Serco Group
Annual Report 2002

Plain-text annual report

A N N U A L R E V I E W & A C C O U N T S S E R C O G R O U P P L C 2 0 0 2 Q & A Serco Group plc – our mission: “to stay at the forefront of the outsourcing revolution in our chosen markets through the commitment, innovation and calibre of our people, the quality of our management processes and the strength of our corporate culture and values” Contents 1 F I N A N C I A L A N D O P E R AT I N G H I G H L I G H T S W H AT S O RT O F B U S I N E S S A R E W E ? Company profile W H AT K I N D O F A Y E A R H AV E W E H A D ? Chairman’s statement W H AT D O T H E N U M B E R S M E A N ? Financial review W H AT H AV E W E B E E N D O I N G A N D W H E R E ? Business review W H E R E D O W E O P E R AT E ? Our global operations Inside story: European Space Agency IT and Great Southern Railway W H AT A R E O U R O P P O RT U N I T I E S F O R G R O W T H ? Our markets, and how we’re addressing them Inside story: Docklands Light Railway W H E R E D O W E S TA N D O N P F I s ? Our strategy for PFIs, and how we account for them Inside story: Joint Service Command & Staff College and Norfolk & Norwich University Hospital H O W D O W E R U N O U R B U S I N E S S ? Our management structure and system Inside story: National Crime Squad H O W D O W E M A N A G E O U R R E S P O N S I B I L I T I E S T O S TA K E H O L D E R S ? How we manage risks and balance responsibilities Inside story: Warship Support Agency H O W D O W E D E V E L O P O U R P E O P L E ? Management training and development Inside story: Institute of Directors C A N A P R I VAT E S E C T O R C O M PA N Y H AV E A P U B L I C S E RV I C E E T H O S ? Our culture and values Inside story: Walsall Metropolitan Borough Council A N N U A L A C C O U N T S I N V E S T O R A N D S H A R E H O L D E R I N F O R M AT I O N 2 3 7 13 21 31 37 43 49 57 63 69 75 145 2 Financial & operating highlights 9 . 5 2 3 , 1 2 . 1 4 ,1 1 9 . 7 5 9 5 . 7 0 8 8 . 7 8 6 0 . 7 5 * 2 . 5 4 7 . 7 3 4 . 1 3 4 . 6 2 98 99 00 01 02 98 99 00 01 02 T U R N OV E R £m I t i I n c l u d i n g j o i n t ve n t u re s l d i t j TURNOVER PROFIT BEFORE TAX – pre-goodwill EARNINGS PER SHARE – pre-goodwill DIVIDEND PER SHARE P RO F I T £m B e fo re a m o r t i s a t i o n o f g o o dw i l l 2002 Restated 2001* £1,325.9m £1,141.2m £57.0m 9.58p 2.08p £45.2m 8.25p 1.86p up 16.2% up 26.3% up 16.1% up 11.8% * The 2001 accounts have been restated after the adoption of UITF Abstract 34 Pre-contract costs in 2002. Serco delivers 15th successive year of double-digit growth Excellent organic growth – 64% of turnover growth from existing contract base Robust cash performance – 75% of EBITDA converted to cash Continued success in winning contracts – Contract wins totalling £1.2bn – 122 new contracts awarded – A further 180 contracts successfully rebid or extended, maintaining our 90% success rate – In January 2003 we won our largest-ever contract award: a 15-year extension to the Atomic Weapons Establishment contract, adding over £1bn to our forward order book Substantial range of future opportunities – Currently addressing a further £12bn of opportunities Continuing high visibility of revenues – 91% of 2003 turnover secured – Order book stands at £7.1bn 3 WHAT SORT of BUSINESS ARE we? ?a Our core products are the skills and processes for organisational design and change management. We are focused on the public sector – which represents 90% of our business – and have a strong public service ethos. In partnership with our customers and staff we aim to enhance service levels and operational efficiency by shortening decision-making chains, reducing bureaucracy and achieving continuous improvement. We apply our skills in an extraordinarily diverse range of fields. We run world-class scientific establishments and railways, maintain offices and spacecraft, manage schools, prisons and motorway systems, test military assets and control air traffic. In every case, our job is to make our customers’ operations more efficient. We can do this by managing existing facilities, projects and systems. Or we can create entirely new facilities – raising finance, designing and procuring them, then operating them. Serco is one of the world’s largest outsourcing businesses, operating in Europe, the Middle East, Asia Pacific and North America. Nearly a third of our turnover comes from outside the UK. 4 W H AT S O RT O F B U S I N E S S A R E W E ? A growth business • Broader exposure to growth opportunities – we can direct Since flotation in 1988 we’ve averaged over 20% annual funds and people into those that offer the best returns. growth in both sales and profits. And we’ve achieved this largely by organic growth rather than by acquisition. • Better risk management – downturns in individual A predictable business markets and geographies can be offset by growth in others, and we can use our established skills to drive Our future earnings and cash flows are highly visible. Our business performance while developing new skills for contracts run typically for 5-10 years, and in practice our high emerging markets. renewal rate means they can last for decades. Our forward order book currently stretches to 2028. The income from our contracts • Better product development – we develop competencies is highly dependable: some 90% comes from governments and and centres of excellence around the world, and share best international agencies, the rest from major corporations. practice across the whole portfolio. A diverse business A versatile business Our contracts are spread across many countries worldwide Our management processes are designed to exploit the and a remarkable range of activities. This diversity brings benefits of diversity. We’ve developed the Serco Management three key benefits: . 9 5 2 3 2 1 1. 4 9 1,1 , . . 7 5 5 9 7 0 8 . 8 7 8 6 . 6 1 7 5 . 0 2 6 4 . 1 8 6 3 . 3 9 8 2 . 5 8 1 2 . 5 5 7 1 . 7 5 2 1 3 . 7 4 2 . 9 5 2 . 2 8 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 TURNOVER £m Inc luding joint ventures 5 System as a common framework for all our contracts, in An innovative business whatever field of activity. It allows contract managers a We don’t see change as a one-off exercise: we focus on high degree of autonomy while maintaining consistency continuously adding value to customers’ operations over of culture, values and standards – and provides an effective time. So we’re never content with the status quo. The mechanism for monitoring and control. The Serco Best relentless pursuit of constant improvement is part of our Practice Centre and Serco Our World intranet ensure that culture – and underpins our success rate of over 90% on every contract has access to what we learn. contract rebids and extensions. A change business An entrepreneurial business Our core task is to manage positive change within One way to manage an outsourcing contract is to focus organisations, making them more efficient and improving on cost cuts. From the bid stage onwards, we take a more the service they deliver. Serco’s management processes are rounded view: if it was a business, how would we improve specifically designed to help plan and manage change. We it? Can we extend our range of services? Can we increase instil customer focus, reduce bureaucracy, encourage staff sales? Could we develop new revenue streams? What if we to take on broader roles – and have well-developed put in some investment? That’s how our contract managers techniques for measuring progress. are trained and empowered to think. It’s what enables them . 0 7 5 * 2 5 4 . . 7 7 3 . 4 1 4 3 6 0 2 2 2 . . . 3 8 1 . 2 5 1 . 5 2 4 1 9 . 0 . 3 6 . 3 3 . 4 7 . 2 7 . 5 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 P RO F I T £m B e fo re a m o r t i s a t i o n o f g o o dw i l l Over the last 15 years the group has achieved compound average annual growth in excess of 23% in turnover and profit. The majority of this growth has been through additions to our contract portfolio with little impact through acquisitions. * The 2001 accounts have been restated after adoption of UITF 34 Pre-contract costs in 2002. 6 W H AT S O RT O F B U S I N E S S A R E W E ? to keep adding value, constantly improving our performance. An ethical and transparent business It’s also why a significant proportion of our new business We deliver public services, and we change the way people in any year comes from broadening the scope of existing work. In both capacities we touch people’s lives and we contracts: if we show customers what we can do, they often recognise our responsibility to act ethically and sensitively. invite us to do more. Our culture is open and collaborative: we aim to form productive partnerships with both staff and customers. A public service business We recognise our responsibilities to investors, too: we aim As our national and local government customers would to communicate clearly and transparently with them and to expect, we have a strong public service ethos. This is not account for our performance straightforwardly. the same as a public sector ethos: we believe passionately that private sector companies bring distinct benefits to the A socially engaged business task of delivering public services. In the words of the recent We also recognise our role in the wider community. We do not UK Confederation of British Industry (CBI) Statement of believe Serco can or should stand apart from the societies in Intent on public private partnerships, which we helped to which it operates: we aim to engage positively with local formulate, a public service ethos revolves around ‘customer communities and to minimise our impact on the environment. service, a sense of duty, fairness, openness and accountability’. Accountability for corporate social responsibility at a local level is part of every contract manager’s job. 7 what kind of a year H AV E w e HAD? ?a Serco has delivered another impressive performance – our 15th successive year of strong and profitable growth. In addition we have already secured 91% of our planned revenue for 2003 and 80% of our planned revenue for 2004. Our markets remain buoyant. Our forward order book continues to grow and, at £7.1bn, is roughly 5.5 times last year’s turnover. We are currently addressing a further £12bn of opportunities across a range and scale of activities that ensures we can continue to bid selectively. Our portfolio approach to a wide range of public sector markets has provided a strong platform during this period of difficult global economic conditions. We remain confident of achieving double-digit growth both this year and over the longer term. CHAIRMAN’S STATEMENT 8 W H AT K I N D O F A Y E A R H AV E W E H A D ? C H A I R M A N ’ S S TAT E M E N T I am delighted to report another excellent performance – our 15th successive year of strong and profitable growth. Turnover was up 16.2% and pre-tax profits rose 26.3% before goodwill, maintaining our record of consistently high growth. In delivering this growth we have continued to convert a high proportion of profits into cash while funding the working after goodwill amortisation. There were no exceptional items in 2002. Earnings per share rose 16.1% to 9.58p before goodwill and 10.4% to 7.66p after goodwill. capital required to bid successfully and implement new Cash generation remains robust, with 75.1% of group EBITDA business activities and contracts. This is a very satisfying (Earnings Before Interest, Tax, Depreciation and Goodwill result for a year that proved unsettling for the support Amortisation) converted into cash. services sector in the UK. Our vigorous organic growth reflects Serco’s key strengths: new shares in March. This was partly to refinance the our long term contract base, ability to enhance customers’ September 2001 acquisition of AEA Technology’s nuclear operations continuously, and long experience of delivering consulting business – now successfully integrated into outsourced public services across a wide range of markets. Serco Assurance – and partly to strengthen the balance We have a well-diversified portfolio, rigorous risk management sheet to facilitate future growth. Since flotation in 1988 processes integrated with the way we do business, and a Serco has raised new equity totalling £161m – less than our We raised £117.4m through an international placing of selective approach to bidding. acquisition costs of £180m over the same period. Apart from this, we have funded our growth from under £50m to over Contract wins during the year totalled £1.2bn. We won 122 £1.3bn annual sales entirely from internally-generated new contracts, achieving our target of winning over half of new cash flow. bids. In addition, we were awarded 180 rebids or extensions to existing contracts, maintaining our success rate of over More sophisticated forms of contract inevitably mean more 90% in this area. Financial performance complex financial statements. In response, we have introduced Financial Review sections to our annual and interim results announcements and continue to extend our commentary on Turnover grew 16.2% to £1.3bn. Pre-tax profits were up 26.3% relevant aspects of accounting and corporate governance. To to £57m before goodwill amortisation and by 22.2% to £48.9m help investors better understand our Private Finance Initiative 2002 turnover £1,325.9m £28.4m £37.7m £118.6m Acquisitions New awards £1,141.2m Increases in scope of existing contracts 2001 turnover 2 0 0 2 T U R N OV E R G ROW T H I n c l u d i n g j o i n t ve n t u re s 9 (PFI) projects we have also published Our Approach to PFIs. The year was characterised by strong organic growth built The latest edition, updated in September 2002, is available on our website at www.serco.com or on request. Dividend on solid foundations: a track record of effectiveness that attracts and convinces new customers, strategic alliances with partners who enhance our capability and credibility, and an approach to working with customers that encourages The recommended final dividend of 1.44p per share gives partnerships, extensions and broadening of relationships. a cumulative dividend for the year of 2.08p – an increase As in the past, a significant part of our turnover growth has of 11.8% over 2001. It is proposed that the dividend will be come from add-ons and extensions to existing contracts. paid on 13 May 2003 to shareholders on the register on 28 February 2003 (record date). Pensions Major contract awards in 2002 included an innovative partnership with the UK’s Ministry of Defence (MOD) Warship Support Agency to manage the Devonport, The recent poor performance of the equity markets has impacted the group’s defined benefit pension schemes. A valuation at 31 December 2002 has identified a net deficit Portsmouth and Clyde marine services contract. This three- year partnership, worth up to £110m, builds on an earlier contract we have had since 1996. We also won a partnership of £73.6m in accordance with FRS 17 on our defined benefit contract to provide communications and information schemes. This will result in additional funding and an technology services to the Defence Scientific and Technical additional profit and loss charge of £9m per annum. Laboratory, worth some £10m annually for up to eight years. Notwithstanding this increase in contributions, we remain on course to achieve good growth going forward. As a member of the Paradigm Secure Communications team, Operational performance which was selected in February 2002 as preferred bidder to provide and operate Skynet 5 global military satellite Our business is made up of five distinct areas: defence communications services, Serco will be providing network (which accounted for 27% of 2002 sales), transport (27%), and facilities management. This is the largest UK MOD PFI civil government (27%), science (9%) and private sector to date, potentially worth some £220m to Serco over 15 clients (10%). Within these sectors, revenues from PFI years, and good progress continues to be made towards contracts accounted for 12% of total sales. contract signature. p 8 5 9 . † p 5 2 . 8 p 8 7 . 6 * p 3 6 . 5 * p 8 7 . 4 p 8 0 . 2 p 6 8 . 1 p 3 6 . 1 * p 2 4 . 1 * p 3 2 . 1 98 99 00 01 02 98 99 00 01 02 BASIC EARNINGS PER SHARE Before amortisation of goodwill * Restated to reflect the capitalisation issue on 5 April 2000. † Restated after the adoption of UITF Abstract 34 in 2002. DIVIDEND PER SHARE 10 W H AT K I N D O F A Y E A R H AV E W E H A D ? C H A I R M A N ’ S S TAT E M E N T As in any year there were a few disappointments – principally a 15-year extension to the contract under which we manage our unsuccessful bid to manage the Army Training Estate the UK’s Atomic Weapons Establishment (AWE) in partnership and Essex County Council’s decision not to pursue the with Lockheed Martin and British Nuclear Fuels (BNFL). The outsourcing of educational services. But disappointment over contract will now run until 2025, adding over £1bn to our the Essex decision was tempered by continuing growth for forward order book. our education business in Walsall: the local council transferred a further 300 staff to us, tripling the value of our contract to £100m over the remaining 51⁄2 years. This followed a very favourable review of our performance by Ofsted, the Our stature as a light rail operator continues to grow. For an unprecedented second year running we won the UK Rail Operator of the Year award, recognising our operational education regulator, which led to a decision to transfer excellence and innovative customer service on London’s the majority of Walsall’s Local Education Authority activities Docklands Light Railway (DLR). We intend to build on our to Serco. achievements with the DLR, Manchester Metrolink and Copenhagen Metro by selectively addressing additional rail This was one of many cases where strong performance was operating opportunities. We have formed a joint venture with rewarded with substantial contract extensions. Others included NedRailways, the international arm of Dutch national rail the National Crime Squad, which more than doubled the size operator Nederlandse Spoorwegen, to pursue some of these. of our partnership contract to support its IT operations and to design and develop its Intelligence Management System. In the UK our strategy is to build on our contract base and In the US, the Federal Aviation Administration significantly to expand into new areas. While continuing to grow in our broadened our role: we are already one of its largest private traditional markets, we seek out contracts that require greater providers of air traffic control services, and it has now awarded managerial or technological sophistication, with structures us a contract to provide weather observation services. that focus on outputs rather than specified inputs. We The largest addition of all – indeed, the largest contract ever to deliver sustained long term benefits both to the public and awarded to the group – was announced in January this year: to our investors. They and their associated service contracts continue to bid for selected PFIs and expect our PFI projects Preferred bidder Extension and rebids Order book 91% 7% 11% 73% 80% 6% 18% 56% 62% 5% 22% 35% 2003 2004 2005 N EA R TE R M CON FI RM ED OR D E R BO O K A S A T F EB RU A RY 2003 Percentage of planned revenue for the year. 11 will provide an income stream to supplement our revenues This enables us to sharpen our focus on contracts offering from traditional contracts. Under the auspices of the CBI public superior growth, margins and cash generation, and may services strategy board, we have joined other public service lead to minor divestments of certain activities. providers in a programme to promote better understanding of the benefits of public private partnerships. This aims to Risk management stress their importance and effectiveness in obtaining value One of the keys to Serco’s consistently robust performance for money and diversity in public service delivery. is its management system and control framework. Our operations are diversified across some 600 contracts and Our commitment to international diversification – with 30% a range of business sectors. Few contracts represent more of our current business turnover overseas – is one of the than 2% of our turnover and the largest represents only 7%. factors that differentiates us in our sector. But the sheer scale of opportunities open to us in the UK means that we The high degree of autonomy that we give to our contract have to be selective. In Europe we see particular opportunities managers is balanced by rigorous monitoring and unobtrusive in Italy and Germany, and are making encouraging progress but effective controls. In 2001 we set up our Corporate in both. In the Middle East our activities and profile continue Assurance Group (CAG) to integrate our approach to assessing to develop well. In Asia Pacific we are focusing principally on business risks and improving controls, and to ensure that Australia and New Zealand, where state governments continue we safeguard the interests of shareholders, customers, staff to develop policies on public private partnerships. In North and the wider community. Reporting directly to the Board, America we see public private partnerships emerging in both CAG is proving a valuable asset in risk management. the US and Canada: these countries potentially represent a major long term market for our skills and experience. Corporate social responsibility To concentrate management and financial resources on living predominantly by delivering public services. We need the most promising opportunities and markets at home and to demonstrate a public service ethos, as a pre-requisite of abroad, we continue to review our business portfolio. our partnership with public sector customers. Although Serco is a private sector business, we earn our Total forward order book £7.1bn £2.8bn £2.3bn £2.0bn 2003-2005 2006-2010 2011-2028 LONG TERM ORDER BOO K AS AT FE BR UARY 2003 12 W H AT K I N D O F A Y E A R H AV E W E H A D ? C H A I R M A N ’ S S TAT E M E N T We take our corporate social responsibility (CSR) seriously. We have formed a number of ‘working partnerships’ with unions Under our corporate governance framework every contract at contract level and are investigating further opportunities. manager is directly accountable for CSR performance. We have established a global network of CSR champions to raise To support and sustain our growth, we attach great importance general awareness and support initiatives that range from to training and developing our managers. During the year the developing an alternative water supply for Goose Bay residents Serco Best Practice Centre provided courses and workshops in Canada to collecting tonnes of stationery for schools and around the world, and our global intranet played an important orphanages in Kabul. We continue to refine our approach and role by giving people access to training and development are currently developing a new structure for charitable giving. online. In a ground-breaking partnership with the UK’s This is designed to support initiatives by our contracts and Institute of Directors (IoD) we have developed a joint individual employees, direct resources towards the communities where we work and recognise the personal commitment of IoD/Serco Certificate in Company Direction assessed and recognised by the IoD. The first 19 Serco managers were Serco people. People awarded the qualification during the year. Outlook Serco’s continuing success comes from the outstanding The committed future income streams from our contracts give dedication of our people and their personal identification us the assurance of highly visible revenues and profits. At the with what they do. In a MORI survey of a cross section of time of writing we have already secured 91% of our planned staff, 95% regarded their work as ‘more than just a job’. revenue for 2003 and 80% of our planned revenue for 2004. Other positive indications – given our drive for continuous improvement and evolution to meet customer needs – were Our forward order book continues to grow. On 31 December that around three quarters said they understood workplace it stood at £6.1bn, and it now stands at £7.1bn – roughly 5.5 objectives and the need for change, and two thirds actively times last year’s turnover. We are currently addressing over supported the change process. We are grateful for all our £12bn of opportunities and our markets are buoyant. Both people’s energy, enthusiasm and imagination – which add at home and abroad, opportunities are emerging at a rate value both to our business and to our customers’ which continues to allow us to bid selectively. operations. We continue to build constructive relationships with trade has provided a strong growth platform during this period of unions. In the UK we support the Partnership Institute difficult global economic conditions. We remain confident of launched by the Trades Union Congress (TUC) to foster achieving double-digit growth both this year and over the co-operative relationships between employers and unions. longer term. Our portfolio approach to a wide range of public sector markets 13 W H AT d o the NUMBERS MEAN? ?a This year’s results show a business that’s growing well and increasingly profitable. Turnover increased by 16.2% and pre-tax profit before goodwill amortisation was up 26.3%. Earnings per share rose by 16.1%. Cash flow performance was robust. We converted 136% of operating profit and 75% of Group EBITDA into cash. FINANCIAL REVIEW 14 W H AT D O T H E N U M B E R S M E A N ? F I NA N C I A L R E V I E W 1 PROFIT AND LOSS ACCOUNT 1.5 Tax 2002 was another year of strong performance which is representing an effective tax rate of 34.0% (2001 – 32.5%). further analysed in figure 1 opposite. The increase in the effective rate is largely as a result of an increased year on year level of goodwill amortisation. The tax charge for 2002 was £16.6m (2001 – £13.0m), 1.1 Turnover Total turnover increased by 16.2% to £1,325.9m. This includes 1.6 Earnings per share a contribution of £43.3m (2001 – £12.1m) from Serco Assurance Taking into account the above and the increased capital (formerly the nuclear consulting division of AEA Technology), base resulting from the equity placing in March, earnings which was acquired in September 2001. per share before goodwill amortisation grew by 16.1% to 1.2 Gross profit Gross profit of £150m increased by 20.9% and represents 2 DIVIDENDS a return on group turnover of 13.7% (2001 – 13.6%). 9.58p. 1.3 Pre-tax profit The proposed final dividend of 1.44p per share gives a cumulative dividend for 2002 of 2.08p, an 11.8% increase Pre-tax profit before goodwill amortisation increased 26.3% on 2001. to £57m. 1.4 Underlying pre-tax profit 3 SHARE PLACEMENT There were no exceptional items in 2002. In order to allow In March £117.4m (net of fees) was successfully raised through comparison of the year on year results, the growth in an international bookbuilt placing of 39.5m new shares underlying pre-tax profit is shown in figure 2 opposite. representing 9.9% of Serco’s issued share capital. This enabled Underlying pre-tax profit grew 20.1% to £54.9m. Underlying Balance Sheet to be strengthened to facilitate future growth. the Serco Assurance acquisition finance to be repaid and the profits are stated after: • A £2.1m (2001 – £0.5m) contribution from Serco Assurance Since flotation in 1988 Serco has raised new equity • A prior year adjustment of £1.2m in 2001 made on the totalling £161m, roughly equivalent to our acquisition costs adoption of Urgent Issue Task Force (UITF) Abstract 34 in of £180m over the same period. Apart from this, we have 2002; this is explained in greater detail in Bid costs funded our growth from under £50m to over £1.3bn of • A net contribution in 2001 of £0.2m from three one-off items. annual sales entirely from internally generated resources. 15 2002 £m 1,325.9 1,097.3 228.6 150.0 (112.8) – 23.9 (4.1) 57.0 (8.1) 48.9 (16.6) 32.3 34% 421.8m 9.58p 7.66p 2002 £m 57.0 (2.1) – – 54.9 Restated* 2001 £m 1,141.2 913.7 227.5 124.0 (97.6) 5.2 18.7 (5.1) 45.2 (5.1) 40.1 (13.0) 27.1 32.5% 389.6m 8.25p 6.94p Restated* 2001 £m 45.2 (0.5) 1.2 (0.2) 45.7 Change % 16.2 20.9 26.3 16.1 Change % 26.3 20.1 FIGURE 1 PROFIT AND LOSS ACCOUNT Total turnover Group turnover Joint venture turnover Gross profit Other administrative expenses Exceptional items Joint venture profit Group interest Profit before goodwill and tax Goodwill Profit before tax Tax Profit after tax Effective tax rate Average number of shares Earnings per share before goodwill Earnings per share after goodwill FIGURE 2 UNDERLYING PRE-TAX PROFIT Reported pre-tax profit before goodwill amortisation 2001 Acquisition: Serco Assurance Prior year adjustment: UITF Abstract 34 Net one-off items Underlying pre-tax profit before goodwill amortisation * The 2001 accounts have been restated after the adoption of UITF Abstract 34 Pre-contract costs in 2002 (see Bid costs on page 19 for more information). 16 W H AT D O T H E N U M B E R S M E A N ? F I NA N C I A L R E V I E W FIGURE 3 CASH FLOW Operating profit before one-off items Non-cash items – Depreciation and goodwill Group EBITDA Working capital movement Operating cash flows before one-off items Pension payment Exceptional items Dividends from joint ventures Interest and taxation Capital expenditure Disposals of tangible assets Other items Free cash flow Acquisitions/disposals Share issues Other financing Dividends paid Net cash flow Closing cash/(overdraft) Long term loans Other loans and finance leases Recourse net cash/(debt) 2002 £m 29.1 23.6 52.7 (13.1) 39.6 (15.5) – 11.1 (11.9) (23.6) 8.1 1.9 9.7 (10.3) 117.9 (3.8) (8.3) 105.2 69.4 (47.4) (15.7) 6.3 Restated* 2001 £m 21.3 18.3 39.6 (13.9) 25.7 – 6.1 9.6 (12.0) (17.6) 4.6 (7.5) 8.9 (73.6) 2.0 (11.9) (6.7) (81.3) (35.8) (45.6) (12.1) (93.5) * The 2001 accounts have been restated after the adoption of UITF Abstract 34 Pre-contract costs in 2002 (see Bid costs on page 19 for more information). 17 4 CASH FLOW Dividends received from joint ventures during 2002 of £11.1m (2001 – £9.6m) represents a 67% (2001 – 76%) conversion of During the year there was a net cash inflow of £105.2m. profit of joint ventures, after tax, into cash. This inflow was after a one-off payment of £15.5m into the Serco Pension and Life Assurance Scheme in February and 4.3 Capital expenditure includes £117.4m from a share placing in March. This cash Capital expenditure, excluding investment in PFI SPCs, inflow contributed to the reduction in Group net debt/funds, for the year was £23.6m (2001 – £17.6m). As a proportion excluding non-recourse PFI debt, from £(93.5)m to £6.3m of Group turnover this expenditure represents 2% and has respectively, as detailed in figure 3 opposite. remained at a similar level to previous years. 4.1 Operating cash flow before one-off items 4.4 Net debt Operating cash flow, before one-off items, was up 54% to In addition to the recourse debt shown in figure 3, the Group £39.6m (2001 – £25.7m), which converts 136% (2001 – 121%) has a non-recourse loan to fund the construction of the Traffic of our operating profit into cash. Control Centre (see Private Finance Initiatives on page 18). At the end of 2002 this loan was £29.7m (2001 – £14.1m). We believe that, as operating profit is calculated after Non-recourse debt is excluded from the Group’s banking facility deducting goodwill and depreciation, the appropriate measure covenants but is presented as a liability in the Group’s for operating cash flow performance is the conversion of Group Balance Sheet. EBITDA before one-off items into operating cash flows. For 2002 this was 75.1% (2001 – 64.9%). 5 PENSIONS The working capital movement reflects the strong level of In 2002, two of Serco’s pension schemes were accounted for organic growth shown by the Group in 2002 and equates to as defined benefit schemes. approximately one month’s incremental turnover, reflecting the typical invoicing cycle of our contracts. The total 2002 pension charge for Serco was £29.1m 4.2 Joint ventures Serco has two types of joint ventures: those which represent (2001 – £19.5m), with the two UK defined benefit schemes having a cost of £12.5m (2001 – £9.3m). traditional operating contracts, such as the Atomic Weapons FRS 17 Retirement Benefits was issued in November 2000 Establishment (AWE) and Premier Custodial Group (PCG); to replace SSAP 24 for accounting periods ending on or after and those reflecting Serco’s equity stakes of up to 50% in 22 June 2003. In July 2002 the Accounting Standards Board PFI Special Purpose Companies (SPCs). delayed the introduction of FRS 17 until 2005, following an 18 W H AT D O T H E N U M B E R S M E A N ? F I NA N C I A L R E V I E W announcement by the International Accounting Standards 6.2 PFI profile Board that it would also issue a new standard. For 2002 PFIs contributed £154m to turnover and £17.7m to For 2002 we have continued to apply the transitional rules and £6.4m of the profit related to the operating contracts, and and disclosures. FRS 17 requires the market value of assets £43.6m of the turnover and £11.3m of the profit to Serco’s share profit before tax for the year, of which £110.4m of the turnover and liabilities for defined benefit schemes to be calculated of the SPCs. and included in the Balance Sheet. At 31 December 2002 we estimate there was a net deficit of £73.6m in relation 6.3 SPC funding to the defined benefit schemes and an asset base of SPC funding is via long term loans which are non-recourse approximately £294.4m, whilst the Minimum Funding to Serco. Rate (MFR) funding level was 100%. Long term company contribution rates will increase by approximately £9m per • Our share of non-recourse debt of joint venture SPCs at the annum from 2003. end of 2002 is £206.7m. This is included as a liability within investments in joint ventures on our Balance Sheet. In February 2003 we merged Serco’s two defined benefit pension schemes to achieve cost and investment efficiencies. • Traffic Information Services (TIS) Limited is the first SPC To assist this process £15.5m was injected into the Serco Pension where Serco has chosen to own 100% of the equity. This and Life Assurance Scheme in February 2002 to achieve a SPC has the contract to deliver the Traffic Control Centre similar funding level for both schemes. The investment profile contract. A non-recourse loan of £29.7m to fund the asset, of the merged scheme will be kept under continuous review to currently in the course of construction, is included in long match the asset and liability profiles. term creditors in the Balance Sheet. Construction completion is anticipated in early 2004, when the non-recourse loan 6 PRIVATE FINANCE INITIATIVES will equate to approximately £60m. 6.1 Disclosure • In June 2002 the lenders to the Joint Services Command The document Our Approach to PFIs, which was originally and Staff College PFI agreed to change the terms of the issued in 2001, was updated in September 2002 and provides a senior debt. This transaction had no effect on profit but summary of our accounting for PFIs. It is available on our website www.serco.com or on request. allowed £6.7m of cash to be paid from the SPC to Serco by way of dividend and loan. 19 7 REVIEW OF JOINT VENTURE ACCOUNTING AND 9 DEFERRED TAXATION CONTROLS In March 2002, in recognition of the perceived uncertainties issued in December 2000 for accounting periods ended on or arising from certain joint venture accounting practices in after 23 January 2002. FRS 19 requires full provision to be the US, the Board undertook a specific review, including made for deferred tax assets and liabilities arising from timing asking Deloitte & Touche to undertake an independent differences between the recognition of gains and losses in the review of our accounting procedures and internal controls financial statements and their recognition in a tax computation. Financial Reporting Standard (FRS) 19 Deferred Taxation was over our joint ventures. This review confirms the Board’s view that all our joint ventures exist for genuine commercial The tax charge for the year has been calculated in accordance reasons, are correctly accounted for and that our controls with FRS 19. The adoption of FRS 19 has not had a material and disclosures are appropriate. effect on the tax charge, as the Group did not have a material level of unprovided deferred tax liabilities or unrecognised 8 BID COSTS deferred tax assets. UITF Abstract 34 Pre-contract costs was issued in May 2002 for accounting periods ending on or after 22 June 2002. UITF Abstract 34 requires all bid costs to be expensed up to the point where award of a contract is ‘virtually certain’. Bid costs incurred after this point may be capitalised. At 31 December 2001 we had £1.2m of bid costs capitalised in relation to 10 TREASURY POLICIES 10.1 Treasury management The Group’s tax and treasury function is responsible for managing the Group’s exposure to financial risk. It operates within policies approved and reviewed by the Board, which contracts for which we had not reached preferred bidder include controls on the use of financial instruments. The status. Applying the Abstract has resulted in a small prior year adjustment to treat these capitalised costs as expensed in 2001. Having made this adjustment, our accounting policies now fully comply with UITF Abstract 34. Group reviews the credit quality of counterparties and limits individual aggregate credit exposures accordingly. 20 W H AT D O T H E N U M B E R S M E A N ? F I NA N C I A L R E V I E W 10.2 Liquidity management The Group does not hedge the sterling equivalent of the net The Group funds its operations through bilateral bank credit assets of its overseas operations on the grounds that the facilities and a long term US Private Placement of loan notes market value of these businesses does not represent a (‘the US Notes’). Borrowings under the bank facilities are significant proportion of the market value of the Group and floating rate, unsecured obligations with covenants and because foreign exchange differences are unlikely to have a obligations typical of these types of arrangements. material effect on the consolidated net asset value of the Group. At the end of 2002 committed bank credit facilities totalled The US Notes were issued in US dollars but the principal £50m, a further £111m annually renewable uncommitted obligation has been swapped into sterling consistent with the bank facilities were undrawn. The committed bank facilities risk profile set out above. mature in November 2005. The US Notes mature in December 2007. 10.4 Interest rate risk 10.3 Foreign exchange risk The Group’s exposure to interest rate fluctuations on its borrowings and deposits is selectively managed, using interest Due to the nature of the Group’s business, which in general rate swaps. The element of the US Notes that has not been does not involve a significant amount of cross-border trade, swapped into floating rates is considered to offer adequate the Group is not exposed to material foreign currency protection from interest rate fluctuations in the current transaction risk, as sales and costs are approximately market and given the Group’s current low level of net debt. matched within overseas operations. All shorter term debt is maintained at floating rates of interest. 