Serco Group Annual Report 2003

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FY2003 Annual Report · Serco Group

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S E R C O G R O U P P L C A N N U A L R E V I E W & A C C O U N T S 2 0 0 3

Serco Group plc Annual review & accounts

Contents

Financial & operating highlights

Chairman’s statement

Dream ticket

Licensed to license

The sky’s not the limit

All the right moves

Finance review

Business review

PFI review

Accounts

F I NA N C I A L H I G H L I G H T S

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Turnover £m
including joint ventures

Profit £m
before amortisation of goodwill

Basic earnings per share
before amortisation of goodwill

Dividend per share

*Restated after the adoption of UITF 34 in 2002

† Restated to reflect the capitalisation issue on 5 April 2000

Turnover

£1,555.5m £1,325.9m

up 17.3%

Profit before tax – pre-goodwill

£67.0m

£57.0m

up 17.4%

Earnings per share – pre-goodwill

11.03p

9.58p

up 15.1%

2003

2002

Profit before tax

Earnings per share

Dividend per share

£52.9m

£48.9m

up 8.0%

7.75p

2.34p

7.66p

2.08p

up 1.2%

up 12.5%

Note: Profit before tax – pre-goodwill is stated before the impact of FRS 10 Goodwill Amortisation, (£14.1m). Full details are provided in part one
of the Finance review.

O P E R AT I N G H I G H L I G H T S

• Strong sales and profits growth for 16th consecutive year

• Succession of sales records broken

– 57% of incremental sales from existing contract base, with

– Total contracts awarded in 2003 – £4.6bn

success rate in rebids and extensions continuing above 90%

– Largest new contract – 25-year Merseyrail Electrics

– 26% of incremental sales from new contract wins, with new

contract – Serco share valued at £1.8bn

bid success rate continuing above 50%

– 27% underlying profit growth (before goodwill, exceptional

items and incremental pension cost of £9m)

• Significantly enhanced cash generation

– Free cash flow increased to £47m (2002 – £9.7m)

– Significant rebids and extensions awarded – new

10-year National Physical Laboratory contract valued
at £500m, 11-year contract at Goose Bay, Canada,
valued at over C$440m and 15-year extension to the
Atomic Weapons Establishment contract valued
at over £1bn

– Largest North American contract – 10-year Ontario driver

– 81% of group EBITDA converted into operating cash

examination services contract valued at C$600m

(2002 – 45%)

– £9.9m cash from Great Southern Railway sale and leaseback
and Norfolk and Norwich University Hospital refinancing

– Largest Middle East contract and first PFI in the region –
in February 2004 awarded preferred bidder for 30-year
Oman Joint Technical College valued at approximately
US$1.4bn – Serco’s share of the consortium is 50%

• Continued high visibility of earnings

– Forward order book stands at £10.3bn

– 93% of 2004, 77% of 2005 and 70% of 2006 planned

turnover already secured

• Substantial range of future opportunities

– Bids worth £5bn submitted and under evaluation

– Over £14bn of further opportunities identified

Note: Free cash flow is reconciled in part four of the Finance review. EBITDA is defined in the Chairman’s statement.

Serco Group – vision:

“to be the leading
service company in
our chosen markets”

C H A I R M A N ’ S S TAT E M E N T

“In another excellent year for Serco we have maintained our consistent
record of strong growth in sales and profits. Total turnover was up 17% to
£1.6bn. Profit before tax and goodwill amortisation was up 17% to £67m.
Free cash flow increased significantly to £47m. Contracts awarded in the
year totalled a record £4.6bn and we enter 2004 with our largest-ever
forward order book of £10.3bn.

The opportunities in our markets continue to grow, driven by unremitting
pressure on governments to deliver value for taxpayers’ money. Our proven
track record of delivering both value and quality improvement in public
services makes us confident that we can sustain continuing strong
earnings growth.”

Kevin Beeston Executive Chairman

The successful £500m rebid of our contract to run the UK’s National
Physical Laboratory completed an excellent year for Serco. We maintained
our unbroken record of double-digit growth in sales and profits before
goodwill, strengthened our free cash flow and balance sheet, and entered
2004 with our largest-ever forward order book of £10.3bn.

During the year we were awarded contracts valued at a record total of £4.6bn.

We were awarded a record £2.4bn of new contracts – including our biggest
ever – as we continued to win over half our bids. There is ample scope for
further growth: we currently have bids with a potential value of £5bn under
evaluation and are addressing further opportunities valued at over £14bn.

Financial performance

Double-digit sales and profit growth
Turnover grew 17% to £1,556m. Pre-tax profit was up 17% to £67m before
goodwill amortisation and 8% to £52.9m after goodwill amortisation. Gross
margin was maintained at 13.7% of sales.

Earnings per share rose 15% to 11.03p before goodwill and 1% to 7.75p
after goodwill.

Pre-tax profit before goodwill amortisation and exceptional items was up
11% to £63.4m. The exceptional items consisted of gains totalling £8.1m
from the sale and leaseback of Great Southern Railway (GSR) rolling stock
and the refinancing of Norfolk and Norwich University Hospital, partially
offset by reorganisation costs of £4.5m.

The key to Serco’s sustained success is a high rate of organic growth from
extending the scope and scale of existing contracts. Over 50% of the year’s
incremental sales were achieved in this way. We maintained our above 90%
success rate on rebids and won a large number of extensions including our
largest ever.

Strong cash performance
Free cash flow increased to £47m, compared with £9.7m in 2002. Operating
cash generation continued to strengthen: we converted 81% of group EBITDA
(earnings before interest, tax, depreciation and goodwill amortisation) into
cash, compared with 45% in 2002. This is a significant achievement as our

C H A I R M A N ’ S S TAT E M E N T

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Turnover £m including joint ventures

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Profit £m before amortisation of goodwill

*Restated after the adoption of UITF 34 in 2002

S E R C O G RO U P P L C

strong growth brings an accompanying demand for working capital –
typically equivalent to a month’s incremental turnover each year.

As part of our continuing focus on cash management we released significant
cash value from capital assets. The sale and leaseback of the remaining
GSR rolling stock in Australia generated £5.8m of cash and £4m of profit.
This followed a similar arrangement completed in June 2001.

A further £4.1m cash and profit came from the refinancing of the Norfolk
and Norwich University Hospital. This was possible because of the success
of the project’s construction phase, which delivered a major teaching hospital
within budget and 20 weeks ahead of schedule.

Reorganisation
As our businesses grow, we need to back them with efficient and consistent
support processes. As part of a continuing review of our organisational
model, we announced in our interim report that we had restructured our
UK support operations, bringing them together on a single business campus
in Hampshire. This new arrangement is working well: although redundancy
and relocation costs resulted in an exceptional charge of £4.5m in 2003, it will
generate ongoing savings of some £1.5m a year.

Dividend
Continuing strong profit growth has enabled us to maintain double-digit
dividend growth. The recommended final dividend of 1.62p per share gives
a total for the year of 2.34p – an increase of 12.5% over 2002. It will be paid
on 12 May 2004 to shareholders on the register on 12 March 2004.

Balance sheet
Maintaining a strong balance sheet is a priority for us, because of the
continuing growth of the business and the scale of opportunities ahead.
In August, we took advantage of historically low interest rates by issuing
£117m of 8-12 year loan notes. This provides assured funding for the future
and allows a mixed portfolio of debt. It has also enabled us to repay the
short term facilities we used to acquire the remaining 50% of Premier
Custodial Group (Premier). Following this restructuring of debt we now
have a very strong balance sheet with increased long term debt capacity.

During the year we acquired full control of two PFI projects by buying-out
joint venture partners’ interests, together with a further five PFI projects
through the acquisition of Premier. This has put us in a better position
to manage the long term operating contracts and develop the potential
for future organic growth.

It is also the principal reason why the non-recourse project debt shown
on the group balance sheet rose over the year from £29.7m to £357m.
Although shown as a liability on the balance sheet, non-recourse debt
is ringfenced and secured on assets and income streams of individual
projects with future revenues of over £3bn. They do not affect the group’s
credit agreement covenants, our risk profile or our ability to fund the
group going forward.

Pensions
As previously announced, in February 2003 we merged our two UK defined
benefit pension schemes to achieve cost and investment efficiencies.

C H A I R M A N ’ S S TAT E M E N T

The merged scheme continues to show a net deficit, now reduced to £70m.
As announced in last year’s report, we have raised our long term contribution
rates to reduce the deficit. An additional payment of £9m was made in 2003.

We successfully rebid and broadened our contract with the Canadian
Department of National Defence to provide site support services at Goose
Bay. The new 11-year contract is valued at over C$440m.

Our underlying growth in pre-tax profit before goodwill, exceptional items
and this incremental pension charge was 27% in 2003.

Growing the business

Contract wins
Sales grew by £230m compared with 2002. As usual, the majority of this
increase (57%) came from extending the duration or scope of existing
contracts. A further 26% came from our record level of new business wins,
and 17% from acquisitions.

It was a good year for rebids and extensions. These are a crucial test of
customer confidence because we can be judged on the performance and
value that we have actually delivered. Our largest-ever contract extension,
valued at £1bn, added 15 years to the 10-year contract under which we and
our partners are managing the Atomic Weapons Establishment. It extends
the contract until 2025.

We were awarded preferred bidder status in our rebid for a further 10-year
contract to run the UK’s National Physical Laboratory, valued at £500m.
This is a vote of confidence in our ability to run the most managerially
and technically demanding contracts.

Our largest-ever new contract, to run Merseyrail Electrics in partnership
with the Dutch rail operator Ned Railways, began in July. Serco’s share of
the £3.6bn contract is valued at £1.8bn over 25 years. Merseyrail Electrics
is a self-contained network in and around Liverpool, with 66 stations and
over 1,000 staff. When we took it over, it was already achieving Britain’s
best PPM – the Public Performance Measure by which train services are
judged; in the first six months we raised its score even higher, to hit a
record level in December.

Another strategically significant win was the public private partnership
under which we are providing driver examination services to 12m residents
throughout Ontario, Canada. This is the first contract of its kind in the
North American market: the model can readily be applied to other activities
where governments collect a fee for service, and other provinces are watching
our progress with interest. We secured the 10-year franchise for C$114m,
funded mainly with non-recourse debt raised in the Canadian market, and
expect to generate revenues totalling some C$600m.

In continental Europe, we have taken over operational management of the
Gefechtsübungszentrum (GÜZ), Germany’s flagship army combat training
centre. Valued at €50m, this is our most important German contract win
to date and greatly strengthens our position in the country’s developing
defence outsourcing market.

2002 Turnover £1,325.9m

Increases in scope
of existing contracts
£131.4m

New awards
£58.6m

Acquisitions
£39.6m

£1,555.5m

2003 Turnover growth including joint ventures

Order book

Extensions and rebids

Preferred bidder

42.0%

26.3%

1.6%

54.5%

20.1%

1.9%

69.9%

76.5%

78.6%

11.5%

3.1%

93.2%

Near term confirmed order book as at 31 December 2003 percentage of planned revenue

Long term order book as at 31 December 2003

Global order book breakdown by sector as at 31 December 2003

£3.5bn

£3.4bn

£10.3bn

£2.9bn

£2.0bn

£4.0bn

£0.8bn

£0.6bn

£10.3bn

2006

2005

2004

2013-2031

2007-2012

2004-2006

Defence

Transport

Civil government

Science

Private sector

C H A I R M A N ’ S S TAT E M E N T

While remaining very satisfied with our success rate of over 50% in new
contract awards, we were disappointed that our consortium did not win the
very large Future Strategic Tanker Aircraft PFI contract announced in January.

Market development
We are passionate about improving the quality and productivity of
public services. In the UK, we have played a leading role in establishing
and supporting the CBI’s Public Services Strategy Board. The board works
with the government and other stakeholders to stimulate debate, publish
research and promote public private partnerships as a means of delivering
better value for the taxpaying public. We also promote these ideas
internationally through direct contact with governments and opinion
leader audiences. During the year, Serco executives addressed public
services conferences in Australia, Hong Kong, Italy, Japan and the US.

The Serco Institute will continue to keep Serco businesses and public
sector stakeholders alert to market developments and thought leadership,
and help us to position Serco appropriately. We have redefined the aims
of the Institute to put greater emphasis on understanding private sector
delivery of public services around the world and promoting best practice
to governments, unions and other stakeholders. In 2003, Institute staff
initiated a major research project on contractual performance regimes,
using a number of Serco’s contracts as the information base.

During the year we recruited management consultants from market leading
firms to create Serco Government Consulting. This team is helping to shape
the way our markets evolve by demonstrating the benefits of competition

within public private partnerships and advising senior civil servants on
ways to improve public service delivery through innovative public private
partnerships and appropriate procurement strategies. Its strength as a
consultancy is that it can deliver practice as well as principles – bringing
in people from our operating companies to advise on practical issues and
implement solutions.

International strategy
We have a well diversified risk profile. Our business spread – across
a range of sectors and countries – enables us to take advantage of areas
of opportunity as they arise and offset periods of slower growth in
other regions.

We allocate resources in favour of the areas of greatest opportunity at any
time. In the past year, the UK has contributed a growing percentage of our
business because of a series of exceptionally large contract wins – not
least the Merseyrail contract which began in July. But our commitment to
international growth and diversity is undiminished: we remain convinced
that this strategy is in the best long term interests of our shareholders.

Portfolio management
We regularly review our portfolio of contracts and make adjustments
to focus the business on areas with greatest potential and reduce
underperforming activities. During the year we disposed of several
facilities management, leisure and IT contracts in the Swedish market
and reached agreement with Network Rail in the UK to terminate our
maintenance contract for the East Midlands zone in January 2004.

S E R C O G RO U P P L C

In July we acquired our partner’s share of Premier, our custodial support
services business. This £48.6m deal followed the acquisition of our partner’s
parent by a competitor. The move has strengthened our position in a market
with high growth potential in the UK and overseas. It secures greater synergy
with the rest of our justice business and enables us to react to the market
more flexibly.

During the year we also bought-out our partners in the Metro Service joint
venture, which runs the Copenhagen Metro, and the joint ventures set up to
deliver the National Physical Laboratory and Manchester Metrolink PFIs. This
has increased our control and ability to deliver change where capital assets
have been constructed and projects have moved into the operating phase.

As in the past we will continue to review our portfolio on an ongoing basis.

Private Finance Initiatives
We are enthusiastic but selective participants in PFIs. Our PFI portfolio
consists of 12 projects: we have operating contracts in all 12 and equity
stakes in all but one. Together, these contracts account for some 9% of our
turnover and are now delivering positive cash returns on both equity
investment and operating contracts.

research into conventionally procured projects, which found only 30%
delivered on time and 27% within budget.

PFIs are extremely good business for Serco. Our interest in them is primarily
for the long term operating contracts that follow the construction or asset
procurement phase: we have built a forward order book of operating
contracts worth some £3bn. To the end of 2003 we have made capital
investments of £15.3m, from which we have already realised cash inflows
of £22.6m.

The emergence of a secondary market in PFI equity and debt confirms that
the value of PFI stakes is now well-recognised and realisable. However, our
strategy is generally to retain our stakes as we expect to generate further
long term value from the operating contracts.

Corporate social responsibility
Social responsibility has always been part of our culture; now it is an
increasingly formalised part. We have a structured approach which delegates
accountability for corporate social responsibility performance to every
contract manager. This ensures that the majority of initiatives are managed
at a local level, where they have most impact. Social responsibility is
integrated into the Serco Management System.

PFIs deliver proven benefits to governments and taxpayers. Recent analyses
by HM Treasury and the National Audit Office have compared PFIs very
favourably with conventional public sector procurement. The Treasury
found that 89% of PFIs deliver on time or early, with no construction cost
overruns borne by the taxpayer. It contrasted these figures with previous

The first Business in the Community Corporate Responsibility Index,
announced in March 2003, indicates that this approach is delivering
encouraging results: Serco was ranked in the second quintile, and our
overall score of 79% fell just short of the top quintile.

C H A I R M A N ’ S S TAT E M E N T

This year for the first time we are publishing a separate Corporate
Responsibility Report, which covers our policies, processes and
performance. We have also greatly enlarged the corporate responsibility
area of our website, www.serco.com, which was recently relaunched.

In 2003 we launched the Serco Foundation to provide additional financial
support to community projects.

Board
We reviewed the composition and balance of the board and appointed
two new non-executive directors during 2003. In 2004 we see the retirement
from the board of one executive and one non-executive director. Mindful of
the new Combined Code on Corporate Governance published in July 2003,
we believe these changes leave the board appropriately composed and
balanced for the future.

In June we appointed David Richardson to the board as a non-executive
director. David is finance director of Whitbread PLC, the FTSE 100 leisure
group. His previous roles there have included eight years as strategy director.

In October we appointed Margaret Ford as a non-executive director. A
successful entrepreneur and specialist in public sector management, she
chairs English Partnerships, the national urban regeneration agency, and
is a non-executive director of Thus plc.

In March 2004 Iestyn Williams retires as an executive director and in April
Rhidian Jones retires as a non-executive director. Both became directors of

Serco in 1987 after the buyout of RCA’s UK business, where Iestyn had been
director of personnel. Each has played a vital role in making Serco what it is
today, and we thank them for their commitment, enthusiasm and guidance
since Serco’s establishment as a plc. Iestyn will remain involved with the
company as non-executive chairman of our education business, Serco Learning.

On Rhidian’s retirement, DeAnne Julius becomes senior non-executive
director and David Richardson takes over as chairman of the Audit Committee.

People
Our continued growth is made possible by the individual commitment
of everyone in Serco. We thank them all for their contribution, and this
year we will be able to acknowledge exceptional achievements through
the new Chairman’s Recognition Awards. These cover individual and team
contributions to environmental, safety and community initiatives – and
other exceptional contributions to Serco’s business success. The award
winners are listed in our separate Corporate Responsibility Report.

To ensure that our management capabilities keep pace with our growth
we continue to enhance leadership training and management development.
We supplemented our very successful Institute of Directors and Chartered
Management Institute accredited courses with a new Directing our Business
programme for almost 240 directors and senior managers. To accelerate
the development of managers with high potential we launched the Serco
Leadership Programme, which provides fast-track training in a range
of skills. Senior managers globally are now beginning to go through
a profiling process to generate focused personal development plans.

S E R C O G RO U P P L C

Outlook
We have made an encouraging start to the new year – notably
with our first PFI in the Middle East: to build, manage and deliver
education at a new joint technical college in Oman. Our consortium,
of which we have a 50% share, has been named as preferred bidder
for the 30-year contract, which has an estimated value of US$1.4bn. In
February we were nominated as preferred supplier to deliver prison
escort and custody services for London and South East England.
It is pleasing to announce preferred bidder status for our longest-
standing contract, now over 40 years old – the solid state phased
array radar support contract at RAF Fylingdales – and also the
broadening of our multi-activity support role with the Naval Air
Command under a new contract valued at about £39m.

At the start of 2004 our forward order book stood at £10.3bn,
equivalent to about seven times last year’s turnover, with contracts
running until 2031. Our consistent success in winning rebids and
extensions provides a solid platform for growth. Assuming a
continuing 90% renewal rate on rebids, we already have contracts
in place to provide 93% of planned revenue this year, 77% in 2005
and 70% in 2006.

The opportunities in our markets continue to grow, driven by
unremitting pressure on governments to deliver value for taxpayers’
money. Our proven track record of delivering both value and quality
improvement in public services makes us confident that we can
sustain continuing strong earnings growth.

“We deliberately

set out to make

ourselves an extension

Challenged to make one of Britain’s best-performing railways

of Merseytravel,

even better, our partnership with Ned Railways is building

to blend our activities

a sound track record on Merseyside...

so that you’d have a

job to see the join.”

partnership

dream ticket

Few companies work across such a wide range of sectors and challenges as we do. The key

to success is to do what you’re best at, and work with partners who bring the extra capabilities

you need. As we take on ever larger and more complex contracts, it’s important to be able to

find the right partners, attract them on board – and quickly forge smooth-running relationships

with them. This is a key skill for us.

Our core strength is planning and managing change to make organisations work better: we

have the experience, the skills and the processes. When we decided to bid for the Merseyrail

Electrics franchise, we also knew enough about railways to know we’d need a partner with
a track record that complemented our own. Our joint bid with Ned Railways, the Dutch rail

operator, won us the contract to improve Britain’s best-performing railway. Together, we’ve
achieved a successful technical and cultural fit that’s meeting the challenge.

16 dream ticket

When we took it over in July last year, Merseyrail Electrics was
already achieving Britain’s best PPM – the Public Performance
Measure by which train services are judged. But that didn’t mean
Merseytravel, the local passenger transport authority, was satisfied.
“I want to see big improvements,” Neil Scales, Merseytravel chief
executive, announced when we signed the contract. “Merseyside
can now look forward to 25 years of investment and improvement.”

It’s getting them. In the first six months we raised the average
PPM from 93% to 93.5%. The December figure was a best-ever
94.6%. We’re beginning to accumulate higher scores on performance
indicators across the board, from security to train cleanliness. And
further improvements are on the way. This year we’re stepping-up

the cleaning of trains and stations, refurbishing trains and
improving customer services, passenger information and security.

Merseyrail Electrics is a self-contained network with 66 stations,
59 trains and over 1,000 staff. It’s about twice the size of the
Docklands Light Railway (DLR) that we operate in London.

The DLR has won us four national rail awards in four years: Best
London Suburban Operator, Best Light Rail, and Rail Operator
of the Year twice running. So why bring in another company?
We have substantial experience in rail passenger services, track
and signalling – but in the UK and continental Europe it’s focused
on light rail networks. To carry more weight on this and future

heavy rail bids, we sought out a partner with a strong record of
delivering punctual and reliable services on high density urban
heavy railways.

running the network. Profitably too: we’ve already triggered bonus
payments to Merseytravel under a profit-sharing agreement. And
we’ve done it without shedding staff.

“Ned Railways are an excellent fit,” says Brian Burdsall, who heads
our heavy rail operations and chairs the Merseyrail Electrics
partnership. “They run one of Europe’s best railways. They have an
excellent engineering department. They’re well known to our Strategic
Rail Authority. And their culture and values are close to ours.”

The staff response has been good. They’re proud of their railway
and welcome our thorough approach. For example, there wasn’t
an engineering director before, so we brought one in from Ned
Railways: she’s an aerospace engineer with a whole range of ideas
for improving reliability.

The client was pleasantly surprised at how well we worked together
to deliver a trouble-free phase-in to an express timetable. The
contract was signed in May, and just eight weeks later we were

In addition to our partnership with Ned Railways, our teamwork
with Merseytravel is also going, well, like a train. It’s an open-book
relationship, based on transparency and collaboration.

“We deliberately set out to make ourselves an extension of Merseytravel, to blend our activities so that
you’d have a job to see the join,” says Brian Burdsall. We’ve purposely kept our own profile low: the trains
now run in Merseyrail Electrics livery, with no visible Serco or Ned Railways branding.

It’s a three-way partnership that’s working well so far for Merseyrail Electrics – and for its customers,
the people of Merseyside. For Serco and Ned Railways, the aim now is to keep building credibility that
will stand us in good stead for further heavy rail bids in the UK and elsewhere.

F I NA N C E R E V I E W

“In 2003 we maintained our record of strong growth in sales and profits,
while further improving our cash flow. To achieve this while still investing
substantially in future growth was particularly pleasing – and we have
further strengthened our balance sheet so that we can take full advantage
of the growth opportunities ahead. Communicating our performance
clearly is important to us and our stakeholders, so we have again
increased levels of disclosure and visibility in our reporting.”

Andrew Jenner Finance Director

Financial performance
2003 has been a year of strong performance. The group has continued
to deliver strong growth in both revenue and profit, combined with
an improved free cash flow. Further analysis is provided in figure 1
on page 21.

1.1 Turnover

Total turnover for the year to 31 December 2003 increased by 17.3%
to £1,555.5m.

1.2 Administration expenses

Administration expenses for the year increased by 22.8% to £138.5m.
This includes a £9m increase in contribution to our UK defined
benefit pension scheme (see 3. Pensions). Excluding this, underlying
administration expenses increased by 14.8%.

1.3 Exceptional items

There were three exceptional items during 2003 resulting
in a net profit of £3.6m. These items are explained in
figure 2 on page 21.

