Serco Group
Annual Report 2000

Plain-text annual report

R&A 14/2/01 5:23 pm Page fc1 Serco Group plc Annual Review and Accounts 2000 R&A 14/2/01 5:23 pm Page fc2 Financial highlights Serco has maintained its record of consistent growth in sales and profits. 1 A message from the Board As well as expanding our base of existing contracts, we have continued to win new contracts that demonstrate our managerial and technological capabilities. AGM notice AGM notice and calendar of events Annual accounts Accounts information, including directors and advisers, corporate governance, directors’ report, directors’ remuneration and auditors’ reports. 33 85 28 Business review An overview of our progress during the year, including reports on business sectors and our view of the year ahead. 16 Growing worldwide A selection of new business gained in 2000. We continue to build on our traditional areas of strength, while winning more complex contracts that require both technological expertise and advanced management techniques. 2 4 3 A very straightforward business To every contract we bring the same proven management processes and expertise in managing change. Serco is a straightforward business with excellent growth prospects. Empower and enable Our contract performance depends on our staff and managers. We do all we can to help them excel – by training, sharing best practice, harnessing technology and empowering them through our uniquely open culture. R&A 14/2/01 5:23 pm Page 1 Financial highlights Turnover† £967.0m £807.5m up 19.7% 2000 1999 Profit before tax – pre FRS 10 highlights Earnings per share – pre FRS 10 Dividend per share £37.7m £31.4m up 20.0% 6.78p 1.63p 5.63p* up 20.4% 1.42p* up 14.4% Employees at 31 December† 32,500 27,500 up 18.2% 967.0 807.5 687.8 571.6 462.0 368.1 289.3 218.5 175.5 47.3 59.2 125.7 82.2 88 89 90 91 92 93 94 95 96 97 98 99 00 Turnover† since flotation £m 37.7 31.4 26.4 22.0 18.3 15.2 12.5 9.4 7.7 3.0 3.6 4.3 5.2 88 89 90 91 92 93 94 95 96 97 98 99 00 Profit before tax – pre FRS 10 – since flotation £m † including joint ventures * restated to reflect a share capitalisation of five shares for every one held approved by shareholders on 5 April 2000 1 R&A 14/2/01 5:23 pm Page 2 A message from the Board 2000 was another year of strong performance. We maintained our record of consistent growth in sales and profits, renewed and expanded our base of existing contracts, and applied our managerial and technological capabilities to win new contracts. Sales grew 19.7% to £967.0 million. Pre-tax profits rose 20.0% to £37.7 million before goodwill amortisation (FRS 10). Earnings per share rose 20.4% before FRS 10. Operating cash flow performance remained strong at £45.5 million. The recommended final dividend of 1.13p per share makes a total of 1.63p for the year – an increase of 14.4% over 1999. There were a number of changes to the Serco Board during the year. In March 2000 Gerry Rodgers retired, having successfully led our Y2K project; we are grateful for his contribution to the business over 30 years. In April Ralph Hodge CBE joined as our third non-executive director. He is a former chief executive of ICI Chemicals and Polymers and chaired the committee that created the ISO 9000 quality standard. Gary Sturgess stood down in December after six years’ valued contribution as a non-executive director, to join the company full-time as group policy adviser. At the same time, Betsy Bernard joined us as a non-executive director; she was until recently executive vice president of National Mass Markets, part of Qwest Communications International, and brings us valuable technology experience – particularly in the North American market. serco group plc Successfully maintaining strong growth in the number, size and complexity of our contracts is not simply a matter of winning bids. We need to secure the necessary depth of management capabilities; share best practice to make the most of the experience we gain; consolidate our growth by retaining contracts as they come up for renewal; and earn our place in the communities we serve by showing social and environmental responsibility. The following pages show the progress we are making in all these areas. Our success depends entirely on the performance of Serco’s people at all levels – we thank them all for their contribution. We will continue to invest in them, empower them with the knowledge, skills and technology that enable them to excel, and develop a pipeline of appropriately skilled managers. The Serco Best Practice Centre is becoming increasingly effective in identifying excellence and making it accessible to contract managers and their teams worldwide. We are successfully maintaining our contract renewal rate at over 90%. And, as a growing number of our customers expect evidence of social and environmental responsibility, we are currently conducting an audit of our performance in these areas. Serco is growing quickly, but judiciously. We are building organically on a solid foundation of existing contracts; and the sheer scale of new opportunities available to us around the world means that we can be selective about where and how we grow. We are maintaining our emphasis on winning contracts that play to our strengths in management and technology – focusing on sectors such as transport, defence, and the justice, education and science activities of central and local government, where there are substantial opportunities to add real value. Our track record of successful Private Finance Initiatives (PFIs) and Public Private Partnerships (PPPs) in the UK will prove a competitive asset as similar opportunities emerge in the Asia Pacific region and Continental Europe. We also continue to pursue larger, more complex opportunities in North America, in partnership with major US corporations. Our bids for initiatives such as the UK’s National Air Traffic Services PPP, the proposed Atomic Weapons Establishment PPP and the Future Strategic Tanker Aircraft PFI programme indicate the scale of our ambition and capabilities. In pursuing opportunities on this scale we will not forget that sustainable long term growth depends on consistently excellent performance and organic growth across the whole spectrum of our contracts and businesses: these all continue to have excellent prospects. 2 R&A 14/2/01 5:23 pm Page 3 A very straightforward business AT FIRST SIGHT, SERCO LOOKS BEWILDERINGLY DIVERSE – with over 500 contracts ranging from rail operations to scientific research. In fact, it is very straightforward. To every project we bring the same things: our expertise in managing change, and our other proven management processes for devolving responsibility and delivering continuing performance improvement. These processes are our product. WE CAN PLAN FOR LONG TERM GROWTH because we can forecast with relative certainty. Future earnings and cash flows are highly visible. Our contracts are typically for 5-10 years, and our success in winning renewals means that in practice they can last for decades. The income is dependable: 90% comes from governments and international agencies, and the rest from major corporations. OUR GROWTH PROSPECTS ARE EXCELLENT. While the market continues to grow rapidly, we have taken care to grow at a measured pace – to avoid overstretching management or jeopardising our unique culture. And each new contract brings further opportunities: about a third of our new business comes from our customers broadening the scope of existing contracts. Our devolved structure helps us to grow our own managers to match our expansion. 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, then liberate them to run their businesses more entrepreneurially. ALL SERCO ’S PROCESSES ARE UNDERPINNED BY SHARED BELIEFS about how to treat customers, staff and the community. We value our people’s 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. In all their dealings with customers, we encourage them to deliver the spirit of our contracts, not merely the letter. AS THE ORGANISATION EXPANDS, WE ARE PASSIONATE AB OUT SHARING IDEAS AND BEST PRACTICE. Constant communication worldwide helps us understand and manage risks, deliver service improvements ahead of customer expectations and keep our competitive edge. The Serco Institute develops and refines our vision of the future. And the Serco Best Practice Centre makes increasing use of internet and other technologies to help our businesses form networks and share ideas and experience; so that, as we grow and become still more diverse, Serco will remain in essence a very straightforward business. 3 R&A 14/2/01 5:24 pm Page 4 Empower and enable Our contract performance depends fundamentally on the individual performance of our staff and managers. So we do all we can to help them excel – by training, sharing best practice, harnessing technology and empowering them through our uniquely open culture. Developing the managers we need What unites all our diverse activities is our systematic application of proven management processes and expertise. To maintain our high growth rate and move into increasingly large and complex contracts, we must constantly develop managers with the right competencies. This has always been a Serco priority. empowering We believe investment in people returns competitive advantage. A key role for both the Serco Institute and our Best Practice Centre is to be vigilant in identifying future needs and innovative in developing managers to meet them. Technology is helping us to achieve consistent standards globally: for example, the centre has developed online self-appraisal software that enables managers to measure their skills against the requirements of their job. The software then offers them a choice of suitable training opportunities, including computer-based training via our intranet. We are passionate believers in training at all levels: it’s one way we can empower people to make a real difference. For example, since taking over a series of service contracts for the Royal Navy we’ve given training to over 600 staff. In Asia Pacific we have a growing programme of partnerships with academic institutions such as the University of Technology Sydney, where we are pioneering schemes that enable staff to gain vocational, graduate and postgraduate qualifications through projects related to their work. This year we are extending the programme to Hong Kong and Singapore, and introducing a vocational award designed for team leaders and supervisors. IDENTIFY FUTURE MARKET NEEDS AND REQUIREMENTS CREATE COMPETITIVE ADVANTAGE DEVELOPING THE MANAGERS WE NEED DEVELOP RELEVANT SKILLS BASE INNOVATE 4 R&A 14/2/01 5:24 pm Page 5 Managing change, changing managers: It’s all very well to say you’re looking for more complex contracts – but where will you find the skills to manage them? Our UK technology services business created its own solution – and developed a new university degree in the process. Three years ago, its change director and colleagues sat down together to define the competencies the business would need to manage complex contracts effectively. They put together an innovative personal development programme for contract and support office managers with potential, to give them the outlook and skills they’d need in the future. Emma Roycroft, pictured here at GlaxoSmithKline’s product supply site, is one of the first 15 managers who’ve taken part. Brighton University liked the programme so much that it has agreed to accredit it – enabling participants to gain an MA in Change Management. Today, the complex contracts anticipated three years ago are becoming reality, and managers who’ve participated in the programme are taking them on with confidence – one, for example, is the service delivery manager designate for the Highways Agency’s national Traffic Control Centre PFI. Participants are also finding new ways to share what they’ve learned – they’ve developed a series of courses for fellow contract managers on skills such as negotiating and change management. 5 R&A 14/2/01 5:24 pm Page 6 PROMOTES AND DEVELOPS SERCO COMMUNITY AND CULTURE PROMOTES BEST PRACTICE GLOBAL KNOWLEDGE SHARING DEVELOPS NETWORKS Using technology to enable our people CREATES OPPORTUNITY As well as giving people the skills they need, we’re also giving them the tools. Our strength in technology enables us to keep on improving the quality of our communication, information, methodology and understanding. enabling With some 500 contracts worldwide and over 32,500 people, Serco has a wealth of knowledge and experience. But how can we best use it? The Serco Best Practice Centre intranet helps our people tap the group’s distilled expertise on core activities such as bidding and phasing-in new contracts, and developing and rebidding existing ones. And the Our World intranet database puts people in touch with colleagues who can help them, enables them to form networks of colleagues with common interests, allows them to search banks of knowledge and opens up job opportunities to the entire workforce worldwide. In the near future it will draw on our own databases and a variety of outside sources to bring them a personalised news service. Technology also enables us to do existing tasks better. Like the satellite positioning system that tracks our 150 UK rail infrastructure maintenance vehicles, so that our people can respond faster to urgent maintenance requests by pinpointing the nearest team with the necessary skills. Technology can also create new possibilities. Valuable business initiatives often start with a chance encounter in a corridor, a casual conversation or an overheard remark. To promote that human interaction on a worldwide scale, our Virtual Office project is installing low-cost teleconference systems that act as ‘windows’ linking communal areas of our offices in the UK, Asia Pacific and North America for several hours each day. It’s one more way in which we’re making Serco a real global community. 6 R&A 14/2/01 5:24 pm Page 7 Giving the controllers more control: Every time you fly, you put your trust in air traffic controllers. You want to know that their knowledge and skills are right up to the minute. In 56 air traffic control (ATC) towers across the US, our 300 controllers provide services within the Federal Aviation Administration (FAA) system. We’re currently working with AMTI, a leading information services and systems engineering specialist, to develop a comprehensive Air Traffic Management Information System that all our ATC staff can use via the internet. This will ensure that they always have online access to the latest versions of FAA regulations, corporate manuals and employee handbooks. Staff at all levels will be able to stay informed and up to date on our performance and to share best practice with colleagues across the country in the ever-changing ATC environment. Online bulletin boards will show job vacancies, so that everyone has the best possible chance to fulfil their potential. And, in keeping with our open culture, critical portions of the system will also be available to the FAA – real-time access to data such as traffic movement and activity reports will help improve our customer’s efficiency as well as our own. 7 R&A 14/2/01 5:24 pm Page 8 ENHANCE SERVICE STANDARDS REALISE COMMERCIAL POTENTIAL ADDED CONTRACT VALUE EXCEED EXPECTATIONS ACHIEVE EFFICIENCY Using technology to deliver for customers Technology doesn’t just help us run our own business better. We also apply our communication and IT skills to achieve greater efficiency, enhance service standards to meet rising expectations, and create new possibilities. improving Developing a new information system for the National Rail Enquiry Scheme in the UK was a timely move. As well as cutting a third off the time taken to answer routine enquiries, it also helped the scheme to cope with an unprecedented tenfold upsurge in enquiries during the disruptions that followed the Hatfield rail crash. During this period our new real-time website at www.nationalrail.co.uk handled some 100,000 hits a day. At the National Physical Laboratory, we’ve created additional opportunities by working with the DTI in establishing major new scientific facilities that are unique to the UK. And we’re making innovative use of the internet by pioneering ways to calibrate scientific instruments online – giving customers direct access to national standards and support information without having to move equipment offsite. Sharing data helps us refine and improve our services. At the Ministry of Defence Joint Services Command and Staff College, opened in 2000, we use our bespoke information management system to monitor and report performance. This has given our staff the tools to monitor their own teams and take personal responsibility for results. On many of our integrated transport contracts, we’re using satellite positioning technology to locate vehicles and give waiting passengers updated information on when buses or trains are due. This has enabled us to go a step further – collating information on journey times, passenger numbers and ticketing types so that we can help our customers refine schedules and services. 8 R&A 14/2/01 5:24 pm Page 9 Just phone for a train: The Docklands Light Railway (DLR) in London has always been associated with advanced technology – and as its operator, we’re determined to keep applying technology to make life easier for passengers. For example, it’s nice to know when the next train’s due to arrive – but wouldn’t it be nicer to know before you got to the platform? We already have real-time data on train movements, so now we’re using it to feed information displays in places around the railway. DAISY, the Docklands Arrivals Information System, enables passengers to watch out for their next train on plasma screens in the University of East London, local exhibition centres and the lifts at Canary Wharf. Visit www.dlr.co.uk and you can see the next three departures from the station of your choice. There’s even a service for WAP phones which lets passengers keep tabs on their train while they wrap up a meeting or finish their coffee. We’re also trialling screens on the trains themselves, to provide real-time travel information, news and entertainment. This not only makes life easier for passengers but also gives us another potential income stream from advertising. Last year developments like these helped DLR win the national Light Rail Operator of the Year award. 