S i n c e f l o t a t i o n i n 1 9 8 8 S e r c o h a s d e l i v e r e d u n i n t e r r u p t e d g r o w t h i n s a l e s a n d p r o f i t s . T h i s 1999 S e r c o G r o u p p l c a n n u a l r e v i e w a n d a c c o u n t s 1 9 9 9 S a r e v i e w m a r k s o v e r a d e c a d e o f o u t s t a n d i n g p e r f o r m a n c e . I t a l s o o f f e r s a n i n s i g h t i n t o t h e f i r m f o u n d a t i o n s t h a t u n d e r p i n t h e f i g u r e s : o u r Our 27,500 staff have made us one of the world’s largest outsourcing businesses, operating in 35 countries. Our customers are mainly national and local governments, and over 40% of our profits come from outside the UK. Since Serco was floated on the London Stock Exchange in 1988, we have achieved average annual growth of over 20% in sales and profit – largely organically rather than by acquisition. contents page 1 financial highlights page 2 a clear and coherent business page 4 delivering certainty page 6 strong management succession page 8 the way we deliver Serco has fully met expectations for the year, maintaining its unbroken record of sales and profit growth. With over 450 contracts, S e r c o may look bewilderingly diverse. But there is a consistent thread running throughout the business: a suite of carefully developed management processes that can be applied to almost any service activity. Serco benefits from a rare business advantage: our future earnings and cash flows are highly visible. W e are able to plan a long-term growth strategy because we can forecast them with relative certainty. Here’s how. Despite our rapid growth, we have been able to grow our own senior managers in abundance – successfully extending and replenishing the team with little recourse to external recruitment. The reason? Our unusually devolved structure. Our values are not handed down from on high. They are deeply ingrained in a culture that delivers the spirit of our contracts, not just the letter, and aims to minimise hierarchy and bureaucracy. page 10 sharing the knowledge page 12 growing worldwide page 24 business review page 29 annual accounts We are passionate about sharing ideas and best practice to avoid reinventing the wheel. Constant communication worldwide helps us understand and manage risks, deliver service improvements which meet customer expectations and keep our competitive edge. A selection of the new business we gained in 1999. In a record year for new and renewed contracts, we drove up the size and complexity curve into areas where Serco is more sharply differentiated. An overview of our progress during the year, including reports on business sectors and our view of the year ahead. Accounts and shareholder information, including directors and advisers, corporate governance, directors’ report, directors’ remuneration and auditors’ report. b s t r a t e g i e s a n d m a n a g e m e n t p r o c e s s e s – a n d t h e d e d i c a t e d p e o p l e w h o s e e f f o r t s e n a b l e u s t o e x c e e d t h e e x p e c t a t i o n s o f c u s t o m e r s A message from the Board For the eleventh successive year since Serco’s flotation, our sales, profit and cash flow performance has fully met expectations. In 1999, sales grew by 17.4% to £807.5 million. Pre-tax profits rose 18.8% to £31.4 million pre FRS 10 (Goodwill and Intangible Assets) and by 14.5% to £29.3 million after FRS 10. Earnings per share before and after FRS 10 rose 17.8% and 11.7% respectively. The recommended final dividend of 5.9p per share makes a total of 8.55p for the year – an increase of 15.5%. The Group can look forward to continued strong growth this year. We have been winning new business at an increasing rate, retaining over 90% of our contracts as they come up for renewal and growing successfully across all our markets. We were particularly pleased to be part of the consortium that won the contract, worth at least £2.2 billion, to manage the UK’s Atomic Weapons Establishment. This is a milestone for us, not just in its size and complexity but because of the confidence it displays in Serco’s capability and responsibility. It gives us a platform for pursuing the larger opportunities that are emerging worldwide – while continuing to grow in our traditional markets, which still have immense potential. Serco is in many ways a 21st century business. Our devolved structure and minimal hierarchy owe little to 20th century models and our function is to help customers modernise their own activities. We use advanced technology to share ideas and information freely worldwide – we are making further substantial investments in new information technology systems this year – but we never forget that the technology exists purely to support our people. This annual review is, as always, a record of their achievements. As the following pages make plain, Serco is very much a people business: our success comes from enabling individuals to deliver the high-quality service our customers expect. Our thanks to them all. Financial highlights 1999 1998 % Turnover* Profit before tax – pre FRS 10 financial highlights Earnings per share – pre FRS 10 Dividend per share £31.4m £26.4m up 18.8 up 15.5 up 17.8 33.8p 8.55p 28.7p 7.4p £807.5m £687.8m up 17.4 Dividend cover – pre FRS 10 3.9 3.7 Employees at 31 December* 27,500 25,000 up 10.0 Turnover* £m Profit before tax – pre FRS 10 £m Serco Group plc 1999 * Including joint ventures 1 a n d i n v e s t o r s . S e r c o ’ s r a p i d g r o w t h a n d e x c e l l e n t p r o s p e c t s c o m e f r o m a s i m p l e p r o p o s i t i o n : o u r a b i l i t y t o m a n a g e a n e x t r a o r d i n a r y We help customers add value to their existing assets. Under our custodianship since 1995, the UK’s National Physical Laboratory (NPL) has continued to advance its stature, influence and revenues. Under a new Private Finance Initiative (PFI) contract, we are part of a consortium with John Laing plc, which is building a state-of-the art 36,000m2 new complex of laboratories, engineering workshops, offices and meeting rooms. This will increase NPL’s efficiency and allow it to maintain its position as one of the world’s great national standards laboratories. The project involves relocating people and science facilities from some 2,800 individual rooms. cl ear and A C LE A R AN D CO HE RE NT B U SI NES S At first sight, Serco looks bewilderingly diverse – over 450 contract managers run individual operations ranging from bus services to research establishments. In fact, it could hardly be more coherent. To every project we bring the same things: our expertise in managing change, and our other proven management processes. These processes are our product. With the help of the Serco Institute we research and update them, document them and train our staff to use them. They are designed to change mindsets; to instil customer focus; and to provide unobtrusive but effective controls that leave contract managers free to run their businesses entrepreneurially. Initially, they enable us to increase value for money while maintaining quality and continuity of service: significantly, no Serco phase-in has ever provoked a strike. Longer-term, they enable us to help customers add value to existing assets: for example, at the UK’s NPL we have recruited an additional 100 scientists to government and commercial programmes since 1995. The great strength of our management processes is that we can apply them to almost any activity. Our strategy is to keep moving them into more complex areas where our skills can be best used. We are now also applying them in Public Private Partnerships. 2 v a r i e t y o f a c t i v i t i e s i n a w a y t h a t d e l i v e r s c u s t o m e r f o c u s , e f f i c i e n c y, v a l u e a n d q u a l i t y. W e h a v e d e v e l o p e d s y s t e m a t i c p r o c e s s e s f o r d 3 i m p l e m e n t i n g n e w m a n a g e m e n t a n d a c h i e v i n g s u s t a i n e d i m p r o v e m e n t . W e h a v e a l o n g - t e r m o u t l o o k , w h i c h i s e v i d e n t b o t h i n t h e w a y w e 4 w i n a n d m a n a g e c o n t r a c t s a n d i n t h e w a y w e p l a n o u r o w n g r o w t h . M a r k e t d e m a n d i s b u o y a n t , t h e r e i s s t i l l i m m e n s e u n t a p p e d p o t e n t i a l , In practice, a five-year contract can last 10, 20, 30 years – or even l o n g e r. Serco has worked at the RAF Fylingdales early warning station since 1959. We provided most of the workforce during construction; and since 1964 we’ve been the facilities management contractor, with over 150 staff operating and maintaining the site 24 hours a day. The site is technologically complex and strategically sensitive. Its primary role is detecting and tracking ballistic missiles, and it also has an accurate satellite tracking capability. Despite repeated competitive tenders, which have seen contractors come and go at the other sites in the early warning chain, Serco remains the only contractor to have operated and maintained the Fylingdales facility. certainty earnings and cash flows are highly visible. DELIVERING CERTAINTY Serco benefits from a rare business advantage: our future We are able to plan a long-term growth strategy because we can forecast with relative certainty. Our contracts are typically for three to five years initially, and the trend is towards longer periods. By building long-term collaborative relationships with clients we have earned a renewal rate of over 90%. So in practice, contracts can last 10, 20, 30 years – or even longer. Our income and cash flows are dependable: 80% of our customers are governments and international agencies, and the rest are major corporations. Our growth prospects are excellent. Our markets are expanding faster than we can – we have been careful to grow at a measured pace, to avoid overstretching management or growing too fast to maintain our unique culture. And each new contract brings further opportunities: a significant proportion of our new business comes from broadening the scope of existing contracts. Nothing in life is guaranteed. But Serco is ideally placed to deliver an unusual degree of certainty to customers, staff and shareholders. And we intend to do everything we can to keep it that way. Serco Group plc 1999 5 a n d w e c o n t i n u e t o t a k e o u r m a n a g e m e n t s k i l l s i n t o n e w f i e l d s . B y i t s n a t u r e , o u r b u s i n e s s b r i n g s a f l o w o f n e w m a n a g e m e n t t a l e n t We are well placed to identify and make the most of people’s talents. John Rusling (right) began his career in the British Army, transferring to us as a satellite communications engineer in 1970 after we won a contract at the Royal Signals Research Establishment. Quickly recognising his talents, we’ve kept him on the move – to the US… Hong Kong… Australia, where he was our Far East Group Manager and helped lay the foundations of Serco Australia… the European Space Agency… back to the UK... and now Germany. He is currently responsible for operational matters relating to the government services division of our recent acquisition in Germany. strong man S T R O N G M A N AG E M E N T S U C C E S S I O N It isn’t easy to grow fast without overstretching your management team. To avoid this pitfall we’ve carefully managed the pace of our growth. But at the same time we’ve been able to grow our own managers in abundance – successfully extending and replenishing the team with little recourse to external recruitment. How come? The answer lies in our devolved structure. As we take on new contracts, we constantly acquire new talent. We provide a framework of highly developed processes and controls, train people to use them – and then, in effect, liberate them to run their own businesses better. So now we have over 450 people who are effectively managing directors, running their own contracts with their own management teams. Our style of operation is based on giving managers the tools to do the job – and then the freedom to manage. Short decision chains keep us agile as a business and make us attractive to entrepreneurial managers: when we take over a contract, the most dynamic people tend to stick around. And our emphasis on small working units and close relationships means we are usually well placed to identify and make the most of people’s talents. In short, continued steady growth is an opportunity rather than a threat to Serco’s management capability. The bigger we get, the stronger we grow. 6 i n t o t h e b u s i n e s s . W e t a k e p a i n s t o n u r t u r e t h i s , s o t h a t w e c a n g o o n e x p a n d i n g w i t h o u t o u t g r o w i n g o u r m a n a g e m e n t s t r e n g t h . C o n c e r n an 7 t o m a k e t h e m o s t o f p e o p l e ’ s t a l e n t s i s a t t h e h e a r t o f S e r c o ’ s d i s t i n c t i v e c u l t u r e . A r e c e n t r e v i e w b y A r t h u r A n d e r s e n c o n f i r m e d a 8 g e n u i n e c o m m i t m e n t t o c u s t o m e r s a n d s t a f f a c r o s s t h e G r o u p , a n d a n o t a b l e d e t e r m i n a t i o n t h a t S e r c o s h o u l d b e s t r a i g h t f o r w a r d a n d Our people’s confidence, enthusiasm and commitment tell customers precisely what we stand for. ‘We’re uncompromising,’ says Los Angeles air traffic control (ATC) manager Don Bohr, pictured centre foreground with colleagues Keith Kildow, David Vance and Roy Sedlaczek. ‘We want to provide the very best for our customers because we feel part of a family and those are the family values. ATC requires an enormous amount of co-ordination and communication – we’re successful because we work as a team: we enjoy the people and the working environment.’ And their customer, the Federal Aviation Administration, liked the results so much that it added 13 more ATC towers to our contract in 1999. deliver deeply ingrained in our culture. TH E WAY W E D E L I VER Our values are not handed down from on high. They are All Serco’s management processes are underpinned by our shared beliefs about how to treat staff and customers. We like to feel we do not employ people for their labour alone. We value their knowledge, ideas and potential to contribute. We give them support and ready access to anyone who can help with a problem or use an idea. We want them to speak their minds freely, take responsibility for solving problems, and enjoy their work. We encourage them to deliver the spirit of our contracts, not just the letter. We are not embarrassed to talk about the Serco ‘f a m i l y’. From the beginning, we have deliberately fostered a family feel – by minimising hierarchy and bureaucracy, and dividing the organisation into highly autonomous units that are small enough for their leaders to know everyone personally. We encourage people at all levels to travel around the company to share ideas and experience. All our contract managers receive share options and at the time of the management buyout in 1987 we gave equity to all staff. Since then we have developed sharesave schemes which give staff the opportunity to build a personal stake in the business. So we don’t need to burden customers with statements about our values. The confidence, enthusiasm and commitment of our people tell them precisely what Serco stands for. Serco Group plc 1999 9 e a s y t o d e a l w i t h . W e a r e d e t e r m i n e d t o r e t a i n t h i s c u l t u r e a s w e g r o w, a n d t o s h a r e i d e a s a n d e x p e r i e n c e w o r l d w i d e . I n 1 9 9 9 w e w o n We are developing techniques to help people share knowledge more readily. The Serco Institute has been addressing this challenge for several years. It has developed systems for sharing information across the company, explored ways of motivating people to share their ideas and know-how, and fostered the creation of communities within Serco that exchange knowledge and ideas across contracts, companies and countries. The Institute’s wider role is to research trends in the outsourcing marketplace, develop management processes and techniques, and promote best practice. Its brief is to keep us on the cutting edge of outsourcing and service delivery. With facilities in the UK and Australia, the Institute team works with Serco businesses and their staff in 35 countries, as well as with customers, partners, policy units and sharing the S H A RI N G T H E K N O W L E D G E In an increasingly diverse organisation we are passionate about sharing ideas and best practice to avoid reinventing the wheel. Constant academic bodies worldwide. communication worldwide helps us understand and manage risks, deliver service improvements to meet customer expectations and keep our competitive edge. We are exploring what motivates people to share knowledge and developing techniques to help them do it more readily. And we are also helping our businesses to form networks and build ‘communities of practice’ which share ideas and experience. To support this process we will be making further investment in training and technology in 2000. We are making increasing use of information technology to identify knowledge dispersed around the organisation and create sustainable, globe-spanning virtual communities. Our intranet is an increasingly valuable tool, and we are introducing new knowledge management processes and systems. These will bring the intranet to almost every employee and lead ultimately to systems that intelligently search the intranet and internet to bring our people individually tailored information. 10 r e c o r d l e v e l s o f n e w b u s i n e s s . K e y e x a m p l e s a r e f e a t u r e d o n t h e f o l l o w i n g p a g e s … he 11 Service manager Jim Shaw joined Serco-Gardner Merchant in 1998. Previously at Gardner Merchant, he worked on the company’s successful 1993 joint tender with Serco for Puckapunyal Military Base. He enjoys the ‘autonomy and sense of ownership’ he has in managing the contract, and ‘Serco’s philosophy of looking after its employees’. C L I E N T: Department of Defence (Australia) D I V I S I O N : Serco-Gardner Merchant (joint venture) D U R AT I O N : 5 years C O N T RA C T: Garrison support services, Central Sydney The Australian Department of Defence has let a series of 11 area base support contracts, of which we have won seven. The Central Sydney contract, won through our joint venture with Gardner Merchant, was the first of the three we gained in 1999. It covers a wide range of support services for half a dozen bases in Central Sydney, including security, grounds, stores transport, catering, cleaning, accommodation management, sanitation services and management of recreation facilities. The location of the sites and broad range of services make this a high-profile contract – particularly in 2000, when Sydney plays host to the Olympics: we expect all the bases to be full, with accommodation and hospitality services working at full stretch. 12 S Y D N E Y 3 3 . 5 3 ˚ S O UT H , 1 5 1 .1 0 ˚ E AS T Klaus Tiemann was managing director of Elekluft and now heads Serco GmbH & Co. KG. He believes the Serco culture is ‘well suited to the service business in Germany – especially the way Serco people don’t just talk about their values but really live them.’ The outsourcing market is now taking off in Germany, he says, and ‘our access to relevant experience in Serco will help us to go for bigger opportunities’. B O N N 5 0. 4 3 ˚ N O R T H, 7. 6 ˚ E AS T A C Q U I R E D BU S I N E S S : Elekluft Elektronik und Luftfahrtgeräte GmbH (Germany) N O W TR A DI NG A S : Serco GmbH & Co. KG A C T I V I T I E S : Services to German government and commercial sectors We acquired Elekluft from DaimlerChrysler Aerospace (DASA) in October 1999 and have reorganised it as Serco GmbH & Co. KG, with three divisions. Government Services will concentrate on opportunities arising from the German government’s desire for better value for money in central and local administration as well as the German Ministry of Defence (MOD). Current customers include the MOD and NAT O. Facilities Management will build on its service centre offerings in Southern Germany, where we provide a full range of technical and administrative services to customers from our sites. In addition, we will develop the services provided to major customers on their own sites. Our major customer is DASA. Service Support provides an extensive range of documentation, training and engineering services to manufacturing industry and will extend this portfolio to offer full ‘cradle to grave’ support. Customers include Ford and DaimlerChrysler. We see a bright future in Germany as we bring our expertise to a market which is in the early stages of contracting-out complex technical tasks. 13 Bob Pritchard has been managing our Adelaide bus contract from the beginning. Since then it has almost tripled in size. He believes in working hard to get results, and giving recognition where it’s due. After four years with Serco, he finds it ‘a very good company to work for – support, good advice and a team approach’. C L I E N T: Adelaide Passenger Transport Board (Australia) D I V I S I O N : Serco Transport Services D U R AT I O N : 5 years, extendable by 5 years C O N T RA C T: Provision of bus services in the Adelaide metropolitan area Serco has been operating bus services in Adelaide since 1996 and under a new contract we will operate about 50% of the city’s services. This latest contract, more than doubling the number of Serco-operated buses from 165 to 400, reflects both the public’s and the transport authority’s satisfaction with our performance to date. Included is the city’s innovative guided busway, O’Bahn, which is the transport system’s centrepiece. We have increased demand by offering service reliability, new late night services, clean buses and friendly, helpful staff. Culture change has been a key factor: bus operators are encouraged to get to know their passengers and to take part in community initiatives including the innovative Serco Watch scheme. This enables passengers and operators to report suspicious behaviour and incidents by radio to colleagues at base, who call the police immediately. The scheme has resulted in a number of arrests and convictions. It also brought emergency medical attention to an elderly passenger who was taken ill at home: an alert driver called for help when she missed her regular bus. 14 A D E L A I D E 34 . 