidated statement of recognised income and expense. The deferred tax asset that arises on pre 7 November 2002 grants, even though the grants themselves are not accounted for within the income statement, is credited directly to equity. Notes to the financial statements – Group Continued 19. Share capital Authorised 100,000,000 ordinary shares of 1p each Allotted, called up and fully paid 58,828,199 (2004: 57,883,146) ordinary shares of 1p each Mears Group PLC annual report and accounts 2005 2005 £’000 2004 £’000 1,000 1,000 588 579 During the year 945,053 ordinary shares of 1p each were issued for consideration of £0.61m as a result of share options being exercised. The difference between the nominal value of £0.01m and the total consideration of £0.61m has been credited to the share premium account. 20. Reconciliation of movement in equity At 1 January 2004 Net result for the year Deferred tax Pension obligation Total recognised income and expense for the year Issue of shares Share option charges Dividends Share capital £’000 570 — — — — 9 — — Share premium account £’000 3,041 — — — — 321 — — At 31 December 2004 579 3,362 Net result for the year Deferred tax Pension obligation Total recognised income and expense for the year Acquisition of minority interests Issue of shares Share option charges Dividends — — — — — 9 — — — — — — — 598 — — Share-based payment reserve £’000 210 — — — — — 315 — 525 — — — — — — 515 — Retained earnings £’000 9,766 5,358 1,105 (54) 6,409 — — (863) 15,312 7,210 1,270 (101) 8,379 — — — (1,225) At 31 December 2005 588 3,960 1,040 22,466 21. Notes to consolidated cash flow statement The following non operating cash flow adjustments have been made to the pre-tax result for the year: Depreciation (Profit)/loss on disposal of fixed assets Share-based payments Result from equity accounted investments Finance income Finance cost Total Minority interest £’000 Total equity £’000 90 13,677 5 — — 5 — — — 95 — — — — (95) — — — — 2005 £’000 1,458 (21) 515 — (70) 92 1,974 5,363 1,105 (54) 6,414 330 315 (863) 19,873 7,210 1,270 (101) 8,379 (95) 607 515 (1,225) 28,054 2004 £’000 1,082 33 315 (4) (16) 84 1,494 40 i F n a n c a i l i n f o r m a t i o n Mears Group PLC annual report and accounts 2005 22. Capital commitments The Group had no capital commitments at 31 December 2005 or at 31 December 2004. 23. Contingent liabilities The Group has guaranteed that it will complete the contracts it has commenced with 18 (2004: 14) local authorities. At 31 December 2005 these guarantees amounted to £2.11m (2004: £1.95m). The Group had no other contingent liabilities at 31 December 2005 or at 31 December 2004. 24. 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 senior 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. IAS 19, ‘Employee 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 2005 by a qualified independent actuary using the projected unit method. The Group has adopted the amendment to IAS 19 in the current year. The amounts recognised in the balance sheet are: 2005 2004 Equities Bonds Cash Group’s estimated asset share Present value of scheme liabilities Net pension liability The amounts recognised in the income statement are as follows: 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 Interest on obligation Total charged to the result for year % 7.1 4.7 4.5 £’000 836 32 71 939 (1,182) (243) % 7.5 4.9 4.8 2005 £’000 120 — 120 51 (46) 5 125 £’000 522 57 73 652 (794) (142) 2004 £’000 121 5 126 38 (33) 5 131 41 i F n a n c a i l i n f o r m a t i o n Notes to the financial statements – Group Continued Mears Group PLC annual report and accounts 2005 24. Pensions continued IAS 19, ‘Employee Benefits’ continued The movements in the net pension liability and the amount recognised in the balance sheet are as follows: Deficit at 1 January 2005 Current service cost Contributions Past service costs Other finance income Actuarial loss Deficit in scheme at end of year The principal actuarial assumptions at the balance sheet date are as follows: Rate of increase of salaries Rate of increase for pensions in payment Discount rate Inflation 2005 £’000 (142) (120) 115 — 5 (101) (243) 2005 % 3.3 2.8 4.8 2.8 2004 £’000 (88) (121) 121 (5) 5 (54) (142) 2004 % 3.3 2.8 5.5 2.8 25. Leasing commitments Operating lease payments amounting to £4.76m (2002: £3.23m) are due within one year. The leases to which these relate expire as follows: 42 In one year or less Between one and five years In five years or more i F n a n c a i l i n f o r m a t i o n 2005 2004 Land and buildings £’000 35 682 604 1,321 Other £’000 191 3,243 — 3,434 Land and buildings £’000 92 727 253 1,072 Other £’000 263 1,894 — 2,157 Company accounts 43 i F n a n c a i l i n f o r m a t i o n Report of the independent auditors – Company To the members of Mears Group PLC Mears Group PLC annual report and accounts 2005 We have audited the Parent Company financial statements of Mears Group PLC for the year ended 31 December 2005 which comprise the principal accounting policies, the balance sheet and notes 1 to 11. These Parent Company financial statements have been prepared under the accounting policies set out therein. We have reported separately on the Group financial statements of Mears Group PLC for the year ended 31 December 2005. 