9 R&A 14/2/01 5:24 pm Page 10 Running every contract as a business Our readiness to invest in contracts reveals the way we see them: not as tasks to be performed to the letter of the contract but as opportunities to develop them in partnership with our customers. Each contract manager runs a business which they’re encouraged to nurture and grow. An increasing number of them have their own ‘board of directors’ including non-executives. DEVOLVED STRUCTURE HIGHLY ACCOUNTABLE MANAGERS AND STAFF INCREASED GROWTH ENTERPRISE CULTURE RECOGNISE AND REWARD 10 From day one of a contract we’re preparing for the rebid – by raising service standards and adding value to benefit our customers, we sharpen our competitive edge. In this way, we often increase the value of contracts and normally extend their duration by winning repeated renewals. We are also alert to the opportunities that one well-run contract provides for winning others. This entrepreneurial spirit at contract manager level has enabled us to grow our rail business from a standing start to £150 million a year in just five years. Our rail property maintenance business now has almost complete coverage of the UK. Other acorns-to-oak stories include the small maintenance contract at the National Physical Laboratory which led to Serco managing the entire laboratory and its programmes – and extending our involvement under a PFI contract. A maintenance contract at an RAF helicopter flying school led to the PFI project in which we are operating the RAF’s Medium Support Helicopter Aircrew Training Facility under a contract with CAE worth over £50 million. In turn, our private finance experience at this facility and our involvement in establishing the Defence Helicopter Flying School will add substance to our bids for complex activities such as the National Air Traffic Services PPP and Future Strategic Tanker Aircraft PFI. The commercial experience they’ve given us complements our proven strength as the world’s leading private sector provider of air traffic services and our ability to handle large-scale, sensitive contracts such as managing the Atomic Weapons Establishment. adding value R&A 14/2/01 5:24 pm Page 11 Watch this space: The European Space Agency (ESA) has developed through political evolution as well as technological advances. By responding flexibly to its changing needs, we have grown our business with ESA from one person in the early 1970s to over 300 today. We now have eight major contracts with the Agency and a wide spectrum of smaller projects and assignments. The key to our success has been a willingness to adapt to changing political, administrative and legislative requirements while also keeping pace with fast-moving technology. We are one of only a few suppliers that can offer ESA a range of capabilities across the board – including satellite engineering at the ESTEC technical centre in the Netherlands, launch site support for CNES at the CSG in French Guiana, satellite control at the ESOC operations centre in Germany, and data collation and analysis at the ESRIN research establishment in Italy. There is no room for complacency: the breadth of our activities means that we rebid a proportion of our contracts every year against stiff competition. Our experience and success in this field are now attracting interest from major organisations across Europe in telecoms, meteorology and global positioning satellites. 11 R&A 14/2/01 5:24 pm Page 12 DEVELOP PARTNERSHIPS ACHIEVE AND SHARE COST SAVINGS LONG TERM CUSTOMER RELATIONS BUILD TRUST BE OPEN Maintaining open relationships with customers PROVIDE VALUE Treating each contract as a business focuses contract managers’ attention on customer relationships. In our experience, maximising the quality of relationships delivers a better long term return than any short term focus on maximising margins. for our customers When a contract is up for rebid, the most effective challenge to competitors is a satisfied customer who can see clearly the value we deliver. That is one way we maintain a contract renewal rate of over 90% – and why a five-year contract can be the start of a relationship lasting 10, 20, 30 or even 40 years. We believe in open partnership relationships with customers – we are comfortable with ‘open book’ contracts, and willing to work in partnership with customers to achieve and share cost savings. This approach may not deliver the largest profit in the short term but it provides a robust business base on which to grow the company. More and more customers are demanding partner relationships and we believe that this will become the outsourcing pattern of the future: our reputation for successful partnerships will stand us in good stead as we bid for larger contracts and PPP programmes. In the UK we’ve developed a pioneering initiative with Railtrack - Partnership in Asset Management. The customer’s managers are based at our Midlands depots to work alongside our business managers; we operate joint safety audits, sharing the findings and developing a common response; and we work with Railtrack on new ideas and initiatives. The competitive benefits of our open approach have been clear at the US Federal Aviation Administration (FAA) since we acquired our original contract in 1997. By maintaining open books we established a strong relationship of trust, and when the FAA rebid its contracts in 2000 it required all tenders to show details of costs and margins. We bid for six contracts and were awarded three – the most that any one company could be awarded. 12 R&A 14/2/01 5:24 pm Page 13 Open books open doors: The transparency of our relationship with Winchester City Council in the South of England has helped us extend a five-year relationship by a further 10 years. Since taking over the council’s direct labour force in 1995 we have been undertaking over 20 contracts ranging from refuse collection and building maintenance to transport hire and highway maintenance. In managing these services to ISO 9002 standards we have always worked in partnership with the council, maintaining open books, sharing its objectives and developing services jointly. During the fuel crisis in mid-2000 we pooled our fuel stocks with the council and shared decisions on priorities for vehicles operated by both Serco and the council; and when the area was hit by extensive flooding, the council trusted us to share crucial decisions on priorities for repairing properties and providing flood defences. We continue to work with the council to enhance services, value for money and the quality of our partnership. For example, under the new 10-year contract awarded in January 2001, we will be teaming-up with both the council and tenants’ groups to deliver a more seamless and responsive housing maintenance service. 13 R&A 14/2/01 5:24 pm Page 14 Maintaining partnership with the community Close relationships with customers in governments and international agencies – some 90% of our business – give us a particular sense of involvement with the communities we serve. And, for a growing number of our clients, social awareness is becoming a critical factor in the contract evaluation process. We have always aimed to be a socially responsible organisation. Today we are developing initiatives that go beyond conventional charitable activity and integrate social responsibility into our operations. In particular, we have a growing number of schemes to provide jobs and training for disadvantaged people, particularly the long term unemployed. and communities IMPROVED REPUTATION STRENGTHENED BIDDER STATUS INTEGRATED SOCIAL RESPONSIBILITY ENHANCED BUSINESS RELATIONSHIPS We’re setting up a pilot site at our Q Stores contract in Sydney which will create traineeships for longer term unemployed people as a first step towards careers in Serco. We plan to extend the programme to other sites during the year. In the UK we’ve recruited all the fireground support staff at our International Fire Training College on Teesside from government schemes for the long term unemployed. In the US we’ve been recruiting staff to our San Francisco parking meters contract under the government Welfare to Work programme. And on our Huntington, West Virginia Department of Motor Vehicles contract, many staff have been recruited through a charity that trains the long term unemployed: contract manager Betty Belville now sits on its local board. BETTER STAFF DEVELOPMENT 14 Our joint venture prison services company, Premier Custodial Group, is addressing employment issues from both sides. Dovegate Prison, opening in July 2001, is working with local groups to create opportunities for socially excluded people and ethnic minorities; while Doncaster Prison has won the prestigious Butler Trust Development Award – which recognises excellence and innovation in prison work – for a pioneering scheme which prepares inmates for employment after their release. R&A 14/2/01 5:24 pm Page 15 Getting engaged: The company, its staff and the local community aren’t separate entities. They’re all inextricably interlinked. We do our best to recognise this by blurring the boundaries between work, home and neighbourhood. Especially in remote communities like those in North West Scotland, where we manage Raasay Ranges for the Ministry of Defence. As you’d expect, both the company and individual staff members support local organisations and charities. In partnership with our customer we also give full support to staff who belong to voluntary organisations such as the fire service, lifeboat crew and mountain rescue team. Our estates manager is supervising an extension to the village swimming pool, the IT supervisor advises local schools on computer issues and our senior managers help local businesses and community organisations. We’ve installed facilities in customer buildings so that they can be used to house the lifeboat and, for a time, the fire service. As well as providing work experience for school students, we offer local residents spare places on our company training courses, to help them gain relevant career skills. Our staff value the opportunity to make a real contribution to the wellbeing of the community – and the more we support our neighbours, the more we find that our neighbours support us. 15 R&A 14/2/01 5:24 pm Page 16 16 R&A 14/2/01 5:24 pm Page 17 IT interface design and usability IT interface design and usability The internet, interactive TV and mobile The internet, interactive TV and mobile internet technologies are enabling internet technologies are enabling governments and businesses to make governments and businesses to make themselves more accessible. But how themselves more accessible. But how accessible is the technology in practice? accessible is the technology in practice? Our Usability Services business has Our Usability Services business has become the UK leader in usability studies become the UK leader in usability studies and user interface design, helping clients and user interface design, helping clients fulfil the potential of interactive technology. fulfil the potential of interactive technology. It started as a small team measuring the It started as a small team measuring the user-friendliness of IT systems at the user-friendliness of IT systems at the National Physical Laboratory. Today National Physical Laboratory. Today we have 15 consultants in the UK, with we have 15 consultants in the UK, with facilities in London and Manchester, and facilities in London and Manchester, and the team is set to double in size within the the team is set to double in size within the next year. Their customers already include next year. Their customers already include the BBC and the ITV network, leading UK the BBC and the ITV network, leading UK clearing banks, two international mobile clearing banks, two international mobile phone operators, supermarket chains phone operators, supermarket chains and the Inland Revenue. To meet growing and the Inland Revenue. To meet growing international demand for usability international demand for usability consultancy we’ve acquired one of the consultancy we’ve acquired one of the world’s top three consultancies, The Hiser world’s top three consultancies, The Hiser Group. The AUS$6 million acquisition, Group. The AUS$6 million acquisition, completed in January 2001, brings us completed in January 2001, brings us an internationally recognised team of an internationally recognised team of specialists based in Australia. Our global specialists based in Australia. Our global capability in this field will enable us to capability in this field will enable us to help many more customers use the help many more customers use the internet more effectively – particularly as internet more effectively – particularly as national and local administrations adopt national and local administrations adopt ‘e-government’ initiatives to put a growing ‘e-government’ initiatives to put a growing proportion of their services online. proportion of their services online. 17 R&A 14/2/01 5:24 pm Page 18 18 R&A 14/2/01 5:24 pm Page 19 Army Training Group Waiouru Army Training Group Waiouru In Australasia we’re continuing to strengthen In Australasia we’re continuing to strengthen our position as a leading provider of services our position as a leading provider of services to the armed forces. In October 2000 we to the armed forces. In October 2000 we received a further vote of confidence from received a further vote of confidence from the New Zealand Army when Serco was the New Zealand Army when Serco was named as preferred service provider for a named as preferred service provider for a NZ$60 million contract at its Waiouru facility. NZ$60 million contract at its Waiouru facility. Our innovative approach and willingness to Our innovative approach and willingness to invest were key factors in the decision. Army invest were key factors in the decision. Army Training Group Waiouru is the New Zealand Training Group Waiouru is the New Zealand Army’s principal training area. All officers Army’s principal training area. All officers and soldiers spend substantial parts of their and soldiers spend substantial parts of their careers there – for initial training, professional careers there – for initial training, professional development courses or collective training development courses or collective training exercises. The six-year contract, with exercises. The six-year contract, with scope for extension to 10 years, covers scope for extension to 10 years, covers a wide range of logistic support services – a wide range of logistic support services – including catering, inventory management, including catering, inventory management, ammunition warehousing, transport, ammunition warehousing, transport, facilities management, range management, facilities management, range management, equipment repair, reprographic, library equipment repair, reprographic, library and security services. and security services. 19 R&A 14/2/01 5:24 pm Page 20 20 R&A 14/2/01 5:24 pm Page 21 Forsmark Nuclear Power Station Forsmark Nuclear Power Station We’ve sharply raised our profile in Sweden We’ve sharply raised our profile in Sweden by winning one of the country’s largest public by winning one of the country’s largest public sector contracts. In 1999 the management sector contracts. In 1999 the management of the nuclear power station at Forsmark of the nuclear power station at Forsmark decided to outsource a range of technical decided to outsource a range of technical services – including decontamination and services – including decontamination and related services – as well as building related services – as well as building maintenance and operation. Some 25 maintenance and operation. Some 25 companies expressed interest in aspects companies expressed interest in aspects of the work, and four consortia were formed of the work, and four consortia were formed to bid for a single all-encompassing contract. to bid for a single all-encompassing contract. Serco was the only company with the Serco was the only company with the breadth of resources to bid for the entire breadth of resources to bid for the entire contract without partners. Our proven contract without partners. Our proven experience of nuclear and politically experience of nuclear and politically sensitive installations helped us win a sensitive installations helped us win a contract worth up to SEK450 million in contract worth up to SEK450 million in June 2000, and we’ve subsequently added June 2000, and we’ve subsequently added responsibility for managing almost 700 responsibility for managing almost 700 residential accommodation units. Since residential accommodation units. Since phase-in began we’ve formed a close phase-in began we’ve formed a close partnership with the customer, steered partnership with the customer, steered by a joint Relationship Committee. by a joint Relationship Committee. This year we’ve extended the contract This year we’ve extended the contract to include operation of the site’s fire to include operation of the site’s fire and rescue services. and rescue services. 21 R&A 14/2/01 5:24 pm Page 22 National Crime Squad Our new strategic partnership with the UK’s National Crime Squad (NCS) builds on long experience of security-related IT with the Government Communications- Electronics Security Group. Under this £65 million, 10-year contract we are providing strategic consultancy on IT, communications and crime-related technologies, seeking best practice from around the world. We will develop a strategy for the NCS’s information management and communications needs and implement a comprehensive, integrated and highly secure solution to meet its business requirement. This complex technical task will involve providing and supporting a secure IT infrastructure, data centres, fixed and mobile communications, secure storage and tracking of vital evidence, IT and technology training for NCS staff and operation of a helpdesk for all NCS technology services. Key factors in selecting Serco for this challenging project included not only our grasp of technology and security issues but also our partnership approach and willingness to adopt an open book relationship. 22 R&A 14/2/01 5:24 pm Page 23 23 R&A 14/2/01 5:24 pm Page 24 24 R&A 14/2/01 5:24 pm Page 25 Seminole County, Florida Seminole County, Florida Serco’s readiness to form mutually Serco’s readiness to form mutually beneficial partnerships – with customers beneficial partnerships – with customers and fellow suppliers – was a key factor in and fellow suppliers – was a key factor in winning an important new contract with winning an important new contract with Seminole County, Florida. The contract Seminole County, Florida. The contract covers maintenance of almost 1,900 covers maintenance of almost 1,900 vehicles for the fire, police, forestry and vehicles for the fire, police, forestry and other county services – ranging from other county services – ranging from mowing machines to bulldozers. The mowing machines to bulldozers. The county authorities were impressed by our county authorities were impressed by our willingness to set a firm price ceiling and willingness to set a firm price ceiling and work with them to achieve and share cost work with them to achieve and share cost savings. They also liked our partnership savings. They also liked our partnership with DMG Maximus, the US industry leader with DMG Maximus, the US industry leader in IT consultancy for fleet maintenance. in IT consultancy for fleet maintenance. This enabled us to provide a customised This enabled us to provide a customised IT package that met their very demanding IT package that met their very demanding requirements for performance tracking. requirements for performance tracking. We’re expecting our relationship with DMG We’re expecting our relationship with DMG Maximus to generate further business for Maximus to generate further business for both companies, and our customers at the both companies, and our customers at the Washington DC Police have already agreed Washington DC Police have already agreed to adopt the same IT system. to adopt the same IT system. 