52 ˚ S OU T H , 1 38 . 3 0˚ E A S T The newly appointed chief executive of AWE Management Limited is John Rae, who joined us in 1995 from the science and innovation business AEA Te c h n o l o g y. At Serco, which he describes as an ‘energetic and exciting business’, he has been our managing director at the National Physical L a b o r a t o r y, responsible for greatly expanding its capabilities and worldwide commercial success. A L D E R M A S T O N 51 . 2 7˚ NO RT H, 0 0 .4 7 ˚ WE S T C L I E N T: Ministry of Defence (UK) D I V I S I O N : AWE Management Limited (joint venture) D U R AT I O N : 10 years, extendable to 25 years C O N T RA C T : Management and operation of Atomic Weapons Establishment Beginning in April 2000, this is our largest contract to date, and a remarkable responsibility. Initially for 10 years, and with the potential for conversion to a 25-year term, it gives us technical custodianship of Britain’s nuclear weapons stockpile and the associated world-class R&D establishment that underpins the nation’s nuclear capability and security if required. The contract includes waste and environmental management, manufacture, and extremely demanding science and research programmes. A crucial challenge is to maintain the ability to design effective weapons and new systems if required. We are working as AWE Management Limited, a joint venture with Lockheed Martin UK Limited and British Nuclear Fuels plc. The award of this contract recognises the calibre of all three partners and the spectrum of technical, scientific and management capability that we are able to deploy. 15 Contract director Ian Jones has spent the past decade on safety-critical contracts in aviation facilities management and engineering. Most recently, he has been contract support and engineering director supporting 43 civil and military aerospace contracts. He joined us from a partner company, impressed by our concern to ‘make people feel valued, however large or small their role’. L E I C E S T E R 52 . 4 0˚ N O R TH , 1 . 9˚ W E ST C L I E N T: Railtrack (UK) D I V I S I O N : Serco Rail D U R AT I O N : 5 years C O N T RA C T: Maintenance of railway infrastructure assets Although we already have a broad range of engineering and maintenance contracts with Railtrack, this infrastructure contract is a breakthrough – making us the first new player in UK track maintenance since the rail network was privatised. We are assuming responsibility for the stewardship of track, signalling and overhead electrics in the Derby, Leicester and Midland Mainline South area. We will be bringing a characteristically innovative approach to improving track quality and track access. Combined with our portfolio of other rail operations, this contract should provide a springboard to further opportunities in the rail sector both in the UK and overseas. WA S H 1616 David Tetreault liked the Serco service so much that he joined the company. He was able to assess our work when he was at the District of Columbia Water and Sewer Authority, where we provided fleet maintenance. Now he’s enjoying a culture which, he says, ‘is the next best thing to being in business for myself’. C L I E N T: District of Columbia (DC) Metropolitan Police Department (US) D I V I S I O N : Serco Management Services, Inc. C O N T RA C T: Fleet maintenance and management services D U R AT I O N : 14 months, extendable to 3 years The benefits to the citizens of Washington DC are not only financial. By outsourcing the maintenance and management of its 1,470 vehicle fleet, the Metropolitan Police Department (MPD) has been able to devote more resources to its core job: policing. We have also helped the MPD to go a step further by broadening the scope of the original contract to include installing and commissioning communications equipment. Contracts such as this are still rare in the US, although Serco does maintain several other municipal fleets ranging from police cars to fire tenders and construction equipment. Given its high visibility in the nation’s capital the MPD contract should provide a convincing example to other municipal authorities of the benefits of outsourcing fleet management. WA S H I N GT O N 3 8 .5 2 ˚ N OR TH , 7 7. 0 0˚ W E ST Serco Group plc 1999 17 17 John Mathias has managed a succession of leisure contracts for us and, appropriately, believes that success comes from combining hard work with fun. He is moving to Aqua Vale from Towcester Centre for Leisure, where our performance has won us contracts for two more facilities from the same council. A Y L E S B U R Y 5 1. 4 8 ˚ N OR T H , 0. 4 9 ˚ W E ST C L I E N T: Aylesbury Vale District Council (UK) D I V I S I O N : Serco Services D U R AT I O N : 10 years, with extension opportunities C O N T RA C T: Operation of Aqua Vale swimming complex Many local authorities, in Britain and elsewhere, have ageing leisure assets that they want to refurbish or replace – but financing can be a problem. To add to the 20 local authority leisure contracts we already manage, we are developing new forms of Public Private Partnerships to help them provide their communities with high-quality facilities. This is the third UK leisure site where we have been involved in design, fitting- out and partial financing. The £9 million complex, opening in April 2001, offers one of the largest water areas in the region, with leisure waters, a 20m eight lane outdoor pool, 25m main pool, dance studio, health and fitness studio and catering facilities. The main pool is equipped to stage televised international events and offers the best venue of its kind in the heart of England. Opportunities for ‘design, finance and operate’ contracts on leisure facilities are proliferating, and we expect to win a growing number in the years ahead. 1818 Contract manager Mathieu Notéris joined Serco in May 1999 and has enjoyed having the opportunity to build our relationship with swITch. He attributes our success in expanding this contract to the professionalism of our people and the substantial degree of autonomy Serco gives to managers who are dealing directly with customers. C L I E N T: nv swITch sa (Belgium) D I V I S I O N : Serco Belgium D U R AT I O N : 2 years, then renewable annually C O N T RA C T : Flight information display systems and PC support services at Brussels Airport (Zaventem) B R U SS E L S 50 . 5 1˚ N O R T H , 4 . 2 1˚ E A ST This contract is one of Serco Belgium’s first for a private sector client and marks a new – and already growing – relationship with nv swITch sa. SwITch is the company formed from the specialised IT resources of the Brussels International Airport Company (BIAC), and the contract is for support services at Brussels National Airport, Zaventem. Systems covered include over 800 Bacroscreens/LCD panels spread around the airport, split-flap display panels, over 650 PCs and the entire airport PA system. Within the first six months we have already enlarged the contract, taking over services previously covered by other companies and increasing the number of staff employed by 40%. Our success with this contract has been noted by companies operating the same hardware as Zaventem, raising the prospect of further similar contracts elsewhere. Serco Group plc 1999 1919 Yeovilton contract manager Stan Charles is a self-confessed ‘Serco freak’. He joined us from the Royal Navy after acting as the Navy’s host to a Serco phase-in team and liking what he saw: ‘I love the culture, the can-do approach, the empowerment to run my business without micro- management from support office but with help, guidance, encouragement and the strong feeling that we’re all playing for the same team’. Y E OV I LT O N 5 0 . 5 6 ˚ N O R T H, 2 .3 9 ˚ W E S T C L I E N T: Royal Navy (UK) D I V I S I O N : Serco Aerospace D U R AT I O N : 3 years, extendable by 2 years C O N T RA C T : Aircraft engineering services and operations at Yeovilton and Culdrose Royal Naval Air Stations We already have a well-established presence at Yeovilton and Culdrose, the Fleet Air Arm’s two major bases, both in our own right and through the former FRA Serco joint venture. After successfully bidding for new contracts in 1999 we are substantially enlarging our role in 2000. At Yeovilton we currently provide in-depth maintenance on Sea King and Lynx helicopters and modifications to Sea Harriers; at Culdrose we maintain Sea Kings. At both sites we provide numerous other aircraft and ground support services. The new contract adds duties that include engineering support and provision of aircrew for 750 Squadron and engineering support for 899 Squadron as well as ground radio at both bases. These additional responsibilities reflect the Navy’s satisfaction with our record of professionalism and flexibility, and clearly enhance our credentials for future provision of services across the Naval Air Command. 2020 Phil Cornwell joined Serco from AWA-Plessey in 1997 and has been senior project manager on two projects for the New South Wales Roads and Traffic Authority. His reason for joining Serco was compelling enough: the personal recommendation of a friend who was already working for us. C L I E N T: Roads and Traffic Authority of New South Wales (Australia) D I V I S I O N : Serco Traffic Solutions/Serco Technology C O N T RA C T: Post-development support for Serco-installed traffic management computer system D U R AT I O N : 2 years World-leading technology we developed for a traffic management contract in Scotland, UK will keep Olympic traffic flowing more smoothly and safely in Sydney in September 2000. In 1997 we won a contract to install a computerised traffic control system in Sydney, shortly after the city was awarded the 2000 Olympics. Facing the prospect of a large influx of vehicles, the Roads and Traffic Authority decided to make an upgraded version of our system the centrepiece of a new Transport Management Centre. Our technology enables operators to monitor traffic flows on the entire road network around the Olympic site and on major arterial roads across New South Wales. When incidents or blockages arise, they can monitor and direct traffic by controlling variable message signs and speed control signals. A further new contract covers support for the system and further development during what will undoubtedly be a gruelling test of its capabilities. S Y D N E Y 3 3 . 5 3 ˚ S O UT H , 1 5 1 .1 0 ˚ E AS T 2121 Serco Group plc 1999 John Cardona, who manages a similar contract in the Royal Borough of Kingston-upon-Thames, sees the Merton win as ‘giving Serco Property & Design the springboard, capability and motivation to grow our business even more’. M E R T O N 5 1. 2 5 ˚ N OR TH , 00 . 1 2 ˚ W E S T C L I E N T: London Borough of Merton (UK) D I V I S I O N : Serco Property & Design D U R AT I O N : 5 years, extendable to 10 years C O N T RA C T: Building professional services The London Borough of Merton was looking for a long-term partner and awarded us preferred contractor status on this contract after considering tenders from a wide range of bidders. We are managing a team of 20 – architects, surveyors, mechanical and electrical design engineers and other professionals – whose responsibilities include design, repairs and maintenance on some 65 schools and 400 civic and public buildings. This is the second such contract Serco has won, and confirms that we are adding a new string to our bow: as we establish a significant capability in building professional services, we now have the resources to service other property portfolios. 2222 The New Zealand Army marches on more contented stomachs since Allan Martin devised an improved process for assembling its Operational Ration Packs. Now he’s managing the New Zealand Police contract – and still looking out for innovation: ‘Serco people will listen to new ideas regardless of who presents them, and accept the need to change plans with changing situations’. C L I E N T: New Zealand Police D I V I S I O N : S e r c o P r o j e c t E n g i n e e r i n g ( j o i n t v e n t u r e ) D U R AT I O N : 7 years C O N T RA C T: Purchasing, warehousing and distribution services nationwide This is no ordinary warehousing and distribution contract. It breaks new ground because we finance the inventory until it is drawn from store. We act as sole suppliers – buying, holding and supplying some 1,600 lines ranging from police uniforms to technical spares, forms and publications. The total value of goods is around £2 million a year. We are carrying out the contract through Serco Project Engineering, our joint venture with William Adams Pty Limited Australia, which was formed to provide warehousing, supply and base repair services to the New Zealand Defence Force. The comprehensive supply chain and inventory management approach we are applying for the police offers clear benefits by releasing capital previously tied-up in inventory, and should prove attractive to other government departments and large commercial organisations. W E L L I N GT O N 41 . 19 ˚ S O U TH , 1 7. 4 6 ˚ E AS T Serco Group plc 1999 2323 Business Review I m p o r t a n t l y, w e c o n t i n u e t o w i n n e w c o n t r a c t s t h a t t a k e u s f u r t h e r u p t h e s i z e a n d c o m p l e x i t y c u r v e – i n t o a r e a s w h e r e S e r c o i s m o r e Sales growth continues worldwide In the UK, the largest contract win of the year – in fact, our largest ever – was for the management of the UK’ s Atomic Weapons Establishment at Aldermaston. The contract includes a 25-year Public Private Partnership (PPP) option to add private finance to accelerate development of the site. This is in addition to the 10 other Pr i v a t e Finance Initiative (PFI) opportunities that we are currently pursuing. We were shortlisted for the STEPS programme, under which the contractor will assume ownership of the entire Inland Revenue and HM Customs & Excise property portfolios and provide office facilities to meet both organisations’ requirements. We also made a breakthrough into infrastructure maintenance for Railtrack. As the first new entrant to this market we believe we have opened the door to an area with considerable potential. These are all exciting developments, but they should not overshadow the strong underlying growth that we achieved in our traditional business. In Continental Europe we built on a well established base in Italy, France, Belgium, the Netherlands and Sweden. We are also making our mark in Germany, and in 1999 we acquired Elekluft Elektronik und Luftfahrtgeräte GmbH, a German company providing engineering and facilities management services to military, aerospace and other commercial customers. This business has now been renamed Serco GmbH & Co. KG. business r In Asia Pacific business was buoyant, particularly in the Australian and New Zealand defence sectors. We also had significant wins in the transport sector and acquired the remaining 50.8% of shares in Great Southern Railway, which operates three interstate passenger rail services in Australia. We made good headway in North America, where state and local governments are becoming increasingly alert to the value of outsourcing and new large-scale strategic opportunities are emerging. Growing in Asia Pacific Stephen Ell has been one of the prime movers of our rapid expansion in Asia Pacific since he joined Serco from our joint venture partner AWA in 1993. To d a y, as chief executive of Serco Asia Pacific, he heads a company of some 6,000 people which, he says, is ‘capable of participating in just about any government or industry opportunity that involves organisational change and development’. He is proud of the company’s high growth rate, which ‘stretches people’s capabilities and gives them many opportunities for advancement’. Central and local government We continued to make good progress in PPP and PFI projects. In the UK the contract for a new prison in Staffordshire brought our total signed contracts to 12: our share of the total operating turnover will amount to more than £80 million a year. The new contract is for an 800-bed unit which will be the UK’s first private-sector prison to incorporate a therapeutic community. It is the fifth PFI contract won by Premier Prison Services (PPS), our joint venture with Wa c kenhut Corrections, to design, construct, manage and finance custodial facilities. In addition to the five PFI projects, PPS manages HM Prison and Young Offenders Institution, Doncaster (where we have been awarded preferred bidder status of a further 10-year contract), has two prisoner escort contracts handling 250,000 prisoners a year, manages two of the UK’s four electronic tagging contracts and provides over 60% of the equipment for electronic tagging used in the UK. Building great teams John Jeffery, who runs our Serco Services business in the UK, sees his principal contribution as ‘building great teams that will continue to grow a successful business for Serco, its customers and shareholders’. John joined us in 1990 from a company we were in the process of acquiring, and spent two years growing our UK local authority business. He ran our UK health business and chaired our Swedish joint venture before taking charge of Serco Services, which operates contracts for local and central government, the health service and the commercial sector in the UK. ‘At Serco I’ve been able to develop my management skills in a supportive environment,’ he says. ‘And I’ve worked with some tremendous people whose values and enthusiasm have made it fun to be part of the team.’ 24 s h a r p l y d i f f e r e n t i a t e d . T h e A t o m i c W e a p o n s E s t a b l i s h m e n t c o n t r a c t w e w o n i n 1 9 9 9 i s w o r t h a t l e a s t £ 2 . 2 b i l l i o n , a n d w e h a v e In the UK the Central Computer and Telecommunications Agency chose Serco for a framework agreement to provide a range of live and automated call handling services including call centres, linked to client or Serco operated databases. This could be a ke y contract, as the government wants it to be possible for 25% of public dealings with government departments to be made electronically by 2002 – rising to 50% in 2005 and 100% in 2008. We also won a two-year extension of our call centre contract with the Driver and Vehicle Licensing Agency – the first time this contract has been extended in partnership in this way. The Aqua Vale swimming complex – our third PPP to develop new public leisure facilities – confirmed our strength in this growth market. We are also developing a promising position in professional services for property portfolios, having been awarded preferred bidder status on our second contract in this field from a UK local authority. s review The National Physical Laboratory (NPL) won over £15 million of commercially competed business in 1999, from clients as diverse as BP Amoco and the Greek Govern m e n t . NPL is developing a growing portfolio of innovation-related management contracts for governments – including for example, a contract to carry out initial appraisal of year 2000 innovation applications for the Queen’s Awards for Enterprise. During 1999 the members of the Metre Convention signed a Mutual Recognition Agreement, which NPL expects will create new opportunities in the international market for calibration and measurement services. Alaska to Antarctica After 17 years in the company, Mike Walker is still struck by ‘the infectious enthusiasm for doing the right thing, which so characterises Serco people’. Now president of Serco Management Services in the US, Mike brings his own infectious enthusiasm to the helm of a company whose activities stretch from Alaska to Antarctica. He joined us in 1983 from the UK Science and Engineering Research Council as a computer specialist and since then his career has taken him to Hong Kong, London, Edinburgh and Gibbsboro, New Jersey. The company he now heads provides a wide range of services to state and local governments and is a leading provider of ATC services. We were one of 33 companies that signed an outline agreement with the German defence ministry, which is a first step to opening up the market for government services in Germany. In North America, the Federal Aviation Administration recognised our excellence in air traffic control (ATC) by adding 13 towers to our existing contract. We renewed parking enforcement contracts in California and Maryland and won another in Chicago. The Serco operated Hopewell Rocks site in New Brunswick, Canada won a British Airways award as one of the best tourist destinations in North America. In the Middle East we renewed our contracts at Dubai International Airport and the United Arab Emirates Air Traffic Control Centre. We also won our first contract in Lebanon, managing part of the American University of Beirut. Defence We maintained our growth in the UK, partly by extending the scope of existing contracts – for example at the Royal Navy’s two major Fleet Air Arm bases, where we added significant new responsibilities. We also won a Ministry of Defence contract to manage the procurement and building of seven auxiliary passenger vessels for the existing port services contracts supporting RN Naval Bases. In Asia Pacific we made strong gains in support services for the Australian and New Zealand military. We continue to extend our reach into the most remote parts of the world with the award of preferred contractor status at the New Zealand Antarctic base. Added to our existing US Antarctic ATC contract, this means we will have over 60 staff based on the ice in Antarctica. 