1.3.1 Reorganisation costs

As the group grows, to ensure we have efficient and consistent
support processes we have restructured our UK support operations,
bringing them together on a single campus site in Hook, Hampshire.
In addition, we have rationalised our Australian support offices to
a single centre in Sydney. The resulting redundancy and relocation
cost resulted in an exceptional charge of £4.5m in the first half year
of 2003, and will generate savings of approximately £1.5m a year
going forward.

Gross margin on group turnover, representing the average contract
margin across the portfolio, was maintained at 13.7% for 2003.

1.3.2 GSR sale and leaseback

Joint venture turnover increased by 1.1% to £231.2m. Joint venture
turnover and profit in the second half of the year was reduced by the
acquisition of the remaining 50% share in Premier Custodial Group
(Premier) in July 2003, which was fully consolidated from that date.

As part of the focus on cash generation we arranged the sale and
leaseback of the remaining rolling stock belonging to our Great
Southern Railway (GSR) business in Australia. This generated cash
of £5.8m and profit of £4.0m, and followed a similar arrangement
completed in June 2001.

F I NA N C E R E V I E W

1.3.3 Norfolk and Norwich University Hospital refinancing

1.7 Earnings per share

The refinancing of the Norfolk and Norwich University Hospital,
in which we are a 5% investor, was completed in December
2003. The refinancing released cash from a PFI asset whilst
simultaneously providing additional funding to the NHS in
Norfolk. This generated cash and profit of £4.1m (see 5. PFIs).

1.4 Profit before tax

Profit before tax and goodwill amortisation increased 17.4%
to £67.0m, representing a net margin on turnover of 4.3%
(2002 – 4.3%). Profit before tax, goodwill amortisation and
exceptional items increased by 11.2%.

Profit before tax and after goodwill amortisation increased
by 8.0%.

1.5 Goodwill

Amortisation of goodwill was £14.1m (2002 – £8.1m). The
increase results largely from the acquisitions of the Ontario
Driver Examination Services (DES) franchise and the remainder
of Premier.

1.6 Tax

The tax charge of £19.1m (2002 – £16.6m) represents an
effective rate of 36.1% (2002 – 34.0%). The increase in tax rate
is largely due to the increased non-deductible goodwill charge
discussed above.

As a result of the above, earnings per share before goodwill
amortisation grew by 15.1% to 11.03p. Earnings per share post
goodwill amortisation grew by 1.2% to 7.75p.

Dividends
The proposed final dividend of 1.62p per share gives a
cumulative dividend for 2003 of 2.34p, a 12.5% increase
on 2002.

Pensions
The total 2003 pension charge for Serco was £36.8m (2002 –
£29.1m), of which the UK defined benefit scheme had a charge
of £20.0m (2002 – £12.5m).

In February 2003 we merged our two UK defined benefit
pension schemes for cost and investment efficiency reasons.
A one-off £15.5m cash contribution was made in 2002 to
align the funding levels of the two schemes to facilitate
the merger.

For 2003 we have continued to apply the transitional rules
and disclosures for the implementation of FRS 17 Retirement
Benefits. This requires the market values of the assets and
liabilities for defined benefit schemes to be calculated and
disclosed in a note, discussed in more detail in note 33 to
the annual review and accounts.

FIGURE 1 PROFIT AND LOSS ACCOUNT

Year to 31 December

Total turnover

Group turnover

Joint venture turnover

Gross profit

Administration expenses

Exceptional items (net)

Joint venture profit

Net group interest

Profit before goodwill and tax

Goodwill amortisation

Profit before tax

Tax

Profit after tax

Effective tax rate

Average number of shares

Earnings per share before goodwill

Earnings per share after goodwill

Dividend per share

FIGURE 2 EXCEPTIONAL ITEMS

Reorganisation costs

GSR sale and leaseback

Norfolk and Norwich refinancing

Net exceptional profit

S E R C O G RO U P P L C

2003
£m

2002
£m

Increase
%

1,555.5

1,325.9

1,324.3

231.2

180.8

(138.5)

3.6

24.0

(2.9)

67.0

(14.1)

52.9

(19.1)

33.8

1,097.3

228.6

150.0

(112.8)

–

23.9

(4.1)

57.0

(8.1)

48.9

(16.6)

32.3

36.1%

429.9m

11.03p

7.75p

2.34p

34.0%

421.8m

9.58p

7.66p

2.08p

17.3%

20.7%

1.1%

20.6%

17.4%

8.0%

15.1%

1.2%

12.5%

2003
£m

(4.5)

4.0

4.1

3.6

F I NA N C E R E V I E W

FIGURE 3 CASH FLOW

Year to 31 December

Operating profit before exceptional item

Exceptional item: reorganisation costs

Operating profit

Non-cash items

Group EBITDA

Pension fund equalisation payment

Working capital movement

Operating cash flow

Dividends from joint ventures

Interest and taxation

Exceptional item: GSR sale and leaseback

Capital expenditure

Disposal of assets

Other items

Free cash flow

Exceptional item: Norfolk and Norwich refinancing

Acquisitions/disposals

Financing

– Long term loans

– Net increase in non-recourse debt

– Share issues/other financing

Dividends paid

Net cash flow

2003
£m

28.2

(4.5)

23.7

33.8

57.5

–

(11.1)

46.4

12.6

(7.8)

5.8

2002
£m

29.1

–

29.1

24.4

53.5

(15.5)

(13.9)

24.1

11.1

(11.9)

–

(21.8)

(23.6)

8.9

2.9

47.0

4.1

(96.6)

117.5

47.0

(8.0)

(9.5)

8.1

1.9

9.7

–

(10.3)

–

114.1

(8.3)

101.5

105.2

S E R C O G RO U P P L C

Pensions (continued)
In summary, at 31 December 2003 there was a net deficit in
relation to the defined benefit scheme of £69.7m (2002 – £73.6m),
and an asset base of approximately £350.4m (2002 – £294.5m).
Long term employer contributions into the scheme were
increased by £9m in 2003 to address the level of deficit on
the scheme.

Cash flow
Free cash flow for 2003 was £47m (2002 – £9.7m). At 31 December
2003 net recourse debt was £22.3m (2002 – £6.3m cash). Further
analysis is shown in figure 3 on page 22 and figure 4 on page 24.

4.1 Operating cash flow

There was an operating cash inflow for the year of £46.4m (2002 –
£24.1m), an increase of 93%. This represents a conversion of 196%
of operating profit into cash (2002 – 83%).

4.2

Joint venture dividends
Dividends received from joint ventures during 2003 of £12.6m (2002 – £11.1m)
represent a 78% (2002 – 67%) conversion of profit after tax into cash.

4.3 Capital expenditure

Capital expenditure, excluding investment in PFI Special Purpose
Companies (SPCs), for the year was £21.8m (2002 – £23.6m). This
expenditure represented 1.6% of group turnover, and is broadly
similar to prior years.

4.4 Acquisitions/disposals

There were two principal acquisitions during 2003: in February 2003,
we acquired the franchise for the operation of DES, a Canadian contract
for C$114m, funded by C$99m of non-recourse debt and C$15m of
equity and subordinated debt. We acquired our joint venture partner’s
share of Premier, our custodial support services business, for £48.6m
in July 2003.

As operating profit is calculated after deduction of goodwill
amortisation and depreciation, we believe that a more appropriate
measure for operating cash flow is the conversion of group EBITDA
into operating cash flow. For 2003 this was 81% (2002 – 45%).

The improvement in conversion rates is particularly notable given
that our strong level of organic growth brings an accompanying
demand for working capital, typically equivalent to a month’s
incremental turnover each year.

Also during 2003, we bought out our partners in three businesses,
to increase our direct control over the long term operating contracts.
These were Laser (the National Physical Laboratory PFI SPC), Altram
(the Manchester Metrolink PFI SPC) and Metro Service (the Copenhagen
Metro joint venture).

As part of the review to focus the business on areas of greatest
potential and to reduce underperforming activities, in October 2003
we disposed of a number of our Swedish contracts for £5.6m.

F I NA N C E R E V I E W

FIGURE 4 NET DEBT

As at 31 December

Closing cash

Long term loans

Other loans and finance leases

Recourse net (debt)/cash

Non-recourse debt (figure 5)

Total net debt

FIGURE 5 NON-RECOURSE DEBT

As at 31 December

Traffic Control Centre (TIS)

National Physical Laboratory (Laser)

Premier Custodial Group

Ontario Driver Examination Services

Non-recourse debt in consolidated balance sheet

2003
£m

170.9

(165.3)

(27.9)

(22.3)

2002
£m

69.4

(47.4)

(15.7)

6.3

(357.0)

(29.7)

(379.3)

(23.4)

2003
£m

54.3

82.4

170.6

49.7

357.0

2002
£m

29.7

–

29.7

S E R C O G RO U P P L C

4.5 Financing

5.2 Disclosure

The movement in long term loans arises as a result of the private
placement (see 6. Treasury) taken out in August 2003.

The net increase in non-recourse loans of £47m primarily represents
the loan taken out to fund the acquisition of the DES franchise.

4.6 Net debt

The 100% ownership of eight of our PFI SPCs at the end of 2003
has raised the transparency and visibility of their assets and
liabilities on the group’s balance sheet. We continue to expand
our disclosure of PFIs in this year’s annual review and accounts.

5.3 SPC funding

SPC funding is via long term loans which are non-recourse
to Serco.

Non-recourse debt (see 5. PFIs) represents long term loans secured on
the contracts of PFI and other concessions, and not any other assets of
the group. The loans are excluded from all of our credit agreement and
other covenants calculations, therefore having no impact on the group’s
ability to borrow. Further analysis is shown in figures 4 and 5 on page 24.

PFIs

5.1 Profile

At the end of 2003 the group had 12 PFI projects, with 11 equity
investments and 12 operating contracts. These contracts contribute
£3.0bn to the group’s order book of £10.3bn. During 2003 PFIs
contributed £133.4m to turnover and £11.9m to gross profit for the year.

At the end of 2003 we had invested £15.3m of equity and subordinated
debt into our SPCs. As a result of refinancings and one sale, we have
received back £22.6m cash from these investments, representing a net
inflow to the group of £7.3m.

At the start of 2003, the Traffic Control Centre (TIS) was the
only fully owned PFI, with full balance sheet consolidation of
non-recourse debt and offsetting PFI asset. All remaining PFIs
in which we had an interest were owned 50% or less, and so
non-recourse debt and PFI assets were included in the share
of gross assets and share of gross liabilities of joint ventures,
which offset within the fixed asset area of the consolidated
balance sheet.

During 2003 as described, we acquired all remaining share
capital in Premier, Laser and Altram, and bought the franchise
for the operation of DES. The impact of these changes is to
consolidate on our balance sheet a non-recourse debt of £357m
as at the end of 2003, as shown in figure 5 on page 24.

In addition to the above, non-recourse debt of £55.2m (2002 –
£205.2m) is included in joint venture gross liabilities.

F I NA N C E R E V I E W

5.4 SPC refinancing

We are a 5% investor in the Norfolk and Norwich University Hospital.
The refinancing of this SPC was completed in December 2003. This
generated cash and profit of £4.1m. This is consistent with our
philosophy of holding equity stakes in SPCs to increase our direct
control over the operating contracts, whilst accelerating our future
cash flows on those equity stakes through refinancing.

Treasury

6.1 Treasury management

The group’s treasury function is responsible for managing the group’s
exposure to treasury risk, and operates within a defined set of
policies and procedures approved and reviewed by the board.

6.2 Liquidity management

The group is funded by a £140m revolving credit facility, and two
private placements.

Revolving credit facility
The credit facility of £140m is provided by a syndicate of seven banks and
expires in 2007. The facility is floating rate, has unsecured obligations
with covenants and obligations typical of these types of arrangement.

Private placements
The group has taken out two private placements. The first private
placement of £43.2m was taken out in the US in 1997 and matures

in 2007. During 2003 a new private placement was raised to extend
the maturity profile of the group’s debt and to take advantage of
historically low interest rates. This second private placement raised
£117m and has a maturity profile of 8-12 years, with an average fixed
coupon of 5.8%.

6.3 Foreign exchange risk

Due to the nature of the group’s business, which in general does not
involve a significant amount of cross-border trade, the group is not
exposed to material foreign currency transaction risk, as sales and
costs are largely matched within overseas operations.

The group does not hedge the sterling equivalent of the net assets of
its overseas operations on the grounds that the market value of these
businesses does not represent a significant proportion of the market
value of the group and because foreign exchange differences are
unlikely to have a material effect on the consolidated net assets value
of the group.

An element of the private placements was issued in US dollars
and was swapped into sterling consistent with the risk profile set
out above.

6.4

Interest rate risk
The group’s exposure to interest rate fluctuations on its borrowing
and deposits is selectively managed, using interest rate swaps. All
short term debt is maintained at floating rates of interest.

S E R C O G RO U P P L C

UITF 38 – accounting for ESOP shares
Urgent Issues Task Force Abstract 38 (UITF 38) Accounting for ESOP
Trusts was issued in December 2003 for accounting periods ending
on or after 22 June 2004; early adoption is, however, encouraged. UITF
Abstract 38 requires any investment in own shares to be deducted
from shareholder funds as opposed to being held as an asset on the
balance sheet. This also requires a restatement of the cash flow
statement to include the movement on the ESOP shares balance
in the non-cash movement section.

We have adopted UITF 38 for 2003 and have restated the 2002 balance
sheet and cash flow statement accordingly.

International Financial Reporting Standards (IFRS)
The group is in the process of preparing to convert to IFRS in time
for application to the 2005 accounts. It is a complex task to assess
the differences between current accounting policies and IFRS, not
least since many of the IFRS are themselves in the course of revision.
A project team, which is working in conjunction with Deloitte &
Touche LLP, has been working for more than a year to identify the
major areas of impact with respect to known and anticipated changes
to financial statements.

“We’re impressed by

Serco’s professionalism

and are already seeing

Ontario’s model for innovation in

tangible improvements in

driver testing is attracting attention

customer service – it’s an

from as far afield as China...

excellent showcase for

the outsourcing model.”

innovation

licensed to license

Why involve the private sector in delivering public services? For one thing, the status quo gets

challenged. There’s a chance to reappraise factors such as risk, pace and scale of investment,

quality, value, flexibility and customer responsiveness.

In short, there’s real pressure to innovate. Or there should be. In the early days, contracts tended

to be based on narrowly specified inputs: provide X personnel for Y days. Not much scope for

innovation there. But the trend is towards more sophisticated models that specify a required

output. For example, in Ottawa we were recently selected as the preferred bidder to provide

a set amount of ‘ice time’ for ice hockey teams each year. How we do it is up to us.

Innovation in designing the contract provides a spur to innovation in delivering the service.
We’re all for it. So when the Government of Ontario had the idea of outsourcing its driver

examination services, we were keen to bid…

Ontario has been one of the pioneers of public private partnerships in Canada. It is eager to innovate,
and the model it designed for outsourcing its Driver Examination Services (DES) was attractively
simple to administer. The Ministry of Transportation would sell the contractor a franchise to operate
DES for a lump sum. The contractor would cover its costs and earn a return on its outlay from the
examination fees. The contractor would pay for independent audit and compliance functions, to ensure
that contractual standards were being met. And the Ministry of Transportation would simply need
to oversee the audit and regulate the fees and policies.

It was simple to administer – but tough to bid for. Some potential bidders dropped out, deterred
by the large number of unknowns that had to be addressed, and the rigour of the selection process.
Our long experience of assessing bid risks and our highly developed bid processes gave us a valuable
edge. We also included on the team a specialist in change management and designing new
organisations – a crucial advantage during both the bid process and the phase-in.

licensed to license

One challenge was the sheer scale of the operation. Ontario is big – five times
bigger than the UK. DES conducts vision, knowledge and road tests at 55 centres
around the province, and periodically at 37 other locations in far-flung communities.
Peter Williams, who heads the Serco DES operation, visited eight of the most
remote centres in the far north earlier this year. The trip took five days.

Another challenge was the volume of work required for the handover process.
For example, new premises had to be found and equipped for 25 of the examination
centres, and extra qualified staff were needed to clear the three-month waiting
list for tests.

Above all, the client wanted to see change: a faster, better quality service
that would bring credit to the politically controversial idea of public
private partnerships.

We began operations in September 2003. Within three months, the waiting lists
were down from three months to as little as a week. That has reduced calls to
the call centre by 25%, so the phone service now works better too. Customers
can book their tests online. And the traditional examiners’ clipboards will be
replaced by handheld computers as part of a wider drive to reduce paperwork.

The fresh thinking also extends to staff relations. “We’ve made the organisation more meritocratic
and introduced an open-door management policy,” says Peter Williams. “We also introduced a staff
association representing the driver examination centres around the province, which meets every six
to eight weeks. After some initial trepidation, which is understandable, staff relations are now excellent.”

Ontario is pleased with progress so far. “It’s working like a real partnership should,” says Blake
Forrest, Director, Business Services Branch Ministry of Transportation. “We’re impressed by Serco’s
professionalism and are already seeing tangible improvements in customer service – it’s an excellent
showcase for the outsourcing model. What we’re doing here has attracted a lot of interest from other
governments in North America and elsewhere: we’ve had delegations visiting from as near as Quebec
and as far away as China.”

B U S I N E S S R E V I E W

“This has been a landmark year for us. The passionate, determined spirit
of our people has produced record-breaking results. We have achieved
targeted international growth and won significant new business with
increased technical and integration content while at the same time
increasing our operational efficiency and cash flow.

This excellent performance takes us one step closer towards our vision
‘to be the leading service company in our chosen markets’. “

Christopher Hyman Chief Executive

Civil government

Market overview
In 2003, civil government contracts (excluding the transport and science
sectors, which are reported as separate segments) accounted for 32% of
turnover. This is one of our most rapidly-evolving markets, with attractive
opportunities emerging in sectors such as justice, education and healthcare.
We are addressing these sectors vigorously and leveraging our expertise
in each market to stimulate others. For example, in the US – where we
are developing relationships in a number of states to bring outsourcing
solutions to budget-constrained governments – there is growing interest
in outsourcing whole agencies along similar lines to our successful driver
examination contract in Ontario, Canada.

In continental Europe, civil government outsourcing continues to gain
momentum and we were pleased to win one of Germany’s first public
private partnership contracts, for schools maintenance and management,

last year. Recent changes in the way European governments account for
public private partnerships have further increased our confidence in the
European market’s potential.

The formation of Serco Government Consulting (SGC) has augmented our
strength in this market, and its relationships and insights are helping our
operating divisions to bid for a wider variety of contracts. SGC has already
completed successful strategic work for a number of UK national and
local government departments, US state governments, local authorities
and the police.

The UK outsourced justice market is forecast to grow by more than 70%
to £2.3bn over the next five years. We aim to be the pre-eminent service
provider in this market. We see opportunities to provide integrated services
that improve performance in areas that are growing significantly faster
than the overall market – such as police support, immigration services,
prison PFIs and custody services, probation, youth justice and tagging
and tracking services. Our strategic consulting team is actively engaged
in shaping some of these integrated services. On the Continent, both the
French and German governments are examining the use of PFIs for their
custodial requirements.

Education is a core issue for the UK government, which has increased
funding and the pace of reform. While the market for involvement in Local
Education Authorities (LEAs) has presently stalled, we are the market
leader by size. This gives us both expertise and exposure to key government
initiatives, strengthening our position as a potential participant in the

B U S I N E S S R E V I E W

emerging Building Schools for the Future programme. This is expected
to attract over £2bn a year of additional government funding to rebuild
or refurbish 3,500 schools. It includes a through-life service element,
providing opportunities to target contracts in a total market worth
over £35bn, primarily by providing our educational IT products and
desktop support.

Delivering an improved National Health Service is another UK political
imperative. The government has budgeted to increase revenue spending
from £68bn in 2002/03 to £109bn in 2007/08. There is a committed pipeline
of hospital building projects and Serco is established as a high quality
supplier of services to PFI hospitals with the highest possible quality
ratings. We also have a specialist health management consultancy, SDC
Consulting, which has grown by some 20% in the last year.

Justice
In July we acquired our partner’s 50% share of Premier Custodial Group
(Premier). Under the terms of the original joint venture agreement we paid
£48.6m, 90% of the independently assessed fair value.

Premier continues to grow strongly. In March 2003 it won a contract to
design, build and operate a second immigration detention centre. The
326-bed Colnbrook Immigration Removal Centre and Short Term Holding
Facility near Heathrow, London will bring our share of total capacity in
the immigration centre market to almost a quarter. After managing the
construction of the new facility, Premier will have an eight-year operating
contract. The centre opens summer 2004.

In February 2004 Premier was named as preferred supplier for the prison
escort and custody services contract in London and South East England.
The seven-year contract involves the secure and safe transportation of
prisoners from prison and police cells to court. Premier already provides
these services in two of the eight existing contract areas in England and
Wales, and satisfactory completion of negotiations will give us a 25% share
of this market.

One of the benefits of taking full control of Premier is that we now have
full responsibility for management performance. In 2002 the Premier-
operated Ashfield Prison and Young Offenders Institution was criticised for
some aspects of its management regime and processes. The action we took,
leading to the restoration of acceptable standards, has been acknowledged
in subsequent reports from the Prisons and Probation Ombudsman and
HM Chief Inspector of Prisons. The latter report praised the ‘concentrated
and hard work that has been needed to pull the establishment up so far
and so fast’, noting that Ashfield now ‘bore comparison with some of the
best-performing young offender institutions’.

The National Crime Squad (NCS) formally accepted the ChildBase biometric
identification and database system, completing a successful partnership
development programme. ChildBase is used to track and investigate internet
crime, specifically online child abuse, and won the 2003 International
Law Enforcement Cybercrime Award from the Society for the Policing
of Cyberspace, based in Canada. In partnership with the NCS, Serco is
uniquely placed to resell this technology, which has a very broad range
of potential uses.

S E R C O G RO U P P L C

Serco Government Consulting has also been working with the NCS on
development of its corporate strategy, a new approach to business planning
and construction of its budget. Our strong relationship with the NCS will
stand us in good stead when the NCS joins forces with the National Criminal
Intelligence services, parts of HM Customs and Excise and the Immigration
and Nationality Directorate to form a new and more powerful organisation,
the Serious Organised Crime Agency, in April 2006.

Education
Our UK education business has two principal contracts, to provide the
services that were previously the responsibility of the LEAs in Bradford
and Walsall. Both have been controversial, arousing strong opinions and
some misinformation in media, political and other arenas. What is now
clear is that educational standards and achievement are rising in both
these challenging inner city areas.

We have built a strong reputation for reliable IT support to UK police
operations. During the year we won five-year contracts with two national
operations. We have been engaged to provide software development and
support services to key parts of the national policing infrastructure of the UK
in addition to the hardware support and training services we already supplied
to this body. We were also appointed to provide a managed IT service and
helpdesk to the Asset Recovery Agency, which works closely with the
National Crime Squad, Police Task Forces and HM Customs and Excise.

As part of a government road safety initiative, most parts of the UK have
introduced Road Safety Camera Partnerships. During 2003 Serco, the
leader in this market, was chosen as the approved equipment supplier
for Transport for London, Essex, West Mercia, West Midlands, Lancashire,
West Yorkshire, Edinburgh, Strathclyde, Swansea, Hertfordshire and
Staffordshire.

We are currently pursuing opportunities in the US at federal, state and local
levels and establishing how best to leverage our security and technology
experience into the Department of Homeland Security.

Our contract with Bradford Council is in its third year. When it began,
there had been no school inspections during the school reorganisation.
It was not until the start of 2003 that a full analysis of all the schools
had been undertaken and realistic benchmarks and targets for judging
our performance could be established. This has enabled the council to
revise some targets that had previously been set. In the first two years,
overall school standards have risen faster than the national average
improvement rate. GCSE 5 A* to C grades improved at twice the national
average rate. In 2003 our Education Bradford team received Investors in
People accreditation. The assessor reported that he was ‘humbled by the
dedication and commitment’ of everyone he interviewed.

Our contract to manage the Walsall LEA is also successfully raising
performance standards. In under two years we have hit 14 of the 16 contract
targets. In July we won specialist status for five schools, qualifying them
for additional government funding totalling £2.8m a year from April 2005.
This will further improve opportunities for pupils. Three-quarters of
Walsall’s secondary schools now have specialist status – the highest
proportion in the West Midlands and one of the highest in the country.