21 WHAT have w e B E E N doing and WHERE? ?a In addition to maintaining our 90% rebid win rate, during the year we continued to extend our capabilities, winning new contracts and forming new partnerships across our principal markets in defence, transport, civil government, science and the private sector. We maintained strong growth in the UK, made good headway in our priority markets in Europe and the Middle East, broadened our base in North America, and consolidated our position in Asia Pacific. One of our greatest business strengths is our diversity – we apply our management skills across a broad range of activities and geographic markets around the world. BUSINESS REVIEW 22 W H AT H AV E W E B E E N D O I N G A N D W H E R E ? B U S I N E S S R E V I E W In the following pages we review the year’s activities top award for industrial safety performance at the site. The by sector and provide an overview of our operations and extension, until 2025, brings the total contract value for Serco markets worldwide. DEFENCE to over £1.7bn and will enable AWE to raise external capital if required for investment to continue developing the site as a world-class scientific facility with safety at the heart of its Defence, our longest-established market, accounted for 27% mission. Meanwhile, investments at AWE during the year of sales in 2002. included installation of the UK’s most powerful computer, which has cut program run time from two months to 15 Defence and security activity has increased in all our regions. minutes for some applications. In the UK the Chancellor’s 2002 Comprehensive Spending Review will raise defence spending by £3.5bn to £32.8bn in In February 2002 the Paradigm Secure Communications 2005/06 – the largest planned real-terms increase in 20 years. team was selected as preferred bidder for the largest defence PFI to date – to provide Skynet 5 global military Serco is a major provider of services to the UK Ministry of satellite communications services to the UK armed forces. Defence (MOD), which has been in the forefront of developing Serco will provide network and facilities management cost-effective ways to outsource defence support activities. services including spacecraft and network operations, We are encouraged by the Defence Logistics Organisation’s network maintenance, training, supply management and declared intention of moving from ‘provider to decider’ on through-life buildings and facilities maintenance under delivery of services, and expect MOD spending on outsourcing a contract potentially worth £220m to us over 15 years. to double, reaching £6.5bn by 2010. We are also a leading Our team has already commenced the implementation of our provider of services to the Australian and New Zealand forces. phase-in plan and good progress continues to be made towards contract award. Our strategy is to retain and expand our existing business, leveraging our core capabilities into new but related areas The Warship Support Agency signed a partnering and selected major bid opportunities. We currently hold over agreement with our Serco Denholm joint venture – 90% £2.5bn worth of defence contracts and see no shortage of owned by Serco – to manage the Devonport, Portsmouth future opportunities. and Clyde marine services contract. This three-year partnership, worth up to £110m, builds on an earlier The defence sector accounted for our largest-ever business contract awarded in 1996. The aim is to reduce overall win at the start of this year. In January 2003 the MOD agreed costs by generating new solutions for long term provision a 15-year extension to our contract for managing the Atomic of marine services. Weapons Establishment (AWE) in partnership with Lockheed Martin and BNFL. Since we began the original 10-year Our strength in IT seat management at scientific and contract in 2000 we have delivered all milestones on time, secure sites helped us win a five-year contract with the surpassed 13 out of 16 performance targets and won the UK’s Defence Scientific and Technical Laboratory. We will 23 provide communications and information services to this international VVIPs and senior military and political agency, which currently has over 3,000 staff at sites across visitors. The award decision is a strong endorsement the UK. The contract has options for three one-year of our performance at Northolt. extensions and additional scope, which together could take the value from a baseline £30m to as much as £80m. In joint venture with SKE Support Services we successfully We successfully strengthened our position in services provide transport services at Wright-Patterson Air Force rebid our contract to maintain over 400 vehicles and to electronic warfare operations, with an MOD contract Base in Ohio. to provide multi-activity services to the Electronic Warfare Tactics Range at RAF Spadeadam. And in a competitive In Germany we are continuing to maintain our good rebid we won a further five-year contract from NATO to relationship with the Bundeswehr – Germany’s ministry of provide engineering services to its Multi-service Electronic defence. Early in 2002 the secretary of defence opened the Warfare Support Group at Yeovilton. This is the latest first of two IT training centres that we equipped and are extension to a contract we first won in 1984 and now operating under a three-year €8.1m contract. The competitively rebid in 1998. centres have already trained some 3,000 soldiers and civilians, achieving above-average results in externally- At HMND Clyde we began a partnership with Babcock assessed examinations. This pilot project has helped to Naval Services who now operate the site. Under a five- convince officials of the benefits of involving the private year contract worth £26m we will provide a one-stop sector in non-core Bundeswehr activity, and a third centre shop for estate management services. has recently been opened in Bonn. We won three important MOD rebids with a total Meanwhile, we have won two new German defence IT operational value of over £30m. At RAF Halton we have contracts – to help introduce a pilot resource management a wide-ranging contract that extends through general system for the Material Support Command and develop engineering and management of the armoury to cleaning integrated quality assurance for the Army Logistics and media services. On Ascension Island we provide a Information System. And we are bidding to provide training comprehensive range of engineering, supply and support support services at the Armoured Training Centre in Munster functions for the RAF. At Wattisham Station, where we – the Panzertruppenschule. provide air traffic services, maintenance and helicopter simulator services to the Army Air Corps, the new contract Among a number of contract extensions in Australia we gives us a broader role including airfield management. added a further year, worth over AUS$10.5m, to the manpower At RAF Northolt, where we provide technical services, engineers, technicians, aviation logistics specialists and we expanded our contract to include the Visiting Aircraft managers to the Royal Australian Air Force at bases across Servicing Section – which routinely handles royalty, the country. and personnel service contract under which we provide 24 W H AT H AV E W E B E E N D O I N G A N D W H E R E ? B U S I N E S S R E V I E W TRANSPORT We won several rebids to maintain urban traffic management The transport sector has been a strong source of growth for and control systems and national motorway communications us in recent years, primarily in the UK and Australia. In 2002 systems in England, Scotland and Northern Ireland. We are it accounted for 27% of sales. now the market leader in maintaining technology on the English motorways, with contracts covering over half the Governments around the world are continuing to invest system. We also re-secured the contract to sell, through our in technology and services for ‘joined-up’ transport systems Swansea-based telesales operation, Select Registrations on that balance different modes of travel and make better use behalf of the Driver and Vehicle Licensing Agency. of public transport. The UK government plans to increase transport spending by 12% annually in real terms, to reach Our PFI to establish the Highways Agency’s Traffic Control £11.6bn in 2005/06, and we have continued to win new Centre continues to make good progress. Construction of the and extended contracts supporting its integrated control centre itself was completed on time and on budget, and transport policy. the fit-out, roll-out of roadside equipment and systems testing are all well underway. As part of this contract, we have been Information is the key to transport integration, and during operating the Midlands Driver Information System since the year we secured a contract with the BBC to provide its January 2002, which has released a valuable police resource. national and regional travel information services covering all road, rail, air and sea networks. Our broadcast service centre We operate London’s Docklands Light Railway (DLR) and began operations in January 2003 and we are now working the Metrolink light rail system in Manchester, where we to develop new travel information services using the internet, helped keep the city moving during the 2002 Commonwealth interactive TV, mobile phones and digital radio. Games by running more frequent services over longer hours to meet increased demand. At the 2002 National Rail Awards, On the roads we secured the contract to equip the UK’s Serco Docklands won the Best Rail Operator award for an first toll motorway, the 27-mile M6 Toll Road, with a £4m unprecedented second year running. As operator of the DLR, communications and traffic management system. It is due to which carried 44m passengers last year, we have earned open in late 2003. The phase-in of a new contract to maintain a reputation for innovation in passenger service and equipment on the motorways in the south east of England information. “Few railway businesses have such an impact was completed on time to start services in February 2003. on community life,” said the judges. Early in 2003 Glasgow City Council awarded us an initial 11⁄2-year contract to supply and install a fully integrated system for management and operation of buses running We remain at the cutting edge of providing solutions to complex technical problems for our customers. We have on Quality Bus Corridors in the city. The system will include been working with Network Rail (effectively the successor technology for vehicle location, fleet management and real- to Railtrack) under an £11m contract to develop a new- time passenger information. Once it is installed we will be generation track measuring vehicle to inspect the UK’s main contracted to maintain it for at least five years. lines on a two-weekly cycle. The ability to measure and 25 monitor track condition at high speed within normal train This is currently bidding for the Wales and Borders and operating patterns will have considerable benefits on Merseyrail Electrics franchises. heavily-used rail routes. The New Measurement Train enters service this spring and two additional monitoring vehicles The first phase of the Copenhagen Metro was completed on will be added later. time and formally opened by the Queen of Denmark in October. We are leading the joint venture that operates the system, Network Rail has also given us two short term contract under a contract worth over DKK500m. The automated, extensions. A £7.5m 15-month extension continues our driverless light rail system initially serves an 11-station, infrastructure-monitoring contract until April 2003, and 13.9km route with some 180 staff, rising eventually to 300 a £4m four-month extension to our multi-purpose vehicles as we open extensions. Passenger numbers are expected contract will cover this year’s weedspraying season – during to rise from 60,000 to 120,000 a day by May 2003. which we will treat about 18,000 miles of track. Our Cardiff Call Centre, which provides rail passenger on traffic management, we successfully rebid our contract information, became the first business in Wales to achieve to manage, operate and maintain the Aberdeen Tunnel. In Hong Kong, where our transport work is focused NVQ Centre of Excellence status for in-house training. And in January 2003, at the Welsh Contact Centre Awards, Serco won both the Best Training Initiative and the e-commerce Most Innovative Use of Technology awards. In Australia we further enhanced our tourism business for Great Southern Railway by establishing the groundwork to extend The Ghan train service to Darwin from late 2003. In Perth, where we successfully rebid our public transport Our rail testing business continues to broaden its information call centre contract, we were also selected as capabilities to become a one-stop shop for testing and preferred bidder to provide facilities management of bus- engineering acceptance of rail vehicles. During the year related infrastructure. it received accreditation from Railway Safety as a Vehicle Acceptance Body. In the US we have extended our relationship with the Federal Aviation Administration (FAA) to include weather In joint venture partnership with SNC Lavalin, we are one observation as well as air traffic control (ATC) services. The of two consortia currently bidding for the Phase 3 network FAA has awarded us a five-year contract to operate weather expansion of the Manchester Metrolink – a 25-year concession. observation stations at seven medium to large airports, with The concession will design, build, operate and maintain at five more to follow in January 2004. least three new extensions to the network while also operating and maintaining the existing system. And in support of our In the Middle East we successfully rebid our contract with plans to bid for selected UK rail franchises, we have formed the United Arab Emirates – held since 1986 – to provide ATC a joint venture with NedRailways, the international arm of and engineering services at the Emirates Area Control Centre the Dutch national rail operator, Nederlandse Spoorwegen. in Abu Dhabi. 26 W H AT H AV E W E B E E N D O I N G A N D W H E R E ? B U S I N E S S R E V I E W Further growth in our airport business will come from an boost if the UK adopts proposals for weekend and night-time investment in South Africa signed in November. Our 50:50 prison sentences enabling offenders to retain normal joint venture with Equity Alliance has acquired a 51% interest employment. in Apron Services Pty, a government-owned airline ground handling company supporting three international and three In 2001 we stepped in at short notice to support a critical domestic airports in South Africa. It has contracts with 53 national intelligence system serving the UK’s 66 police forces airlines. This investment of £4m will provide an opportunity and other agencies. Our response proved effective, and to develop our services in civil aviation and a platform for in 2002 we were awarded a five-year contract to maintain exploring other market opportunities in South Africa. and support the system. CIVIL GOVERNMENT Building on our growing reputation for services to police This is our most rapidly-evolving market, with opportunities forces, we won a contract from Merseyside Police to provide emerging in sectors such as justice, education and healthcare and support its new command and control system. The pilot where outsourcing is relatively new. In 2002, civil government system went live very successfully in November and full contracts (excluding the transport and science sectors, which operations will begin in March 2003. Other forces for whom are reported as separate segments) accounted for 27% of sales. we operate command and control systems include the Justice Hampshire and Isle of Wight Constabulary – which has now appointed us to support the system with a full business Our activity in this field is currently focused on the UK, continuity and disaster recovery solution. where the criminal justice budget for England and Wales is £14.7bn this year, rising to £18.3bn over three years. We are the UK market leader in providing road safety We estimate our current addressable market at about cameras. During the year we won contracts to supply and £1.3bn, covering intelligence, operational support, install over 300 additional camera locations in Lancashire demand management and technology services. There is and West Yorkshire. major potential for working with police forces in England and Wales to identify non-core activities that can be Our development work continues on the National Crime outsourced, allowing operational staff to concentrate Squad (NCS) Operations and Intelligence Management on policing and investigation. The custodial market continues to expand – opportunities include prison PFI tenders, secure training centres for juvenile offenders and development of new immigration System and we have delivered the first modules, including the Evidence Management System. We have added several enhancements to the original contract. These include opening and managing a new 39,000ft2 seized assets store, introducing a secure knowledge management system and providing the IT accommodation centres over the next five years. Electronic and communications infrastructure for the newly-formed tagging and monitoring of offenders is a current and rapidly- Immigration Crime Teams. We will provide support services growing non-custodial market which could receive a further to these teams in line with the main NCS contract. 27 Premier Custodial Group (PCG) continues to perform well. In April 2002, Ofsted commended our service quality in The business now comprises five prisons, one secure training Walsall and our progress in restructuring and redefining centre, one immigration detention centre and court escort school support services. After reviewing the remaining services and electronic tagging activities. There have been some provided by the LEA, Ofsted recommended that these, too, performance issues at HMP Ashfield Young Offenders Institution, which we are working through and are well on the way to being resolved. As previously reported we are pursuing through the courts a contractual right to acquire full control of PCG following our partner’s merger with Group 4 Falck: the court’s decision is expected in the middle of this year. Education should be outsourced. The result was a threefold expansion of our contract from September: over the remaining 51⁄2 years it will be worth some £100m to us. A further 300 Walsall Council staff transferred to Serco in January this year. Ofsted has also recognised the significant progress made by our educational partnership with Bradford Council. The performance targets set by the contract are demanding and there is much work still to do before we can meet them all. But already government figures show above-average In the UK, this market has expanded and evolved rapidly improvement in Bradford schools since we arrived and in over the past year. Opportunities for working in partnership the primary school league tables Bradford is the third most with local education authorities (LEAs) continue to emerge. improved LEA in the country. Over the longer term we believe schools will gain increasing autonomy to purchase the services currently provided or Outside the UK, our activities in the education sector include bought by LEAs. The education budget for England will rise managing and maintaining school and university facilities by 6% a year in real terms to reach £58bn over three years – in Australia and Sweden. Last year we won a new contract when spending per pupil will be 50% higher in real terms to provide facilities management, teaching assistants and than in 1997. We have been developing an extended range administrative support to a new 1,200-pupil secondary of services for schools to enhance our market position. Our school in Hong Kong which opened in September. turnover in education is currently over £75m a year and in the UK we are one of the sector’s leading service providers. Our strategic focus on organic growth means that when we Our education business is not only with LEAs. In April, rather than capacity. The acquisition in 2000 of Quality for example, we retained and expanded a contract worth Assurance Associates in the UK – the basis for our fast-growing over £3m a year to inspect more than 200 schools annually education business – was a case in point. In December 2002 for the UK education inspectorate, Ofsted. we acquired CCM Software Services for an initial consideration make acquisitions we tend to buy complementary capabilities Our progress in Walsall, where we have provided services to scheduling, resource allocation and finance systems that 129 schools on behalf of the LEA since 2001, has demonstrated complement our existing school management and improvement how our effective management drives strong organic growth. products to make a unique integrated toolkit. Its customers of £8.6m. CCM produces, maintains, updates and operates 28 W H AT H AV E W E B E E N D O I N G A N D W H E R E ? B U S I N E S S R E V I E W include a rapidly growing number of schools, universities recognised by the Hong Kong government, which rewarded and colleges and nearly all the secondary schools in Ireland. us with a prestigious Caring Company award. This year we have launched Serco Learning, which brings Other public services the CCM products together with our existing portfolio of In addition to the principal areas described above we also virtual learning environment, leadership training and provide a wide range of other services – both behind the consultancy products. Together, these put us in a unique scenes and in direct contact with the public. position to work with schools on all areas of development. Health In the UK we won a 10-year rebid and expansion of our environmental services contract with Canterbury City The majority of our activity is currently in the UK, where we Council, worth £53m. The new contract represents a deeper are involved in two of the first wave of hospital PFIs – Norfolk level of partnership with the council – and includes operating and Norwich University Hospital and Wishaw General Hospital, the call centre which is the customer’s first point of contact, both now operational. New UK markets are emerging in taking 50,000 calls a year on a wide range of council services. information technology and clinical service provision as well as a variety of support service partnerships. Outside the UK we Our local council services business made further headway in provide hospital support services in Hong Kong and Australia. January 2003, when we won Woking Borough Council’s ground maintenance and street cleaning services. Subject to contract, In June we broadened our capabilities by acquiring SDC we will work from a dedicated depot in the Woking area, with Consulting, a leading provider of strategic consultancy contract management and support from our existing operation services to NHS customers. This enables us to grow into both in Winchester. This partnership contract is expected to be worth existing and emerging health markets by developing a new at least £25m over 10 years, with additional revenue depending solutions business that combines a strengthened consultancy on the service and extension options that the borough exercises. and advisory practice with participation in clinical and non- clinical support service partnerships. The government has In Belgium three contracts further strengthened our recognised our capabilities by making Serco one of only eight relationships with major European institutions. The European private companies approved to support underperforming NHS Commission (EC), already an established IT customer, awarded trusts identified in the NHS franchise programme – a role us a new contract to provide IT support. The European similar to the one we are playing with local education Parliament chose us to provide IT services to its members authorities. and their offices in both Brussels and Strasbourg. We also successfully rebid our ‘complete life cycle’ computer services Our track record at three hospitals in Hong Kong won us contract with the EC’s Directorate General for Regional Policy. contracts to provide cleaning and non-clinical services at two more: the Tseung Kwan O Hospital and the busy 1,265-bed In New Zealand, Wellington City Council awarded us a contract United Christian Hospital. During the year our efforts were to provide planned and responsive maintenance services for 29 over 30 buildings ranging from high profile council offices, SCIENCE museums and libraries to retail and office buildings. Our Management of government scientific undertakings developing relationship with Manukau City Council has earned is a relatively recent but fast-emerging sector, in which us an additional contract each year since 1999. In 2002 we won Serco was an early entrant and has established a strong two further contracts to maintain its playgrounds, structures competitive position. Our science contracts now account and asset management of buildings, bringing total annual for 9% of sales. We aim to be recognised by governments revenue from the city to over NZ$7.6m. Impressed by our around the world as one of the best private sector partners track record, Rodney District Council awarded us a NZ$17.2m for the management of scientific organisations, programmes five-year contract to manage parks, reserves and coastal areas. and consulting services. In Australia we successfully rebid our property management UK government investment in science, engineering and contract, worth AUS$22.2m over five years, covering all the technology (SET) supports innovation and competitiveness justice buildings in Perth and all education buildings in in the economy, as well as defence, health, safety and south Perth. environmental management. Government SET expenditure is increasing and we expect it to exceed £8bn in 2003/04. Hong Kong is planning a sophisticated meter system covering all its on-street parking. This will use reloadable smartcard In the UK we have demonstrated our capabilities in managing technology compatible with the island’s Octopus transport highly complex science-based organisations such as the and cash transaction card. Our joint venture with Wilson National Physical Laboratory (NPL) under partnership contracts Parking will design, install and maintain the system using with government – delivering services that range from prize- dual language technology that we have developed, under a winning international research to support for small business. seven-year contract worth almost HK$87.9m. In Singapore We have also built a strong position in nuclear safety and we have carved out a niche with the government as a provider aim to support government in its management of nuclear of accommodation management services. Last year we gained liabilities: government spending in this area under a long a further contract, as managing agent for 411 housing units. term programme is estimated to be over £30bn. We believe our UK experience provides a model that can be applied In the US we extended our contract in San Francisco to install in other countries as they involve the private sector in and manage over 25,000 parking meters, to run for delivering public science services. a further five years. All our US government contracts begin and end with an environmental baseline study, which we In the run-up to a rebid at NPL, our contract has been can provide in-house through Serco Environmental Services. further extended – taking our original five-year contract We also market these services externally, and recently won into its eighth year. Together with Laing, our construction a contract – indemnified by the Canadian government – to partner, we are currently developing world-class new science conduct a major baseline study on the largest non-commercial facilities at NPL. After some early setbacks, construction is bulk fuel storage tank farm in North America. now well advanced and we are working closely with the 30 W H AT H AV E W E B E E N D O I N G A N D W H E R E ? B U S I N E S S R E V I E W Department of Trade and Industry and Laing to resolve all Our existing business consists mainly of multi-service outstanding issues. Meanwhile, we have launched major new facilities management contracts for blue-chip clients. national facilities, including a centre to secure accuracy in Microsoft, for example, recently added five years to our radiation therapy for cancer sufferers and a laboratory facilities management contract covering its seven properties developing innovative measurement techniques for bioscience. in Ireland. It also awarded a one-year contract for support services, with a view to integrating it with the remaining Serco Assurance (formerly the nuclear consulting division of four years of the facilities management contract. AEA Technology) has substantially augmented our offering in nuclear safety. Now integrated with our science business, We increased the scope of our work with Ilford – one of it is performing in line with expectations and generating the world’s leading photographic imaging businesses – new opportunities. by taking over the field force of specialist technicians that supports its equipment across Europe and the US. In May Serco Assurance won a new contract to support the This gave us the opportunity to develop a new Asset and BNFL Magnox Reactor Services Organisation with a range Equipment Services (AES) business. In August 2002 we of technical services, in a consortium led by Mitsui Babcock. finalised agreement with Imation, one of the leaders in The consortium will provide 85% of the external technical removable data storage, to transfer its field services and support to the organisation’s six operating Magnox nuclear field technician staff to our AES business in Germany and power stations; this is the first time such a contract has the Netherlands. Together, these contracts have given us been let in the UK civil nuclear industry. The value to Serco a stable platform for addressing the field service market will be about £10m over three years, with a possible two- and possibly creating further opportunities elsewhere in year extension. the world. More recent projects have included testing superalloys for In the Middle East, our new Serco Gulf joint venture ALSTOM Power in Sweden, environmental studies for a low- won a 10-year contract to deliver engineering and other level radioactive effluent pipeline, simulation studies of support services to the Dubai Ports, Customs and Free Zone corrosion in Magnox boilers, specialist computer modelling work Corporation at Jebel Ali, Port Rashid and other locations for the Swedish radioactive waste disposal agency and a variety in Dubai. This is a ground-breaking contract that should of environmental protection projects. Contract extensions provide a springboard to other government contracts included two three-year contracts from the UK MOD to provide in this expanding marketplace – initially in Dubai and research and support services aimed at detecting and managing eventually in the rest of the United Arab Emirates battlefield radioactivity hazards. We also extended a contract and other Gulf countries. with Network Rail under which we are developing asset management information technology, which we have already We continued to grow our relationship with BHP Steel applied to London Underground and Yorkshire Electricity. in Australia, building on our original protective and PRIVATE SECTOR emergency services contract at its Port Kembla steelworks. Last year we added fire and transport services, and The private sector accounted for 10% of sales in 2002. are now responsible for fire equipment inspection Because of the scope available to us in the public sector, and maintenance and personnel transport movement this market has not been a primary focus so far, but it at all BHP Steel operations in the Illawarra region does provide opportunities which we address selectively. of New South Wales. 31 WHERE DO WE operate? ?a Our operations are widely distributed across selected markets in the UK, continental Europe, the Middle East, Asia Pacific and North America. The range of our activities varies from region to region. We are finding increasing opportunities to transfer expertise. 32 W H E R E D O W E O P E R AT E ? United Kingdom SALES 2002: £930.5m – up 17% The UK provides some 70% of our business and remains an • Transport: We have built strong positions in both road exciting market for us. Our expertise and proven track record, and rail transport; for example, we are national Rail combined with a receptive marketplace, enable us to continue Operator of the Year and a market leader in fields as innovating to develop value for money solutions for both diverse as road traffic management systems, passenger government and industry across a wide range of activities. information and rail infrastructure maintenance. We are Key sectors currently building the Highways Agency’s new Traffic Control Centre for England. We operate complete rail • Defence: Since we began maintaining the Ballistic Missile franchises for the Docklands Light Railway and Early Warning System site at RAF Fylingdales in 1964, we Manchester Metrolink, maintain railway property and have built a business that now encompasses UK contracts infrastructure including nearly 1,800km of track, provide ranging from helicopter simulator training to managing, rail passenger information services from our Cardiff with our partners, the Atomic Weapons Establishment. Call Centre and undertake infrastructure and rolling We are a market leader in task management, operational stock testing. and logistic support to the UK armed services. • Civil government: We have over 25 years’ experience in and technology since the original Fylingdales radar delivering public services – across a range of activities that contract. Today we manage scientific establishments now spans justice, education, health and local authority including the National Physical Laboratory and are services. We are in the forefront of the trend towards private also the UK’s largest provider of nuclear safety and provision of public services through ever more sophisticated performance services. and output-oriented contracts. • Science and technology: We have had our roots in science Defence 27% Transport 27% Civil government 27% Science 9% Private sector 10% 2002 Total turnover £1,325.9m Including joint ventures Defence 29% Transport 25% Civil government 27% Science 8% Private sector 11% 2001 Total turnover £1,141.2m Including joint ventures SECTOR SEGMEN TAL ANALYSIS – TOTAL GROUP 33 Continental Europe and Middle East SALES 2002: £170.6m – up 22% From our roots in IT support contracts in Italy, Belgium and • IT support: This was our original core activity in Europe the Netherlands, through our defence and government services and remains a growth area. We now provide support to the business in Germany to our aeronautical and airport technical IT infrastructure of the European Commission, serving users services expertise in the Middle East, we have an increasingly in four countries. Other customers include the European diverse business. Key sectors Space Agency (ESA), European Parliament and Italian regional and central government. • Defence: Our involvement in the defence sector on the • Science and technology: We first worked for ESA in the European mainland is relatively new, but we have established 1970s and have become one of the agency’s major suppliers increasingly important relationships with the German – providing a range of spacecraft engineering, scientific, ministry of defence and the Dutch navy. IT, project management and support services at sites across Europe. Other customers include the European • Civil government: Our services to local and national Particle Physics Laboratory, CERN, close to Geneva. governments extend from buildings management to a range of technical services including development of safety cases • Air traffic services: We began providing airport services for nuclear facilities. • Transport: We are extending our light rail and traffic including air traffic control (ATC) in Bahrain in the 1940s. Now we have contracts for primary air traffic services across the region – including ATC, engineering, meteorological management expertise into continental Europe and have had services, aeronautical information services, ATC training particular success in Scandinavia. We operate the newly- and aviation systems development. opened Copenhagen Metro and Stockholm’s Central Technical System, which facilitates traffic management and the dissemination of traffic and travel information for the region. UK 70% Europe and Middle East 13% Asia Pacific 12% North America 5% 2002 Total turnover £1,325.9m Including joint ventures UK 70% Europe and Middle East 12% Asia Pacific 12% North America 6% 2001 Total turnover £1,141.2m Including joint ventures GEOGRAPHIC SEGMENTAL ANALYS IS – TOTAL GROUP 34 W H E R E D O W E O P E R AT E ? Asia Pacific North America SALES 2002: £155.1m – up 9% SALES 2002: £69.9m – up 7% As well as large, broadly based operations in Australia and Having entered the North American market in 1993, we have New Zealand we have operations in Hong Kong and a foothold steadily built businesses in the US, Canada and Bermuda. in Singapore. Key sectors We provide a broad range of services in the federal, state and local government sectors, concentrating on air traffic control operations and management, managed fleet services, and • Defence: We are a major player in defence support in multi-activity base operations for the defence forces. Australia and New Zealand. In Australia we provide 50% of all garrison support services and our port service contract Key sectors for the navy is seen as a case study for future public private • Defence: We provide a wide range of base support services. partnerships. In New Zealand we are the largest service For example, at Wright-Patterson US Air Force Base we provider to the forces. Looking ahead, we aim to build on provide vehicle operations and maintenance for a community our highly successful defence maritime services joint venture of 23,000 and thousands more visitors each year. In Canada with P&O. we have a full multi-activity contract employing over 300 staff for the Department of National Defence at Goose Bay. • Civil government: Our services include maintaining buildings and open spaces, warehousing and distribution, hospital • Civil government: We are growing our business with state support and water and wastewater services. Major contracts and local governments across a wide range of services. For include providing civil, mechanical and electrical engineering example, we undertake parking management, enforcement services to City West Water in Melbourne, covering some and meter collection services, manage municipal vehicle 260,000 properties including Victoria’s largest petrochemical fleets, conduct environmental studies and operate leisure and manufacturing facilities. facilities such as the multi award-winning ecological visitor • Transport: In Australia we operate bus services, manage and maintain road infrastructure, build and support traffic • Transport: We are a leading private air traffic control management systems and manage airports. We own Great operator across the US, where we now operate 58 ATC Southern Railway, which we have restored to profit since towers. We also provide meteorology and other services we bought it from the Australian government. In Hong Kong at civil and military airports in the US, Canada and we have a number of road tunnel and parking management Bermuda. Vehicle fleet maintenance is a growth activity centre at Hopewell Rocks in Canada. contracts. for us in several sectors, particularly defence, utilities and civil government. In Seminole County, Florida, • Health: We provide support services to a growing number we manage over 1,600 county vehicles and items of hospitals in Hong Kong and Australia. of municipal equipment. 