6,000 by 2000 ‘When I joined Serco in Australia in May 1989, we had just 3,000 staff worldwide,’ says Chris Bowman. ‘If somebody had told me that we’d have 6,000 staff in Asia Pacific alone by the turn of the millennium, I’d have said they were mad.’ As marketing director of Serco Asia Pacific since 1992, Chris was a driving force in developing the market and achieving that growth. Serco Group plc 1999 25 s i g n e d o u r 1 2 t h P r i v a t e F i n a n c e I n i t i a t i v e c o n t r a c t . A w o r l d w i d e s u r v e y c o n f i r m e d g e n e r a l c u s t o m e r s a t i s f a c t i o n w i t h o u r a p p r o a c h International agencies In Belgium we won our first two contracts from Eurocontrol, the European organisation for air navigation safety, and a support contract for the European Commission’s Data Centre. Our relationship with the European Meteorological Satellite Agency (E U M E T S AT ) continued to develop during the year: we won a new contract for data archive and retrieval services and, in partnership with Alcatel, a substantial increase in our existing contract for the provision of spacecraft operations analysts and operators for existing and future missions. Transport In a good year for new rail business we won our first contract for infrastructure maintenance, a market with great potential. This Railtrack contract involved the transfer to Serco of some 700 staff from the existing contractor. It followed another contract worth over £48 million to operate and maintain Railtrack’s new fleet of multi-purpose vehicles for traction improvement, de-icing and vegetation control. business r We also entered new geographical territory – winning a contract to mobilise and operate the highly automated Copenhagen Metro, opening in 2002, and our first US rail contract, to supply Amtrak with testing services. We made good progress in traffic management systems in Asia Pacific and Europe, using increasingly sophisticated technology. HM Customs & Excise ordered our automatic number plate recognition equipment in the UK and we saw growing demand for Gatsometer speed and red light cameras in Ireland and the UK. Among several new aircraft maintenance contracts, we began a promising relationship with MAS Aerotechnologies, which is a wholly-owned subsidiary of Malaysian Airlines. MAS Aerotechnologies is building a substantial aircraft maintenance operation based in Kuala Lumpur. We are providing licensed engineers and consultants (when they are not locally available) to support their current maintenance operations and help build new maintenance businesses on aircraft types which are outside their current capabilities. We anticipate significant opportunities to build on this contract, both by increasing our contribution to MAS Aerotechnologies and by providing similar serv i c e s to other customers. In the UK we enlarged our contracts with Inflite Engineering Services at Stansted Airport and Marshall Aerospace. On the European mainland we began a new relationship with the Belgian airport authorities with a contract to support technical operations at Zaventem, the country ’ s national airport. Our International Fire Training Centre at Teesside, UK, won a contract from the Hellenic Civil Aviation Authority. Commerce and industry We saw an increase in opportunities for facilities management which should continue through 2000, winning contracts from blue-chip customers such as Boots The Chemists, Ericsson, IBM and Microsoft. Our online services operation benefited from the continuing growth of call centre and e-commerce business. And our consultancy operation experienced overwhelming demand for its advice on the usability of information systems and new developments in e-commerce and interactive TV. Despite taking on additional consultants it was unable to keep pace with demand and expects to continue rapid growth in 2000. Spreading the esprit Phil Edwards, now chief executive of Serco North America, has managed Serco businesses on three continents. Since he joined us from the British Army in 1988, he has been pleased to see how successfully the company’s ‘esprit de corps’ has translated across so many different national cultures around the world. 26 a n d p e r f o r m a n c e a n d w e l o o k f o r w a r d t o f u r t h e r s t r o n g g r o w t h i n 2 0 0 0 – b o t h i n o u r t r a d i t i o n a l b u s i n e s s a n d i n e x c i t i n g n e w a r e a s . Managing the business As we grow, it becomes increasingly important to check – both formally and i n f o rmally – that we are still living up to our customers’ and our own expectations. In 1999 we commissioned the Serco Institute to conduct a worldwide customer survey. This confirmed general satisfaction with our approach and performance – as our contract renewal rate of over 90% continues to confirm. We are encouraged by the positive overall response, but not complacent. We are using the findings to improve our service wherever we can: for example, although our communication was considered good, some respondents wanted us to pay more attention to discussing their future requirements, particularly the skills they need. s review We believe that much of our success stems from a strong culture based on clear values. To formalise the way we monitor these, we asked Arthur Andersen to evaluate the application of our values across senior management in January 2000. The review concluded that Serco is clearly differentiated by its culture, p a r t i c u l a r l y in the way it values people, devolves responsibility, and shows commitment to straightforwardness in dealings with staff and customers. We apply effective risk management to all our activities and have had a risk manager reporting directly to the group chief executive since August 1998. Risks and proposed responses are regularly reviewed at all levels and, as part of this process, we will be continuing to review and audit the effectiveness of internal controls in 2000. Catching the buzz When Julia Bowler joined Serco Systems in 1995, ‘my manager warned me that it was a rapidly changing company – and in fact my first job changed between the time I accepted and the day I joined’. There have been many more changes since then: Julia was closely involved with a succession of companies as Serco’s UK businesses grew, and she became group company secretary in 1999 at the age of 32. The pace of change is part of what she enjoys: ‘The buzz of the organisation, the excitement and opportunities associated with a company that is growing rapidly’. Our non-executive directors play an important role in monitoring our performance from an independent perspective. We are pleased to announce the appointment of a third non-executive director, Ralph Hodge, with effect from 5 April 2000. A distinguished engineer with a keen interest in management education, Ralph was formerly chief executive of ICI Chemicals and Polymers, a non-executive director of Halifax Plc and chairman of Enron Europe Limited. He also chaired the committee that created the ISO 9000 quality standard. He is currently chairman of the Water Research Council, deputy chairman of Azurix International Limited, a director of Wessex Water Services Limited and a non-executive chairman of the Addis Group. Outlook With our global reach and ability to handle operations on the scale of the UK Atomic Weapons Establishment, we are a highly credible contender for very large challenges such as the UK’s National Air Traffic Services PPP and the many large PFIs currently under discussion. These large opportunities are not confined to the UK: they exist in Asia Pacific and North America. Looking further ahead, we are also seeking opportunities in Japan in association with the Itochu Corporation. Meanwhile, we should not lose sight of the continuing strong growth in our traditional business, across all our regional m a r kets. It is this underlying strength that makes us confident of delivering continued progress in 2000 and beyond. Can do The keys to Serco’s success: ‘The can-do attitude, and the willingness of the team to think outside the box and find service solutions that work for the customer,’ believes Ian Downie, managing director of our Strategic Development Group. He says the highlight of his career so far was helping to win the AWE management contract: ‘This ground-breaking contract gives impetus to the new smart procurement era in the UK’. Serco Group plc 1999 27 Values Statement Serco’s growth is often attributed to its strong organisational There were a number of examples where the stated value of culture and values. To date the Group has relied on informal working to the spirit rather than the letter of a contract was processes to check the application of its values across the seen as the preferred approach to customers. Instances of organisation. In January 2000, Serco subjected itself to a innovation and being proactive in terms of helping its customers review by Arthur Andersen, Human Capital, on how well to develop their business were often given as examples of the its corporate values are enacted within the organisation. way in which Serco adds value to its customers. Maintaining The review was conducted within the senior management a proactive approach in this regard was viewed as a challenge. population and consisted of: In addition, effective communications remains a priority as l Structured one on one interviews with all managing directors; Serco continues to grow. The Arthur Andersen, Human Capital survey indicates that Serco manages to maintain a small company feel and is regarded l A web-based survey for managing directors by management as an enjoyable place to work. Teamworking is and directors. also deemed to be good within individual operating units. In total the views of 130 managing directors and directors It is clearly the view of senior management that the stated were obtained, representing more than 80% of those invited organisational values remain important in the current operating to participate. This response rate is considerably greater than climate, and several respondents indicated that there has been would be expected for such reviews and appears to confirm increased vigour to ensure their implementation across the that Serco’s values are regarded as highly important to its business over the past two years. There is also a view that management. continuing emphasis will need to be placed on staff-related values in the future so as to ensure that Serco retains its The results of the assessment clearly emphasise that the culture competitive edge by recruiting and retaining committed at Serco is perceived by its managing directors and directors to employees. be special and that although there may be some differences in the way in which different operating units adopt Serco’s stated It appears that there is a high correlation in terms of the personal values, in general they are shared across the entire organisation. value sets of the senior management team and the Serco In Arthur Andersen’s opinion, the senior management team values, thereby facilitating the internalisation of those values. regards the values to be important and relevant to Serco’s c u rr e n t operating environment. The behaviours described by those It is Arthur Andersen’s opinion that the senior management s u rveyed would also imply that, as a group, they take pride team at Serco does in the main, live the stated Serco values as role models in promoting the values to staff. consistently across the world. At the same time, Serco’s management is working to improve the application of values The assessment highlighted a number of key themes with in areas identified as more challenging. regard to the way in which Serco’s values are translated into the organisational environment. Firstly, it is significant that participants felt that the culture at Serco was special, in the main due to the way it treats its people and the way managers are supported by the Board. Particular behaviours emphasised included devolving responsibility extensively throughout the organisation, operating an open and non-hierarchical style and Arthur Andersen, Human Capital practical, symbolic demonstrations that individuals are important to the organisation. The values cited as being most important 1 Surrey Street to the business and the most deeply embedded were those London relating to the commitment of Serco to its customers and staff, WC2R 2PS especially its determination to be straightforward and easy to deal with. 2 March 2000 28 gr annual accounts page 30 Directors, Secretary and Advisers page 31 Corporate Governance Report page 34 Directors’ Report page 38 Directors’ Responsibilities page 39 Remuneration Report page 44 Auditors’ Report page 45 Consolidated Profit and Loss Account page 46 Consolidated Balance Sheet page 47 Company Balance Sheet page 48 Consolidated Cash Flow Statement page 49 Consolidated Statement of Recognised Gains and Losses page 50 Notes to the Accounts page 85 Notice of Annual General Meeting Serco Group plc 1999 29 Directors, Secretary and Advisers Executive Chairman Richard White Directors Kevin Beeston Christopher Hyman Rhidian Jones* Gerrard Rodgers Gary Sturgess* Iestyn Williams Secretary Julia Bowler Registered Office Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT Auditors Deloitte & Touche Principal Bankers Merchant Bankers Stockbrokers Solicitors Registrar Chartered Accountants Hill House 1 Little New Street London EC4A 3TR Barclays Bank PLC 54 Lombard Street London EC3P 3AH National Westminster Bank Plc 1 Princes Street London EC2R 8PB Lazard Brothers & Co. Limited 21 Moorfields London EC2P 2HT Cazenove & Co. 12 Tokenhouse Yard London EC2R 7AN Allen & Overy One New Change London EC4M 9QQ Lloyds TSB Registrars The Causeway Worthing West Sussex BN99 6DA *Non-executive 30 Corporate Governance Report Introduction Such matters include the examination of the Company's The Board of Serco Group plc (“the Company”) supports the Annual Accounts, the procedures in place for the control of the principles set out in the Hampel Committee’s Principles of Group's business, as well as compliance with accounting Good Governance and Code of Best Practice as appended to standards and policies. In addition, the fees and objectivity of the London Stock Exchange Listing Rules (“the Combined the Company's auditors and other external accounting advisers Code”). This Report sets out how the Company applies the are considered by the members of that Committee. Combined Code in practice. The Board and its Directors Detailed presentations to the Committee are made, on request, by the Company's internal and external auditors. The presence The Board currently comprises five Executive and two of senior members of the management team within the Group, Non-executive Directors: Kevin Beeston, Chief Executive; as well as that of the Finance Director, may also be requested Christopher Hyman, Finance Director; Rhidian Jones, Senior by the members of the Committee. Non-executive Director; Gerrard Rodgers, Executive Director; Gary Sturgess, Non-executive Director; Richard White, The conclusions of the Audit Committee meetings are reported Executive Chairman and Iestyn Williams, Executive Director. to the Board by the Chairman of that Committee. Their profiles are set out on page 36. The members of the Board are responsible to the shareholders of the Company and The Remuneration Committee meet regularly to discuss and decide on issues of strategy, performance and control. Information required by Directors on issues concerning Serco Group plc and its subsidiaries (“the Group”) is supplied by management on a timely basis. In addition, regular detailed presentations are made to the Board by senior employees on business performance and significant developments that require Board consideration. A Director wishing to seek independent professional advice may do so at the Company's expense. The Board and its Committees The Board has delegated authority to a number of Committees to deal with matters in accordance with written terms of reference. The Chairmen of the Audit, Remuneration, Training and Nomination Committees are present at the Annual General Meeting of the Company to answer questions from shareholders. Brief details relating to each of the principal Committees are outlined below: The Audit Committee The Audit Committee comprises both Non-executive Directors and is chaired by Rhidian Jones. The members of this Committee meet on at least two occasions each year to examine and consider matters relating to the affairs of the Group. The Remuneration Committee comprises both Non-executive Directors and is chaired by Gary Sturgess. The members of this Committee meet on at least two occasions each year to examine and consider matters relating to the remuneration of Executive Directors as well as the terms and conditions of their service. The recommendations of this Committee, as adopted by the Board, are set out in the Remuneration Report on pages 39 to 43. The conclusions of the Remuneration Committee meetings are reported to the Board by the Chairman of that Committee. The Training Committee The Training Committee comprises Iestyn Williams, Christopher Hyman, Rhidian Jones and Gary Sturgess.The Committee is chaired by Iestyn Williams and the members of this Committee meet on at least two occasions each year to examine and consider the training needs of the Directors and senior executives. The conclusions of the Training Committee meetings are reported to the Board by the Chairman of that Committee. Serco Group plc 1999 31 Corporate Governance Report The Nomination Committee The Nomination Committee comprises the Executive Chairman of the Company, as well as both Non-executive Directors. The Committee is chaired by Richard White and the members of the Committee meet on an ad-hoc basis to examine and consider proposed appointments to the Board. Where required, the members of the Committee consult with other members of the Board before submitting their final recommendation for approval by the whole Board. Other significant financial, operational and compliance procedures used by the Group are described below: Executive Directors agree marketing, sales and financial targets with business units on an annual basis. Progress against these targets is reviewed at formal quarterly meetings attended by the business unit management and senior Serco Group management who act in the capacity of Non-executive Directors for that unit. This process is replicated at key individual contracts. The conclusions of the Nomination Committee meetings are reported to the Board by the Chairman of that Committee. Executive Directors agree annual budgets with each of the business units. Performance against these budgets is reviewed regularly as part of the management process. The Company and its shareholders The Board encourages dialogue with its shareholders and holds both formal and informal discussions with institutional investors. Formal presentations are made to institutional investors and brokers’ analysts after the release of the interim and final results. The principal methods of communication employed by the Company with private investors are the Interim Statement, the Annual Review and Accounts and the Annual General Meeting. On each occasion a detailed review of the Company's performance and achievements is communicated to shareholders. Additional information about the Company’s history, markets, services and significant announcements is on the Company's web site on the internet. Internal Control The Board is mindful of its responsibility to maintain a sound system of internal control to safeguard shareholders’ investments and the Company’s assets as detailed in the Combined Code, Principle D.2. It is acknowledged that any system of internal control has inherent limitations and that even the most effective system can only provide reasonable, as opposed to absolute, assurance against misstatement or loss. During the year the Board appointed a senior executive with Group responsibility to oversee and review the internal control and risk policies, procedures and management framework within the Group. Each business unit has an audit committee which meets at least twice a year and focuses on risk and internal controls. The senior executive reports to the Board on the findings of these meetings. The Board has also identified a number of key support activities that are subject to regular reporting. These include management of treasury and pension, risk and insurance, health and safety and quality assurance. The Group has a clearly defined framework for reviewing and approving capital projects and expenditure. Appropriate authorisation levels are in place. Business unit management teams or, where applicable senior executives, review bid documents, tenders and pricing prior to their submission to customers. There are formal sign off procedures to ensure that the appropriate authority levels are observed. Contract documents are also reviewed at an appropriate level to ensure that the terms and conditions therein are acceptable to the Group. External audit firms are appointed by the Company to perform an internal audit function on behalf of the Group, reporting on selected aspects of the internal controls, such as those identified above. Grant Thornton and Pannell Kerr Forster were appointed to undertake this function during 1999. The senior executive who reports to the Board has implemented an appropriate programme for internal audit that addresses the recommendations of the Turnbull Report. The Board has performed its annual review of internal controls which has not revealed any significant matters that indicate a lack of effectiveness. The transitional approach for the internal control aspects of the Combined Code as set out in the letter from the London Stock Exchange to listed companies dated 27 September 1999 has been adopted for this Annual Review and Accounts. The Board is of the opinion that the Group has established the n e c e s s a ry procedures for the implementation of ‘Internal Control: Guidance for Directors on the Combined Code’ for the year 2000. 