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 Directors and auditors The Directors’ responsibilities for preparing the Parent Company financial statements in accordance with United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the statement of Directors’ responsibilities on page 18. Our responsibility is to audit the Parent Company financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the Parent Company financial statements give a true and fair view and whether the Parent Company financial statements have been properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors’ report is not consistent with the Parent Company 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 other transactions is not disclosed. We read other information contained in the annual report and accounts and consider whether it is consistent with the audited Parent Company financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Parent Company financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Parent Company financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the Parent Company financial statements, and of whether the accounting policies are appropriate to the Company’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 Parent Company 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 Parent Company financial statements. 44 Opinion In our opinion: i F n a n c a i l i n f o r m a t i o n the Parent Company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Company’s affairs at 31 December 2005; and the Parent Company financial statements have been properly prepared in accordance with the Companies Act 1985. Grant Thornton UK LLP Registered Auditors Chartered Accountants Cheltenham 18 April 2006 Mears Group PLC annual report and accounts 2005 Principal accounting policies – Company 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 Company are set out below. Except as stated below, the following accounting policies have remained unchanged from the previous year and continue to be the most appropriate. Turnover Turnover is the total amount receivable by the Company for goods supplied and services provided during the year, excluding VAT. Investments Investments are included at cost net of any provision for impairment. Deferred taxation Deferred tax is recognised on all timing differences where the transactions or events that give the Company 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. 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. 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. Accounting for dividends Following the issue of FRS 21, ‘Events after the balance sheet date’, the Company has amended its accounting policy for accounting for dividends. This has resulted in dividends approved after the balance sheet date being no longer recognised as a liability at the balance sheet date since the liability did not represent a present obligation at that date. As a result it has been necessary to restate the comparative figure. The effect of the change in accounting policy has been to increase the net assets at 31 December 2005 by £1.12m (2004: £0.82m). 45 i F n a n c a i l i n f o r m a t i o n Parent Company balance sheet As at 31 December 2005 Fixed assets Investments Current assets 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 Mears Group PLC annual report and accounts 2005 Note 2005 £’000 2004 restated £’000 3 4 5 6 7 8 8 8 12,440 12,767 4,839 46 4,885 (1,802) 3,083 5,500 — 5,500 (4,838) 662 15,523 13,429 (600) 14,923 588 3,960 90 10,285 14,923 (2,243) 11,186 579 3,362 90 7,155 11,186 The financial statements were approved by the Board of Directors on 18 April 2006. S J Black Director D J Robertson Director 46 The accompanying accounting policies and notes form an integral part of these financial statements. i F n a n c a i l i n f o r m a t i o n Mears Group PLC annual report and accounts 2005 Notes to the financial statements – Company 1. 