35 I N S I D E S T O R Y WHERE DO WE operate? Wherever we operate, we apply the same skills and processes for managing change and maintaining continuous improvement. These skills and processes can be successfully brought to bear on virtually any kind of contract or activity – as these two very different examples demonstrate. In Australia, we used them to transform a rail business rapidly after acquiring ownership – while in Europe we’ve used them to evolve and develop our IT services to the European Space Agency over more than two decades of technological change… Exceeding expectations – in six languages European Space Agency IT We’ve been providing technical services support to the European Space Agency (ESA) for over 20 years – since we were part of RCA. Our activities today include spacecraft engineering and scientific research projects. They also include activities that may not be rocket science, but are no less important to the organisation’s effectiveness – such as supporting ESA’s 3,500 computer users. W e won our first ESA computer In 1999 we began our first service level agreement experienced call agents operating a multilingual operations contract in 1980, when (SLA) contract for ESA, providing a range of IT service desk in Frascati, Italy, and there’s a computing was all about mainframes: services. We determined how best to deliver the permanent force of technicians and engineers at our operators worked in computer rooms and services, then successfully tendered against other nine of the 15 sites. In addition to the base services network centres at ESA’s four major sites in bidders’ solutions. Holland, Germany, Italy and France. defined in the SLA, we provide a wide range of additional services from system management and Four years on, this approach has exceeded database administration, to graphic design. Over time, computers changed beyond all the agency’s expectations. Applying our ‘IT seat recognition, yet service contracts stayed much management’ approach, we now support 3,500 The contract has proved an important and the same. They specified the number of people ESA users at 15 sites in nine countries – as well innovative step for both ESA and Serco. Its flexibility we should supply, and the hours they should as 5,000 external users of ESA applications. has been a boon for such a diverse user population work. Working this way, we provided a reliable – which ranges from scientists and engineers to service and our role at ESA grew. Now our We’ve built a pan-European operation providing administrative staff. With user satisfaction running contractual relationship has taken a significant desktop support, network management, email at over 98.5% we’re exceeding our contractual step forward. A few years ago the agency and document management with libraries and service targets. ESA recognised this achievement moved away from specifying the detailed inputs databases, and applications infrastructure support. by extending the original three-year contract by to the contract; instead, it defines the outputs it We design and install systems, maintain them, a further two years. And to confirm our quality needs and looks for best value and innovation in help people use them, and resolve any problems credentials, our ESA team achieved ISO 9001- delivering them. that arise. For first-line support we have 23 2000 accreditation in 2002. WHERE DO WE operate? Turning the trains around Great Southern Railway Five years ago, the Australian national passenger railway service was losing around AUS$25m a year. Today, it’s a profitable business. And it already has over 11,000 people lining up for its latest service – which doesn’t even launch until late 2003. W e acquired the operation from the renamed it Great Southern Railway (GSR). We Australian government in 1997 as part refurbished the carriages and the service to of a consortium, buying out our turn an Indian Pacific or The Ghan journey into partners in 1999. We’ve built it into a world-class a real travel experience. We created a range of tourism business operating three long-distance products, from the budget-priced Red Kangaroo services. The Indian Pacific spans the continent Class to the premium Gold Kangaroo Service from east to west, linking Sydney and Perth. The and prestige heritage carriages. Overland links Adelaide and Melbourne, while The Ghan runs from Adelaide to Alice Springs – and on We expanded sales distribution across the to Darwin from late 2003, to complete a north- world, appointing GSR sales managers in south route across the continent. the UK and US. And we made Indian Pacific The turnaround was based on rethinking the own Trainways packaged holiday operation – business from a marketing point of view. We now one of Australia’s fastest-growing holiday and The Ghan journeys the centrepiece of our programmes. GSR retail outlets in Melbourne, Adelaide and Sydney support a wide network of travel agents and our own international call centre. The result has been a dramatic growth in sales, with passenger revenue up 39% since we took over the business. Despite the aftermath of September 11 and the Bali bombing, GSR again achieved record sales in 2002. Growth will be further stimulated this year by the opening of the Alice Springs-Darwin link, allowing The Ghan to become a coast-to-coast service. Over 11,000 people have already joined the Top End Club to gain priority access to tickets on the new route in its first 12 months of operation. In just a few years we’ve transformed a burden on the taxpayer into an internationally acclaimed, customer-focused and profitable business. “with user satisfaction running at over 98.5% we’re exceeding our contractual service targets.” 37 what ARE OUR opportunities for growth? ?a At present we are focusing on selected opportunities in the UK, Italy and Germany, North America, the Middle East, Australia and New Zealand. Given the scale of our addressable market and the diversity of sectors in which we are active, we have developed clear criteria for determining specific focus areas. The criteria we’ve developed for selecting key targets in a worldwide marketplace will shape the way Serco evolves in the future. The market for outsourced public services is expanding worldwide. In a marketplace that is so large and growing so fast we have to be highly selective in the opportunities we choose to pursue. Our strategy is to maintain a balanced portfolio of businesses, ensuring an appropriate mix of new opportunities and strong organic growth to maintain our success in the future. 38 W H AT A R E O U R O P P O RT U N I T I E S F O R G ROW T H ? Our vision more opportunities than ever for developing long term Our vision is to become the leading global outsourcing relationships with our customers to deliver complex company. To achieve this, we are pursuing and helping to outcomes. The government’s Comprehensive Spending Review shape multi-activity service contract opportunities with will take annual spending by government departments from governments around the world as they seek to harness £240bn in 2002 to £301bn in 2005/06 – a 25% uplift in three commercial expertise and private finance to manage public years. Coupled with the stated aim of improving public services better and more efficiently. services, this presents us with a wealth of opportunity over Key geographic markets the next few years. The principal beneficiaries will be the justice, education, health and defence sectors in which we Around the world the public and budgetary pressure on have tremendous strengths and significant experience. We governments to improve service delivery and cost efficiency fully support the government’s reform agenda and continue is ever-growing. As a result, more and more of our key to enhance our core skills and capabilities in organisational geographic markets are looking to the private sector for change and the transformation of public service delivery. support. To maximise our growth potential we are not only responding to conditions in the most favourable markets, but While aiming to enhance our reputation for trusted, working in partnership with government bodies to create new consistent service delivery, we also intend to be recognised opportunities based on long term relationships. The relative as a reliable strategic partner for government in the design, attractiveness and development rate of these opportunities build and implementation of world-class public services. will vary from one geographical market to another. United Kingdom Because our customers are now looking for support at earlier stages in the development of sophisticated contract models, The UK remains our core market and continues to demand we are establishing a new public sector strategic consultancy innovation in the delivery of public services: we are seeing service. This integrates our existing capability with a newly Australia/ New Zealand High Low g n i c r u o s t u o f o e e r g e D UK North America Europe Japan 0% 1% 2% 3% 4% 5% 6% 7% 8% Annual growth rate GROWTH IN PUBLIC EXP END ITURE Source: EIU Country forecasts, inflation adjusted; Europe based on Germany, France, Italy and Spain.Ł Size of the boxes represents total government expenditure 2002 (US$bn). 39 formed team to support clients as they develop strategies for and our portfolio of contracts with a number of European organisational reform, transformation of public service agencies gives us additional capability and credibility. In delivery and creation of cost-effective supporting infrastructure. Germany, significant steps are being made in the education, It will deliver sustainable value by establishing long term defence and transport sectors. In Italy, the outsourcing of relationships based on realistic organisational process non-core government services is now the norm. In the Middle and fiscal designs and achievable business transformation East, our solid contract base in aerospace and air traffic planning. By applying its expertise not only in the UK but services is providing a platform for diversification and worldwide, it will benefit our reputation and operations growth – as evidenced by our recent contract to deliver throughout the group. engineering and other support services to the Dubai Ports, Customs and Free Zone Corporation. The consultancy team will be backed by specialist programme delivery units drawn from within Serco to provide practical Asia Pacific solutions that meet requirements for change and operational The Australian defence outsourcing market – in which performance improvement, information management, we are a market leader – is maturing, but a programme of infrastructure regeneration and project management. defence and civil PFIs is beginning to emerge as Australian states come under increasing budgetary pressure. The New Continental Europe and Middle East Zealand government has begun to pursue public private The diverse European markets in which we operate are partnerships in transportation and to look at wider evolving rapidly. Financial, political and social imperatives applications for private finance. In Japan, pressure for are driving governments towards new models for the delivery reform of public finances has led to the introduction of PFI- of public services, requiring greater private sector involvement driven opportunities. We continue to monitor these markets in both funding and providing services. Germany and Italy closely: our strategy is to focus on selected opportunities are key markets where we are well positioned for growth – where our experience will have the greatest impact. Mature Developing Embryonic Development curve UK Italy Australia/US Western Europe Time MARKET DEVELOPMENT Relative position of key markets on the development curve. 40 W H AT A R E O U R O P P O RT U N I T I E S F O R G ROW T H ? North America Selecting and balancing opportunity The US government has recently announced a major reform A core part of our strategy is to maintain not only a wide of procurement policy. Over the next two years federal geographic presence but also a broad base of core skills agencies will have to open up 50% of their activities to private and expertise. This diversity protects us against downturns sector competition, and this will rise eventually to 100%. This in individual markets, and balances maturity in one with the directive will effectively market-test over 800,000 government growth of another. It means we can draw on a wide portfolio posts. In 2002 the US government spent over US$80bn on of management competencies and core skills that enable us services, including information technology, base operations to compete effectively for the most demanding contracts. And and engineering services, and we expect annual growth of it also exposes us to more growth opportunities than we can at least 12% in the federal sector. Major growth will be seen possibly pursue – so an important function of our annual in the Departments of Defense and Homeland Security, where planning is to select the right opportunities. the combined 2003 budget is likely to exceed $400bn and further significant growth is expected over the coming years. Our selection processes are rigorous and designed to help In Canada federal, provincial and municipal governments are us balance the portfolio, maintain our focus on opportunities using public private partnerships to solve budgetary gaps most likely to deliver success and provide the best return and to improve public services, particularly in the health to shareholders. Our confidence in our growth planning and and transportation sectors. British Columbia (BC) has created forecasting is founded on the ability to make considered a new central agency, Partnerships BC, to drive this process. decisions about each opportunity, be it a new market entry North America remains the world’s largest outsourcing market or a single contract, based on robust assessments of the and so demands careful and constant attention from us. financial and strategic benefits. 41 I N S I D E S T O R Y what ARE OUR opportunities for growth? One area where we see clear opportunities for growth is rail transport. In the UK, Scandinavia and Australia we’re building an impressive track record – and demonstrating a variety of options for reducing the cost of public transport to the taxpayer. London’s award-winning Docklands Light Railway (DLR) is a case in point… what ARE OUR opportunities for growth? Best in Britain – twice running Docklands Light Railway An urban metro isn’t just a piece of transport infrastructure. It’s part of the way people live. It’s how they go to work, how they get to the shops, how they have a night out. If you want to run it properly, you have to engage with the way people run their lives. That’s what the National Rail Awards judges had in mind when they named us Best UK Rail Operator last year, for the second year running. They didn’t just commend our service intervals or the cleanliness of our trains. "The DLR is as much part of East London as Bow Bells," they said. % 6 9 0 9 . % 3 6 6 8 . % 6 6 2 9 . % 4 0 2 9 . F ive years ago, when we took over the One key to our success is the close partnership franchise, that certainly wasn’t the case. with our customer, Docklands Light Railway Ltd. Since then we’ve stepped-up service This ensures the effective use of resources to deliver frequency and capacity. We’ve cut delays by 70% the best possible services to the travelling public. and vehicle failures by 40% to beat the franchise target of 96% reliability. And because people The second factor is the way we’ve built the DLR know they can trust the service, they use it more. into the life of the community. First we made it The number of passengers has more than frequent and reliable. Then we made sure everyone doubled, from 20m to over 44m. knew about it, by taking real-time train information Being able to run our own show is an advantage. innovations have included displaying train arrival out of the stations and into the community. Our 99 00 01 02 C USTOMER SATISFACTI ON We’re responsible for the whole business, including countdowns in public buildings and office lifts operation and maintenance of the trains, structures, around individual stations, and making accurate tracks and automatic signalling. We’ve also been arrival information instantly available on the able to increase non-core revenue through internet and mobile phones. innovations in areas such as advertising, retail and promotions – increasing the value of the franchise and ultimately reducing the public cost of supporting DLR services. We’ve also built strong links with local Behind the scenes we’ve supported crucial organisations, from schools to businesses and infrastructure investment; for example, by charities. We provide free travel for some local integrating a second-generation computer-based primary schools, community groups and special signalling system. And our public face has been needs organisations. We support vital local enhanced by multi-skilled staff who have the initiatives such as an ethnic community centre, a training and empowerment to deliver friendly toddler care centre, a children’s hospice and a drop- and helpful service. in centre for the unemployed. We sponsor the Women in Docklands business networking That combination of qualities – in people, organisation and the Round The Island Road Race technology and communication – is what’s made for charity. You can see school children’s art on the delivery of the DLR service special. This was . 2 4 4 . 2 1 4 . 8 5 3 . 2 0 3 . 3 6 2 . 9 9 1 . 8 6 1 . 5 4 1 95 96 97 98 99 00 01 02 DLR trains, the Salvation Army making weekly reflected by the London Transport Users Committee HOW PASSENGER NUMBERS HAVE GROWN collections on DLR concourses, and secondary in its 2001/02 annual report: “[The DLR] continued school teams in DLR-sponsored football kit. In to achieve a level of service reliability, and of user Since Serco took over in 1997 passenger numbers have doubled to 44.2m. these and many other ways we’ve woven the DLR satisfaction, that London’s other public transport into the fabric of community life. operators could only dream of.” “DLR continued to achieve a level of service reliability, and of user satisfaction, that London’s other public transport operators could only dream of.” 3) ANNUAL REVIEW (Pr8)NEW 11/3/2003 22:05 Page 43 43 where DO WE stand on PFIs? ?a We’re enthusiastic participants in the Private Finance Initiative (PFI). We’ve been involved in PFIs since 1995 and believe they can benefit investors and taxpayers alike. In early 2003 the National Audit Office reported that government ‘has obtained a much higher degree of price certainty and timely delivery of good quality build assets’ with PFI than under traditional methods of procurement. And the benefits extend far beyond the construction phase. Throughout the life of their operating contracts, PFIs are about diversity, culture change and innovation in the delivery of specified service outputs. 3) ANNUAL REVIEW (Pr8)NEW 11/3/2003 22:06 Page 44 44 W H E R E D O W E S TA N D O N P F I s ? PFIs fit well with our ability to deliver sophisticated service efficient procurement and value for money than with contracts based on long term relationships. The concept traditional methods – and innovation and diversity in service is gathering momentum internationally, and we’ll continue delivery. Integrating design and service elements from project to bid selectively for PFIs that meet our business criteria. inception should lead to better operational facilities and But PFI is just one of the many successful models for public more accurately targeted investment. Uncertainties are private partnership in which we’re involved. We expect PFIs reduced because the delays and cost overruns, so often to be a valuable component in our balanced portfolio of associated with public procurement, should be cut or contracts, but by no means a dominant one – at present, eliminated by better project definition and financial control. they account for about 12% of our business. Risks are transferred from the taxpayer to contractors, who What’s so good about PFIs? in line with the risk profile, and through contracts for building are appropriately rewarded through returns on their investment PFIs were launched by the UK government in 1992. The basic and operating the assets. principle is that public authorities contract-out not only the operation of major capital assets but also the creation of the How do they fit with our strategy? assets themselves – combining financing, design, construction In strategy terms, we see PFIs essentially as a means to and operation into a single contract package. an end – the end being sophisticated, long term operating In principle, PFIs offer a ‘win-win’ result. Government and PFIs have a part to play in a portfolio diversified across taxpayers should enjoy early access to new assets, more many different sectors, geographies and contract models. contracts. Operating contracts are our core business, and 3) ANNUAL REVIEW (Pr8)NEW 11/3/2003 22:06 Page 45 45 We have been involved in 13 PFIs to date. Our total committed PFIs and good relationships with experienced partners. We were investment in them is £21m, of which we had actually invested in on the ground floor and we’ve developed the appropriate £12.4m at 31 December 2002. They have only recently started skills. As a result we can address new opportunities selectively to contribute to group profitability as the first projects have and bid judiciously – anticipating potential pitfalls such as high moved into the operational phase. In 2002, PFIs contributed bid costs and delays, and factoring them into our calculations. in total £154m to turnover (12% of the total). To manage our PFI investments we have established a the goods – but we are already building a successful track dedicated investment division, Serco Capital. This functions record that speaks for itself. Over the next few years we hope independently from the operating divisions so that we can to leverage that record internationally as other countries follow price and manage operating and investment returns separately. the UK’s example in developing their own PFI programmes. We fully recognise that PFIs are only profitable if you deliver What makes them good for Serco? What returns do we get on our PFI investments? Every PFI project is different: there’s an onus on bidding The Special Purpose Company (SPC) set up to run the project companies to assess the costs and risks accurately and earns fees from the customer: in turn it pays dividends on to secure appropriate terms. our equity in the SPC and interest on any subordinated debt Some contractors have expressed disappointment with PFIs. Our lending will vary according to the perceived risk profile, but enthusiasm for the model is based on extensive experience of are currently 15-20% on capital invested. we lend to it. After-tax returns anticipated on equity and Government customer Banks Banks Senior debt Principal & interest Special purpose company Subordinated debt & equity Service company 50% Service company 50% Dividends, principal & interest Asset provider 50% Asset provider 50% Operating contract Construction contract Service company Service company Asset provider Asset provider IT solution Catering Security Potential subcontracts TYPI CA L PF I S TR UC TU RE Most PFIs involve the creation of a SPC into which the participants invest their risk capital. The structure and equity shares will vary to suit the project, but this is how a typical SPC would look. The arrows indicate cash flows. The SPC raises senior debt funding from the capital markets which is non-recourse to its shareholders. In other words, this debt does not represent a risk to the shareholding companies. 3) ANNUAL REVIEW (Pr8)NEW 11/3/2003 22:06 Page 46 46 W H E R E D O W E S TA N D O N P F I s ? What returns do we get on the operating contracts? Any other benefits? We’re keen to invest in PFI projects where the risk and In some cases, there are opportunities to share in other cash flow profiles are acceptable. But our primary objective sources of income; for example, at the Traffic Control Centre is to gain the associated long term operating contracts, we will sell traffic information to commercial organisations which increase the visibility of our future revenues and providing traffic information services. cash flows and enhance our order book position. In general we seek to minimise our investment outlay in relation to Once the construction stage is complete, the reduction in risk the size of the operating contract. may provide an opportunity to make a one-off capital gain from refinancing. It is our policy to share any such gains As the service contractor we derive sales and margin on with the customer. the operating contract in the same way as with non-PFI contracts. The return will be in proportion to the levels Full details of the way we approach, manage and account for of risk on each project and will generally be higher than PFIs are given in the report Our Approach to PFIs, available our average margin on sales. at www.serco.com or on request. PFI PROJECTS Project Joint Services Command and Staff College Serco equity stake 50% Medium Support Helicopter Aircrew Training Facility 2% National Physical Laboratory Traffic Control Centre Manchester Metrolink Norfolk & Norwich University Hospital Wishaw General Hospital HMP Dovegate* HMP Kilmarnock* HMP Lowdham Grange* HMP YOI Ashfield* Hassockfield Secure Training Centre* 50% 100% 26% 5% – 50% 50% 50% 50% 50% Serco equity investment £m Serco subordinated debt investment £m Start of operating contract Value of operating contract† £m Duration of operating contract (years) 2.9 0.2 2.2 3.4 0.2 0.1 – – – – 5.2 1.7 1.6 – 0.7 2.8 Aug 2000 168 Oct 1997 Jan 2002 Jan 2004 May 1997 Aug 2001 May 2001 Aug 2001 Apr 1999 Feb 1998 Oct 1999 Sep 1999 36 50 130 153 270 42 300 175 175 175 45 28 18 25 10 17 30 7 25 25 25 25 15 TOTAL 9.7 11.3 Our interest in another PFI, the Defence Helicopter Flying School, has been sold. * Operating contracts within joint ventures. † Excluding inflation increases and contract extensions. 3) ANNUAL REVIEW (Pr8)NEW 13/3/2003 18:23 Page 47 47 I N S I D E S T O R Y where DO WE stand on PFIs? are now in the operational phase and generating revenue for us under long term service Since 1995 we’ve embarked on 13 PFI projects – of which 11 contracts. They’re working well for us, and for our customers – as evidenced by these two examples… Heading range left to margin 3) ANNUAL REVIEW (Pr8)NEW 13/3/2003 18:23 Page INS9 where DO WE stand on PFIs? ‘A textbook PFI’ say auditors Joint Services Command & Staff College The Joint Services Command & Staff College (JSCSC) is emerging as a model PFI. It has won praise from the public spending watchdog, and also from the people who use it. Many visitors actually write to tell us how impressed they are – sometimes to their great surprise. One colonel told us we had “converted a dinosaur into a disciple of PFI”. T he JSCSC replaced three separate services debt capital – our equity investment in the housing, training support, mess accommodation colleges at Greenwich, Camberley and joint venture was just £2.9m. The construction and such elaborate IT systems. Bracknell. It now carries out all was subcontracted to Laing. After a two-year command and staff training for the UK armed construction phase Serco took over the site in The audio visual (AV) system is one of the forces, from junior to advanced and higher August 2000. We’re now running it under a largest integrated presentation and AV facilities levels, as well as for officers from some 50 28-year facilities and task management contract ever built in the UK. The IT network – serving countries worldwide. employing 345 people and currently worth military, academic and administrative offices, It’s a large complex that cost £120m to create. around £8m a year. eight major lecture theatres and 67 syndicate rooms – supports not only conventional Standing on a 100-acre site, it includes some Making a success of the venture was important applications but also battlefield communications, 45,000m2 of floor space, 290 family houses for Serco, and also for the whole PFI concept. wargaming and other military activities. The and a range of sports facilities. When the JSCSC entered its operational phase War Studies department alone has a Dean and It was built by a joint venture owned by Serco Even in the defence sector – a pioneer in this London, and we run the world’s second largest and Equion, and funded largely by non-recourse field – no previous PFI had combined education, war studies library. it was one of the most ambitious PFIs to date. 36 lecturers subcontracted from Kings College 3) ANNUAL REVIEW (Pr8)NEW 13/3/2003 18:23 Page INS10 Flying start for a 30-year partners Norfolk & Norwich University Hospital The new Norfolk & Norwich University Hospital was completed 20 weeks replacing one that was originally built in 1771, that may not seem so muc key benefits that PFIs can achieve. T he £229m first phase was England’s hospital was designed in partnership with the largest PFI hospital project – a 953-bed Trust but built by Octagon Healthcare – a special complex begun in January 1998 and purpose company uniting Serco, 3i, Barclays, completed within budget in summer 2001. With Innisfree Partners and Laing. It was financed by its 3,500 rooms and over 100,000m2 of floor space, five shareholders and a consortium of 18 banks. it replaced two older hospitals on a single 63-acre greenfield site. The landscaped grounds include 2,300 parking spaces and 65,000 trees and shrubs. Octagon has now begun a 30-year partnership with the Trust to provide non-clinical services including building and ground maintenance, The aim was to let the Norfolk & Norwich catering, car park management, portering, IT, University Hospital NHS Trust concentrate on its security, cleaning, laundry, waste disposal and core activity of delivering healthcare. So the new telephones. We’re providing all these services Crucially for a pioneering PFI, the JSCSC has been a widely recognised success. It has delivered the expected benefits on time and on budget. After due scrutiny, the National Audit Office declared it a ‘textbook example’ of how a PFI should work. And our operating contract team have maintained a culture of success; for example, they won full certification to the ISO 9000 quality management standard in just seven months – five months ahead of the contractual requirement. 3) ANNUAL REVIEW (Pr8)NEW 13/3/2003 18:23 Page INS11 ership eks ahead of schedule. When you’re much, but speedy delivery is one of the under a contract to Octagon, currently valued wards with 144 beds has been completed at £12m a year. Talking to the Financial Times Anna Dugdale, the Trust’s Director of Resources, described the working relationship with Serco as excellent. "We’re open and honest about our business needs and they’re open and honest about theirs. We try to meet halfway across the table.” The transfer to the new building took just seven weeks. A second phase adding two ahead of schedule. And the Trust has achieved not only the highest Patient Environmental Action Team rating but also teaching hospital status. So the complex is now the Norfolk & Norwich University Hospital – and an object lesson in healthcare PFIs. 3) ANNUAL REVIEW (Pr8)NEW 13/3/2003 18:23 Page INS12 College is “a textbook PFI” say auditors “crucially for a pioneering PFI, the JSCSC has been a widely recognised success. It has delivered the expected benefits on time and on budget.” 3) ANNUAL REVIEW (Pr8)NEW 13/3/2003 18:23 Page 48 49 how do we RUN OUR business? a?a Serco is one business with a single vision, strategy and values. But it consists of over 600 separate contracts – each operated with a high degree of autonomy, as if it were a business in its own right. In other words, we aim for the best of both worlds: coherent direction at the centre and customer focus at the contract level, supported by a framework of effective controls. To achieve that, we’ve developed a unique management structure and methodology. 50 H OW D O W E RU N O U R B U S I N E S S ? Our structure devolves decision-making responsibility for the company’s activities and protecting Our fundamental aims are to focus on customers’ the interests of shareholders and relevant stakeholders. requirements, grow the business judiciously and respond effectively to changing market conditions. We need The Global Management Board includes some Group to do these things while ensuring that we protect the Board members, the divisional chief executives and other interests of shareholders, investors, our people and key senior executives. It meets quarterly as the forum for the communities we work in. And we need a system decisions that influence the direction of the business and that works across a business that’s technically diverse reviews performance, strategy and governance in the and geographically spread. business divisions. It exercises leadership in directing the company to achieve its strategic objectives. Key To achieve customer focus, we want to make decisions as members of this board form a smaller Executive Team close to the point of delivery as possible. So we devolve that meets monthly to monitor and progress key aspects management responsibility – while providing clear of the operational business. direction about our objectives and values, and a common set of business controls. This means decisions, tasks and Beneath the Global Management Board, Serco is responsibilities can be undertaken by the people best organised into business divisions running a number placed to do so within a framework that’s fully of operating companies that deliver services to sector- understood. specific customers under more than 600 contracts (diagram below). These management layers, right up to At the top of the organisation, the Group Board sets Group Board level, are tightly interconnected by giving strategy and objectives, taking legal and regulatory dual responsibilities to key managers at each level: Accountability Control Monitoring Reporting Policy Group Board Standards GMB Systems Business divisions Formal delegation Compliance Audit Review Procedures Operating companies Instructions Contracts Management systems Structure SERCO GROUP MANAGEMENT STRUCTURE The group structure devolves decision-making downwards towards our customers, while the Serco Management System ensures an upward line of accountability and control to the Group Board. Layers are tightly interlinked by key managers with dual responsibilities. 51 • Chief executives of business divisions hold specific So we give each contract its own board, including ‘non- responsibilities for their divisions and share responsibility executives’ from elsewhere in the group. This helps to replicate with the Global Management Board for group performance the group’s governance processes throughout the organisation. in line with the strategy they have formulated and agreed It also enables us to share technical and management expertise with the Group Board. Each division sets its own strategy across the group and give contract management teams a for contributing to the achievement of group objectives and catalyst for innovation, continuing service improvement and is managed by its own board. contract review. The contract board takes a strategic role – reviewing and evaluating opportunities, strengths, weaknesses • Managing directors of operating companies hold specific and risks, and feeding back into group strategy generation. It responsibilities for their companies and also share also has an important assurance and corporate governance role. responsibility with the chief executive and senior management team of their business division for divisional Our system ensures accountability performance. We have developed and refined the Serco Management System over many years to provide a framework for all our activities. • Contract managers have specific responsibilities for their It spells out the rights and obligations of managers at all contract and also share responsibility for their operating levels, so that the organisation can behave consistently company’s performance with its management team. across its global portfolio of contracts while maintaining its business diversity and devolved management style. We want contract management teams to run their operations like businesses, addressing customer needs and opportunities Each business division is responsible for operating within responsively and entrepreneurially. the framework defined by the management system. Business drivers M a r k e t / R e g u l a t o r s / I n v e s t o r s / C o m m u n i t i e s T h e b u s i n e s s w e w a n t t o r u n CULTURES AND VALUES How we behave Vision and strategy Operating structure and principles Policies Core process Direct, develop, deliver, support, assure Where we want to go and how to get there How we want to manage the business Best practice/guidance How we make it happen i R u n n n g t h e b u s i n e s s Outcomes GOVERNANCE/ASSURANCE/RISK What we stand for TH E SER CO MANAGEMEN T SYS TEM 52 H OW D O W E RU N O U R B U S I N E S S ? They do this by establishing and operating appropriate • ‘Running the business’ is the responsibility of systems, processes and procedures to apply group policy the Global Management Board and reflected in the and monitor their compliance with it. business divisions’ operational strategies. It is defined by the group operating structure, principles and core The Serco Management System is built around two processes that explain ‘how we make things happen’. principal elements: These provide a business framework setting the boundaries and expectations placed on each business • ‘The business we want to run’ is formulated by the Global division, and a common set of processes for each Management Board, decided on by the Executive Team and business to adapt and apply. interpreted within the group vision and strategy. It sets the shared values defining the ‘individual’ behaviours expected from every employee and the shared operating principles defining the ‘corporate’ behaviours of every Serco business. These elements reflect external influences including market pressures, regulatory demands and the expectations of investors and the communities with which we interact. 