32 Corporate Governance Report Risk Management Composition of Nomination Committee As detailed in the Business Review on pages 24 to 27, effective risk management is undertaken throughout the Group. A risk manager reports to the Chief Executive and each business unit team reviews risk as part of the internal control process. Managers throughout the Group have risk management manuals and are encouraged to attend training courses on the subject. Following the recommendations of the Turnbull Report, the internal audit function is reviewing the Group’s risk management procedures and the Chief Executive will be formally reporting to the Board on a quarterly basis. Going Concern Following a review of the Group's financial results and forecasts, as well as holding discussions with relevant individuals, the Board has a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Consequently, the going concern basis continues to be adopted in preparing the Annual Accounts. Compliance during 1999 Since 1 April 1999, the composition of the Nomination Committee has been in accordance with Provision A.5.1 of the Combined Code, which requires the majority of the members of that Committee to be Non-executive Directors. Prior to his retirement from the Company on 1 April 1999, Dr George Gray CBE had been Chairman of the Committee and the membership comprised two Executive and two Non-executive Directors. Number of Non-executive Directors Provision A.3.1 of the Combined Code recommends that at least one third of the Board be Non-executive Directors. Similarly, under Provision D.3.1 of the Combined Code it is recommended that the Audit Committee should have at least three Non-executive Directors. The Directors of the Company resolved to appoint a third Non-executive Director and following a formal selection process are now pleased to announce the appointment of Ralph Hodge with effect from 5 April 2000. With the exception of matters set out in the following Contractual Notice Periods paragraphs, the Company has fully complied with the The Remuneration Committee and the Board continue to provisions stated in Section 1 of the Combined Code. believe that the nature of the business and the competitive Retirement and Re-election Prior to April 1999 the Company’s Articles of Association did not require Executive Directors to retire by rotation. New Articles of Association were adopted by the Company, at an Extraordinary General Meeting on 1 April 1999, embodying Principle A.6 that Directors submit themselves for re-election by the shareholders every three years. Kevin Beeston, Gary Sturgess and Richard White voluntarily retired and submitted themselves for re-election at the 1999 Annual General Meeting. Rhidian Jones and Iestyn Williams, who have not retired by rotation since their appointment to the Board, are submitting themselves for re-election at the forthcoming Annual General Meeting. Christopher Hyman who was appointed following the 1999 Annual General Meeting, will also be retiring and submitting himself for re-election in accordance with the Company’s Articles of Association. environment in which the Company operates warrants the retention of a two year contractual notice period in Executive Directors’ contracts of service. This departs from the recommendation set out in Provision B.1.7 of the Combined Code to reduce contractual notice periods to one year or less. Approved by the Board of Directors and signed on its behalf: Julia Bowler Secretary Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT 2 March 2000 Serco Group plc 1999 33 Directors’ Report Annual Review and Accounts Details of the Directors’ interests in the Share Capital of the The Directors of the Company submit the Annual Review Company are listed below. The Executive Directors’ service and Accounts of the Company for the year ended contracts and the Non-executive Directors’ letters of 31 December 1999. appointment are reported on in the Remuneration Report Principal Activities and Business Review on page 43. The Company is a holding company, which operates via its At the conclusion of the Annual General Meeting on 1 April subsidiaries to provide facilities management, systems 1999, Dr George Gray CBE retired as Executive Chairman of engineering services and equity investment management. the Company. Richard White, who was the Group’s Chief Executive, became Executive Chairman. Kevin Beeston, who The review of the business for the year ended 31 December had served as the Group’s Finance Director became Chief 1999 can be found in the Business Review on pages 24 to 27. Executive and Christopher Hyman was welcomed to the Board Dividends and Transfers to Reserves served as Group Company Secretary. Everton Bryan left the of Directors as Group Finance Director, having previously An interim dividend of 2.65p (1998 – 2.3p) per Ordinary Share Company on the same date. was paid on 15 October 1999. A final dividend of 5.9p (1998 – 5.1p) per Ordinary Share is being recommended by the Other than the Executive Directors’ service contracts and the Directors for payment in April 2000 as set out in Note 8 of the Non-executive Directors’ letters of appointment, there were Annual Accounts on page 58. After dividends, retained profits no contracts in which Directors had an interest. of £14,201,000 will be transferred to reserves. Share Capital The Directors’ interests in the shares of the Company The increase in the issued Ordinary Share Capital during the (including the percentages held of the issued Share Capital of period is explained in Note 21 to the Annual Accounts set out the Company) were as follows: Directors’ Shareholdings on pages 72 and 73. The Directors are proposing a capitalisation issue, the details of which are set out in the Notice of Extraordinary General Meeting which accompanies this document. Substantial Shareholdings As at the close of business on 15 February 2000 (being the latest practical date prior to the printing of the Directors’ Report), the Company had received notifications of the following substantial interests: Putnam Investments Legal & General Investment Management Standard Life Assurance Company Salomon Smith Barney Inc. 7.16% 3.97% 3.91% 3.78% Ordinary Shares of 2p each fully paid 1 January 1999 31 December 1999 % Shares % 0.02% 7,830 0.01% Shares 10,130 – – 424,908 0.66% 200 7,750 12,500 – 369,502 476,945 – 0.01% 0.02% – 0.57% 0.74% – – 200 – – – 7,750 0.01% 12,500 0.02% – – 369,502 0.57% 416,945 0.64% K S Beeston E Bryan* G G Gray* C R Hyman R H B Jones G Rodgers G L Sturgess R D White I M Williams * Following G G Gray’s retirement, and E Bryan’s leaving, their shareholdings at 31 December 1999 no longer require Directors disclosure. The names of the Directors of the Company are shown on page 30. Their profiles are given on page 36. 34 Directors’ Report Annual General Meeting Advice and support on health, safety and environmental issues The Thirteenth Annual General Meeting of the Company will is provided within the Group by a dedicated team who operate be held at the National Physical Laboratory, Teddington, closely with the local business unit teams and with site Middlesex, TW11 0LW on Wednesday 5 April 2000 at 10:00 am. representatives. Training is encouraged and regular courses are The Notice of the Annual General Meeting, together with held in order to maintain a high level of safety and relevant notes, is set out on pages 85 and 86. The proxy card environmental awareness. accompanies this Report. Extraordinary General Meeting The Group health, safety and environment team conducts audits of systems to ensure compliance with legislation and An Extraordinary General Meeting will be held at the National Group standards. In addition, external advisers conduct audits Physical Laboratory, Teddington, Middlesex, TW11 0LW on from time to time. Wednesday 5 April 2000 immediately following the conclusion of the Annual General Meeting. The Notice of the Creditor Payment Policies Extraordinary General Meeting, together with relevant notes The Company requires each of its business units to negotiate and a proxy card accompany this Report. and agree the terms and conditions of payment for the supply Employment Policies of capital and revenue items just as keenly as they negotiate prices and other commercial matters. Suppliers are made aware The Board is committed to maintaining a working of the agreed terms and the way in which disputes are to be environment, where staff are individually valued and settled. Payment is to be made in accordance with these terms. recognised. Managers are tasked with developing employees' awareness of days (1998 - 36 days) (Company – 28 days (1998 – 30 days)). The Group's average creditor payment terms in 1999 were 30 factors affecting the business and matters concerning them as employees, and noting employees' views so that they can be Year 2000 taken into account when making decisions that may affect Following the Year 2000 review which was undertaken them or the business. Regular meetings are held with employee throughout the Group, the Directors continue to be alert to the representatives where trade unions or staff associations are potential risks and uncertainties surrounding the millennium recognised or where works councils are constituted. date change on computer programmes. As at 15 February 2000 (being the latest practical date prior to the printing of the The Board understands its responsibility to encourage and Directors’ Report), the Directors were not aware of any assist in the employment, training, promotion and personal significant factors that have arisen, or may arise, which will career development of disabled people. The Group gives proper affect the activities of the Group. The Board will continue to consideration to applications for employment received from the receive regular reports on any risks relating to the Year 2000 disabled and offers employment when suitable opportunities issue. Although any future costs associated with the Year 2000 arise. If employees become disabled during their services with issue cannot be quantified, they are not expected to be the Group, wherever practicable, arrangements are made to significant. continue their employment and training. Health, Safety and Environmental Policies During 1999, the Group made contributions of £43,000 The Company recognises and accepts its responsibilities for (1998 - £52,000) to charities in the United Kingdom. health, safety and the environment. The Group has a health, There were no political contributions made by the Group. Charitable and Political Donations safety and environment senior executive, who reports to the Board, and is responsible for the development and monitoring of policies, procedures and control systems. Serco Group plc 1999 35 Directors’ Report Director profiles Kevin Stanley Beeston FCMA (37) Gary Leon Sturgess Llb (46) Chief Executive Kevin joined Serco in 1985 as a financial analyst and has since Non-executive Director Gary was Cabinet Secretary and Director General of the held a number of financial and commercial roles. When the Cabinet Office in the New South Wales State Government Group acquired International Aeradio Limited in 1992 he from 1988 to 1992. He is now the Principal of Sturgess became its Finance Director and later its Managing Director. Australia, a business specialising in strategic policy advice to He became Chairman and Chief Executive of Serco government and the private sector. He has been a Serco International Limited in 1994 and in 1996 he was appointed Non-executive Director since 1994. He is also a Non-executive Finance Director of the Group. He was appointed Chief Director for Serco Asia Pacific Pty Limited, a principal Executive in April 1999. subsidiary of the Company. Christopher Rajendran Hyman CA(SA) (36) Richard David White BSc (Hons) (50) Finance Director Christopher joined Serco in 1994, as Finance Director for Serco Executive Chairman Richard joined the business in 1970, when it was part of RCA. Europe, the division specialising in providing services to He worked in both operations and marketing roles, becoming European government agencies. He was appointed Group Director of Government Services in 1984. After the Company Secretary with additional responsibility for corporate management buyout from RCA in 1987 he became the new finance in 1996. He was appointed Finance Director of the company’s Managing Director and subsequently Chief Group in April 1999. Executive, taking particular responsibility for developing Serco’s marketing philosophy and operational strategy. He was Rhidian Huw Brynmor Jones MA FCIS FIMgt (56) appointed Executive Chairman following the retirement of Non-executive Director Rhidian is a partner at solicitors Nabarro Nathanson, where he Dr George Gray CBE. is Head of the Corporate Department. He also has first-hand Iestyn Milton Williams BA (48) experience of commerce and industr y, having worked in management for 10 years. He was a Serco Non-executive Executive Director Iestyn is responsible for leading the Group’s expansion in Director from 1987 to 1994 and was reappointed in 1996. Europe. He joined RCA in 1978 and became Director of He is also a Non-executive Director of the Britannia Building Personnel six years later. After the management buyout in 1987 he became Personnel Director of Serco. Since then he has been involved in acquiring businesses in Asia Pacific and later spent two years as Chairman of Serco North America before returning to the UK in 1998 to take up his present position. Society. Gerrard Rodgers (51) Executive Director Gerry is responsible for IT and innovation. He joined the business in 1970, when it was part of RCA, and worked in a number of engineering, project management and contract management roles before becoming Chairman and Chief Executive of Serco Services in 1993. In 1995 he became Managing Director of Serco Systems and joined the Board in 1997. 36 Directors’ Report Auditors Deloitte & Touche have expressed their willingness to continue in office as auditors and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting. Approved by the Board of Directors and signed on its behalf: Julia Bowler Secretary Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT 2 March 2000 Serco Group plc 1999 37 Directors’ Responsibilities Company Law requires the Directors to prepare Accounts and Notes for each financial year, which give a true and fair view of the state of affairs of the Company and the Group as at the end of the financial year and of the profit or loss of the Group for that period. In preparing those Accounts and Notes, 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; and • prepare the Accounts and Notes on the going concern basis unless it is inappropriate to presume that the Group will continue in business. The Directors are responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the Accounts and Notes comply with the Companies Act 1985. They are also responsible for the Company’s system of internal control and for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Approved by the Board of Directors and signed on its behalf: Julia Bowler Secretary Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT 2 March 2000 38 Remuneration Report Introduction Business and Accountability This Report details the remuneration policy and remuneration The members of the Committee meet on at least two of the Directors of the Company for the year ended 31 occasions each year to examine and consider matters relating December 1999, as determined by the Remuneration to the remuneration of Executive Directors as well as the terms Committee (“the Committee”) and adopted by the Board. and conditions of their service with the Company. In preparing this Report, consideration has been given to the The business of the Committe and the remuneration policy for provisions set out in Schedule B of the Combined Code. Executive Directors is determined in accordance with written Composition practice in remuneration policies. The Committee comprises Gary Sturgess and Rhidian Jones, the Company's Non-executive Directors. The Committee is In developing the Company's remuneration policy, or when terms of reference, as well as taking into consideration best chaired by Gary Sturgess. Remuneration Policy setting an individual Director's pay, the Committee consults with the Executive Chairman in respect of other Director’s remuneration and with the Chief Executive in respect of the The remuneration policy is set to attract, retain and motivate Executive Chairman’s remuneration. In addition, the senior executives within the Group. When determining policy, Committee retains firms of external specialists to advise on consideration is given to the international nature of the market trends and competitive packages. business, the culture fostered within the Group, the continuing growth of the Group and the need to provide competitive and The conclusions of the Committee meetings are reported to market-related terms and conditions in light of these changing the Board by the Chairman of the Committee. The Chairman circumstances. of the Committee also attends the Company's Annual General Meeting and is available to take questions from shareholders in Executive Directors' remuneration comprises short-ter m respect of the matters outlined in this Report. rewards such as salary and benefits and long-term elements such as pensions, life assurance and share-based incentives. It is not the Company policy to pay annual cash bonuses except Executive Directors' Remuneration in exceptional circumstances. The share-based incentives are The details of Directors’ short and long term rewards are set linked to performance criteria and effectively align the interests out on pages 40 to 43. of Directors with those of the Company's shareholders. Serco Group plc 1999 39 Remuneration Report 1. Salaries and Benefits The base salaries and benefits of each Director are as follows: Basic Salary £ 234,500 48,446 31,897 134,000 – 206,000 – 310,462 211,725 1,177,030 Fees £ – – – – 25,000 – 35,101 – – 60,101 K S Beeston E Bryan G G Gray C R Hyman R H B Jones G Rodgers G L Sturgess R D White I M Williams Total Notes: Total Total Remuneration Remuneration excluding pensions 1998 £ excluding pensions 1999 £ Other £ Benefits £ – 175,888 – – – – – – – 175,888 1,349 182 287 842 – 1,121 – 2,016 2,552 8,349 235,849 224,516 32,184 134,842 25,000 207,121 35,101 312,478 214,277 1,421,368 216,729 251,973 142,805 – 36,000 186,447 43,353 299,819 209,218 1,386,344 On 1 April 1999: G G Gray retired from the Board; C R Hyman was appointed to the Board; E Bryan left the Company, and on cessation of his employment he received a one-off payment of £175,888 which included a £25,000 pension contribution. 2. Share-based Incentives Long-term share-based incentives are awarded to No awards were made under the LTIS in 1999. However Directors under the Serco Group plc 1996 Long-Term Incentive Scheme (“the LTIS”) and the Serco Group plc the Remuneration Committee has reviewed the LTIS and has made proposals which, if approved by shareholders at 1998 Executive Option Plan (“the EOP”). the Extraordinary General Meeting on 5 April 2000, would apply to future awards under the LTIS. Awards made under the LTIS, which are structured as options with a zero exercise price, may be exercised after Options granted under the EOP may be exercised after the third anniversary of grant. The extent to which an the third anniversary of grant, dependent upon the award vests (and thus becomes exercisable) is measured achievement of a financial performance target. If the by reference to growth in the Company’s earnings per growth in EPS before FRS 10 is less than 10% p.a. over share (“EPS”) before FRS 10 over the performance period. the performance period, none of the options may be If the growth in EPS before FRS 10 is less than 35%, no exercised. If the growth in EPS before FRS 10 is more part of the award vests. If the growth in EPS before FRS than 15% p.a., all of the options may be exercised. Where 10 is more than 50%, all of the award vests. Where growth is between 10% p.a. and 15% p.a., a proportion of growth is between 35% and 50%, a proportion of the the options may be exercised. award vests. 