B U S I N E S S R E V I E W

Civil government 32%

Defence 26%

Civil government 27%

Defence 27%

Private sector 8%

Science 7%

Transport 27%

Private sector 10%

Science 9%

Transport 27%

2003 Total turnover £1,555.5m
including joint ventures

2002 Total turnover £1,325.9m
including joint ventures

Sector segmental analysis – total group

North America 5%

Asia Pacific 10%

North America 5%

UK 73%

Asia Pacific 12%

UK 70%

Europe and
Midde East 12%

Europe and
Midde East 13%

2003 Total turnover £1,555.5m
including joint ventures

2002 Total turnover £1,325.9m
including joint ventures

Geographic segmental analysis – total group

S E R C O G RO U P P L C

Elsewhere in the UK we successfully rebid our one-year school inspections
contract with Ofsted, the school inspection and regulatory body, increasing
the contract size from £3m to £5m. We also successfully re-tendered
to provide the National College for School Leadership’s head teacher
induction programme for England. This three-year contract maintains
our prominence in leadership training to schools and LEAs as well
as increasing our access to schools.

Health
Our SDC Consulting business was part of two consortia that
won hospital PFIs: Consort Healthcare at University Hospital
Birmingham and the Equion group at North Staffordshire NHS Trust.
It is currently involved with three PFI consortia – Skanska, Taylor
Woodrow and Equion – on some of the country’s largest hospital
PFI bids.

In its first year under Serco ownership, CCM Software Services –
which provides management information systems and other solutions
to schools – increased sales ahead of forecast. In December we acquired
Teknical, a leading UK supplier of e-learning solutions to education,
government and industry. The £350,000 acquisition enhances our
joined-up approach to school performance management: we have
integrated Teknical’s Virtual Learning Environment with our school
performance management products to create the first managed learning
environment for UK schools.

In continental Europe a local authority in the state of North-Rhine/
Westphalia awarded us one of Germany’s first public private partnership
contracts. We have taken responsibility for building maintenance and
management in a group of schools in Monheim under a 25-year contract
valued at over €35m.

In Asia Pacific we added to our three existing education contracts with
a sourcing, procurement and support service for Hong Kong’s newly
commissioned Po Leung Kuk Ngan Po Ling College.

Norfolk and Norwich University Hospital, built under a PFI contract
in which Serco is a shareholder, was formally opened by HM The Queen
on 5 February 2004. It was handed over to the NHS Trust in 2001, almost
20 weeks early. Successful completion of the construction and handover
phase (where the risk is greatest) enabled Serco to generate a profit of
£4.1m. Our primary interest in the PFI remains the continuing support
services contract, which has now been extended from 30 to 35 years.

Our partnership with Summit Healthcare and Lanarkshire Acute Hospital
NHS Trust won the Partners in PPP/PFI Award at the annual Premises
& Facilities Management Partnership Awards. This acknowledges the
quality of our services at Wishaw General Hospital in Lanarkshire,
widely seen as a PFI flagship.

Regional and local government services
Our contract to provide driver examination services to 12m residents
in Ontario is now fully operational, with over 500 new employees
transferred from Ontario’s Ministry of Transportation. This is our North
American operation’s largest contract win to date – with expected

B U S I N E S S R E V I E W

revenues of C$600m over 10 years – and its first public private partnership
requiring financial structuring skills and a significant investment of
capital. The client was impressed by our breadth of experience in
government outsourcing, our commitment to work closely with the
government to improve road user safety, and our approach to improving
customer service – notably the reduction of road test appointment
waiting times and the introduction of leading edge technology.

In a smaller but similarly innovative contract, we have undertaken to
sell the City of Ottawa 2,400 hours of ‘ice time’ a year for hockey clubs.
The demand for ice time significantly exceeds existing capacity in
Ottawa, and we are the preferred contractor to build two new ice rinks
at an existing leisure centre. We will design, build and operate the new
facility in a combined contract with the leisure centre for 20 years.

to Canterbury City Council. This partnership contract should
consolidate our position as a provider of local government housing
maintenance services, helping to open up similar partnership
opportunities over the coming year. Starting in April 2004, it extends
our existing service to the council, broadening the range of activities
and adding new measures such as pre-emptive maintenance to avoid
repairs and reduce operating costs. Payments will be linked to tenants’
satisfaction with the service.

Other government services
The Canada Mortgage and Housing Corporation awarded us a C$17.7m
five-year extension to the contract under which we provide document
services, project management, customer services, call centre operations
and general contract support.

In the UK we began an innovative partnership to combine Woking’s
ground maintenance and street cleaning services into unique area-based
multifunctional service teams. The commercial framework is flexible,
giving both parties opportunities to extend the initial contract term and
add further services. Our level of financial return is related to public
satisfaction surveys and the contract features a shared risk and reward
mechanism to stimulate investment in service enhancements and future
projects. Valued at some £25-30m over 10-20 years, it provides a potentially
attractive model for other councils.

We were appointed preferred bidder in our rebid for a contract worth
at least £21m to provide housing repairs and maintenance services

Serco Government Consulting (SGC), formed in early 2003, has already
won and successfully delivered strategic consultancy work for a wide
range of central and local government agencies in the UK and overseas.
Its UK clients have included the Department of Health, Department for
Constitutional Affairs, Foreign & Commonwealth Office, National Crime
Squad, Office of the Deputy Prime Minister, London Borough of Newham
and Wiltshire County Council.

A combined team from SGC and Serco North America recently completed
a study of outsourcing for a US state government. As well as analysing
activity to date, it identified scope for improvement and opportunities
for further outsourcing using innovative business models.

S E R C O G RO U P P L C

Defence

Market overview
Defence, our longest-established market, accounted for 26% of turnover
in 2003. We currently hold over £2.9bn worth of defence contracts and
see no shortage of future opportunities.

Defence is a fast developing marketplace with good growth potential.
We have a strong position and track record to build on and aim to
become a benchmark organisation for the delivery of integrated service
solutions in defence markets worldwide. Our strategy is to retain and
expand our existing business, leveraging our core capabilities into new
but related areas and selected major bid opportunities.

Serco is a major provider of services to the UK Ministry of Defence
(MOD). We estimate that the MOD market accessible to the support
services industry will grow from £3.5bn a year currently to £8bn
by 2010. In 2003 we had an 8% share of this market.

good relationships with these customers. As a result we have once again
been successful in winning new projects.

During the year, SGC recruited client-side procurement specialists
to augment the capability of our defence business development teams.
These senior consultants have been intimately involved in shaping
new opportunities.

Major business wins
Our defence business had a very successful year, winning several very
large bids and many smaller contracts.

Our largest win was the extension to our management contract at the
UK’s Atomic Weapons Establishment (AWE), which will now run until
2025 – adding £1bn to the forward order book. Through this contract
the MOD now has access to private finance as required for major capital
projects that provide environmental and operational improvements and
increase efficiency.

We are also a leading provider of defence services in Australia –
where we hold 55% of the garrison support market – and New Zealand.
In Australia we recently began the rebid process for our support
services business, in a total market valued at more than A$500m
a year.

In Europe, the German Armed Forces are increasing their outsourcing
of non-core support services. We are building on, and enhancing our

As part of the £2.5bn Skynet 5 PFI with the MOD, we won a £220m
support services contract extending to 2018. Serco is a partner in the
Paradigm Secure Communications consortium, which is providing a
new generation global military satellite communications system for
Britain’s armed forces. Our role will be to manage the network and
facilities – providing spacecraft and network operations, network
maintenance, training, supply management and through-life buildings
and facilities maintenance. In preparation for Skynet 5 we are already

B U S I N E S S R E V I E W

managing the existing Skynet 4 network and facilities under an
interim contract: this began in May 2003 after a seven-month handover
from the RAF and was included in our order book figure for the end
of 2002.

Another important win was the successful rebid of our site support
services contract at the Canadian Forces Base, Goose Bay – one of the
cornerstones of our Canadian operations. The new contract, valued at
over C$440m, extends our original five-year contract by a further 11
years and broadens our responsibilities by transferring to us the base’s
vehicle fleet, including snow clearing vehicles and other emergency
equipment.

UK
Among a series of contracts and rebids from the UK Ministry of Defence,
we were particularly pleased to win the £60m support services multi-
activity contract and multi-engine interim aircraft solution contract at
RAF Cranwell, the RAF’s premier officer training station. The contract,
the first of its kind to deliver fixed wing aircraft to the RAF through
a service solution, includes introducing a new training aircraft and
associated simulation: we are leasing seven Beech King Air B200s to
the station, which provides initial officer training, officer and aircrew
training and all the RAF’s multi-engine pilot training.

The rebid of our infrastructure facilities maintenance contract at
Plymouth Dockyard broadened the scope of our activities, raising the
annual value from £3m to £8m for up to 10 years.

Another example of our ability to grow business organically was the
contract awarded by Naval Air Command (NAC) for aircraft engineering
and operational support at Culdrose, Yeovilton, Prestwick and Plymouth.
This multi-activity contract, valued at approximately £39m, expands the
range of support services that we have been providing to the NAC since
1995, and runs for up to three years.

We extended the duration of several other multi-activity contracts, including
the support services contract with the RAF Personnel and Training Command
covering RAF Brampton, Wyton and Henlow, valued at a total of £18m.

The MOD has extended all our current Works Service Management
(WSM) estate management contracts to align them with the start of the
Defence Estates new procurement model, rationalising all WSM services
across the UK into five Regional Prime contracts. We are bidding for
South East Regional Prime. We currently have 11 WSM contracts – all
originally for three years, making a total of 33 years. Most have already
been significantly extended, adding a total of 49 extra contract years.

We were also pleased to be named as preferred bidder for the solid state
phased array radar support contract at RAF Fylingdales, continuing a
relationship of over 40 years.

International
A transportation and supply services contract with United States Air
Force Europe (USAFE) took us into a new market area: this is the first
time USAFE has outsourced such activities in the UK. The £5.5m

S E R C O G RO U P P L C

contract includes ground passenger transportation, cargo transportation
services, vehicle management, vehicle maintenance, personal property,
supply support and supply training at five RAF sites over five years.

In Germany, we were delighted to win the contract to manage the
Gefechtsübungszentrum (GÜZ) Army Combat Training Centre against very
challenging opposition from the incumbent joint venture of German system
companies. GÜZ, in the state of Sachsen-Anhalt, is the German army’s flagship
training centre and one of the world’s best-equipped. We won the contract
in partnership with Saab Training Systems. Valued at over €50m to Serco, it
requires a complex combination of technical maintenance, operations support
and systems management: using a combination of laser and computer
engineering, 2,600 soldiers can exercise simultaneously in realistic conditions
without live ammunition. GÜZ has the potential to become a hub for
combat training personnel from a variety of European countries.

In the Middle East we have been selected with our Omani partner, the
Bahwan Group, as preferred bidder for the first PFI in Oman. The contract
is to design and build a joint technical college and operate it for 30 years.
The college, which will be built on a greenfield site, will provide training
for the Oman Ministry of Defence – leading to internationally accredited
qualifications for army, navy and air force technicians. It will also provide
both diploma and degree courses to civilians and will become a centre of
education excellence within the region. The contract value is estimated at
US$1.4bn over 30 years for the consortium, of which Serco has a 50% share.
The project enhances our PFI and education portfolios and represents an
important entry into a new region in the Arabian Gulf.

In Australia, our Defence Maritime Services (DMS) joint venture with P&O
won a contract to design and build a new generation of patrol boats for the
Royal Australian Navy. DMS will project manage the construction of 12 new
56-metre patrol craft between 2004 and 2007 and provide through-life
support including crew training for a further 15 years at A$15.7m a year.

The patrol boat contract is the fruition of a successful relationship that has
grown since DMS began a port and support craft services contract for the
Navy in 1997. A Department of Finance review of this contract found that
the Navy was obtaining 125% of value for 75% of the cost compared with
the previous internal baseline.

Transport

Market overview
The transport sector has been a strong source of growth for us in recent years,
primarily in the UK and Australia. In 2003 it accounted for 27% of turnover.

We have particular strength in light rail and traffic management systems
and are the UK leader in both markets. In the UK, the traffic management
market is expected to grow from £2.8bn a year to £4.3bn over the next five
years, and light rail is expected to continue to grow to £205m as more new
schemes are approved by government. The heavy rail market is growing
more slowly but is already valued at over £5bn. We have exited rail
infrastructure maintenance, where the risk/margin profile is no longer
attractive, but continue to maintain rail property.

B U S I N E S S R E V I E W

Our success in road traffic management is founded on our strength
in systems design, development and integration. Following complex
integration projects for the Dartford Crossing and Blackwall Tunnel in the
1980s we became UK market leader in the 1990s, ultimately winning the
contract to create and operate the national Traffic Control Centre for the
Highways Agency. This has involved developing a complex computer system
and installing communications and monitoring equipment on England’s
strategic road network.

We aim to be the first choice for road and rail operations and
infrastructure services, supporting the implementation of government
transport policies in the UK and overseas. While growing our strong
position in the UK, we are also seeking suitable opportunities in Europe
and North America. Our focus in these markets will be to leverage our
track record in integrated traffic management systems and efficient
rail operations.

variable message signs. We are also providing information to radio, TV and
other commercial travel data providers.

In Scotland, we won a £4.7m contract to support Glasgow’s Quality Bus
Corridors scheme. We are installing automatic vehicle location, bus fleet
management and real time passenger information systems over 18 months,
and will maintain them for a further five years.

In the US, we added three contracts to our fleet maintenance portfolio –
with the USDA Forest Service, the energy corporation Vectren and East
Kentucky Power – and completed the installation of over 22,500 smart card
parking meters for the city of San Francisco.

The Hong Kong government awarded us a contract to manage, operate and
maintain all on-street parking for at least three years, in joint venture with
Wilson Parking – a major parking operator in the Asia Pacific region.

Road
In the UK we are completing the design, build and implementation stages
of the national Traffic Control Centre in the West Midlands. The public
launch is scheduled for June 2004, although the first operations began
in November and the centre is now monitoring the motorway and major
A-roads across England. It collects real-time information on network
conditions from sources including CCTV cameras, automatic number plate
recognition cameras and vehicle detection loops. Information on congestion
and incidents is relayed directly to the public through an interactive
telephone service, a real-time traffic information website and roadside

Rail
In July we began our largest-ever contract, valued at £3.6bn, to run the
Merseyrail Electrics contract for 25 years in partnership with the Dutch
rail operator Ned Railways. Serco’s share of the contract is valued at
£1.8bn. Merseyrail Electrics is a self-contained railway network in and
around Liverpool with 66 stations, 1,000 staff and two dedicated
maintenance depots. We have already improved its performance ratings
across the board, from security to train cleanliness; this year we are
stepping-up the cleaning of trains and stations, refurbishing trains and
further improving customer services, passenger information and security.

S E R C O G RO U P P L C

Our Great Southern Railway (GSR) business in Australia received worldwide
media coverage in February 2004 when the Alice Springs-Darwin link
opened. This enabled The Ghan service to make a full south-to-north run
across the continent. Ticket sales for the route topped A$15m before the
service began, and the first train was over a kilometre in length – the
longest passenger train ever to run in Australia. The new route provides
valuable additional revenue and some income smoothing because its peak
demand profile differs from that of the other GSR services. It will further
improve profitability by enhancing rolling stock utilisation.

During the first half we bought-out our partners in the Altram consortium
which built Phase 2 of the Manchester Metrolink tramway system and
operates and maintains Phases 1 and 2. Passenger revenues rose 6% in
2003, and the new revenue-sharing arrangement we agreed with the local
transport authority during the year will provide further incentive to
maintain growth.

from the Secure Stations scheme. And the railway was rated Level 7 in its
annual regulatory safety audit, the highest rating ever achieved in the UK.

Our dedicated call centre in Cardiff has provided a substantial part
of Britain’s National Rail Enquiry Service for seven years, consistently
achieving the highest quality ratings. The contract ends in March 2004
and we were disappointed to lose the rebid. However, we have agreed that
400 of our staff will transfer to the incoming operator with effect from
1 April, and we are working hard to ensure a smooth handover of
the service.

We continue to bid for carefully selected rail contracts and our Merseyrail
Electrics success has encouraged us in our bids for the Northern Rail
franchise and the third phase of the Manchester Metrolink. In December
we were one of two companies shortlisted for the Northern Rail franchise,
which begins in October 2004.

In Denmark we bought-out our joint venture partner in the Copenhagen
Metro, which opened in 2002. The second construction phase has now
added six more stations and the new automated system is fully operational
and approaching target performance levels. Passenger levels have doubled
in the past year to 105,000 a day.

The Serco-operated Docklands Light Railway (DLR) won a UK National Rail
Award for the fourth year running. It was named Best London Suburban
Operator, adding to its Best Operator awards in 2001 and 2002 and Best Light
Rail/Metro award in 2000. Canary Wharf DLR station won a national award

Air
In the Middle East, we broadened our aeronautical services contract at
Dubai International Airport. The new contract is valued at £10.2m over two
years and continued growth in Dubai tourism has created a need for
additional controllers in 2004. We are still the region’s only private sector
provider of air traffic services and are actively seeking other opportunities
in the Gulf, where we are well established.

We continued to increase our aviation operations in the US as the Federal
Aviation Administration (FAA) added two more towers to our air traffic

B U S I N E S S R E V I E W

control contract, bringing the total to 60. One of the additions, Vandenberg
Air Force Base, is the first active duty military facility to outsource its air
traffic control services. The FAA also added new facilities in Tallahassee,
Florida and Corpus Christi, Texas to our weather observation contract,
bringing the total to 11 facilities.

We are supporting the efforts of the United States Agency for International
Development (USAID) to restore civil aviation in Iraq. Operating through
a prime contractor, we started providing operational management services
at Baghdad International Airport in July and Basra International Airport
in September. Three more airports may follow. The £6m contract is for
18 months and two option years.

In the UK, we began a new £4.8m four-year contract to manage
Newquay Airport in Cornwall. Also in the UK, the Civil Aviation Authority
Safety Regulation Group approved our aviation safety management
system – making us the first commercial provider to gain this
approval.

Science

Market overview
Management of government scientific undertakings is a fast-emerging
sector, in which Serco was an early entrant and has established a strong
competitive position. Our science contracts now account for 7% of turnover,
exclusive of AWE.

We aim to be recognised by governments as one of the best private-sector
partners for the management of scientific organisations, programmes and
consulting services. We are focusing on three market segments created
by the demands of UK and international governments and agencies:
management and operation of scientific and technical organisations
(where we are UK market leader), strategic technical services, and
management of individual science and innovation programmes. In the
UK alone, markets accessible to Serco are expected to grow from £0.5bn
a year in 2003 to £1bn in 2008.

Business highlights
Our contract to continue running the UK’s National Physical Laboratory
(NPL) for a further 10 years, valued at £500m, was a welcome recognition
of what we have achieved there since 1995. During this time we have grown
revenues and the number of young scientists working at NPL. We have
strengthened the laboratory’s global leadership in measurement science
and it will continue to develop standards and measurement technologies
that have a major impact on British competitiveness and quality of life.
NPL is currently moving into a world-class new science facility, which we
have been building under a PFI with Laing Investments. The construction
phase is virtually complete and we have acquired Laing’s 50% share in the
joint venture for a nominal sum.

Serco Assurance has been appointed preferred bidder for two contracts for
the Conditioned Waste Store Project at the Dounreay nuclear establishment.
The new facility will provide a secure and modern environment for storing
almost 10,000m3 of nuclear waste from decommissioning and site

S E R C O G RO U P P L C

restoration work over the next 50-60 years. Serco Assurance will act as
building services and facilities management consultant, and provide vital
safety and environmental protection solutions. It has also won a contract
to provide regulatory advice, assessment and inspection support to the
MOD’s new Nuclear Weapon Regulator.

CERN, the European Organisation for Nuclear Research, awarded us a
contract to provide electrical, mechanical and electronic support services
at the world’s largest particle physics laboratory in Switzerland and
France. We are collaborating with two French companies and the value
to Serco will be some €9m over five years.

At the European Space Operations Centre (ESOC) in Darmstadt,
Germany, we successfully rebid a contract to provide teams of analysts
and controllers to cover all European Space Agency (ESA) missions.
We have participated in the majority of ESA missions over more than
20 years.

We successfully rebid the contract we have held for five years to maintain
and run ESOC’s operational computing and communications infrastructure:
the new contract adds five more years plus a five-year renewal option. We
also successfully rebid our support services contract with ESOC’s Ground
Systems Engineering Department in Darmstadt, Germany for three years,
with a two-year renewal option. And we were awarded a two-year
extension, valued at over €8m, to our earth observation ground segment
engineering and operations contract at ESA’s ESRIN Earth Observations
Centre in Italy.

In the US, we are exploring opportunities within the Department of Energy,
which is looking into increasing private sector involvement in the
management and operation of its laboratory contracts.

Private sector

Market overview
The private sector accounted for 8% of turnover in 2003. Because of
the scope available to us in the public sector, this market has not been
a primary focus so far; but we do pursue selected opportunities where
we can apply our core skills effectively.

Business highlights
In the UK, GlaxoSmithKline added a three-year extension to the facilities
management contract that we have held at its Ware site since 1995.
Building on this relationship, we were also awarded the catering services
contract for the site, taking the total contract value to £2.6m a year.

In Germany, Audi awarded us a five-year contract to train dealer
service engineers for its A8 and A3 models. We took just eight weeks
to establish the training centre, train the trainers and set up the
administration.

We won our first facilities management contract in Italy, covering the
external areas of Rome’s EUR business district. The client is a recently
privatised public entity owned by the Treasury Ministry and the City of

B U S I N E S S R E V I E W

Rome. The wide-ranging contract includes parks and gardens maintenance
and a call centre operation; it has an initial annual value of €1.7m.

Broadband Maritime, a US-based telecommunications service provider,
awarded us a contract to install and maintain the first widely affordable
broadband satellite communications solution for ships at sea. Serco is
exclusively contracted to install and maintain the system on commercial
maritime vessels worldwide, and we expect to deliver over 2,000
installations in the next three years.

Telecom New Zealand broadened a long established relationship by
appointing us as property manager for its corporate, mobile and network
estates throughout New Zealand under a new three-year NZ$6.9m contract.
We successfully rebid a NZ$5.2m facilities maintenance contract with New
Zealand Steel. And we broadened our alliance partnership with BlueScope
Steel (formerly BHP Steel) in Australia: we now provide comprehensive
security and emergency response services, fire equipment inspection,
maintenance and all personnel transport management at its operations
in the Illawarra region of New South Wales.

People

model, augmented by an online 360° feedback survey. Over 50 directors
underwent assessment in 2003, and the rest will follow this year. The Serco
Leadership Model specifies required knowledge in commercial, stakeholder
and people management, together with personal leadership skills.

Our director development programme in partnership with the Institute
of Directors (IoD) continues to be a great success. By the year end an
additional 37 people had qualified for the IoD/Serco Certificate in Company
Direction. They included a fast track group from our Continental Europe
and Middle East region – many studying in English as a second language –
who achieved a pass rate of 73%. A further 11 people moved onto the second
level, achieving Diploma status, and several are now working for Chartered
Director status, the highest qualification available. All pass rates were
ahead of national averages. In addition, almost 240 members of Serco
Divisional Boards worldwide attended a one-day Directing Our Business
workshop designed in association with the IoD.

In partnership with the Chartered Management Institute (CMI), we are
preparing to deliver training and assessment for accredited CMI
qualifications for UK front line managers and supervisors. In 2004 we will
deliver the CMI Diploma in Management, preparing candidates to become
Chartered Managers. Meanwhile, eight people have qualified for a Diploma
in Management in the pilot programme in 2003.

Training and development
During the year, we launched personal development planning for all
members of Serco divisional boards and the Global Management Board.
Plans are based on comprehensive assessment against a defined leadership

Over 600 people in the UK attended workshops to receive training in Serco’s
core business processes. Similar courses were held in the US, continental
Europe, the Middle East and Australia. New courses from the Serco Best

S E R C O G RO U P P L C

Practice Centre included a workshop on strategic selling to help managers
create new business opportunities with their customers.