53 I N S I D E S T O R Y how do we RUN OUR business? With an increasing number of customers we’re developing the traditional contractual relationship into something far more flexible and collaborative. These ‘partnership’ contracts are all about responsiveness, innovation and being fast on our feet. They don’t lend themselves to being run from a distant head office. They work because of the empowerment our management system delegates to individual contract teams – the people working on the spot. Here’s an example, where our responsiveness has more than doubled the size of our role in a little over two years… how do we RUN OUR business? Partners in crimefighting National Crime Squad As crime grows more sophisticated, so do the agencies pitted against it. The National Crime Squad (NCS) was formed in 1998 to fight organised crime on a national and international level. Rather than reactively investigating crimes, it directly targets the people involved in organised crime. That means working dynamically and flexibly, making fast and productive use of every scrap of intelligence. The demands the NCS makes on its IT and communications are exceptional and fast-evolving. So outsourcing these activities required rather more than a conventional support contract. I nstead, the NCS formed a strategic – for example, when we restructured its partnership with Serco. There’s a formal mobile phone contract, saving the NCS agreement underpinning the relationship around £750,000 over 10 years. – but it doesn’t stipulate fixed inputs or outputs. It’s a flexible framework for a close, co-operative Since September 2000 we’ve working relationship that won’t get overtaken by developed the partnership events or wrongfooted when the goalposts move. flexibly and professionally to deliver reliable and secure Fighting organised crime is an unpredictable services to some 1,330 officers business: our shared aim is to meet the squad’s and 420 support staff at more than business objectives as they evolve, using new 30 low-profile locations around the UK. ideas and technologies as they emerge. What’s At the start we identified 11 major projects. important on a day to day basis is mutual trust This has already grown to 57 – including and a shared determination to get results. Within support for the formation of a high-tech crime the partnership structure we’re able to make best unit, an immigration crime team and a central use of the expertise on both sides, sharing jointly- intelligence unit, and development of a secure developed intellectual property and financial gains image analysis system and database. The relationship allows business objectives and develop the customer us and NCS to vary our roles relationship, while keeping tabs on performance and responsibilities: we work as a and reporting back to the centre so that the single team, and incentives are structured group maintains effective financial controls. to encourage innovation on both sides. We also have the opportunity to enhance the contract by It works for us, and it works for the customer. initiating new services that broaden its scope and As the NCS stated in its last annual report: add value for both Serco and the NCS. “Serco provides us with significant help in developing vital support services… A thorough You can’t run a contract like this by remote post-implementation review concluded that the control. It works because we have an contract was delivering value for money and that organisation that’s able to devolve much more has been achieved than would have responsibility to the contract manager. been the case if the partnership had not been He has the empowerment, the in place.” training and the tools to make decisions on the spot – finding the best ways to meet NCS 57 HOW do WE manage our of a responsibilities B U S I N E S S TO stakeholders? A R E W E ? a?a ?W H AT K I N D Our strategy and values don’t exist in isolation. They’re shaped by the way we understand and balance the interests and expectations of our stakeholders. If you want to do this effectively and responsibly, you can’t do it piecemeal. So we set up a Corporate Assurance Group to oversee all aspects of our responsibilities to stakeholders – from managing risk to safeguarding the environment. 58 H OW D O W E M A NAG E O U R R E S P O N S I B I L I T I E S T O S TA K E H O L D E R S ? Who are our stakeholders? we aim to stimulate internal awareness of issues raised, As the size and diversity of our business grows, so does encourage responsive action and change, and report the number of interested parties. But they generally fall progress back to the relevant stakeholders. into one of six groups: • Shareholders • Customers • Our people and their representatives • Business partners and suppliers • Neighbours and local communities • Regulators and legislators. Balancing stakeholder interests Corporate governance and internal control The Board has identified a set of key business processes for which it shares responsibility with senior managers throughout the group. These processes and their associated internal controls are regularly reviewed by the Audit Committee and internal auditors, who report back to the Board. We’re committed to dealing fairly with all stakeholders, The Corporate Assurance Group (CAG) gives us a one-stop not just shareholders or customers. Alongside making a shop for addressing the interests of all stakeholders in an profit – which ensures our continuing viability – we aim integrated way. It ensures that: to deliver value to all these groups in a socially responsible • Our policies and management systems reflect the cultural and environmentally sustainable manner. and ethical values we’ve adopted We’re realistic. We know we can’t please all these people • We protect the safety and wellbeing of staff, all the time. But we recognise our responsibility to strike customers, the wider community and the a broadly acceptable balance. environment • We comply with national laws and regulations Open and candid dialogue with stakeholders is one of • We protect the value and integrity of our reputation, the foundations of our management style. To build on it, products, services and tangible and intellectual assets. • We identify risks and manage them proactively 59 The CAG’s work includes helping our operating businesses The group directors take ultimate responsibility for to maintain effective and efficient business processes, health and safety, delegated through the divisional giving advice and guidance on assurance matters, and chief executives and directors, who ensure effective raising awareness and understanding through education implementation of health and safety policy through and training. It reports to the Group Board quarterly or documented management systems. more frequently if need be, advising on policy and ways of achieving best assurance practice throughout the We give staff appropriate – and regularly updated – organisation. Risk management training to protect their own and others’ health and safety. Each division also provides occupational health and welfare support. We define risk as the possibility of failure to achieve key business goals; and we define these goals in relation Community to our stakeholders’ objectives. Taking and managing risk Our approach to corporate social responsibility (CSR) is a central part of our business, and balancing risks and delegates responsibility for community involvement opportunities is a key management responsibility. We have through the business divisions to individual contract robust processes for identifying, analysing and managing managers. It aims to encourage staff at all levels to risks and minimising the impact of undesired and engage with local community initiatives, and channels unexpected events. All parts of the business have support from the company through staff volunteers. Each appropriate risk and crisis management plans that business division develops and maintains processes for meet defined policy standards. Safety management applying the community involvement aspects of our CSR model, setting targets and reviewing performance for each operating company and contract. Some examples of our As well as taking care of our staff, we also have to protect community and environmental initiatives are listed on customers and the public in many of our activities. pages 70-72. Action change progress People Shareholders CSR FOCUS Community Environment Safety Risks Quality Security Customers SERCO GROUP PLC Our people Policy Business partners and suppliers STAKEHOLDERS Community Regulators and legislators Monitor report review A N INT EGRATED APPROACH We aim to keep all stakeholder groups in the loop, and to address all stakeholder-related issues in an integrated way. 60 H OW D O W E M A NAG E O U R R E S P O N S I B I L I T I E S T O S TA K E H O L D E R S ? Environment trade unions, government departments and others. The Everyone in Serco is responsible for minimising our impact project team’s findings were published in December, in on the environment. We aim to reduce environmental harm, a 68-page report containing 45 detailed recommendations. minimise use of energy and other resources, and apply sustainable development principles. Each business division is responsible for developing management systems to meet group environmental policy and relevant statutory or The report can be seen on the consultation website at www.pascalea.com, where AWE has undertaken to publish its response by the end of March 2003. regulatory requirements. All divisions conduct regular Quality reviews to update their understanding of their environmental Quality matters – in the services and products we supply risks and impacts. to customers, and in our internal processes. Our management systems enable us to assess and manage quality, and deliver Individual contracts may also engage with stakeholders continual improvement. We obtain external quality at local level to help them determine goals and priorities. certification where appropriate. At the Atomic Weapons Establishment (AWE), for example, we set up an independent consultation exercise led by a Security and asset protection firm of environmental consultants working with Lancaster One of management’s major responsibilities is the security University. During 2002 the programme sought stakeholders’ of Serco and its customers, staff and assets, including views through a variety of channels including public intangibles such as intellectual property. Our risk management meetings, a website and a series of workshops involving process includes measures to review and protect these assets, regulators, local Chambers of Commerce, heritage and address the implications of interruption to business and conservation groups, anti-nuclear groups, employees, ensure appropriate insurance cover. 61 I N S I D E S T O R Y HOW do WE manage our responsibilities TO stakeholders? Because we see customers as stakeholders, our relationships don’t stand still. Our marine services contract with the Warship Support Agency (WSA) has evolved from a conventional structure to a partnership that will help shape future procurement policy. But what hasn’t changed is our concern for the wellbeing of other stakeholders – employees and neighbouring communities… Providing services responsively – and responsibly Warship Support Agency Our Serco Denholm joint venture provides a wide range of waterborne port services for the WSA at Devonport, Portsmouth and on the Clyde. We operate and maintain some 140 Ministry of Defence (MOD) vessels including tugs, passenger vessels, torpedo recovery and minelaying vessels and a variety of fuel, ammunition, stores and tank cleaning lighters. Originally we operated these vessels under MOD regulations. Now, after bringing them up to Lloyds Classification Society maintenance standards, we charter them from the MOD and operate them under Marine Safety Agency rules. A ll our customers have expressed great The contract also requires a sensitive and the organisation. Regular internal audits provide satisfaction with our service since we responsible approach to the wellbeing of other assurance to management at all levels. A won the original contract in 1996. The stakeholders – our own employees, MOD centralised information reporting system provides new £110m three-year contract, negotiated personnel and neighbouring communities – as a vehicle for problem solving and spreads best between August and November 2002, will take we transport fuel and explosives in the marine practice rapidly across all parts of the operation. our service into its tenth year. But the new environment. contract is fundamentally different. It’s designed Management reviews at contract and support office levels provide the structure for setting to prepare the way for a future public private Our safety management system integrates objectives and implementing new initiatives for partnership and PFI procurement programme and operational maritime safety, occupational safety improvement. involves us in developing an innovative partnering and health and environmental protection along arrangement with the WSA. with quality management principles. It addresses both marine and onshore legislation, meets the Over the next three years we’ll be working closely Code for ship safety and pollution prevention, with the WSA – in consultation with employees and is certified to ISO 9001-2000 by Lloyds and their representatives – to devise radical new Register. ways of providing the MOD with marine services that will reduce costs over the long term. Our It’s based on stringent hazard identification and ability to establish this kind of relationship reflects risk assessment processes, and underpinned by the way customers trust Serco to balance the comprehensive training programmes for all staff long term interests of stakeholders and seek at the three ports. Everyone is involved in safety, genuine win-win solutions. and communication flows freely throughout HOW do WE manage our responsibilities TO stakeholders? “our safety management system integrates operational maritime safety, occupational safety and health and environmental protection along with quality management principles.” 63 HOW do WE DEVELOP of a O U R B U S I N E S S people? A R E W E ? a ?a ?W H AT K I N D We have only two kinds of product: our processes and our people. To achieve our business goals we want to excel on both counts. Needless to say, we’ve developed systematic processes for developing our people. We encourage them to learn and grow throughout their careers. Because we constantly gain new people as we phase-in new contracts, we’ve devised ways of helping them assimilate our values and buy into the unique Serco culture. And because we have such a diverse portfolio of contracts, our training and development processes are designed to produce managers who are versatile, flexible and inventive. appear. The real copy has been typed separately and will not be set until it has received text will appear and how much area it takes up on the page. What you are reading now WHAT YOU ARE READING now is not the finished copy. The copy you are now reading is set out to show you the TYPEFACE AND THE TYPESIZE in which the real copy will FINAL APPROVAL. The text has been placed here to show you the position where the is not the FINISHED COPY. 64 H OW D O W E D E V E L O P O U R P E O P L E ? Instilling the values Whatever the method, the key criterion is relevance: can Change management is one of our core capabilities, and people apply their newly acquired skills back at work? we constantly refine our processes for inspiring culture Hence our enthusiasm for linking performance reviews and change as we phase-in new contracts. learning activity. Research in 2002 found that the majority of people who attended our training workshops used their We do this through the Serco Best Practice Centre (SBPC), newly acquired skills back at work within a very short time, which works not only with our own businesses but also and that their attendance at the workshop was part of a with their partners. At Wishaw General Hospital, for example, wider development plan. We encourage contract managers we worked with the local management team on workshops to work with their management teams on devolving designed to embed the Serco culture and values. This helped responsibility and developing their own successors: the new organisation to get off to a successful start and meet individual learning is a crucial part of this process. some exceptional performance targets. In the Middle East recently, the SBPC staged workshops with a prospective joint As Serco becomes increasingly global, distance learning is venture partner so we could share insights into each other’s likely to become more important. We’re currently investing businesses and processes. This enabled us to develop a novel in solutions that will enable us to deploy and track learning in business solution based on a clear understanding of our geographically diverse locations – enabling us to reach all our differing capabilities. people, everywhere. Combined with effective diagnostic tools, including performance appraisal and development centres, With new contracts, we can begin winning hearts and minds this will ensure we deliver learning solutions that meet even before the phase-in starts. During 2002 we developed today’s business needs and help us anticipate future needs. a Serco Orientation CD-Rom to help people gain a firmer grasp of what we are and how we work – particularly if Learning to lead they’re about to join Serco under a new contract phase-in. One such forward-looking solution is the senior management It can be sent anywhere, and early feedback suggests that it’s Combining the best available external expertise with our own a successful way to start building relationships and helping experience and capability, the programme is underpinned by people to see where they fit in, what we can achieve together external assessment that may lead to Chartered Director status. programme we’ve developed with the Institute of Directors (IoD). and how they can contribute within the Serco culture. Gaining the skills Initiatives like this reflect our desire to provide the combination of personal and business capability that makes great business Distance-learning, using CD-Roms or our intranet, is just leadership. In a business like ours, with its relatively flat one of many channels we use, from highly structured training hierarchy and high degree of autonomy at contract management environments to broader based learning on the job. We aim to level, it’s essential to help our managers acquire real leadership identify and use the most effective method for the individual, ability and inspire it in others. We continue to develop tools the business and the skills being taught. to help all our teams identify potential and develop capability. 65 I N S I D E S T O R Y HOW do WE DEVELOP O U R people? On all our contracts, continuous improvement is part of the package. We constantly ask ourselves: "Is there a better way to do this? Or should we be doing something else instead?” We’re passionate about innovation, and always willing to work with quality partners who can enhance our capability. It’s an approach that works well for our customers – and equally well when we apply it internally. In the past year, it’s helped to transform the way we develop our future top managers… HOW do WE DEVELOP O U R people? Directors in the pipeline Institute of Directors Nobody in Serco is too senior to need training. In a fast-changing world, we believe lifelong learning is a business necessity. Towards the end of 2001, we reviewed the various options for developing our current and future senior managers and decided we needed something new. The result was a unique programme we’ve developed with the Institute of Directors (IoD). B y combining the best external capability with our internal expertise and external assessment we believe we’ve come up with a programme that provides excellence, rigour – and relevance to our unusual corporate structure, culture and management system. It consists of three sections. In the first, delegates study and discuss the role of the company and the director, and relevant aspects of law, strategic business direction and finance. This is followed by an exam leading to the IoD/Serco Certificate in Company Direction. Initially we’ve provided the programme in the UK only, but we’ve been working with the IoD on a version for European colleagues and are planning further international variants. Serco is the first UK-listed company to develop such a programme, and IoD Chairman Christopher Beale has been impressed by our determination to set a benchmark in top management development. "It’s been a very exciting time," he says. "The results have been extremely positive and it’s been great to work so closely with such a forward-thinking organisation." The second section covers marketing strategy, human resources, leading change and board decision-making. A second exam leads to the IoD/Serco Diploma in Company Direction. The final section can lead to becoming a Chartered Director. This requires candidates to demonstrate relevant experience and pass an interview with the IoD. So far, 19 of our senior managers have passed the Certificate programme in two groups and 15 have gone on to study for the Diploma. The third Certificate group and first Diploma group will get their examination results in June. Getting the programme up and running has taken considerable investment of company resources and personal time by committed individuals. But it sends out a clear signal both inside and outside the business that we’re a meritocracy intent on establishing a pipeline of management talent leading all the way to the boardroom. We believe we’re already beginning to reap the rewards in management motivation, business performance, differentiation and competitive advantage. “The quality of the lecturers was really high and they brought a wide range of external experiences into their programme content. Having an externally recognised awarding body does make a difference: you know you have to reach a national standard, not just an internal benchmark. I found the whole experience intellectually demanding, challenging but really enjoyable.” LUCY ADAMS, CHANGE DIRECTOR, SERCO RAIL 1 2 3 Assessment High potential person identified to attend IoD / Serco company direction programme Active two-way review process undertaken to create personal development plans linked to an annual appraisal Appropriate candidates selected to participate in programme January February March Serco / IoD programme modules Role of company board and directors Strategic business direction Finance for non-finance directors June Results Revision day and exam Io D TIMELINE “The course has dramatically enhanced my understanding of why it’s so important to embrace change to constantly enhance the company’s competitive position. It’s boosted my confidence and I’m now providing better leadership of my division. What’s more, I think this confidence boost has also brought out improvement in my management team’s performance.” DAMIAN McHALE, DIVISIONAL DIRECTOR, TRANSPORT SYSTEMS Next page: “The strategic business direction and finance modules made me ask some difficult questions about the way I manage and lead and the way I measure performance. The combination of Serco and IoD was good. Networking with other Serco people was valuable and provided the opportunity to apply the course material directly to Serco – while the IoD gave the course standing outside Serco.” DR MARTYN SENÉ, HEAD OF CENTRE FOR ACOUSTICS & IONISING RADIATION, NATIONAL PHYSICAL LABORATORY 69 can a private S E C T O R of a company have B U S I N E S S a public service E T H O S ? A R E W E ? a ?a ?W H AT K I N D Delivering public services has always been our business. We began in the 1960s by providing technical maintenance services, but since then we’ve moved from the backroom to the forefront of service delivery. We’re now running people’s buses and trains, managing their hospitals and helping to educate their children. That requires a special kind of relationship with our customers. We need to understand their values. We need to make ‘partnership’ something more than a slogan. We need to deliver private sector efficiency with a public service ethos. Our business depends on it. appear. The real copy has been typed separately and will not be set until it has received text will appear and how much area it takes up on the page. What you are reading now WHAT YOU ARE READING now is not the finished copy. The copy you are now reading is set out to show you the TYPEFACE AND THE TYPESIZE in which the real copy will FINAL APPROVAL. The text has been placed here to show you the position where the is not the FINISHED COPY. 70 CA N A P R I VAT E S E C T O R C O M PA N Y H AV E A P U B L I C S E RV I C E E T H O S ? Public service is 90% of our business. If we couldn’t We believe in safety first convince our customers that we understand what public We work in fields such as education, healthcare, justice, service is all about, we wouldn’t still be here. And we’ll transport, defence and science. Inevitably, many of our only succeed in the future if we and our employees activities involve a responsibility for the safety of the continue to deliver not only high-quality services and public as well as our staff. And because we take a long value for money, but also the values and passions that view, we don’t see a conflict between safety and profits: motivate public sector managers. We believe in accountability ultimately, a responsible approach to safety is the only way to safeguard profits. In fields from food hygiene to nuclear safety, governments trust us not just to maintain Public sector agencies are spending taxpayers’ money. existing standards but to improve on them. Last year, They demand a high level of performance assessment for example, our rail division launched a collaborative and accountability. We’ve always welcomed this investigation with the Institute for Occupational heightened scrutiny because it focuses everyone’s Ergonomics at the University of Nottingham to study track attention on customer satisfaction. We’re happy workers and identify the factors influencing safety culture to work with open books, as we do with a number and working behaviour. The findings have been welcomed of existing clients. by staff, union representatives and Network Rail alike, and action plans are being developed to address the The public expects those involved in delivering public issues raised. services to have high ethical standards. As well as applying our code of ethics, we foster the kind of climate We believe in people that ensures it’s observed. The culture is open, people Public sector customers expect us to treat our employees communicate freely and there are clear channels for fairly and equitably. In the complicated business of voicing concerns. taking-over and change-managing hundreds of different These are just some examples of community initiatives from our education, we launched a worldwide appeal for stationery. With the CSR programme: Huntington, West Virginia, US aid of the British Forces, over two tonnes of stationery were distributed to schools and refugee camps in and around Kabul. Serco is involved in a programme that helps local people get back RAF Northolt, UK into employment by providing work experience. Of the 13 interns who Our team at Northolt developed a training and lifelong learning have worked with Serco on the programme to date, including five last programme for ramp handlers. Serco Aerospace Training Unit at year, seven have gone on to full-time employment with us. Our contract RNAS Yeovilton, which developed the initial generic course for new manager is now a member of the Goodwill Business Advisory Board employees at RAF Brize Norton and Northolt, is now the National Council. Vocational Qualification (NVQ) co-ordination centre. In conjunction with on-job training and assessment, we train people to NVQ Level 2, Serco Group (HK) Limited, Hong Kong helping them develop specialist skills linked to their area of work. Our Hong Kong hospital contracts provide job opportunities for people with disabilities, employing them on the same terms and Goose Bay, Canada conditions as other members of staff. This won us a prestigious We identified a need in the local community for an alternative clean Caring Company award from the Hong Kong Government. water supply. We’re working with the Canadian Government to develop a new supply, and it’s expected to be complete in Spring 2003. Afghanistan Stationery Appeal, UK We’re also providing a scholarship to the College of the North Atlantic After Serco employees from Rollestone working with the British Military and helping fund a programme that raises high school students’ in Afghanistan saw that local children lacked the basic tools for their awareness of business and its needs. 71 public service teams, we couldn’t claim it’s always been fostering partnership and trust in every relationship. Not plain sailing. Or that we never make mistakes. But we just because that’s a good thing to do, but because our do have generally excellent relations with staff and their competitive edge depends on attracting, developing and unions. We’re involved in the TUC’s Partnership Initiative, motivating the best people. We train and develop our people which fosters closer relationships between employers as well as we can. We empower our people to do what it and unions. takes to deliver noticeably superior service. We welcomed the UK’s Transfer of Undertakings Protection We believe in social responsibility of Employment (TUPE) regulations when they were first Apart from our responsibilities to staff and customers, introduced, and when we take over staff under a new contract we recognise our wider social obligations. We try to interact we’ve earned a reputation for acting decently and responsibly, beneficially with everyone who’s affected by our operations. avoiding non-voluntary redundancies except as a last resort. We believe that responsiveness to all our stakeholders’ When we take over public sector contracts we often inherit customer satisfaction, greater commitment on the part of complexity in terms and conditions of employment. Wherever employees, and an enhanced reputation in the community interests creates greater business success – through improved possible our preferred approach is to sit down and talk to at large. employees themselves, or their representatives, and develop terms and conditions to make them relevant and appropriate Doing business with honesty, integrity, openness and to today’s business circumstances. professionalism means applying the same standards in our dealings with the wider community. Our approach to Corporate We operate in many countries, jurisdictions and cultures. Social Responsibility (CSR) takes account of our diversity and But wherever we work we apply the same principles of equal devolved structure and ensures that wherever in the world opportunity, honouring the rights of the individual and we work we apply the same standards and values. Ray Friel Centre, Ontario, Canada Frankston, Victoria, Australia Our team at the Ray Friel recreational centre supports the non-profit We sponsored and co-designed Frankston Framed, an event that gave making Cumberland Resource Centre (CRC) by donating free activities young photographers an opportunity to capture life in their and programmes to families in its shelters. On selected dates we also community on camera. The project involved the whole community in donate all revenue from wave swim admissions to the CRC, host local recording life from the beach to the ballet school. food drives, offer any members of the community free access to the facility and donate non-perishable food. Serco Schrobenhausen, Germany Joint Services Command and Staff College, Shrivenham, UK where companies in the community introduce local students and In 2002 we participated in a regular information exchange event We provide scholarships for English language courses to the wives of graduates to the commercial world. international officers attending courses at the college. This helps them integrate with the local community at Shrivenham. Corporate Assurance Group, Hampshire, UK RAF Donna Nook, Lincolnshire, UK conference in the UK. In partnership with Future Forests, a UK-based Serco staff regularly help manage thousands of grey seals that colonise the weapons range in the winter, often assisting in the capture and environmental organisation, CAG calculated the CO2 created by participants travelling to the conference and offset it by planting release of injured seals and abandoned pups. RAF Donna Nook is the 55 fruit trees in one of the poorest regions of Mexico. first MOD property to be designated as a National Nature Reserve. In October 2002 our Corporate Assurance Group (CAG) held its annual 72 CA N A P R I VAT E S E C T O R C O M PA N Y H AV E A P U B L I C S E RV I C E E T H O S ? Each business division has processes and procedures for over the long term. They’re also about being willing to pick up applying our CSR model, setting targets and reviewing a challenge. When we went into education, we didn’t look for performance in every operating company and contract. A global soft options. We took on two of the UK’s toughest areas, in network of CSR Champions manages the application of our CSR Walsall and Bradford. By rising to the challenge we’ve built a process, regularly reviewing and reporting on its effectiveness. marketable track record and earned valuable commendations from Ofsted, community stakeholders and our customers. And every contract manager has responsibility for community involvement – not just through taking part in local initiatives We believe in delivering more but through the way the contract itself is run. Hence the We want our customers to see us as partners in achieving the judges’ comments in naming us Rail Operator of the Year for outcomes they want. And as our 90% success rate in contract the Docklands Light Railway: “Few railway businesses have extensions and renewals suggests, we don’t just meet their such an impact on community life, proving that the journey expectations. We raise them. We aim to keep adding value can be much more than a means to an end.” throughout the life of a contract, through constant innovation. We believe in the long term The next improvement may come from one big change, or from attention to a dozen little details. But we’ll continue Partnerships aren’t about making a quick profit and moving to ask ourselves how we can do things even better: that’s on. They’re about building trust and mutual benefit that lasts part of our culture. School of Army Aviation, Middle Wallop, UK Serco Best Practice Centre, Hampshire, UK Work experience in the Serco-operated air traffic control (ATC) tower The SBPC is helping Woking College to redevelop its internet site. is popular with local schools. Demand has been so great that we’ve The new site will provide information that’s more pertinent to students developed a package which provides real training and gives an and will have special access features for disabled groups. insight into a career in ATC. Atomic Weapons Establishment (AWE), Berkshire, UK Serco Metrolink has piloted a school mentoring programme where Our joint venture at AWE has a very active community programme. members of staff are trained with Bolton and Bury Education One scheme helps 50 local schools to promote scientific and Partnership to mentor 12-16 year olds. Serco Metrolink, Manchester, UK technological excellence. Each school is linked to a member of AWE staff who has a particular interest in that school: for example, as a parent or school governor. 73 I N S I D E S T O R Y can a private S E C T O R company have a public service E T H O S ? On the face of it, we have a conventional business relationship with Walsall Metropolitan Borough Council. As supplier, we have a contract to deliver educational support and management services. But through that contract our responsibilities extend to the wider Walsall community. We’re supporting headteachers at the borough’s 129 schools… teachers… boards of governors… 51,000 pupils and adult learners… parents. The fact is, we’re serving an entire population – and need to act accordingly. can a private S E C T O R company have a public service E T H O S ? Working with a community of customers Walsall Metropolitan Borough Council To support Walsall’s schools effectively, we can bring our business skills to bear in many ways – improving administration, finance and asset management. We can introduce new ideas in time management, staff support and measurement of results that enhance a school’s effectiveness. We have a duty to be bold, challenge the status quo and add real value. But we’ll only truly succeed if we build meaningful partnerships with all our customers. And ultimately that means everyone in the community with an interest in education. O ur education operation in Walsall school supporting staff. So we’ve increased a local primary school. It’s not off-limits to teachers began in July 2001, with a School communication channels using the internet, emails, or pupils – in fact, we’re helping the children to Improvement and Strategic Management a telephone help desk, headteacher breakfast take care of our garden as part of a nature project. contract. This involved taking over some 100 briefings and weekly drop-in management surgeries. people from the existing Local Education Authority This joined-up approach helped win praise from (LEA). In December 2002 we took on most of the We’re strengthening schools’ links with business Ofsted for our work in Walsall. In turn, Ofsted’s rest of the LEA’s functions, along with another and community organisations such as the Walsall recommendation has led to a substantial expansion 300 staff. Lifelong Learning Alliance, the Black Country of our role there – and greatly strengthens our School Improvement Partnership, the Learning hand as we bid for education contracts elsewhere. With their help, our broad goal is to make and Skills Council, the Children and Young Clear evidence that, for a public service business, Walsall a first-class education and learning People’s Strategic Partnership and Connexions. community involvement is an integral element community. We want to raise aspirations and in achieving commercial success. achievement, and increase social cohesion and We’ve joined individuals in the local community inclusion through our policies and service delivery. and agencies such as the police and social services To do this effectively, we’re steadily extending in an initiative to reduce truancy and juvenile linked our links into the wider community. crime. Over 12 months it achieved both objectives To anchor these efforts firmly in the day to day reality of our schools, we need excellent And we’ve made sure we don’t work in an ivory communication with and between teachers and tower. Our main office in Walsall is attached to and earned Jubilee medals for all participants. With thanks to: Blakenall Heath Junior School, Brownhills Community Technology College and New Invention Infants School. “for a public service business, community involvement is an integral element in achieving commercial success.” 