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 £4.4m (2004: £4.9m) which is dealt with in the financial statements of the Company. This result is stated after charging auditors’ remuneration of £15,000 relating to audit services and £10,000 relating to non-audit services. 2. Directors and employees Employee benefits expense All staff costs relate to Directors. Staff costs during the year were as follows: Wages and salaries Social security costs Other pension costs The average number of employees of the Company during the year was: Office and management 2005 £’000 932 102 135 2004 £’000 813 82 106 1,169 1,001 2005 3 2004 3 Details relating to the remuneration in respect of the highest paid Director are detailed in note 5 of the notes to the consolidated financial statements. 3. Fixed asset investments Investment in subsidiary undertakings Cost At 1 January 2005 Additions Revision to previous acquisition At 31 December 2005 £’000 12,767 125 (452) 12,440 Additions relate to the purchase of the remaining 1% of equity share capital of Mears Decorating Services Limited. The revision to a prior year acquisition is detailed in note 10 of the notes to the consolidated financial statements. The principal undertakings held by the Company are detailed in note 12 of the notes to the consolidated financial statements. 4. Debtors Amounts owed by Group undertakings 5. Creditors: amounts falling due within one year Bank overdraft Corporation tax Social security and other taxes Amounts owed to Group undertakings Other creditors Accruals 2005 £’000 4,839 2005 £’000 — 10 133 — 1,316 343 1,802 2004 £’000 5,500 2004 restated £’000 1,984 9 25 2,141 550 129 4,838 47 i F n a n c a i l i n f o r m a t i o n Notes to the financial statements – Company Continued Mears Group PLC annual report and accounts 2005 6. Long term financial liabilities Other creditors 2005 £’000 600 2004 £’000 2,243 Included in Other creditors is deferred consideration of £1.79m (2004: £2.79m), of which £1.19m (2004: £0.55m) falls due within one year, relating to deferred consideration on the acquisitions of M&T Group Limited and Powersave Limited. These are payable by instalments over a three year period. Interest rate risk The Company finances its operations through a mixture of retained profits and bank borrowings. The interest rate exposure of the financial liabilities of the Company as at 31 December 2005 was: Financial liabilities – 2005 Financial liabilities – 2004 Interest rate Fixed £’000 — — Floating £’000 — 1,984 Zero £’000 1,790 2,793 Total £’000 1,790 4,777 The floating rate borrowings bear interest at rates based on LIBOR. The bank overdraft facility is secured by a fixed and floating charge over the Group’s assets. 7. Share capital Authorised 100,000,000 ordinary shares of 1p each Allotted, called up and fully paid 58,828,199 (2004: 57,883,146) ordinary shares of 1p each 2005 £’000 2004 £’000 1,000 1,000 588 579 During the year 945,053 ordinary shares of 1p each were issued for consideration of £0.61m as a result of share options being exercised. The difference between the nominal value of £0.01m and the total consideration of £0.61m has been credited to the share premium account. 48 8. Share premium account and reserves i F n a n c a i l i n f o r m a t i o n At 1 January 2005 as originally stated Prior year adjustment At 1 January 2005 as restated Issue of shares Retained profit for the year At 31 December 2005 Share capital £’000 579 — 579 9 — 588 Share premium account £’000 3,362 — 3,362 598 — 3,960 Shares to be issued £’000 90 — 90 — — 90 Profit and loss account £’000 6,340 815 7,155 — 3,130 10,285 9. Capital commitments The Company had no capital commitments at 31 December 2005 or at 31 December 2004. 10. Contingent liabilities The Company had no contingent liabilities at 31 December 2005 or at 31 December 2004. 11. Pensions Defined contribution schemes The Company contributes to personal pension schemes of the Directors. Mears Group PLC annual report and accounts 2005 Mears Group PLC annual report and accounts 2005 Who we are We are the leading social housing repairs and maintenance provider in the UK. We achieve the highest levels of financial performance and innovation in our sector. 