25 R&A 14/2/01 5:24 pm Page 26 26 R&A 14/2/01 5:24 pm Page 27 Middle East international airports Middle East international airports Our aeronautical services business in the Our aeronautical services business in the Middle East, Serco-IAL, has over 50 years’ Middle East, Serco-IAL, has over 50 years’ experience of serving the aviation industry experience of serving the aviation industry in the Gulf and elsewhere. In the past year in the Gulf and elsewhere. In the past year we have successfully renegotiated we have successfully renegotiated contracts at three airports – Dubai, Ras contracts at three airports – Dubai, Ras Al Khaimah and Sharjah. These contracts Al Khaimah and Sharjah. These contracts include provision of air traffic control include provision of air traffic control (ATC) services and the maintenance and (ATC) services and the maintenance and operation of ATC-related systems. At Ras operation of ATC-related systems. At Ras Al Khaimah and Sharjah they also cover Al Khaimah and Sharjah they also cover fire and rescue systems and airport security. fire and rescue systems and airport security. An important part of our relationship with An important part of our relationship with customers on these contracts is our customers on these contracts is our commitment to training local staff so that commitment to training local staff so that they can manage day to day operations they can manage day to day operations to the highest international standards. to the highest international standards. In addition to these renewed contracts, In addition to these renewed contracts, we also won a new contract to provide we also won a new contract to provide consultancy for the specification, consultancy for the specification, installation and commissioning of installation and commissioning of upgraded navigational aids at Bahrain upgraded navigational aids at Bahrain International Airport. International Airport. 27 R&A 14/2/01 5:24 pm Page 28 Business review Our strong performance in 2000 reflected successes in all regions. We retained and extended much of our existing business while winning new contracts – many of which allow us to demonstrate new levels of management and technical capability. In the UK we began four very large contracts: the Atomic Weapons Establishment (AWE), the Joint Services Command and Staff College, an infrastructure maintenance contract for Railtrack and an information management and communication partnership with the National Crime Squad. In continental Europe our German, Italian and Belgian businesses are making an increasingly valuable contribution. We won significant contracts in Sweden, including technical services at the Forsmark nuclear power station, and from CERN, the European Organisation for nuclear research in Switzerland. We also gained important new projects from the European Space Agency. In the Middle East we successfully renewed the aeronautical technical services contracts at Dubai, Ras Al Khaimah and Sharjah International Airports, and phased-in a new air traffic management system in Dubai. We had a good year in North America. In rebidding for air traffic control (ATC) contracts from the Federal Aviation Administration (FAA) we increased the number of towers we operate, giving us scope for further expansion. New opportunities have opened up for our relationship with Lockheed Martin, enabling us to begin negotiations on a private finance initiative (PFI) project to provide an astrobiology laboratory. In Asia Pacific our principal successes were in defence – in Australia, where we now provide 50% of all garrison support services, and in New Zealand, where we continued to win significant contracts. Public private partnerships (PPPs) and PFIs remain a significant source of opportunity for us. In the UK, at the Joint Services Command and Staff College, where Serco has an operating contract worth more than £200 million over 27 years, our joint venture completed the £90 million facility and we recruited 300 staff to operate it. Dovegate Prison, Norfolk and Norwich Hospital and Wishaw General Hospital are on schedule for completion this year. We are in advanced negotiations for the Highways Agency’s new national Traffic Control Centre PFI. At AWE we are currently discussing a PPP which would extend our 10-year contract by a further 15 years and enable our consortium to raise private finance for a series of major capital works. We have been included on the final shortlist of three for the National Air Traffic Services PPP. We have successfully completed the first selection stage for the UK’s Future Strategic Tanker Aircraft programme; and we are investigating the opportunities for a similar programme due to be announced in Australia – the fact that the Australian military are developing PFI projects augurs well for the spread of this procurement method and for our own future growth prospects. We are pursuing our first opportunities in Japan; and we have formally agreed a joint working group with Lockheed Martin in the US to identify further projects beyond our astrobiology laboratory PFI proposal. National, regional and local government Our aim in this market is to maintain a solid foundation through rebids and extensions, while winning increasingly critical, complex projects with existing and new customers. In the UK we won and successfully began a major partnership with the National Crime Squad. Under a 10-year contract, valued at over £65 million, we will develop its information management and communications strategy and provide comprehensive and highly secure technical resources ranging from the provision of data centres to the storage and tracking of vital evidence. Justice has become an increasingly important sector for us. During the year we successfully rebid a 10-year contract for management and operation of Doncaster Prison in Yorkshire. In 2001 we begin operation of Dovegate Prison in Staffordshire under a PFI contract. We won our largest Swedish contract to date, for technical services and facilities management at Forsmark nuclear power station. This covers a wide range of activities from decontamination services to managing almost 700 accommodation units and we have already broadened its scope. In Germany we won a further extension of the contracts we have held since 1984 with the Federal Employment Office. Under these contracts we provide further education and retraining for over 1,000 job- seekers a day at 13 training centres. 28 R&A 14/2/01 5:24 pm Page 29 Serco Group plc In the Netherlands we extended our mainframe computer support contract with the European Patent Office. We won our second contract with the Dutch government, to manage the Housing Ministry’s telecommunications infrastructure at its three main sites in The Hague. Our IT contracts with the European Commission were extended. These cover primarily PC user support to over 15,000 staff in some 30 buildings in Brussels and Luxembourg, and continue to achieve good organic growth. We began a new contract for CONSOB, the National Commission that oversees the Italian Stock Exchange and public companies: we are supporting its entire IT infrastructure for 450 employees at two offices in Rome and one in Milan. We are actively pursuing opportunities in the UK education market, where we see significant future growth potential. In December 2000 we acquired Quality Assurance Associates, which is one of the UK’s primary providers of school inspection services and head teacher leadership training. The acquisition, for £2.6 million, complements our change management and process improvement expertise and will support our proposals for partnerships with local education authorities. In 1995 we took over the direct labour organisation of Winchester City Council for five years. The success of the contract, and the strong partnership we have built with the council, won us a 10-year renewal beginning in April 2001. In the US the outsourcing of state government services is gathering momentum. We made further progress by winning the vehicle fleet maintenance contract for Seminole County in Florida. This includes police and county vehicles and the firefighting fleet at Sanford Airport. In Asia Pacific we renewed our housing management contract with JTC Corporation in Singapore; and renewed and extended contracts to maintain nearly 300 parks and open spaces in Manukau City, New Zealand. In Australia we won a five-year contract employing 60 staff to manage and operate the Transinfo public transport information service jointly funded by Queensland Transport, Queensland Rail and Brisbane City Council. We are building increasing strength in leisure centre management. In the UK we won a 10-year contract to manage the Manchester Aquatics Centre. Built to host the Commonwealth Games in 2002 and to provide a community legacy, this is the world’s most technically advanced pool complex. We also won a 10-year extension to our management and operation contract at Tenterden Leisure Centre in Kent, which will include significant investment in new facilities. In Aylesbury Vale we won a 10-year extension to a leisure centre contract, also involving investment in new facilities; and our customer’s satisfaction with our performance has led to a second leisure centre contract. In Sweden we renewed our contract to run the Linköping Leisure Centre and won a five-year contract to manage the Umeå Leisure Centre. Defence Defence is a growing and rapidly evolving market where customers are increasingly looking to procure services or capabilities rather than assets. In the UK alone the market for defence services is expected to reach £15.1 billion by 2009. We aim to maintain our position as a major service provider to national defence forces through contract extensions and rebids, while extending the depth and geographic spread of our capability. In October we were named as preferred service provider for logistical support, facilities management and range management services to the New Zealand Army’s principal training area in Waiouru. The six-year contract, with scope for extension to 10 years, is worth NZ$60 million. Importantly, we won a seven-year renewal of our contract at the Defence Procurement Agency headquarters in Abbey Wood near Bristol. With work services management added to our previous contract, we will have over 350 people delivering a total corporate support service. Another valuable renewal was a second one-year extension to our Royal Navy marine services support contract at the Portsmouth, Devonport and Clyde submarine bases, taking the original five-year term to seven years. This £35 million a year contract involves operating 140 Ministry of Defence vessels and employs 700 seagoing and shore-based support staff. We also successfully rebid for a further four years’ consultancy to Germany’s part of a NATO Air Command and Control System project, and for the management of the Defence Evaluation and Research Agency (DERA) Hebrides and Raasay weapons testing ranges in Scotland. 29 R&A 14/2/01 5:24 pm Page 30 Business review We achieved an important addition to our facilities management business in Germany by winning the contract to provide serviced accommodation for OCCAR, the joint defence procurement body formed by Germany, the UK, France and Italy. Significant new UK contracts included spares and support for the Sonar 2093 system in Sandown Class minehunters; maintenance and repair support for Sonar 2054 training systems; and a contract from DERA to crew, operate and maintain its new experimental research vessel RV Triton – a revolutionary trimaran that will be used to test the triple hull concept for future Royal Navy warships. To broaden our defence engineering skills and enhance our ability to provide complete solutions, we acquired Rakmulti in July for £1 million. This is a UK-based systems integration business specialising in high bandwidth satellite communications, a growth area which is particularly important to naval operations and ‘out of area’ activity for land and air forces. In January 2001 we delivered the final vessel under a UK contract to design and build seven passenger support vessels for the Naval Bases and Supply Agency. The vessels were built at two UK shipyards. Air transport Air transport is a major global growth market and our aim has been to consolidate our position as the world’s leading provider of private air traffic control (ATC) and aviation technical services. In the US we successfully rebid for our ATC contracts with the FAA, further increasing the number of towers under our control from 51 to 56. The contracts are now worth over US$19 million a year. In the Middle East we renewed ATC and technical services contracts at Dubai, Ras Al Khaimah and Sharjah International Airports; and at Bahrain International Airport we will manage the installation and commissioning of upgraded navigational aids. In Europe we further extended our contracts with Eurocontrol and our operations at Zavantem Airport in Brussels. Under a planned PPP, the UK government is selling a controlling share of the National Air Traffic Services (NATS) to a strategic partner. NATS is the UK’s ATC service covering UK airspace and the eastern parts of the North Atlantic as well as 14 of the country’s busiest airports. We have been shortlisted for this partnership. Rail transport Rail is a large and technically complex market that is changing fast as a result of deregulation worldwide. Our service expertise and in-depth experience of safety management position us well for growth in activities as diverse as infrastructure maintenance, testing and passenger services. In the UK we phased-in our infrastructure maintenance contract with Railtrack’s East Midlands Zone, covering some 1,200 miles of track and employing about 600 people. We have already been awarded additional contracts for structures inspection and property maintenance, and are in discussions to add track renewals. We also bid successfully for the property management and maintenance contracts in Railtrack’s Southern and Anglia Zones, increasing our business in this field by 250%. Together with the renewal of our contract for the North West Zone, this means that we now provide over 60% of Railtrack’s property maintenance. Train testing is under way for the Copenhagen Metro, where we are scheduled to start operating passenger services in 2002. Information technology for transport infrastructures is a significant growth area for us. In the UK we won the contract to run the Association of Train Operating Companies’ communication centre, which collects and distributes rail information from Railtrack and train operators. At the National Rail Enquiry Scheme we implemented a new information system and internet site – in time to assist with a tenfold increase in enquiries during the prolonged upheaval that followed the Hatfield rail crash. In Scotland, the rail operator ScotRail, part of the National Express Group, extended our information and telesales contract after we helped to increase revenues by 50% in two years. As operator of London's award-winning Docklands Light Railway (DLR) we have been enhancing the service by displaying real-time train information in streets and buildings around stations, on the DLR website and via WAP mobile phones. We are also trialling real-time news and information screens in trains – a UK first. In Australia we introduced email booking and enquiry facilities for our Ghan, Indian Pacific and Overland trains, followed by direct internet booking early in 2001. These services, which rank among the great train journeys of the world, attract tourists from all over the globe. 30 R&A 14/2/01 5:24 pm Page 31 Serco Group plc In the UK we began acceptance testing of new non- tilting trains for Virgin CrossCountry services, under a new contract with Bombardier Transportation. We also secured a contract from ALSTOM to undertake certain aspects of the acceptance testing on the Coradia 1000 Class 180 diesel trains. Road transport Congestion is a major issue for cities worldwide – it costs the UK economy alone over £15 billion a year. The efficient use of traffic infrastructure has become a major growth area, and we aim to develop a breadth of capability across road transport that enables us to support customers in devising and implementing integrated transport plans. We are in negotiation with the UK Highways Agency for a contract to build and operate its national Traffic Control Centre. This will allow the strategic management of traffic on England’s core trunk road network, monitor traffic and journey times, and distribute traffic and travel information through existing and new media. We would construct the centre and develop its IT systems over a 21⁄2-year period, and then operate and maintain it for a further 71⁄2 years. In Scotland we bid successfully to expand the scope of the country’s National Driver Information and Control System. This integrated traffic management system, which we have been developing since 1993, is now one of the world’s largest and most advanced driver information and control systems. In New Zealand we have won a three-year contract to operate and maintain a traffic control centre for the Auckland motorway system. This contract complements our existing communications and traffic control contracts. We successfully rebid our contract to manage Auckland’s state highway and motorway network including maintenance, asset management strategy and traffic planning. In Hong Kong we won a further six-year contract to manage the Lion Rock and Airport Road tunnels. The new contracts – extending a relationship begun in 1993 – will employ over 200 staff. Science and technology Governments around the world are increasingly concerned to improve the effectiveness of their science and technology spend through investment in new equipment and better knowledge transfer to industry. As a major employer of scientists, we are looking to extend our presence in this market. We successfully phased-in the management and operation of the UK Atomic Weapons Establishment (AWE), managing over 4,000 staff through our joint venture with Lockheed Martin UK Ltd and British Nuclear Fuels plc. Both the Nuclear Installations Inspectorate and the Environment Agency have praised our safety and environmental performance to date. Our operations have already been extended to include support for the weapons convoys serving the AWE – a significant demonstration of our customer’s confidence in our capability. We are negotiating a two-year extension to our contract to manage the National Physical Laboratory (NPL), where we are currently investing in extensive new laboratory facilities to replace 50 of the site’s 73 buildings. Another investment to maintain the NPL’s position among the world’s top three measurement laboratories is the creation of one of the world’s largest scientific websites. We continue to create revenue-generation opportunities, including a new Knowledge Transfer Centre which is already producing income of £4 million a year. Current NPL programmes include a £7 million government project to promote environmental best practice and a series of R&D contracts with companies leading the fibre optic communications revolution. We further extended our activities with the