75 Serco group plc A N N U A L accounts 2 0 0 2 76 Directors, Secretary and Advisers Chairman Kevin Beeston Directors Ralph Hodge CBE* Christopher Hyman Andrew Jenner Rhidian Jones† DeAnne Julius CBE* Iestyn Williams Secretary Julia Cavanagh Registered Office Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT Auditors Deloitte & Touche Chartered Accountants London Principal Bankers Barclays Bank plc 54 Lombard Street London EC3P 3AH Investment Bankers The Royal Bank of Scotland plc 135 Bishopsgate London EC2M 3UR Lazard Brothers & Co Ltd 21 Moorfields London EC2P 2HT Morgan Stanley & Co Ltd 25 Cabot Square Canary Wharf London E14 4QA Stockbrockers Cazenove & Co Ltd 12 Tokenhouse Yard London EC2R 7AN Merrill Lynch International Merrill Lynch Financial Centre 2 King Edward Street London EC1A 1HQ Solicitors Allen & Overy One New Change London EC4M 9QQ Registrar Lloyds TSB Registrars The Causeway Worthing West Sussex BN99 6DA * Non-Executive Director † Senior Non-Executive Director 77 Corporate Governance Report Introduction The Board of Serco Group plc (the “Company”) is committed to achieving high standards of corporate governance, integrity and business ethics for all its activities around the world. The Company supports the principles of good governance and code of best practice as appended to the Listing Rules of the Financial Services Authority (the “Combined Code”). This report sets out how the Company applies the Combined Code. Reference has also been made to the Higgs’ Review of the Role and Effectiveness of Non- Executive Directors (the “Higgs Review”) and the Smith Report on Audit Committees Combined Code Guidance (the “Smith Report”) where appropriate. The Board and its Directors The Board currently comprises seven Directors: Kevin Beeston, Ralph Hodge, Christopher Hyman, Andrew Jenner, Rhidian Jones, DeAnne Julius and Iestyn Williams. Excluding the Chairman, the Board comprises an equal number of Executive and Non-Executive Directors. The Company continues to believe in the need for a full time Executive Chairman who is responsible for the effective operation of the Board, oversight of corporate governance and assurance activities and the Company’s relationship with the City and key stakeholders. This role is distinct from that of the Chief Executive who focuses on the operational strategy and delivery of the business. The Directors’ profiles are set out on pages 85 to 88. The Board continues to believe 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. They bring a wide range of experience to the Board including international business operations, strategy and economics. The senior Non-Executive Director is Rhidian Jones. Rhidian has met with shareholders in the past, upon request, and continues to be available to do so as required. Rhidian has expressed his desire to retire from the Board at the end of April 2004 when his current term of appointment expires. The Company is currently seeking a fourth Non-Executive Director and is proposing to commence the search for an additional Non-Executive Director with relevant financial experience to replace Rhidian as Chairman of the Audit Committee on his retirement. The Non-Executive Directors meet on an informal basis during the year without the presence of the Executive Directors. During the year the Board met six times at varying locations, and took the opportunity to combine the formal business of the Company with site visits and divisional presentations and discussions. There is a formal schedule of matters reserved for the Board including the responsibility for leading and directing the affairs of the Group. During the year a strategy conference was held, hosted by the Chairman, and attended by the Board and 20 key senior managers of the Group. The Chairman has held individual meetings with the Directors to evaluate the performance of the Board and identify any areas for review. His report will be presented to the Board in February 2003. All Directors have access to the Company Secretary and independent professional advice at the Company’s expense. The Company Secretary has the responsibility for ensuring that Board procedures are followed. The appointment and removal of the Company Secretary is one of the matters reserved for the Board. The Company Secretary is also Secretary to all the Board Committees. The information provided to the Board is reviewed by the Chairman and the Company Secretary on a regular basis, to ensure that it remains appropriate and adequate and enables the Directors to discharge their duties. 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. Board Committees The Board has delegated authority to a number of committees to deal with matters in accordance with written terms of reference. The terms of reference are reviewed annually. It is proposed that once a fourth Non-Executive Director has been appointed the Non-Executive Directors will not be required to sit on every Committee. The Chairmen of the Board committees attend the Annual General Meeting to answer questions from shareholders. 78 C O R P O R AT E G OV E R NA N C E R E P O RT Board Committees (continued) Global Management Board The Board has delegated responsibility for the day to day management of the business to the Global Management Board (“GMB”). The GMB meets formally on a quarterly basis and more frequently if required. Matters discussed by the GMB which require formal approval are submitted to the Approvals and Allotment Committee details of which are provided below. Further details relating to the ongoing management of the business can be found in the section ‘How do we run our business?’ provided in the Annual Review section of the Annual Review and Accounts. Audit Committee The Audit Committee, which comprises the three Non-Executive Directors and is chaired by Rhidian Jones, met twice during the year. At the meetings, attended by the internal and external auditors and by invitation the Finance Director, matters relating to the integrity of the financial statements of the Company, the accounting policies adopted, significant financial reporting judgements made and the role of the internal auditors were discussed. Discussions were also held regarding the business risk auditing activities undertaken by the Company’s internal audit providers, Grant Thornton and Pannell Kerr Forster. The members of the Committee have access to the Company’s auditors without the presence of the Executive Directors. During the year, the Committee has reviewed the independence, objectivity and effectiveness of the external auditors, their terms of engagement and remuneration, and has also approved a policy with regard to the engagement of external auditors in the provision of non-audit services. The Company has identified alternative providers of non-audit services. The members of the Committee receive updates on accounting standards and generally accepted accounting principles on a quarterly basis as part of the Finance Director’s report to the Board, and also on a half yearly basis from the external auditors. Remuneration Committee The Remuneration Committee comprises the three Non-Executive Directors and is chaired by Ralph Hodge. The Committee met five times during the year to deal with matters relating to remuneration and undertook a comprehensive review of the Executive Directors remuneration. The details of the Company’s remuneration policies and the results of the review are detailed in the Remuneration Report on pages 90 to 99. Remuneration of senior executives in the Company is considered and approved by the Remuneration Committee of the GMB, which comprises the Executive Chairman, Chief Executive and Chief Operating Officer and is advised by the Human Resource & Change Director. In the event that any member of the GMB Remuneration Committee is conflicted by the business to be discussed, his place may be taken in that instance by another member of the GMB. Training Committee The Training Committee comprises Iestyn Williams, its Chairman, Christopher Hyman and the three Non-Executive Directors. It meets once per year to consider the training needs of all Directors and the Company Secretary. The induction programme for new Directors provides a comprehensive familiarisation programme including the role of the Board and its Committees, the Company’s corporate governance framework and latest financial statements, together with site visits and meetings with senior management around the Group. The induction programme and the individual development needs of the Executive Directors, in relation to their new roles, were reviewed by the Committee during the year. All Directors and the Company Secretary are encouraged to attend relevant training courses at the Company’s expense. Nomination Committee The Nomination Committee comprises Kevin Beeston and the three Non-Executive Directors. The Company believes that the Executive Chairman should remain as the Chairman of the Committee in order to discharge his responsibility for the effective functioning of the Board. The Committee meets to discuss proposed changes to and development of the Board, but has also carried out a review of succession planning for the Directors. A similar review is also being undertaken for senior executives by members of the GMB. The members of the Committee consult with other members of the Board prior to submitting final recommendations for approval by the whole Board. Approvals and Allotment Committee This Committee meets as required and comprises the Executive Directors, the Chief Operating Officer and Strategic Development Director, with any two Executive Directors forming a quorum. The business of the Committee is varied and ranges from bid approval to approval to release share options. Matters requiring formal approval following consideration by the GMB can also be approved by this Committee. 79 The Company and its Shareholders The Board remains committed to ongoing dialogue with its institutional and private shareholders. This year has seen the continuation of the Company’s programme of site visits and strategy presentations attended by institutional investors and analysts designed to facilitate a greater understanding of the Company. As part of the review of Executive Directors’ remuneration undertaken by the Remuneration Committee, Ralph Hodge sought the opinion of the six largest shareholders (representing 35% of the share register) and the ABI prior to making a recommendation for approval by the Board and shareholders at the forthcoming Annual General Meeting. The senior Non-Executive Director is also available to shareholders on request. Formal presentations are made to institutional investors and brokers’ analysts after the release of the interim and final results. Individual requests for meetings have been satisfied by the Executive Chairman and the Finance Director, although the other Directors are available as required. During the year the Company increased its on-line communication with a web cast of the interim results presentation and an on- line interview with the Executive Chairman on its website www.serco.com. It is proposed that a web cast will be repeated for the final results presentation. During the year the Company has also introduced a programme of quarterly trading updates in line with best practice and the recommendations of the Financial Services and Markets Act. The principal methods of communication with private investors remains the News Announcements, Interim Report, the Annual Review and Accounts, the Annual Review and Summary Financial Statement, the Annual General Meeting and the Company’s website www.serco.com. Internal Control and Risk Management The Company has a well-established and embedded system of internal control, including financial, operational and compliance controls and risk management designed to safeguard shareholders’ investments and the Company’s assets and reputation. Whilst the Board has overall responsibility for the Company’s system of internal control and for reviewing its effectiveness, it is the role of management to implement the policies on risk and control. The Group’s risk management process identifies the key risks facing each business and reports to the Board on how those risks are being managed. The Board confirms that this process has been in place for the year under review and up to the date of approval of the Annual Report. These processes are reviewed annually by the Board and conform to the guidance set out in Internal Control: Guidance for Directors on the Combined Code (the “Turnbull Report”). Such a system however can only be designed to mitigate, rather than eliminate, the risk of failure to achieve business objectives, and can only provide reasonable, and not absolute, assurance against material misstatement or loss. The Company has a full time Risk Director who is a member of the Corporate Assurance Group (“CAG”). CAG was formed in 2001 with specific responsibility to oversee and review the internal control and risk management policies, procedures and management framework within the Group and to develop guidance, training material and management training to ensure the current and future needs of the business are met. CAG sponsors three specialist groups: • An Assurance Network, chaired by the Assurance Director, and comprising senior assurance representatives from across the Group. During the year this network met four times to review Company policy and procedures and the development, integration and dissemination of the Serco Management System that defines how the Company operates. • A Risk Oversight Group, chaired by the Risk Director, comprising assurance representatives from across the Group, met twice during the year to discuss the Group risk register and key risk controls. This group provides additional assurance in relation to the system of internal control and risk management and enhances the Board’s ability to discharge its responsibilities in relation to internal control. • An Aviation Oversight Group, chaired by the Aviation Safety Director and comprising the aviation safety representatives from across the Group met twice during the year. This group has been responsible for the implementation of the aviation safety management system across the Group, and for transferring best practice across the world. Following a review of rail safety undertaken during 2001 and chaired by Ralph Hodge, a Rail Safety Oversight Group commenced operations during the year. It is proposed that a formal group holding regular meetings is established during 2003. 80 C O R P O R AT E G OV E R NA N C E R E P O RT Internal Control and Risk Management (continued) During the year CAG hosted a conference attended by almost 100 assurance representatives from around the world. Presentations were received from internal and external speakers, including the Executive Chairman and Senior Non-Executive Director, on varying aspects of assurance and attendees took the opportunity to network and discuss best practice during informal sessions held as part of the meeting. A further explanation of the role of CAG can be found in the Annual Review and Accounts section ‘How do we manage our responsibilities to stakeholders?’ During the year the Serco Management System, including the Company’s risk management standard, was rolled out across the business. The business divisions and their operating companies are following processes and procedures to implement the system, including the risk management standard, in ways that are appropriate to the type of business being undertaken. Divisional Chief Executives and company Managing Directors have the responsibility and authority to implement the system and monitor its operation within their businesses. As part of this process CAG has reviewed and revised all company policies. These policies were authorised by the Board in December. Supporting company standards and guidance have also been produced. The risk management process requires that at each level in the organisation risk registers are maintained that identify the key risks, the probability of those risks occurring, their potential impact and the actions being taken to mitigate the risks. Risks are ranked using a scoring system across the business. Risk registers are maintained at a contract, company, divisional and Group level and are reviewed at least quarterly and more frequently as required. The Group risk register identifies the key risks facing the business including risks that are managed directly at a Group level. The Group risk register is updated regularly and discussed at quarterly Board meetings. Each Group risk is assigned an owner at Board level. While operational risk can never be eliminated, the Company endeavours to minimise the impact by ensuring that appropriate infrastructure, controls, systems, staff and processes are in place. Some of the key management controls are set out below: • The principles of clear delegation of authority and segregation of duties are fully reflected in the Company’s operating processes; • Comprehensive process development and business acquisition review programmes have been established to ensure that our services and products meet customer expectations, performance criteria, operational effectiveness, regulatory requirements, investment returns and profitability; • Sound project management and change implementation disciplines are applied to all major development projects including new contract phase-ins, acquisitions, new technology applications, change programmes and other major initiatives; • The commitment and capability of staff is critical for the effective management of operational risk. Ongoing training and career development constantly improve the skills of our workforce. Selective recruitment, succession planning and other human resource policies and practices are in place to ensure that staff skills are aligned with the needs of the organisation; • Safety management systems in the Company’s aviation, rail, defence, nuclear and marine businesses have been addressed by the appointment of safety specialists for each area who report directly to the Board and are charged with maintaining and further developing the very high standards of safety expected in these industries. Occupational health, safety and environmental protection are addressed by qualified and experienced staff in each business unit; • The operational risk framework tracks key risk indicators. These include analysis of business planning and variance, customer satisfaction and retention data, staff turnover and satisfaction levels, occupational health and safety incidents and error and exception reporting; • The Company maintains insurance policies to provide protection from losses arising from circumstances such as damage or destruction of physical assets, theft and legal liability for third party loss. The adequacy of the insurance cover is reviewed at regular intervals. During 2002, Grant Thornton and Pannell Kerr Forster, the Company’s internal auditors, had their term extended for a further three years. As part of the continually evolving approach to business risk auditing the Company has developed, in association with Grant Thornton, a risk matrix designed to profile relative risk across the contracts and support functions of the Group, thereby ensuring that the audit focus is retained in the key risk areas as well as a more general approach to the rest of the business. Both Grant Thornton and Pannell Kerr Forster reported to the Audit Committee during the year. 81 Internal Control and Risk Management (continued) In addition to contracts held in Serco’s name, the Group has material investments in a number of joint ventures and associated companies. Where these investments are not wholly managed by Serco, the Group can influence, but not control, management practices. Serco representatives within these companies ensure that the processes and procedures for identifying and managing risk are appropriate for the business and that internal controls exist and are regularly monitored. Employees from the Company’s joint ventures are invited to participate in the risk oversight group and were invited to attend the CAG conference held in October 2002. Going Concern The Directors confirm that they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and therefore continue to adopt the going concern basis in preparing the Annual Review and Accounts. Compliance during 2002 With the exception of contractual notice periods for the Executive Directors, the Company has fully complied throughout the year with the provisions stated in Section 1 of the Combined Code. Contractual Notice Periods As detailed in the Remuneration Report, a number of recommendations have been made for shareholder consideration in relation to Executive Directors’ remuneration. Following approval of the relevant resolutions at the forthcoming Annual General Meeting, the Executive Directors’ service contracts will be amended to incorporate the changes. At this time the notice period for all Executive Directors will be reduced from 24 to 12 months in line with the notice period operational for those directors appointed after 1 January 2002. Approved by the Board of Directors and signed on its behalf: Julia Cavanagh Secretary Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT 19 February 2003 82 Report of the Directors Annual Review and Accounts The Directors of the Company have pleasure in presenting the Annual Review and Accounts of the Group for the year ended 31 December 2002. Activities The Company is a holding Company, which operates via its subsidiaries and its joint ventures to provide facilities management, systems engineering and equity investment management. The review of the business for the year ended 31 December 2002 can be found in the Business Review on pages 21 to 30. Share Capital The authorised and issued share capital of the Company, together with the details of shares issued during the year, are shown in Note 21 of the Accounts. Dividends and Transfers to Reserves An interim dividend of 0.64p (2001 – 0.57p) per Ordinary Share was paid on 11 October 2002. The Directors recommend a final dividend of 1.44p (2001 – 1.29p) per Ordinary Share, which if approved by the Annual General Meeting, will be paid on 13 May 2003, to those shareholders on the register at the close of business on 28 February 2003. After dividends, retained profits of £22,861,000 will be transferred to reserves. Substantial Shareholdings At close of business on 18 February 2003 (being the latest practical date prior to the signing of the Report of the Directors), the Company had received notifications of the following substantial interests representing over 3% of the issued capital: Legal & General Group plc – 3.84% Morley Fund Management Limited – 4.99% 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 – 10.85% Changes to the Board The current Directors of the Company are listed on page 76 and their profiles are provided on pages 85 and 88. As detailed in the 2001 Annual Review and Accounts, Richard White retired as Executive Chairman following the Annual General Meeting on 3 May 2002. Kevin Beeston was appointed Executive Chairman, Christopher Hyman was appointed Chief Executive and Andrew Jenner was appointed Finance Director. In accordance with the Company’s Articles of Association, Andrew Jenner will be subject to election by shareholders at the forthcoming Annual General Meeting. Directors’ Interests With the exception of the Executive Directors’ service contracts and Non-Executive Directors’ letters of appointment, there were no contracts in which any Director has an interest. Details of the Directors’ interests in the Ordinary Shares and options over the Ordinary Shares of the Company are set out in the Remuneration Report on pages 94 to 96. 83 Annual General Meeting The sixteenth Annual General Meeting of the Company will be held at the Queen Elizabeth II Conference Centre, London on 6 May 2003 at 11.00am. The Notice of the Annual General Meeting, together with relevant notes and proxy card are circulated with this document. Employment Policies The Board is committed to maintaining a working environment where staff are individually valued and recognised. The Group is committed to ensuring equal opportunity, honouring the rights of the individual and fostering partnership and trust in every working relationship. We maintain a safe working environment that provides appropriate remuneration and benefits, training, personal development and compliance with employment laws and regulations of the countries within which we operate. The Group recognises the United Nations Universal Declaration of Human Rights and implements appropriate policies and processes to meet the requirements of the declaration. The Group remains proud of its record of managing employee relations and continues to believe that the structures of individual and collective consultation and negotiation are best developed at a local level. Over the years the Group has demonstrated that working with trade unions and creating effective partnerships allows improvements to be delivered in business performance as well as terms and conditions of employment. Where employees choose not to belong to a trade union, employee communication forums such as works councils exist to ensure involvement of staff within the business. The Board understands its responsibility to encourage and assist in the employment, training, promotion and personal career development of all employees without prejudice. Included within the Annual Review is a section entitled ‘How do we develop our people?’ which provides an insight into the work of the Best Practice Centre and its development of an Institute of Directors programme within the United Kingdom. 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. Participation by staff in the success of the Group is encouraged by the availability of share save schemes, and a share option scheme for senior staff which effectively aligns their interests with those of shareholders by requiring that performance criteria are achieved prior to exercise. Health, Safety and Environmental Policies The Group recognises and accepts its responsibility for health, safety and the environment (“H,S&E”). A full time Company H,S&E Adviser, a member of the Corporate Assurance Group (“CAG”), is responsible for the development and monitoring of H,S&E policies, procedures and control systems and reports to the Board via the Executive Chairman. The Executive Chairman is the director responsible for H,S&E matters on behalf of the Board. H,S&E is also formally reported to the Global Management Board on a quarterly basis as part of the Corporate Assurance Report. The Group is committed to maintaining a safe and healthy working environment in all places that the Company operates, for our staff, our customers, members of the public and any other third party. The Group recognises that it is everyone’s responsibility for reducing injury and illness at work. Equally the Group is committed to the protection of the environment, recognising everyone’s responsibility for minimising the impact that we have on it. This commitment extends to all our activities, wherever they take place, which have the potential to adversely affect the environment. The Group aims to reduce environmental harm, minimise the use of energy and other resources and ensure that the principles of sustainable development are operated throughout the range of activities in which we are engaged. 84 R E P O RT O F T H E D I R E C T O R S Health, Safety and Environmental Policies (continued) CAG is supported by dedicated H,S&E teams in each business unit, either in contracts or the support office, which provide advice and support on H,S&E issues. All employees share responsibility for continuously improving the Company’s performance in relation to H,S&E management. Regular H,S&E meetings are held and representatives from the business units attended the CAG Conference held in October 2002. In order to maintain a high level of H,S&E awareness, great emphasis is placed on training both in relation to specific H,S&E matters but also in the overall context of assurance within the Company. To ensure compliance with all relevant legislation and Company standards as detailed in the Serco Management System, there is a comprehensive audit system. 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 audited by regulatory authorities. Creditor Payment Policies The Company requires each of its business units to negotiate and agree terms and conditions for 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 terms and the way in which disputes are to be settled. Payment is then made in accordance with those terms. The Group’s average creditor payment terms in 2002 were 29 days (2001 – 27 days); Company 29 days (2001 – 34 days). Donations Charitable donations totalling £94,859 (2001 – £116,000) were made during the year. In addition there were a number of community initiatives and support provided in kind to charitable and voluntary organisations made by contract and support office staff. During the year the Company made no political donations and intends to continue this policy. The Political Parties and Referendums Act 2000 (the “Act”) became effective in December 2000 and requires companies to obtain shareholder approval before incurring European Union (“EU”) political expenditure. The Group may need, as part of its business, to contact politicians and political parties within the EU on a non-partisan basis in order to make them aware of industry views, technology and trends. As the Act defines EU political organisations and political expenditure widely, the Directors are proposing to seek shareholder authority to incur such expenditure at its Annual General Meeting in May 2003. Auditors Deloitte & Touche have expressed their willingness to continue in office as auditors and a resolution to re-appoint them will be proposed at the forthcoming Annual General Meeting. 85 Directors’ Profiles Kevin Stanley Beeston FCMA (40) Executive Chairman Kevin joined Serco in 1985 and has since held a number of financial and commercial roles. He was Finance Director of the Group from 1996 to 1999 and Chief Executive from 1999 to 2002. He was appointed Executive Chairman in May 2002. He is a member of the CBI’s President’s Committee and Deputy Chairman of the CBI’s Public Services Strategy Board. Ralph Noel Hodge CBE BEng (Hons) (68) Non-Executive Director Ralph is Chairman of the Water Research Council, and a Non-Executive of British Ceramic Tiles and ORC (Inc). He was previously Non-Executive Chairman of Enron Europe Limited, Chief Executive of ICI Chemicals and Polymers and a Non-Executive Director of the Halifax Building Society. He was appointed to the Board of Serco on 5 April 1999, and is Chairman of the Board’s Remuneration Committee. Christopher Rajendran Hyman CA (SA) (39) Chief Executive 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. In 2000 Christopher was given additional responsibility as Chief Executive of a new Serco division, Serco Global Projects and has been instrumental in developing new processes and capabilities at the leading edge of the Group’s activities. He was appointed Chief Executive in May 2002. Andrew Mark Jenner ACA (34) Finance Director Andrew joined Serco in 1996 as Group Financial Controller, having previously worked for Unilever. He was appointed Corporate Finance Director with additional responsibility for Treasury activities in 1999. He was appointed Finance Director of the Group in May 2002. Andrew has primary responsibility along with the Executive Chairman for the Company’s relationship with shareholders and the City. Rhidian Huw Brynmor Jones MA FCIS FCMI (59) Senior Non-Executive Director Rhidian is an experienced corporate finance lawyer and was Head of the Corporate Department of solicitors Nabarro Nathanson until retiring from that firm in May last year. He is also a Non-Executive Director of Britannia, the UK’s second largest building society, and a policy adviser on company law to ICSA. Before training as a solicitor at Herbert Smith he worked in commerce and industry, including seven years in a senior finance and property role at Granada. He was appointed a Serco Non-Executive Director in 1996, having previously served on the Board from 1987 to 1994. He is Chairman of the Board’s Audit Committee. 86 R E P O RT O F T H E D I R E C T O R S 87 From left to right: Kevin Beeston DeAnne Julius Christopher Hyman Andrew Jenner Ralph Hodge Rhidian Jones Julia Cavanagh (Company Secretary) Iestyn Williams With thanks to Rushall JMI School, Walsall. 88 R E P O RT O F T H E D I R E C T O R S Directors’ Profiles (continued) DeAnne Shirley Julius CBE PhD (Econ) (53) Non-Executive Director DeAnne sits on the Court of the Bank of England, having been a member of its Monetary Policy Committee from its formation in 1997 until June 2001. Previously she held senior strategy positions with British Airways and Royal Dutch Shell. Before moving to the UK from America, DeAnne spent seven years with the World Bank developing infrastructure projects in Asia and Africa. She is a Non-Executive Director of Lloyds TSB, BP, Roche and was appointed to the Board of Serco on 29 October 2001. Iestyn Milton Williams BA (51) 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. In 1995 he was 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. Since then he has spent his time developing new business, first in the expansion of the Group’s activities in Europe, and for the last two years leading the Group’s entry into the education sector. Iestyn is also a Non-Executive Director of Law at Work Ltd and Dolphin Schools Ltd. Approved by the Board of Directors and signed on its behalf: Julia Cavanagh Secretary Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT 19 February 2003 89 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; and • State whether applicable accounting standards have been followed. 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 19 February 2003 90 Remuneration Report Introduction During the year the Remuneration Committee (the “Committee”) commissioned a review of Executive Directors’ remuneration, the first external benchmarking exercise undertaken since 1999, and the first review of base salary levels since September 2000. The recommendations of the review which are included in detail in the Remuneration Report detailed below are based on a remuneration philosophy grounded in the following four principles: total rewards should be market competitive; incentive plans should be used to reinforce a high performance culture; the interests of Directors and shareholders should be aligned as far as reasonably possible, and the reward structure should be easily understood by all. In revising the remuneration framework the Committee consulted with the Company’s six largest institutional investors, representing approximately 35% of the shareholder base, and the ABI before making its recommendations. The following report details the remuneration policy, the actual remuneration of the Directors of the Company for the year ended 31 December 2002 and the proposed changes to elements of the remuneration framework to be introduced during 2003, as determined by 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 and the new requirements for the disclosure of Directors’ remuneration under the Directors’ Remuneration Report Regulations 2002. Reference has also been made to the Higgs Review where it is deemed appropriate. Composition and Terms of Reference of the Remuneration Committee The Committee is comprised of all three Non-Executive Directors; Ralph Hodge (Chairman), Rhidian Jones and DeAnne Julius. It operates in accordance with written terms of reference which are determined by the Board and takes into account best practice and the requirements of the Combined Code. The Executive Chairman and Human Resource & Change Director may attend the meetings of the Committee by invitation. Advisers to the Remuneration Committee During the year, the Committee has been advised by Neil Hayward, Human Resource & Change Director and Mercer Human Resource Consulting (“Mercer”) who were appointed by the Committee following a competitive tendering process. Advice has been sought from Mercer on matters surrounding remuneration policy and philosophy, benchmarking exercises for both individual Executive Directors and remuneration packages based on current market trends. Support was also provided in relation to the consultation exercise with the major institutional investors. Advice on legislation and best practice in this area has also been provided by the Company’s legal advisers Allen & Overy. Remuneration Policy and Practice The members of the Committee met five times during the year to consider matters relating to the remuneration of Executive Directors as well as the terms and conditions of their service with the Company. Recommendations to the Board following the extensive review process were made within a framework based on the four key principles detailed above. Executive Directors remuneration comprises a combination of short and long term rewards as explained below and then detailed on pages 94 to 99. All aspects of Executive Directors’ remuneration are performance related with the exception of base salary, pensions and life assurance. i) Salaries and Benefits Base Salary Salary changes were introduced in September 2002 following the remuneration review to reflect market conditions, and take account of a pay freeze agreed by Executive Directors since September 2000. Base salaries were increased by 10% for full time Executive Directors and will be reviewed annually in September on an ongoing basis. During the year Iestyn Williams elected to work part time (three days per week) and the reduction in his base salary is a direct reflection of that decision. 