40 Remuneration Report i) Serco Group plc 1996 Long Term Incentive Scheme The total share options granted under the Serco Group plc 1996 Long Term Incentive Scheme to Directors are as follows: Number of options Exercised during the period at 1 January 1999 Lapsed during Balance at 31 the December Exercise price 1999 period Market price on exercise date £ Value realised on End of exercise performance period £ Date of expiry of option K S Beeston E Bryan G G Gray* C R Hyman R H B Jones G Rodgers 3 Yr Award Add’ Award 3 Yr Award Add’ Award 3 Yr Award Add’ Award 3 Yr Award Add’ Award Add’ Award 3 Yr Award 3 Yr Award Add’ Award 3 Yr Award Add’ Award G L Sturgess R D White 3 Yr Award Add’ Award 3 Yr Award Add’ Award I M Williams 3 Yr Award Add’ Award 3 Yr Award Add’ Award 9,851 12,240 6,120 19,701 19,701 7,299 – – 19,701 19,701 9,851 9,851 12,240 6,120 14,096 3,000 – 9,851 12,240 6,120 – 6,120 – – – 19,701 15,833 – – – – 31,114 31,114 15,557 15,557 20,772 – 10,386 10,386 – 26,155 – 13,077 – 14,466 – 7,233 – – – – – – – 12,240 – – – – – – – – – – – – – – – – – – 2,552 12,240 6,120 – – – – – 3,000 – 3,868 9,851 12,240 6,120 – – – 20,772 – 26,155 13,077 14,466 7,233 – – – 14.70 – – – Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil – Nil Nil Nil Nil – 14.70 289,605 01-01-99 01-01-03 14.70 107,295 01-01-99 01-01-03 – 01-01-00 01-01-04 – 01-01-99 01-01-04 14.70 289,605 01-01-99 01-01-03 14.70 144,810 01-01-99 01-01-03 – 01-01-00 01-01-04 89,964 01-01-99 01-01-04 – 01-01-99 01-01-03 – 01-01-00 01-01-04 – – – 14.70 232,745 01-01-99 01-01-03 – 01-01-99 01-01-03 – 01-01-00 01-01-04 – 01-01-99 01-01-04 – – – Nil 14.271/2 444,152 01-01-99 01-01-03 Nil 14.271/2 222,076 01-01-99 01-01-03 Nil – 01-01-00 01-01-04 Nil 14.271/2 148,260 01-01-99 01-01-04 – 01-01-99 01-01-03 Nil – 01-01-99 01-01-03 Nil – 01-01-00 01-01-04 Nil – 01-01-99 01-01-04 Nil – – – – – – – – – The scheme is an unapproved scheme for Inland Revenue purposes. *Following G G Gray’s retirement, his options at 31 December 1999 no longer require disclosure. Serco Group plc 1999 41 Remuneration Report ii) Serco Group plc 1998 Executive Option Plan The total share options granted under the Serco Group plc 1998 Executive Option Plan to Directors are as follows: Numbers of options at 1 January 1999 Granted during period Exercised during the period Lapsed during Balance at 31 the December 1999 Period Exercise price £ Date from which exercisable Date of expiry of option K S Beeston Approved E Bryan Unapproved Unapproved Approved Unapproved G G Gray C R Hyman Approved R H B Jones G Rodgers G L Sturgess R D White Unapproved Unapproved Approved Unapproved Unapproved Approved Unapproved Unapproved I M Williams Approved Unapproved Unapproved 2,298 11,487 2,298 11,487 – 2,298 4,215 – – 2,298 11,487 – – – 12,789 – – – – – 6,802 – – – – 12,789 – – – 2,298 – 19,908 – 20,602 – – – 14,346 2,298 13,165 – – – – – – 2,298 – – 11,487 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 2,298 11,487 12,789 – – – 2,298 4,215 6,802 – 2,298 11,487 12,789 – 2,298 19,908 20,602 2,298 13,165 14,346 13.05 13.05 14.70 13.05 13.05 – 13.05 13.05 14.70 – 13.05 13.05 14.70 – 13.05 13.05 14.70 13.05 13.05 14.70 21-05-01 21-05-01 01-04-02 21-05-01 21-05-01 – 21-05-01 21-05-01 01-04-02 – 21-05-01 21-05-01 01-04-02 – 21-05-01 21-05-01 01-04-02 21-05-01 21-05-01 01-04-02 20-05-08 20-05-05 31-03-06 20-05-08 20-05-05 – 20-05-08 20-05-05 31-03-06 – 20-05-08 20-05-05 31-03-06 – 20-05-08 20-05-05 31-03-06 20-05-08 20-05-05 31-03-06 The scheme is an approved scheme for Inland Revenue purposes, but has an unapproved schedule. No options have been exercised by Directors since the end of the financial year. iii) Serco Group plc Senior Staff Share Option Scheme The total share options that remain under the Serco Group plc Senior Staff Share Option Scheme to Directors are as follows: Numbers of options at 1 January 1999 Exercised and sold during the period – 10,000 – – – – – – – – 10,000 – – – – – – – K S Beeston E Bryan G G Gray C R Hyman R H B Jones G Rodgers G L Sturgess R D White I M Williams Lapsed Balance at 31 during the December 1999 period Market price on date of exercise £ Value realised on exercise £ Exercise Price £ – – – – – – – – – – – – – – – – – – – 3.69 – – – – – – – – – 14.70 110,100 – – – – – – – – – – – – – – Date from which exercisable Date of expiry of option – 16-10-98 – – – – – – – – 15-10-05 – – – – – – – No options have been exercised by Directors since the end of the financial year. The scheme was an approved Scheme for Inland Revenue purposes, and had an unapproved schedule. 42 Remuneration Report 3. Pension and Life Assurance The Executive Directors receive pension and life assurance benefits consistent with those provided by other leading companies. The details of the defined benefit schemes operated by the Group are set out in Note 34. In the event of death in service, each scheme provides for a lump sum payment as well as a dependents’ pension. The accrued pension benefits of Executive Directors are as follows: Increase in pension during the year Transfer value of increase Total accrued pension at year end £ £ £ p.a. K S Beeston E Bryan C R Hyman G Rodgers R D White I M Williams 11,090 – 3,395 19,041 12,925 1,666 67,762 – 18,128 241,779 149,462 9,491 54,931 17,288 5,278 89,580 136,055 99,416 Notes to pension benefits: i) E Bryan received and C R Hyman receives an additional benefit from a supplementary arrangement whereby the Company contributes 15% of that remuneration in excess of the Permitted Maximum under the Inland Revenue approved pension scheme into a Funded Unapproved Retirement Benefit Scheme. ii) The total accrued pension shown is that which would be paid annually on retirement, based on service to the end of this year. The increase in accrued pension during the year excludes any increase for inflation. iii) The transfer value of the increase in accrued pension has been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11, less Directors’ contributions. iv) Members have the option to pay Additional Voluntary Contributions: neither the contributions nor the resulting benefits are included in the above table. v) Transfer values disclosed do not represent the sum paid or payable to the individual Director. Instead, they represent a potential liability of the pension scheme. Service Contracts and Compensation Each Executive Director has a service contract with the Company, and these service contracts will be available for inspection prior to and after the Company’s Annual General Meeting. The Company can terminate such service contracts by giving two years' notice to an Executive Director. It is the opinion of the Remuneration Committee and the Board, given the competitive environment in which the Company operates, that such notice periods are necessary to retain, recruit and motivate Executive Directors. Compensation for early termination of a service contract is not addressed in the contracts. The Remuneration Committee considers and determines the level of compensation on a case by case basis, taking into account the circumstances surrounding termination and the individual's responsibility to mitigate loss. Non-executive Directors’ Appointment and Fees The Non-executive Directors of the Company are appointed for a three-year term, and that appointment may be terminated on three months' written notice. Renewal of appointments are not automatic, and Non-executive Directors are required to retire and stand for re-election in accordance with the Company's Articles of Association. The Non-executive Directors of the Company have no personal financial interests in the matters determined by the Committee, no potential conflicts of interest arising from cross-directorships and no involvement in the day-to-day running of the Group. The fees and terms of engagement of Non-executive Directors are determined and set by the Board. Approved by the Board of Directors and signed on its behalf: Julia Bowler Secretary Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT 2 March 2000 Serco Group plc 1999 43 Auditors’ Report Auditors’ Report to the members of Serco Group plc Basis of audit opinion We have audited the financial statements on pages 45 to 84, We conducted our audit in accordance with Auditing Standards which have been prepared under the accounting policies set out issued by the Auditing Practices Board. An audit includes on pages 50 and 51. examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also Respective responsibilities of Directors and Auditors includes an assessment of the significant estimates and The Directors are responsible for preparing the Annual judgements made by the Directors in the preparation of the Accounts, as described on page 38 of the financial statements. financial statements and of whether the accounting policies are Our responsibilities, as independent auditors, are established appropriate to the circumstances of the Company and the by statute, the Auditing Practices Board, the Listing Rules of Group, consistently applied and adequately disclosed. the London Stock Exchange and by our profession’s ethical guidance. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary We report to you our opinion as to whether the financial in order to provide us with sufficient evidence to give statements give a true and fair view and are properly prepared reasonable assurance that the financial statements are free in accordance with the Companies Act 1985. We also report to from material misstatement, whether caused by fraud or other you if, in our opinion, the Directors’ Report is not consistent irregularity or error. In forming our opinion, we also evaluated with the financial statements, if the Company has not kept the overall presentation of information in the financial proper accounting records, if we have not received all the statements. information and explanations we require for our audit or if information specified by law or the Listing Rules regarding Opinion Directors’ remuneration and transactions with the Company In our opinion, the financial statements give a true and fair and other members of the Group is not disclosed. view of the state of affairs of the Company and the Group as at 31 December 1999 and of the profit of the Group for the year We review whether the Corporate Governance statement on then ended and have been properly prepared in accordance page 33 reflects the compliance with the seven provisions of with the Companies Act 1985. the Combined Code specified for our review by the London Stock Exchange and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all the risks and controls or to form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. Deloitte & Touche Chartered Accountants and Registered Auditors We read the other information contained in the Annual Accounts, including the Corporate Governance Report, and Hill House consider whether it is consistent with the audited financial 1 Little New Street statements. We consider the implications for our report if we London become aware of any apparent misstatements or material EC4A 3TR inconsistencies with the financial statements. 2 March 2000 44 Consolidated Profit and Loss Account For the year ended 31 December 1999 Turnover: Group and share of joint ventures - continuing operations Less: share of joint ventures Group turnover Cost of sales Gross profit Administrative expenses Amortisation of goodwill Other administrative expenses Operating profit - continuing operations Share of operating profit in joint ventures Gross operating profit Net exceptional items Interest receivable Group Share of joint ventures Interest payable and similar charges Group Share of joint ventures Profit on ordinary activities before taxation Taxation on profit on ordinary activities Profit on ordinary activities after taxation Dividends Retained profit for the financial year Earnings per Ordinary Share of 2p each: Basic earnings per share, after amortisation of goodwill Basic earnings per share, before amortisation of goodwill Diluted earnings per share, after amortisation of goodwill Diluted earnings per share, before amortisation of goodwill Note 2 2 2 4 5 6 7 8 24 9 1999 £’000 807,544 (138,982) 668,562 (580,586) 87,976 (63,824) (2,092) (61,732) 24,152 11,121 35,273 – 1,596 1,517 79 (7,537) (4,160) (3,377) 29,332 (9,538) 19,794 (5,593) 14,201 30.6p 33.8p 30.4p 33.6p Restated 1998 £’000 687,760 (113,471) 574,289 (499,052) 75,237 (51,865) (823) (51,042) 23,372 6,315 29,687 162 2,840 2,764 76 (7,070) (4,852) (2,218) 25,619 (8,199) 17,420 (4,888) 12,532 27.4p 28.7p 27.0p 28.3p Serco Group plc 1999 Serco Group plc 1999 45 Consolidated Balance Sheet At 31 December 1999 Fixed assets Intangible asset Tangible assets Investments in joint ventures Share of gross assets Share of gross liabilities Current assets Stocks Debtors: Amounts due within one year Debtors: Amounts due after more than one year Cash at bank and in hand Creditors: Amounts falling due within one year Bank loans and overdrafts Trade creditors Other creditors including taxation and social security Accruals and deferred income Proposed dividend Net current assets Total assets less cur rent liabilities Creditors: Amounts falling due after more than one year Provisions for liabilities and charges Capital and reserves Called up share capital Share premium account Capital redemption reserve Other reserve: shares to be issued Profit and loss account Equity shareholders’ funds Note 10 11 12 13 14 14 17 16 15 8 16 18 21 22 23 24 20 1999 £’000 1998 £’000 66,854 36,508 18,022 213,872 (195,850) 121,384 26,830 132,412 29,488 58,779 247,509 23,592 48,178 53,533 74,970 3,854 204,127 43,382 164,766 47,232 25,906 91,628 1,307 69,517 143 – 20,661 91,628 23,332 23,962 10,617 128,524 (117,907) 57,911 9,127 119,757 37,608 53,474 219,966 9,483 48,768 33,334 58,137 3,279 153,001 66,965 124,876 48,957 3,726 72,193 1,285 57,195 143 3,078 10,492 72,193 These Accounts and Notes were approved by the Board of Directors on 2 March 2000 and signed on behalf of the Board: Richard White Executive Chairman Christopher Hyman Finance Director 46 Company Balance Sheet At 31 December 1999 Fixed assets Tangible assets Investments Current assets Amounts owed by subsidiary companies due within one year Amounts owed by subsidiary companies due after more than one year Debtors Cash at bank and in hand Creditors: Amounts falling due within one year Bank loans and overdrafts Trade creditors Other creditors including taxation and social security Accruals and deferred income Proposed dividend Net current assets Total assets less cur rent liabilities Creditors: Amounts falling due after more than one year Capital and reserves Called up share capital Share premium account Capital redemption reserve Other reserve: shares to be issued Profit and loss account Equity shareholders’ funds Note 1999 £’000 1998 £’000 11 12 14 16 15 8 16 21 22 23 24 896 27,664 28,560 4,196 93,529 5,038 36,515 139,278 11,838 727 2,332 7,636 3,854 26,387 112,891 141,451 41,420 100,031 1,307 69,517 143 – 29,064 100,031 479 27,664 28,143 17,518 45,160 6,588 43,219 112,485 – 418 4,152 7,259 3,279 15,108 97,377 125,520 41,430 84,090 1,285 57,195 143 3,078 22,389 84,090 These Accounts and Notes were approved by the Board of Directors on 2 March 2000 and signed on behalf of the Board: Richard White Executive Chairman Christopher Hyman Finance Director Serco Group plc 1999 47 Consolidated Cash Flow Statement For the year ended 31 December 1999 Net cash inflow from operating activities 25 36,818 30,032 Dividends received from joint ventures 2,156 1,023 Note 1999 £’000 1998 £’000 Returns on investment and servicing of finance Interest received Interest paid Net cash outflow from returns on investments and servicing of finance Taxation UK corporation tax paid Overseas tax paid Tax paid Capital expenditure and financial investment Purchase of tangible fixed assets Sale of tangible fixed assets Net long term loans with joint ventures Net short term cashflows with joint ventures Reorganisation costs Net cash outflow from capital expenditure and financial investment Acquisitions and disposals Purchase of subsidiary undertakings Net cash acquired with subsidiary undertakings Subscription for shares in joint ventures Proceeds from disposal of PFI investment Net cash outflow from acquisitions and disposals Equity dividends paid Dividends paid Net cash outflow from equity dividends paid Net cash outflow before financing Financing Issue of Ordinary Share Capital Debt due within one year: (Decrease)/increase in other loans Debt due beyond one year: (Decrease)/increase in other loans Capital element of finance lease repayments Net cash (outflow)/inflow from financing (Decrease)/increase in cash Balance at 1 January Balance at 31 December 48 29 30 12 678 (4,160) (3,482) (5,467) (1,812) (7,279) (10,637) 395 6,864 (1,249) – (4,627) (26,578) 2,504 (2,214) – (26,288) (5,018) (5,018) (7,720) 2,764 (4,852) (2,088) (3,258) (1,146) (4,404) (8,379) 7,902 (7,786) 3,374 (4,440) (9,329) (20,138) 1,853 (922) 3,350 (15,857) (4,302) (4,302) (4,925) 2,348 33,279 (207) 19 (838) (2,387) (1,084) (8,804) 43,991 35,187 113 (2,104) 31,307 26,382 17,609 43,991 Consolidated Statement of Recognised Gains and Losses For the year ended 31 December 1999 Profit on ordinary activities after taxation Currency translation differences on foreign currency net investments Exercise of Share Scheme options 1999 £’000 19,794 1,586 (5,618) 1998 £’000 17,420 (298) – Total recognised gains and losses relating to the year 15,762 17,122 Serco Group plc 1999 49 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 1. Accounting policies These Accounts have been prepared in accordance with applicable accounting standards. The particular accounting policies adopted are described below: Accounting convention These Accounts have been prepared under the historical cost convention. Basis of consolidation The Group Accounts consolidate the Accounts of the Company, its subsidiaries and joint ventures made up to 31 December of each year, for the periods they are owned by Serco Group plc. Depreciation Depreciation is provided on a straight-line basis at rates which, in the opinion of the Directors, reduce the assets to their residual value over their estimated useful lives. The principal annual rates used are: Freehold buildings 2.5% Short leasehold building improvements The higher of 10% or rate produced by lease term Machinery Motor vehicles Furniture Office equipment Leased equipment Stocks 15% – 20% 18% – 50% 10% 20% – 33% The higher of the rate produced by either lease term or useful life Stocks are stated at the lower of cost and net realisable value. Cost includes an appropriate proportion of direct material and labour. Long term contracts Long term contract balances represent costs incurred on specific contracts, net of amounts transferred to cost of sales in respect of work recorded as turnover by reference to the value of the work carried out to date. No profit is recognised until the contract has advanced to a stage where the total profit can be assessed with reasonable certainty. Advance payments are included in creditors to the extent that they exceed the related work in progress. Deferred taxation Deferred taxation is provided in full on timing differences relating to pension and other post retirement benefits calculated at the rates at which it is expected that tax will arise. Deferred taxation is provided at the anticipated tax rates on timing differences arising from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the accounts, to the extent that it is probable that a liability or asset will crystallise in the future. 50 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 Fixed asset investments: Subsidiaries Investments held as fixed assets are stated at cost less provision for any impairment in value. Fixed asset investments: Joint ventures In the consolidated accounts, investments in joint ventures are accounted for using the gross equity method of accounting in accordance with Financial Reporting Standard 9 (“FRS 9”) - Associates and Joint Ventures. The Group consolidated Profit and Loss Account includes the Group’s share of joint ventures’ operating profits and interest, and the attributable taxation. In the consolidated Balance Sheet, the investments in the joint ventures are shown as the Group’s share of the net assets of the joint ventures. The share of net assets is split between gross assets and liabilities. Goodwill Goodwill arising on acquisitions is capitalised in the Balance Sheet in accordance with Financial Reporting Standard 10 (“FRS 10”) - Goodwill and Intangible Assets. Amortisation of goodwill is provided on a straight line basis over a period of 20 years, which, in the opinion of the Directors is a period not exceeding the economic useful life of the asset. Basis of translation of foreign currencies Transactions of UK companies denominated in foreign currencies are translated into Sterling at the rate ruling at the date of the transaction. Amounts receivable and payable in foreign currencies at the Balance Sheet date are translated at the rates ruling at that date and any differences arising are taken to the Profit and Loss Account. The Accounts of overseas subsidiary companies and associated undertakings are translated into Sterling at the closing rates of exchange at the Balance Sheet date and the difference arising from the translation of the opening net investment and matched long term foreign currency borrowings is taken directly to reserves. The Profit and Loss Account is translated using average exchange rates. Pension costs: Defined benefit schemes Retirement benefits to employees of Group companies except in Germany, are funded by contributions from Group companies and employees. Payments are made to trust funds which are financially separate from the Group in accordance with periodic calculations by consulting actuaries. The expected cost to the Group of providing defined benefit pensions is charged to the Profit and Loss Account so as to spread the cost of pensions over the service lives of employees in the schemes, in such a way that the cost is a substantially level percentage of payroll cost, which experience surpluses and deficits being amortised on a straight line basis. In Germany retirement benefits to employees are accrued for by the Company. The expected cost to the Company for providing defined benefit pensions is calculated in accordance with periodic valuations by consulting actuaries. Turnover Turnover represents net sales of goods and services sold to third parties together with investment related income. Leases Assets obtained under finance leases are capitalised at their fair value on acquisition and depreciated over the shorter of their estimated useful lives or lease term. The finance charges are allocated over the period of the lease in proportion to the capital element outstanding. Rentals on assets under operating leases are charged to the Profit and Loss Account in equal annual amounts. Serco Group plc 