During 2003 we launched the Serco Leadership Programme for high-potential
individuals. The first 13 candidates are currently on a pilot programme
covering core skills plus personal development planning based on the Serco
Leadership Model. Early indications are very encouraging and the programme
is being extended in 2004.

Because of our worldwide spread, distance learning is a valuable and
increasingly important part of our training strategy. We are major users
of e-learning programmes delivered through our intranet. During 2003 we
released two new online learning products: an interactive exercise to simulate
running an operational business and Leading Change, an interactive
explanation of our change management methods with supporting tools
and case studies.

“A lot of exciting

projects are coming up in

satellite communications

Eight industry leaders are creating

and global positioning

the Skynet 5 system, on earth and

technology, in both the

in space. Serco is one of them.

public and private

sectors worldwide.”

complexity

the sky’s not the limit

We began, 40 years ago, with a radar maintenance contract. Today we’re involved in PFI projects

so large and sophisticated that it takes teams of specialist companies to deliver them.

For Skynet 5, eight major companies joined forces to enable Paradigm Secure Communications

(which is sponsored by EADS) to create the next-generation secure communications system for

Britain’s armed forces. EADS Astrim is the systems provider and Paradigm Services is the

operator. And as subcontractor to Paradigm Services, Serco will manage the network and

facilities to exacting performance standards.

When the £2.5bn contract was awarded in October 2003, Skynet 5 was the biggest defence

PFI ever. Even larger and more complex projects will mean more and more multi-partner teams
being formed to tackle unprecedented challenges. Our primary interest in joining these consortia

is to win the long term operating contracts that follow the construction phase. It’s a role that
requires real teamworking skills, as we need to form effective partnerships with all the other
participants – and the customer.

Serco began as a provider of technical skills. Our first contract, in the mid-
1960s, was to maintain the Ballistic Missile Early Warning System at RAF
Fylingdales. We broadened our capability to cover complete management
of all support services. This took us into early PFI joint ventures such as
the Joint Services Command and Staff College contract, where a ‘build’
partner teamed up with Serco as the ‘operate’ partner. Now, as we embark
on complex multi-partner PFIs, our technical skills are as important as ever –
but it’s our management and partnering skills that have come to the fore.

Skynet 5 will guarantee secure communications for Britain’s armed forces
whenever and wherever they’re required. Our track record on many defence
contracts – and also with the European Space Agency – helped us win the
15-year operating contract, valued at over £220m.

the sky’s not the limit

Everything about Skynet is big and complex: the bid and negotiation
process alone took four years. The phase-in began in November 2002,
while negotiations continued, and since March 2003 we’ve been gaining
invaluable experience in operating and maintaining the existing Skynet 4
system. This may be nearing the end of its service life, but the UK’s
involvement in crisis points such as Bosnia and Iraq means it’s been
fully stretched. “In October 2003 we saw the highest level usage of
military satellite communications voice and data services ever recorded
via the Skynet 4 system,” says Richard Vella, our Network Director, who
transferred to Serco with some 75% of the Skynet 4 ground station staff.

Modern military operations call for greater capacity than Skynet 4 can
provide. Delivering it will require many skills. The Paradigm team, led
by European spacecraft manufacturer EADS, includes Cable & Wireless,
Cogent, General Dynamics, LogicaCMG and Stratos as well as Serco.

Paradigm has already started building new ground infrastructure
including new transmitters. In 2006 and 2007 it will add two new
satellites. Paradigm is also equipping the ground stations to use
capacity on commercial satellites to bolster its ability to meet
military and commercial user demands.

Serco’s operational role includes network maintenance, training,
supply management, through-life maintenance of the buildings
and facilities, installation of communication systems in operational
zones such as Bosnia – and spacecraft operations. Our spacecraft
control teams work round the clock, manoeuvring the satellites to
maintain their orbital position, orient them in the right direction
and keep them in optimal condition. There are planned operations –
such as regular station-keeping manoeuvres to return the spacecraft
to their normal orbital position – and unplanned, in response to
onboard failures or factors such as solar activity.

Maintaining business as usual while Skynet 5 takes shape requires
effective teamwork with all the Paradigm partners. We’re also helping
them with system reviews and advice on developing new procedures.

As a newcomer to Serco, Richard Vella says he’s been impressed
by “the can-do approach, and the ability to interact so well with
the other partners. By embedding ourselves in their organisations,
we’re helping to bind the whole project together.”

For Serco, Skynet could provide a springboard to further
opportunities. “A lot of exciting projects are coming up in
satellite communications and global positioning technology,
in both the public and private sectors worldwide,” says Project
Director Paul King. “Skynet 5 is a ground-breaking deal. It will
be used as a basis for many other similar procurements worldwide.
By showing our ability to work with our partners on Skynet 5,
and our ability to deliver, we’ll be well placed to address this
exciting new market.”

P F I R E V I E W

PFIs are generating good returns for Serco – and good value for taxpayers

Our portfolio of Private Finance Initiative (PFI) projects is delivering cash
returns on our investment and a £3bn order book of service contracts.
We now wholly own the great majority of the PFIs that we’re involved
in, which makes for better long term customer relations. And we’re seeing
good cash returns from our investments, with cash inflows exceeding
our total investment.

PFIs continue to offer very good value for money to governments, in the
UK and, increasingly, overseas. Their effectiveness has been confirmed by
recent studies from HM Treasury and the UK’s National Audit Office. They
have been proven to deliver better results than traditional procurement
methods through better project definition, reduced procurement time, focus
on service delivery, better asset utilisation, effective competition and risk
transfer. In the UK, PFIs will continue to play a partial but important part
in public sector capital investment. Contracts signed to date have a combined
capital value of over £35bn, and an equivalent value of contracts are
currently out to tender or identified.

More than 90% of any PFI’s funding comes from competitively sourced
non-recourse debt. These non-recourse debts are secured on the relevant
projects’ assets and cash flows: creditors have no recourse to Serco and
the debt has no impact on our banking covenants. More information on
non-recourse debt is included on page 25 in the Finance review.

The size and maturity of our portfolio means we can manage the capital
base actively and efficiently – for example through the Norfolk and Norwich
University Hospital refinancing in 2003, which realised £4.1m of profit for
Serco as well as releasing significant resources for the NHS.

During the year we bought out our partners in two PFI joint ventures where
the construction phase is complete, and our partner in Premier Custodial
Group, which has a number of PFIs. This has enabled us to manage the long
term operating contracts better and develop the potential for future organic
growth. It also means that we own 100% of the projects’ assets and debts,
which can therefore be shown more visibly on our balance sheet.

If PFIs are such good business for Serco, why don’t we have more of them?

We are currently involved in 12 PFIs – with operating contracts in all 12 and
equity stakes in 11. Last year PFIs contributed £133.4m to turnover and £11.9m
to gross profit. By the year end, total cash inflows of £22.6m exceeded our
investment to date by £7.3m.

Because not all PFIs are the same, and we’re highly selective. We look for
projects with high service content where we can minimise our equity
investment in relation to the operating contract value.

PFIs provide multiple income streams. Our primary interest is the income
that comes from the operating contracts, which are generally long term and
significantly improve the visibility of our earnings and cash flows. Some
£3bn of our current £10.3bn order book comes from PFI operating contracts.
We can earn dividend income from our equity stake in each project and
interest on any loans we make. And as the risk profile of a project declines
– notably when the construction phase is complete – it may be possible to
realise a further financial gain by refinancing the debt capital raised from
third parties.

The PFI model continues to evolve. There is now a solid base of good
practice to build on, and standardisation of contracts will reduce bidding
costs and procurement times for many projects. The bundling of similar
projects into a single package – as in the proposed Building Schools for the
Future programme – will make the PFI model viable for smaller projects.
And new approaches to public private partnership, such as our Ontario
Driver Examination Services franchise, are still emerging. The creation
of Serco Government Consulting will help us stay in the forefront of this
process by helping national and local governments to devise appropriate
models for procuring assets efficiently.

Supporting but not spoonfeeding Lynne Morrison Associate Director, Premier Custodial Group

“When I started, a colleague told me Serco supports its employees but doesn’t spoonfeed them. They were right. Serco’s good

at recognising what people have to offer. It will give you opportunities. And if you want anyone’s advice or experience you only

have to ask – everyone’s door is open. It’s a company that’s good at sharing what it knows.”

1994: Wheelchair field services supervisor in North Wales

1997: Contracts administration manager, Serco Investments

1998: Commercial manager, Serco Investments, working on PFIs

2002: Associate director, Serco Investments

2004: Associate director, Premier Custodial Group

Ten years ago, Lynne Morrison was ‘an unemployed mum who had
been a secretary’ and had started a distance learning law degree.
She’s learned a lot since then –- completing her degree and, with
Serco’s help, a Certificate in Management Studies and a Master’s in
Finance and Administration. She joined as a workshop supervisor.
The management studies helped with the first job. The law degree
took her into contracts administration. And the Master’s, which
involved a dissertation on refinancing PFIs, led to a stint as
commercial manager on a succession of PFIs. Now she’s moving
to Premier Custodial Group to develop new areas of business in
the justice sector.

“If you do a

good job of, say,

change management,

Careers in Serco don’t tend to go in straight

you’ll be drawn to

lines. We like people to move around – across

somewhere else where

sectors, functions and national frontiers.

that skill is needed.

There are no barriers.”

development
all the right moves

Customers don’t bring us in to preserve the status quo. They want us to change things. That’s

why the people who do well in Serco are the ones who see things differently, who find better

ways to get things done. It’s also why we like to move people around. We offer them new

challenges in unexpected areas, where their skills will open up fresh thinking. It’s a great way

to transfer skills and share knowledge. Often, unconventional career moves enable people to

come up with unexpected solutions to tough problems. And as they move around, they enrich

their experience and understanding even more.

It’s exciting to see people rise to new challenges. But to be sure they succeed, you need to give
them all the support they need. We’re keen to give people training in skills they’ll find useful.

The Serco Leadership Model helps us identify and develop management capability. And,
importantly, we have an open and collaborative culture where people are encouraged to share

their experience, advice and ideas.

A constant upward pull
Dilys Foster Director, Serco Government Services

1989: Satellite ground stations engineer, European Space Operations Centre,

Germany – and supporting a worldwide network including Belgium,
Kenya, Canaries and French Guiana

1998 (after a career break): Leading Serco’s Skynet 5 PFI team

2000: Contract support director, Serco Aerospace

2001: Serco Institute, seconded to government task force

2002: Director of Serco Facilities Management

2003: Director of Serco Government Services, managing strategic selling initiative

“Serco is growing rapidly, so there is a constant pull up the
organisation to fill new roles. There are always exciting
opportunities available, and many will be outside your past
experience.” Dilys Foster should know. She joined Serco in 1989
as a satellite ground stations engineer. Today -– via aerospace,
several PFIs and secondment to a government task force on
strategic partnering -– she’s taking on strategic marketing as
a director of Serco Government Services. “If you do a good job
of, say, change management, you’ll be drawn to somewhere else
where that skill is needed. There are no barriers – people move
internationally because they are supported and encouraged
to do so.”

The opportunity to change things
Peter Williams Managing Director, Ontario Driver Examination Services, Serco North America

1994: Contract manager, Shoeburyness firing range

1995: Contract manager on facilities management contract at Abbey Wood

office complex, housing 6,000 civil servants

1998: Facilities team leader on Atomic Weapons Establishment bid

1999: Project director, Joint Services Command and Staff College PFI

2003: Managing director, Ontario Driver Examination Services,

Serco North America

Peter Williams likes making things happen. He joined us 10 years
ago, after 29 years in the British Army. After managing support
contracts at a weapons research range and one of Europe’s largest
office complexes, he helped lead our then largest-ever bid, to run
the Atomic Weapons Establishment. When we won it, he took over
the £130m Joint Services Command and Staff College PFI contract
a year before construction finished. He got it open on time and ran
it for three years. Now he’s moved to Ontario to lead our Driver
Examination Services franchise. “If you’re willing to take on new
challenges, Serco will help you all the way,” he says. “The culture
is: prove your worth and we’ll let you get on with it. I like giving
people the opportunity to change things for the better – and that’s
the key to Serco.”

Looking outside as well as inside
Gordon Paterson Chief Executive, Serco Solutions

1984: Joined Serco as a young engineer in Guisborough, worked on a series

of road and rail information systems

1993: Operations manager, Serco Guisborough

1998: Managing director, Serco Transport Systems

1999: Managing director, Serco Technology

2000: Managing director of newly created Serco Government Services

2002: Set up Serco Integrated Solutions to bid for large, complex contracts

2003: Chief executive of Serco Solutions, formed by integrating our investment

management business and new consulting business

Gordon Paterson has spent 20 years with Serco. “Not intentionally,”
he says. “The challenges just came so thick and fast that I have never
wanted to look elsewhere.” Today he’s on our Global Management
Board. But he’s not averse to looking outside for fresh ideas, even
at the top.

“Outsourcing business models are changing very fast,” he says.
“In Serco Solutions we’ve put together the capability to design
and implement contracts that are unprecedented in their scale and
sophistication. We need to ensure top management has the skills to
maintain our leadership position. Our new joint training courses with
the Institute of Directors and Chartered Management Institute help
bring in ideas from outside and keep our thinking fresh. So does
external recruitment, like the influx of people we’ve recruited for
our consulting business. We’re here to take capabilities and ideas
and turn them into competitive advantage – to reinvent the whole
solution, even if we draw on familiar core principles. We need
these external influences to shape our thinking.”

03Serco Group plc Accounts 2003

60 Directors, secretary and advisers

61 Corporate governance report

69 Directors’ report

73 Directors’ profiles

76 Directors’ responsibilities

77 Remuneration report

Independent auditors’ report

90 Accounts

95 Notes to the accounts

142 Investor and shareholder information

D I R E C TO R S, S E C R E TA RY A N D A DV I S E R S

Chairman

Kevin Beeston

Registered Office

Serco House

Directors Margaret Ford*

Ralph Hodge CBE*

Christopher Hyman

Andrew Jenner
Rhidian Jones*†

DeAnne Julius CBE*

David Richardson*

Iestyn Williams

16 Bartley Wood Business Park

Bartley Way

Hook

Hampshire

RG27 9UY

Auditors

Deloitte & Touche LLP

Chartered Accountants

London

Secretary

Julia Cavanagh

Stockbrokers

Cazenove & Co. Ltd

Investment Bankers

Lazard Brothers & Co Ltd

21 Moorfields

London

EC2P 2HT

Morgan Stanley & Co Ltd

25 Cabot Square

Canary Wharf

London

E14 4QA

Principal Bankers

Barclays Bank plc

54 Lombard Street

London

EC3P 3AH

The Royal Bank of Scotland plc

135 Bishopsgate

London

EC2M 3UR

20 Moorgate

London

EC2R 6DA

Merrill Lynch International

Merrill Lynch Financial Centre

2 King Edward Street

London

EC1A 1HQ

Solicitors

Allen & Overy

One New Change

London

EC4M 9QQ

Registrars

Computershare

The Pavillions

PO Box 82

Bridgewater Road

Bristol

BS99 7NH

* Non-Executive Director
† Senior Non-Executive Director

C O R P O R AT E G OV E R NA N C E R E P O RT

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”). In July 2003, The Financial
Reporting Council published a revised Combined Code on Corporate Governance which includes certain recommendations from
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”).This Report sets out how the Company applies the 2003 Revised
Combined Code, with which it has been largely in compliance, during the year. It is the Company’s intention to achieve full
compliance with the 2003 Revised Combined Code, or justify any exceptions, during 2004.

The Board and its Directors
The Board currently comprises nine Directors: Kevin Beeston, Margaret Ford, Ralph Hodge, Christopher Hyman, Andrew Jenner,
Rhidian Jones, DeAnne Julius, David Richardson and Iestyn Williams. Excluding the Chairman, the Board comprises five
Non-Executive and three Executive Directors. This will be reduced to four and two respectively following the retirement of
Iestyn Williams and Rhidian Jones on 31 March and 30 April 2004.

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. Job specifications are in place for both the Executive Chairman and the Chief Executive defining their roles and
responsibilities. The Directors’ profiles are set out on pages 73 and 74.

The Board believes that all 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 judgment. They bring a wide range of
experience to the Board including international business operations, strategy, human resources 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. As announced in the 2002 Annual Report, Rhidian Jones will be retiring in April 2004. It has been agreed by
the Board that DeAnne Julius will be appointed Senior Non-Executive Director following Rhidian’s retirement. David Richardson
will replace Rhidian as Chairman of the Audit Committee. As Finance Director of a FTSE 100 Company, the Board believes that
David has the relevant financial experience to chair this Committee as recommended by the Higgs Review. The Non-Executive
Directors meet on an informal basis during the year without the presence of the Executive Directors. The Non-Executive Directors
are initially appointed for a three-year term.

During the year the Board met six times, on four occasions for two days at a time, at varying locations, and took the opportunity to
combine the formal business of the Group with site visits and divisional presentations and discussions. During the year a strategy
review was held, hosted by the Executive Chairman, and attended by the Board and key senior managers of the Group.

There is a formal schedule of matters reserved for the Board including the responsibility for leading and directing the affairs of
the Group. This schedule together with the terms of reference for the Board Committees were reviewed and revised by the Board
in November in light of the 2003 Revised Combined Code.

C O R P O R AT E G OV E R NA N C E R E P O RT

The Board and its Directors (continued)
During the year each Director completed an evaluation questionnaire, the results of which were discussed at the Board Meeting
in November 2003. There were no material matters arising, although a small number of minor procedural improvements have
been effected. The Chairman also held meetings with individual Directors to discuss the operation and performance of the Board.
A further review will be undertaken during 2004. The Senior Non-Executive Director met with the Executive Chairman to evaluate
his performance as Chairman of the Board.

During the year Kevin Beeston was appointed as a Non-Executive Director of Ipswich Town Football Club PLC. The Board are fully
supportive of his role and consider that the time commitment required will not significantly impact his position in the Company.
The role is non-fee earning. Iestyn Williams also holds a number of Non-Executive positions including Non-Executive Deputy
Chairman of V Holdings Ltd. As Iestyn has a part time role with the Company, his Non-Executive roles are undertaken in his own
time. He retains the fees earned from these positions.

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 and for advising on governance matters. 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 and responsible for operation of the Group’s whistle-blowing procedure. 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, timely and adequate and enables the Directors to discharge their duties. The information provided to the Board was
assessed as part of the Board evaluation process.

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 stood for re-election. The Directors are proposing to
adopt new Articles of Association at the Company’s Annual General Meeting in April 2004. One of the changes to the Articles will be
to replace the requirement that the Directors retire by rotation, with a requirement that a Director must retire at an annual general
meeting (but be eligible for re-appointment) if he has held office for more than 30 months (as at the date of the notice convening
the meeting) since he was appointed or last re-appointed. This change is intended to align the Articles more closely with the
requirements of the 2003 Revised Combined Code.

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 were reviewed and revised in November 2003 to take account of the 2003 Revised Combined Code. The
Chairmen of the Board Committees attend the Annual General Meeting to answer questions from shareholders.

The Terms of Reference for the Board Committees are displayed on the Company’s website www.serco.com.

S E R C O G RO U P P L C

Board Committees (continued)
As required by the 2003 Revised Combined Code, detailed below are the members, meetings and attendance records for the Board
and each of the following Committees: Audit, Nomination and Remuneration. Reports of the Audit and Remuneration Committees
have also been provided.

Name

Kevin Beeston
Margaret Ford
Ralph Hodge
Christopher Hyman
Andrew Jenner
Rhidian Jones
DeAnne Julius
David Richardson
Iestyn Williams

Number of Meetings
Apologies for Absence

C = Chairman

X = Member

Board

Audit

Nomination

Remuneration

C
X
X
X
X
X
X
X
X

6
0

C
X
X

3
0

C
X
X

X
X
X

3
0

X
C

X
X

5
0

The Audit Committee
The Audit Committee is currently chaired by Rhidian Jones. David Richardson will chair this Committee following Rhidian’s
retirement. The terms of reference for the Audit Committee were updated during the year to take into account the recommended
changes of the 2003 Revised Combined Code which incorporates certain of the recommendations of the Smith Report. In accordance
with best practice the Committee has produced a report on its activities during the year, which can be found below;

Report of the Audit Committee
The Audit Committee met three times 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. During
the year the Committee held discussions regarding the business risk auditing activities undertaken by the Company’s internal
audit providers, Grant Thornton. Members of the Committee have received 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. Early in the year the Committee considered and approved a policy in relation to the provision of
audit and non audit services by Deloitte & Touche LLP (“Deloitte”) and other financial advisers. Financial limits were set in relation
to services provided and these have been monitored during the year by the Committee. Deloitte provide other services to the Group
such as tax advice and technical advice in relation to accounting for new bids where appropriate. Non-audit work is subject
to a tender process as required, and as a result work has been undertaken during the year by a number of other firms including
Ernst & Young LLP and KPMG. The Committee also considered and approved the annual audit fee for Deloitte.

C O R P O R AT E G OV E R NA N C E R E P O RT

Report of the Audit Committee (continued)
The independence, objectivity and effectiveness of the external auditors has been examined by the Committee and discussions
held regarding their terms of engagement, remuneration and proposal for partner rotation. The Committee has met with both the
internal and external auditors without the presence of the Executive Directors.

In accordance with the 2003 Revised Combined Code, the Committee has considered and approved a formal whistleblowing policy
and procedure for implementation around the Group. Updates will be provided to the Committee in relation to this matter.

The Committee recommended to the Board that Deloitte be proposed for re-appointment at the forthcoming Annual General
Meeting. This recommendation has been accepted and will be proposed to Shareholders.

The Nomination Committee
The Nomination Committee is chaired by Kevin Beeston, and met three times during the year. Matters considered included the
appointment of Non-Executive Directors, succession planning and crisis management for the Board. The recruitment process was
undertaken using an external consultancy and formal terms of reference. The successful candidates were met by all members of the
Board prior to appointment. Consideration was given to the skills, knowledge and experience desired by the Board and the need to
ensure an effective and balanced Board. The existing commitments of the candidates were also discussed to ensure sufficient time
was available to undertake their duties as a Director of the Company.

The Remuneration Committee
The Remuneration Committee is chaired by Ralph Hodge. The Committee met five times during the year to deal with matters relating
to remuneration for Executive Directors. The Remuneration Report is set out on pages 77 to 87. The Committee also considered the
policy and framework of remuneration for senior executives within the Group. The remuneration of these executives is considered
and approved by the Remuneration Committee of the Global Management Board (“GMB”), which comprises the Executive Chairman,
Chief Executive and Chief Operating Officer and is advised by the Human Resources (“HR”) Director. The quorum of the Committee
being any two of the members.

There are three further committees of the Board, details of which are provided below:

The Approvals and Allotment Committee
This Committee meets on an as required basis and comprises the Executive Directors with any two forming a quorum, except in
relation to the exercise of share options when the Company Secretary and any one Director can constitute a quorum. The business
of the Committee is varied and ranges from bid approval to approval to the releasing of share options. This Committee also considers
matters requiring formal approval following discussion by the GMB. The Committee forms a key part of the Group’s internal controls
and acts to facilitate and authorise the operations of the business at a certain level on a day-to-day basis. The level of authority
delegated to this Committee is reviewed on an annual basis.

The Global Management Board
The Board has delegated responsibility for the day-to-day management of the business to the GMB. The GMB meets formally on a
quarterly basis and more frequently if required. The GMB is made up of a number of senior managers within the business and includes
three of the Executive Directors. Matters discussed by the GMB which require formal approval are submitted to the Board or the
Approvals and Allotment Committee, details of which are provided above. Further details relating to the ongoing management of
the business can be found in the Annual Review section of the Accounts.

S E R C O G RO U P P L C

The Training and Development Committee
The Training and Development Committee comprises Margaret Ford, Christopher Hyman, Ralph Hodge, Rhidian Jones, DeAnne Julius
and is chaired by Iestyn Williams. Following Iestyn’s retirement, Kevin Beeston will take over as Chairman of this Committee.
The Committee met once during the 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 Group’s corporate governance framework and latest financial statements, together with site visits and meetings with senior
management around the Group. New Non-Executive Directors have attended full induction programmes as determined by the
Committee. All Board members are encouraged to attend training courses at the Company’s expense.