91 Remuneration Policy and Practice (continued) i) Salaries and Benefits (continued) Bonus Schemes Following the remuneration review, the Committee has recommended to the Board that the Company introduce a deferred bonus scheme for full time Executive Directors with effect from 2003. The maximum value of this bonus will be 40% of base salary and will be awarded on the basis that the Company achieves earnings per share growth before FRS 10 (Goodwill Amortisation) (“EPS”) of RPI +10% in that financial year. The bonus will reduce to 20% on a straight-line basis for EPS growth in excess of RPI +5%. No payment will be made if EPS growth falls below that level. Participants can elect to defer, for three financial years, up to 100% of the bonus earned to purchase shares in the Company. The shares purchased will be matched by the Company if stretching performance targets are met. Achievement of the performance criteria will be measured by comparing Serco’s total shareholder return (“TSR”) to that of the constituent companies in the FTSE 350 over the three year period. No matching will occur for below median performance, matching will be made on a one for two basis for median performance increasing to a one for one matching for top quartile performance. An explanation of TSR and the use of the FTSE 350 as a comparator group is provided below. Approval to implement this plan will be sought from shareholders at the Company’s Annual General Meeting. Following discussions with Mercer, the Remuneration Committee approved an interim cash only bonus plan for the financial year 2002 for full time Executive Directors which will provide a maximum benefit of 50% of salary dependent on EPS growth. If EPS growth is below 10% none of the bonus will be available, at 10%, 25% bonus will be available increasing on a straight-line basis for EPS growth between 10% and 15%, with a maximum bonus available for growth of more than 15%. This bonus will be determined following sign off of the 2002 Annual Review and Accounts by the external auditors. The Executive Directors have agreed to use 50% of any net bonus received to purchase shares at market value in the Company. It is proposed to replace this scheme with the deferred bonus scheme following shareholder approval at the Annual General Meeting in May 2003. TSR and the FTSE 350 The Committee has recommended the introduction of TSR as a performance measure in the light of current practice and following the consultation process with institutional investors. TSR is defined as the return shareholders would receive if they held a notional number of shares, and received dividends on those shares over a three year time period. It measures the percentage growth in the company’s share price together with the value of any dividends paid, assuming that the dividends are re-invested into the company’s shares. TSR performance is being measured against the FTSE 350 as the Company has been unable to identify a large or appropriate enough peer group against which to compare its performance more directly, and at present the Company is positioned in the middle of the FTSE 350. The relevance of measuring performance against this group of companies will be reviewed on a regular basis by the Committee. ii) Share Based Incentives Long term share based incentives are awarded to Executive Directors under the Serco Group plc 1996 Long Term Incentive Scheme (as amended on 5 April 2000) (the “LTIS”) and the Serco Group plc 1998 Executive Option Plan (the “EOP”). The performance conditions relating to each of the schemes is set out below. Long Term Incentive Scheme (“LTIS”) Awards made under the LTIS, which are structured as options with a zero exercise price, may be exercised after the third anniversary of grant. Awards made to Executive Directors are calculated at 64% of salary at the time of grant. For awards made in relation to performance periods commencing up to and including 1 January 2002, the extent to which an award vests (and therefore becomes exercisable) is measured by reference to growth in the Company’s EPS over the performance period of three financial years. 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%. EPS was initially selected as the appropriate performance criteria for the scheme as it is visible, easily understood and audited on an annual basis. 92 R E M U N E R AT I O N R E P O RT Remuneration Policy and Practice (continued) ii) Share Based Incentives (continued) Following the remuneration review, the Committee has recommended for approval by shareholders at the forthcoming Annual General Meeting, a revision to the performance criteria under which the LTIS currently operates. It is proposed that for future awards made under the LTIS, achievement of the performance criteria will be measured by comparing Serco’s TSR to that of the constituent companies in the FTSE 350. No awards will vest for below median performance, 40% will vest for median performance, increasing on a straight-line basis to full vesting for top quartile performance. A justification of the selection of TSR and use of the FTSE 350 as a comparator group together with an explanation of the terms is provided above. Except in exceptional circumstances, awards are made to employees prior to the commencement of the performance period to which they relate. Executive Option Plan (“EOP”) 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. Grants made to Executive Directors are based on 100% of salary as at 31 December prior to grant. For grants made in relation to performance periods commencing up to and including 1 January 2002 the extent to which an option vests (and therefore becomes exercisable) is measured by reference to the growth in the Company’s EPS. If the compound annual growth in EPS is less than 10%, 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. EPS was initially selected as the appropriate performance criteria for the scheme as it is visible, easily understood and audited on an annual basis. The Committee has recommended for approval by shareholders a revision to the performance criteria under which the EOP currently operates. It is proposed that for options granted for performance periods commencing 1 January 2003 or later, achievement of the performance criteria will be measured by reference to the Company’s growth in EPS relative to RPI. If the compound annual growth in EPS is less than RPI +5%, none of the options may be exercised. If compound annual growth in EPS is more than RPI +10%, all the options may be exercised. Where compound growth is between RPI +5% and RPI +10%, a proportion of the options may be exercised. The decision to measure compound EPS growth against an RPI index rather than by reference to a peer group of companies was made, as no group of a suitable size or composition could be identified. The decision to retain EPS as the relevant performance measure for this scheme was based on two factors; firstly this scheme applies broadly within the Company to over 800 senior staff and therefore simplicity and visibility is important; and secondly it is considered by the Committee to be an appropriate performance measure with a degree of balance against the TSR measures applied in other aspects of remuneration design. iii)Pensions 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 to the Accounts. In the event of death in service, each scheme provides for a lump sum payment as well as a dependants’ pension. iv) Service Contracts and Compensation Each Executive Director has a rolling service contract with the Company and these service contracts will be available for inspection prior to the start and after the Company’s Annual General Meeting. Following approval of the shareholder resolutions in relation to Executive Remuneration, the service contracts will be amended to reflect the revised conditions. The service contracts will also be amended to reflect a reduction in notice period from 24 months to 12 months, thereby bringing all Executive Directors’ notice periods in line. Executive Directors appointed since 1 January 2002 already operate with a one year notice period. This change will rectify the one area of non-compliance by the Company in relation to the current Combined Code. 93 Remuneration Policy and Practice (continued) iv) Service Contracts and Compensation (continued) Compensation for early termination of a service contract is not currently addressed in the contracts. The 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. Under the new service agreements being proposed for Executive Directors following the Annual General Meeting, the Company reserves the right to make a payment in lieu of notice. In addition, where a Director leaves the Company following a change of control, either because he is dismissed or he elects to leave on notice, he will receive a payment equivalent to one year’s remuneration. The service agreements do not provide for termination payments to be made in any other circumstances. There have been no payments made during the year in relation to compensation for loss of office. A summary of contract details relating to each director who served during the year is provided below: Name of Director Executive Directors: K S Beeston C R Hyman A M Jenner I M Williams R D White Non-Executive Directors: R N Hodge R H B Jones D S Julius Date of contract/ letter of appointment Unexpired term and notice period at 31 December 2002 29 March 1996 1 April 1999 3 May 2002 1 April 1999 29 March 1996 Refer to note a) below Refer to note a) below Rolling contract with 12 month notice period Refer to note a) below None 5 April 2000 1 September 2002 29 October 2001 3 months unexpired at 31 December 2002, now extended to 4 April 2004 16 months 22 months Notes: a) Executive Directors have a rolling contract with a 24 month notice period which will be reduced to 12 months following approval of the shareholder resolutions at the Annual General Meeting in May 2003. b) Compensation to Executive Directors for early termination of a service contract is not currently addressed in the contracts. The Committee considers and determines the level of compensation on a case by case basis. c) Non-Executive Directors have a three month notice period and no compensation or other benefits are payable on early termination. Non-Executive Directors 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. As at 31 December 2002, the Non-Executive Directors of the Company have no personal financial interest in the matters determined by the Committee, no potential conflicts of interest arising from cross-directorships and no involvement in the day to day running of the Group. The fees and terms of engagement of Non-Executive Directors are reviewed on an annual basis and approved by the Board. Following the publication of the Higgs Review, the Board will consider the recommendation to make additional payments to Chairmen of the Board Committees. The Board does not believe that the partial payment of fees in shares is appropriate and will therefore continue to make cash only payments. Non-Executive Directors’ fees are not performance related. 94 R E M U N E R AT I O N R E P O RT 1 Salaries and Benefits The total salaries, fees and benefits paid to or receivable by each person who served as a Director at any time during the year, are as follows: Names K S Beeston R N Hodge C R Hyman A M Jenner R H B Jones D S Julius R D White I M Williams TOTAL Total basic salary £ 361,667 – 344,732 136,694 – – 119,487 210,000 1,172,580 Fees £ – 37,125 – – 30,125 30,125 – – 97,375 Bonuses £ 192,500 – 242,500 115,500 – – – – 550,500 Total estimated Total remuneration excluding pensions 2002 £ value of any other non-cash benefits £ Total remuneration excluding pensions 2001 £ 1,286 – 1,029 686 – – 2,310 1,286 6,597 555,453 37,125 588,261 252,880 30,125 30,125 121,797 211,286 351,239 38,500 300,992 – 27,500 4,718 352,433 303,886 1,827,052 1 , 3 7 9 , 2 6 8 Notes: On 3 May 2002 A M Jenner was appointed as Finance Director and R D White retired as Executive Chairman. With effect from April 2002, I M Williams has worked for the Company on a part time basis. In addition to the 2002 bonus, C R Hyman received a discretionary bonus during the year. R N Hodge received fees of £7,000 in relation to additional days worked as chairman of an internal rail safety committee. Section 1 is subject to audit by Deloitte & Touche. 2 Directors’ Shareholdings The Directors’ interests in the shares of the Company were as follows: K S Beeston R N Hodge C R Hyman R H B Jones A M Jenner D S Julius I M Williams * at date of appointment Ordinary Shares of 2p each fully paid 1 January 2002 Ordinary Shares of 2p each fully paid 31 December 2002 98,713 2,010 21,382 46,500 1,722 * – 2,387,323 106,520 2,010 29,394 55,000 9,529 5,000 2,387,323 95 3 Share Based Incentives The total share options granted to each person who has served as a Director of the Company at any time in the financial year are as follows: i) Serco Group plc 1996 Long Term Incentive Scheme (“LTIS”) The total share options granted under the LTIS to such Directors are as follows: Number of shares under option at 1 January 2002 (or, if later, the date of appointment as Director) 3 Yr Award 3 Yr Award 3 Yr Award – 3 Yr Award 3 Yr Award 3 Yr Award – – – 3 Yr Award 3 Yr Award 3 Yr Award 3 Yr Award 3 Yr Award 3 Yr Award 38,736 51,885* 54,676* – 32,868 44,474* 46,865* – – – 48,516 51,885* 48,172 32,868 44,474* 46,865* Number of shares under option at 31 December 2002 (or, if earlier, cessation date as Director) Granted during period Lapsed Exercised unexercised during period during period Exercise price £ Market price at grant £ Value realised on exercise £ – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 38,736 51,885 54,676 – 32,868 44,474 46,865 – – – 48,516† 51,885† 48,172† 32,868 44,474 46,865 Nil Nil Nil – Nil Nil Nil – – – Nil Nil Nil Nil Nil Nil 4.26 4.90 4.65 – 4.26 4.90 4.65 – – – 4.26 4.90 4.65 4.26 4.90 4.65 – – – – – – – – – – – – – – – – Date exercisable 31.12.02 31.12.03 31.12.04 – 31.12.02 31.12.03 31.12.04 – – – 31.12.02 31.12.03 31.12.04 31.12.02 31.12.03 31.12.04 Date of expiry of option 04.04.10 23.11.10 15.11.11 – 04.04.10 23.11.10 15.11.11 – – – 04.04.10 23.11.10 15.11.11 04.04.10 23.11.10 15.11.11 K S Beeston R N Hodge C R Hyman A M Jenner R H B Jones D S Julius R D White I M Williams * Approximately 13.5% of the options granted under the LTIS represent supplementary options, granted for the sole purpose of compensating participants for agreeing to bear the Company’s liability to employers’ National Insurance Contributions upon the exercise of the underlying LTIS options. † At date of retirement from the Board The Scheme is an unapproved scheme for Inland Revenue purposes. No payment was made for the grant of the awards, no awards have had terms varied during the period, and no awards have been exercised by the Directors since the end of the financial year. The performance criteria to which the exercise of awards under the LTIS is conditional are as set out on pages 91 and 92. For each share under an LTIS option that is unexpired at the end of the financial year, the market price at the end of the financial year was £1.53 and the highest and lowest market prices during the financial year were £4.00 and £1.325 respectively. 96 R E M U N E R AT I O N R E P O RT 3 Share Based Incentives (continued) ii) Serco Group plc 1998 Executive Option Plan (“EOP”) The total share options granted under the EOP to such Directors are as follows: Number of shares under option at 1 January 2002 (or, if later, the date of appointment as Director) Lapsed Granted Exercised unexercised during during period period during period K S Beeston R N Hodge C R Hyman A M Jenner R H B Jones D S Julius R D White I M Williams Approved Unapproved Unapproved Unapproved Unapproved Unapproved – Approved Unapproved Unapproved Unapproved Unapproved Unapproved Approved Approved Unapproved Unapproved Unapproved Unapproved – – Approved Unapproved Unapproved Unapproved Unapproved Approved Unapproved Unapproved Unapproved Unapproved Unapproved 13,788 68,922 76,734 58,764 91,321* – – 13,788 25,290 40,812 49,830 78,275* – 4,134‡ 8,574‡ 7,422‡ 12,336‡ 18,524‡* – – – 13,788 119,448 123,612 73,572 91,321* 13,788 78,990 86,076 49,830 78,275* – – – – – – 152,035* – – – – – – 130,316* – – – – – 78,189* – – – – – – – – – – – – 130,316* – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Balance at 31 December 2002 (or, if earlier, cessation date as Director) 13,788 68,922 76,734 58,764 91,321 152,035 – 13,788 25,290 40,812 49,830 78,275 130,316 4,134 8,574 7,422 12,336 18,524 78,189 – – 13,788† 119,448† 123,612† 73,572† 91,321† 13,788 78,990 86,076 49,830 78,275 130,316 Market price on exercise date £ Exercise price £ Value realised on exercise £ Date from which exercisable Date of expiry of option – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 2.18 2.18 2.45 4.26 4.35 2.64 – 2.18 2.18 2.45 4.26 4.35 2.64 2.18 2.45 2.45 4.26 4.35 2.64 – – 2.18 2.18 2.45 4.26 4.35 2.18 2.18 2.45 4.26 4.35 2.64 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 21.05.01 21.05.01 01.04.02 05.04.03 28.03.04 03.05.05 – 21.05.01 21.05.01 01.04.02 05.04.03 28.03.04 03.05.05 21.05.01 01.04.02 01.04.02 05.04.03 28.03.04 03.05.05 – – 21.05.01 21.05.01 01.04.02 05.04.03 28.03.04 21.05.01 21.05.01 01.04.02 05.04.03 28.03.04 03.05.05 20.05.08 20.05.05 31.03.06 04.04.07 27.03.08 02.05.09 – 20.05.08 20.05.05 31.03.06 04.04.07 27.03.08 02.05.09 20.05.08 31.03.09 31.03.06 04.04.07 27.03.08 02.05.09 – – 20.05.08 20.05.05 31.03.06 04.04.07 27.03.08 20.05.08 20.05.05 31.03.06 04.04.07 27.03.08 02.05.09 * Approximately 13.5% of the options granted as unapproved options under the EOP represent supplementary options, granted for the sole purpose of compensating participants for agreeing to bear the Company’s liability to employers’ National Insurance Contributions upon the exercise of the underlying unapproved options. † At date of retirement from the Board ‡ At date of appointment 97 3 Share Based Incentives (continued) ii) Serco Group plc 1998 Executive Option Plan (continued) The Scheme is an approved scheme for Inland Revenue purposes but has an unapproved schedule. No payment was made for the grant of the options, no options have had terms varied during the period, and no options have been exercised by the Directors since the end of the financial year. The performance criteria to which the exercise of options under the EOP is conditional are as set out on page 92. For each share under an EOP option that is unexpired at the end of the financial year, the market price at the end of the financial year was £1.53 and the highest and lowest market prices during the financial year were £4.00 and £1.325 respectively. Section 3 is subject to audit by Deloitte & Touche. 4 Performance Graph – Serco five year TSR vs FTSE 350 index 350% 300% 250% 200% 150% 100% 50% 0% -50% Jan 98 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 C UM U L AT I V E T S R P E R F O RM A N C E Serco FTSE 350 index Provided by Mercer Human Resource Consulting. This graph demonstrates the performance of Serco’s total shareholder return (“TSR”) in relation to the FTSE 350 index over the past five years. As detailed earlier, TSR is defined as the return shareholders would receive if they held a notional number of shares, and received dividends on those shares over a period of time. It measures the percentage growth in the company’s share price together with the value of any dividends paid, assuming that the dividends are re-invested into the company’s shares. 98 R E M U N E R AT I O N R E P O RT 5 Pensions The 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 all Directors under defined benefit scheme are as follows: Transfer value of accrued benefits as at 31 December 2002 £ Transfer value of accrued benefits as at 31 December 2001 £ 539,342 100,212 11,025 2,532,643 1,141,718 449,414 84,132 – 1,581,562 1,009,305 Increase in transfer value between 2001 report and 31 December 2002 £ 72,622 1,568 2,446 942,425 122,107 Gross increase in accrued pension during the year £ Increase in accrued pension during the year, net of inflation £ 18,429 3,495 2,430 14,680 13,270 16,956 3,265 2,430 11,873 11,246 Value of net increase in accrual over the year £ Total accrued pension at year end £ p.a. 86,139 4,723 2,446 137,195 107,721 105,073 17,010 2,430 179,772 132,322 K S Beeston C R Hyman A M Jenner R D White I M Williams Notes to pension benefits: a) The total accrued pension shown is that which would be paid annually on retirement, based on service to the end of this year, or date of retirement in the case of R D White. The increase in accrued pension during the year is shown both as a gross increase and excluding any increase in inflation. b) Transfer values have been calculated in accordance with version 1.5 of the Guidance Note GN11 issued by the actuarial profession. The difference between the transfer values at the beginning and end of the year includes the effect of fluctuations in the transfer value due to factors beyond the control of the Company and the Directors, such as stock market movements. It is calculated after deducting Directors’ contributions. c) The value of the net increase in accrual represents the incremental value to the director of his service during the year, calculated on the assumption that his service terminated at the year-end. It is based on the accrued pension increase net of inflation after deducting the Director’s contribution. d) Members have the option to pay Additional Voluntary Contributions; neither the contributions nor the resulting benefits are included in the above table. e) 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. f) In the case of R D White, who retired on 5 July 2002, the increase in transfer value between 2001 and the year-end is a result of the different actuarial valuation approach for a retired member as opposed to an active member, and as the result of his benefits having to be restricted by Inland Revenue limits. These effects have been accentuated as a result of R D White having retired before age 60. 99 5 Pensions (continued) g) C R Hyman also benefits from a defined contribution arrangement to which the Company contributes 15% of remuneration in excess of the Permitted Maximum under the Inland Revenue approved Scheme. Company contributions paid under this arrangement during the year amounted to £33,247. Section 5 is subject to audit by Deloitte & Touche. Approved by the Board of Directors and signed on its behalf: Julia Cavanagh Secretary Dolphin House Windmill Road Sunbury-on-Thames Middlesex TW16 7HT 19 February 2003 100 Independent Auditors’ Report to the Members of Serco Group plc We have audited the financial statements of Serco Group plc for the year ended 31 December 2002 which comprise the profit and loss account, the balance sheets, the cash flow statement, the statement of total recognised gains and losses and the related notes 1 to 32. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the part of the Directors’ Remuneration Report that is described as having been audited. This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditors As described in the statement of Directors’ Responsibilities, the Company’s Directors are responsible for the preparation of the financial statements in accordance with applicable United Kingdom law and accounting standards. They are also responsible for the preparation of the other information contained in the annual report including the Directors’ Remuneration Report. Our responsibility is to audit the financial statements and the part of the Directors’ Remuneration Report described as having been audited in accordance with relevant United Kingdom legal and regulatory requirements and auditing standards. We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Directors’ Remuneration Report described as having been audited have been properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Report of the Directors is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors’ remuneration and transactions with the Company and other members of the Group is not disclosed. We review whether the Corporate Governance Statement reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules of the Financial Services Authority and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all 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 Report of the Directors and the other information contained in the Annual Report for the above year as described in the contents section including the unaudited part of the Directors’ Remuneration Report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. 101 Basis of audit opinion We conducted our audit in accordance with United Kingdom auditing standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’ Remuneration Report described as having been audited. 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 and the part of the Directors’ Remuneration Report described as having been audited 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 and the part of the Directors’ Remuneration Report described as having been audited. 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 2002 and of the profit of the Group for the year then ended; and • the financial statements and the part of the Directors’ Remuneration Report described as having been audited have been properly prepared in accordance with the Companies Act 1985. Deloitte & Touche Chartered Accountants and Registered Auditors London 19 February 2003 Neither an audit nor a review provides assurance on the maintenance and integrity of the website, including controls used to achieve this, and in particular whether any changes may have occurred to the financial information since first published. These matters are the responsibility of the directors but no control procedures can provide absolute assurance in this area. Legislation in the United Kingdom governing the preparation and dissemination of financial information differs from legislation in other jurisdictions. 102 Consolidated Profit and Loss Account For the year ended 31 December 2002 2002 Group £’000 2002 Joint Ventures £’000 2002 Total £’000 Restated 2001 Group £’000 Note Restated 2001 Joint Ventures £’000 Restated 2001 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 intangible assets Other administrative expenses Exceptional item: Unsuccessful NATS acquisition Operating profit-continuing operations Exceptional item: GSR refinancing 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 EARNINGS PER SHARE (“EPS”) PER ORDINARY SHARE 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 2 2 2 4 5 6 7 8 2 3 9 1,097,278 – 228,670 (228,670) 1,325,948 (228,670) 913,693 – 227,510 (227,510) 1,141,203 (227,510) – – – – – – – 1,097,278 (947,313) 149,965 (120,862) (8,098) (112,764) – 1,097,278 (947,313) 149,965 (120,862) (8,098) (112,764) – 29,103 – – 1,422 1,422 – (5,486) (5,486) – – – 21,883 16,894 – 16,894 (14,875) – (14,875) 25,039 23,902 29,103 – 21,883 18,316 1,422 16,894 (20,361) (5,486) (14,875) 48,941 (16,639) 32,302 (9,441) 22,861 7.66p 9.58p 7.63p 9.54p 913,693 (789,686) 124,007 (102,753) (5,123) (97,630) (10,187) 11,067 15,356 – 2,207 2,207 – (7,299) (7,299) – – – – – – – – – – 17,374 17,102 – 17,102 (15,768) – (15,768) 21,331 18,708 913,693 (789,686) 124,007 (102,753) (5,123) (97,630) (10,187) 11,067 15,356 17,374 19,309 2,207 17,102 (23,067) (7,299) (15,768) 40,039 (13,012) 27,027 (7,265) 19,762 6.94p 8.25p 6.91p 8.22p The basis of preparation of this statement and the effect of the prior year restatement is set out in Note 1. 103 Restated 2001 £’000 141,170 48,724 30,510 322,338 (291,828) 18,983 Note 2002 £’000 147,473 62,479 35,883 317,831 (281,948) 18,207 10 11 12 12 13 14 14 17 16 15 8 16 18 21 22 23 20 264,042 239,387 38,744 220,042 108,932 71,774 439,492 2,386 74,377 93,843 136,766 6,184 313,556 125,936 389,978 87,588 34,533 267,857 8,697 190,791 143 68,226 267,857 35,838 199,705 76,105 34,812 346,460 70,647 58,034 100,621 128,629 5,026 362,957 (16,497) 222,890 68,570 25,249 129,071 7,903 73,656 143 47,369 129,071 Consolidated Balance Sheet At 31 December 2002 FIXED ASSETS Intangible assets 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/(LIABILITIES) 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 These Accounts and Notes were approved by the Board of Directors on 19 February 2003 and signed on behalf of the Board: Kevin Beeston Executive Chairman Andrew Jenner Finance Director 104 Company Balance Sheet At 31 December 2002 FIXED ASSETS Tangible assets Investments in subsidiaries CURRENT ASSETS Amounts owed by subsidiary companies due after more than one year 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 2002 £’000 2001 £’000 11 12 14 14 16 15 8 16 18 21 22 23 2,309 141,418 143,727 111,426 21,669 1,297 17,753 152,145 – 1,066 688 6,395 6,184 14,333 137,812 281,539 43,784 335 237,420 8,697 190,791 143 37,789 237,420 1,682 35,598 37,280 148,183 14,820 – – 163,003 30,245 757 1,077 5,098 5,026 42,203 120,800 158,080 41,420 – 116,660 7,903 73,656 143 34,958 116,660 These Accounts and Notes were approved by the Board of Directors on 19 February 2003 and signed on behalf of the Board: Kevin Beeston Executive Chairman Andrew Jenner Finance Director 105 Consolidated Cash Flow Statement For the year ended 31 December 2002 Note Operating profit before cost of unsuccessful NATS acquisition Exceptional item: Cost of unsuccessful NATS acquisition Operating profit Depreciation and amortisation of goodwill Net increase in working capital One-off pension fund contribution NET CASH INFLOW FROM OPERATING ACTIVITIES BEFORE PFI ASSET EXPENDITURE Expenditure on PFI asset under construction* Net cash inflow from operating activities after PFI asset expenditure 24 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 Tax paid CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT Purchase of tangible and intangible fixed assets Sale of tangible fixed assets Exceptional item: GSR refinancing Security deposit on PFI asset under construction Net cashflows with joint ventures Purchase of own shares Net cash outflow from capital expenditure and financial investment ACQUISITIONS AND DISPOSALS Acquisitions Net cash acquired with acquisitions Subscription for shares in joint ventures Proceeds on disposal of joint ventures Net cash outflow from acquisitions and disposals EQUITY DIVIDENDS PAID Dividends paid Net cash outflow from equity dividends paid Net cash outflow before financing FINANCING Issue of Ordinary Share Capital Debt due within one year: (Decrease)/increase in other loans Debt due beyond one year: Increase in: Other loans Non-recourse debt financing PFI asset * Capital element of finance lease repayments Net cash inflow from financing Increase/(decrease) in cash Balance at 1 January BALANCE AT 31 DECEMBER *PFI asset under construction financed by non-recourse loan 12 12 2002 £’000 29,103 – 29,103 23,632 (13,124) (15,500) 24,111 (14,950) 9,161 11,095 1,223 (7,362) (6,139) Restated 2001 £’000 21,254 (10,187) 11,067 18,283 (13,866) – 15,484 (13,733) 1,751 9,645 578 (6,182) (5,604) (5,738) (6,417) (23,596) 8,125 – – 1,235 – (14,236) (11,353) 397 (370) 1,030 (10,296) (8,283) (8,283) (17,626) 4,569 16,343 (6,000) (1,945) (9,964) (14,623) (77,106) 3,558 (38) – (73,586) (6,664) (6,664) (24,436) (95,498) 117,929 (300) 15,624 24 15,600 (3,594) 129,659 105,223 (35,835) 69,388 2,001 100 14,850 750 14,100 (2,785) 14,166 (81,332) 45,497 (35,835) 106 Consolidated Statement of Total Recognised Gains and Losses For the year ended 31 December 2002 Profit on ordinary activities after taxation Currency translation differences on foreign currency net investments Total recognised gains and losses for the year Prior year adjustment (see Note 1) Total gains and losses recognised since last annual report and financial statements Restated 2001 £’000 27,027 (1,917) 25,110 2002 £’000 32,302 (1,911) 30,391 (806) 29,585 107 Notes to the Accounts For the year ended 31 December 2002 1 Accounting policies These Accounts have been prepared in accordance with applicable UK accounting standards, and the particular accounting policies adopted are detailed below. These have all been applied consistently with the exception of bid costs which is explained in the restatement 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 and its subsidiaries, and equity accounts for its share of joint ventures made up to 31 December of each year, for the periods they are owned by Serco Group plc. Restatement The 2001 Accounts have been restated to reflect the impact of the Urgent Issues Task Force Abstract 34 (“UITF 34”) – Pre-Contract Costs; eliminating £1,193,000 of bid costs, previously disclosed within debtors, and the associated tax effect of £387,000. The impact of this adjustment in the 2002 Accounts is a reduction in amortisation of bid costs of £400,000. The Profit and Loss Account has been restated to reclassify ‘Other operating costs relating to joint ventures’ within ‘Other administrative expenses’. Accounting for PFI Contracts Within Public Private Partnership (“PPP”) projects (including Private Finance Initiative (“PFI”) projects), where the concession agreement transfers limited risks and rewards associated with ownership to the contractor, the costs incurred during the period of initial asset construction, as a direct consequence of financing, designing and constructing the asset, are shown as ‘assets in the course of construction’ within current assets. On completion of the asset construction phase the asset is transferred to debtors as ‘amounts receivable under PPP contracts’. Revenues received from the customer are apportioned between capital repayments and operating revenue. The ‘finance income’ element of the capital repayment is shown within interest receivable. Serco has one Special Purpose Company – Traffic Information Services (TIS) Limited, where the results are fully consolidated. All other SPCs are classified as joint ventures and accounted for using the gross equity method. 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 average 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. 108 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 1 Accounting policies (continued) Pension costs: Defined contribution schemes Contributions for the year in respect of defined contribution schemes are charged to the Profit and Loss Account. Differences between charges accruing during the year and cash payments are included as either accruals or prepayments in the Balance Sheet. The Group has adopted the transitional disclosure requirements of Financial Reporting Standard 17 (“FRS 17”) – Retirement Benefits. For further information see Note 31. Turnover Turnover represents net sales of goods and services to third parties together with investment related income. Goodwill Goodwill arising on acquisitions is capitalised in the Consolidated 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. Current Tax Current tax, including UK Corporation Tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantially enacted at the Balance Sheet date. Fixed asset investments: Subsidiaries Investments held as fixed assets are stated at cost less provision for any impairment in value. Fixed asset investments: Joint ventures In the consolidated Accounts, investments in joint ventures are accounted for using the gross equity method of accounting in accordance with Financial Reporting Standard 9 (“FRS 9”) – Associates and Joint Ventures. The Group Consolidated Profit and Loss Account includes the Group’s share of joint ventures’ operating profits and interest, and the attributable taxation. In the Consolidated Balance Sheet, the Group’s share of the net assets of its joint ventures, which includes several PFIs, is included under the heading ‘investments in joint ventures’. The share of net assets is split between gross assets and gross liabilities. 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. Investment in own shares is stated at cost less provision for impairment. 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 performance period during which the benefits are earned by employees. 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. 109 1 Accounting policies (continued) 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 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 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. Pre-contract costs All bid costs are expensed through the Profit and Loss Account up to the point where contract award is virtually certain in accordance with UITF 34. Bid costs incurred after this point are then capitalised within debtors. On contract award these bid costs are amortised through the Profit and Loss Account on a straight-line basis over the contract period. Deferred taxation The charge for taxation takes account of taxation deferred because of differences between the timing of recognition of certain items for taxation purposes and for accounting purposes. Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the Balance Sheet date where the transactions or events that give rise to an obligation to pay more or less tax in the future have occurred by the Balance Sheet date. A deferred tax asset is recognised only when it is considered more likely than not that it will be recovered. Deferred tax is recognised on a non-discounted basis using tax rates in force at the Balance Sheet date. Financial Reporting Standard 19 (“FRS 19”) – Deferred Tax has been adopted for the first time in these financial statements and there is no material effect on the comparative figures. 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 any 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. 110 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 2 Segmental Report Classes of Business 2002 TURNOVER Civil Government Defence Transport Science Private sector TOTAL PROFIT BEFORE TAXATION AND OTHER COSTS Civil Government Defence Transport Science Private sector TOTAL OTHER COSTS Common costs Amortisation of intangible assets Net interest – Group Net interest – Joint ventures PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION NET ASSETS Civil Government Defence Transport Science Private sector TOTAL Unallocated assets TOTAL Group £’000 267,127 228,579 347,815 115,603 138,154 Joint Ventures £’000 89,220 134,654 4,796 – – Total £’000 356,347 363,233 352,611 115,603 138,154 1,097,278 228,670 1,325,948 17,796 13,259 15,126 9,845 6,909 62,935 5,287 15,956 640 – – 21,883 23,083 29,215 15,766 9,845 6,909 84,818 (25,734) (8,098) (4,064) 2,019 48,941 43,269 53,400 45,716 69,771 31,679 243,835 24,022 267,857 111 Group £’000 202,605 218,001 275,888 87,404 129,795 913,693 13,271 11,312 14,179 4,907 6,778 50,447 Joint Ventures £’000 107,917 115,349 4,244 – – Restated Total £’000 310,522 333,350 280,132 87,404 129,795 227,510 1,141,203 5,169 11,996 209 – – 17,374 18,440 23,308 14,388 4,907 6,778 67,821 (24,070) (10,187) 15,356 (5,123) (5,092) 1,334 40,039 33,517 36,282 27,044 903 14,246 111,992 17,079 129,071 2 Segmental Report (continued) Classes of Business 2001 TURNOVER Civil Government Defence Transport Science Private sector TOTAL PROFIT BEFORE TAXATION AND OTHER COSTS Civil Government Defence Transport Science Private sector TOTAL OTHER COSTS Common costs Exceptional item: Cost of unsuccessful NATS acquisition Exceptional item: GSR refinancing Amortisation of intangible assets Net interest: Group Net interest: Joint ventures PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION NET ASSETS Civil Government Defence Transport Science Private sector TOTAL Unallocated assets TOTAL 112 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 2 Segmental Report (continued) Geographical segments 2002 TURNOVER United Kingdom Rest of Europe and Middle East Asia Pacific North America TOTAL PROFIT BEFORE TAXATION AND OTHER COSTS United Kingdom Rest of Europe and Middle East Asia Pacific North America TOTAL OTHER COSTS Common costs Amortisation of intangible assets Net interest: Group Net interest: Joint ventures PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION NET ASSETS United Kingdom Rest of Europe and Middle East Asia Pacific North America TOTAL Unallocated assets TOTAL Group £’000 752,247 163,218 116,671 65,142 Joint Ventures £’000 178,207 7,341 38,406 4,716 Total £’000 930,454 170,559 155,077 69,858 1,097,278 228,670 1,325,948 35,065 12,895 9,503 5,472 62,935 19,029 625 1,750 479 21,883 54,094 13,520 11,253 5,951 84,818 (25,734) (8,098) (4,064) 2,019 48,941 142,821 43,951 40,057 17,006 243,835 24,022 267,857 Note: Turnover is shown by geographical origin. Turnover analysed by geographical destination is not materially different. 