European Space Agency by winning two new contracts at the European Space Research and Technology Centre in the Netherlands. The first provides support services in thermal microgravity instruments, robotics and optics laboratories; the second is for radiation and quality testing of satellite components. The City of Birmingham in England appointed us to set up a bus tracking and passenger information system modelled on the satellite-based systems we have provided in Coventry and Sheffield. These supply real-time information to operators and passengers, and givebuses priority at traffic-signalled junctions. In partnership with Air Liquide of France and Linde Kryotechnik of Switzerland we have been selected by the European organisation for nuclear research, CERN, to maintain and operate its helium cryogenic plants, the world’s largest cryogenic installation, from July 2001. This is the fourth contract we have secured with CERN. 31 R&A 14/2/01 5:24 pm Page 32 Business review Private sector As businesses focus their talent and investment on areas of competitive advantage, they increasingly seek external management support for non-core activities. Our experience of managing critical services for governments positions us well to handle the outsourcing of ever more complex tasks for the private sector. In the US we built on our existing vehicle fleet maintenance contract with Dayton Power & Light to win an additional contract to provide mobile tanker refuelling for its 900-strong vehicle fleet. We added value to the contract by enhancing our mobile maintenance service – introducing hand-held data terminals and a wireless internet management information system. We have become Ireland’s leading facilities management company, benefiting from the country’s economic growth and the influx of US companies. In January we began a facilities management contract with Microsoft, covering a wide range of technical and non-technical services in the company’s 12 Dublin premises. These include its European operations and product localisation centres. The expertise we gain in the public sector can often have applications in the commercial sector. For instance, our defence business has won a contract to provide engineering support to Global Marine Systems, the world’s leading submarine cable maintenance and installation company. The contract includes operation and maintenance of sub-sea vehicles for installing fibre optic telecommunication cables. We have also extended our reach in Northern Ireland with a two-year facilities management contract for the Bank of Ireland at its new Belfast operations centre. Outlook Our markets remain buoyant and our ability to deliver a full range of services in a single contract is increasingly in demand. Our largest markets, in defence and transport, remain very strong – and we also see increasing opportunity in new fields such as science, justice and education. The scale and complexity of opportunities continue to increase, and this plays to our strengths in both bidding and implementation. We are seen as a world leader in private sector solutions for delivering public services and we expect to be a significant beneficiary of a worldwide trend towards PFIs and PPPs. The US has started discussing PPPs in the space sector, the Australian Department of Defence is developing a PFI methodology, the state of New South Wales has released a green paper on PFIs, Japan has begun inviting PFI tenders, and Germany has initiated pilot projects in defence. We have formed a Global Projects team to identify and bid for the very large and complex opportunities that are beginning to emerge around the world; and we are forming partnerships and strategic alliances with major international corporations where we believe they will enhance our credibility in this exciting new arena. The outlook for the future remains bright and we are confident of maintaining our growth record for the foreseeable future. Worldwide developments in e-commerce, internet application services, interactive television and WAP are creating exciting prospects for our usability business, which helps companies to make their technology user- friendly. In November we opened a new purpose-built usability laboratory in London. To increase our international presence in this field we acquired The Hiser Group in Australia; the AUS$6 million deal, completed in January 2001, brings us one of the world’s most respected consultancies in user interface design and usability. We have recently been asked by the UK government to form an industry network covering interactive TV issues. In New Zealand we extended our contract to provide property maintenance and building services at 4,000 sites for Telecom New Zealand, the country’s largest business. This contract has grown to include Telecom’s preventive maintenance programme, and in the past two years we have earned substantial incentive payments for achieving cost savings. In Sweden we built on our existing building maintenance contract at Stockholm’s Grand Hotel, winning a new contract to manage a SEK150 million renovation project. We continue to extend our relationship with the hotel – this year we have added responsibility for cleaning and transport support services. We extended our Welsh facilities management contract with the stainless steel company AvestaPolarit after successfully growing the contract since 1992. 32 R&A 14/2/01 5:24 pm Page 33 annual accounts AGM Notice Directors, Secretary and Advisers 34 Corporate Governance Report 85 35 Notes to the Accounts 54 Directors’ Report 38 Consolidated Statement of Recognised Gains and Losses Consolidated Cash Flow Statement 53 52 41 42 Directors’ Responsibilities Remuneration Report 51 Company Balance Sheet 47 Auditors’ Report 50 48 Consolidated Balance Sheet 49 Statutory Consolidated Profit and Loss account Proforma Summary Consolidated Profit and Loss account 33 R&A 14/2/01 5:24 pm Page 34 Directors, Secretary and Advisers Executive Chairman Richard White Directors Kevin Beeston Betsy Bernard* Ralph Hodge CBE* Christopher Hyman Rhidian Jones* Iestyn Williams Secretary Julia Cavanagh Registered Office Auditors Principal Bankers Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT Deloitte & Touche Chartered Accountants Hill House 1 Little New Street London EC4A 3TR Barclays Bank PLC 54 Lombard Street London EC3P 3AH Merchant Bankers Stockbrokers Solicitors Registrar The Royal Bank of Scotland plc 135 Bishopsgate London EC2M 3UR 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 34 R&A 14/2/01 5:24 pm Page 35 Corporate Governance Report Introduction Board Committees The Board of Serco Group plc (“the Company”) supports the principles of good governance and code of best practice set out by the Hampel Committee as appended to the Listing Rules of the UK Listing Authority (“the Combined Code”). This Report sets out how the Company applies the Combined Code. The Board and its Directors The Board currently comprises seven Directors: Kevin Beeston, Betsy Bernard, Ralph Hodge, Christopher Hyman, Rhidian Jones, Richard White, and Iestyn Williams. Their profiles and roles are set out on page 40. It is the opinion of the Board that the Non-executive Directors are independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement. The senior independent Non-executive Director is Rhidian Jones. The Board is responsible to the shareholders of the Company and meets regularly to discuss and decide on issues of strategy, performance and control. There is a formal schedule of matters specifically reserved to the Board for decision, including but not limited to, submission of major bids, material acquisitions and disposals, and corporate objectives. Information required by Directors on issues concerning the Company and its subsidiaries (“the Group”) is supplied by management on a timely basis. In addition, regular presentations are made to the Board by senior employees on business performance, health, safety and the environment, corporate governance and risk management. The adequacy of this information is regularly reviewed. All Directors have access to the Company Secretary, who is responsible for ensuring that Board procedures and applicable rules and regulations are observed. The Board has established a procedure whereby Directors, wishing to do so in the furtherance of their duties, may take independent professional advice at the Company’s expense. In accordance with the Company’s Articles of Association, one third of the Board are required to retire by rotation each year so that over a three-year period all Directors will have retired from the Board and faced re-election. The Board has delegated authority to a number of committees to deal with matters in accordance with written terms of reference. The Chairman of each of the Committees provides a report of any meeting of that Committee at the next Board Meeting, and the Chairmen of the four standing Committees are present at the Annual General Meeting to answer questions from shareholders. Brief details relating to each of the standing Committees are set out below: The Audit Committee The Audit Committee is comprised of all three Non-executive Directors and is chaired by Rhidian Jones. The Committee meets on at least two occasions each year to examine and consider matters relating to the affairs of the Group. These matters include examination of the Company’s Annual Accounts and review of the internal financial control procedures in place for controlling the Group’s business, as well as compliance with accounting standards and generally accepted accounting principles. In addition, the fees and objectivity of the Company’s auditors and other external accounting advisers are considered by members of the Committee. Detailed presentations to the Committee are made, on request, but no less than annually, by the Company’s internal and external auditors. The presence of the Finance Director and other senior managers from the Group may be requested. The Remuneration Committee The Remuneration Committee comprises all three of the Non-executive Directors and is chaired by Ralph Hodge. The Committee meets on at least two occasions each year to examine and consider matters relating to the remuneration of Executive Directors and their terms and conditions of service. The recommendations of this Committee, as adopted by the Board, are set out in the Remuneration Report on pages 42 to 46. 35 R&A 14/2/01 5:24 pm Page 36 Corporate Governance Report The Company’s Risk Management Policy formalises the requirement for all business units to operate appropriate and effective risk management processes. The Company has a detailed risk management process which identifies the key risks facing each business unit. These processes are designed to support the Group’s strategic direction and business objectives. Implementation of this approach is based on the premise that responsibility for risk management rests with line management and the Company endeavours to ensure that the appropriate infrastructure, controls, systems, staff, training and processes are in place. Some of the key management control processes are set out below: Sound project management and change implementation disciplines are applied to all major development projects including new contract phase-ins, acquisitions, new technology applications and other major initiatives. The commitment and capability of all staff is critical for the effective management of risk. Ongoing training and development is made available to improve the skills of managers to ensure the current and future needs of the business can be met. Safety management systems in the Company’s aviation, rail, defence and nuclear businesses have been addressed by the appointment of safety specialists for each area who report regularly to the Board and are charged with maintaining and further developing the very high standards of safety expected in these industries. Additionally all business units have clearly detailed health and safety management systems. The operational risk framework tracks key risk indicators. These include analysis of business planning, customer satisfaction, staff turnover and satisfaction levels, occupational health and safety incidents and error and exception reporting. The Company maintains insurance cover and ensures that the policies are reviewed on a regular basis. Each contract and project produces a risk register which identifies the key risks, the probability of those risks occurring, their likely impact and the mitigating actions being undertaken. Risk data is reviewed and consolidated to produce business unit risk registers which are reviewed quarterly. The Group risk register is derived from the business unit analysis and identifies the key risks facing the Group including certain risks which are managed directly at a Group level. A review of the risk register is undertaken at the Board Meeting on a quarterly basis. The Training Committee The Training Committee is comprised of Betsy Bernard, Ralph Hodge, Christopher Hyman, Rhidian Jones and Iestyn Williams. The Committee is chaired by Iestyn Williams and meets at least once a year to examine and consider the training needs of Directors and senior executives. During the year, the Committee has reviewed ongoing training requirements for all Directors, and the Company Secretary. The Committee has also formalised the Company’s induction programme for Non-executive Directors to ensure that a comprehensive familiarisation programme is in place. The Nomination Committee The Nomination Committee is comprised of the Executive Chairman of the Company, together with the three Non-executive Directors. The Committee, which is chaired by Richard White, meets as required to examine and consider proposed appointments to the Board. The members of the Committee consult with other members of the Board before submitting their final recommendation for approval by the whole Board. The Company and its Shareholders The Board values dialogue with its institutional and private shareholders. This year the Board has hosted site visits for institutional investors to facilitate a deeper understanding of the operations of the Group. Formal presentations are made to institutional investors and brokers’ analysts after the release of the interim and final results, and individual meetings by request are held during the year. The principal methods of communication with private investors are the Interim Statement, the Annual Review and Accounts, Annual Review and Summary Financial Statement and the Annual General Meeting. Additional information about the Company’s heritage, markets, services and significant announcements is available on the Company’s web site. Internal Control and Risk Management The Board of Directors has overall responsibility for the system of internal control, including financial, operational and compliance controls and risk management, to safeguard shareholders’ investments and the Company’s assets. It is acknowledged that any system of internal controls is designed to manage rather than eliminate risk and that even the most effective system can only provide reasonable and not absolute assurance against misstatement or loss. 36 R&A 14/2/01 5:24 pm Page 37 Corporate Governance Report A full time Risk Director has the responsibility to oversee and review the internal control and risk policies and 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 Risk Director reports to the Board on any material findings of these meetings. Significant internal control processes used by the Group are described below: Executive Directors agree marketing, sales and financial targets and budgets with the business units on an annual basis. Progress against these targets is reviewed at formal quarterly meetings attended by the business unit management and senior Company management who act in the capacity of Non- executive Directors for that unit. This process is replicated at an individual contract level by the use of “contract boards”. There is a clearly defined framework for approving all acquisitions, capital projects and expenditure within the Group. Appropriate authorisation procedures are in place for the review and submission of bid documents to customers, and contract documents are reviewed at an appropriate level to ensure the terms and conditions therein are acceptable to the Group. During 2000, Grant Thornton and Pannell Kerr Forster have continued to provide an internal audit function within the Group. Their programme has been designed to address internal control and risk management processes and the recommendations of the Turnbull Report. Their findings are reported to business units, the Audit Committee and the Board. Following publication of Internal Control: Guidance for Directors on the Combined Code (“the Turnbull Guidance”), the Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, and that this process has been in place for the year under review and up to the date of approval of the Annual Review and Accounts. This process is regularly reviewed by the Board and is consistent with the Turnbull Guidance. Going Concern Following a review of the Group’s financial results and forecasts, as well as holding discussions with relevant individuals, the Directors confirm that they are satisfied that the Group has adequate resources to continue in operational business for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the Annual Review and Accounts. Compliance during 2000 With exception of those matters detailed below the Company has fully complied with the provisions stated in Section 1 of the Combined Code. 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. Since the appointment of a third Non-executive Director on 5 April 2000, the Company has complied with both provisions. Contractual Notice Periods The Remuneration Committee and the Board continue to believe that the nature of the business and the competitive environment in which the Company operates warrants the retention of a two-year contractual notice period in Executive Directors’ service contracts. 