1999 51 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 2. Segmental Report Classes of Business 1999 Turnover Total sales: Group and share of joint ventures Less: share of joint ventures Group turnover: sales to third parties Profit before taxation Segment profit before common costs, goodwill, joint ventures, interest and taxation Common costs Amortisation of goodwill Operating profit Share of operating profit of joint ventures Gross operating profit Net interest: Group Facilities Management £’000 Systems Engineering £’000 Investments £’000 Total £’000 713,645 (123,098) 590,547 76,323 (567) 75,756 17,576 (15,317) 2,259 807,544 (138,982) 668,562 36,262 5,095 222 5,275 129 5,717 41,579 (15,335) (2,092) 24,152 11,121 35,273 (2,643) (3,298) 29,332 74,982 16,646 91,628 Share of joint ventures (88) 33 (3,243) Group profit before taxation Net assets Segment net assets before unallocated assets Unallocated assets Total net assets 64,975 6,642 3,365 52 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 Classes of Business 1998 restated Facilities Management £’000 Systems Engineering £’000 Investments £’000 Total £’000 Turnover Total sales: Group and share of joint ventures Less: share of joint ventures Group turnover: sales to third parties 613,471 (109,723) 503,748 68,705 – 68,705 5,584 (3,748) 1,836 687,760 (113,471) 574,289 Profit before taxation Segment profit before common costs, goodwill, joint ventures, exceptional items, interest and taxation 29,873 Common costs Amortisation of goodwill Operating profit Share of operating profit of joint ventures Gross operating profit Net exceptional items Net interest: Group 3,298 Share of joint ventures (645) Group profit before taxation 5,819 302 – – 3,017 (1,497) Net assets Segment net assets before unallocated assets Unallocated assets Total net assets 52,562 5,896 1,404 35,994 (11,799) (823) 23,372 6,315 29,687 162 (2,088) (2,142) 25,619 59,862 12,331 72,193 Serco Group plc 1999 53 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 2. Segmental Report (continued) Geographical Segments 1999 United Kingdom £’000 Rest of Europe £’000 Asia Pacific £’000 Other £’000 Total £’000 Turnover Turnover by destination: Total sales: Group and share of joint ventures Less: share of joint ventures Group turnover: sales to third parties Turnover by origin: Total sales: Group and share of joint ventures Less: share of joint ventures Group turnover: sales to third parties Profit before taxation Segment profit before common costs, g o o d w i l l , joint ventures, interest and taxation Common costs Amortisation of goodwill Operating profit Share of operating profit of joint ventures Gross operating profit Net interest: Group 492,733 (63,727) 429,006 496,137 (63,727) 432,410 86,135 (7,708) 78,427 84,583 (7,708) 76,875 137,442 (46,739) 90,703 137,249 (46,739) 90,510 91,234 (20,808) 70,426 807,544 (138,982) 668,562 89,575 (20,808) 68,767 807,544 (138,982) 668,562 22,461 6,073 7,544 5,501 7,641 687 1,718 1,075 Share of joint ventures (3,269) 35 (64) – Group profit before taxation Net assets Segment net assets before unallocated assets Unallocated assets Total net assets 42,925 4,338 19,970 7,749 54 41,579 (15,335) (2,092) 24,152 11,121 35,273 (2,643) (3,298) 29,332 74,982 16,646 91,628 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 Geographical Segments 1998 restated United Kingdom £’000 Rest of Europe £’000 Asia Pacific £’000 Other £’000 Total £’000 Turnover Turnover by destination: Total sales: Group and share of joint ventures Less: share of joint ventures Group turnover: sales to third parties Turnover by origin: Total sales: Group and share of joint ventures Less: share of joint ventures Group turnover: sales to third parties 442,857 (53,678) 389,179 448,906 (53,678) 395,228 45,960 (3,301) 42,659 42,711 (3,301) 39,410 126,921 (36,241) 90,680 125,809 (36,241) 89,568 72,022 (20,251) 51,771 70,334 (20,251) 50,083 687,760 (113,471) 574,289 687,760 (113,471) 574,289 Profit before taxation Segment profit before common costs, goodwill, joint ventures, exceptional items, interest and taxation Common costs Amortisation of goodwill Operating profit Share of operating profit/(loss) of joint ventures Gross operating profit Net exceptional items Net interest: Group 19,106 4,975 7,800 4,113 7,459 (105) (2,104) 1,065 Share of joint ventures (1,969) 11 (184) – Group profit before taxation Net assets Segment net assets before unallocated assets Unallocated assets Total net assets 36,471 3,510 14,607 5,274 35,994 (11,799) (823) 23,372 6,315 29,687 162 (2,088) (2,142) 25,619 59,862 12,331 72,193 Serco Group plc 1999 55 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 3. Information regarding Directors and employees a) Directors’ remuneration: Fees as Directors Other emoluments Total remuneration excluding pensions Refer to the Remuneration Report on page 40. b) Employee costs Employee costs including Directors: Wages and salaries Social security costs Other pension costs (Note 34) Long Term Incentive Scheme costs c) Number of persons employed by Serco Group plc and its subsidiaries Average number of persons employed in the provision of services: Facilities Management Systems Engineering Investments Non-specific 1999 £’000 60 1,361 1,421 1999 £’000 1998 £’000 79 1,307 1,386 1998 £’000 323,181 26,675 16,228 332 366,416 288,067 22,076 14,875 1,050 326,068 1999 Number 1998 Number 18,415 929 26 113 19,483 16,356 1,149 12 93 17,610 56 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 4. Interest receivable Short term deposits Loans to joint ventures Total Group Share of joint ventures’ interest 5. Interest payable and similar charges On liabilities repayable within five years: Group bank loans and overdrafts Share of joint ventures’ interest On liabilities repayable after five years: Group bank loans and overdrafts Share of joint ventures’ interest 6. Profit on ordinary activities before taxation Profit on ordinary activities before taxation is after charging: Rentals under operating leases: Land and buildings Plant and machinery Depreciation on tangible assets: Owned Held under finance leases Finance lease interest on operational assets Amortisation of goodwill Auditors’ remuneration: Deloitte & Touche Other auditors Other fees paid to auditors 1999 £’000 560 957 1,517 79 1,596 1999 £’000 1,023 70 1,093 3,137 3,307 6,444 7,537 1999 £’000 1998 £’000 2,141 623 2,764 76 2,840 1998 £’000 1,820 194 2,014 3,032 2,024 5,056 7,070 1998 £’000 7,666 15,251 6,436 16,317 7,537 2,033 381 2,092 371 82 794 6,257 1,839 428 823 411 24 742 Serco Group plc 1999 57 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 7. Taxation on profit on ordinary activities The taxation charge on the results of the year is made up as follows: United Kingdom corporation taxation at 31% to 31 March 1999 and 30% from 1 April 1999 onwards (1998 – 31%) based on the profit for the year Overseas taxation Deferred taxation Adjustment in respect of prior years: United Kingdom corporation taxation Overseas taxation Deferred taxation Share of joint ventures’ taxation charge 1999 £’000 1998 £’000 6,334 2,582 (435) (718) 3 (573) 2,345 9,538 2,796 1,840 1,429 (1,015) 91 26 3,032 8,199 The effective tax charge for the year is higher than the United Kingdom corporation tax rate principally as a result of higher rates of overseas taxation, losses accruing overseas that are not available for relief and disallowed expenditure. The above 1998 tax charge includes £585,000 attributable to exceptional items. 8. Dividends Interim dividend of 2.65p per share on 64,868,881 Ordinary Shares (1998 – 2.3p on 64,238,968 Ordinary Shares) of 2p each fully paid – paid 15 October 1999 Proposed final dividend of 5.9p per share on 65,329,282 Ordinary Shares (1998 – 5.1p on 64,291,629 Ordinary Shares) of 2p each fully paid – proposed payment in April 2000 1999 £’000 1998 £’000 1,719 1,477 3,854 5,573 93,279 4,7564,756 1997 final dividend of 4.4p on 3,000,000 shares relating to March 1998 share placement 132– 1998 final dividend of 5.1p on 389,764 shares relating to shares issued between 31 December 1998 and 19 March 1999 (record date) 20 5,593 132 – 4,888 58 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 9. Earnings per Ordinary Share 1999 basic and diluted earnings per Ordinary Share after goodwill have been calculated in accordance with Financial Reporting Standard 14 – Earnings Per Share. Earnings per share is shown both before and after goodwill to assist in the understanding of the impact of FRS 10 on the Group Accounts. The calculation of basic earnings per Ordinary Share after goodwill is based on profits of £19,794,000 for the year ended 31 December 1999 (1998 – £17,420,000) and the weighted average number of 64,785,309 (1998 – 63,662,797) Ordinary Shares of 2p each in issue during the year. The calculation of basic earnings per Ordinary Share before goodwill is based on profits of £21,886,000 (adjusted for the effect of goodwill amortisation of £2,092,000) for the year ended 31 December 1999 (1998 - £18,243,000 as adjusted for goodwill amortisation of £823,000) and the weighted average number of 64,785,309 (1998 - 63,662,797) Ordinary Shares of 2p each in issue during the year. The calculation of diluted earnings per Ordinary Share after goodwill is based on adjusted profits of £19,794,000 for the year ended 31 December 1999 (1998 – £17,420,000) and the weighted average number of 65,158,919 (1998 – 64,474,738) Ordinary Shares of 2p each assuming that the options are all exercised. The calculation of diluted earnings per Ordinary Share before goodwill is based on adjusted profits of £21,886,000 (adjusted for the effect of goodwill amortisation of £2,092,000) for the year ended 31 December 1999 (1998 - £18,243,000 as adjusted for goodwill amortisation of £823,000) and the weighted average number of 65,158,919 (1998 - 64,474,738) Ordinary Shares of 2p each assuming that the options are all exercised. 10. Intangible asset: Goodwill Cost: At 1 January 1999 Additions during the year Adjustments to goodwill capitalised on acquisitions prior to 1 January 1999 At 31 December 1999 Accumulated amortisation: At 1 January 1999 Charge for the year At 31 December 1999 Net book value: At 31 December 1999 At 31 December 1998 Group £’000 24,155 44,979 635 69,769 823 2,092 2,915 66,854 23,332 Serco Group plc 1999 59 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 11. Tangible assets Group Cost: At 1 January 1999 Subsidiaries acquired Reclassifications Capital expenditure Disposals Transfers to current assets Foreign exchange differences At 31 December 1999 Accumulated depreciation: At 1 January 1999 Subsidiaries acquired Reclassifications Provided during the year Disposals Transfers to current assets Foreign exchange differences At 31 December 1999 Net book value: At 31 December 1999 At 31 December 1998 Freehold Land & Buildings £’000 Short Leasehold Building Improvements £’000 Machinery, Motor Vehicles, Furniture & Equipment £’000 4,201 4,434 (417) 318 (183) – (194) 8,159 458 1,699 (187) 158 (39) – (81) 2,008 6,151 3,743 4,062 215 493 1,412 (171) – 5 6,016 1,510 59 231 811 (105) – (3) 2,503 3,513 2,552 Total £’000 56,953 35,186 – 12,004 (5,740) (2,669) (416) 95,318 32,991 21,638 – 9,570 (4,650) (117) (622) 48,690 30,537 (76) 10,274 (5,386) (2,669) (227) 81,143 31,023 19,880 (44) 8,601 (4,506) (117) (538) 54,299 58,810 26,844 17,667 36,508 23,962 The cost of assets held by the Group under finance leases at 31 December 1999 was £10,722,000 (1998 – £10,503,000). The accumulated depreciation provided for those assets at 31 December 1999 was £6,217,000 (1998 – £4,788,000). 60 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 Company Cost: At 1 January 1999 Transfers from subsidiary undertakings Reclassifications Capital expenditure Disposals At 31 December 1999 Accumulated depreciation: At 1 January 1999 Transfers from subsidiary undertakings Reclassifications Provided during the year Disposals At 31 December 1999 Net book value: At 31 December 1999 At 31 December 1998 Short Leasehold Building Improvements £’000 Machinery, Motor Vehicles, Furniture & Equipment £’000 189 – 12 159 – 360 70 – 3 54 – 127 233 119 1,293 17 (12) 555 (78) 1,775 933 7 (3) 191 (16) 1,112 663 360 Total £’000 1,482 17 – 714 (78) 2,135 1,003 7 – 245 (16) 1,239 896 479 Serco Group plc 1999 61 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 12. Investments held as fixed assets a) Shares in subsidiary companies at cost: Balance at 1 January 1999 and 31 December 1999 b) Group investments in joint ventures: At 1 January 1999 Dividends receivable Acquisitions/disposals Goodwill arising on acquisition Foreign exchange translation difference Retained profits At 31 December 1999 Company £’000 27,664 Group £’000 10,617 (2,735)) 3,049 1,417 196) 5,478 18,022 c) A list of the principal undertakings of Serco Group plc is shown in Note 35. All the subsidiaries of the Group have been consolidated. d) At 31 December 1999, Group companies had branches in Abu Dhabi, Antarctica, Ascension Island, Bahrain, Chile, Dubai, French Guyana, Korea, Ras Al Khaimah, Saudi Arabia and Switzerland. e) All the subsidiaries of Serco Group plc and the joint venture undertakings are engaged in the provision of services with the exception of Serco Investments Limited, which manages investments. 1999 £’000 1998 £’000 f) The aggregate of the Group’s share in the assets and liabilities of joint ventures is: Share of fixed assets Share of current assets Share of liabilities due within one year or less Share of liabilities due after more than one year Share of net assets 47,0340,521 173,351 213,872 47,035 81,489 128,524 31,357 164,493 195,850 18,022 32,892 85,015 907117,907 10,617 62 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 g) Acquisitions: (i) Serco GmbH & Co. KG (formerly Elekluft Elektronik und Luftfahrtgeräte GmbH) All the issued share capital of Serco GmbH & Co. KG was acquired by Serco International GmbH on 1 August 1999. Concurrently Serco GmbH & Co. KG bought certain assets and liabilities for a cash consideration of £17,735,000. This acquisition has been accounted for by the acquisition method of accounting. Two fair value adjustments were made: the building held for re-sale (within debtors) was revalued from £5,144,000 to £6,483,000 and the pension provision was increased in accordance with UK GAAP from £17,297,000 to £23,757,000. The goodwill arising on consolidation of £33,376,000 is being carried forward as an intangible asset and will be amortised over 20 years. Net liabilities acquired: Tangible assets Stocks Debtors Cash Creditors Pension provision Net liabilities acquired Goodwill Discharged by: Cash paid Acquisition costs £’000 4,598 5,005 17,399 1,703 (19,272) (23,757) (14,324) 33,376 19,052 £’000 17,735 1,317 19,052 (ii) Great Southern Railways Pty Limited (“GSR”) The remaining 50.76% of the shares in GSR were acquired on the 1 October 1999 by Serco Asia Pacific Pty Limited for a cash consideration of £4,098,000 and deferred cash consideration of £3,368,000. The acquisition of GSR has been accounted for by the acquisition method of accounting. The fair value of assets and liabilities are considered to be the same as the book value. The goodwill arising on consolidation of £7,025,000 is being carried forward as an intangible asset and will be amortised over 20 years. Discharged by: Cash paid Acquisition costs Deferred cash consideration Net assets acquired: Tangible assets Stocks Debtors Cash Creditors Net assets acquired Investment in GSR as a joint venture at the date of acquisition: Equity Loan notes Goodwill £’000 8,335 379 4,576 297 (12,755) 832 3,245 (3,532) 7,025 7,570 £’000 4,098 104 3,368 7,570 Serco Group plc 1999 63 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 12. Investments held as fixed assets (continued) (iii) FRA Serco Limited The remaining 50% of the shares of FRA Serco Limited were acquired by Serco Limited on 1 June 1999, for a cash consideration of £2,175,000. Acquisition costs of £669,000 were incurred. The acquisition has been accounted for by the acquisition method of accounting. The fair value of assets and liabilities are considered to be the same as the book value. The investment in FRA Serco Limited as a joint venture at the date of acquisition was £1,784,000. The goodwill arising on consolidation of £4,578,000 is being carried forward as an intangible asset and will be amortised over 20 years. (iv) Serco Viatech Limited The remaining 50% of shares of Serco Viatech Limited were acquired by Serco Group NZ Limited on 1 July 1999, for a cash consideration of £480,000. This acquisition has been accounted for by the acquisition method of accounting. The fair value of assets and liabilities are considered to be the same as the book value. The investment in Serco Viatech as a joint venture at the date of acquisition was £605,000. There is no goodwill arising on consolidation. (v) Subscriptions for shares in joint ventures During the year the Group made subscriptions and further equity injections in joint ventures all of which have been accounted for by the gross equity method of accounting. The details of each transaction are as follows: Further equity injections were made in Defence Management (Holdings) Limited by Serco Investments Limited during 1999, for a total cash amount of £51,000. Further equity injections were made in Laser (Teddington Holding) Limited by Serco Investments Limited during 1999, for a total cash amount of £1,288,604. Further equity injections were made in Premier Prison Services Limited by Serco Investments Limited during 1999, for a deferred cash consideration of £200,000. 50% of the Ordinary Share Capital of Moreton Prison (Holdings) Limited was subscribed for by Serco Investments Limited on 27 September 1999, for a cash consideration of £100,000. 64 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 50% of the Ordinary Share Capital of Brands On Show Pty Limited was subscribed for by Serco Asia Pacific Pty Limited on 31 December 1999, for a cash consideration of £405,000 and with a deferred cash consideration of £1,012,000. The fair value of the net assets of Brands on Show Pty Limited were nil, therefore goodwill arose on this transaction of £1,417,000. The goodwill will be amortised over 20 years. 33.33% of the Ordinary Share Capital of AWE Management Limited was subscribed for by Serco Limited on 1 December 1999, for a cash consideration of £49,998. 50% of the Ordinary Share Capital of Serco-Denholm Shipping Company Limited was subscribed for by Serco Limited on 19 January 1999, for a cash consideration of £124,999. 40% of the Ordinary Share Capital of BAS-Serco Limited was subscribed for by Serco Facilities Management, Inc on 4 May 1999, for a cash consideration of £188,000. 50% of Ordinary Share Capital of Serco S.A.L was subscribed for by Serco IAL Limited on 8 April 1999, the date of incorporation, for a cash consideration of £6,000.5 d As part of the acquisition of Serco GmbH & Co KG on the 1 August 1999, 51% of the Ordinary Share Capital of ESDAS was acquired. The net asset value on acquisition was £183,000. 50% of the Ordinary Share Capital of Premier Custodial Group Limited was subscribed for by Serco Investments Limited on 2 December 1999, for a deferred cash consideration of £1,000 and its shareholdings in four PFI project companies (Moreton Prison (Holdings) Limited, Lowdham Grange Prison Services Limited, Medomsley Holdings Limited and Pucklechurch Custodial (Holdings) Limited). 13. Stocks Service spares Long term contract balances 1999 £’000 10,097 16,733 26,830 Group 1998 £’000 4,967 4,160 9,127 Serco Group plc 1999 65 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 14. Debtors Group Company a) Amounts recoverable within one year: Amounts recoverable on contracts Other debtors Prepayments and accrued income Amounts owed by joint ventures Building held for re-sale b) Amounts recoverable after more than one year: Amounts recoverable on contracts Other debtors Pensions prepayment (Note 34) Amounts owed by joint ventures Total debtors 1999 £’000 1998 £’000 101,459 7,383 12,096 5,279 6,195 132,412 11,437 3,997 8,433 5,621 29,488 161,900 99,737 7,938 10,774 1,308 – 119,757 9,600 3,376 8,779 15,853 37,608 157,365 1999 £’000 – 4,919 119 – – 5,038 – – – – – 5,038 1998 £’000 – 6,397 191 – – 6,588 – – – – – 6,588 Included in amounts recoverable on contracts is an amount of £17,297,000 (1998 – £18,173,000) in respect of items procured on behalf of customers. This is partly offset by an amount of £11,366,000 (1998 – £17,447,000) in trade creditors and an amount of £3,483,000 (1998 – £2,857,000) in accruals. 15. Other creditors including taxation and social security Group Company Obligations under finance leases Corporation tax Advance corporation tax on dividends Other taxes and social security costs Other creditors Amounts owed to joint ventures Other loans 1999 £’000 1,764 6,151 – 19,521 20,201 5,339 557 53,533 1998 £’000 1,897 4,894 214 15,167 7,398 3,000 764 33,334 1999 £’000 – 1,874 – 458 – – – 2,332 1998 £’000 30 551 214 357 – 3,000 – 4,152 66 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 16. Creditors: Amounts falling due after more than one year Group Company 1999 £’000 1998 £’000 1999 £’000 1998 £’000 a) Amounts falling due after more than one year: Bank loans and overdrafts Obligations under finance leases Other loans Total loans Less: amounts included in creditors falling due within one year Amounts falling due after more than one year 65,012 4,290 3,843 73,145 25,913 47,232 50,903 5,310 4,888 61,101 12,144 48,957 53,258 – – 53,258 11,838 41,420 41,420 40 – 41,460 30 41,430 b) Analysis of loan repayments due: Bank loans and overdrafts: Within one year or on demand After five years Obligations under finance leases: Within one year or on demand Between one and two years Between two and five years After five years Other loans: Within one year or on demand Between one and two years Between two and five years After five years c) All loans are unsecured. 