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 Group.

Formal presentations are made to institutional investors and brokers’ analysts after the release of the interim and final results.
Further requests for individual meetings are considered on a case-by-case basis. Two Non-Executive Directors attended a site visit
and strategy visit respectively with institutional investors and analysts during year. An Investor Relations Report is presented to
the Board on a quarterly basis, which ensures the Directors have a clear understanding of the views of investors and brokers.

During the year the Company continued its on-line communication with a webcast of the interim results presentation and an
online radio broadcast for staff. An open conference call for investors was also provided. In addition to the Interim and
Preliminary Results announcements, the Company has introduced two further trading updates during the year.

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.

The Company’s website, www.serco.com was substantially improved and updated during 2003. The new site includes an area
specifically tailored for investors including information such as the Terms of Reference for all the Board committees and information
on voting at the last Annual General Meeting. It also has a link directly to our Registrars to enable Shareholders to view their
shareholding on line.

Internal Control and Risk Management
The Group 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 Group’s assets and reputation. Whilst the Board
has overall responsibility for the Group’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 requirements of the 2003 Revised Combined Code on Corporate Governance. 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 misstatement or loss.

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)
The Corporate Assurance Group (“CAG”) has the responsibility to oversee and review the internal control and risk 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 reports to the Board on a quarterly basis providing analyses of performance
against previously established assurance targets, and also advises the Board regarding policy and future activities to enhance best
practice around the organisation.

The CAG sponsors four specialist Groups:

• An Assurance Network Group, chaired by the Assurance Director, and comprising senior assurance representatives from across
the Group. During the year, this group met four times to review policy and procedures, and the development, integration and
dissemination of the Serco Management System that defines how the Group operates.

• A Risk Oversight Group, chaired by the Risk Director, comprising members from across the Group, met twice during the year to

review 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 Safety 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 between Serco’s aviation operating companies.

• A Rail Safety Oversight Group, chaired by the Rail Technical Director of the Integrated Transport division, and comprising the

rail safety representatives from across the Group was established in 2003 to oversee safety management systems within Serco’s
rail businesses in the United Kingdom, Denmark and Australia.

The Serco Management System provides the framework within which the business divisions and their operating companies have
implemented processes and procedures 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 the Serco Management System, a set of policies have been authorised by the Board
and supporting standards, guidance and training material have also been produced. A risk management standard defines the
processes that are required at each level in the organisation in order to manage the threats to the achievement of our business
objectives. Risk registers are maintained at a contract, company, divisional and Group level and are reviewed at least quarterly
and more frequently as required. The risk registers 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 consistent scoring system across the business.
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.

S E R C O G RO U P P L C

Internal Control and Risk Management (continued)
While operational risk can never be eliminated, the Group endeavours to minimise the impact by ensuring that appropriate
infrastructure, controls, systems, staff and processes are in place. Some of the key management and control techniques are set
out below:

• The principles of clear delegation of authority and segregation of duties are fully reflected in the Group’s operating processes;

• Comprehensive business review processes ensure that our services and products meet customer expectations, performance

criteria, operational effectiveness, regulatory requirements, investment returns and profitability;

• An Investment Committee meets on a monthly basis to consider new projects against a defined set of investment criteria.

Projects can then be submitted to the GMB for consideration as a group key target and allocation of appropriate resource from
across the Group;

• There is a formal review and approval process for all proposals and business acquisitions including delegated authority
for sign-off based on the financial value and capital requirement of the transaction and the assessed risk of the project;

• 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 improves 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 and safety and environmental
protection are addressed by qualified and experienced staff in each business unit. The Group also outsources support in the area
of occupational health to a professional consultancy;

• A programme of internal audits confirms that key controls are in place across the Group’s business activities. Audit priorities

are established on the basis of risk assessments, regulatory requirements and business imperatives;

• The operational risk framework tracks key risk indicators. These include analysis of business planning and variances, customer
satisfaction and retention data, staff turnover and satisfaction levels, occupational health and safety incidents, and error and
exception reporting;

• The Group 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.

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 2003, Grant Thornton has continued to provide an internal audit function within the Group. Their programme has been
designed to address internal control and risk management processes and the recommendations of the Combined Code. This year
Grant Thornton undertook a review of the Group’s risk management framework and the quarterly assurance reporting process
managed by CAG. Grant Thornton reported to the Audit Committee twice during the year.

In addition to contracts held in Serco’s name, the Group has material investments in a number of joint ventures. Where these
investments are not wholly owned 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 Group’s joint ventures are invited
to participate in the Assurance Network and the Risk Oversight Group.

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 2003
With the exception of the contractual notice periods for the Executive Directors which were reduced to twelve months following
the Annual General Meeting, the Company has fully complied throughout the year with the provisions stated in Section 1 of the
Combined Code and believes that it is largely compliant with the proposed Combined Code.

Approved by the Board of Directors and signed on its behalf:

Julia Cavanagh
Secretary

Serco House
16 Bartley Wood Business Park
Bartley Way, Hook
Hampshire RG27 9UY
United Kingdom

2 March 2004

D I R E C TO R S ’ R E P O RT

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 2003.

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 2003 can be found in the Business review on pages 33 to 47.

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 22 of the Accounts.

Dividends and Transfers to Reserves
An interim dividend of 0.72p (2002 – 0.64p) per Ordinary Share was paid on 10 October 2003. The Directors recommend
a final dividend of 1.62p (2002 – 1.44p) per Ordinary Share, which if approved by shareholders at the Annual General Meeting,
will be paid on 12 May 2004, to those shareholders on the register at the close of business on 12 March 2004. After dividends,
retained profits of £23,248,000 will be transferred to reserves.

Substantial Shareholdings
At close of business on 1 March 2004 (being the latest practical date prior to the printing of the Directors’ Report), the Company
had received notifications of the following substantial interests representing over 3% of the issued capital:

HBOS plc – 3.01%
Legal & General Group plc – 3.96%
Morley Fund Management Limited – 4.92%

Following a reduction in the shareholding of Merrill Lynch Investment Managers Limited the Company has received no further
notification regarding new material interests representing 10% or more of the issued share capital.

Changes to the Board
The current Directors of the Company are listed on page 60 and their profiles are provided on pages 73 and 74.

As detailed in the 2002 Annual Review and Accounts and the 2003 Interim Report, Iestyn Williams will be retiring as an Executive
Director and Rhidian Jones as an Non-Executive Director in March and April 2004 respectively. David Richardson and Margaret
Ford have been appointed during 2003 as Non-Executive Directors, and in accordance with the Company’s Articles of Association
will be subject to election by shareholders at the forthcoming Annual General Meeting.

D I R E C T O R S ’ R E P O RT

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 82 to 84.

Annual General Meeting
The seventeenth Annual General Meeting of the Company will be held at the Queen Elizabeth II Conference Centre, London
on 30 April 2004 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 is also committed to the creation of diverse teams, placing diversity at the
heart of business performance. The launch of an e-recruitment facility will assist in tracking the diversity of applicants, and
the benchmarking of employment policies against the best in class will enable the Group to drive forward best practice in this area.

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 Company 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.

The Group gives full consideration to applications for employment, career development and promotion, 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 sharesave schemes, and a share option scheme
for senior management which effectively aligns their interests with those of shareholders by requiring that performance criteria
are achieved prior to exercise. Following the success of two previous sharesave schemes, the Company is offering all eligible staff
the opportunity to participate in a further sharesave scheme in March 2004.

S E R C O G RO U P P L C

Health, Safety and Environmental Policies
The Group recognises and accepts its responsibility for health, safety and the environment (“H,S&E”). A full time Director of Health,
Safety and Environment, 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. This report consolidates divisional assurance reports that
have been reviewed and approved by the respective divisional boards.

The Group is committed to maintaining a safe and healthy working environment in all places that the Group operates, for our staff,
our customers, members of the public and any other third party. During the year the UK Health and Safety Executive approached
the Company to participate in a collaborative study into the way that it engages with major support services contractors. As part
of the study it provided an independent review of our health and safety commitment, systems and processes. The report provided
confirmation of the Group’s commitment to the principles of effective health and safety management. A number of recommendations
were made which are being actioned and form part of our safety strategy for 2004. 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.

CAG is supported by dedicated H,S&E teams in Serco Business Services, divisional support offices and in contracts, which provide
advice and support on H,S&E issues. All employees share responsibility for continuously improving the Group’s performance
in relation to H,S&E management.

Regular H,S&E meetings are held and representatives from the operating divisions attend quarterly Assurance Network meetings.

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
and also in the overall context of assurance within the Group.

Serco has been committed to addressing issues of work related ill-health over many years and has established occupational
support across the business. Our aim is to provide a working environment where the health of our employees is not affected by the
work that they undertake. Our occupational health providers support management in their efforts to identify and prevent work
related illness and provide support and guidance about health problems at work. They also provide health surveillance where
appropriate and assist in issues such as absence from work and supporting the Group’s programme of encouraging individuals
back to work where possible.

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 2003 were 26 days (2002 – 29 days); Company 26 days (2002 – 29 days).

D I R E C T O R S ’ R E P O RT

Donations
Charitable donations totalling £159,395 (2002 – £94,859) were made during the year. During the year the Group introduced a process
to capture investment in local communities on a worldwide basis. This measure takes into account cash support, gifts in kind, staff
time and management costs, and is based upon the Business in the Community (“BiTC”) established reporting format. The value
of this investment has been calculated as £648,566. This figure equates to 1.2% of the Group’s pre-tax profit.

During the year the Company made no political donations and intends to continue with this policy.

The Political Parties and Referendums Act 2000 (the “Act”) 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 the forthcoming Annual General Meeting, a similar resolution was passed unanimously by Shareholders
in May 2003.

Auditors
Deloitte & Touche LLP 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.

D I R E C TO R S ’ P RO F I L E S

Kevin Stanley Beeston FCMA (41) Executive Chairman
Since joining Serco in 1985, Kevin has worked in both financial and commercial roles. He was Group Finance Director 1996-1999
and Chief Executive 1999-2002, becoming Executive Chairman in May 2002. He is a member of the CBI’s President’s Committee,
Deputy Chairman of the CBI’s Public Services Strategy Board, a council member of Business in the Community, and a non-executive
director of Ipswich Town Football Club.

Margaret Anne Ford MA MPhil (46) Non-Executive Director
Margaret joined Serco as a Non-Executive Director in October 2003. Margaret is the Chairman of English Partnerships, the national
regeneration agency, a non-executive director of Thus plc and of Good Practice Ltd, the publishing company that she founded.
She spent her early career in a variety of roles either in the public sector or as an adviser to government and is a specialist
in leadership development, culture change and public sector reform. From 1997-2000 she was Chairman of Lothian Health Board
and from 2000-2003 was a non-executive director of Ofgem.

Ralph Noel Hodge CBE BEng (Hons) (69) Non-Executive Director
Ralph joined Serco as a Non-Executive Director in April 1999 and chairs the Board’s Remuneration Committee. He is Chairman of
the Water Research Council and a non-executive director of British Ceramic Tiles and ORC (Inc). He was previously non executive
Chairman of Enron Europe, Chief Executive of ICI Chemicals and Polymers and a non-executive director of the Halifax Building Society.

Christopher Rajendran Hyman CA (SA) (40) Chief Executive
Christopher joined Serco in 1994 as Finance Director for Serco Europe. He was appointed Group Company Secretary with
additional responsibility for corporate finance in 1996, and Group Finance Director in April 1999. In 2000 he took additional
responsibility as Chief Executive of a new division, Serco Global Projects, and he has been instrumental in developing new
processes and capabilities at the leading edge of our activities. He became Chief Executive in May 2002.

Andrew Mark Jenner ACA (35) Finance Director
Andrew joined Serco in 1996 as Group Financial Controller, having previously worked for Unilever. He became Corporate Finance
Director with additional responsibility for Treasury activities in 1999 and Group Finance Director in May 2002. Andrew shares
with the Executive Chairman responsibility for our relationship with Shareholders and the City.

Rhidian Huw Brynmor Jones MA FCIS FCMI (60) Senior Non-Executive Director
Rhidian became a Serco Non-Executive Director in 1996, having previously served on the Board 1987-1994. He is Chairman of the
Board’s Audit Committee. He is an experienced corporate finance lawyer and was Head of the Corporate Department of solicitors
Nabarro Nathanson until retiring from that firm in May 2002. 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 is a policy adviser on company law to ICSA
and was formerly non-executive Deputy Chairman of Britannia, the UK’s second largest building society. Rhidian will be retiring
from the Board on 30 April 2004.

DeAnne Shirley Julius CBE PhD (Econ) (54) Non-Executive Director
DeAnne joined Serco as a Non-Executive Director in October 2001. She is Chairman of the Royal Institute of International Affairs
and sits on the Court of the Bank of England, having been a founder member of its Monetary Policy Committee 1997-2001. She has
held senior strategy positions with British Airways and Royal Dutch Shell, and spent seven years with the World Bank developing
infrastructure projects in Asia and Africa. She is a non-executive director of Lloyds TSB, BP and Roche. DeAnne will be taking over
as Senior Non-Executive Director from May 2004.

D I R E C T O R S ’ P RO F I L E S

David Hedley Richardson BSc FCA (52) Non-Executive Director
David joined Serco as a Non-Executive Director in June 2003 and will chair the Board’s Audit Committee from May 2004. He is
currently Finance Director of Whitbread PLC, where his previous roles in a 20-year career have included eight years as Strategy
Director: he was instrumental in transforming Whitbread from a brewing and pubs company into a market leader in hotels,
restaurants and leisure clubs.

Iestyn Milton Williams BA (52) Executive Director
Iestyn joined RCA in 1978, becoming Serco’s Personnel Director after the management buyout in 1987. 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 been developing new business activities, first in Continental Europe and latterly in the education sector.
Iestyn is non-executive chairman of Senad Group Ltd, non-executive deputy chairman of V Holdings Ltd and non-executive
director of Law at Work. He is also a Governor of a local school. Iestyn has announced that he will be retiring from the Board
of Serco Group plc at the end of March 2004.

Approved by the Board of Directors and signed on its behalf:

Julia Cavanagh
Secretary

Serco House
16 Bartley Wood Business Park
Bartley Way
Hook
Hampshire
RG27 9UY

2 March 2004

With thanks to Merseyrail Electrics

Julia Cavanagh
(Company Secretary)

David Richardson

Iestyn Williams

S E R C O G RO U P P L C

Ralph Hodge

Margaret Ford

Kevin Beeston

Andrew Jenner

DeAnne Julius

Christopher Hyman

Rhidian Jones

D I R E C TO R S ’ R E S P O N S I B I L I T I E S

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 ensuring proper accounting records are kept 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

Serco House
16 Bartley Wood Business Park
Bartley Way
Hook
Hampshire
RG27 9UY

2 March 2004

R E M U N E R AT I O N R E P O RT

Introduction
The following report details the remuneration policy, and the actual remuneration of the Directors of the Company for the year
ended 31 December 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 requirements for the disclosure of Directors’
remuneration under the Directors’ Remuneration Report Regulations 2002. Reference has also been made to the 2003 Revised
Combined Code, which incorporates certain recommendations from the Higgs Review where it is deemed appropriate.

Following extensive review of Executive Directors’ remuneration during 2002 and as detailed in last year’s Remuneration Report,
resolutions relating to the introduction of a deferred bonus scheme for Directors and changes to the performance criteria for the
Long Term Incentive Scheme and Executive Option Plan were presented to Shareholders at the Company’s Annual General Meeting
on 6 May 2003. These resolutions were all passed and the changes effected during the year.

Composition and Terms of Reference of the Remuneration Committee
The Committee is currently comprised of four independent Non-Executive Directors; Margaret Ford, DeAnne Julius, David Richardson
and Ralph Hodge (Chairman). It operates in accordance with written terms of reference, which are determined by the Board and
take into account best practice and the requirements of the Combined Code. The Executive Chairman and the Group Human
Resources Director (“HR Director”) may attend the Committee meetings by invitation.

During the year the terms of reference for the Committee were reviewed and revised in light of the changes to the Combined Code
and approved by the Board in November 2003.

Advisers to the Remuneration Committee
During the year, the Committee has been advised by the HR Director and Mercer Human Resource Consulting (“Mercer”). As part of
the annual remuneration review process, Mercer undertook a benchmarking exercise on behalf of the Committee, of remuneration
packages for individual Executive Directors based on current market trends. Mercer also provides advice to the Trustees of the
Serco Pension and Life Assurance Scheme.

Advice in respect of employee share plans has been provided to the Committee by Ernst & Young LLP. Ernst & Young has also
provided advice to the Company in the areas of company secretarial compliance, governance, bid modelling and treasury matters.

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. As detailed in the 2002 Remuneration Report,
notice periods for Executive Directors have been reduced to 12 months during the year.

Executive Directors’ remuneration comprises a combination of short and long term rewards as explained below and then detailed
on pages 82 to 87. The Committee recognises the importance of maintaining an appropriate balance between those elements of
remuneration which are fixed versus variable, and incentives which are short term versus longer term. The split of remuneration
between salary and bonus and long term incentives for Executive Directors is currently estimated to be 60:40.

R E M U N E R AT I O N R E P O RT

1 Salaries and Benefits

Base Salary
Base salary levels for full time Executive Directors were reviewed in September 2003 following an external benchmarking
exercise undertaken by Mercer against a peer group of 12 companies.

Bonus Schemes
As explained in the Remuneration Report last year, the Committee recommended to the Board that the Company introduce
a deferred bonus scheme for full time Executive Directors, this was approved by Shareholders at the Annual General Meeting
in May 2003 and implemented for the year ended 31 December 2003.The maximum value of this bonus is 40% of base salary
and will be awarded on the basis of the Company’s earnings per share growth before FRS 10 (“EPS”) in comparison to RPI.
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. Details of the relevant
performance conditions are provided in the Performance Criteria section below.

As described in 2002, the Remuneration Committee approved an interim cash only bonus plan for the financial year 2002 for
full time Executive Directors. This bonus was paid during 2003 and 50% of the net proceeds were used by each of the relevant
Directors to acquire further shares in the Company.

2 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 the schemes are detailed in the Performance Criteria section below. The Company complies with the ABI
guidelines in relation to the granting of no more than 10% of share capital for employee share schemes in any 10-year period.

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 once confirmation has been received from the auditors regarding the achievement of the performance
criteria. 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. For awards granted after 1 January 2003 achievement of the performance criteria is measured
by reference to the Company’s total shareholder return performance. Details relating to both measures are detailed in the
Performance Criteria section below.

Except in exceptional circumstances awards must be made to employees prior to the commencement of the performance period
to which they relate.

S E R C O G RO U P P L C

2 Share Based Incentives (continued)

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. The options are granted at market value and awards 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.

For awards granted after 1 January 2003, achievement of the performance criteria is measured by reference to the Company’s
EPS performance relative to RPI. Details relating to both measures are detailed in the Performance Criteria section below.

Performance Criteria
Prior to Shareholder approval at the Annual General Meeting in 2003, the Company’s share based incentives were based on EPS
growth targets, this being regarded as best practice at the time of implementation. Following the extensive review of remuneration
undertaken in 2002, resolutions were put to Shareholders to introduce varied performance targets for bonus schemes and share
plans: the details of these changes are provided below. Whilst it is recognised that no single target provides an acceptable
performance measure for all investors, the Company believes that the portfolio of targets measuring achievement against both
earnings per share and total shareholder return provides a balanced approach for investors returns and is appropriate for
the business.

i) Earnings per Share (“EPS”)

As detailed above, prior to 2003 the performance criteria for both the LTIS and EOP were measured against absolute EPS
growth. For LTIS grants made in relation to performance periods commencing prior to 1 January 2003, full vesting will only
occur if the cumulative EPS growth over the three year performance period 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. For LTIS grants made in relation to periods commencing
from 1 January 2003, the performance target is measured against total shareholder return, as detailed below.

For EOP grants made in relation to performance periods commencing prior to 1 January 2003, if compound growth in EPS
is more than 15% all of the options may be exercised; if the annual compound growth in EPS is less than 10%, none of the
options may be exercised. For a compound growth in EPS of between 10% and 15% a proportion of the options may be
exercised. As detailed below the performance criteria for EOP remains growth in EPS, however the measurement is now
against RPI rather than an absolute growth requirement. With effect from 2003, the Deferred Bonus Scheme and EOP
measure the achievement of the Company’s EPS growth against the Retail Price Index (“RPI”). For the bonus scheme EPS
growth is measured over the financial year, whilst for the EOP the measurement is compound growth over the performance
period of three financial years.

For both schemes the maximum award is achieved when EPS growth reaches RPI + 10%. No award is achieved if EPS
growth is less than RPI + 5%. For an EPS growth between RPI + 10% and RPI + 5% the bonus will reduced from 40% to 20%
on a straight line basis. The equivalent EPS performance under the EOP will reduce the level of vesting from 100% to 40%
on a straight line basis. The use of EPS growth versus RPI, provides a measure of the real growth in the Company’s EPS.

R E M U N E R AT I O N R E P O RT

2 Share Based Incentives (continued)

ii) Total Shareholder Return (“TSR”) and the FTSE 350

The LTIS and deferral element of the Deferred Bonus Scheme measure the achievement of the Company’s TSR against that
of the constituent companies of the FTSE 350 immediately prior to the start of the performance period. TSR is defined
as the return shareholders would receive if they hold a notional number of shares, and receive dividends on those shares
over a three year performance period. It measures the percentage growth in the Company’s share price together with the
value of any dividends paid, assuming the dividends are re-invested into the Company’s shares.

For both schemes the maximum award is achieved when the Company’s TSR performance is in the top quartile with no
award vesting for below median performance. For top quartile performance 100% of the LTIS vests and a maximum one for
one share matching occurs under the Deferred Bonus Scheme; for median performance 40% of the LTIS vests and a one for
two share matching occurs. Between median and upper quartile performance, LTIS vesting increases from 40% to 100% and
share matching increases from one for two, to one for one, both on a straight line basis.

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. The Company also remains in the middle of the
FTSE 350. The relevance of measuring performance against this group of companies was reviewed during the year and
the Committee continues to believe this is correct for the business.

3 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 33 to the accounts. In the event of death
in service, each scheme provides for a lump sum payment as well as a dependant’s pension.

4 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. The service contracts were amended during
2003 to reflect a reduction in notice period from 24 months to 12 months, thereby bringing all Executive Directors’ notice
periods into line.

Under the new service contracts for Executive Directors 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 be entitled to receive a payment equivalent to up to one year’s remuneration. The service contracts
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.

S E R C O G RO U P P L C

4 Service Contracts and Compensation (continued)

A summary of 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

Date of appointment
to the Board

Date of contract/
letter of appointment

Un-expired term and notice period at 31 December 2003

29 February 1996
1 April 1999
3 May 2002
12 September 1986

21 July 2003
21 July 2003
21 July 2003
1 April 1999

Rolling contract with 12 months notice period
Rolling contract with 12 months notice period
Rolling contract with 12 months notice period
Will be retiring on 31 March 2004

Non-Executive Directors:
M A Ford
R N Hodge
R H B Jones
D S Julius
D H Richardson

8 October 2003
5 April 1999
17 June 1996
29 October 2001
2 June 2003

8 October 2003
15 January 2003
1 September 2002
29 October 2001
2 June 2003

34 months
15 months
Will be retiring on 30 April 2004
10 months
29 months

Note: 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 initially appointed for a three-year term, and that appointment may be
terminated on three months written notice. Renewal of appointments is 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 2003, the Non-Executive Directors of the Company have no personal financial interest in the matters
determined by the Committee, there are no 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 approved the payment of £5,000 per annum to the Chairmen of the
Audit and Remuneration Committees with effect from 1 June 2003. 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.