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 Cavanagh Secretary Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT 20 February 2001 37 R&A 14/2/01 5:24 pm Page 38 Directors’ Report Annual Review and Accounts Directors The Directors of the Company have pleasure in presenting the Annual Review and Accounts of the Group for the year ended 31 December 2000. Principal Activities and Business Review The Company is a holding company, which operates via its subsidiaries to provide facilities management, systems engineering services and equity investment management. The review of the business for the year ended 31 December 2000 can be found in the Business Review on pages 28 to 32. Share Capital At an Extraordinary General Meeting held on 5 April 2000, the shareholders approved a share capitalisation of five Ordinary Shares for each existing Ordinary Share already held. This change together with other increases in the issued Ordinary Share Capital during the period is explained in Note 21 to the Annual Accounts set out on pages 73 and 74. During the year the Company purchased 2,298,090 Ordinary Shares to satisfy options granted under employee incentive schemes. The value of these shares is included within fixed assets on the Balance Sheet. The names of the current Directors of the Company are given on page 34 and their profiles are provided on page 40. Details of the Directors’ interests in the Share Capital of the Company are listed below. The Executive Directors’ service contracts and Non-executive Directors’ letters of appointment are detailed in the Remuneration Report on page 46. The following changes have been made to the Board during the year. On 3 March, Gerry Rodgers retired as an Executive Director; at the conclusion of the Annual General Meeting on 5 April, Ralph Hodge was appointed as a Non-executive Director; on 20 December, Betsy Bernard was appointed as a Non-executive Director and Gary Sturgess resigned as a Non-executive Director to join the Company as a full time executive. During the second half of the year Gary Sturgess provided consultancy services to the Group via his company, Sturgess Australia. Excluding Executive Directors’ service contracts, the Non-executive Directors’ letters of appointment and the consultancy services disclosed above, there were no other contracts in which Directors had an interest. Directors’ Shareholdings The Directors’ interests in the shares of the Company were as follows: 1 January 2000 Ordinary Shares of 2p each fully paid 1 January 2000 31 December 2000 Dividends and Transfers to Reserves An interim dividend of 0.50p (1999 – 0.44p restated as a result of the share capitalisation detailed above) per Ordinary Share was paid on 13 October 2000. A final dividend of 1.13p (1999 – 0.98p restated as detailed above) per Ordinary Share is being recommended by the Directors for payment on 6 April 2001 as set out in Note 8 to the Accounts on page 62. After dividends, retained profits of £16,583,000 will be transferred to reserves. 7,830 K S Beeston – B J Bernard – R N Hodge 200 C R Hyman 7,750 R H B Jones R D White 369,502 I M Williams 416,945 restated 46,980 – – 1,200 46,500 2,217,012 2,501,670 107,140 – 2,010 15,879 46,500 2,217,012 2,501,670 Substantial Shareholdings As at the close of business on 9 February 2001 (being the latest practical date prior to the printing of the Directors’ Report), the Company had received notifications of the following substantial interests representing over 3% of the issued share capital: Standard Life Investments Company FMR Corp. and Fidelity International Limited 3.58% 4.11% In the case of non-material interests representing 10% or more of the issued share capital, the Company had received the following notification: Merrill Lynch Investment Managers Limited 10.42% 38 The number of shares as at 1 January 2000 has been restated to reflect the capitalisation issue on 5 April 2000. Annual General Meeting The Fourteenth Annual General Meeting of the Company will be held at the National Physical Laboratory, Teddington, Middlesex, TW11 0LW on 29 March 2001 at 10.00am. The Notice of the Annual General Meeting, together with relevant notes, is set out on pages 85 and 86. The proxy card accompanies this report. R&A 14/2/01 5:24 pm Page 39 Directors’ Report Employment Policies The Board is committed to maintaining a working environment where staff are individually valued and recognised. Managers are tasked with developing employees’ awareness of factors affecting the business and matters concerning them as employees, and noting employees’ views so that they can be taken into account when making decisions that may affect them or the business. Regular meetings are held with employee representatives where trade unions or staff associations are recognised or where works councils are constituted. The Board understands its responsibility to encourage and assist in the employment, training, promotion and personal career development of all employees without prejudice. The Group gives proper consideration to applications for employment received from the disabled and offers employment when suitable opportunities arise. If employees become disabled during their service with the Group, wherever practicable, arrangements are made to continue their employment and training. The Group encourages employees to be involved in the local communities in which we operate. Last year our employees supported local charities and good causes through their own initiatives. Participation by staff in the success of the Group is encouraged by the availability of a world wide share save scheme, and a share option plan for senior staff which effectively aligns their interests with those of shareholders by requiring that options may only be exercised conditional upon performance criteria being achieved. Health, Safety and Environmental Policies The Group recognises and accepts its responsibilities for health, safety and the environment (“H,S&E”). The Group has an H,S&E Director who is responsible for the development and monitoring of policies, procedures and control systems and reports to the Board via the Chief Executive. Within the Group there is a dedicated team which provides advice and support on H,S&E issues. This team operates closely with the H,S&E Managers within the business units. Regular H,S&E meetings are held and are attended by business unit Managing Directors or their nominated representatives. A Company H,S&E Conference is held annually with representatives from around the world. In order to maintain a high level of H,S&E awareness, great emphasis is placed on training in all related subjects and regular in-house and external courses are provided for staff at all levels of the organisation. To ensure compliance with all relevant legislation and Company standards in operation throughout the Group there is a comprehensive audit system. The Group H,S&E team undertakes regular audits of the Health, Safety and Environmental Management systems around the Group. Detailed audit reports are produced, best practice is shared, corrective action identified if relevant and remedial action promptly implemented. In addition the business units are frequently externally audited. Creditor Payment Policies The Company requires each of its business units to negotiate and agree the terms and conditions of payment for the supply of capital and revenue items just as keenly as they negotiate prices and other commercial matters. Suppliers are made aware of the agreed terms and the way in which disputes are to be settled. Payment is to be made in accordance with these terms. The Group’s average creditor payment terms in 2000 were 31 days (1999 – 30 days)(Company – 29 days (1999 – 28 days)). Charitable and Political Donations During 2000, the Group made contributions of £103,000 (1999 – £43,000) to charities in the United Kingdom. There were no political contributions made by the Group. 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. 39 R&A 14/2/01 5:24 pm Page 40 Directors’ Report Directors Profiles Kevin Stanley Beeston FCMA (38) Chief Executive Kevin joined Serco in 1985 as a financial analyst and has since held a number of financial and commercial roles. When the Group acquired International Aeradio Limited in 1992 he became its Finance Director and later its Managing Director. He became Chairman and Chief Executive of Serco International Limited in 1994 and in 1996 he was appointed Finance Director of the Group. He was appointed Chief Executive in April 1999. Betsy Jane Bernard MBA (45) Non-executive Director Betsy was until recently Executive Vice President of National Mass Markets, part of Qwest Communication International. She previously worked at AT&T for 18 years. Betsy has a wealth of commercial experience, an understanding of operating in an environment of rapidly changing technology and knowledge of the North American Market. Ralph Noel Hodge CBE B.Eng (Hons) (66) Non-executive Director Ralph is Chairman of the Water Research Council, a Non-executive Director of British Ceramic Tiles and ORC (Inc) and a member of the International Board of Faircourt Capital. He was previously Non-executive Chairman of Enron Europe Limited and Chief Executive of ICI Chemicals and Polymers. He is a distinguished Engineer and has recently been awarded a CBE in recognition of his services to the power generation and gas industries. Christopher Rajendran Hyman CA (SA) (37) Finance Director Christopher joined Serco in 1994, as Finance Director for Serco Europe, the division specialising in providing services to European government agencies. He was appointed Group Company Secretary with additional responsibility for corporate finance in 1996. He was appointed Finance Director of the Group in April 1999. Rhidian Huw Brynmor Jones MA FCIS FIMgt (57) Senior Non-executive Director Rhidian is a partner at solicitors Nabarro Nathanson, where he is Head of the Corporate Department. He also has first- hand experience of commerce and industry, having worked in management for 10 years. He was a Serco Non-executive Director from 1987 to 1994 and was re-appointed in 1996. He is also the Non-executive Deputy Chairman of the Britannia Building Society. Richard David White BSc (Hons) (51) Executive Chairman Richard joined the business in 1970, when it was part of RCA. He worked in both operations and marketing roles, becoming Director of Government Services in 1984. After the management buyout from RCA in 1987 he became the new company’s Managing Director and subsequently Chief Executive, taking particular responsibility for developing Serco’s marketing strategy and operational philosophy. He was appointed Executive Chairman in April 1999. Iestyn Milton Williams BA (49) Executive Director Iestyn joined RCA in 1978 and became Director of Personnel six years later. After the management buyout in 1987 he became Personnel Director of Serco. Since then he has been involved in building the business 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. Over the last two years Iestyn has focussed on leading the Group’s expansion in Europe. Approved by the Board of Directors and signed on its behalf: Julia Cavanagh Secretary Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT 20 February 2001 40 R&A 14/2/01 5:24 pm Page 41 Directors’ Responsibilities 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, 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 Cavanagh Secretary Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT 20 February 2001 41 R&A 14/2/01 5:24 pm Page 42 Remuneration Report Introduction Business and Accountability This Report details the remuneration policy and actual remuneration of the Directors of the Company for the year ended 31 December 2000, as determined by the Remuneration Committee (“the Committee”) and adopted by the Board. In preparing this Report consideration has been given to the provisions set out in Schedule B of the Combined Code. Composition The Committee comprises all three Non-executive Directors and is chaired by Ralph Hodge. Remuneration Policy The remuneration policy is set to attract, retain and motivate senior executives within the Group. When determining policy, consideration is given to the international nature of the business, the culture fostered within the Group, the continuing growth of the Group and the need to provide competitive and market-related terms and conditions in the light of changing circumstances. Executive Directors’ remuneration comprises short-term rewards such as salary and benefits and long term elements such as pensions, life assurance and share-based incentives. It is not the Group policy to pay annual cash bonuses except in exceptional circumstances. The share-based incentives are linked to performance criteria and effectively align the interests of Directors with those of the Company’s shareholders. The members of the 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 with the Company. The business of the Committee and the remuneration policy for Executive Directors is determined in accordance with written terms of reference, as well as taking into consideration best practice in remuneration policies. In developing the Company’s remuneration policy, or when setting an individual Director’s remuneration, the Committee consults with the Executive Chairman and the Chief Executive. In addition, the Committee retains firms of external specialists to advise on market trends and competitive packages. The conclusions of the Committee meetings are reported to the Board by the Chairman of the Committee. The Chairman of the Committee also attends the Company’s Annual General Meeting and is available to take questions from shareholders in respect of the matters outlined in this Report. Executive Directors’ Remuneration The details of Directors’ short and long term rewards are set out on pages 43 to 46. 42 R&A 14/2/01 5:24 pm Page 43 Remuneration Report 1. Salaries and Benefits The salaries and benefits of the Directors are as follows: Basic salary £ 286,458 – – 244,042 – 57,077 – 329,292 244,042 Fees £ – 828 20,208 – 26,458 – 22,307 – – Other £ – – – – – 15,000 86,250 – – Total Remuneration excluding pensions 2000 £ Total Remuneration excluding pensions 1999 £ 287,536 828 20,208 244,901 26,458 72,077 108,557 331,128 246,315 235,849 – – 134,842 25,000 207,121 35,101 312,478 214,277 Benefits £ 1,078 – – 859 – – – 1,836 2,273 1,160,911 69,801 101,250 6,046 1,338,008 1,164,668 K S Beeston B J Bernard R N Hodge C R Hyman R H B Jones G Rodgers G L Sturgess R D White I M Williams Total Notes: On 3 March 2000 G Rodgers retired as an Executive Director and subsequently retired from the Company. On retirement he received a one off payment of £15,000 and a contribution of £467,196 was made to his pension fund, as referred to in paragraph 3 note (ii) of the Remuneration Report. On 5 April 2000, R N Hodge was appointed as a Non-executive Director. On 20 December 2000 B J Bernard was appointed as a Non-executive Director of the Company and G L Sturgess resigned. During the second half of the year G L Sturgess received £86,250 in relation to consultancy services. G G Gray received a final payment of £18,838 in relation to additional days worked prior to his retirement. 2. Share-based Incentives Long-term share-based incentives are awarded to Directors under the Serco Group plc 1996 Long Term Incentive Scheme (“the LTIS”) and the Serco Group plc 1998 Executive Option Plan (“the EOP”). On 5 April 2000, shareholders approved a resolution to amend the terms of the LTIS and the EOP for any subsequent awards made under the schemes. Awards made under the LTIS, which are structured as options with a zero exercise price, may be exercised after the third anniversary of grant. The extent to which an award vests (and therefore becomes exercisable) is measured by reference to growth in the Company’s earnings per share before FRS 10 (Accounting for Goodwill and Intangible Assets) (“EPS”) over the performance period of three financial years. Prior to this year, the last grant of awards made under the LTIS was in 1997 with a performance period expiring on 31 December 1999. Growth in EPS for the performance period exceeded 50% and all of the awards have vested. For awards made after 5 April 2000 the EPS target growth has been made more rigorous and full vesting will only occur if the cumulative EPS growth is at least 64%. Awards will partially vest where the cumulative EPS growth is at least 35% and will continue to vest on a straight line basis for each percentage increase in EPS growth over the three year period until full vesting is achieved at a cumulative growth rate of 64%. Except in exceptional circumstances awards must be made to employees prior to the commencement of the performance period to which they relate. Options granted under the EOP may be exercised after the third anniversary of grant, dependent upon the achievement of a financial performance target over three years. If the compound annual growth in EPS is less than 10% over the performance period, none of the options may be exercised. If the compound annual growth in EPS is more than 15%, all of the options may be exercised. Where compound annual growth is between 10% and 15%, a proportion of the options may be exercised. 43 R&A 14/2/01 5:24 pm Page 44 Remuneration Report 2. Share-based Incentives (continued) i) Serco Group plc 1996 Long Term Incentive Scheme The total share options granted under the Long Term Incentive Scheme to Directors are as follows: Number of options Granted Exercised during the period at 1 January 2000 during the period K S Beeston Add’ Award 3 Yr Award Add’ Award 3 Yr Award 3 Yr Award – – B J Bernard R N Hodge 15,312 73,440 36,720 – – – – C R Hyman 3 Yr Award 18,000 3 Yr Award 3 Yr Award R H B Jones – G Rodgers 3 Yr Award Add’ Award 3 Yr Award Add’ Award – – – 23,208 59,106 73,440 36,720 R D White 3 Yr Award 124,632 – – – 15,312 73,440 36,720 38,736 51,885 – – – 32,868 44,474 – – – – – – – – – – 18,000 – – – 23,208 59,106 73,440 36,720 124,632 3 Yr Award 3 Yr Award – – 48,516 51,885 I M Williams 3 Yr Award 156,930 78,462 86,796 43,398 Add’ Award 3 Yr Award Add’ Award 3 Yr Award 3 Yr Award – – 32,868 44,474 – – – – – – – – – – – – Lapsed during Balance at 31 the December 2000 period – – – – – – – – – – – – – – – – – – – – – – – – – – – 38,736 51,885 – – – 32,868 44,474 – – – – – – 48,516 51,885 156,930 78,462 86,796 43,398 32,868 44,474 Market price on exercise date £ 4.61 4.61 4.61 – – – – Value realised on End of exercise performance period £ Date of expiry of option 70,588 01-01-99 01-01-03 338,558 01-01-00 01-01-04 169,279 01-01-99 01-01-04 – – – – 31-12-02 04-04-10 31-12-03 23-11-10 – – – – 4.53 81,540 01-01-00 01-01-04 – – – 4.83 4.83 4.83 4.83 4.53 – – – – – – – – – – – 31-12-02 04-04-10 31-12-03 23-11-10 – – 112,095 01-01-99 01-01-03 285,482 01-01-99 01-01-03 354,715 01-01-00 01-01-04 177,358 01-01-99 01-01-04 564,583 01-01-00 01-01-04 – – – – – – – – 31-12-02 04-04-10 31-12-03 23-11-10 01-01-99 01-01-03 01-01-99 01-01-03 01-01-00 01-01-04 01-01-99 01-01-04 31-12-02 04-04-10 31-12-03 23-11-10 Exercise price £ Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil The number of options at 1 January 2000 and the market price on exercise have been restated to reflect the capitalisation issue on 5 April 2000. The scheme is an unapproved scheme for Inland Revenue purposes. No awards have been exercised by the Directors since the end of the financial year. 44 R&A 14/2/01 5:24 pm Page 45 Remuneration Report ii) Serco Group plc 1998 Executive Option Plan The total share options granted under the Executive Option Plan to Directors are as follows: Number of options Granted Exercised during Balance Market price on exercise at 1 January 2000 during the period at 31 the December 2000 period Value realised date on exercise £ £ K S Beeston B J Bernard R N Hodge C R Hyman R H B Jones G Rodgers R D White I M Williams Approved Unapproved Unapproved Unapproved – – Approved Unapproved Unapproved Unapproved – Approved Unapproved Unapproved Approved Unapproved Unapproved Unapproved Approved Unapproved Unapproved Unapproved 13,788 68,922 76,734 – – – 13,788 25,290 40,812 – – 13,788 68,922 76,734 13,788 119,448 123,612 – 13,788 78,990 86,076 – – – – – – – – 58,764 – – – – – – – – – – – 49,830 – – – 13,788 – 68,922 – 76,734 – – – – – – – 73,572 – – – – – – – 49,830 13,788 68,922 76,734 58,764 – – 13,788 25,290 40,812 49,830 – – – – 13,788 119,448 123,612 73,572 13,788 78,990 86,076 49,830 – – – – – – – – – – – 5.30 5.30 5.30 – – – – – – – – – – – – – – – – – – – 43,019 215,037 218,692 – – – – – – – – Exercise Date from which £ exercisable price Date of expiry of option – – – – – 2.18 21-05-01 20-05-08 2.18 21-05-01 20-05-05 2.45 01-04-02 31-03-06 4.26 05-04-03 04-04-07 – – 2.18 21-05-01 20-05-08 2.18 21-05-01 20-05-05 2.45 01-04-02 31-03-06 4.26 05-04-03 04-04-07 – 2.18 21-05-01 20-05-08 2.18 21-05-01 20-05-05 2.45 01-04-02 31-03-06 2.18 21-05-01 20-05-08 2.18 21-05-01 20-05-05 2.45 01-04-02 31-03-06 4.26 05-04-03 04-04-07 2.18 21-05-01 20-05-08 2.18 21-05-01 20-05-05 2.45 01-04-02 31-03-06 4.26 05-04-03 04-04-07 – The opening balance and the exercise price on those options granted prior to 5 April 2000 have been restated to reflect the capitalisation. The scheme is an approved scheme for Inland Revenue purposes, but has an unapproved schedule. No options have been exercised by the Directors since the end of the financial year. 45 R&A 14/2/01 5:24 pm Page 46 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 31. In the event of death in service, each scheme provides for a lump sum payment as well as a dependants’ pension. The accrued pension benefits of Executive Directors are as follows: Increase in pension during the year £ 12,152 2,272 – 8,807 1,415 Transfer value of increase £ 77,362 – – 99,695 5,829 Total accrued pension at year end £ p.a. 68,895 7,724 86,889 149,352 104,112 K S Beeston C R Hyman G Rodgers R D White I M Williams Notes to pension benefits: i) C R Hyman is to receive an additional benefit from an arrangement to which the Company contributes 15% of remuneration in excess of the Permitted Maximum under the Inland Revenue approved pension scheme. ii) On his retirement the Company made a contribution to G Rodgers pension of £467,196. A further payment of £43,195 is to be made in 2001. iii) 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. iv) 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. v) Members have the option to pay Additional Voluntary Contributions: neither the contributions nor the resulting benefits are included in the above table. vi) 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. 