113 Group £’000 618,559 130,608 103,414 61,112 913,693 26,988 10,041 8,597 4,821 50,447 Joint Ventures £’000 175,641 8,876 38,588 4,405 Restated Total £’000 794,200 139,484 142,002 65,517 227,510 1,141,203 14,068 720 1,871 715 17,374 41,056 10,761 10,468 5,536 67,821 (24,070) (10,187) 15,356 (5,123) (5,092) 1,334 40,039 64,563 9,278 30,919 7,232 111,992 17,079 129,071 2 Segmental Report (continued) Geographical segments 2001 TURNOVER United Kingdom Rest of Europe and Middle East Asia Pacific North America TOTAL PROFIT BEFORE TAXATION AND OTHER COSTS United Kingdom Rest of Europe and Middle East Asia Pacific North America TOTAL OTHER COSTS Common costs Exceptional item: Cost of unsuccessful NATS acquisition Exceptional item: GSR refinancing Amortisation of intangible assets Net interest: Group Net interest: Joint ventures PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION NET ASSETS United Kingdom Rest of Europe and Middle East Asia Pacific North America TOTAL Unallocated assets TOTAL Note: Turnover is shown by geographical origin. Turnover analysed by geographical destination is not materially different. 114 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 3 Information regarding Directors and Employees a) Directors’ remuneration: Fees as Directors Other emoluments Total remuneration excluding pensions The prior year comparative includes Directors who did not serve in 2002. 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: Civil Government Defence Transport Science Private sector Non-specific 4 Interest receivable Short term deposits Loans to joint ventures Total Group Share of joint venture interest 2002 £’000 97 1,730 1,827 2001 £’000 83 1,319 1,402 2002 £’000 2001 £’000 444,693 36,713 29,096 776 511,278 399,447 36,376 19,544 661 456,028 2002 2001 7,138 6,251 4,442 1,665 2,999 202 6,738 6,491 4,653 1,460 2,445 116 22,697 21,903 2002 £’000 818 604 1,422 16,894 18,316 2001 £’000 1,484 723 2,207 17,102 19,309 5 Interest payable and similar charges Bank loans and overdrafts Share of joint venture 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 and intangible assets Auditors’ remuneration: Deloitte & Touche Other auditors Other fees paid to Deloitte & Touche: Bid support Tax Other Other fees paid to other accountancy firms: Internal audit Other 115 2002 £’000 5,486 14,875 20,361 2001 £’000 7,299 15,768 23,067 2002 £’000 2001 £’000 12,599 20,686 12,307 3,227 721 8,098 514 175 1,170 490 595 152 555 11,790 17,586 10,861 2,299 454 5,123 444 125 659 544 432 183 391 116 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 7 Taxation on profit on ordinary activities The taxation charge on the profit for the year is made up as follows: United Kingdom Corporation Tax Double tax relief Overseas taxation: Operating income Exceptional item: GSR refinancing Deferred taxation Adjustment in respect of prior years: United Kingdom Corporation Tax Overseas taxation Deferred taxation Share of joint ventures’ taxation charge 2002 £’000 1,654 – 1,950 – 4,120 (750) (37) 2,375 7,327 Restated 2001 £’000 3,010 (349) 2,777 1,219 (504) 292 – 501 6,066 16,639 13,012 The current tax recognised for the year is higher than the United Kingdom corporation tax rate of 30%. The main reasons for this are set out below: Profit on ordinary activities before taxation multiplied by the UK Corporation Tax rate of 30% Effect on the reported tax charge of: Expenses not deductible for tax purposes (primarily goodwill amortisation) Tax allowances in excess of depreciation Other short term timing differences Unrelieved tax losses and higher tax rates on overseas earnings Tax exempt income and the effect of the use of unrecognised tax losses Tax incentives including Tonnage Tax and Research & Development Tax Credits Current tax charge for the year Deferred tax Adjustment in respect of prior years Taxation on profit on ordinary activities 2002 £’000 14,682 3,463 (1,828) (1,953) 255 (634) (3,054) 10,931 6,495 (787) 16,639 Restated 2001 £’000 12,012 4,450 (2,610) (2,109) 2,458 (519) (959) 12,723 (3) 292 13,012 117 8 Dividends Interim dividend of 0.64p per share on 429,260,960 Ordinary Shares (2001 – 0.57p on 392,551,903 Ordinary Shares) of 2p each fully paid – paid 11 October 2002 Proposed final dividend of 1.44p per share on 429,448,207 Ordinary Shares (2001 – 1.29p on 389,613,782 Ordinary Shares) of 2p each fully paid – proposed payment on 13 May 2003 2001 final dividend of 1.29p on 39,547,465 shares issued between 31 December 2001 and 13 March 2002 (record date) 2000 final dividend of 1.13p on 50,212 shares relating to shares issued between 31 December 2000 and 6 April 2001 (record date) 2002 £’000 2,747 6,184 8,931 510 – 2001 £’000 2,238 5,026 7,264 – 1 9,441 7,265 A dividend waiver is effective for those shares held on behalf of the Company by its Employee Share Ownership Trust. 9 Earnings per Ordinary Share Basic and diluted earnings per Ordinary Share after goodwill have been calculated in accordance with Financial Reporting Standard 14 (“FRS 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 £32,302,000 for the year ended 31 December 2002 (2001 restated – £27,027,000) and the weighted average number of 421,813,107 (2001 – 389,552,980) 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 £40,400,000 (adjusted for the effect of goodwill amortisation of £8,098,000) for the year ended 31 December 2002 (2001 restated – £32,150,000 adjusted for the effect of goodwill amortisation of £5,123,000) and the weighted average number of 421,813,107 (2001 – 389,552,980) 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 £32,302,000 for the year ended 31 December 2002 (2001 restated – £27,027,000) and the weighted average number of 423,288,423 (2001 – 391,115,673) 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 £40,400,000 (adjusted for the effect of goodwill amortisation of £8,098,000) for the year ended 31 December 2002 (2001 restated – £32,150,000 adjusted for the effect of goodwill amortisation of £5,123,000) and the weighted average number of 423,288,423 (2001 – 391,115,673) Ordinary Shares of 2p each assuming that the options are all exercised. 118 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 10 Intangible assets Cost: At 1 January 2002 Additions during the year Adjustments to goodwill capitalised on acquisitions prior to 1 January 2002 AT 31 DECEMBER 2002 Accumulated amortisation: At 1 January 2002 Charge for the year AT 31 DECEMBER 2002 Net book value: AT 31 DECEMBER 2002 At 31 December 2001 Goodwill £’000 152,889 13,029 (403) 165,515 11,719 7,777 19,496 Other £’000 – 1,775 – 1,775 – 321 321 Group Total £’000 152,889 14,804 (403) 167,290 11,719 8,098 19,817 146,019 141,170 1,454 – 147,473 141,170 Other intangible assets comprise a £1,775,000 premium for the acquisition of two, five-year, licences and are amortised over the licence life. 11 Tangible assets Group Cost: At 1 January 2002 Subsidiaries acquired Transfer from asset held for resale Capital expenditure Disposals Foreign exchange differences AT 31 DECEMBER 2002 Accumulated depreciation: At 1 January 2002 Subsidiaries acquired Provided during the year Disposals Foreign exchange differences AT 31 DECEMBER 2002 Net book value: AT 31 DECEMBER 2002 At 31 December 2001 Freehold land and buildings £’000 Short leasehold building improvements £’000 Machinery, motor vehicles, furniture and equipment £’000 7,567 – 5,532 63 (5,535) 405 8,032 2,234 – 181 – 143 2,558 5,474 5,333 10,128 – – 3,749 (214) 73 13,736 4,074 – 1,153 (175) 17 5,069 8,667 6,054 Total £’000 115,541 838 5,532 29,431 (11,548) 2,394 142,188 66,817 483 15,534 (4,633) 1,508 79,709 97,846 838 – 25,619 (5,799) 1,916 120,420 60,509 483 14,200 (4,458) 1,348 72,082 48,338 37,337 62,479 48,724 The cost of assets held by the Group under finance leases at 31 December 2002 was £24,977,000 (2001 – £18,905,000). The accumulated depreciation provided for those assets at 31 December 2002 was £9,168,000 (2001 – £6,903,000). 119 Short leasehold building improvements £’000 Machinery, motor vehicles, furniture and equipment £’000 1,117 1,161 (1,049) 36 – 1,265 355 365 (323) 151 – 548 717 762 2,624 2,329 (1,897) 1,054 (27) 4,083 1,704 1,398 (1,160) 566 (17) 2,491 1,592 920 Total £’000 3,741 3,490 (2,946) 1,090 (27) 5,348 2,059 1,763 (1,483) 717 (17) 3,039 2,309 1,682 11 Tangible assets (continued) Company Cost: At 1 January 2002 Transfers from subsidiary undertakings Transfers to subsidiary undertakings Capital expenditure Disposals AT 31 DECEMBER 2002 Accumulated depreciation: At 1 January 2002 Transfers from subsidiary undertakings Transfers to subsidiary undertakings Provided during the year Disposals AT 31 DECEMBER 2002 Net book value: AT 31 DECEMBER 2002 At 31 December 2001 The cost of assets held by the Company under finance leases at 31 December 2002 was £872,000 (2001 – £Nil). The accumulated depreciation provided for those assets at 31 December 2002 was £71,307 (2001 – £Nil). 12 Investments held as fixed assets a) Shares in subsidiary companies at cost: At 1 January 2002 Transfer of investments from Group companies Transfer of investments to Group companies Equity subscriptions for shares in Group companies Redemption of Serco Australia Pty Ltd preference shares AT 31 DECEMBER 2002 Company £’000 35,598 115,890 (29,437) 22,908 (3,541) 141,418 120 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 12 Investments held as fixed assets (continued) b) Group investments in joint ventures: At 1 January 2002 Dividends receivable Acquisitions Disposals Foreign exchange translation difference Share of profits after tax AT 31 DECEMBER 2002 c) Investment in own shares: At 1 January 2002 Amortisation AT 31 DECEMBER 2002 Group £’000 30,510 (11,095) 370 (139) (338) 16,575 35,883 Group £’000 18,983 (776) 18,207 Investment in own shares represents 5,414,630 (2001 – 5,557,033) shares in Serco Group plc held by the Employee Share Ownership Trust (the “Trust”) equal to 1.25% of current allotted share capital (2001 – 1.4%). The market value of shares held by the Trust at 31 December 2002 was £8,284,384 (2001 – £20,283,170). 142,403 shares were allotted during the year, all of which were at nil value (2001 – 52,308, of which 9,864 were allotted at £4.26 and 42,444 at nil value). d) Joint ventures: The Group’s share of its joint ventures is summarised as follows: Turnover Profit before tax Tax Fixed assets Current assets Liabilities due within one year Liabilities due after more than one year Net assets * Atomic Weapons Establishment Management Ltd † Premier Custodial Group Ltd AWE* £’000 91,386 7,801 (1,832) – 21,861 21,861 17,660 1,066 18,726 3,135 PCG† £’000 52,504 4,993 (2,070) 2,288 124,266 126,554 17,518 94,446 111,964 14,590 Other £’000 84,780 11,108 (3,425) 31,278 138,138 169,416 27,313 123,945 151,258 18,158 2002 Total £’000 228,670 23,902 (7,327) 33,566 284,265 317,831 62,491 219,457 281,948 35,883 2001 Total £’000 227,510 18,708 (6,066) 54,147 268,191 322,338 62,817 229,011 291,828 30,510 Adjustments have been made to joint venture results to ensure they are consistent with Group accounting policies. 121 12 Investments held as fixed assets (continued) e) A list of the principal undertakings of Serco Group plc is shown in Note 32. All the subsidiaries of the Group have been consolidated. f) At 31 December 2002, Group companies had branches in Abu Dhabi, Bahrain, Chile, Dubai, Korea, Ras Al Khaimah, Saudi Arabia, Sharjah and Switzerland. g) The subsidiaries of Serco Group plc and its joint venture undertakings are primarily engaged in the provision of services with the exception of Serco Investments Limited and certain other holding companies, which manage equity investments. h) Acquisitions: All acquisitions made during the year have been accounted for using the acquisition method of accounting. The goodwill arising on all acquisitions made in the year is being amortised over a period of 20 years. i) CCM Software Services Limited All the issued share capital of CCM Software Services Limited was acquired by Serco International Limited on 3 December 2002 for cash consideration of £8,647,000 and deferred cash consideration, contingent on achievement of certain financial targets post acquisition, valued at £2,068,000. Acquisition costs of £515,000 were incurred. The fair value of net assets acquired was £631,000 after taking account of adjustments of £448,000 required to recognise obligations for which no liability had been booked at the date of acquisition. The goodwill arising on consolidation is £10,599,000. ii) Other acquisitions The issued share capital of Euromedic Ltd and the assets and liabilities of SDC, a partnership, were acquired by Serco Holdings Ltd on 13 March 2002 and 31 May 2002 respectively for a total cash consideration of £2,088,000 and deferred cash consideration, contingent on achievement of certain financial targets post acquisition, valued at £223,000. Acquisition costs of £103,000 were incurred. The fair values of assets and liabilities acquired are considered to be the same as their book values. The total goodwill arising on consolidation is £2,430,000. 13 Stocks Service spares Long term contract balances Group 2002 £’000 10,065 28,679 38,744 Group 2001 £’000 10,093 25,745 35,838 122 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 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 PFI asset in the course of construction* TOTAL DEBTORS Group 2002 £’000 168,820 18,425 30,131 2,666 – 220,042 Group 2002 £’000 18,412 16,297 28,350 12,033 33,840 108,932 328,974 Restated Group 2001 £’000 150,342 21,224 19,148 4,257 4,734 199,705 Restated Group 2001 £’000 11,847 14,131 26,460 9,567 14,100 76,105 Company 2002 £’000 Company 2001 £’000 – 21,089 580 – – 21,669 – 14,747 73 – – 14,820 Company 2002 £’000 Company 2001 £’000 – 1,297 – – – 1,297 – – – – – – 275,810 22,966 14,820 Included in amounts recoverable on contracts is £7,978,000 (2001 – £14,710,000) in respect of items procured on behalf of customers. This is offset by an amount of £8,792,000 (2001 – £12,038,000) in trade creditors and an amount of £945,000 (2001 – £1,611,000) in accruals. * The impact on the Group Accounts of the PFI asset in the course of construction in relation to the Traffic Control Centre contract is summarised as follows: Balances in relation to asset in course of construction: PFI asset in the course of construction excluding capitalised interest Interest included in PFI asset in the course of construction Total PFI asset in the course of construction Cash Other debtors Accruals and deferred income Funded by: Non-recourse loan Profits retained within Special Purpose Company Balance at 1 January 2002 £’000 Movement during the year £’000 Balance at 31 December 2002 £’000 13,733 367 14,100 – – – 14,100 (14,100) – (14,100) 18,355 1,385 19,740 270 1,447 (4,852) 16,605 (15,600) (1,005) (16,605) 32,088 1,752 33,840 270 1,447 (4,852) 30,705 (29,700) (1,005) (30,705) 123 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 16 Creditors: Amounts falling due after more than one year a) 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 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 Non-recourse debt to fund PFI asset Other After five years Non-recourse debt to fund PFI asset Other Group 2002 £’000 4,836 2,195 31,432 38,034 16,974 372 93,843 Group 2002 £’000 2,386 15,291 77,505 95,182 7,594 87,588 Group 2002 £’000 Group 2001 £’000 2,557 4,418 30,464 47,689 14,864 629 100,621 Group 2001 £’000 70,647 11,385 60,371 142,403 73,833 68,570 Company 2002 £’000 Company 2001 £’000 267 – 304 117 – – 688 Company 2002 £’000 – 792 43,259 44,051 267 43,784 – – 631 446 – – 1,077 Company 2001 £’000 30,245 – 41,420 71,665 30,245 41,420 Group 2001 £’000 Company 2002 £’000 Company 2001 £’000 2,386 70,647 – 30,245 4,836 4,667 4,291 1,497 372 1,687 70,735 25,200 45,535 4,711 4,500 211 95,182 2,557 2,543 3,826 2,459 629 1,618 14,681 14,100 581 43,443 – 43,443 142,403 267 525 – – – – 43,259 – 43,259 – – – 44,051 – – – – – – – – – 41,420 – 41,420 71,665 c) Finance lease obligations are secured by retention of title to the relevant assets. 124 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 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 set and reviewed by the Board. There has been no material 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 (“FRS 13”) – Derivatives and other Financial Instruments: Disclosures short term debtors and non interest bearing short term creditors and loans from joint ventures have been excluded from the following disclosures other than the disclosure of the currency profile of financial assets and liabilities. The fundamental purpose of interest rate and foreign currency financial instruments entered into is to hedge monetary assets and liabilities, the details of which are set out below. Interest rate risk The Group borrows at both fixed and floating rates of interest. The Group’s exposure to interest rate fluctuations on its long term borrowings is managed by using interest rate swaps and forward rate agreements. At 31 December 2002, after taking account of interest rate swaps, the proportion of the Group’s fixed rate borrowings was 66.6% (2001 – 33.3%). Foreign currency risk The Group’s policy is not to hedge the net assets of overseas subsidiaries as they represent a small proportion of the market value of the Group and because exchange rate fluctuations thereon are unlikely to have a material effect on the consolidated net asset value of the Group. Business units 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 2002 with unhedged transactional exposure. Financial assets and liabilities i) Assets 31 December 2002 Cash and short term deposits Long term interest-bearing loans to joint ventures Other long term debtors TOTAL LONG TERM ASSETS 31 December 2001 Cash and short term deposits Long term interest-bearing loans to joint ventures Other long term debtors Total long term assets Sterling £’000 43,024 8,009 87,918 95,927 Sterling £’000 12,782 8,817 64,564 73,381 Euro £’000 Australian Dollar £’000 13,468 2,009 – 7,285 7,285 Euro £’000 4,024 1,696 5,720 Australian Dollar £’000 11,282 2,450 – – – 750 1,363 2,113 US Dollar £’000 2,868 – – – US Dollar £’000 5,670 – 611 611 Other currencies £’000 Total £’000 10,405 71,774 – – – Other currencies £’000 12,033 96,899 108,932 Total £’000 2,628 34,812 – – – 9,567 66,538 76,105 Included in the above is £4,095,000 (2001 – £4,117,000) of loans to joint ventures which carry a fixed interest rate of 13.0% for a weighted average period of 13 years (2001 – 14 years). All other interest-bearing assets are held at floating rates of interest. Of total short term debtors 79% (2001 – 93%) is denominated in Sterling. 125 17 Treasury policies and risk management (continued) ii) Liabilities 31 December 2002 Sterling Australian Dollar US Dollar Euro TOTAL 31 December 2001 Sterling Australian Dollar US Dollar Euro Total Total liabilities £’000 Floating rate liabilities £’000 Fixed rate liabilities £’000 44,586 3,075 46,885 636 95,182 14,886 3,075 13,182 636 31,779 29,700 – 33,703 – 63,403 Total liabilities £’000 Floating rate liabilities £’000 Fixed rate liabilities £’000 98,077 2,451 41,420 455 142,403 83,977 2,451 8,038 455 94,921 14,100 – 33,382 – 47,482 Fixed Rate Liabilities Weighted Weighted average time for which rate is fixed Years average interest rate % 5.46 – 7.33 – 3 – 5 – Fixed Rate Liabilities Weighted Weighted average time for which rate is fixed Years average interest rate % 5.46 – 7.34 – 3 – 6 – Of total short term creditors 80% (2001 – 81%) is denominated in Sterling. The maturity of the Group’s financial liabilities at 31 December 2002 and 31 December 2001: 31 December 2002 Sterling Australian Dollar US Dollar Euro TOTAL 31 December 2001 Sterling Australian Dollar US Dollar Euro Total 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 4,105 768 2,085 636 7,594 3,884 1,255 1,215 – 6,354 30,677 829 43,520 – 75,026 5,920 223 65 – 6,208 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 72,677 701 – 455 73,833 3,216 945 – – 4,161 17,777 730 – – 18,507 4,407 75 41,420 – 45,902 Total £’000 44,586 3,075 46,885 636 95,182 Total £’000 98,077 2,451 41,420 455 142,403 126 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 17 Treasury policies and risk management (continued) iii) Fair Values The book value and fair value of the Group’s financial assets and liabilities at 31 December 2002 and 31 December 2001 were: ASSETS Cash and short term deposits Long term loans to joint ventures Other long term debtors Derivatives held to manage currency and interest rate risk TOTAL LIABILITIES Long term borrowing: Sterling Australian Dollar US Dollar TOTAL Short term borrowing: Sterling Australian Dollar US Dollar Euro TOTAL 2002 Book value £’000 2002 Fair value £’000 2001 Book value £’000 2001 Fair value £’000 71,774 12,033 96,899 – 71,774 12,033 96,899 1,716 108,932 110,648 40,481 2,307 44,800 87,588 4,105 768 2,085 636 7,594 40,481 2,307 49,091 91,879 4,105 768 2,085 636 7,594 34,812 9,567 66,538 – 76,105 25,400 1,750 41,420 68,570 72,677 701 – 455 73,833 34,812 9,567 66,538 4,492 80,597 25,400 1,750 48,991 76,141 72,677 701 – 455 73,833 Foreign currency assets which are hedged using forward foreign exchange contracts are translated at the contracted rates. The fair value of other foreign currency contracts, interest rate swaps, and the US$70,000,000 loan notes, have been determined by reference to prices available from the markets on which the instruments involved are traded. Gains and losses on hedges Changes in the fair value of financial instruments used as hedges are not recognised until the hedged position matures. There was an unrecognised gain of £1,716,000 (2001 – gain of £4,492,000) on hedges as at 31 December 2002. The unrecognised gain is not expected to be recognised in the Profit and Loss Account in the next period. Borrowing facilities The Group had committed bank credit facilities of £50,000,000 at 31 December 2002. The Group also had annually renewable uncommitted bank facilities totalling £111,000,000, all of which were undrawn at 31 December 2002. 127 18 Provisions for liabilities and charges Group Pensions provision Deferred taxation Company Deferred tax 19 Deferred taxation Restated Balance 1 January 2002 £’000 23,003 2,246 25,249 Balance 1 January 2002 £’000 – The amounts of deferred taxation provided in the accounts are: Tax allowances in excess of depreciation Overseas timing differences Other timing differences Potential amounts of deferred taxation for which no credit has been taken: Overseas 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 Exercise of share scheme options Net increase in shareholders’ funds Opening shareholders’ funds as previously stated Prior year adjustment Opening shareholders’ funds as restated Closing shareholders’ funds as restated Utilised £’000 (463) – (463) Utilised £’000 – Group 2002 £’000 2,650 1,967 4,108 8,725 (2,767) (2,767) Charged to the profit and loss account £’000 Foreign exchange differences £’000 Balance 31 December 2002 £’000 1,663 6,495 8,158 1,605 (16) 1,589 25,808 8,725 34,533 Charged to the profit and loss account £’000 Foreign exchange differences £’000 Balance 31 December 2002 £’000 335 – 335 Restated Group 2001 £’000 332 692 1,222 2,246 (3,224) (3,224) Company 2002 £’000 Company 2001 £’000 (77) – 412 335 – – 2002 £’000 32,302 (9,441) 22,861 (1,911) 117,929 (93) 138,786 129,877 (806) 129,071 267,857 – – – – – – Restated 2001 £’000 27,027 (7,265) 19,762 (1,917) 3,561 (1,260) 20,146 108,925 – 108,925 129,071 128 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 21 Called up share capital a) Authorised 550,000,000 (2001 – 550,000,000) Ordinary Shares of 2p each 2002 £’000 2001 £’000 11,000 11,000 2002 £’000 2001 £’000 b) Called up, allotted and fully paid: 434,862,837 (2001 – 395,170,815) Ordinary Shares of 2p each 8,697 7,903 c) Ordinary Shares of 2p each allotted in the year: During the year 289,581 Ordinary Shares of 2p each were allotted to the holders of options or their personal representatives. Of these, 147,178 were allotted using newly issued shares, 2,628 were allotted at £2.0208*, 104,796 at £2.175, 38,706 at £2.45*, and 1,048 at £3.81. The remaining 142,403 were allotted at nil value using shares purchased in the market and held in trust. In addition to the above, 39,500,000 Ordinary Shares of 2p each were allotted under a share placement on 12 March 2002 at £3.05. 44,844 Ordinary Shares of 2p each were also allotted on 19 December 2002 as deferred consideration relating to the acquisition of Serco QAA (formerly Quality Assurance Associates Limited) made in December 2000. *Restated to reflect the capitalisation issue on 5 April 2000. d) Options in respect of Ordinary Shares of 2p each: i) ii) iii) 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 2002 no options remain. 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 2002 there remained 54,000 options which are exercisable at nil value in accordance with the rules of the Scheme. 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 2002 there remained 1,606,259 options which are exercisable at a price of £2.175 each and 10,830 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 2002 there remained 2,385,474 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 the 1996 Sharesave Scheme. 2,577,092 options were held by employees on 31 December 2002. The options are exercisable at any time between 1 May 2003 and 31 October 2003 at a price of £3.81 each in accordance with the rules of the Scheme. 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 2002 there remained 2,368,224 options which are exercisable at a price of £4.2542* each in accordance with the rules of the Scheme. 129 21 Called up share capital (continued) d) Options in respect of Ordinary Shares of 2p each: (continued) 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 2002 there remained 148,236 options which are exercisable at a 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’. As at 31 December 2002 there remained 26,268 options which are exercisable at a price of £5.825 and 8,878 options which are exercisable at a price of £4.90 each in accordance with the rules of the scheme. 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 2002 there remained 188,169 options which are exercisable at nil value in accordance with the rules of the Scheme. x) On 20 March 2001, 2,851,962 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’. As at 31 December 2002 there remained 2,700,200 options which are exercisable at a price of £4.07 each in accordance with the rules of the Scheme. xi) On 27 March 2001, 603,144 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’. As at 31 December 2002 there remained 600,838 options which are exercisable at a price of £4.35 each in accordance with the rules of the Scheme. xii) On 16 November 2001, 248,374 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 2002 there remained 200,202 options which are exercisable at nil value in accordance with the rules of the Scheme. xiii) On 3 May 2002, 5,986,743 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’. As at 31 December 2002 there remained 5,914,886 options which are exercisable at a price of £2.64 each in accordance with the rules of the Scheme. xiv) On 3 May 2002, 55,600 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 2002 no options had been exercised or lapsed. These options have been granted in respect of a three year performance period starting 1 January 2002 and are exercisable at a nil value in accordance with the rules of the Scheme. xv) On 6 September 2002, 5,428,691 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’. As at 31 December 2002 there remained 5,327,309 options which are exercisable at a price of £1.645 each in accordance with the rules of the Scheme. *Restated to reflect the capitalisation issue on 5 April 2000. e) The market price of Serco Group plc Ordinary Shares of 2p each as at 31 December 2002 was £1.53. The market prices of these shares ranged from £4.00 to £1.325 during the year. 130 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 22 Share premium account Group and Company Balance at 1 January 2002 Deferred consideration relating to the acquisition of Serco QAA Limited Share premium on issue of shares upon exercise of options Share placement (net of £3,041,000 expenses) BALANCE AT 31 DECEMBER 2002 23 Profit and loss account Group At 31 December as previously stated Prior year adjustment Balance at 1 January 2002 as restated Retained profit transferred to reserves Currency translation differences on foreign currency net investments Exercise of share option schemes BALANCE AT 31 DECEMBER 2002 £’000 73,656 69 422 116,644 190,791 £’000 48,175 (806) 47,369 22,861 (1,911) (93) 68,226 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. 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 £14,219,000, which includes dividends of £24,874,000 received from subsidiary companies. A final ordinary dividend of £6,184,000 is proposed, which together with the interim dividend of £2,747,000 and the payment in relation to the 2001 final dividend caused by the movement in the number of shares in issue of £510,000, leaves a profit of £4,778,000 which has been added to reserves brought forward of £34,958,000. This, along with a foreign exchange charge of £1,947,000, results in reserves carried forward of £37,789,000. 131 24 Reconciliation of operating profit to net cash inflow from operating activities Operating profit before cost of unsuccessful NATS acquisition Exceptional item: Cost of unsuccessful NATS acquisition Operating profit Depreciation Amortisation of goodwill and intangible fixed assets Profit on sale of tangible fixed assets Increase in stocks Increase in debtors Increase in creditors Increase/(decrease) in provisions One off pension fund contribution NET CASH INFLOW FROM OPERATING ACTIVITIES BEFORE PFI ASSET EXPENDITURE Expenditure on PFI asset in the course of construction Net cash inflow from operating activities after PFI asset expenditure 2002 £’000 29,103 – 29,103 15,534 8,098 (1,948) (2,906) (41,870) 30,795 2,805 (15,500) 24,111 (14,950) 9,161 Restated 2001 £’000 21,254 (10,187) 11,067 13,160 5,123 (1,236) (8,932) (56,223) 53,578 (1,053) – 15,484 (13,733) 1,751 25 Analysis of net debt Cash at bank and in hand Overdrafts Cash net of overdrafts Other loans due after more than one year Other loans due within one year Finance leases Recourse net cash Non-recourse debt to fund PFI asset Net debt Balance 1 January 2002 £’000 34,812 (70,647) (35,835) (45,642) (629) (11,385) (93,491) (14,100) Cash flow £’000 36,962 68,261 105,223 (24) 300 3,594 109,093 (15,600) (107,591) 93,493 Other non-cash changes £’000 Balance 31 December 2002 £’000 – – – (1,767) (43) (7,500) (9,310) – (9,310) 71,774 (2,386) 69,388 (47,433) (372) (15,291) 6,292 (29,700) (23,408) 132 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 26 Reconciliation of increase/(decrease) in cash to movement in net debt Increase/(decrease) in cash Cash inflow from non-recourse debt financing PFI asset Cash outflow from debt and lease financing Change in net debt resulting from cash flows Non cash changes from other debt and lease financing Movement in net debt in the year Net debt at 1 January Net debt at 31 December 2002 £’000 105,223 (15,600) 3,870 93,493 (9,310) 84,183 (107,591) 2001 £’000 (81,332) (14,100) 1,935 (93,497) (10,089) (103,586) (4,005) (23,408) (107,591) 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 £7,610,000 (2001 – £10,089,000). During the year £93,000 (2001 – £1,260,000) has been charged to the profit and loss reserve in respect of shares issued under employee share incentive schemes. Other non-cash movements with respect to other loans relate to foreign exchange. 28 Contingent liabilities The Group has given indemnities in respect of overseas credit facilities and lease payments amounting to £7,426,000 (2001 – £7,590,000). In addition to this, the Group has given indemnities in respect of performance guarantees, letters of credit and import duty guarantees issued on its behalf in the ordinary course of business, which are not expected to result in any material financial loss. 29 Capital and other commitments Capital expenditure contracted but not provided Group 2002 £’000 8,595 Group 2001 £’000 1,244 Company 2002 £’000 – Company 2001 £’000 – There is a commitment of £30 million in relation to the Traffic Control Centre PFI asset under construction, which will be funded by non-recourse bank debt. During the year ending 31 December 2003 the Group is to make the following payments in respect of operating leases: Leases which expire: Within one year Between one and five years After five years Land and buildings £’000 Other £’000 1,965 7,015 4,464 13,444 4,199 16,690 4,264 25,153 133 30 Related parties Directors The Directors of Serco Group plc had no material transactions with the Group during the year other than service contracts and Directors’ liability insurance. Joint ventures The following material transactions took place between the Group and its joint ventures during 2002: 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 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 Trading balance Details of Group investments in joint ventures and other principal undertakings are given in Note 32. 2002 £’000 1,797 1,800 2,302 11,095 16,994 2002 £’000 2,140 287 239 2,666 12,033 12,033 2001 £’000 2,131 2,671 2,448 9,645 16,895 2001 £’000 – 342 3,915 4,257 9,567 9,567 2002 £’000 2001 £’000 16,974 – 16,974 14,165 699 14,864 134 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 31 Pension schemes The Group has continued to account for pensions in accordance with SSAP 24. Full adoption of the requirements of FRS 17 - Retirement Benefits will not be mandatory for the Group until the year ended 31 December 2005. The transitional disclosures required by FRS 17 are set out in Part (B) of this note which shows the Group’s pension deficit in accordance with FRS 17 at 31 December 2002 was £73.6 million (2001 – £3.6 million) on an asset base of £294.4 million (2001 – £298.4 million). A) SSAP 24 Disclosure The net pension charge in accordance with SSAP 24 for the year ended 31 December 2002 was £29,096,000 (2001 – £19,544,000). The Group operates or is a member of a number of pension schemes 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. The latest formal valuation of the scheme was carried out as at 6 April 1999. The figures included in the accounts are based on a formal valuation, which is currently being carried out as at 6 April 2002. During 2002 there has been a fall in general stock market values and a bulk transfer was received from the AEA Technology Pension Scheme. The figures in the Profit and Loss Account and the Balance Sheet prepayment have been determined in accordance with the requirements of SSAP 24. The average contribution rate is currently 18% for the scheme. The projected unit method was adopted for the actuarial valuation of the Scheme for accounting purposes. The main actuarial assumptions used to value liabilities are: Investment yield Salary growth Price inflation Pension increases 7.0% p.a. (5.5% post retirement) 3.75% p.a. 2.5% p.a. 2.5% p.a. The Scheme is assessed to be fully funded on a current funding level basis based on a market value of assets of £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 costs 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 £12,300,000 (2001 – £9,760,000), of which £500,000 related to special contributions in respect of a discretionary increase to pensions in payment awarded during the year (2001 – £652,000) and £600,000 of contributions in respect of augmentations (2001 – £810,000). A £15,000,000 contribution which was included in accruals and prepayments at 31 December 2001 was paid in February 2002. At 31 December 2002 a prepayment of £17,450,000 (2001 – £17,360,000) in respect of the Scheme was included in the Balance Sheet. £12,210,000 was charged to the Profit and Loss Account in respect of the Scheme (2001 – £8,950,000). 135 31 Pension schemes (continued) A) SSAP 24 Disclosure (continued) 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 2001. On the assumptions adopted for accounting purposes and based on a market value of assets of £104,037,000 at 31 March 2001, the actuarial value of the assets represented 110% of the ongoing past service liabilities of the Scheme as at that date. The current contribution rate is 17.8% for the Scheme. For accounting purposes, the projected unit method has been adopted and the main actuarial assumptions used to value liabilities are: Investment return Salary growth (excluding salary scale) Pension increases 6.0% p.a. 4.5% p.a. 2.5% p.a. The past service surplus in excess of the prepayment as at 31 March 2001 is being amortised for accounting purposes over a nine year period at a constant monetary amount. Employer pension contributions paid into the Scheme during the year were £2,125,000 (2001 – £1,738,000). An amount of £325,000 (2001 – £300,000) has been charged to the 2002 Profit and Loss Account in respect of the Scheme and a prepayment of £10,900,000 (2001 – £9,100,000) has been included in the Balance Sheet as at 31 December 2002. c) Serco GmbH & Co.KG Pension arrangement The German pension arrangement comprises two elements; an unfunded defined benefit arrangement and an unfunded hybrid scheme. Actuarial assessments covering liabilities are carried out by independent qualified actuaries, with the last such review being carried out as at 23 December 1999 and updated as at 31 December 2002 by a qualified independent actuary. The projected unit method was adopted for the actuarial valuation of the arrangement. The main actuarial assumptions used in the valuation for accounting purposes were: Discount rate Salary growth Price inflation 6.0% p.a. 3.0% p.a. 1.0% p.a. The Profit and Loss charge for the year was £1,663,000 (2001 – £130,000) and a provision of £25,808,000 (2001 – £23,003,000) has been included in the Balance Sheet as at 31 December 2002 of which £20,271,000 (2001 – £17,466,000) relates to the hybrid element of the Scheme and £5,537,000 to the defined benefit element of the Scheme. 