23,592 41,420 9,483 41,420 11,838 41,420 – 41,420 1,764 1,507 871 148 557 84 3,202 – 73,145 1,897 1,449 1,809 155 764 664 1,120 2,340 61,101 – – – – – – – – 53,258 30 10 – – – – – – 41,460 d) Finance lease obligations are secured by retention of title to the relevant vehicles and equipment. Serco Group plc 1999 67 Notes to the Accounts Notes to the Accounts For the year ended 31 December 1999 For the year ended 31 December 1999 17. Treasury policies and risk management The principal risks arising from the Group’s financing activities are interest rate risk and foreign currency risk. Treasury operations are conducted within a framework of policies and guidelines authorised and reviewed by the Board. There has been no change during the year or since the year end to the major financial risks faced by the Group or the Group’s approach to the management of these risks. As permitted by Financial Reporting Standard 13 – ‘Derivatives and other Financial Instruments: Disclosures’ short term debtors and non interest bearing short term creditors have been excluded from the following disclosure other than the currency profile of monetary assets and liabilities. The fundamental purpose of interest rate and foreign currency financial instruments entered into is to hedge long term and short term financial borrowings, the details of which are set out below: Interest rate risk The Group borrows in the required currencies at both fixed and floating rates of interest. The Group’s exposure to interest rate fluctuations on its borrowing is managed by using interest rate swaps and forward rate agreements. At the year end and after taking account of interest rate swaps the proportion of the Group’s fixed rate borrowings was 53% with the remaining 47% at floating rates. Foreign currency risk The Group has a significant investment in overseas subsidiaries. The Group’s policy is not to hedge net assets of overseas subsidiaries since the net assets represent a small proportion of the market value of the Group. Subsidiaries are required to hedge their material trading transactions (sales and purchases in currencies other than their functional currency) by using forward contracts. There were no material debtors or creditors as at 31 December 1999 with unmatched transactional exposure. 68 Notes to the Accounts For the year ended 31 December 1999 Financial assets and liabilities (i) Assets Other than short term debtors, the Group had the following financial assets as at 31 December 1999: Asset Cash and short term deposits Long term interest bearing loans to joint ventures Other long term debtors Total long term assets Sterling £’000 Australian Dollar £’000 US Dollar £’000 Deutsche Mark £’000 Various other currencies £’000 Total £’000 Note 31,419 6,267 5,298 7,153 8,642 58,779 26 5,263 358 – 1 8 , 6 3 6 2 , 6 3 9 2 , 2 5 6 – 3 2 8 23,899 2,997 2,256 328 – 8 8 5,621 2 3 , 8 6 7 29,488 14 The above assets except other long term debtors earn interest at relevant national LIBOR equivalents, net of margins. (ii) Liabilities After taking into account the interest rate and currency swaps the interest rate profile of the Group’s financial liabilities at 31 December 1999 were: Currency US Dollar Deutsche Mark Australian Dollar Sterling Total (Note 16) Total liabilities £’000 53,071 11,838 3,156 5,080 7 3 , 1 4 5 Floating rate liabilities £’000 14,610 11,838 3,156 5,080 3 4 , 6 8 4 Fixed rate liabilities £’000 38,461 – – – 3 8 , 4 6 1 Fixed Rate Liabilities Weighted average interest rate % Weighted average time for which rate is fixed Years 7.45 – – – – 8 – – – – The floating rate borrowings bear interest at relevant national LIBOR equivalents, plus margin. Serco Group plc 1999 69 Notes to the Accounts For the year ended 31 December 1999 17. Treasury policies and risk management (continued) The maturity of the Group’s financial liabilities at 31 December 1999 was as follows: Maturing within one year £’000 10,124 11,838 2,618 1,333 2 5 , 9 1 3 Maturing between one and two years £’000 Maturing between two and and five years £’000 Maturing after more than five years £’000 281 – 416 894 1 , 5 9 1 1,246 – 122 2,705 4 , 0 7 3 41,420 – – 148 4 1 , 5 6 8 Total £’000 53,071 11,838 3,156 5,080 7 3 , 1 4 5 Currency US Dollar Deutsche Mark Australian Dollar Sterling (iii) Fair Values The book value and fair value of the Group’s financial assets and liabilities are as follows: Assets Cash and short term deposits Amount owed by joint ventures Other long term debtors Liabilities Long term borrowings: US Dollar Australian Dollar Sterling Short term borrowings: US Dollar Deutsche Mark Australian Dollar Sterling Derivatives held to manage the currency and interest rate profile Book value £’000 Fair value £’000 Unrecognised gain/(loss) £’000 58,779 58,779 5,621 23,867 29,488 5,621 23,867 29,488 – – – – 42,947 538 3,747 47,232 10,124 11,838 2,618 1,333 – 25,913 41,346 538 3,747 45,631 (1,601) – – (1,601) 10,124 11,838 2,618 1,333 1,215 27,128 – – – – 1,215 1,215 The fair value of the interest rate swaps, foreign currency contracts and US Dollar denominated long term fixed rate debt, with a carrying amount of USD70,000,000, have been determined by reference to prices available from the markets on which the instruments involved are traded. 70 Notes to the Accounts For the year ended 31 December 1999 Gains and losses on hedges The Group uses interest rate swaps to manage its interest rate profile. Changes in the fair value of instruments used as hedges are not recognised in the financial statements until the hedged position matures. There were no unrecognised gains or losses brought forward that were charged to the profit and loss account during the period. There was an unrecognised loss of £1,601,000 on the long term US Dollar loan and an unrecognised gain of £1,215,000 on the interest rate swaps as at 31 December 1999, as set out in the previous table. The unrecognised loss and gain are not expected to be recognised in the Profit and Loss Account in the next financial year. Borrowing facilities The Group had facilities of £10,000,000 committed and £80,000,000 uncommitted that were unused as at 31 December 1999. Facilities are renewable on an annual basis. 18. Provisions for liabilities and charges Group Pensions provision Deferred taxation Balance 1 January 1999 £’000 – 3,726 3,726 Liability Assumed £’000 23,757 – 23,757 Charged/(Credited) Foreign Exchange Differences £’000 to the Profit & Loss Account £’000 Balance 31 December 1999 £’000 662 (1,008) (346) (997) (121) (1,118) 23,309 2,597 25,906 Usage £’000 (113) – (113) 19. Deferred taxation The amounts of deferred taxation provided in the accounts are: Capital allowances in excess of depreciation Overseas timing differences Other timing differences Potential amounts of deferred taxation for which no credit has been taken: Depreciation in advance of capital allowances Overseas timing differences Other timing differences 1999 £’000 60 – 2,537 2,597 (420) (3,342) (95) (3,857) Group 1998 £’000 – 582 3,144 3,726 (701) (341) (772) (1,814) Serco Group plc 1999 71 Notes to the Accounts For the year ended 31 December 1999 20. Reconciliation of movements in shareholders’ funds Profit on ordinary activities after taxation Dividends Currency translation differences on foreign currency net investments New capital subscribed Issue of shares as deferred consideration for the acquisition of Docklands Railway Management Limited Exercise of Share Scheme options Net increase in shareholders’ funds Opening shareholders’ funds Closing shareholders’ funds 21. Called up share capital 1999 £’000 19,794 (5,593) 14,201 1,586 12,344 (3,078) (5,618) 19,435 72,193 91,628 1998 £’000 17,420 (4,888) 12,532 (298) 33,279 – – 45,513 26,680 72,193 1999 £’000 1998 £’000 a) Authorised 100,000,000 (1998 – 100,000,000) Ordinary Shares of 2p each 2,000 2,000 b) Called up, allotted and fully paid: 65,329,282 (1998 – 64,291,629) Ordinary Shares of 2p each 1,307 1,285 c) Ordinary Shares of 2p each allotted in the year: During the year 1,037,653 Ordinary Shares of 2p each were allotted to the holders of options or their personal representatives. 758 of these were allotted at £13.05, 366,403 at £8.40, 459,430 at £4.61, 10,000 at £4.30, 32,000 at £3.69, 27,500 at £2.20 and 141,562 at nil value. d) Options in respect of Ordinary Shares of 2p each: i) On 10 September 1993, 70,000 options in respect of Ordinary Shares of 2p each were granted, of these there remain 14,000 options which are exercisable at any time up to 10 September 2003 at a price of £2.20 each. ii) On 16 October 1995, 80,000 options in respect of Ordinary Shares of 2p each were granted, of these there remain 3,000 options which are exercisable at any time up to 16 October 2005 at a price of £3.69 each. iii) In January 1996, 201,732 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules of the ‘Serco Group plc 1996 Long Term Incentive Scheme’. At 31 December 1999 there remained 82,676 options which are exercisable at nil value in accordance with the rules of the Scheme. iv) The Company operates a Sharesave Scheme whereby eligible employees are granted options to apply for shares as part of a save-as-you-earn contract. 64,320 options were held by employees on 31 December 1999 which were granted on 28 August 1996. The options are exercisable at any time up to 30 April 2000 at a price of £4.61 each provided the requirements of the Scheme are met. 72 Notes to the Accounts For the year ended 31 December 1999 v) In January 1997, 239,937 options in respect of Ordinary Shares of 2p each were granted in accordance with t h e rules of the ‘Serco Group plc 1996 Long Term Incentive Scheme’. At 31 December 1999 there remained 181,191 options which are exercisable at nil value in accordance with the rules of the Scheme. vi) On 21 May 1998, 553,824 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules of the ‘Serco Group plc 1998 Executive Option Plan’. At 31 December 1999 there remained 539,281 options which are exercisable at a price of £13.05 each in accordance with the rules of the Scheme. vii) On 4 September 1998, 3,067 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules of the ‘Serco Group plc 1998 Executive Option Plan’. At 31 December 1999 there remained 3,067 options which are exercisable at a price of £12.121/2 each in accordance with the rules of the Scheme. viii)On 1 April 1999, 576,944 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules of the ‘Serco Group plc 1998 Executive Option Plan’ at a price of £14.70 each. At 31 December 1999 no options had been exercised or lapsed. e) The market price of Serco Group plc Ordinary Shares of 2p each as at 31 December 1999 was £19.421/2 and ranged from £11.331/2 to £22.471/2 during the year. 22. Share premium account Balance at 1 January 1999 Share premium on issue of shares upon exercise of options Balance at 31 December 1999 23. Other reserve – shares to be issued Balance at 1 January 1999 Issue of shares as deferred consideration for the acquisition of Docklands Railway Management Limited Balance at 31 December 1999 24. Profit and loss account Group Balance at 1 January 1999 Retained profit transferred to reserves Foreign exchange translation differences Exercise of Share Scheme options Balance at 31 December 1999 £’000 57,195 12,322 69,517 £’000 3,078 (3,078) – £’000 10,492 14,201 1,586 (5,618) 20,661 The profit and loss account includes a goodwill charge of £41,578,000 under the accounting policy applicable prior to the implementation of FRS 10. Serco Group plc 1999 73 Notes to the Accounts For the year ended 31 December 1999 24. Profit and loss account (continued) Company As permitted by Section 230 of the Companies Act 1985, the profit and loss account of the Parent Company is not presented as part of these accounts. The consolidated profit for the financial year includes the Parent Company profit of £10,305,000 which includes dividends of £17,653,000 received from subsidiary companies. A final ordinary dividend of £3,854,000 is proposed which together with the interim dividend of £1,719,000 and the payment in relation to the 1998 final dividend caused by the movement in number of shares of £20,000, leaves a profit of £4,712,000 which has been added to reserves brought forward of £22,389,000 along with a foreign exchange movement of £516,000 and an employee Share Scheme reserve movement of £1,447,000, result in reserves carried forward of £29,064,000. 25. Reconciliation of operating profit to net cash inflow from operating activities 1999 £’000 24,152 9,570 2,092 695 (9,767) 19,971 (9,447) (448) 36,818 1998 £’000 23,372 8,096 823 346 (865) (7,143) 7,854 (2,451) 30,032 Other non-cash changes £’000 Balance 31 December 1999 £’000 – – – – – – – (1,367) (1,367) 58,779 (23,592) 35,187 (41,420) (6,233) (3,286) (557) (4,290) (14,366) Balance 1 January 1999 £’000 53,474 (9,483) 43,991 (41,420) 2,571 (4,124) (764) (5,310) (7,627) Cash Flow £’000 5,305 (14,109) (8,804) – (8,804) 838 207 2,387 (5,372) Operating profit Depreciation Goodwill amortisation Loss on sale of tangible assets Increase in stocks Decrease/(increase) in debtors (Decrease)/increase in creditors Decrease in provisions Net cash inflow from operating activities 26. Analysis of net debt Cash at bank and in hand Overdrafts Cash net of overdrafts Bank loans due after more than one year Cash net of overdrafts and bank loans Other loans due after more than one year Other loans due within one year Finance leases Net debt 74 Notes to the Accounts For the year ended 31 December 1999 27. Reconciliation of (decrease)/increase in cash to movement in net debt (Decrease)/increase in cash Cash outflow from debt and lease financing Change in net debt resulting from cash flows New finance leases Movement in net debt in the period Net debt at 1 January Net debt at 31 December 28. Major non-cash transactions 1999 £’000 (8,804) 3,432 (5,372) (1,367) (6,739) (7,627) (14,366) 1998 £’000 26,382 1,972 28,354 (1,885) 26,469 (34,096) (7,627) During the year the Group entered into finance lease arrangements in respect of assets with a total capital value at the inception of the leases of £1,367,000 (1998 – £1,885,000). During the year the option to purchase the remaining share capital of Docklands Railway Management Limited was exercised, resulting in 366,403 Serco Group plc shares (equivalent to £3,078,000) being issued for nil cash consideration. As part of the acquisition of the remaining 50.76% of the shares in Great Southern Railways Pty Limited, deferred consideration of £3,368,000 is payable on 15 March 2000. During the year £5,618,000 has been charged to the profit and loss reserve in respect of shares issued under Employee Share Scheme options. 29. Purchase of subsidiary undertakings Net liabilities acquired: Tangible assets Stock Debtors Cash Creditors Pension provision Bank overdraft Net liabilities Investment in joint ventures at the dates of acquisition: Equity Loan notes Goodwill (see Note 10) Discharged by: Cash paid in current year Deferred cash consideration 1999 £’000 13,548 5,384 31,402 2,675 (41,438) (23,757) (171) 1998 £’000 1,469 163 5,998 1,967 (13,310) – (114) (12,357) (3,827) 856 (3,532) 44,979 29,946 26,578 3,368 29,946 (190) – 24,155 20,138 20,138 – 20,138 Serco Group plc 1999 75 Notes to the Accounts For the year ended 31 December 1999 30. Analysis of the net outflow of cash in respect of the purchase of subsidiary undertakings Cash consideration Cash of acquired subsidiary undertakings Bank overdrafts of acquired subsidiary undertakings Net outflow of cash in respect of the purchase of subsidiaries 31. Contingent liabilities 1999 £’000 26,578 (2,675) 171 24,074 1998 £’000 20,138 (1,967) 114 18,285 The Group has given indemnities to banks totalling £23,207,000 in respect of performance bonds in the normal course of business. In addition the Group has given financial guarantees in respect of a lease security to a subsidiary and equity contributions to joint ventures of £8,605,000. 32. Capital and other commitments Group Company Capital expenditure contracted but not provided 4,262 2,637 1999 £’000 1998 £’000 1999 £’000 – 1998 £’000 – During the year ending 31 December 2000 the Group is to make the following payments in respect of operating leases: Leases which expire: Within one year Between one and five years After five years Land and Buildings £’000 Other £’000 1,528 2,205 4,755 8,488 4,627 10,257 1,936 16,820 76 Notes to the Accounts For the year ended 31 December 1999 33. Related parties Directors The Directors of Serco Group plc had no material transactions with the Group during the year other than service contracts and in relation to Directors’ liability insurance. Details of the Directors’ remuneration is disclosed in the Remuneration Report. Joint ventures The following material transactions took place between the Group and its joint ventures during 1999: Net loans during the year Net trading Royalties and management fees receivable Dividends receivable 1999 £’000 12,271 2,635 2,021 2,735 19,662 The following receivable balances relating to joint ventures were included in the Group Balance Sheet: 1998 £’000 (5,563) (2,084) 744 1,023 (5,880) 1998 £’000 1,120 2 56 130 1,308 1999 £’000 1,420 1,725 1,425 709 5,279 5,621 15,853 Amounts due within one year: Loans Trading balance Royalties and management fees Dividends Amounts due after more than one year: Loans The following payable balances relating to joint ventures were included in the Group Balance Sheet: Amounts payable within one year: Loans 1999 £’000 1998 £’000 5,339 3,000 Details of Group investments in joint ventures and other principal undertakings are given in Note 35. No amounts were written off during the period. Serco Group plc 1999 77 Notes to the Accounts For the year ended 31 December 1999 34. Pension schemes The net pension charge for the year ended 31 December 1999 was £16,228,000 (1998 – £14,875,000). The Group paid employer contributions of £3,206,000 (1998 – £3,179,000) into other UK defined contribution and foreign state pension schemes. The other main Group operated pension schemes were as follows: a) Serco Pension and Life Assurance Scheme (“SPLAS”) This is a pre-funded defined benefit scheme. With effect from 6 April 1999, the Serco Alternative Pension Scheme 1994 (“SAPS”) and the Serco Services Pension Scheme (“SSPS”), were merged into the SPLAS. This merger was carried out by transferring all assets and liabilities into the SPLAS. No change in benefits or contributions was made at the time of the merger. The funding policy is to contribute such variable amounts, on the advice of the actuary, as will achieve 100% funding on a projected salary basis. Actuarial assessments covering expenses and contributions are carried out by independent qualified actuaries, with the last such review being carried out as at 6 April 1999. The projected unit method was adopted for the actuarial valuation of the Scheme for accounting purposes. The main actuarial assumptions used in the valuation for accounting purposes this year were: Investment yield Salary growth Increase in LEL offset Price inflation Equity dividend growth Pension increases (in excess of GMP) 9.5% p.a. 7.5% p.a. (including 0.5% p.a. in respect of promotion) 5.0% p.a. (SPLAS section only) 5.0% p.a. 5.0% p.a. 5.0% p.a. (for SAPS and Services section) 4.5% p.a. (for SPLAS section accrual after 6/4/97) 0% p.a. (for SPLAS section accrual prior to 6/4/97) The Scheme is assessed to be fully funded on a current funding level basis based on a market value of assets of £145,881,000 at 6 April 1999 following the merger. Liabilities for this purpose are calculated using the basis for determining individual cash equivalents for active members and deferred pensioners and by estimating the cost of purchasing annuity policies for pensioners. The actuarial value of the assets represented 81% of the ongoing liabilities of the Scheme. Variations from the normal cost are amortised for accounting purposes over a fifteen year period as a constant monetary amount. Employer pension contributions paid into the Scheme during the year were £7,165,000 (1998 – £4,355,000 SPLAS, £348,000 SSPS, £3,802,000 SAPS), of which £448,000 related to special contributions in respect of a d i s c r e t i o n a ry increase to pensions in payment awarded during the year (1998 – £619,000 SPLAS, £399,000 SAPS). At 31 December 1999 a prepayment of £684,000 (1998 prepayments – £248,000 SPLAS, £396,000 SSPS, £250,000 SAPS) in respect of the Scheme was included in the Balance Sheet. £7,376,000 was charged to the 1999 Profit and Loss Account, in respect of the Scheme (1998 – £3,405,000 SPLAS, £221,000 SSPS, £3,585,000 SAPS). 