46 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. Gary Sturgess resigned as a member of the Committee prior to undertaking consultancy services to the Group via his company Sturgess Australia. 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 Cavanagh Secretary Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT 20 February 2001 R&A 14/2/01 5:24 pm Page 47 Auditors’ Report Auditors’ Report to the members of Serco Group plc Basis of audit opinion We have audited the financial statements on pages 48 to 84, which have been prepared under the accounting policies set out on pages 54 and 55. Respective responsibilities of Directors and Auditors The Directors are responsible for preparing the Annual Report, including as described on page 41 preparation of the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibilities, as independent auditors, are established by statute, the Auditing Practices Board, the Listing Rules of the UK Listing Authority and by our profession’s ethical guidance. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors’ Report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit or if information specified by law or the Listing Rules regarding Directors’ remuneration and transactions with the Company and other members of the Group is not disclosed. We review whether the Corporate Governance statement on page 37 reflects the compliance with the seven provisions of the Combined Code specified for our review by the UK Listing Authority 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 form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Accounts, including the Corporate Governance Report, and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. We conducted our audit in accordance with United Kingdom auditing standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements and of whether the accounting policies are appropriate to the circumstances of the Company and the Group, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion, the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 December 2000 and of the profit of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985. Deloitte & Touche Chartered Accountants and Registered Auditors Hill House 1 Little New Street London EC4A 3TR 20 February 2001 47 R&A 14/2/01 5:24 pm Page 48 Proforma Summary Consolidated Profit and Loss Account For the year ended 31 December 2000 Turnover: Group and share of joint ventures Less: share of joint ventures Group turnover Cost of sales Gross profit Administrative expenses excluding goodwill Share of profits arising from joint ventures - including group joint venture costs and joint venture interest Profit before group interest and goodwill Net group interest Profit on ordinary activities before taxation – pre amortisation of goodwill Amortisation of goodwill Profit on ordinary activities before taxation Taxation on profit on ordinary activities Profit on ordinary activities after taxation Dividends Note 2 2 2 4,5 6 7 8 2000 £’000 1999 £’000 966,991 807,544 (194,948) (138,982) 772,043 668,562 (669,361) (580,586) 102,682 87,976 (74,601) (58,259) 13,172 4,350 41,253 (3,543) 37,710 (3,681) 34,029 (11,059) 22,970 (6,387) 34,067 (2,643) 31,424 (2,092) 29,332 (9,538) 19,794 (5,593) Retained profit for the financial year 23 16,583 14,201 Earnings per Share (“EPS”) of 2p each: Basic EPS, after amortisation of goodwill Basic EPS, before amortisation of goodwill Diluted EPS, after amortisation of goodwill Diluted EPS, before amortisation of goodwill *Restated to reflect the capitalisation issue on 5 April 2000. The basis of preparation of this statement is set out in Note 1. 9 5.85p 6.78p 5.79p 6.72p 5.09p* 5.63p* 5.06p* 5.60p* 48 R&A 14/2/01 5:24 pm Page 49 Statutory Consolidated Profit and Loss Account For the year ended 31 December 2000 2000 2000 Group Joint Ventures £’000 £’000 2000 Total £’000 1999 Group £’000 1999 Joint Ventures £’000 Note Restated 1999 Total £’000 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 Other operating costs relating to joint ventures Operating profit – continuing operations Share of operating profit in joint ventures 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 2 2 2 4 5 6 7 8 23 Earnings per Share (“EPS”) of 2p each: 9 Basic EPS, after amortisation of goodwill Basic EPS, before amortisation of goodwill Diluted EPS, after amortisation of goodwill Diluted EPS, before amortisation of goodwill *Restated to reflect the capitalisation issue on 5 April 2000. 772,043 194,948 966,991 668,562 138,982 807,544 – (194,948) (194,948) – (138,982) (138,982) 772,043 (669,361) 102,682 (78,282) (3,681) (74,601) – – – – – – 772,043 668,562 (669,361) (580,586) 102,682 87,976 (78,282) (60,351) (3,681) (2,092) (74,601) (58,259) – – – – – – 668,562 (580,586) 87,976 (60,351) (2,092) (58,259) – (7,654) (7,654) – (3,473) (3,473) 24,400 (7,654) 16,746 27,625 (3,473) 24,152 – 28,876 28,876 – 11,121 11,121 1,212 1,212 – (4,755) (4,755) 139 – 139 1,351 1,212 139 (8,189) (12,944) – (8,189) – (4,755) (8,189) 1,517 1,517 – (4,160) (4,160) 79 – 79 (3,377) – – (3,377) 1,596 1,517 79 (7,537) (4,160) (3,377) 20,857 13,172 34,029 24,982 4,350 29,332 (11,059) 22,970 (6,387) 16,583 5.85p 6.78p 5.79p 6.72p (9,538) 19,794 (5,593) 14,201 5.09p* 5.63p* 5.06p* 5.60p* 49 R&A 14/2/01 5:24 pm Page 50 Consolidated Balance Sheet At 31 December 2000 Fixed assets Intangible asset Tangible assets Investments in joint ventures Share of gross assets Share of gross liabilities Investment in own shares 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 current liabilities Creditors: Amounts falling due after more than one year Provisions for liabilities and charges Net assets Capital and reserves Called up share capital Share premium account Capital redemption reserve Profit and loss account Equity shareholders’ funds Note 2000 £’000 1999 £’000 10 11 12 68,662 40,269 27,688 66,854 36,508 18,022 305,588 213,872 (277,900) (195,850) 12 9,680 – 146,299 121,384 13 14 14 17 16 15 8 16 18 21 22 23 20 25,942 26,830 158,532 132,412 32,197 80,098 29,488 58,779 296,769 247,509 34,601 56,902 76,630 88,386 4,425 23,592 48,178 53,533 74,970 3,854 260,944 204,127 35,825 43,382 182,124 164,766 47,121 26,078 47,232 25,906 108,925 91,628 7,877 70,121 143 1,307 69,517 143 30,784 20,661 108,925 91,628 These Accounts and Notes were approved by the Board of Directors on 20 February 2001 and signed on behalf of the Board: Richard White Executive Chairman Christopher Hyman Finance Director 50 R&A 14/2/01 5:24 pm Page 51 Company Balance Sheet At 31 December 2000 Fixed assets Tangible assets Investments in subsidiaries 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 current liabilities Creditors: Amounts falling due after more than one year Net assets Capital and reserves Called up share capital Share premium account Capital redemption reserve Profit and loss account Equity shareholders’ funds Note 11 12 14 16 15 8 2000 £’000 1999 £’000 1,221 30,314 896 27,664 31,535 28,560 822 110,576 7,870 45,273 4,196 93,529 5,038 36,515 164,541 139,278 32,005 11,838 1,317 5,695 7,682 4,425 727 2,332 7,636 3,854 51,124 26,387 113,417 112,891 144,952 141,451 16 41,420 41,420 103,532 100,031 21 22 23 7,877 70,121 143 1,307 69,517 143 25,391 29,064 103,532 100,031 These Accounts and Notes were approved by the Board of Directors on 20 February 2001 and signed on behalf of the Board: Richard White Executive Chairman Christopher Hyman Finance Director 51 R&A 14/2/01 5:24 pm Page 52 Consolidated Cash Flow Statement For the year ended 31 December 2000 Net cash inflow from operating activities Dividends received from joint ventures 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 Purchase of own shares Net cash outflow from capital expenditure and financial investment Acquisitions and disposals Purchase of subsidiary undertakings Net (overdraft) /cash acquired with subsidiary undertakings Subscription for shares in joint ventures Proceeds from disposal of shares in joint ventures Net cash outflow from acquisitions and disposals Equity dividends paid Dividends paid Net cash outflow from equity dividends paid Net cash inflow/(outflow) before financing Financing Issue of Ordinary Share Capital Debt due within one year: Decrease in other loans Debt due beyond one year: Increase/(decrease) in other loans Capital element of finance lease repayments Net cash outflow from financing Increase/(decrease) in cash Balance at 1 January Balance at 31 December 52 Note 2000 £’000 1999 £’000 24 45,534 36,818 7,477 2,156 950 678 (4,755) (4,160) (3,805) (3,482) (2,856) (2,797) (5,467) (1,812) (5,653) (7,279) (15,332) (10,637) 862 (5,009) 11,514 (10,000) 395 6,864 (1,249) – (17,965) (4,627) 12 12 12 (4,409) (26,578) (73) (4,963) 1,271 2,504 (2,214) – (8,174) (26,288) (5,816) (5,018) (5,816) (5,018) 11,598 (7,720) 818 2,348 (28) (207) 186 (2,264) (838) (2,387) (1,288) (1,084) 10,310 (8,804) 35,187 43,991 45,497 35,187 R&A 14/2/01 5:24 pm Page 53 Consolidated Statement of Recognised Gains and Losses For the year ended 31 December 2000 Profit on ordinary activities after taxation Currency translation differences on foreign currency net investments Exercise of Share Scheme options Total recognised gains and losses relating to the year 2000 £’000 22,970 (1,155) (5,305) 1999 £’000 19,794 1,586 (5,618) 16,510 15,762 53 R&A 14/2/01 5:24 pm Page 54 Notes to the Accounts For the year ended 31 December 2000 1. Accounting policies These Accounts have been prepared in accordance with applicable accounting standards. The statutory profit and loss account for 1999 has been restated to show group and joint venture results separately. Proforma summary consolidated profit and loss account To aid in the understanding of the results of the Group and its joint ventures a Proforma Summary Profit and Loss Account has been included as an alternative presentation. The results are derived directly from the Statutory Profit and Loss Account, and explanations have been given on the face of the Proforma Summary Profit and Loss Account where appropriate. 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 Short leasehold building improvements Machinery Motor vehicles Furniture Office equipment Leased equipment Stocks 2.5% The higher of 10% or rate produced by lease term 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. Fixed asset investments: Subsidiaries Investments held as fixed assets are stated at cost less provision for any impairment in value. 54 R&A 14/2/01 5:24 pm Page 55 Notes to the Accounts For the year ended 31 December 2000 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. In the Proforma Summary Consolidated Profit and Loss Account operating costs relating to joint ventures have been included within “Share of profits arising from joint ventures – including group joint venture costs and joint venture interest”. Fixed asset investment: Own shares Investment in own shares represents shares in Serco Group plc held by the Serco Group plc 1998 Employee Share Ownership Trust (“the Trust”). The dividends on these shares have been waived. The Trust is a discretionary trust for the benefit of the employees and shares are held to satisfy the Group’s liabilities to employees for share options and long term incentive plans. The net cost to the Group of these schemes is charged to the Profit and Loss Account over the period to which they relate. 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, with experience surpluses and deficits being amortised on a straight line basis. In Germany retirement benefits to employees are accrued for by Serco GmbH & Co. KG. 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 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. 55 R&A 14/2/01 5:24 pm Page 56 Notes to the Accounts For the year ended 31 December 2000 2. Segmental Report Classes of Business 2000 Turnover Facilities Management £’000 Systems Engineering £’000 Investments £’000 Total £’000 Total sales: Group and share of joint ventures 830,117 61,214 75,660 966,991 Less: share of joint ventures (120,271) (1,184) (73,493) (194,948) Group turnover: sales to third parties 709,846 60,030 2,167 772,043 Profit before taxation Segment profit before common costs, goodwill, joint ventures, interest and taxation Common costs Amortisation of goodwill Operating profit 34,326 3,749 949 Share of operating profit in joint ventures 18,175 315 10,386 Net interest: Group Share of joint ventures (4,471) (7) (3,572) Group profit before taxation Net assets Segment net assets before unallocated assets 76,941 6,282 8,398 Unallocated assets Total net assets 39,024 (18,597) (3,681) 16,746 28,876 (3,543) (8,050) 34,029 91,621 17,304 108,925 56 R&A 14/2/01 5:24 pm Page 57 Notes to the Accounts For the year ended 31 December 2000 Classes of Business 1999 Turnover Facilities Management £’000 Systems Engineering £’000 Investments £’000 Total £’000 Total sales: Group and share of joint ventures Less: share of joint ventures 713,645 (123,098) 76,323 17,576 807,544 (567) (15,317) (138,982) Group turnover: sales to third parties 590,547 75,756 2,259 668,562 Profit before taxation Segment profit before common costs, goodwill, joint ventures, exceptional items, interest and taxation 36,262 5,095 222 Common costs Amortisation of goodwill Operating profit Share of operating profit in joint ventures 5,275 129 5,717 Net interest: Group Share of joint ventures (88) 33 (3,243) Group profit before taxation Net assets Segment net assets before unallocated assets 64,975 6,642 3,365 Unallocated assets Total net assets 41,579 (15,335) (2,092) 24,152 11,121 (2,643) (3,298) 29,332 74,982 16,646 91,628 57 R&A 14/2/01 5:24 pm Page 58 Notes to the Accounts For the year ended 31 December 2000 2. Segmental Report (continued) Geographical Segments 2000 Turnover Turnover by destination: United Kingdom £’000 Rest of Europe £’000 Asia Pacific £’000 Other £’000 Total £’000 Total sales: Group and share of joint ventures 621,165 112,656 138,967 94,203 966,991 Less: share of joint ventures (130,379) (6,204) (42,095) (16,270) (194,948) Group turnover: sales to third parties 490,786 106,452 96,872 77,933 772,043 Turnover by origin: Total sales: Group and share of joint ventures 630,241 106,296 138,331 92,123 966,991 Less: share of joint ventures (130,379) (6,204) (42,095) (16,270) (194,948) Group turnover: sales to third parties 499,862 100,092 96,236 75,853 772,043 Profit before taxation Segment profit before common costs, goodwill, joint ventures, interest and taxation Common costs Amortisation of goodwill Operating profit 16,476 7,963 8,482 6,103 Share of operating profit in joint ventures 25,523 524 1,316 1,513 Net interest: Group Share of joint ventures (8,073) (10) 33 – Group profit before taxation Net assets Segment net assets before unallocated assets 49,901 5,568 24,573 11,579 Unallocated assets Total net assets 39,024 (18,597) (3,681) 16,746 28,876 (3,543) (8,050) 34,029 91,621 17,304 108,925 58 R&A 14/2/01 5:24 pm Page 59 Notes to the Accounts For the year ended 31 December 2000 Geographical Segments 1999 Turnover Turnover by destination: United Kingdom £’000 Rest of Europe £’000 Asia Pacific £’000 Other £’000 Total £’000 Total sales: Group and share of joint ventures Less: share of joint ventures 492,733 (63,727) 86,135 (7,708) 137,442 91,234 807,544 (46,739) (20,808) (138,982) Group turnover: sales to third parties 429,006 78,427 90,703 70,426 668,562 Turnover by origin: Total sales: Group and share of joint ventures Less: share of joint ventures 496,137 (63,727) 84,583 (7,708) 137,249 89,575 807,544 (46,739) (20,808) (138,982) Group turnover: sales to third parties 432,410 76,875 90,510 68,767 668,562 Profit before taxation Segment profit before common costs, goodwill, joint ventures, interest and taxation Common costs Amortisation of goodwill Operating profit 22,461 6,073 7,544 5,501 Share of operating profit in joint ventures 7,641 687 1,718 1,075 Net interest: Group Share of joint ventures (3,269) 35 (64) – Group profit before taxation Net assets Segment net assets before unallocated assets 42,925 4,338 19,970 7,749 Unallocated assets Total net assets 41,579 (15,335) (2,092) 24,152 11,121 (2,643) (3,298) 29,332 74,982 16,646 91,628 59 R&A 14/2/01 5:24 pm Page 60 Notes to the Accounts For the year ended 31 December 2000 3. Information regarding Directors and employees a) Directors’ remuneration: Fees as Directors Other emoluments Total remuneration excluding pensions Refer to the Remuneration Report, sections 1,2 and 3 on pages 43 to 46. The prior year comparative includes Directors who did not serve in 2000. b) Employee costs including Directors: Wages and salaries Social security costs Other pension costs (Note 31) 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 4. Interest receivable Short term deposits Loans to joint ventures Total Group Share of joint ventures’ interest 60 2000 £’000 70 1,268 1,338 1999 £’000 60 1,361 1,421 2000 £’000 1999 £’000 358,707 33,612 17,851 320 323,181 26,675 16,228 332 410,490 366,416 2000 Number 1999 Number 19,031 803 55 167 20,056 18,415 929 26 113 19,483 2000 £’000 606 606 1,212 139 1,351 1999 £’000 560 957 1,517 79 1,596 R&A 14/2/01 5:24 pm Page 61 Notes to the Accounts For the year ended 31 December 2000 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 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 30% (1999 average – 301⁄4%) 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 2000 £’000 1,665 10 1,675 3,090 8,179 11,269 12,944 1999 £’000 1,023 70 1,093 3,137 3,307 6,444 7,537 2000 £’000 1999 £’000 10,028 16,640 7,666 15,251 9,788 1,950 357 3,681 397 82 909 2000 £’000 1,646 2,038 (336) (576) (274) 157 8,404 11,059 7,537 2,033 381 2,092 371 82 794 1999 £’000 6,334 2,582 (435) (718) 3 (573) 2,345 9,538 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 and disallowed expenditure. 