136 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 31 Pension schemes (continued) A) SSAP 24 Disclosure (continued) d) Serco Superannuation Fund The defined benefit element of the Scheme 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. 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 2000. The attained age method was used for the actuarial valuation of the Scheme as at 31 December 2000. 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 were: Average long term interest rate (net of investments and administration expenses and investment tax) Average long term allowance for salary increases 8.0% p.a. 5.5% 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 £1,385,000 (A$3,938,000) at 31 December 2000 with a ratio of market value of assets to current funding level liabilities of 107%. The actuarial value of assets of the defined benefit element of the Scheme represented 115% of its ongoing liabilities at 31 December 2000. 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 11 years. Employer pension contributions paid into the Scheme and charged to the 2002 Profit and Loss Account relating to the defined benefit element of the Scheme were £257,000 (2001 – £104,000). e) The NPL Management Limited Pension Scheme This is a pre-funded defined benefit scheme. The Company accounts for this scheme as a defined contribution scheme since at re-bid any surplus or deficit would transfer to the next contractor. Cash contributions are recognised as pension costs and no asset or liability is shown on the Balance Sheet. Actuarial assessments covering expenses and contributions are carried out by independent qualified actuaries, with the last such review being carried out as at 5 April 2001. The funding policy is to contribute such variable amounts as will achieve 100% funding on a projected unit basis. The average contribution rate is currently 20.8% for the scheme. The main actuarial assumptions proposed in the valuation were: Investment return Salary growth Price inflation Pension increases 6.50% p.a. (5.0% for current pensioners) 4.25% p.a. (plus promotional scale) 2.25% p.a. 2.25% p.a. The market value of assets represented 93% of the ongoing liabilities of the Scheme. Employer pension contributions charged to the 2002 Profit and Loss Account were £1,903,000 (2001 – £1,634,000). 137 31 Pension schemes (continued) A) SSAP 24 Disclosure (continued) f) The Serco Shared Cost Section of the Railways Pension Scheme This is a pre-funded defined benefit scheme. The Company accounts for this scheme as a defined contribution scheme since at re-bid any surplus or deficit would transfer to the next contractor. Cash contributions are recognised as pension costs and no asset or liability is shown on the Balance Sheet. Actuarial assessments covering expenses and contributions are carried out by independent qualified actuaries, the last such review being carried out as at 31 December 2001. The funding policy is to contribute such variable amounts as will achieve 100% funding on a projected unit basis. The main actuarial assumptions used in the valuation were: Investment return Salary growth Price inflation Pension increases 6.3% p.a. 4.0% p.a. (plus promotional scale) 2.5% p.a. 2.5% p.a. The actuarial value of assets represented 117% of the ongoing liabilities of the Scheme. The current contribution rate is 7.5%. Employer pension contributions charged to the 2002 Profit and Loss Account during the year were £715,000 (2001 – £634,000). g) Serco Metrolink Pension Scheme This is a pre-funded defined benefit scheme. The Company accounts for this scheme as a defined contribution scheme as at re-bid any surplus or deficit would transfer to the next contractor. Cash contributions are recognised as pension costs and no asset or liability is shown on the Balance Sheet. Actuarial assessments covering expenses and contributions are carried out by independent qualified actuaries, the last such review being carried out as at 31 August 2001. The funding policy is to contribute such variable amounts as will achieve 100% funding on a projected unit basis. The main actuarial assumptions used in the valuation were: Investment return Salary growth Price inflation Pension increases 6.5% p.a. 4.4% p.a. 2.4% p.a. 2.4% p.a. The actuarial value of assets represented 82% of the ongoing liabilities of the Scheme. The current contribution rate is 8.2%. Employer pension contributions charged to the 2002 Profit and Loss Account were £244,000 (2001 – £225,000). 138 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 31 Pension schemes (continued) A) SSAP 24 Disclosure (continued) h) Docklands Light Railway Pension Scheme This is a pre-funded defined benefit scheme with Docklands Light Railway Limited being the principal employer. Serco accounts for this scheme as a defined contribution scheme, since at re-bid any surplus or deficit would transfer to the next contractor. Cash contributions are recognised as pension costs and no asset or liability is shown on the Balance Sheet. Actuarial assessments covering expenses and contributions are carried out by independent qualified actuaries, with the last such review being carried out at 1 April 2001. The funding policy is to contribute such variable amounts as will achieve 100% funding on a projected unit basis. The main actuarial assumptions used in the valuation this year were: Investment return Salary growth Pension increases Dividend yield 7.0% p.a. 5.0% p.a. (including promotional scale) 3.0% p.a. 2.75% p.a. The actuarial value of assets represented 96% of the ongoing liabilities of the Scheme. The current contribution rate is 15.2%. Employer pension contributions charged to the 2002 Profit and Loss Account were £1,378,000 (2001 – £1,181,000). i) Other defined contribution schemes The Group paid employer contributions of £10,401,000 (2001 – £6,386,000) into UK and Australian defined contribution schemes and foreign state pension schemes. B) FRS 17 Disclosure The disclosures required under the transitional arrangements within FRS 17 have been based on the most recent full actuarial valuations of the Serco Pension and Life Assurance Scheme as at 6 April 1999 and the Serco-IAL Scheme as at 31 March 2001, updated to 31 December 2002 by independent qualified actuaries. If the amounts had been recognised in the financial statements the net assets and the Profit and Loss Account would be as follows: Net assets excluding net, SSAP 24, pension assets Net pension liability under FRS 17 Net assets including pension liabilities under FRS 17 Profit and loss reserve Reversal of SSAP 24 prepayments, net of deferred taxation (Deficit) in relation to SPLAS scheme, net of deferred taxation (Deficit)/surplus in relation to Serco-IAL scheme, net of deferred taxation Total pension deficit Profit and loss reserve adjusted 2002 £’000 248,012 (73,601) Restated 2001 £’000 110,549 (3,614) 174,411 106,935 2002 £’000 68,226 (19,845) 48,381 (62,427) (11,174) (73,601) (25,220) Restated 2001 £’000 47,369 (18,522) 28,847 (5,740) 2,126 (3,614) 25,233 31 Pension schemes (continued) B) FRS 17 Disclosure (continued) a) Serco Pension and Life Assurance Scheme (“SPLAS”) The financial assumptions used were: Rate of increase in salaries Rate of increase in deferred pensions Rate of increase in pensions in payment Discount rate Inflation assumption The Scheme’s assets and the expected rates of return as at 31 December 2002 were: Equities AA corporate bonds Gilts Cash and other Total market value of assets Present value of scheme liabilities Deficit in the Scheme Related deferred tax asset Net pension liability 2002 % p.a. 7.00 5.47 4.50 4.00 2002 £’000 134,319 17,252 28,264 – 179,835 (269,017) (89,182) 26,755 (62,427) 2002 % p.a. 3.85 2.25 2.25 5.47 2.35 2001 % p.a. 7.25 5.83 5.00 4.00 The amount chargeable under FRS 17 to operating profit for the year ended 31 December 2002 would have been: Service cost Past service cost Total operating charge Analysis of the net return on the pension scheme for the year ended 31 December 2002: Expected return on pension scheme assets Interest on pension liabilities Net return 139 2001 % p.a. 4.00 2.25 2.25 5.83 2.50 2001 £’000 119,600 15,500 21,000 15,800 171,900 (180,100) (8,200) 2,460 (5,740) £’000 11,391 1,100 12,491 £’000 12,872 (12,664) 208 140 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 31 Pension schemes (continued) B) FRS 17 Disclosure (continued) a) Serco Pension and Life Assurance Scheme (“SPLAS”) (continued) Analysis of amount recognisable in Statement of Total Recognised Gains and Losses (“STRGL”) for the year ended 31 December 2002: Actual return less expected return on assets Experience gains and losses on liabilities Changes in assumptions Actuarial loss recognised in STRGL Movement in deficit during the year: Deficit in scheme at 31 December 2001 Movement in year: Current service cost Contributions Past service costs Net return on assets Actuarial loss Deficit in scheme at 31 December 2002 History of experience gains and losses: Difference between expected and actual return on scheme assets Percentage of scheme assets Experience gains and losses on scheme liabilities Percentage of scheme liabilities Total amount recognised in STRGL Percentage of scheme liabilities £’000 (56,996) (20,013) (3,990) (80,999) £’000 (8,200) (11,391) 12,300 (1,100) 208 (80,999) (89,182) 2002 £’000 (56,996) 31.7% (20,013) 7.4% (80,999) 30.1% 31 Pension schemes (continued) B) FRS 17 Disclosure (continued) b) The Serco-IAL Pension Scheme The financial assumptions used were: Rate of increase in salaries Rate of increase in pensions – RPI – LPI – discretionary Discount rate Inflation assumption The Scheme’s assets and the expected rates of return as at 31 December 2002 were: Equities UK bonds Property Cash and other assets Annuity policies Total market value of assets Present value of scheme liabilities (Deficit)/surplus in the Scheme Related deferred tax asset/(liability) Net pension (liability)/asset 2002 % p.a. 7.00 4.82 6.24 4.50 5.47 2002 £’000 49,483 28,758 7,690 908 27,798 114,637 (130,600) (15,963) 4,789 (11,174) 2002 % p.a. 3.85 2.35 2.25 2.25 5.47 2.35 2001 % p.a. 7.25 5.18 6.54 4.00 5.83 The amount chargeable under FRS 17 to operating profit for the year ended 31 December 2002 would have been: Service cost Past service cost Total operating charge Analysis of the net return on the pension scheme for the year ended 31 December 2002: Expected return on pension scheme assets Interest on pension liabilities Net return 141 2001 % p.a. 4.00 2.50 2.25 2.25 5.83 2.50 2001 £’000 59,694 31,336 7,329 78 28,100 126,537 (123,500) 3,037 (911) 2,126 £’000 2,300 – 2,300 £’000 7,900 (7,000) 900 142 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 31 Pension schemes (continued) B) FRS 17 Disclosure (continued) b) The Serco-IAL Pension Scheme (continued) Analysis of amount recognisable in STRGL for the year ended 31 December 2002: Actual return less expected return on assets Experience gains and losses on liabilities Changes in assumptions Actuarial loss recognised in STRGL Movement in surplus during the year: Surplus in scheme at 31 December 2001 Movement in year: Current service cost Contributions Past service costs Net return on assets Actuarial loss Deficit in scheme at 31 December 2002 History of experience gains and losses: Difference between expected and actual return on scheme assets Percentage of scheme assets Experience gains and losses on scheme liabilities Percentage of scheme liabilities Total amount recognised in STRGL Percentage of scheme liabilities £’000 (16,100) 700 (4,300) (19,700) £’000 3,037 (2,300) 2,100 – 900 (19,700) (15,963) 2002 £’000 (16,100) 14.0% 700 0.5% (19,700) 15.1% c) The Balance Sheet position for all of the other Group Pension Schemes is materially the same in accordance with FRS 17 as for SSAP 24. 143 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 voting rights are the same as the percentage holding. The companies are incorporated and principally operate in the countries stated below. Principal subsidiaries United Kingdom Rest of Europe Belgium Denmark France Germany Ireland Italy Guernsey Luxembourg The Netherlands Spain Sweden Switzerland Asia Pacific Australia New Zealand Hong Kong Other Canada USA Serco Limited Serco-Denholm Limited Serco Europe Limited Serco-IAL Limited Serco Railtest Limited Serco Systems Limited NPL Management Limited Serco Docklands Limited Rakmulti Technology Limited Serco QAA Limited Traffic Information Services (TIS) Limited Serco Belgium S.A. Metro Service A/S Serco France Sarl Serco International GmbH Serco Services GmbH Serco Services Ireland Limited CCM Software Services Ltd Serco s.r.l Serco Insurance Company Limited Serco Facilities Management S.A. Serco Facilities Management BV Serco Gestion de Negocias SL Serco Sverige AB Serco Facilities Management S.A. Serco Group Pty Limited Serco Australia Pty Limited Great Southern Railway Limited Serco Group NZ Limited Serco Group (Hong Kong) Limited Serco Facilities Management, Inc. Serco Group, Inc. Serco, Inc. Serco Management Services, Inc. (Delaware) Barton ATC, Inc. Serco Management Services, Inc. (Tennessee) JL Associates, Inc. 100% 90% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 67% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 144 N OT E S T O T H E AC C O U N T S For the year ended 31 December 2002 32 List of principal undertakings (continued) Joint venture undertakings United Kingdom Asia Pacific Australia New Zealand Other USA Bahrain Bermuda Cyprus Dubai Saudi Arabia Singapore Turkey Premier Custodial Group Limited Kilmarnock Prison Services Limited Lowdham Grange Prison Services Limited Medomsley Holdings Limited Pucklechurch Custodial Services Limited Moreton Prison Services Limited Serco Gulf Engineering Limited Defence Management Watchfield Limited Laser (Teddington) II Limited Altram (Manchester) Limited Serco-Denholm Shipping Company Limited AWE Management Limited Defence Maritime Services Pty Limited Serco Sodexho Defence Services Pty Limited Serco Sodexho Defence Services Limited Serco – SKE Aeradio Technical Services WLL BAS-Serco Limited Serco Kalisperas International Aeradio (Emirates) LLC Key Communications Development Co Limited Serco Guthrie Pte Ltd Elektronik Sistemier Destek Sanavi ve Ticaret AS 50% 50% 50% 50% 50% 50% 50% 50% 50% 26% 50% 33% 50% 50% 50% 50% 49% 40% 50% 49% 49% 50% 51% Full details of related undertakings will be attached to the Company’s Annual Return to be filed with the Registrar of Companies. 145 Investor and Shareholder Information Registrar The Company’s registrar is Lloyds TSB Registrars. They maintain our register of members and make the payment of dividends to our shareholders. Their address is: Lloyds TSB Registrars, The Causeway, Worthing, West Sussex, BN99 6DA, UK T +44 (0)870 600 3970 F +44 (0)870 600 3980 The Lloyds TSB Registrars shareholder website is at www.shareview.co.uk (the “shareview website”). Shares in issue At 31 December 2002 there were 434,862,837 Serco Group plc Ordinary 2p Shares in issue. Dividend mandate Dividends can be paid directly into shareholders’ bank or building society accounts. If you want to take advantage of this facility, please complete the dividend mandate form attached to your dividend cheque, or contact our registrar by post or by fax. The form is also available by visiting the shareview website. Dividend re-investment plan The Serco dividend re-investment plan (“DRIP”) gives shareholders the chance to re-invest their dividends in Serco Group plc shares instead of receiving cash. If you participate in the scheme, your cash dividend will be paid directly to the registrar. The administrator will calculate the number of shares to which you are entitled and buy them on the stock market. Participants’ share purchases are aggregated, so the dealing costs are relatively low; shares are then distributed to the participants. To register, you simply have to complete a form and send it to our registrar. For further information about the DRIP please contact the registrar directly or look under the home page section on the shareview website. 146 Investor and Shareholder Information (continued) Electronic mailing Where the law allows, you can now choose not to receive a paper copy of the documentation we send out. Instead we can send you an email notification every time a new shareholder document is posted on our site. This will include annual and interim reports and other shareholder communications. You can then view the document(s) on our website at www.serco.com. To receive documents electronically you will need to register online with our registrar on its shareview website. This is a secure, straight forward online service operated free of charge by Lloyds TSB. Postal share dealing services Serco has arranged with Cazenove & Co Ltd a simple, low-cost method of buying and selling its shares by post, where shares are bought and sold on the day Cazenove receives instructions by post. For a dealing form, please contact the postal dealing department at Cazenove. Cazenove & Co Ltd, 12 Tokenhouse Yard, London, EC2R 7AN, UK T +44 (0)20 7606 1768 The terms and conditions for this service are found on the last page of the form. Unsolicited mail We are legally obliged, whenever requested, to provide copies of our shareholder register to any third parties, so from time to time you may receive unsolicited mail. You can limit the amount of unsolicited mail you receive by contacting: The Mailing Preference Service, Freepost 22, London, W1E 7EZ, UK Change of registered office On 7 May 2003 the registered office will move to: Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire, RG27 9UY, UK 75 Serco group plc S U M M A R Y financial STATEMENT 2 0 0 2 76 Summary Financial Statement Introduction The Summary Financial Statement has been produced to allow readers of the accounts an overview of the financial affairs of Serco Group plc and its subsidiaries (the “Group”), through the principal financial statements, without the need to refer to the more detailed Annual Review and Accounts. This Summary Financial Statement is only a summary of the Annual Review and Accounts, which contain the full annual accounts, other statutory information and the full Report of the Directors. This Summary Financial Statement does not contain sufficient information to allow as full an understanding of the results and state of affairs of the Group as is provided by the full Annual Review and Accounts. Shareholders have the right to receive, free of charge, a copy of the Annual Review and Accounts from the Company’s Registered Office. Shareholders who wish to receive, free of charge, full Annual Review and Accounts in place of the Summary Financial Statement for all future years, should write to the Company at the Registered Office. Summary Directors’ Report The Directors have pleasure in presenting this Summary Financial Statement for the year ended 31 December 2002. Results and dividends The profit before tax on ordinary activities for the year ended 31 December 2002 was £48,941,000 (2001 Restated – £40,039,000). An interim dividend of 0.64p per Ordinary Share was paid on 11 October 2002 (2001 – 0.57p). The Directors recommend a final dividend of 1.44p (2001 – 1.29p) per Ordinary Share which, if approved at the Annual General Meeting, will be paid on 13 May 2003, to those shareholders on the register at the close of business on 28 February 2003. Restatement The 2001 accounts have been restated to reflect the impact of the Urgent Issues Task Force Abstract 34 (“UITF 34”) – Pre-Contract Costs eliminating £1,193,000 of bid costs, previously disclosed within debtors, and the associated tax effect of £387,000. The impact of this adjustment in the 2002 accounts is a reduction in amortisation of bid costs of £400,000. The Profit and Loss Account has been restated to reclassify ‘Other operating costs relating to joint ventures’ within ‘Other administration expenses’. Business review and future activities The 2002 business review is set out on pages 21 to 30. Directors The following Directors served during 2002: Kevin Beeston Ralph Hodge (Non-Executive) Christopher Hyman Andrew Jenner (appointed 3 May 2002) Rhidian Jones (Senior Independent Non-Executive) DeAnne Julius (Non-Executive) Richard White (resigned 3 May 2002) Iestyn Williams The total emoluments of Directors, excluding pensions, for the year ended 31 December 2002 were £1,827,000 (2001 – £1,402,000). The prior year comparative includes Directors who did not serve in 2002. 77 Summary Directors’ Remuneration Report During the year the Remuneration Committee (the “Committee”) commissioned a review of Executive Directors’ remuneration, the first external benchmarking exercise undertaken since 1999, and the first review of base salary levels since September 2000. The recommendations of the review, which are included in detail in the Remuneration Report section of the Annual Review and Accounts, are based on a remuneration philosophy grounded in the following four principles: total rewards should be market competitive; incentive plans should be used to reinforce a high performance culture; the interests of Directors and shareholders should be aligned as far as reasonably possible; and the reward structure should be easily understood by all. In revising the remuneration framework the Committee consulted with the Company’s six largest institutional investors, representing approximately 35% of the shareholder base, and the ABI, before making its recommendations. Executive Directors’ remuneration comprises the following: Base salary – which was reviewed in September 2002; Annual Bonus – Full time Executive Directors will be entitled to receive a one off cash bonus up to 50% of salary depending on the earnings per share pre FRS 10 (Goodwill amortisation) (“EPS”) growth of the Company during the 2002 financial year. The Company is expecting to introduce a deferred bonus scheme in 2003 following shareholder approval at the forthcoming Annual General Meeting. The maximum payment under this plan will be 40% depending on EPS growth relative to RPI. Participants can elect to defer, for three financial years, up to 100% of the bonus earned to purchase shares in the Company. Shares purchased will be matched by the Company, if stretching performance targets comparing the Company’s total shareholder return (“TSR”) growth versus the FTSE 350 are met; Long Term Incentive Plan – Awards made under this plan are structured as options with a zero exercise price and may be exercised after the third year of grant. For awards made up to and including 1 January 2002 the performance criteria is measured by reference to EPS growth. Following shareholder approval, for awards made after this date, performance will be measured by reference to the Company’s TSR growth versus the FTSE 350 over the three year period. The awards are granted at 64% of salary at the date of grant; Executive Option Plan – Options granted under this scheme can be exercised after the third anniversary of grant. For grants made up to and including 1 January 2002 the performance criteria is measured by absolute growth in EPS over the performance period. Following shareholder approval, for grants made after this date, performance will be measured by reference to EPS growth compared to RPI over the three year period; Pensions and Life Assurance – The Executive Directors receive pension and life assurance benefits consistent with those provided by other leading companies. All aspects of Executive Directors’ remuneration are performance related with the exception of base salary, pensions and life assurance. 78 S U M M A RY F I NA N C I A L S TAT E M E N T Summary Directors’ Remuneration Report (continued) Performance Graph – Serco five year TSR vs FTSE 350 index 350% 300% 250% 200% 150% 100% 50% 0% -50% Jan 98 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 C UM U L AT I V E T S R P E R F O RM A N C E Serco FTSE 350 index Provided by Mercer Human Resource Consulting. This graph demonstrates the performance of Serco’s TSR in relation to the FTSE 350 index over the past five years. TSR is defined as the return shareholders would receive if they held a notional number of shares, and received dividends on those shares over a period of time. It measures the percentage growth in the company’s share price together with the value of any dividends paid, assuming that the dividends are reinvested into the company’s shares. Auditors The Auditors’ Report on the Annual Review and Accounts of the Company and Group for the year ended 31 December 2002 was unqualified and did not contain a statement under either Section 237(2) or 237(3) of the Companies Act 1985. 79 Independent auditors’ statement to the members of Serco Group plc We have examined the Summary Financial Statement which comprises the summary directors’ report, profit and loss account, balance sheet, cash flow statement and summary directors’ remuneration report. This report is made solely to the Company’s members, as a body, in accordance with section 251 of the Companies Act 1985. Our work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, for our audit report, or for the opinions we have formed. Respective Responsibilities of Directors and Auditors The Directors are responsible for preparing the Summary Financial Statement in accordance with applicable United Kingdom law. Our responsibility is to report to you our opinion on the consistency of the Summary Financial Statement with the full annual accounts, the Report of the Directors and the Directors’ Remuneration Report, and its compliance with the relevant requirements of section 251 of the Companies Act 1985 and the regulations made thereunder. We also read the other information contained in the Summary Financial Statement as described in the contents section, and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Summary Financial Statement. Basis of opinion We conducted our work in accordance with bulletin 1999/6 The Auditors’ Statement on the Summary Financial Statement issued by the United Kingdom Auditing Practices Board. Opinion In our opinion, the Summary Financial Statement is consistent with the full Annual Accounts, the Report of the Directors and the Directors’ Remuneration Report of Serco Group plc for the year ended 31 December 2002 and Companies Act 1985, and the regulations made thereunder. Deloitte & Touche Chartered Accountants and Registered Auditors London 19 February 2003 Neither an audit nor a review provides assurance on the maintenance and integrity of the website, including controls used to achieve this, and in particular whether any changes may have occurred to the financial information since first published. These matters are the responsibility of the directors but no control procedures can provide absolute assurance in this area. Legislation in the United Kingdom governing the preparation and dissemination of financial information differs from legislation in other jurisdictions. 80 S U M M A RY F I NA N C I A L S TAT E M E N T Consolidated Profit and Loss Account For the year ended 31 December 2002 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 intangible assets Other administrative expenses Exceptional item: Unsuccessful NATS acquisition Operating profit-continuing operations Exceptional item: GSR refinancing 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 EARNINGS PER SHARE (“EPS”) PER ORDINARY SHARE 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 2002 Group £’000 2002 Joint Ventures £’000 2002 Total £’000 Restated 2001 Group £’000 Restated 2001 Joint Ventures £’000 Restated 2001 Total £’000 1,097,278 – 228,670 (228,670) 1,325,948 (228,670) 913,693 – 227,510 (227,510) 1,141,203 (227,510) – – – – – – – 1,097,278 (947,313) 149,965 (120,862) (8,098) (112,764) – 1,097,278 (947,313) 149,965 (120,862) (8,098) (112,764) – 29,103 – – 1,422 1,422 – (5,486) (5,486) – – – 21,883 16,894 – 16,894 (14,875) – (14,875) 25,039 23,902 29,103 – 21,883 18,316 1,422 16,894 (20,361) (5,486) (14,875) 48,941 (16,639) 32,302 (9,441) 22,861 7.66p 9.58p 7.63p 9.54p 913,693 (789,686) 124,007 (102,753) (5,123) (97,630) (10,187) 11,067 15,356 – 2,207 2,207 – (7,299) (7,299) – – – – – – – – – – 17,374 17,102 – 17,102 (15,768) – (15,768) 21,331 18,708 913,693 (789,686) 124,007 (102,753) (5,123) (97,630) (10,187) 11,067 15,356 17,374 19,309 2,207 17,102 (23,067) (7,299) (15,768) 40,039 (13,012) 27,027 (7,265) 19,762 6.94p 8.25p 6.91p 8.22p The results for 2001 have been restated on the basis set out in the Summary Directors’ Report. Consolidated Balance Sheet At 31 December 2002 FIXED ASSETS Intangible assets 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/(LIABILITIES) 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 81 2002 £’000 147,473 62,479 35,883 317,831 (281,948) 18,207 Restated 2001 £’000 141,170 48,724 30,510 322,338 (291,828) 18,983 264,042 239,387 38,744 220,042 108,932 71,774 439,492 2,386 74,377 93,843 136,766 6,184 313,556 125,936 389,978 87,588 34,533 267,857 8,697 190,791 143 68,226 267,857 35,838 199,705 76,105 34,812 346,460 70,647 58,034 100,621 128,629 5,026 362,957 (16,497) 222,890 68,570 25,249 129,071 7,903 73,656 143 47,369 129,071 This Summary Financial Statement was approved by the Board of Directors on 19 February 2003 and signed on behalf of the Board: Kevin Beeston Executive Chairman Andrew Jenner Finance Director 82 S U M M A RY F I NA N C I A L S TAT E M E N T Consolidated Cash Flow Statement For the year ended 31 December 2002 Operating profit before cost of unsuccessful NATS acquisition Exceptional item: Cost of unsuccessful NATS acquisition Operating profit Depreciation and amortisation of goodwill Net increase in working capital One-off pension fund contribution NET CASH INFLOW FROM OPERATING ACTIVITIES BEFORE PFI ASSET EXPENDITURE Expenditure on PFI asset under construction* Net cash inflow from operating activities after PFI asset expenditure 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 Tax paid CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT Purchase of tangible and intangible fixed assets Sale of tangible fixed assets Exceptional item: GSR refinancing Security deposit on PFI asset under construction Net cashflows with joint ventures Purchase of own shares Net cash outflow from capital expenditure and financial investment ACQUISITIONS AND DISPOSALS Acquisitions Net cash acquired with acquisitions Subscription for shares in joint ventures Proceeds on disposal of joint ventures Net cash outflow from acquisitions and disposals EQUITY DIVIDENDS PAID Dividends paid Net cash outflow from equity dividends paid Net cash outflow before financing FINANCING Issue of Ordinary Share Capital Debt due within one year: (Decrease)/increase in other loans Debt due beyond one year: Increase in: Other loans Non-recourse debt financing PFI asset* Capital element of finance lease repayments Net cash inflow from financing Increase/(decrease) in cash Balance at 1 January BALANCE AT 31 DECEMBER *PFI asset under construction financed by non-recourse loan 2002 £’000 29,103 – 29,103 23,632 (13,124) (15,500) 24,111 (14,950) 9,161 11,095 1,223 (7,362) (6,139) Restated 2001 £’000 21,254 (10,187) 11,067 18,283 (13,866) – 15,484 (13,733) 1,751 9,645 578 (6,182) (5,604) (5,738) (6,417) (23,596) 8,125 – – 1,235 – (14,236) (11,353) 397 (370) 1,030 (10,296) (8,283) (8,283) (17,626) 4,569 16,343 (6,000) (1,945) (9,964) (14,623) (77,106) 3,558 (38) – (73,586) (6,664) (6,664) (24,436) (95,498) 117,929 (300) 15,624 24 15,600 (3,594) 129,659 105,223 (35,835) 69,388 2,001 100 14,850 750 14,100 (2,785) 14,166 (81,332) 45,497 (35,835) 83 Directors’ Profiles Kevin Stanley Beeston FCMA (40) Executive Chairman Kevin joined Serco in 1985 and has since held a number of financial and commercial roles. He was Finance Director of the Group from 1996 to 1999 and Chief Executive from 1999 to 2002. He was appointed Executive Chairman in May 2002. He is a member of the CBI’s President’s Committee and Deputy Chairman of the CBI’s Public Services Strategy Board. Ralph Noel Hodge CBE BEng (Hons) (68) Non-Executive Director Ralph is Chairman of the Water Research Council, and a Non-Executive of British Ceramic Tiles and ORC (Inc). He was previously Non-Executive Chairman of Enron Europe Limited, Chief Executive of ICI Chemicals and Polymers and a Non-Executive Director of the Halifax Building Society. He was appointed to the Board of Serco on 5 April 1999, and is Chairman of the Board’s Remuneration Committee. Christopher Rajendran Hyman CA (SA) (39) Chief Executive 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. In 2000 Christopher was given additional responsibility as Chief Executive of a new Serco division, Serco Global Projects and has been instrumental in developing new processes and capabilities at the leading edge of the Group’s activities. He was appointed Chief Executive in May 2002. Andrew Mark Jenner ACA (34) Finance Director Andrew joined Serco in 1996 as Group Financial Controller, having previously worked for Unilever. He was appointed Corporate Finance Director with additional responsibility for Treasury activities in 1999. He was appointed Finance Director of the Group in May 2002. Andrew has primary responsibility along with the Executive Chairman for the Company’s relationship with shareholders and the City. Rhidian Huw Brynmor Jones MA FCIS FCMI (59) Senior Non-Executive Director Rhidian is an experienced corporate finance lawyer and was Head of the Corporate Department of solicitors Nabarro Nathanson until retiring from that firm in May last year. He is also a Non-Executive Director of Britannia, the UK’s second largest building society, and a policy adviser on company law to ICSA. Before training as a solicitor at Herbert Smith he worked in commerce and industry, including seven years in a senior finance and property role at Granada. He was appointed a Serco Non-Executive Director in 1996, having previously served on the Board from 1987 to 1994. He is Chairman of the Board’s Audit Committee. DeAnne Shirley Julius CBE PhD (Econ) (53) Non-Executive Director DeAnne sits on the Court of the Bank of England, having been a member of its Monetary Policy Committee from its formation in 1997 until June 2001. Previously she held senior strategy positions with British Airways and Royal Dutch Shell. Before moving to the UK from America, DeAnne spent seven years with the World Bank developing infrastructure projects in Asia and Africa. She is a Non-Executive Director of Lloyds TSB, BP, Roche and was appointed to the Board of Serco on 29 October 2001. Iestyn Milton Williams BA (51) 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. In 1995 he was 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. Since then he has spent his time developing new business, first in the expansion of the Group’s activities in Europe, and for the last two years leading the Group’s entry into the education sector. Iestyn is also a Non-Executive Director of Law at Work Ltd and Dolphin Schools Ltd. 84 S U M M A RY F I NA N C I A L S TAT E M E N T 85 From left to right: Kevin Beeston DeAnne Julius Christopher Hyman Andrew Jenner Ralph Hodge Rhidian Jones Julia Cavanagh (Company Secretary) Iestyn Williams With thanks to Rushall JMI School, Walsall. 86 Investor and Shareholder Information Registrar The Company’s registrar is Lloyds TSB Registrars. They maintain our register of members and make the payment of dividends to our shareholders. Their address is: Lloyds TSB Registrars, The Causeway, Worthing, West Sussex, BN99 6DA, UK T +44 (0)870 600 3970 F +44 (0)870 600 3980 The Lloyds TSB Registrars shareholder website is at www.shareview.co.uk (the “shareview website”). Shares in issue At 31 December 2002 there were 434,862,837 Serco Group plc Ordinary 2p Shares in issue. Dividend mandate Dividends can be paid directly into shareholders’ bank or building society accounts. If you want to take advantage of this facility, please complete the dividend mandate form attached to your dividend cheque, or contact our registrar by post or by fax. Electronic mailing Where the law allows, you can now choose not to receive a paper copy of the documentation we send out. Instead we can send you an email notification every time a new shareholder document is posted on our site. This will include annual and interim reports and other shareholder communications. You can then view the document(s) on our website at www.serco.com. To receive documents electronically you will need to register online with our registrar on its shareview website. This is a secure, straight forward online service operated free of charge by Lloyds TSB. Postal share dealing services Serco has arranged with Cazenove & Co Ltd a simple, low-cost method of buying and selling its shares by post, where shares are bought and sold on the day Cazenove receives instructions by post. For a dealing form, please contact the postal dealing department at Cazenove. Cazenove & Co Ltd, 12 Tokenhouse Yard, London, EC2R 7AN, UK T +44 (0)20 7606 1768 The form is also available by visiting the shareview website. The terms and conditions for this service are found on the last page of the form. Dividend re-investment plan The Serco dividend re-investment plan (“DRIP”) gives shareholders the chance to re-invest their dividends in Serco Group plc shares instead of receiving cash. If you participate in the scheme, your cash dividend will be paid directly to the registrar. The administrator will calculate the number of shares to which you are entitled and buy them on the stock market. Participants’ share purchases are aggregated, so the dealing costs are relatively low; shares are then distributed to the participants. To register, you simply have to complete a form and send it to our registrar. For further information about the DRIP please contact the registrar directly or look under the home page section on the shareview website. Unsolicited mail We are legally obliged, whenever requested, to provide copies of our shareholder register to any third parties, so from time to time you may receive unsolicited mail. You can limit the amount of unsolicited mail you receive by contacting: The Mailing Preference Service, Freepost 22, London, W1E 7EZ, UK Change of registered office On 7 May 2003 the registered office will move to: Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire, RG27 9UY, UK 26 February Ex dividend date 28 February Record Date 17 March Accounts published 17 April Last day for DRIP election 2003 Calendar of events 6 May Annual General Meeting 13 May Proposed final dividend payment September Proposed announcement of interim results October Proposed payment of interim dividend Artwork and Production: Serco Media & Design Design: Pocknell Print: Butler and Tanner 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 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 Serco Group plc is a company registered in England and Wales No. 2048608 

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