R E M U N E R AT I O N R E P O RT

1 Directors’ Remuneration

The Remuneration of the Directors for the year was as follows:

Names

K S Beeston
M A Ford
R N Hodge
C R Hyman
A M Jenner
R H B Jones
D S Julius
D H Richardson
I M Williams

Total

Total basic
salary
£

395,000
–
–
395,000
238,000
–
–
–
190,500

Note

4,5

2,4,5

3,5

Fees
£

–
7,785
35,500
–
–
35,500
32,583
19,250
–

1,218,500

130,618

Bonuses
£

166,000
–
–
166,000
100,800
–
–
–
–

432,800

Total estimated Total remuneration
excluding pensions
2003
£

value of any other
non-cash benefits
£

Total remuneration
excluding pensions
2002
£

25,522
–
–
25,540
25,700
–
–
–
26,466

586,522
7,785
35,500
586,540
364,500
35,500
32,583
19,250
216,966

555,453
–
37,125
588,261
252,880
30,125
30,125
–
211,286

103,228

1,885,146

1,705,255

Notes:
1 D H Richardson and M A Ford were appointed on 2 June 2003 and 8 October 2003 respectively.
2 A M Jenner was appointed as Finance Director on 3 May 2002.
3 I M Williams has worked for the Company on a part time basis with effect from April 2002.
4 The bonuses shown include performance bonuses earned in the period under review, but not paid in the financial year.
5 The value of the non-cash benefits relates to the provision of a car allowance and private healthcare.

This section has been audited by Deloitte.

2 Directors’ Shareholdings

The Directors’ interests in the shares of the Company were as follows:

K S Beeston
M A Ford
R N Hodge
C R Hyman
A M Jenner
R H B Jones
D S Julius
D H Richardson
I M Williams

* at date of appointment

Ordinary Shares of 2p each fully paid
1 January 2003

Ordinary Shares of 2p each fully paid
31 December 2003

106,520
0*
2,010
29,394
9,529
55,000
5,000
0*
2,387,323

161,081
0
2,010
84,330
42,265
65,000
15,000
10,000
1,387,323

S E R C O G RO U P P L C

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”)

Number of
shares under
option at
1 January 2003
(or, if later,
the date of
appointment
as Director)

Lapsed
Granted Exercised unexercised
during
during
period
period

during
period

K S Beeston

M A Ford
R N Hodge
C R Hyman

A M Jenner

R H B Jones
D S Julius
D H Richardson
I M Williams

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
–
–
–
3 yr award
3 yr award
3 yr award
3 yr award

38,736
51,885*
54,676*
–
–
–
–
32,868
44,474*
46,865*
–
–
–
–
–
–
–
32,868
44,474*
46,865*
–

–
–
–
185,289*
173,142*
–
–
–
–
–
185,289*
173,142*
111,174*
105,138*
–
–
–
–
–
–
86,628*

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

Number of
shares under
option at
31 December
2003 (or,
if earlier,
cessation
date as
Director)

38,736
51,885
54,676
185,289
173,142
–
–
32,868
44,474
46,865
185,289
173,142
111,174
105,138
–
–
–
32,868
44,474
46,865
86,628

Exercise
price
£

Market
price
at grant
£

Value
realised on
exercise
£

Date
exercisable

Nil
Nil
Nil
Nil
–
–
–
Nil
Nil
Nil
Nil
Nil
Nil
Nil
–
–
–
Nil
Nil
Nil
Nil

4.26
4.90
4.65
1.53
1.75
–
–
4.26
4.90
4.65
1.53
1.75
1.53
1.75
–
–
–
4.26
4.90
4.65
1.53

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

31.12.02
31.12.03
31.12.04
31.12.05
31.12.06
–
–
31.12.02
31.12.03
31.12.04
31.12.05
31.12.06
31.12.05
31.12.06
–
–
–
31.12.02
31.12.03
31.12.04
31.12.05

Date of
expiry of
option

04.04.10
23.11.10
15.11.11
05.05.13
26.11.13
–
–
04.04.10
23.11.10
15.11.11
05.05.13
26.11.13
05.05.13
26.11.13
–
–
–
04.04.10
23.11.10
15.11.11
05.05.13

*Approximately 14.67% (13.5% for prior year grants) 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. These options can only be exercised
in conjunction with and to the extent of the underlying award.

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 78 to 80.

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 £1.72 and the highest and lowest market prices during the financial year were £1.92 and £1.055 respectively.

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”)

Number of
shares under
option at
1 January 2003
(or, if later,
the date of
appointment
as Director)

Lapsed
Granted Exercised unexercised
during
during
period
period

during
period

Balance
at 31
December
2003

Market
price on
exercise
date
£

Exercise
price
£

Value
realised on
exercise
£

Date from
which
exercisable

Date of
expiry of
option

K S Beeston

M A Ford
R N Hodge
C R Hyman

A M Jenner

R H B Jones
D S Julius
D H Richardson
I M Williams

Approved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
–
–
Approved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Approved
Approved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
–
–
–
Approved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved
Unapproved

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
78,990
86,076
49,830
78,275*
130,316*
–

–
–
–
–
–

289,515*
–
–
–
–
–
–
–

289,515*
–
–
–
–
–
–
173,709*
–
–
–
–
–
–
–
–
–
135,357*

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

13,788
68,922
76,734
58,764
91,321
152,035
289,515
–
–
13,788
25,290
40,812
49,830
78,275
130,316
289,515
4,134
8,574
7,422
12,336
18,524
78,189
173,709
–
–
–
13,788
78,990
86,076
49,830
78,275
130,316
135,357

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

2.18
2.18
2.45
4.26
4.35
2.64
1.53
–
–
2.18
2.18
2.45
4.26
4.35
2.64
1.53
2.18
2.45
2.45
4.26
4.35
2.64
1.53
–
–
–
2.18
2.18
2.45
4.26
4.35
2.64
1.53

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

21.05.01
21.05.01
01.04.02
05.04.03
28.03.04
03.05.05
06.05.06
–
–
21.05.01
21.05.01
01.04.02
05.04.03
28.03.04
03.05.05
06.05.06
21.05.01
01.04.02
01.04.02
05.04.03
28.03.04
03.05.05
06.05.06
–
–
–
21.05.01
21.05.01
01.04.02
05.04.03
28.03.04
03.05.05
06.05.06

20.05.08
20.05.05
31.03.06
04.04.07
27.03.08
02.05.09
05.05.10
–
–
20.05.08
20.05.05
31.03.06
04.04.07
27.03.08
02.05.09
05.05.10
20.05.08
31.03.09
31.03.06
04.04.07
27.03.08
02.05.09
05.05.10
–
–
–
20.05.08
20.05.05
31.03.06
04.04.07
27.03.08
02.05.09
05.05.10

Approximately 14.67% (13.5% for prior year grants) 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. These
options can only be exercised in conjunction with and to the extent of the underlying option.

S E R C O G RO U P P L C

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 awards under the EOP is conditional are as set out on page 79.

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 £1.72 and the highest and lowest market price during the financial year were £1.92 and £1.055 respectively.

This section has been audited by Deloitte.

4 Performance Graph – Serco five year TSR vs FTSE 350 index

Serco Group plc TSR vs FTSE 350 index TSR

250%

200%

150%

Total shareholder return

100%

50%

-50%

31 Dec
98

31 Dec
99

31 Dec
00

31 Dec
01

31 Dec
02

31 Dec
03

Serco Group plc

FTSE 350 index

Provided by Ernst & Young LLP

In drawing this graph it has been assumed that all dividends paid have been reinvested. The TSR level shown at 31 December
each year is the average of the closing daily TSR levels for the 30-day period up to and including that date.

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 reinvested into the company’s shares.

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 33. 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
2003
£

Transfer value
of accrued
benefits as at
31 December
2002
£

685,469
133,696
29,142
1,511,915

539,342
100,212
11,025
1,141,718

Increase in
transfer value
during
the year
£

Gross increase
in accrued
pension during
the year
£

Increase
in accrued
pension during
the year, net
of inflation
£

126,576
18,701
4,076
360,871

18,027
3,615
3,345
31,618

15,085
3,139
3,277
27,913

Value of
net increase
in accrual
over the year
£

81,574
5,557
2,495
308,581

Total accrued
pension at
year end
£ p.a.

123,100
20,625
5,775
163,940

K S Beeston
C R Hyman
A M Jenner
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. The increase in accrued pension during the year is shown both as a gross increase and excluding any increase in
inflation. Part of the increase in the accrued pension of I M Williams is the result of receiving confirmation from the Inland
Revenue during the year regarding his pension calculation as a part time Director.

b) Transfer values have been calculated in accordance with version 9.0 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.

S E R C O G RO U P P L C

5 Pensions (continued)

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) CR Hyman and AM Jenner also benefit from defined contribution arrangements 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 are as follows: CR Hyman £52,072 and AM Jenner £27,607.

Section 5 has been audited by Deloitte.

Approved by the Board of Directors and signed on its behalf:

Julia Cavanagh
Secretary

Serco House
16 Bartley Wood Business Park
Bartley Way, Hook
Hampshire RG27 9UY
United Kingdom

2 March 2004

INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF SERCO GROUP PLC
For the year ended 31 December 2003

We have audited the accounts of Serco Group plc for the year ended 31 December 2003 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 35. These
accounts 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
accounts 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 accounts 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 accounts give a true and fair view and whether the accounts 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 Directors’ Report is not consistent with the accounts, 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 Directors’ Report 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 accounts.

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 accounts 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 accounts and of whether the accounting policies are appropriate to the
circumstances of the Company and the Group, consistently applied and adequately disclosed.

I N D E P E N D E N T AU D I T O R S ’ R E P O RT T O T H E M E M B E R S O F S E R C O G RO U P P L C

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 accounts 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 accounts and the
part of the Directors’ Remuneration Report described as having been audited.

Opinion
In our opinion:

• the accounts give a true and fair view of the state of affairs of the Company and the Group as at 31 December 2003 and of the

profit of the Group for the year then ended; and

• the accounts 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 LLP
Chartered Accountants and Registered Auditors
London

2 March 2004

C O N S O L I DAT E D P RO F I T A N D L O S S AC C O U N T
For the year ended 31 December 2003

2003
Group
£’000

2003
Joint
Ventures
£’000

2003
Total
£’000

2002
Group
£’000

2002
Joint
Ventures
£’000

2002
Total
£’000

Note

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: reorganisation costs

Operating profit-continuing operations

Exceptional item: GSR sale and leaseback
Share of operating profit in joint ventures

Interest receivable and similar income

Group

Exceptional item: Norfolk and
Norwich refinancing

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

Share of joint venture minority interest
Minority interest

Profit for the financial year

Equity 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

1,324,271

231,255

1,555,526

1,097,278

228,670

1,325,948

–

(231,255)

–

(228,670)

1,324,271

(1,143,418)

180,853

(157,144)

(14,131)

(138,516)

(4,497)

23,709
3,977

–

16,760

12,691

4,069

–

(15,609)

–

–
–

22,700

11,397

–

11,397

(10,080)

–

(10,080)

28,837

24,017

1,324,271

1,097,278

(1,143,418)

(947,313)

180,853

149,965

(157,144)

(120,862)

(14,131)

(8,098)

(138,516)

(112,764)

(4,497)

–

–
–

21,883

16,894

–

16,894

(14,875)

–

29,103
–

–

1,422

–

(5,486)

–

(14,875)

25,039

23,902

23,709
3,977

22,700

28,157

12,691

4,069

11,397

(25,689)

(15,609)

(10,080)

52,854

(19,103)

33,751

(198)
(255)

33,298

(10,050)

23,248

7.75p

11.03p
7.74p

11.02p

1,097,278

(947,313)

149,965

(120,862)

(8,098)

(112,764)

–

29,103
–

21,883

18,316

1,422

–

16,894

(20,361)

(5,486)

(14,875)

48,941

(16,639)

32,302

–
–

32,302

(9,441)

22,861

7.66p

9.58p
7.63p

9.54p

The basis of preparation of this statement is set out in Note 1.

C O N S O L I DAT E D BA L A N C E S H E E T
At 31 December 2003

Note

2003
£’000

Fixed assets
Intangible assets
Tangible assets
Investments in joint ventures
Share of gross assets
Share of gross liabilities

Current assets
Stocks
Debtors: amounts due within one year
Debtors: amounts due after more than one year
Cash at bank and in hand

Creditors: amounts falling due within one year
Bank loans and overdrafts
Trade creditors
Other creditors including taxation and social security
Accruals and deferred income
Proposed dividend

Net current assets

Total assets less 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
ESOP reserve
Profit and loss account

Equity shareholders’ funds

Restated
2002
£’000

147,473
62,479
35,883
317,831
(281,948)

222,950
77,398
24,886
151,460
(126,574)

325,234

245,835

39,543
278,931
419,589
170,888

908,951

–
81,335
90,892
177,866
6,958

357,051

551,900

877,134
539,798
56,526

280,810

8,697
190,791
143
(16,949)
98,128

38,744
220,042
108,932
71,774

439,492

2,386
74,377
93,843
136,766
6,184

313,556

125,936

371,771
87,588
34,533

249,650

8,697
190,791
143
(18,207)
68,226

280,810

249,650

These Accounts and Notes were approved by the Board of Directors on 2 March 2004 and signed on behalf of the Board:

Kevin Beeston Executive Chairman

Andrew Jenner Finance Director

C O M PA N Y BA L A N C E S H E E T
As at 31 December 2003

Fixed assets
Tangible assets
Investments in subsidiaries

Current assets
Stock
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

2003
£’000

2002
£’000

1,256
262,783

264,039

41
146,501
21,281
1,169
39,165

208,157

–
881
11,010
5,801
6,958

24,650

183,507

447,546
161,456
–

286,090

8,697
190,791
143
86,459

286,090

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

These Accounts and Notes were approved by the Board of Directors on 2 March 2004 and signed on behalf of the Board:

Kevin Beeston Executive Chairman

Andrew Jenner Finance Director

C O N S O L I DAT E D CA S H F L OW S TAT E M E N T
For the year ended 31 December 2003

Note

Operating profit before exceptional item
Exceptional item: reorganisation costs

Operating profit
Depreciation and amortisation of goodwill
Movement in ESOP investment
Net increase in working capital
One-off pension fund contribution

Net cash inflow from operating activities before PFI asset expenditure
Movement in PFI debtor*
Expenditure on PFI assets under construction*

Net cash inflow from operating activities after PFI asset expenditure

Dividends received from joint ventures

Returns on investments and servicing of finance
Interest received
Interest paid
Exceptional item: Norfolk and Norwich refinancing

Net cash inflow/(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 sale and leaseback
Net cashflows with joint ventures

Net cash outflow from capital expenditure and financial investment

Acquisitions and disposals
Acquisitions†
Net cash acquired with acquisitions
Net cash redeemed upon disposal
Subscription for shares in joint ventures
Proceeds on disposal of subsidiary undertakings
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) in other loans
Debt due beyond one year: increase in:

Other loans
Non-recourse debt financing – DES†
Non-recourse debt financing PFI assets*
Capital element of finance lease repayments

Net cash inflow from financing

Increase in cash in the year

Balance at 1 January

Balance at 31 December

* PFI assets and debtor financed by non-recourse loans

2003
£’000

28,206
(4,497)

23,709
32,532
1,258
(11,111)
–

46,388
3,680
(33,001)

17,067

12,630

5,652
(6,054)
4,069

3,667

Restated
2002
£’000

29,103
–

29,103
23,632
776
(13,900)
(15,500)

24,111
–
(14,950)

9,161

11,095

1,223
(7,362)
–

(6,139)

(7,354)

(5,738)

(21,835)
8,878
5,761
2,969

(4,227)

(107,463)
12,843
(3,141)
(3,354)
4,471
–

(96,644)

(9,529)

(23,596)
8,125
–
1,235

(14,236)

(11,353)
397
–
(370)
–
1,030

(10,296)

(8,283)

(84,390)

(24,436)

–
(1,709)
193,787
117,502
49,774
26,511
(6,188)

185,890

101,500

69,388

170,888

117,929
(300)
15,624
24
–
15,600
(3,594)

129,659

105,223

(35,835)

69,388

CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
For the year ended 31 December 2003

Profit for the financial year

Currency translation differences on foreign currency net investments

Total recognised gains and losses for the year

Prior year adjustment

Total gains and losses recognised since last annual report and accounts

2003
£’000

33,298

6,654

2002
£’000

32,302

(1,911)

39,952

30,391

–

(806)

39,952

29,585

N OT E S TO T H E AC C O U N T S
For the year ended 31 December 2003

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 investment in own shares 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, 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. The results of subsidiaries acquired or
sold are consolidated for the periods from or to the date on which control passed. Acquisitions are accounted for under the
acquisition method.

Restatement
The 2002 Accounts have been restated to reflect the early adoption of the Urgent Issues Task Force Abstract 38 (UITF 38) –
Accounting for ESOP trusts. Investment in own shares which was previously disclosed in Fixed Assets is now classified as an ESOP
reserve and is shown as a reduction in the shareholders’ funds.

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, during the period of initial asset
construction costs incurred 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 a PFI debtor.

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.

The Group has eight fully owned Special Purpose Companies (SPC) which are used for the purpose of running the PFI business.
All other SPCs are 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.

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

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 33.

Turnover
Turnover represents net sales of goods and services to third parties. To the extent that the Group acts as an agent under the
definitions of Financial Reporting Standard (FRS 5) – Reporting the Substance of Transactions, Application Note G, amounts
invoiced in respect of items procured on behalf of customers are not recognised within turnover.

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 the economic
useful life of the asset or a period of 20 years, whichever is shorter.

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
Investments held as fixed assets are stated at cost less provision for any impairment in value.

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 include
certain PFIs is included under the heading ‘investments in joint ventures’. The share of net assets is split between gross assets and
gross liabilities.

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.

Finance costs
Finance costs of debt are recognised in the profit and loss account over the term of such instruments at a constant rate on the
carrying amount.

Finance costs which are directly attributable to the construction of tangible fixed assets are capitalised as part of the cost of those
assets. The commencement of capitalisation begins when both finance costs and expenditures for the asset are being incurred and
activities that are necessary to get the asset ready for use are in progress. Capitalisation ceases when substantially all the
activities that are necessary to get the asset ready for use are complete.

S E R C O G RO U P P L C

1 Accounting policies (continued)

Debt
Debt is initially stated at the amount of the net proceeds after deduction of issue costs. The carrying amount is increased by the
finance cost in respect of the accounting period and reduced by payments made in the period.

Debt of certain Special Purpose Companies is described as non-recourse debt. Debt is described as non-recourse debt only if the
security granted to the relevant lenders is limited to the assets and cash flows of the borrowing company.

Derivative financial instruments
The Group uses derivative financial instruments to reduce exposure to foreign exchange risk and interest rate movements. The Group
does not hold or issue derivative financial instruments for speculative purposes.

For a forward foreign exchange contract to be treated as a hedge the instrument must be related to actual foreign currency assets
or liabilities or to a probable commitment. It must involve the same currency or similar currencies as the hedged item and must
also reduce the risk of foreign currency exchange movements on the Group’s operations. Gains and losses arising on these contracts
are deferred and recognised in the profit and loss account, or as adjustments to the carrying amount of fixed assets, only when the
hedged transaction has itself been reflected in the Group’s accounts.

For an interest rate swap to be treated as a hedge the instrument must be related to actual assets or liabilities or a probable
commitment and must change the nature of the interest obligation by converting a fixed rate to a variable rate or vice versa.
Interest differentials under these swaps are recognised by adjusting net interest payable over the periods of the contracts.

Tangible fixed assets
Tangible fixed assets are stated at cost or valuation, net of depreciation and any provision for impairment.

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.

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

1 Accounting policies (continued)

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 stage of completion of the work carried out to date and provision for anticipated
future losses on contracts. 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.

Amounts recoverable on long term contracts, which are included in debtors, are stated at the net sales value of the work done less
amounts received as progress payments on account.

Pre-contract costs
All bid costs are expensed through the profit and loss account up to the point where contract award (or full recovery of costs)
is virtually certain in accordance with Urgent Issues Task Force Abstract 34 ‘Pre-contract costs’. 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.

ESOP reserve
The ESOP reserve represents shares in Serco Group plc held by the Serco Group plc 1998 Employee Share Ownership Trust
(the Trust).

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. In accordance with UITF 38, the difference between the market value of the shares
at the date of award and any consideration to be paid for the shares in respect of these schemes is charged to the profit and loss
account over the performance period during which the benefits are earned by employees.

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.

S E R C O G RO U P P L C

2 Segmental report

Classes of business

2003

Turnover
Civil government
Defence
Transport
Science
Private sector

Total

Profit before taxation and other costs/income
Civil government
Defence
Transport
Science
Private sector

Total

Other (costs)/income
Common costs
Exceptional items – reorganisation costs and GSR sale and leaseback
Amortisation of intangible assets
Net interest – group
Exceptional item – Norfolk and Norwich refinancing
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

444,875
252,469
385,793
111,004
130,130

Joint
Ventures
£’000

42,897
151,496
36,862
–
–

Total
£’000

487,772
403,965
422,655
111,004
130,130

1,324,271

231,255

1,555,526

17,025
17,878
18,976
11,619
8,697

74,195

4,195
15,968
2,537
–
–

22,700

21,220
33,846
21,513
11,619
8,697

96,895

(31,858)
(520)
(14,131)
(2,918)
4,069
1,317

52,854

43,749
53,127
59,173
64,508
32,436

252,993

27,817

280,810

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

2 Segmental report (continued)

Classes of business

2002

Turnover
Civil government
Defence
Transport
Science
Private sector

Total

Profit before taxation and other costs/income
Civil government
Defence
Transport
Science
Private sector

Total

Other (costs)/income
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

Restated

43,269
53,400
45,716
69,771
31,679

243,835

5,815

249,650

100

S E R C O G RO U P P L C

2 Segmental report (continued)

Geographical segments

2003

Turnover
United Kingdom
Europe and Middle East
Asia Pacific
North America

Total

Profit before taxation and other costs/income
United Kingdom
Europe and Middle East
Asia Pacific
North America

Total

Profit on ordinary activities before taxation

Net assets
United Kingdom
Europe and Middle East
Asia Pacific
North America

Total

Unallocated assets

Total

Group
£’000

950,098
185,936
109,627
78,610

Joint
Ventures
£’000

174,723
8,355
43,251
4,926

Total
£’000

1,124,821
194,291
152,878
83,536

1,324,271

231,255

1,555,526

43,017
14,414
6,982
9,782

74,195

19,274
227
2,831
368

22,700

62,291
14,641
9,813
10,150

96,895

(31,858)
(520)
(14,131)
(2,918)
4,069
1,317

52,854

142,166
41,670
42,553
26,604

252,993

27,817

280,810

Turnover is shown by geographical origin. Turnover analysed by geographical destination is not materially different.

101

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

2 Segmental report (continued)

Geographical segments

2002

Turnover
United Kingdom
Europe and Middle East
Asia Pacific
North America

Total

Profit before taxation and other costs/income
United Kingdom
Europe and Middle East
Asia Pacific
North America

Total

Other (costs)/income
Common costs
Amortisation of intangible assets
Net interest – group
Net interest – joint ventures

Profit on ordinary activities before taxation

Net assets
United Kingdom
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

Restated

142,821
43,951
40,057
17,006

243,835

5,815

249,650

Turnover is shown by geographical origin. Turnover analysed by geographical destination is not materially different.

102

S E R C O G RO U P P L C

3 Information regarding directors and employees

a) Directors’ remuneration:

Fees as directors
Other emoluments

Total remuneration excluding pensions

b) Employee costs including directors:

Wages and salaries
Social security costs
Other pension costs (Note 33)
Long Term Incentive Scheme costs (Note 24)

c) The average number of persons employed by Serco Group plc and its subsidiaries

in the provision of services was:
Civil government
Defence
Transport
Science
Private sector
Non-specific

2003
£’000

131
1,754

1,885

2002
£’000

97
1,730

1,827

2003
£’000

2002
£’000

551,117
50,320
36,755
1,258

639,450

444,693
36,713
29,096
776

511,278

2003

2002

8,135
7,920
5,577
1,630
2,941
249

7,138
6,251
4,442
1,665
2,999
202

26,452

22,697

103

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

4 Non-operating exceptional item

The effect of the exceptional item reported after operating profit on the amount of taxation charged to the profit and loss account was:

Profit on GSR sale and leaseback
Effect of tax charged to the profit and loss account

2003
£’000

3,977
1,193

2002
£’000

–
–

The sale and leaseback of the remaining rolling stock belonging to the Group’s Great Southern Railway (GSR) business in Australia
generated cash of £5,761,000 and profit of £3,977,000.