61 R&A 14/2/01 5:24 pm Page 62 Notes to the Accounts For the year ended 31 December 2000 8. Dividends Interim dividend of 0.50p per share on 391,169,280 Ordinary Shares (1999 – 0.44p* on 389,213,286* Ordinary Shares) of 2p each fully paid – paid 13 October 2000 Proposed final dividend of 1.13p per share on 391,591,141 Ordinary Shares (1999 – 0.98p* on 391,975,692* Ordinary Shares) of 2p each fully paid – proposed payment on 6 April 2001 1999 final dividend of 0.98p* on 658,230 shares issued between 31 December 1999 and 17 March 2000 (record date) 1998 final dividend of 0.85p* on 2,338,584* shares relating to shares issued between 31 December 1998 and 19 March 1999 (record date) *Restated to reflect the capitalisation issue on 5 April 2000 9. Earnings per Ordinary Share 2000 £’000 1999 £’000 1,956 1,719 4,425 6,381 6 – 3,854 5,573 – 20 6,387 5,593 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 £22,970,000 for the year ended 31 December 2000 (1999 – £19,794,000) and the weighted average number of 392,825,780 (1999 – 388,711,854*) 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 £26,651,000 (adjusted for the effect of goodwill amortisation of £3,681,000) for the year ended 31 December 2000 (1999 – £21,886,000 as adjusted for goodwill amortisation of £2,092,000) and the weighted average number of 392,825,780 (1999 – 388,711,854*) Ordinary Shares of 2p each in issue during the year. The calculation of diluted earnings per Ordinary Share after goodwill is based on profits of £22,970,000 for the year ended 31 December 2000 (1999 – £19,794,000) and the weighted average number of 396,763,939 (1999 – 390,953,514*) 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 profits of £26,651,000 (adjusted for the effect of goodwill amortisation of £3,681,000) for the year ended 31 December 2000 (1999 – £21,886,000 as adjusted for goodwill amortisation of £2,092,000) and the weighted average number of 396,763,939 (1999 – 390,953,514*) Ordinary Shares of 2p each assuming that the options are all exercised. *Restated to reflect the capitalisation issue on 5 April 2000. 62 R&A 14/2/01 5:24 pm Page 63 Notes to the Accounts For the year ended 31 December 2000 10. Intangible asset: Goodwill Cost: At 1 January 2000 Additions during the year Adjustments to goodwill capitalised on acquisitions prior to 1 January 2000 At 31 December 2000 Accumulated amortisation: At 1 January 2000 Charge for the year At 31 December 2000 Net book value: At 31 December 2000 At 31 December 1999 11. Tangible assets Group Cost: At 1 January 2000 Subsidiaries acquired Capital expenditure Disposals Foreign exchange differences At 31 December 2000 Accumulated depreciation: At 1 January 2000 Subsidiaries acquired Provided during the year Disposals Foreign exchange differences At 31 December 2000 Net book value: At 31 December 2000 At 31 December 1999 Group £’000 69,769 3,278 2,211 75,258 2,915 3,681 6,596 68,662 66,854 Total £’000 95,318 281 17,392 (7,776) (1,214) Freehold land and buildings £’000 Short Machinery, leasehold motor vehicles, furniture and building equipment improvements £’000 £’000 8,159 – 521 (141) (20) 8,519 2,008 – 280 (4) 12 2,296 6,223 6,151 6,016 22 2,126 (175) (40) 81,143 259 14,745 (7,460) (1,154) 7,949 87,533 104,001 2,503 14 979 (171) (28) 54,299 173 10,479 (6,426) (386) 58,810 187 11,738 (6,601) (402) 3,297 58,139 63,732 4,652 3,513 29,394 26,844 40,269 36,508 The cost of assets held by the Group under finance leases at 31 December 2000 was £11,517,000 (1999 – £10,722,000). The accumulated depreciation provided for those assets at 31 December 2000 was £6,900,000 (1999 – £6,217,000). 63 R&A 14/2/01 5:24 pm Page 64 Notes to the Accounts For the year ended 31 December 2000 11. Tangible assets (continued) Company Cost: At 1 January 2000 Transfers to subsidiary undertakings Capital expenditure At 31 December 2000 Accumulated depreciation: At 1 January 2000 Transfers to subsidiary undertakings Provided during the year At 31 December 2000 Net book value: At 31 December 2000 At 31 December 1999 12. Investments held as fixed assets a) Shares in subsidiary companies at cost: At 1 January 2000 Acquisition of Serco QAA Limited At 31 December 2000 b) Group investments in joint ventures: At 1 January 2000 Dividends receivable Acquisitions/disposals Foreign exchange translation difference Retained profits At 31 December 2000 64 Short Machinery, leasehold motor vehicles, furniture and building equipment improvements £’000 £’000 360 – 283 643 127 – 73 200 443 233 1,775 (243) 550 2,082 1,112 (102) 294 1,304 778 663 Total £’000 2,135 (243) 833 2,725 1,239 (102) 367 1,504 1,221 896 Company £’000 27,664 2,650 30,314 Group £’000 18,022 (6,768) 3,684 328 12,422 27,688 R&A 14/2/01 5:24 pm Page 65 Notes to the Accounts For the year ended 31 December 2000 c) Investment in own shares: At 1 January 2000 Additions Amortisation At 31 December 2000 Group £’000 – 10,000 (320) 9,680 Investment in own shares represents 2,298,090 shares in Serco Group plc held by the Trust. The market value of shares held by the Trust at 31 December 2000 was £12,237,000. d) A list of the principal undertakings of Serco Group plc is shown in Note 32. All the subsidiaries of the Group have been consolidated. e) At 31 December 2000, Group companies had branches in Abu Dhabi, Antarctica, Ascension Island, Bahrain, Chile, Dubai, French Guiana, Korea, Ras Al Khaimah, Saudi Arabia, Sharjah and Switzerland. f) 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 equity investments. g) 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 h) Acquisitions: i) Rakmulti Technology Limited 2000 £’000 1999 £’000 41,144 264,444 40,521 173,351 305,588 213,872 60,107 217,793 31,357 164,493 277,900 195,850 27,688 18,022 All the issued share capital of Rakmulti Technology Limited was acquired by Serco Limited on 1 July 2000, for a cash consideration of £650,000 and deferred cash consideration of £350,000. Acquisition costs of £154,000 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 goodwill arising on consolidation of £787,000 is being carried forward as an intangible asset and will be amortised over 20 years. 65 R&A 14/2/01 5:24 pm Page 66 Notes to the Accounts For the year ended 31 December 2000 12. Investments held as fixed assets (continued) h) Acquisitions: (continued) ii) Serco QAA Limited (formerly Quality Assurance Associates Limited) All the issued share capital of Quality Assurance Associates Limited was acquired by Serco Group plc on 20 December 2000, for a cash consideration of £237,000, the issue of 188,346 Serco Group plc shares (equivalent £1,050,000) and deferred consideration comprising loan stock of £763,000 and shares in Serco Group plc equivalent to £500,000. Acquisition costs of £100,000 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 book value. The goodwill arising on consolidation of £2,491,000 is being carried forward as an intangible asset and will be amortised over 20 years. iii) 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 2000 for a total cash amount of £2,689,000. Further equity injections were made in AWE Management Limited by Serco Limited during 2000 for a total cash amount of £400,000. Further equity injections were made in Laser (Teddington) II Limited (formerly Laser (Teddington Holding) Limited) by Serco Investments Limited during 2000 for a total cash amount of £612,000. Further equity injections were made in Octagon Healthcare (Holdings) Limited by Serco Investments Limited during 2000, for a total cash amount of £250,000. i) Disposals 25.76% of the Ordinary Share Capital of Brands on Show Pty Limited was disposed of on 31 December 2000 for consideration amounting to £885,000. 10% of the Ordinary Share Capital of National Remote Sensing Centre was disposed of on 15 February 2000 for a total cash amount of £82,000. 50% of the Ordinary Share Capital of REM Serco AB was disposed of on 31 October 2000 for a total cash amount of £1,189,000. j) Deferred consideration paid On the 15 March 2000, the deferred consideration of £3,368,000 due on the acquisition of the shares in Great Southern Railways Pty Limited on 1 October 1999 was paid. During the year the deferred consideration of £1,012,000 due on Brands on Show Pty Limited was paid. 13. Stocks Service spares Long term contract balances 66 2000 £’000 11,529 14,413 25,942 Group 1999 £’000 10,097 16,733 26,830 R&A 14/2/01 5:24 pm Page 67 Notes to the Accounts For the year ended 31 December 2000 14. Debtors a) Amounts due 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 due after more than one year: Amounts recoverable on contracts Other debtors Pensions prepayment (Note 31) Amounts owed by joint ventures Group Company 2000 £’000 1999 £’000 121,526 16,317 11,843 3,940 4,906 101,459 7,383 12,096 5,279 6,195 158,532 132,412 2000 £’000 – 7,795 75 – – 7,870 Group Company 2000 £’000 1999 £’000 2000 £’000 9,451 3,246 9,212 10,288 32,197 11,437 3,997 8,433 5,621 29,488 – – – – – 1999 £’000 – 4,919 119 – – 5,038 1999 £’000 – – – – – Total debtors 190,729 161,900 7,870 5,038 Included in amounts recoverable on contracts is an amount of £15,913,000 (1999 – £17,297,000) in respect of items procured on behalf of customers. This is offset by an amount of £13,499,000 (1999 – £11,366,000) in trade creditors and an amount of £2,886,000 (1999 – £3,483,000) in accruals. 15. Other creditors including taxation and social security Obligations under finance leases Corporation tax Other taxes and social security costs Other creditors Amounts owed to joint ventures Other loans Group Company 2000 £’000 1,852 3,501 24,697 28,838 17,213 529 76,630 1999 £’000 1,764 6,151 19,521 20,201 5,339 557 53,533 2000 £’000 – – 616 79 5,000 – 5,695 1999 £’000 – 1,874 458 – – – 2,332 67 R&A 14/2/01 5:24 pm Page 68 Notes to the Accounts For the year ended 31 December 2000 16. Creditors: Amounts falling due after more than one year 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 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. Group Company 2000 £’000 1999 £’000 2000 £’000 76,021 4,081 4,001 84,103 36,982 47,121 65,012 4,290 3,843 73,145 25,913 47,232 73,425 – – 73,425 32,005 41,420 1999 £’000 53,258 – – 53,258 11,838 41,420 Group Company 2000 £’000 1999 £’000 2000 £’000 1999 £’000 34,601 41,420 23,592 41,420 32,005 41,420 11,838 41,420 1,852 1,456 713 60 529 257 3,169 46 1,764 1,507 871 148 557 84 3,202 – – – – – – – – – – – – – – – – – 84,103 73,145 73,425 53,258 d) Finance lease obligations are secured by retention of title to the relevant vehicles and equipment. 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. 68 R&A 14/2/01 5:24 pm Page 69 Notes to the Accounts For the year ended 31 December 2000 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 after taking account of interest rate swaps the proportion of the Group’s fixed rate borrowings was 35.2% with the remaining 64.8% 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 subsidaries 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 2000 with unmatched transactional exposure. Financial assets and liabilities i) Assets Other than short term debtors, the Group’s financial assets as at 31 December 2000 and 31 December 1999 were: 31 December 2000 Sterling £’000 Australian Dollar £’000 US Deutsche Mark £’000 Dollar £’000 Various other currencies £’000 Euro £’000 Total £’000 Cash and short term deposits 59,813 1,891 4,952 1,952 6,227 5,263 80,098 Note 25 Long term interest bearing loans to joint ventures Other long term debtors 6,576 16,720 3,606 2,306 106 1,888 Total long term assets 23,296 5,912 1,994 – – – – – – – 995 10,288 21,909 995 32,197 14 31 December 1999 Sterling £’000 Australian Dollar £’000 US Deutsche Mark £’000 Dollar £’000 Cash and short term deposits 31,419 6,267 5,298 7,153 Long term interest bearing loans to joint ventures Other long term debtors 5,263 18,636 358 2,639 – 2,256 Total long term assets 23,899 2,997 2,256 – 328 328 Various other currencies £’000 Euro £’000 Total £’000 – – – – 8,642 58,779 – 8 8 5,621 23,867 29,488 Note 25 14 The above assets except long term debtors earn interest at relevant national LIBOR equivalents, net of margins. 69 R&A 14/2/01 5:24 pm Page 70 Notes to the Accounts For the year ended 31 December 2000 17. Treasury policies and risk management (continued) ii) Liabilities After taking into account the interest rate and currency swaps the interest profile of the Group’s financial liabilities at 31 December 2000 and 31 December 1999 were: 31 December 2000 Sterling Australian Dollar US Dollar Deutsche Mark Euro Total (Note 16) 31 December 1999 Sterling Australian Dollar US Dollar Deutsche Mark Total (Note 16) Fixed Rate Liabilities Weighted Weighted average time for which rate is fixed Years average interest rate % – – 7.64 – – – – 7 – – Fixed rate liabilities £’000 – – 29,585 – – Total liabilities £’000 Floating rate liabilities £’000 5,469 2,047 44,582 16,389 15,616 84,103 5,469 2,047 14,997 16,389 15,616 54,518 29,585 Total liabilities £’000 Floating rate liabilities £’000 5,080 3,156 53,071 11,838 73,145 5,080 3,156 14,610 11,838 34,684 Fixed rate liabilities £’000 – – 38,461 – 38,461 Fixed Rate Liabilities Weighted Weighted average time for which rate is fixed Years average interest rate % – – 7.45 – – – 8 – The floating rate borrowings bear interest at relevant national LIBOR equivalents, plus margin. The maturity of the Group’s financial liabilities at 31 December 2000 and 31 December 1999 were: 31 December 2000 Sterling Australian Dollar US Dollar Deutsche Mark Euro Total 31 December 1999 Sterling Australian Dollar US Dollar Deutsche Mark Total 70 Maturing within one year £’000 Maturing between one and two years £’000 Maturing between two and five years £’000 Maturing after more than five years £’000 2,535 894 1,548 16,389 15,616 36,982 558 986 169 – – 1,713 2,369 167 1,346 – – 3,882 7 – 41,519 – – 41,526 Maturing within one year £’000 Maturing between one and two years £’000 Maturing between two and five years £’000 Maturing after more than five years £’000 1,333 2,618 10,124 11,838 25,913 894 416 281 – 1,591 2,705 122 1,246 – 4,073 148 – 41,420 – 41,568 Total £’000 5,469 2,047 44,582 16,389 15,616 84,103 Total £’000 5,080 3,156 53,071 11,838 73,145 R&A 14/2/01 5:24 pm Page 71 Notes to the Accounts For the year ended 31 December 2000 iii) Fair Values The book value and fair value of the Group’s financial assets and liabilities at 31 December 2000 and 31 December 1999 were: 2000 1999 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Unrecognised gain/(loss) £’000 Book value £’000 Fair value £’000 –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Unrecognised gain £’000 Book value £’000 Fair value £’000 Assets Cash and short term deposits Amounts owed by joint ventures Other long term debtors Liabilities Long term borrowings: Sterling Australian Dollar US Dollar Short term borrowings: Sterling Australian Dollar US Dollar Deutsche Mark Euro Derivatives held to manage the currency and interest rate profile 80,098 10,288 21,909 32,197 2,934 1,153 43,034 47,121 2,535 894 1,548 16,389 15,616 80,098 10,288 21,909 32,197 2,934 1,153 46,439 50,526 2,535 894 1,548 16,389 15,616 – – – – – – (3,405) (3,405) – – – – – 58,779 5,621 23,867 29,488 3,747 538 42,947 47,232 1,333 2,618 10,124 11,838 – 58,779 5,621 23,867 29,488 3,747 538 41,346 45,631 1,333 2,618 10,124 11,838 – – – – – – – 1,601 1,601 – – – – – – 3,231 36,982 40,213 3,231 3,231 – 1,215 25,913 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. 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 gain of £3,231,000 (1999 – £1,215,000) on the interest rate swaps as at 31 December 2000, as set out in the previous table. The unrecognised gain is not expected to be recognised in the Profit and Loss account in the next period. Borrowing facilities The Group had facilities of £30,000,000 committed and £108,000,000 uncommitted that were unused as at 31 December 2000. Committed facilities are renewable every five years and uncommitted facilities annually. 71 R&A 14/2/01 5:24 pm Page 72 Notes to the Accounts For the year ended 31 December 2000 18. Provisions for liabilities and charges Group Pensions provision Deferred taxation 19. Deferred taxation Balance 1 January 2000 £’000 23,309 2,597 25,906 Charged/(credited) to the profit and loss account £’000 Usage £’000 Foreign exchange differences £’000 Balance 31 December 2000 £’000 (138) – (138) 542 (179) 363 116 (169) (53) 23,829 2,249 26,078 2000 £’000 178 38 2,033 2,249 (546) (3,341) (295) (4,182) 2000 £’000 22,970 (6,387) 16,583 (1,155) 7,174 – (5,305) 17,297 91,628 108,925 Group 1999 £’000 60 – 2,537 2,597 (420) (3,342) (95) (3,857) 1999 £’000 19,794 (5,593) 14,201 1,586 12,344 (3,078) (5,618) 19,435 72,193 91,628 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 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 72 R&A 14/2/01 5:24 pm Page 73 Notes to the Accounts For the year ended 31 December 2000 21. Called up share capital a) Authorised 550,000,000 (1999 – 100,000,000) Ordinary Shares of 2p each 2000 £’000 11,000 2000 £’000 1999 £’000 2,000 1999 £’000 b) Called up, allotted and fully paid: 393,864,463 (1999 – 65,329,282) Ordinary Shares of 2p each 7,877 1,307 c) At an Extraordinary General Meeting on 5 April 2000 the Authorised Share Capital of the Company was increased from £2,000,000 to £11,000,000 by the creation of an additional 450,000,000 Ordinary Shares of 2p each. Under a general power granted to the Directors at the meeting £6,545,399, being part of the sum standing to the credit of the Company’s Share premium account, was capitalised and 327,269,935 fully paid Ordinary Shares of 2p each were distributed among the members who were on the register at 7 April 2000 by allotting five fully paid new Ordinary Shares to them for every Ordinary Share held. d) Other Ordinary Shares of 2p each allotted in the year: During the year 1,076,900 Ordinary Shares of 2p each were allotted to the holders of options or their personal representatives. Of these 124,705 were allotted prior to the capitalisation issue on 5 April 2000, 3,540 were allotted at £13.05, 32,990 at £4.61, 3,000 at £3.69 and 85,175 at nil value (a further 623,525 Ordinary Shares of 2p each were allotted to the holders of these shares in the capitalisation issue). The remaining 952,195 Ordinary Shares of 2p each were allotted after the capitalisation issue, of which 5,880 were allotted at £4.2542, 4,273 at £3.81, 103,086 at £2.45, 126,222 at £2.175, 72,630 at 76.83 pence, 84,000 at 36.70 pence and 556,104 at nil value. In addition to the above, 188,346 Ordinary Shares of 2p each were allotted at £5.575 per share on 20 December 2000 as consideration for the acquisition of Serco QAA Limited (formerly Quality Assurance Associates Limited) (Note 12). e) Options in respect of Ordinary Shares of 2p each: i) ii) In January 1996, 1,210,392* 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 2000 there remained 235,392* options which are exercisable at nil value in accordance with the rules of the Scheme. In January 1997, 1,439,622* 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 2000 there remained 202,194* options which are exercisable at nil value in accordance with the rules of the Scheme. iii) 3,341,346* options in respect of Ordinary Shares of 2p each were granted in May and September 1998 in accordance with the rules of the ‘Serco Group plc 1998 Executive Option Plan’. At 31 December 2000 there remained 2,778,889* options which are exercisable at a price of £2.175* each and 18,402* at £2.0208* each in accordance with the rules of the Scheme. iv) On 1 April 1999, 3,461,664* 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 2000 there remained 3,102,498* options which are exercisable at a price of £2.45* each in accordance with the rules of the scheme. v) On 31 March 2000, 4,511,988* options in respect of Ordinary Shares of 2p each were granted as part of a new Company Sharesave Scheme, whereby eligible employees were granted options to apply for shares as part of a save-as-you-earn contract. 