78 Notes to the Accounts For the year ended 31 December 1999 b) The Serco-IAL Pension Scheme This is a pre-funded defined benefit scheme. The funding policy is to contribute such variable amounts, on the advice of the actuary, as will achieve 100% funding on a projected salary basis. Actuarial assessments covering expenses and contributions are carried out by independent qualified actuaries, with the last such review being carried out as at 31 March 1998. On the assumptions adopted for accounting purposes and based on a market value of assets of £97,316,000 at 31 March 1998, the actuarial value of the assets represented 117% of the ongoing past service liabilities of the Scheme as at that date. For accounting purposes, the projected unit method has been adopted and the main actuarial assumptions used are: Investment yield Salary growth (excluding salary scale) Equity dividend growth Pension increases (Part 4 and 6 members) Pension increases (others) 8.50% p.a. 6.00% p.a. 5.50% p.a. 3.75% p.a. 4.00% p.a. The past service surplus as at 31 March 1998 is being amortised for accounting purposes over a nine year period as a constant monetary amount. No employer pension contributions were paid into the Scheme during the year. An amount of £135,000 (1998 – £154,000 credit) has been charged to the 1999 Profit and Loss Account in respect of the Scheme and a prepayment of £7,749,000 (1998 – £7,885,000) has been included in the Balance Sheet as at 31 December 1999. Serco Group plc 1999 79 Notes to the Accounts For the year ended 31 December 1999 34. Pension schemes (continued) c) Serco Superannuation Fund This is a combined defined benefit and defined contribution scheme which was established in Australia on 1 April 1993 to provide equivalent benefits for members transferring from the AWA Defence Industries Superannuation Fund, a defined benefit scheme, and the AWA Group Superannuation Fund (1987), a defined contribution scheme. Actuarial assessments covering expenses and contributions relating to the defined benefit element of the Scheme are carried out by independent qualified actuaries with the last such valuation being carried out as at 31 December 1997. The attained age method was used for the actuarial valuation of the Scheme as at 31 December 1997. This method was chosen to produce a level employer contribution rate as a proportion of members’ salaries over the expected future working lives of the existing members, as the defined benefit element of the Scheme was closed to new members with effect from 1 April 1993. The main actuarial assumptions used in the actuarial valuation for accounting purposes this year were: Average long term interest rate (net of investment and administration expenses and investment tax) 9.5% p.a. 7.0% p.a. Average long term allowance for salaries increases The defined benefit element of the Scheme is assessed to be fully funded on a current funding level basis based on a market value of assets of £1,158,000 (A$2,860,000) at 31 December 1997 with a ratio of market value of assets to current funding level liabilities of 108%. The actuarial value of assets of the defined benefit element of the Scheme represented 112% of its ongoing liabilities at 31 December 1997. The pension cost calculated under the attained age method will amortise the above surplus over the expected future working lives of the existing members which have an average value of 14 years. Employer pension contributions paid into the Scheme during the year were as follows: Defined benefit element Regular cost Variation cost Defined contribution element Total Defined benefit element Regular cost Variation cost Defined contribution element Total 80 1999 £’000 91 41 132 1,630 1,762 1998 £’000 96 (9) 87 1,852 1,939 1999 A$’000 2282 103 331 4,086 4,417 1998 A$’000 261 (24) 237 5,025 5,262 Notes to the Accounts For the year ended 31 December 1999 d) The NPL Management Limited Pension Scheme This is a pre-funded defined benefit scheme. The funding policy is to contribute such variable amounts, on the advice of the actuary, as will achieve 100% funding on a projected salary basis. Actuarial assessments covering expenses and contributions are carried out by independent qualified actuaries, with the last such review being carried out as at 6 April 1998. The projected unit method was adopted for the actuarial valuation of the Scheme. The main actuarial assumptions used in the valuation for accounting purposes this year were: Investment yield Salary growth Price inflation Pension increases 9.5% p.a. 7.0% p.a. (plus promotional scale) 5.0% p.a. 5.0% p.a. The Scheme is assessed to be fully funded on a current funding level basis based on a market value of assets of £15,677,000 at 6 April 1998. Liabilities for this purpose are calculated using the basis for determining individual cash equivalents for active members and deferred pensioners and by estimating the cost of purchasing annuity policies for pensioners. The actuarial value of the assets represented 72% of the ongoing liabilities of the Scheme. Variations from the normal cost are amortised for accounting purposes over a fifteen year period as a constant monetary amount. At 31 December 1999 a provision of £16,000 (1998 – nil) in respect of the Scheme was included in the Balance Sheet. £1,827,000 was charged to the 1999 Profit and Loss Account in respect of the Scheme (1998 – £1,607,000). e) The Serco Shared Cost Section of the Railways Pension Scheme The Serco Shared Cost Section of the Scheme was established on 6 January 1997 after the acquisition of Nationwide Fire Services from the British Railways Board. This is a pre-funded defined benefit scheme. The funding policy is to contribute such variable amounts, on the advice of the actuary, as will achieve 100% funding on a projected salary basis. An initial actuarial valuation was carried out as at 6 January 1997 and the first of the regular valuations was as at 31 December 1998. The attained age method was adopted for the actuarial valuation of the Scheme. The main actuarial assumptions used in the valuation for accounting purposes were: Investment yield Salary growth Dividend growth Pension increases 6.75% p.a. 4.50% p.a. 3.75% p.a. 3.00% p.a. As at 31 December 1998 the actuarial value of the assets represented 133% of the value of the liabilities, after including reserves for contributions to be paid at the reduced rate of 121/2 % (employer 71/2%, members 5%) until September 2003 and for employer matching voluntary contributions to be subsumed within the normal 71/2% rate. Employer pension contributions paid into the Scheme and charged to the 1999 Profit and Loss Account during the year were £202,000 (1998 – £203,000). Serco Group plc 1999 81 Notes to the Accounts For the year ended 31 December 1999 34. Pension schemes (continued) f) Serco Metrolink Pension Scheme This is a pre-funded defined benefits scheme established on 1 September 1990. On 27 May 1997 Serco Metrolink Limited replaced Greater Manchester Metro Limited as the principal employer of the Scheme. The funding policy is to contribute such variable amounts, on the advice of the actuary, as will achieve 100% funding on a projected salary basis. Actuarial assessments covering expenses and contributions are carried out by independent qualified actuaries, with the last such review being carried out as at 1 September 1998. The projected unit method was adopted for the actuarial valuation of the Scheme for accounting purposes. The main actuarial assumptions used in the valuation for accounting purposes this year were: Investment yield Salary growth Price inflation Equity dividend growth Pension increases 9.0% p.a. 7.0% p.a. 5.0% p.a. 5.0% p.a. 4.0% p.a. The Scheme is assessed to be fully funded on a current funding level basis at 1 September 1998. Liabilities for this purpose were calculated using the MFR basis, which corresponds to the basis for determining individual cash equivalents for active members and deferred pensioners and an estimate of the cost of purchasing annuity policies for pensioners. Assets for this purpose were taken at their market value of £2,674,000. As at 1 September 1998 the actuarial value of the assets represented 101% of the ongoing liabilities of the Scheme based on the assumptions used for the formal triennial valuation. As the surplus at 1 September 1998 was negligible, no variation has been made to the regular cost in its respect. The regular cost estimated as at 1 September 1998 was 8.2% of total pensionable salaries, including an allowance for future expenses and the cost of insuring lump sum benefits on death in service. Employer pension contributions paid into the Scheme during the year and charged to the 1999 Profit and Loss Account totalled £204,000 (1998 – £205,000). 82 Notes to the Accounts For the year ended 31 December 1999 g) Docklands Light Railway Pension Scheme Docklands Railway Management Limited became a participating employer in the Scheme on 6 April 1997. The Scheme is a pre-funded defined benefit scheme, with Docklands Light Railway Limited being the principal employer. The funding policy is to contribute such variable amounts, on the advice of the Scheme actuary, as will achieve 100% funding on a projected salary basis. Actuarial assessments covering expenses and contributions are carried out by independent qualified actuaries, with the last such review being carried out as at 1 April 1998. The projected unit method was adopted for the actuarial valuation of the Scheme for accounting purposes. The main actuarial assumptions used in the valuation for accounting purposes this year were: Investment yield Salary growth Equity dividend growth Pension increases 8.5% p.a. 6.5% p.a. 5.2% p.a. 4.25% p.a. for Pre 1/4/1989 joiners 4.0% p.a. for Post 1/4/1989 joiners The Scheme is assessed to be fully funded on a current funding level basis based on a market value of assets of £15,316,000 at 1 April 1998. The actuarial value of the assets represented 100% of the ongoing liabilities of the Scheme. Variations from the normal cost are amortised for accounting purposes over the future working lifetime of current active members as a percentage of salaries. Employer pension contributions paid into the Scheme and charged to the 1999 Profit and Loss Account totalled £854,000 (1998 – £685,000). h) Serco GmbH & Co. KG Pension arrangement This is an un-funded defined benefit arrangement. Actuarial assessments covering liabilities are carried out by independent qualified actuaries, with the last such review being carried out as at 23 December 1999. The projected unit method was adopted for the actuarial valuation of the arrangement. The main actuarial assumptions used in the valuation for accounting purposes this year were: Investment yield Salary growth Price inflation 6.0% p.a. 3.0% p.a. 2.0% p.a. Employer expenses for the arrangement during the period were £662,000 and a provision of £23,309,000 has been included in the Balance Sheet as at 31 December 1999. Serco Group plc 1999 83 Notes to the Accounts For the year ended 31 December 1999 35. List of principal undertakings The companies listed below are, in the opinion of the Directors, the principal undertakings of Serco Group plc. The percentage of equity capital directly or indirectly held by Serco Group plc is shown. The companies are incorporated and principally operate in the countries designated below. Principal subsidiaries United Kingdom Serco Limited* Serco Contracting Limited Serco-Denholm Limited Serco Europe Limited Serco-IAL Limited Serco International Limited Serco Railtest Limited Sercoserve Limited Serco Systems Limited* Serco Test Technology Limited Serco Overseas Investments Limited* Serco Project Development Limited* Serco Research & Development Limited* Serco Insurance Co Limited* NPL Management Limited* Docklands Railway Management Limited Serco Investments Limited* Community Leisure Management Ltd FRA Serco Limited Rest of Europe Belgium Serco Belgium S.A. Denmark Metro Service A/S France Serco France Sarl Germany Serco International GmbH Serco GmbH & Co. KG (formerly Elekluft Elektronik und Luftfahrtgeräte GmbH) Serco Services GmbH Serco FM GmbH (formerly Serco GmbH) Ireland Serco Services Ireland Limited Italy Serco s.r.l. (formerly Serco Servizi s.r.l.) Luxembourg Serco Facilities Management S.A. The Netherlands Serco Facilities Management BV Serco International BV Serco Investments BV Sweden Serco Services AB Serco Sverige AB (formerly Serco Newsec AB) Switzerland Serco Facilities Management S.A. Asia Pacific Australia Serco Asia Pacific Pty Limited Serco Australia Pty Limited Serco Water (WA) Pty Limited Great Southern Railways Pty Limited New Zealand Serco Group NZ Limited Serco Viatech Limited Other Canada Serco Facilities Management, Inc. Serco Aviation Services, Inc. 84 100% 100% 90% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 67% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% USA Serco, Inc. Serco Management Services, Inc. (Delaware) Barton ATC, Inc. Serco Management Services, Inc. (Tennessee) (formerly Barton ATC International, Inc) JL Associates, Inc. 100% 100% 100% 100% 100% Joint venture undertakings United Kingdom Premier Prison Services Limited Kilmarnock Prison (Holdings) Limited Serco Gulf Engineering Limited Defence Management (Holdings) Limited Laser (Teddington Holding) Limited Altram (Manchester) Limited Premier Custodial Group Limited Lowdham Grange Prison Services Limited Medomsley Holdings Limited Pucklechurch Custodial (Holdings) Limited Moreton Prison (Holdings) Limited Serco-Denholm Shipping Company Limited AWE Management Limited Serco Fleet Services Limited Asia Pacific Australia Defence Maritime Service Pty Limited InfoDirect Pty Limited Serco-Gardner Merchant Pty Limited Brands on Show Pty Limited New Zealand Serco Project Engineering Ltd Serco Gardner Merchant NZ Hong Kong Serco Guardian (FM) Limited Other Bahrain Aeradio Technical Services WLL Bermuda BAS-Serco Limited Cyprus Serco Kalisperas Dubai International Aeradio (Emirates) LLC Johnston Atoll, Pacific Ocean Kalama Services Saudi Arabia Key Communications Development Co Limited Singapore JBS Singapore Pte Limited Serco Guthrie Pte Ltd Sweden REM Serco AB Turkey ESDAS USA Baker Serco Wright Patterson *directly held by Serco Group plc 50% 50% 50% 50% 50% 26% 50% 50% 50% 50% 50% 50% 33% 50% 50% 50% 50% 50% 50% 50% 50% 49% 40% 50% 49% 38% N/A 20% 50% 50% 51% 49% Notice of Annual General Meeting Notice is hereby given that the Thirteenth Annual General Meeting of the Company will be held at the National Physical Laboratory, Teddington, Middlesex, TW11 0LW on Wednesday 5 April 2000 at 10:00 am for the purpose of considering the following resolutions: To be passed as Ordinary Resolutions 1. To receive and adopt the Annual Review and Accounts and reports of the Directors and Auditors of the Company for the year ended 31 December 1999. 2. To declare a final dividend of 5.9p per share for the year ended 31 December 1999. 3. To re-elect Christopher Hyman as an Executive Director. (Note 3) 4. To re-elect Iestyn Williams as an Executive Director. (Note 4) 5. To re-elect Rhidian Jones as a Non-executive Director. (Note 4) 6. To re-appoint Deloitte & Touche as the Company’s auditors and to authorise the Directors to fix the auditors' remuneration. (Note 5) 7. To authorise the Directors to allot relevant securities up to a maximum nominal amount of £431,384 in accordance with Article 6 of the Company’s Articles of Association. All previous authorities under s80 of the Companies Act 1985 shall be revoked. This authority shall expire on the fifth anniversary of the passing of this resolution. (Note 6) To be passed as Special Resolutions 8. To authorise the Directors to allot equity securities for cash in accordance with Article 7 of the Company’s Articles of Association. For the purposes of paragraph (b) of that Article, the nominal amount to which this power is limited to is £65,361. This authority shall expire on the fifth anniversary of the passing of this resolution. (Note 7) 9. To authorise the Directors to make market purchases (within the meaning of s163 of the Companies Act 1985) of the Company’s Ordinary Shares in accordance with Article 11 of the Company’s Articles of Association on such terms and in such manner as the Directors may from time to time determine, provided that: (a) the maximum number of Ordinary Shares that may be purchased under this authority is 6,536,124; (b) the minimum price which may be paid for an Ordinary Share purchased under this authority is 2p; (c) the maximum price which may be paid for an Ordinary Share purchased under this authority is an amount equal to 5% above the average of the middle market prices shown in the quotations for Ordinary Shares in the London Stock Exchange Daily Official List for the five business days immediately preceding the day on which that Ordinary Share is purchased; (d) this authority will expire at the conclusion of the Company’s next Annual General Meeting or, if earlier, 15 months after the passing of this Resolution; and (e) a contract, or contracts, to purchase Ordinary Shares entered into by the Company before the expiry of this authority can be executed, wholly or partly, by the Company after the expiry of this authority. (Note 8) By order of the Board: Julia Bowler Secretary Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT 2 March 2000 Serco Group plc 1999 85 Notes to Annual General Meeting Notes 1. If your name appears on the Register of Shareholders on 5 April 2000, you will be entitled to attend and vote at the Thirteenth Annual General Meeting of the Company. If you wish to appoint someone else to attend and vote on your behalf, you may do so by completing the proxy form and returning it to our Registrars by 10:00 am on 3 April 2000. If you change your mind about your proxy, you may still attend and vote at the meeting. The proxy does not need to be a shareholder in the Company. Please bring some form of identification with you to the Annual General Meeting, in case we need to verify that your name appears on our register of shareholders or proxies. 2. The Register of Directors’ Interests, as well as Directors’ Service Contracts, will be available for inspection during normal business hours at the Registered Office, Dolphin House, Windmill Road, Sunbury-on-Thames, Middlesex TW16 7HT from 10:00 am on 2 March 2000 to 9:00 am on 5 April 2000. If you wish to arrange a time to view these documents please telephone the Company Secretarial Department on +44 (0)1932 755900. The same documents will also be available for inspection for a period of 15 minutes before the commencement and after the conclusion of the Annual General Meeting on 5 April 2000. 3. Christopher Hyman retires following his appointment since the last Annual General Meeting and submits himself for re- election in accordance with the Company's Articles of Association. 4. Iestyn Williams and Rhidian Jones retire by rotation and submit themselves for re-election in accordance with the Company’s Articles of Association. 5. This appointment will be effective from the conclusion of this Annual General Meeting and remain in effect until the conclusion of the next Annual General Meeting. 6. This authority is in respect of 33% of the issued share capital of the Company on 15 February 2000 (the last practical date before printing this report), and is in accordance with the recommendations of the Association of British Insurers (“ABI”). It is the Directors’ intention to seek renewal of this authority annually. The Directors have no present intention of exercising this authority other than to allot shares or grant options pursuant to the Company’s share schemes. 7. This authority is in respect of 5% of the issued share capital of the Company on 15 February 2000 (the last practical date before printing this report), and is in accordance with the recommendations of the ABI. It is the Directors’ intention to seek renewal of this authority annually. The Directors have no present intention of exercising this authority other than to allot shares or grant options pursuant to the Company’s share schemes. 8. This authority is in respect of 10% of the issued share capital of the Company on 15 February 2000 (the last practical date before printing this report), and the power given by this resolution will only be exercised if the Directors are satisfied that any purchase will increase the Earnings per Share of the Ordinary Share Capital in issue after the purchase and accordingly, that the purchase is in the interests of shareholders. 86 Notes Serco Group plc 1999 87 Shareholder Information Annual General Meeting The Thirteenth Annual General Meeting of Serco Group plc (“the Company”) will be held at the National Physical Laboratory, Teddington, Middlesex, TW11 0LW on Wednesday 5 April 2000 at 10.00 am. The Notice of the Annual General Meeting, together with the relevant notes, is set out on pages 85 and 86. A proxy card accompanies this Review. Extraordinary General Meeting An Extraordinary General Meeting of the Company will be held at the National Physical Laboratory, Teddington, Middlesex, TW11 0LW on Wednesday 5 April 2000 immediately following the conclusion of the Annual General Meeting. The Notice of the Extraordinary General Meeting, together with the relevant notes and a proxy card accompany this Review. Final Dividend The 1999 final dividend will be paid on 14 April 2000, to shareholders registered at the close of business on Friday 17 March 2000 (the record date). Shareholder Enquiries In the event of any enquiries such as the loss of a share certificate, dividend payments or, to notify a change of address, shareholders should write to the Company’s Registrars at the address detailed below: Lloyds TSB Registrars The Causeway Worthing West Sussex BN99 6DA United Kingdom Internet Information about the Company’s history, markets, financial results, share price and significant news announcements are available on the Company’s internet site: http://www.serco.com Registered Office Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT United Kingdom Telephone:+44 (0)1932 755900 Facsimile: +44 (0)1932 755854 88 calendar of events 5 April Annual General Meeting 14 April Proposed payment of Final Dividend for 1999 September Announcement of Interim Results October Proposed payment of Interim Dividend for 2000 Design and production: Merchant and Moore Lo w e n h o f f Typesetting and artwork: Final Image Photography: Colin Tu r n e r Print: CTD 89 Serco Group plc 1999 Serco Asia Pacific Pty Limited Level 10 90 Arthur Street North Sydney NSW 2060 Australia Serco Group, Inc. 20 E Clementon Road Suite 102 South Gibbsboro New Jersey 08026 United States Telephone: +61 (0)2 9964 9733 Facsimile: +61 (0)2 9964 9924 Telephone:+1 856 346 8800 Facsimile: +1 856 346 8463 Serco Group plc Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT United Kingdom Telephone: +44 (0)1932 755900 Facsimile: +44 (0)1932 755854 A company registered in England and Wales No. 2048608 www.serco.com 4