5 Interest receivable and similar income

Loans to joint ventures
Other

Exceptional Item: Norfolk and Norwich refinancing

Total group

Share of joint venture interest

2003
£’000

831
11,860

12,691

4,069

16,760

11,397

28,157

2002
£’000

604
818

1,422

–

1,422

16,894

18,316

The refinancing of the Norfolk and Norwich University Hospital, in which the Group is a 5% investor, was completed in December
2003. This generated cash and investment income of £4,069,000.

6 Interest payable and similar charges

Share of joint venture interest
Other

2003
£’000

10,080
15,609

25,689

2002
£’000

14,875
5,486

20,361

104

S E R C O G RO U P P L C

7 Profit on ordinary activities before taxation

Profit on ordinary activities before taxation is stated 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 for audit services:

Deloitte & Touche LLP
Other auditors

Other fees paid to Deloitte & Touche LLP:

Bid support
Tax
Other

Other fees paid to other accountancy firms:

Internal audit
Other

8 Taxation on profit on ordinary activities

The taxation charge is made up as follows:
United Kingdom corporation tax
Overseas taxation
Adjustment in respect of prior years:
United Kingdom corporation tax
Overseas taxation

Current tax
Deferred taxation

Current year movement
Adjustments in respect of prior years

Share of joint ventures’ taxation charge

2003
£’000

2002
£’000

13,884
19,067

13,742
4,659
1,067
14,131

772
116

186
889
1,223

165
98

2003
£’000

–
5,074

898
(122)

5,850

5,292
182
7,779

12,599
20,686

12,307
3,227
721
8,098

514
175

1,237
560
458

152
555

2002
£’000

1,654
1,950

(750)
(37)

2,817

4,120
2,375
7,327

19,103

16,639

105

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

8 Taxation on profit on ordinary activities (continued)

The current tax is different to the United Kingdom corporation tax rate of 30%. The reasons for this are set out below:

Profit on ordinary activities before taxation
Less: Share of profit before tax of joint ventures

Profit on ordinary activities before taxation multiplied by the UK corporation tax rate of 30%
Effect on the reported tax charge of:
Amortisation of goodwill and investment in own shares not deductible for tax
Other expenses not deductible for tax
Tax allowances in excess of depreciation
Other short term timing differences
Unrelieved tax losses and different tax rates on overseas earnings
Tax exempt income and the effect of the use of unrecognised tax losses
Tax incentives
Adjustments in respect of prior years

Current tax
Deferred tax
Share of joint ventures’ tax charge

Taxation on profit on ordinary activities

2003
£’000

52,854
(24,017)

28,837

8,651

2,220
2,935
(4,729)
(2,245)
352
(159)
(1,951)
776

5,850
5,474
7,779

2002
£’000

48,941
(23,902)

25,039

7,512

1,437
1,869
(1,828)
(1,953)
255
(634)
(3,054)
(787)

2,817
6,495
7,327

19,103

16,639

Factors affecting future tax charge
The tax charge of the Group in future periods is expected to be affected most significantly by the non-deductible amortisation
of goodwill, the higher effective rate of tax borne by certain PFI projects, the incurrence of non-deductible expenditure and the
utilisation of unrecognised deferred tax assets.

106

S E R C O G RO U P P L C

9 Dividends

Interim dividend of 0.72p per share on 429,466,207 Ordinary Shares (2002 – 0.64p
on 429,260,960 Ordinary Shares) of 2p each fully paid – paid 10 October 2003
Proposed final dividend of 1.62p per share on 429,529,098 Ordinary Shares
(2002 – 1.44p on 429,448,207 Ordinary Shares) of 2p each fully paid –
proposed payment on 12 May 2004

2001 final dividend of 1.29p on 39,547,465 shares issued between 31 December 2001 and
13 March 2002 (ex dividend date)

2003
£’000

2002
£’000

3,092

2,747

6,958

10,050

–

10,050

6,184

8,931

510

9,441

A dividend waiver is effective for those shares held on behalf of the Company by its Employee Share Ownership Trust.

10 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 £33,298,000 for the year ended 31 December
2003 (2002 – £32,302,000) and the weighted average number of 429,878,711 (2002 – 421,813,107) 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 £47,429,000 (adjusted for the effect of
goodwill amortisation of £14,131,000) for the year ended 31 December 2003 (2002 – £40,400,000 adjusted for the effect of goodwill
amortisation of £8,098,000) and the weighted average number of 429,878,711 (2002 – 421,813,107) 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 £33,298,000 for the year ended 31 December
2003 (2002 – £32,302,000) and the weighted average number of 430,291,041 (2002 – 423,288,423) 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 £47,429,000 (adjusted for the effect
of goodwill amortisation of £14,131,000) for the year ended 31 December 2003 (2002 – £40,400,000 adjusted for the effect of
goodwill amortisation of £8,098,000) and the weighted average number of 430,291,041 (2002 – 423,288,423) Ordinary Shares
of 2p each assuming that the options are all exercised.

107

11 Intangible assets

Cost:
At 1 January 2003
Additions during the year
Disposals

At 31 December 2003

Accumulated amortisation:
At 1 January 2003
Charge for the year
Disposals

At 31 December 2003

Net book value:

At 31 December 2003

At 31 December 2002

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

Goodwill
£’000

165,515
89,608
(1,902)

253,221

19,496
13,751
(1,902)

31,345

Other
£’000

1,775
–
–

1,775

321
380
–

701

Group
Total
£’000

167,290
89,608
(1,902)

254,996

19,817
14,131
(1,902)

32,046

221,876

146,019

1,074

1,454

222,950

147,473

Other intangible assets comprise a £1,775,000 premium for the acquisition of two, five year licences and are amortised over the
licence life.

Additions are further explained in Note 13.

108

12 Tangible assets

Group

Cost:
At 1 January 2003
Subsidiaries acquired
Additions
Disposals
Foreign exchange differences

At 31 December 2003

Accumulated depreciation:
At 1 January 2003
Provided during the year
Disposals
Foreign exchange differences

At 31 December 2003

Net book value:

At 31 December 2003

At 31 December 2002

S E R C O G RO U P P L C

Freehold
land and
buildings
£’000

Short
leasehold
building
improvements
£’000

Machinery,
motor
vehicles,
furniture and
equipment
£’000

8,032
–
1,844
(93)
361

10,144

2,558
210
(59)
176

2,885

13,736
1,471
3,427
(355)
251

18,530

5,069
1,653
(222)
112

6,612

Total
£’000

142,188
3,841
36,118
(18,640)
5,372

120,420
2,370
30,847
(18,192)
4,760

140,205

168,879

72,082
16,538
(9,490)
2,854

81,984

79,709
18,401
(9,771)
3,142

91,481

7,259

5,474

11,918

8,667

58,221

48,338

77,398

62,479

The cost of assets held by the Group under finance leases at 31 December 2003 was £38,008,000 (2002 – £24,977,000). The accumulated
depreciation provided for those assets at 31 December 2003 was £13,472,000 (2002 – £9,168,000).

109

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

12 Tangible assets (continued)

Company

Cost:
At 1 January 2003
Transfers to subsidiary undertakings
Additions

At 31 December 2003

Accumulated depreciation:
At 1 January 2003
Transfers to subsidiary undertakings
Provided during the year

At 31 December 2003

Net book value:

At 31 December 2003

At 31 December 2002

Short
leasehold
building
improvements
£’000

Machinery,
motor
vehicles,
furniture and
equipment
£’000

1,265
(1,090)
96

271

548
(407)
34

175

717

4,083
(1,639)
900

3,344

2,491
(556)
249

2,184

1,160

1,592

Total
£’000

5,348
(2,729)
996

3,615

3,039
(963)
283

2,359

1,256

2,309

The cost of assets held by the Company under finance leases at 31 December 2003 was £750,000 (2002 – £872,000). The accumulated
depreciation provided for those assets at 31 December 2003 was £63,000 (2002 – £71,307).

13 Investments held as fixed assets

a) Shares in subsidiary companies at cost:

At 1 January 2003
Increase in investments in Group companies

At 31 December 2003

b) Group investments in joint ventures:

At 1 January 2003
Acquisitions
Disposals
Foreign exchange translation difference
Share of profits after tax
Dividends received

At 31 December 2003

Disposals are further explained in g) i) and ii).

110

Company
£’000

141,418
121,365

262,783

Group
£’000

35,883
4,077
(19,460)
976
16,040
(12,630)

24,886

S E R C O G RO U P P L C

13 Investments held as fixed assets (continued)

c) Joint ventures:

The Group’s share of its joint venture assets is summarised as follows:

2003
AWE*
£’000

2003
Other
£’000

2003
Total
£’000

2002
AWE*
£’000

2002
PCG
£’000

Turnover

101,493

129,762

231,255

91,386

52,504

Profit before tax
Tax
Minority interest

Profit after tax

Fixed assets
Current assets

Liabilities due within
one year
Liabilities due after
more than one year

8,984
(1,584)
–

7,400

–
28,875

28,875

15,033
(6,195)
(198)

8,640

19,236
103,349

122,585

24,017
(7,779)
(198)

16,040

19,236
132,224

151,460

7,801
(1,832)
–

5,969

–
21,861

21,861

4,993
(2,070)
–

2,923

2,288
124,266

126,554

2002
Other
£’000

84,780

11,108
(3,425)
–

7,683

31,278
138,138

169,416

2002
Total
£’000

228,670

23,902
(7,327)
–

16,575

33,566
284,265

317,831

17,207

32,740

49,947

17,660

17,518

27,313

62,491

7,356

24,563

69,271

76,627

102,011

126,574

1,066

18,726

94,446

111,964

123,945

151,258

219,457

281,948

Share of net assets

4,312

20,574

24,886

3,135

14,590

18,158

35,883

* Atomic Weapons Establishment Management Limited

Adjustments have been made to joint ventures results to ensure they are consistent with Group accounting policies.

d) A list of the principal undertakings of Serco Group plc is shown in Note 34. All the subsidiaries of the Group have been

consolidated.

e) At 31 December 2003, Group companies had branches in UAE, Bahrain, Chile, Korea, Saudi Arabia, Switzerland and South

Africa.

f) All the subsidiaries of Serco Group plc and its joint venture undertakings are engaged in the provision of services with the

exception of Serco Investments Limited and certain other holding companies, which manage equity investments.

111

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

13 Investments held as fixed assets (continued)

g) 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 the economic useful life of the asset or a period of 20 years,
whichever is shorter.

i) Premier Custodial Group Limited

In July 2003 the Group acquired the remaining 50% of the issued share capital of Premier Custodial Group Limited
(Premier) for a total cash consideration of £48,600,000. Acquisition costs of £3,481,000 were incurred.

The provisional fair value of the net assets acquired was £16,671,000 representing 50% of the book values of the assets and
liabilities. The following table sets out the book values of the identifiable assets and liabilities acquired and their
provisional fair value to the Group:

Tangible fixed assets
Current assets
PFI debtor
Stocks
Debtors
Cash

Total assets

Liabilities
Trade creditors
Senior debt financing
Subordinated debt financing
Accruals and deferred income
Provisions

Total liabilities

Net assets

Net assets acquired (50 per cent)
Goodwill

Cash consideration

112

Provisional fair
value to group
£’000

3,266

194,878
1,994
37,751
15,878

253,767

17,583
169,965
16,817
9,149
6,911

220,425

33,342

16,671
35,410

52,081

S E R C O G RO U P P L C

13 Investments held as fixed assets (continued)

i) Premier Custodial Group Limited (continued)

The following table sets out the summary profit and loss account for Premier for the period 1 January 2003 to 3 July 2003:

Turnover

Operating profit

Profit before taxation
Taxation on profit on ordinary activities

Profit for the period

Six months to
3 July 2003
£’000

60,660

520

3,924
(2,062)

1,862

The corresponding profit after tax for the full year to 31 December 2002 was £5,846,000.

ii) Buy-out of other investment partners

During the year the Group bought out its partners in the following businesses, two of which are PFI projects. In March 2003
the Group acquired the remaining 50% of Laser (Teddington II) Limited, a joint venture with Laing Investments Limited formed
to build the new science building for the National Physical Laboratory in Teddington. Also in March 2003 the Group acquired
the remaining 74% of the Altram consortium company, which had built Phase 2 of the Metrolink system in Manchester and
operates and maintains Phases 1 and 2. In June 2003 the Group acquired the remaining 33% of Metro Service AS.

The total cash consideration amounted to £2,389,000. The fair value of the net liabilities acquired was £51,000. The total
adjustment, required to the book values of the assets and liabilities of the companies acquired in order to present the net
assets of those companies at fair values in accordance with Group accounting policies, was £2,300,000.

The aggregate goodwill arising on consolidation is £140,000.

iii) Other acquisitions

In February 2003, the Group acquired a renewable 10-year franchise (renewable to a maximum 20-year term) from the
province of Ontario, Canada, relating to Ontario Driving Examination Services (DES).

Consideration of £47,707,000 was incurred along with £5,248,000 of related acquisition costs. The fair value of the net
assets acquired are considered to be the same as their book value and amounted to £1,952,000.

Goodwill arising is £51,003,000.

Prior to acquisition the financial results of the DES business were not separately reported by the Ministry of
Transportation, Ontario, and as such, it has not been possible to provide a summarised profit and loss account for the
pre-acquisition period in accordance with FRS 6.

113

The acquisition of Teknical in December 2003 gave rise to goodwill of £746,000.

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

13 Investments held as fixed assets (continued)

h) Disposals:

In October 2003 the Group sold its 100% interest in the ordinary share capital of Serco Sverige AB. The total sales proceeds
of £5,601,000 comprised cash of £4,471,000 and a loan note of SKr 15,200,000 (£1,130,000) payable in two equal annual
instalments commencing 31 December 2004. The loan carries interest at 150bp over 3-month LIBOR which is payable semi-
annually in arrears commencing 31 December 2003. The net assets disposed of were £4,753,000 and disposal costs amounted
to £581,000, resulting in a profit on disposal of £267,000. The profit of Serco Sverige AB up to the date of disposal was
£749,000, and for its last financial year was £897,000.

14 Stocks

Service spares
Long term contract balances

15 Debtors

a) Amounts due within one year:

Amounts recoverable on contracts
Other debtors
Corporation tax recoverable
Prepayments and accrued income
Amounts owed by joint ventures
PFI debtor*

Group
2003
£’000

15,954
23,589

39,543

Group
2003
£’000

198,687
32,572
1,670
35,924
2,600
7,478

278,931

Group
2002
£’000

10,065
28,679

38,744

Company
2003
£’000

Company
2002
£’000

–
41

–
–

–

Group
2002
£’000

Company
2003
£’000

Company
2002
£’000

168,820
18,425
–
30,131
2,666
–

220,042

189
8,129
12,125
613
225
–

21,281

–
6,623
14,466
580
–
–

21,669

114

S E R C O G RO U P P L C

15 Debtors (continued)

b) Amounts due after more than one year:
Amounts recoverable on contracts
Other debtors
Pensions prepayment (Note 33)
Amounts owed by joint ventures
PFI debtor*
PFI assets in the course of construction*

Total debtors

Group
2003
£’000

22,043
21,780
30,580
8,869
260,780
75,537

419,589

698,520

Group
2002
£’000

Company
2003
£’000

Company
2002
£’000

18,412
16,297
28,350
12,033
–
33,840

108,932

328,974

–
1,169
–
–
–
–

1,169

–
1,297
–
–
–
–

1,297

22,450

22,966

Included in amounts recoverable on contracts is £12,448,000 (2002 – £7,978,000) in respect of items procured on behalf
of customers. This is offset by an amount of £9,933,000 (2002 – £8,792,000) in trade creditors and an amount of £7,659,000
(2002 – £945,000) in accruals.

*PFI contract balances in debtors

The impact of the PFI contract balances in debtors on the Group accounts in relation to the Traffic Control Centre, Laser and
Premier contracts is summarised as follows:

Balances in relation to PFI contracts:
PFI assets excluding capitalised interest
Interest included in PFI debtor

Total PFI debtor and assets in the course of construction

Balance at
1 January
2003
£’000

32,088
1,752

33,840

Acquired
during
the year
£’000

275,498
5,136

280,634

Movement
during
the year
£’000

Balance at 31
December
2003
£’000

27,777
1,544

29,321

335,363
8,432

343,795

The PFI assets analysed above are funded by non-recourse loans of £307,205,000 (2002 – £29,700,000).

115

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

16 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

17 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

Group
2003
£’000

5,898
–
9,022
55,214
16,285
4,473

90,892

Group
2003
£’000

–
23,461
526,708

550,169
10,371

539,798

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

Company
2003
£’000

Company
2002
£’000

131
–
–
679
10,200
–

11,010

Company
2003
£’000

–
671
160,916

161,587
131

161,456

267
–
304
117
–
–

688

Company
2002
£’000

–
792
43,259

44,051
267

43,784

116

S E R C O G RO U P P L C

17 Creditors: amounts falling due after more than one year (continued)

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
Non-recourse debt
Other

Between two and five years
Non-recourse debt
Other

After five years

Non-recourse debt
Other

Group
2003
£’000

Group
2002
£’000

Company
2003
£’000

Company
2002
£’000

–

2,386

5,898
7,214
9,289
1,060

4,473
80,111
79,348
763
110,402
63,841
46,561
331,722
213,790
117,932

550,169

4,836
4,667
4,291
1,497

372
1,687
–
1,687
70,735
25,200
45,535
4,711
4,500
211

95,182

–

131
146
394
–

–
–
–
–
43,171
–
43,171
117,745
–
117,745

161,587

–

267
525
–
–

–
–
–
–
43,259
–
43,259
–
–
–

44,051

Included above in other loans payable after five years is a private placement for £117m sourced from a number of institutions
and completed by the Group in August 2003. This private placement is designed to lengthen the maturity profile of the Group’s
debt, with a final maturity of 12 years and an average term of 10 years. The debt was issued in Sterling and US Dollars at a
fixed average coupon of 5.7%. The debt issued in US Dollars has been swapped into Sterling.

The non-recourse debt has a term to maturity of between 10 and 23 years. The interest rates payable on this debt range from
5.5% to 8.7%.

c) Finance lease obligations are secured by retention of title to the relevant assets.

117

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

18 Financial assets and liabilities

A description of the Group’s treasury and risk management policies is set out in the Finance review on page 26.

As permitted by Financial Reporting Standard 13 (FRS 13) – ‘Derivatives and other Financial Instruments’ 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.

i) Assets

31 December 2003

Sterling
£’000

Euro
£’000

Australian
Dollar
£’000

Cash and short term deposits

121,257

20,112

6,556

Long term interest-bearing loans
to joint ventures
Other long term debtors

Total long term 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

3,436
398,963

402,399

Sterling
£’000

43,024

8,009
87,918

95,927

–
479

479

Euro
£’000

5,433
1,265

6,698

Australian
Dollar
£’000

13,468

2,009

–
7,285

7,285

4,024
1,696

5,720

US
Dollar
£’000

3,261

–
–

–

US
Dollar
£’000

2,868

–
–

–

Other
currencies
£’000

Total
£’000

19,702

170,888

–
10,013

10,013

8,869
410,720

419,589

Other
currencies
£’000

Total
£’000

10,405

71,774

–
–

–

12,033
96,899

108,932

Included within the assets recognised above is cash of £21,851,000 (2002 – £270,000) and debtors of £336,317,000
(2002 – £33,840,000) held by companies that are funded by non-recourse debt. The cash is not currently freely distributable
as it represents a debt service reserve for the lenders of the non-recourse debt.

Fixed rate loans included in the above comprise Sterling loans of £2,217,000 carrying a weighted average interest rate of 9.3%,
and an Australian Dollar loan of £1,033,000 carrying an interest rate of 15%.

67% of short-term trade debtors are Sterling denominated (2002 – 79%).

118

S E R C O G RO U P P L C

18 Financial assets and liabilities (continued)

ii) Liabilities

31 December 2003

Sterling
Australian Dollar
US Dollar
Canadian Dollar
Other

Total

31 December 2002

Sterling
Australian Dollar
US Dollar
Euro

Total

Total
liabilities
£’000

493,055
955
223
53,215
2,721

550,169

Floating rate
liabilities
£’000

45,006
955
223
3,464
2,721

52,369

Fixed rate
liabilities
£’000

448,049
–
–
49,751
–

497,800

Total
liabilities
£’000

Floating rate
liabilities
£’000

Fixed rate
liabilities
£’000

87,757
3,075
3,714
636

95,182

24,354
3,075
3,714
636

31,779

63,403
–
–
–

63,403

Fixed rate liabilities

Weighted Weighted average
time for which
rate is fixed
Years

average
interest rate
%

6.83
–
–
5.27
–

9
–
–
5
–

Fixed rate liabilities

Weighted Weighted average
time for which
rate is fixed
Years

average
interest rate
%

6.45
–
–
–

4
–
–
–

Included within the liabilities recognised above is non-recourse debt of £356,979,000 (2002 – £29,700,000).

75% of short-term trade creditors are Sterling denominated (2002 – 80%).

The maturity of the Group’s financial liabilities at 31 December 2003 and 31 December 2002 were:

31 December 2003

Sterling
Australian Dollar
US Dollar
Canadian Dollar
Other

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

5,933
495
83
8,268
909

15,688

36,563
230
140
4,844
348

42,125

117,964
230
–
15,687
1,276

135,157

332,595
–
–
24,416
188

357,199

Total
£’000

493,055
955
223
53,215
2,721

550,169

119

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

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

73,848
829
349
–

75,026

5,920
223
65
–

6,208

Total
£’000

87,757
3,075
3,714
636

95,182

18 Financial assets and liabilities (continued)

ii) Liabilities (continued)

31 December 2002

Sterling
Australian Dollar
US Dollar
Euro

Total

iii) Fair values

The book value and fair value of the Group’s financial assets and liabilities at 31 December 2003 and 31 December 2002 were:

Long term debt
Cross currency swaps
Short term debt

Interest rate swaps
Forward exchange contracts

Cash and short term deposits
Long term loans to joint ventures
Other long term debtors

Total

2003
Book value
£’000

(525,724)
(8,757)
(15,688)

2003
Fair value
£’000

(529,884)
(3,233)
(15,688)

2002
Book value
£’000

(88,047)
459
(7,594)

–
–

(27,230)
(5,726)

170,888
8,869
410,720

40,308

170,888
8,869
410,720

8,716

–
–

71,774
12,033
96,899

85,524

2002
Fair value
£’000

(91,879)
4,138
(7,594)

–
(2,422)

71,774
12,033
96,899

82,949

Foreign currency assets and liabilities 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 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 in the accounts until the hedged position
matures. There was an unrecognised loss of £36,189,000 (2002 – gain of £1,716,000) on derivatives held to manage currency and
interest rate risk as at 31 December 2003. The unrecognised loss of £36,189,000 includes the fair value of interest rate swaps in
Premier Custodial Group and Laser (Teddington II) Limited. The equivalent values for these swaps are not included in the prior
year comparative number of £1,716,000 because Premier Custodial Group and Laser (Teddington II) Limited were joint ventures
on 31 December 2002.

120

S E R C O G RO U P P L C

18 Financial assets and liabilities (continued)

iii) Fair values (continued)

The expected movements in the fair value of hedges, are as follows:

Losses on hedges unrecognised at 31 December 2003

Expected to be recognised in the following year
Expected to be recognised thereafter

19 Provisions for liabilities and charges

Interest
rate
hedges
£’000

(27,230)

(6,678)
(20,552)

Cross
currency
swaps
£’000

(3,233)

(453)
(2,780)

Forward
exchange
contracts
£’000

(5,726)

(1,281)
(4,445)

Total
£’000

(36,189)

(8,412)
(27,777)

Group

Pensions provision
Deferred taxation

Company

Deferred tax

Balance
1 January
2003
£’000

25,808
8,725

34,533

Balance
1 January
2003
£’000

335

Subsidiaries
acquired
£’000

–
11,958

11,958

Charged to
the profit and
loss account
£’000

Foreign
exchange
differences
£’000

Balance
31 December
2003
£’000

1,663
7,195

8,858

2,008
8

2,016

28,640
27,886

56,526

Utilised
£’000

(839)
–

(839)

Subsidiaries
acquired
£’000

Charged to
the profit and
loss account
£’000

Foreign
exchange
differences
£’000

Balance
31 December
2003
£’000

Utilised
£’000

–

(531)

–

(196)

The deferred tax asset in the Company balance sheet at 31 December 2003 has been included within ‘other debtors’.