2,300 people work at Mears. Together with our clients, we maintain, repair and upgrade people’s homes. We carry out more than 3,000 repairs each day to 500,000 houses nationwide. Our customer service philosophy is simple: we want to make tenants smile. Our results in 2005 underline the financial and operational strengths of this Group. Our vision Our purpose is to make a positive difference to the communities we serve by improving homes, improving neighbourhoods and improving lives. We do this by constantly striving to achieve the highest levels of customer satisfaction, efficiency and effectiveness in the social housing sector. Our approach is based on the development of outstanding partnerships with employees, clients, tenants and the wider community. Success enables us to create great opportunities for our employees and sustainable value for our shareholders. What we do Every day our people support clients and tenants by: Maintaining and improving homes, buildings and communities. Carrying out a planned programme of Decent Homes improvements. Fixing damage and responding to other urgent tenant needs. We work hard to improve people’s quality of life wherever we operate. How we do it We listen carefully to people’s needs and we always try to find better ways to do things. We believe tenants should be involved at all stages and always put their needs at the heart of what we do. We call our approach the One Mears Way. Through this we capture the best ideas, processes and methods and share them with colleagues so all stakeholders can understand and follow the right way to do things – every single day. Why we do it Helping our clients to meet their objectives enables us to grow the scale and profitability of our business so as to provide improving service levels. That means we can create great opportunities for our employees and sustainable value for our shareholders. Success also enables us to support a wide range of community projects, from breakfast clubs for schoolchildren to skills training centres for potential employees. Annual General Meeting Record date for final dividend 7 June 2006 16 June 2006 Dividend warrants posted to shareholders 3 July 2006 Interim results announced 22 August 2006 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 noon on 7 June 2006 when the following ordinary business will be considered: 1. To receive and adopt the accounts for the year ended 31 December 2005, together with the reports of the Directors and auditors thereon. 2. To declare a final dividend of 1.9p 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 R Holt as a Director who, in accordance with the Articles of Association, retires by rotation. 5. To re-appoint D J Robertson as a Director who, in accordance with the Articles of Association, retires by rotation. And the following special business: Ordinary resolution 6. 7. THAT the report of the Board in relation to remuneration policy and practice (as referred to on pages 20 and 21 of the annual report and accounts for the year ended 31 December 2005) be approved. THAT in substitution for the authority to allot relevant securities conferred on the Directors by the ordinary resolution passed on 1 June 2005, 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 £272,738 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 8. THAT: (a) the Directors be authorised to allot securities of the Company (pursuant to the authority conferred on the Directors by resolution 7 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 £29,414. (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 (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 2006 1390 Montpellier Court Gloucester Business Park Brockworth Gloucester GL3 4AH Notes 1. A member entitled to attend and vote at the Meeting may appoint a proxy to attend and, on a poll, to vote instead of him. A proxy need not also be a member of the Company. 2. 3. 4. 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 2 June 2006 shall be entitled to attend or vote at the Meeting in respect of the numbers of shares registered in their name on that date. 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: the Register of members; the Register of Directors’ interests in the share capital of the Company; the Memorandum and Articles of Association; details of proxies received; and copies of the Directors’ Contracts of Service with the Company or its subsidiaries. 49 N o t i c e o f t h e A n n u a l G e n e r a l M e e t i n g Mears Group PLC annual report and accounts 2005 Mears Group PLC 1390 Montpellier Court Gloucester Business Park Brockworth Gloucester GL3 4AH Tel: 01453 511 911 www.mearsgroup.co.uk M e a r s G r o u p P L C a n n u a l r e p o r t a n d a c c o u n t s 2 0 0 5 designed & produced by T H E D E S I G N P O R T F O L I O a member of the flathill communications group plc www.flathillplc.com Mears’ commitment to environmental issues is reflected in this annual report which has been printed on Revive Uncoated, 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 this production has been recycled. The printer is a Carbon Neutral® company. Both the printer and the paper mill are registered to ISO 14001.