4,228,645 options were held by employees on 31 December 2000. The options are exercisable at any time between 1 May 2003 and 31 October 2003 at a price of £3.81* each provided the requirements of the Scheme have been met. 73 R&A 14/2/01 5:24 pm Page 74 Notes to the Accounts For the year ended 31 December 2000 21. Called up share capital (continued) vi) On 5 April 2000, 2,524,836* 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 2000 there remained 2,504,310* options which are exercisable at a price of £4.2542* each in accordance with the rules of the Scheme. vii) On 5 April 2000, 219,900* options in respect of Ordinary Shares of 2p each were granted in accordance with the rules of the ‘1996 Serco Group plc Long Term Incentive Scheme as amended by the company on 5 April 2000’. At 31 December 2000 no options had been exercised or lapsed. These options are exercisable at nil value in accordance with the rules of the Scheme. viii) 37,677 options in respect of Ordinary Shares of 2p each were granted in August and November 2000, in accordance with the rules of the ‘Serco Group plc 1998 Executive Option Plan’. 26,268 of these options are exercisable at £5.825 and 11,409 at £4.90. No options had been exercised or lapsed at 31 December 2000. ix) On 24 November 2000, 259,351 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules of the ‘1996 Serco Group plc Long Term Incentive Scheme as amended by the Company on 5 April 2000’. At 31 December 2000 no options had been exercised or lapsed. These options have been granted in respect of a three year performance period starting 1 January 2001 and are exercisable at nil value in accordance with the rules of the Scheme. *Restated to reflect the capitalisation issue on 5 April 2000. f) The market price of Serco Group plc Ordinary Shares of 2p each as at 31 December 2000 was £5.321⁄2. After adjusting for the capitalisation issue the market price of these shares ranged from £3.311⁄2 to £6.80 during the year. 22. Share premium account Balance at 1 January 2000 Capitalisation – issue of new shares – costs Acquisition of Serco QAA Limited (formerly Quality Assurance Associates Limited) Share premium on issue of shares upon exercise of options Balance at 31 December 2000 23. Profit and loss account Group Balance at 1 January 2000 Retained profit transferred to reserves Foreign exchange translation differences Exercise of Share Scheme options Balance at 31 December 2000 £’000 69,517 (6,545) (54) 1,046 6,157 70,121 £’000 20,661 16,583 (1,155) (5,305) 30,784 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. 74 R&A 14/2/01 5:24 pm Page 75 Notes to the Accounts For the year ended 31 December 2000 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 £2,062,000 which includes dividends of £19,598,000 received from subsidiary companies. A final ordinary dividend of £4,425,000 is proposed which together with the interim dividend of £1,956,000 and the payment in relation to the 1999 final dividend caused by the movement in number of shares of £6,000, leaves a loss of £4,325,000 which has been deducted from reserves brought forward of £29,064,000. This along with a foreign exchange credit of £652,000 results in reserves carried forward of £25,391,000. 24. Reconciliation of operating profit to net cash inflow from operating activities Operating profit Depreciation Goodwill amortisation Loss on sale of tangible assets Decrease/(increase) in stocks (Increase)/decrease in debtors Increase/(decrease) in creditors Increase/(decrease) in provisions 2000 £’000 16,746 11,738 3,681 313 1,094 (25,657) 37,099 520 1999 £’000 24,152 9,570 2,092 695 (9,767) 19,971 (9,447) (448) Net cash inflow from operating activities 45,534 36,818 25. 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 Balance 1 January 2000 £’000 58,779 (23,592) 35,187 (41,420) (6,233) (3,286) (557) (4,290) Cash flow £’000 21,319 (11,009) 10,310 – 10,310 (186) 28 2,264 Net debt (14,366) 12,416 Other non-cash changes £’000 Balance 31 December 2000 £’000 – – – – – – – (2,055) (2,055) 80,098 (34,601) 45,497 (41,420) 4,077 (3,472) (529) (4,081) (4,005) 75 R&A 14/2/01 5:24 pm Page 76 Notes to the Accounts For the year ended 31 December 2000 26. Reconciliation of increase/(decrease) in cash to movement in net debt Increase/(decrease) 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 2000 £’000 10,310 2,106 12,416 (2,055) 10,361 (14,366) 1999 £’000 (8,804) 3,432 (5,372) (1,367) (6,739) (7,627) (4,005) (14,366) 27. Major non-cash transactions 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 £2,055,000 (1999 – £1,367,000). As part of the acquisition of 100% of the shares in Serco QAA Limited (formerly Quality Assurance Associates Limited), 188,346 Serco Group plc shares (equivalent to £1,050,000) were issued for nil cash consideration. During the year £5,305,000 (1999 – £5,618,000) has been charged to the profit and loss reserve in respect of shares issued under Employee Share Scheme Options. 28. Contingent liabilities The Group has given indemnities to banks totalling £13,707,000 in respect of performance bonds in the normal course of business. In addition the Group has given indemnities to banks and financial guarantees in respect of a lease security to a subsidiary and equity contributions to joint ventures of £16,528,000. 29. Capital and other commitments Capital expenditure contracted but not provided Group Company 2000 £’000 1,172 1999 £’000 4,262 2000 £’000 – During the year ending 31 December 2001 the Group is to make the following payments in respect of operating leases: 1999 £’000 – Other £’000 4,116 8,840 1,045 Land and buildings £’000 1,575 7,405 3,382 12,362 14,001 Leases which expire: Within one year Between one and five years After five years 76 R&A 14/2/01 5:24 pm Page 77 Notes to the Accounts For the year ended 31 December 2000 30. Related parties Directors The Directors of Serco Group plc had no material transactions with the Group during the year other than service contracts, Directors’ liability insurance and consultancy services provided by Gary Sturgess as detailed in the Remuneration Report. 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 2000: Net loans during the year Net trading Royalties and management fees receivable Dividends receivable The following receivable balances relating to joint ventures were included in the Group Balance Sheet: 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 Details of Group investments in joint ventures and other principal undertakings are given in Note 32. 2000 £’000 8,431 2,848 2,429 6,768 20,476 2000 £’000 196 760 2,984 – 3,940 1999 £’000 12,271 2,635 2,021 2,735 19,662 1999 £’000 1,420 1,725 1,425 709 5,279 10,288 5,621 2000 £’000 1999 £’000 17,213 5,339 77 R&A 14/2/01 5:24 pm Page 78 Notes to the Accounts For the year ended 31 December 2000 31. Pension schemes The net pension charge for the year ended 31 December 2000 was £17,851,000 (1999 – £16,228,000). The Group paid employer contributions of £3,659,000 (1999 – £3,206,000) into 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. 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) 8.0% p.a. 6.0% p.a. (including 0.5% p.a. in respect of promotion) 3.5% p.a. (SPLAS section only) 3.5% p.a. 3.5% p.a. 3.5% p.a. (for Serco Alternative Pension Scheme and Services section) 3.0% p.a. (for SPLAS section accrual after 6/4/97) 0.5% 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. 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 £8,861,000 (1999 – £7,165,000), of which £640,000 related to special contributions in respect of a discretionary increase to pensions in payment awarded during the year (1999 – £448,000). At 31 December 2000 a prepayment of £1,550,000 (1999 – £684,000) in respect of the Scheme was included in the Balance Sheet. £7,995,000 was charged to the 2000 Profit and Loss Account, in respect of the Scheme (1999 – £7,376,000). 78 R&A 14/2/01 5:24 pm Page 79 Notes to the Accounts For the year ended 31 December 2000 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 £87,000 (1999 – £135,000) has been charged to the 2000 Profit and Loss Account in respect of the Scheme and a prepayment of £7,662,000 (1999 – £7,749,000) has been included in the Balance Sheet as at 31 December 2000. c) Serco Superannuation Fund This is a combined defined benefit and 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) Average long term allowance for salaries increases 9.5% p.a. 7.0% p.a. The defined benefit element of the Scheme was assessed to be fully funded on a current funding level based on a market value of assets of £1,063,830 (A$2,860,000) at 31 December 1997 with a ratio of market value of assets to current funding level liabilities of 108%. The actuarial value of assets of the defined benefit element of the Scheme represented 112% of its ongoing liabilities at 31 December 1997. The pension cost calculated under the attained age method will amortise the above surplus over the expected future working lives of the existing members which have an average value of 14 years. Employer pension contributions paid into the Scheme and charged to the 2000 Profit and Loss Account during the year were £2,171,000 (1999 – £1,762,000). 79 R&A 14/2/01 5:24 pm Page 80 Notes to the Accounts For the year ended 31 December 2000 31. Pension schemes (continued) Defined benefit element Regular cost Variation cost Defined contribution element Total Defined benefit element Regular cost Variation cost Defined contribution element Total d) The NPL Management Limited Pension Scheme This is a pre-funded defined benefit scheme. 2000 £’000 91 26 117 2,054 2,171 1999 £’000 91 41 132 1,630 1,762 2000 A$’000 238 68 306 5,359 5,665 1999 A$’000 228 103 331 4,086 4,417 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 return Salary growth Price inflation Equity dividend growth Pension increases 8.0% p.a. 6.0% p.a. (plus promotional scale) 3.5% p.a. 3.5% p.a. 3.5% 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. Employer pension contributions paid into the Scheme during the year were £1,664,000. At 31 December 2000 a provision of £82,000 (1999 – £16,000) in respect of the Scheme was included in the Balance Sheet. £1,730,000 was charged to the 2000 Profit and Loss Account in respect of the Scheme (1999 – £1,827,000). 80 R&A 14/2/01 5:24 pm Page 81 Notes to the Accounts For the year ended 31 December 2000 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 2000 Profit and Loss Account during the year were £527,000 (1999 – £202,000). f) Serco Metrolink 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 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 8.0% p.a. 6.0% p.a. 3.5% p.a. 3.5% p.a. 3.0% p.a. The Scheme is assessed to be fully funded on a current funding level basis at 1 September 1998. Liabilities for this purpose are calculated using the basis for determining individual cash equivalents for active members and deferred pensioners. Pension liabilities at the valuation date were fully secured with an insurance company and so have been excluded from the valuation. The actuarial value of the assets represented 90% of the ongoing liabilities of the Scheme. Variations from the normal cost are amortised for accounting purposes over an eighteen year period as a constant monetary amount. Employer pension contributions paid into the Scheme during the year 2000 were £218,000 (1999 – £204,000). At 31 December 2000 a provision of £23,000 (1999 – nil) in respect of the Scheme was included in the Balance Sheet. £241,000 (1999 – £204,000) was charged to the 2000 Profit and Loss Account, in respect of the Scheme. 81 R&A 14/2/01 5:24 pm Page 82 Notes to the Accounts For the year ended 31 December 2000 31. Pension schemes (continued) 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 £15,338,000 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 2000 Profit and Loss Account totalled £921,000 (1999 – £854,000). 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 £520,000 (1999 – £662,000) and a provision of £23,829,000 (1999 – £23,309,000) has been included in the Balance Sheet as at 31 December 2000. 82 R&A 14/2/01 5:24 pm Page 83 Notes to the Accounts For the year ended 31 December 2000 32. 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 Rest of Europe Belgium Denmark France Germany Ireland Italy Luxembourg The Netherlands Sweden Switzerland Asia Pacific Australia New Zealand 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 Overseas Investments Limited* Serco Research & Development Limited* Serco Insurance Co Limited* NPL Management Limited* Serco Docklands Limited (formerly Docklands Railway Management Limited) Serco Investments Limited* Community Leisure Management Ltd Serco Aerospace Limited (formerly FRA Serco Limited) Rakmulti Technology Limited Serco QAA Limited (formerly Quality Assurance Associates Limited)* Serco Belgium S.A. Metro Service A/S Serco France Sarl Serco International GmbH Serco GmbH & Co. KG (formerly Elekluft Elektronik und Luftfahrtgeräte GmbH) Serco Services GmbH Serco FM GmbH (formerly Serco GmbH) Serco Services Ireland Limited Serco s.r.l. (formerly Serco Servizi s.r.l.) Serco Facilities Management S.A. Serco Facilities Management BV Serco International BV Serco Investments BV Serco Services AB Serco Sverige AB (formerly Serco Newsec AB) Serco Facilities Management S.A. Serco Group Pty Limited (formerly Serco Asia Pacific Pty Limited) Serco Australia Pty Limited Serco Water (WA) Pty Limited Great Southern Railways Pty Limited Serco Group NZ Limited Serco Viatech Limited 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% *directly held by Serco Group plc 83 R&A 14/2/01 5:24 pm Page 84 Notes to the Accounts For the year ended 31 December 2000 32. List of principal undertakings (continued) Principal subsidiaries Other Canada USA Joint venture undertakings United Kingdom Asia Pacific Australia New Zealand Hong Kong Other Bahrain Bermuda Cyprus Dubai Saudi Arabia Singapore Turkey USA *directly held by Serco Group plc 84 Serco Facilities Management, Inc. Serco Aviation Services, Inc. Serco Group, Inc. Serco, Inc. Serco Management Services, Inc. (Delaware) Barton ATC, Inc. Serco Management Services, Inc. (Tennessee) (formerly Barton ATC International, Inc) JL Associates, Inc. Premier Prison Services Limited Kilmarnock Prison (Holdings) Limited Serco Gulf Engineering Limited Defence Management (Holdings) Limited Laser (Teddington) II Limited (formerly 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 Defence Maritime Service Pty Limited InfoDirect Pty Limited Serco-Gardner Merchant Pty Limited Serco Project Engineering Ltd Serco Gardner Merchant NZ Serco Guardian (FM) Limited Aeradio Technical Services WLL BAS-Serco Limited Serco Kalisperas International Aeradio (Emirates) LLC Key Communications Development Co Limited JBS Singapore Pte Limited Serco Guthrie Pte Ltd ESDAS Baker Serco Wright Patterson 100% 100% 100% 100% 100% 100% 100% 100% 50% 50% 50% 50% 50% 26% 50% 50% 50% 50% 50% 50% 33% 50% 50% 50% 50% 50% 50% 50% 49% 40% 50% 49% N/A 20% 50% 51% 49% R&A 14/2/01 5:24 pm Page 85 Notice of Annual General Meeting Notice is hereby given that the Fourteenth Annual General Meeting of the Company will be held at the National Physical Laboratory, Teddington, Middlesex, TW11 0LW on 29 March 2001 at 10.00am 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 2000. 2. To declare a final dividend of 1.13p per share for the year ended 31 December 2000. 3. To re-elect Kevin Beeston as an Executive Director. (Note 3) 4. To elect Ralph Hodge as a Non-executive Director. (Note 4) 5. To elect Betsy Bernard 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 £2,599,614 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 purpose of paragraph (b) of that Article, the nominal amount to which this power is limited is £393,881. 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 39,388,096; 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 proceeding the day on which the 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 Cavanagh Secretary Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT 20 February 2001 85 R&A 14/2/01 5:24 pm Page 86 Notes to the Notice of Annual General Meeting 1. If your name appears on the Register of Shareholders on 29 March 2001, you will be entitled to attend and vote at the Fourteenth 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 10.00am on 27 March 2001. 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 20 February 2001 to 9:00 am on 29 March 2001. If you wish 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 29 March 2001. 3. Kevin Beeston retires by rotation and submits himself for re-election in accordance with the Company’s Articles of Association. 4. Ralph Hodge and Betsy Bernard retire following their appointment since the last Annual General Meeting and submit themselves for 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 9 February 2001 (the latest 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 9 February 2001 (the latest 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 9 February 2001 (the latest 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 R&A 14/2/01 5:25 pm Page 87 calendar of events 29 March 6 April August October Annual General Meeting Proposed payment of final dividend Announcement of interim results Proposed payment of interim dividend Artwork and Production: Serco Media and Design Design: Pocknell Studio Photography: Colin Turner and Neal Wilson Print: CTD R&A 14/2/01 5:25 pm Page 88 Serco Group plc Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT United Kingdom T: +44 (0)1932 755900 F: +44 (0)1932 755854 A company registered in England and Wales No. 2048608 www.serco.com Serco Group Pty Limited Level 10 90 Arthur Street North Sydney NSW 2060 Australia T: +61 (0)2 9964 9733 F: +61 (0)2 9964 9924 Serco Group, Inc. 20 E Clementon Road Suite 102 South Gibbsboro New Jersey 08026 United States T: +1 856 346 8800 F: +1 856 346 8463 

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