121

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

20 Deferred taxation

The amounts of deferred taxation provided in the accounts are:
Deferred tax liabilities:
Tax allowances in excess of depreciation
Overseas timing differences
Other timing differences

Deferred tax assets (included within ‘other debtors’):
Overseas timing differences

Movement in deferred taxation
Balance 1 January 2003
Acquisitions in the year
Tax charge for the year
Tax credit for the year
Foreign exchange

Balance 31 December 2003

Group
2003
£’000

Group
2002
£’000

Company
2003
£’000

Company
2002
£’000

2,650
1,967
4,108

8,725

–

8,725

(203)
–
7

(196)

–

(196)

(77)
–
412

335

–

335

16,166
28
11,692

27,886

(1,721)

26,165

8,725
11,958
7,195
(1,721)
8

26,165

Potential amounts of deferred taxation for which no credit has been taken:
Overseas timing differences

(6,100)

(2,767)

–

122

S E R C O G RO U P P L C

21 Reconciliation of movements in shareholders’ funds

Profit on ordinary activities after taxation
Share of joint venture minority interest
Minority interest
Dividends

Currency translation differences on foreign currency net investments
New capital subscribed
Exercise of share scheme options
Change in ESOP reserve

Net increase in shareholders’ funds

Opening shareholders’ funds as previously stated
Restatement

Opening shareholders’ funds as restated

Closing shareholders’ funds as restated

22 Called up share capital

a) Authorised 550,000,000 (2002 – 550,000,000) Ordinary Shares of 2p each

2003
£’000

33,751
(198)
(255)
(10,050)

23,248
6,654
–
–
1,258

31,160

249,650
–

249,650

280,810

Restated
2002
£’000

32,302
–
–
(9,441)

22,861
(1,911)
117,929
(93)
–

138,786

129,071
(18,207)

110,864

249,650

2003
£’000

2002
£’000

11,000

2003
£’000

2002
£’000

b) Called up, allotted and fully paid:

434,880,837 (2002 – 434,862,837) Ordinary Shares of 2p each

8,697

c) Ordinary Shares of 2p each allotted in the year:

During the year 80,891 Ordinary Shares of 2p each were allotted to the holders of options or their personal representatives.

Of these, 18,000 were allotted using newly issued shares, 18,000 were allotted at £nil value.

Of the remaining 59,438 were allotted at £nil value and 3,453 at a price of £1.645 using shares purchased in the market and
held in trust.

123

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

22 Called up share capital (continued)

d) Options in respect of Ordinary Shares of 2p each:

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 2003 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 2003 there remained 36,000 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 2003 there remained 1,416,413 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 2003 there remained 2,029,242 options which are
exercisable at a price of £2.45* each in accordance with the rules of the Scheme.

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 2003 there remained 1,710,792 options which are
exercisable at a price of £4.2542* each in accordance with the rules of the Scheme.

vi) 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 2003
there remained 127,038 options which are exercisable at a nil value in accordance with the rules of the Scheme.

vii) 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 2003 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.

viii) 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
2003 there remained 170,481 options which are exercisable at nil value in accordance with the rules of the Scheme.

ix) 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 1998 Executive Option Plan’. As at 31 December 2003 there remained 2,626,535 options which are
exercisable at a price of £4.07 each in accordance with the rules of the Scheme.

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 1998 Executive Option Plan’. As at 31 December 2003 there remained 600,838 options which are
exercisable at a price of £4.35 each in accordance with the rules of the Scheme.

124

S E R C O G RO U P P L C

22 Called up share capital (continued)

d) Options in respect of Ordinary Shares of 2p each: (continued)

xi) 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
2003 there remained 179,650 options which are exercisable at nil value in accordance with the rules of the Scheme.

xii) 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 1998 Executive Option Plan’. As at 31 December 2003 there remained 5,753,308 options which are
exercisable at a price of £2.64 each in accordance with the rules of the Scheme.

xiii) 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 2003
no options had been exercised or lapsed.

xiv) 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 1998 Executive Option Plan’. As at 31 December 2003 there remained 5,161,098 options which
are exercisable at a price of £1.645 each in accordance with the rules of the Scheme.

xv) On 6 May 2003, 787,358 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 2003 no
options had been exercised or lapsed. These options have been granted in respect of a three-year performance period
starting 1 January 2003 and are exercisable at a nil value in accordance with the rules of the Scheme.

xvi) On 6 May 2003, 11,032,976 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules
of the ‘Serco Group 1998 Executive Option Plan’. As at 31 December 2003 there remained 10,831,695 options which are
exercisable at a price of £1.525 each in accordance with the rules of the Scheme.

xvii) On 6 May 2003, 60,675 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules of the

‘Serco Group 1998 Executive Option Plan’. As at 31 December 2003 there remained 60,675 options which are exercisable
at a price of £1.39 each in accordance with the rules of the Scheme.

xviii) On 27 November 2003, 650,850 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
2003 no options had been exercised or lapsed. These options have been granted in respect of a three-year performance
period starting 1 January 2004 and are exercisable at a nil value in accordance with the rules of the Scheme.

xix) On 17 December 2003, 35,178 options in respect of Ordinary Shares of 2p each were granted in accordance with the rules
of the ‘Serco Group 1998 Executive Option Plan’. As at 31 December 2003 there remained 35,178 options which are
exercisable at a price of £1.70 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 2003 was £1.72. The market price of these

125

shares ranged from £1.92 to £1.055 during the year.

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

23 Share premium account

Group and Company

Balance at 1 January 2003

Balance at 31 December 2003

24 ESOP reserve

Group

At 1 January 2003
Amortisation

At 31 December 2003

£’000

190,791

£’000

(18,207)
1,258

(16,949)

The ESOP reserve represents 5,351,739 (2002 – 5,414,630) shares in Serco Group plc held by the Employee Share Ownership Trust
(the Trust) equal to 1.23% of current allotted share capital (2002 – 1.25%). The market value of shares held by the Trust at 31 December
2003 was £9,204,991 (2002 – £8,284,384). 62,891 shares were allotted during the year, 59,438 were allotted at nil value and 3,453
at a price of £1.645 (2002 – 142,403 all of which were at nil value).

25 Profit and loss account

Group

Balance at 1 January 2003
Retained profit transferred to reserves
Currency translation differences on foreign currency net investments

Balance at 31 December 2003

£’000

68,226
23,248
6,654

98,128

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 £59,510,000, which includes
dividends of £72,080,000 received from subsidiary companies.

A final ordinary dividend of £6,958,000 is proposed, which together with the interim dividend of £3,092,000, leaves a profit
of £49,460,000 which has been added to reserves brought forward of £37,789,000. This, along with a foreign exchange charge
of £790,000, results in reserves carried forward of £86,459,000.

126

S E R C O G RO U P P L C

26 Reconciliation of operating profit to net cash inflow from operating activities

Operating profit before exceptional item
Exceptional item: reorganisation cost

Operating profit
Depreciation
Amortisation of goodwill and intangible fixed assets
Profit on sale of tangible fixed assets
Profit on sale of subsidiary undertaking
Decrease/(increase) in stocks
Increase in debtors
(Decrease)/increase in creditors
Increase in provisions
Decrease ESOP investment
One-off pension fund contribution

Net cash inflow from operating activities before PFI asset expenditure
Movement in PFI debtor
Expenditure on PFI assets in the course of construction

Net cash inflow from operating activities after PFI asset expenditure

27 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/debt
Non-recourse debt

Net debt

Balance
1 January
2003
£’000

71,774
(2,386)

69,388
(47,433)
(372)
(15,291)

6,292
(29,700)

Cash flow
acquired
during
the year
2003
£’000

12,843
–

12,843
–
–
(234)

12,609
(250,994)

(23,408)

(238,385)

Cash flow
movement
during
the year
2003
£’000

86,271
2,386

88,657
(117,502)
1,709
6,422

(20,714)
(76,285)

(96,999)

2003
£’000

28,206
(4,497)

23,709
18,401
14,131
(1,965)
(267)
1,875
(4,401)
(19,263)
12,910
1,258
–

46,388
3,680
(33,001)

17,067

Other
non-cash
changes
2003
£’000

–
–

–
(321)
(5,810)
(14,358)

(20,489)
–

Restated
2002
£’000

29,103
–

29,103
15,534
8,098
(1,948)
–
(2,906)
(41,870)
30,019
2,805
776
(15,500)

24,111
–
(14,950)

9,161

Balance 31
December
2003
£’000

170,888
–

170,888
(165,256)
(4,473)
(23,461)

(22,302)
(356,979)

(20,489)

(379,281)

127

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

28 Reconciliation of increase in cash to movement in net debt

Increase in cash
Cash (inflow) from non-recourse debt
Cash (inflow)/outflow from debt and lease financing

Change in net debt resulting from cash flows before acquisitions
Change in debt due to acquisitions
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

2003
£’000

101,500
(76,285)
(109,605)

(84,390)
(250,994)
(20,489)

(355,873)
(23,408)

2002
£’000

105,223
(15,600)
3,870

93,493
–
(9,310)

84,183
(107,591)

(379,281)

(23,408)

29 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 £13,824,000 (2002 – £7,611,000).

During the year £nil (2002 – £93,000) has been charged to the profit and loss reserve in respect of shares issued under employee
share incentive schemes.

30 Contingent liabilities

The Group has given guarantees and indemnities in respect of loans amounting to £3,672,000. The total value of credit facilities
and future lease payments guaranteed at 31 December 2003 was £15,081,000.

In addition, 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.

128

S E R C O G RO U P P L C

31 Capital and other commitments

Capital expenditure contracted but not provided

Group
2003
£’000

11,878

Group
2002
£’000

8,595

Company
2003
£’000

–

Company
2002
£’000

–

During the year ending 31 December 2004 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

32 Related parties

Land and buildings
£’000

Other
£’000

4,323
8,139
4,308

16,770

3,004
19,596
1,023

23,623

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. Details of the Directors’ remuneration is disclosed in the Remuneration Report.

Joint ventures
The following material transactions took place between the Group and its joint ventures during 2003:

Net loans during the year
Net trading
Royalties and management fees receivable
Dividends receivable

2003
£’000

(7,821)
1,561
1,098
12,630

7,468

2002
£’000

1,797
1,800
2,302
11,095

16,994

129

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

32 Related parties (continued)

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
Royalties and management fees

The following payable balances relating to joint ventures were included in the Group Balance Sheet:

Amounts payable within one year:
Loans

Details of Group investments in joint ventures and other principal undertakings are given in Note 34.

2003
£’000

1,944
488
168

2,600

3,619
5,250

8,869

2002
£’000

2,140
287
239

2,666

12,033
–

12,033

2003
£’000

2002
£’000

16,285

16,974

33 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 2003 was £69.7 million (2002 – £73.6 million) on an asset base of £350.4 million (2002 – £294.5 million). For 2003
the Group has increased its pension contribution by £9 million, which was accounted for evenly over the year.

130

S E R C O G RO U P P L C

33 Pension schemes (continued)

a) SSAP 24 disclosure

The net pension charge in accordance with SSAP 24 for the year ended 31 December 2003 was £36,755,000 (2002 – £29,096,000).
The Group operates or is a member of a number of pension schemes as follows:

Serco Pension and Life Assurance Scheme (SPLAS)

The two principal defined benefit schemes, Serco Pension and Life Assurance Scheme (SPLAS), and the Serco-IAL Pension
Scheme were merged in February 2003. During 2003 a bulk transfer was received from the Serco IAL Pension Scheme. A full
actuarial valuation was carried out at 6 April 2002 and updated to 31 December 2003 by a qualified independent actuary.

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, excluding the increased pension contribution of £9 million, is 19%.

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 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.
3.7% 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
£216,085,000 at 6 April 2002. 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 86% 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 £22,250,000 (2002 – £14,425,000), of which
£9,000,000 relates to the increased lump sum contributions, and of which £910,000 related to special contributions and
augmentations (2002 – £1,100,000).

At 31 December 2003 a prepayment of £30,580,000 (2002 – £28,350,000) in respect of the scheme was included in the balance
sheet. £20,020,000 was charged to the profit and loss account in respect of the scheme (2002 – £12,535,000).

131

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

33 Pension schemes (continued)

a) SSAP 24 disclosure (continued)

ii) 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 (2002 – £1,663,000) and a provision of £28,640,000 (2002 – £25,808,000)
has been included in the Balance Sheet as at 31 December 2003 of which £22,482,000 (2002 – £20,271,000) relates to the
hybrid element of the scheme, and £6,158,000 (2002 – £5,537,000) to the defined benefit element of the scheme.

iii) 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 salaries increases

8.0 % p.a.
5.5 % p.a.

132

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%.

S E R C O G RO U P P L C

33 Pension schemes (continued)

a) SSAP 24 disclosure (continued)

iii) Serco Superannuation Fund (continued)

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 in 2003 profit and loss account relating to the defined benefit element
of the scheme were £nil (2002 – £257,000).

iv) 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 rebid 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 used 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 2003 profit and loss account were £1,974,000 (2002 – £1,903,000).

133

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

33 Pension schemes (continued)

a) SSAP 24 disclosure (continued)

v) The Serco Shared Cost Section of the Railways Pension Scheme (RPS)

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%
of Section Pay.

Employer pension contributions charged to the 2003 profit and loss account during the year were £783,000 (2002 – £715,000).

vi) Serco Metrolink Pension Scheme

This is a pre-funded defined benefit scheme. The Group accounts for this scheme as a defined contribution scheme since at
rebid 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.

134

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 2003 profit and loss account were £277,000 (2002 – £244,000).

S E R C O G RO U P P L C

33 Pension schemes (continued)

a) SSAP 24 disclosure (continued)

vii) Docklands Light Railway Pension Scheme

This is a pre-funded defined benefit scheme with Docklands Light Railway Limited being the principal employer. The Group
accounts for this scheme as a defined contribution scheme, since at rebid 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 2003 profit and loss account were £1,521,000 (2002 – £1,378,000).

viii) Other defined contribution schemes

The Group paid employer contributions of £10,517,000 (2002 – £10,401,000) into UK and other defined contribution schemes,
foreign state pension schemes and multi-employer schemes.

135

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

33 Pension schemes (continued)

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 2002 and the Serco IAL Scheme as at 31 March 2001,
updated to 31 December 2003 by independent qualified actuaries.

If the amounts had been recognised in the accounts the net assets and the profit and loss account would be as follows:

Net assets excluding net pension assets
Net pension liability

Net assets including pension liabilities

Profit and loss reserve
Reversal of SSAP 24 prepayments, net of deferred taxation

Pension (deficit)

Profit and loss reserve adjusted

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

2003
£’000

259,404
(69,712)

Restated
2002
£’000

229,805
(73,601)

189,692

156,204

2003
£’000

98,128
(21,406)

76,722

(69,712)

7,010

2002
£’000

68,226
(19,845)

48,381

(73,601)

(25,220)

2003
% p.a.

3.80
2.70
2.70
5.40
2.80

2002
% p.a.

3.85
2.25
2.25
5.47
2.35

136

S E R C O G RO U P P L C

33 Pension schemes (continued)

b) FRS 17 disclosure (continued)

The Scheme’s assets and the expected rates of return as at 31 December 2003 were:

Equities
Bonds
Gilts
Property
Cash and other
Annuity policies

Total market value of assets
Present value of scheme liabilities

Deficit in the scheme
Related deferred tax asset

Net pension liability

2003
% p.a.

7.30
5.40
4.80
6.35
4.00
5.40

2003
£’000

192,684
41,510
75,627
8,192
2,985
29,418

350,416
(450,005)

(99,589)
29,877

(69,712)

2002
% p.a.

7.00
5.47
4.50
6.24
4.50
5.47

2002
£’000

183,802
26,840
47,434
7,690
908
27,798

294,472
(399,617)

(105,145)
31,544

(73,601)

The amount chargeable under FRS 17 in 2003 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 2003.

Expected return on pension scheme assets
Interest on pension liabilities

Net return on (interest cost)/assets

2003
£’000

13,655
1,350

15,005

2002
£’000

13,691
1,100

14,791

2003
£’000

18,965
(22,056)

(3,091)

2002
£’000

20,772
(19,664)

1,108

137

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

33 Pension schemes (continued)

b) FRS 17 disclosure (continued)

Analysis of amount recognisable in Statement of Total Recognised Gains and Losses (STRGL) for the year ended 31 December 2003:

Actual return less expected return on assets
Experience gains and losses on liabilities
Changes in assumptions

Actuarial gain/(loss) recognisable in STRGL

Movement in deficit during the year:

Deficit in scheme at 31 December 2002
Movement in year:
(Current service cost)
Contributions
(Past service costs)
Net return on (interest cost)/assets
Actuarial gain/(loss)

Deficit in scheme at 31 December 2003

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

2003
£’000

22,520
6,637
(27,755)

2002
£’000

(73,096)
(19,313)
(8,290)

1,402

(100,699)

2003
£’000

2002
£’000

(105,145)

(5,163)

(13,655)
22,250
(1,350)
(3,091)
1,402

(13,691)
14,400
(1,100)
1,108
(100,699)

(99,589)

(105,145)

2003
£’000

22,520
6%
6,637
1%
1,402
0%

2002
£’000

(73,096)
–21%
(19,313)
–5%
(100,699)
–25%

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.

138

S E R C O G RO U P P L C

34 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
Switzerland

Serco Limited
Serco-Denholm Limited
Serco Europe Limited
Serco-IAL Limited
Serco Railtest Limited
Serco Systems Limited
NPL Management Limited
Serco Docklands Limited
Traffic Information Services (TIS) Limited
Premier Custodial Group Limited
Kilmarnock Prison Services Limited
Lowdham Grange Prison Services Limited
Medomsley Training Services Limited
Premier Prison Services Limited
Premier Monitoring Services Limited
Premier Geografix Limited
Pucklechurch Custodial Services Limited
Moreton Prison Services Limited
Laser (Teddington II) Limited
Altram (Manchester) Limited

Serco Belgium SA
Metro Service A/S
Serco France SAS
Serco International GmbH
Serco GmbH & Co KG
Serco Services Ireland Limited
CCM Software Services Limited
Serco SpA
Serco Insurance Company Limited
Serco Facilities Management SA
Serco Facilities Management BV
Serco Gestion de Negocias SL
Serco Facilities Management S.A

100%
90%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

139

34 List of principal undertakings (continued)

Principal subsidiaries

Asia Pacific
Australia

New Zealand
Hong Kong

Other
Canada
USA

Joint venture undertakings

United Kingdom

Asia Pacific
Australia

New Zealand

Other
USA
Bahrain
Bermuda
Cyprus
Singapore
Turkey

N OT E S T O T H E AC C O U N T S
For the year ended 31 December 2003

Serco Group Pty Limited
Serco Australia Pty Limited
Great Southern Railways 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.

Serco Gulf Engineering Limited
Defence Management Watchfield Limited
Serco-Denholm Shipping Company Limited
AWE Management Limited
Merseyrail Electrics 2002 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
Serco Guthrie Pte Ltd
Elektronik Sistemer Destek Sanavi ve Ticaret AS

100%
100%
100%
100%
100%

100%
100%
100%
100%
100%
100%
100%

50%
50%
50%
33%
50%

50%
50%
50%

50%
49%
40%
50%
50%
51%

Full details of related undertakings will be attached to the Company’s Annual Return to be filed with the Registrar of Companies.

140

S E R C O G RO U P P L C

35 International Financial Reporting Standards

The Council of the European Union announced in June 2002 that listed companies in Europe would adopt International Financial
Reporting Standards (IFRS) for accounting periods beginning on or after 1 January 2005. The adoption of IFRS will be first
reflected in the Group Accounts in the year ending 31 December 2005. In accordance with the Committee of European Securities
Regulators (CESR) Guideline, set out below is a brief summary of how the Group is managing the convergence to IFRS.

The Group has established a global project team to manage the convergence to IFRS. The scope of this project necessarily includes:

• An initial assessment of the impact from the conversion to IFRS on the Group’s reported financial results;

• A continued assessment of the impact from proposed future developments to IFRS;

• Identification of required changes to the Group’s existing accounting systems and procedures;

• Targeted training and education of all employees within the businesses; and

• The timely communication to internal and external stakeholders, of areas subject to significant change.

141

I N V E S TO 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

Registrars
With effect from 2 February 2004 the Company’s registrar changed to Computershare
Investor Services. Computershare maintains our register of members and makes
dividend payments to our Shareholders. Please direct any correspondence about your
holding – including change of address and dividend mandate instructions – to
Computershare at this address:

Computershare Investor Services PLC
PO Box 82
The Pavilions
Bridgewater Road
Bristol BS99 7NH

Computershare’s shareholder website is at www.computershare.com. A dedicated
shareholder services helpline is available on +44 (0)870 873 5839. The helpline is
open during working hours (UK time) if you have any questions about your holding
in the Company.

Shares in issue
At 31 December 2003 there were 434,880,837 Serco Group plc Ordinary 2p Shares
in issue.

Dividend mandate
Dividends can be paid directly into your bank or building society account. To take
advantage of this facility, please complete the dividend mandate form attached to
your dividend cheque or contact Computershare by phone, fax or post.

The form is also available from the Computershare website.

Dividend Re-investment Plan
The Serco Dividend Re-investment Plan (“DRIP”) gives Shareholders the chance to re-
invest their dividends in Serco shares instead of receiving cash.

If you participate in the DRIP, your cash dividend will be paid directly to
Computershare, who will calculate the number of shares to which you are entitled
and buy them on the stock market. Because participants’ share purchases are
aggregated, the dealing costs are relatively low.

To register, simply complete a form and send it to the registrar. For further information
about the DRIP please contact Computershare directly on the number provided above,
or alternatively look under the home page section on the Computershare website.

142

Postal share dealing services
Serco has arranged with Cazenove & Co a simple, low-cost method of buying and
selling its shares by post. Shares are bought and sold on the day Cazenove receives

the instruction. For a dealing form, please contact the postal dealing
department at Cazenove:

Cazenove & Co. Ltd
Share Dealing Service
20 Moorgate
London EC2R 6DA
United Kingdom

T +44 (0)20 7606 1768

The terms and conditions for this service are shown on the last page
of the form.

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
website. This will include the 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 on the
Computershare website. This is a secure, straightforward online service
operated free of charge by Computershare.

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
United Kingdom

Change of registered office
On 7 May 2003 the registered office of Serco Group plc changed to :

Serco House
16 Bartley Wood Business Park
Bartley Way, Hook
Hampshire RG27 9UY
United Kingdom

04 10 March

Calendar of events

12 March
Record date

Ex dividend date

26 March
Accounts published

20 April
Last day for DRIP election

30 April
Annual General Meeting

12 May
Proposed final dividend payment

September
Proposed announcement
of interim results

October
Proposed payment
of interim dividend

This report has been printed on paper which is recyclable. A great proportion of the raw material used is the by-product
from other production processes ie saw mill waste and waste which results from forest thinning. The mill holds not only
ISO 2002 but also the ISO 14001 accreditation for its environmental management systems which include an active policy
on sustainable forestry management.

Artwork and production: Serco Media & Design

Design: www pocknellstudio com Print: First Impression

Serco Group, Inc.

20 E Clementon Road

Suite 102 South

Gibbsboro

New Jersey 08026

United States

Serco Group plc

Registered Office

Serco House

and Middle East

PO Box 9197

16 Bartley Wood Business Park

Dubai

Bartley Way, Hook

Hampshire RG27 9UY

United Kingdom

United Arab Emirates

Level 10

90 Arthur Street

North Sydney

NSW 2060

Australia

Serco Continental Europe

Serco Group Pty Limited

T +1 856 346 8800

F +1 856 346 8463

T +44 (0)1256 745900

F +44 (0)1256 744111

T +971 (0)4 3244691

F +971 (0)4 3244690

T +61 (0)2 9964 9733

F +61 (0)2 9964 9924

E generalenquiries-na@serco.com

E generalenquiries@serco.com

E generalenquiries-ceme@serco.com

E generalenquiries-aspac@serco.com