Servcorp
Annual Report 2003

Plain-text annual report

results 2003 our aim Servcorp’s aim is to be the World’s Finest Serviced Office Operator. The aim includes a commitment to the best management team in our industry, a training process second to none, the adoption of efficient business processes and the provision of leading technology services. Servcorp focuses on a diversified portfolio of high quality serviced offices in multiple locations. This year we will look to increase critical mass in cities and countries where Servcorp operates. Servcorp is also committed to the expansion of its virtual office capabilities and to growth in the virtual office client base. Success is built on over 20 years experience, a profitable track record, a strong financial capability, an energetic team and a commitment to our clients. achieving our aim will bring a smile to our shareholders’ faces. servcorp annual report 2003 The past financial year Chairman’s message Managing Director’s slight grin Community service The IT Smile Servcorp locations Our happy team Corporate Governance Directors’ Report Financial Report Audit Report Shareholder information Corporate directory 2 4 6 7 8 10 12 14 18 25 64 65 67 1 we can smile again but not lose our focus Actual Actual Actual Actual 8 months 12 months 12 months 12 months June 2000 June 2001 June 2002 June 2003 $’000 $’000 $’000 $’000 58,665 122,697 118,428 113,761 8,976 6,851 18,923 (188) 5,251 14,191 (3,409) 2,455 Revenue EBT NPAT Cash flow from operating activities 13,831 24,081 10,993 12,018 Cash & interest bearing financial assets 11,907 51,450 46,385 39,173 2 servcorp annual report 2003 back to reality and profit growth mature location profit $8.9m immature location loss -$0.8m mature location profit projected 2004 $11.0m clients in residence Virtual and serviced office 5,171 12 months growth in clients 4.9% Projected 2004 12% growth revenue 12 months to June 2002 $118.4m 12 months to June 2003 $113.7m - 3.9% but profit is rising 3 chairman’s message 2003 has been another challenging year for Servcorp. The pressures present in the global serviced office market in 2002 remained however, while our major global competitors stumbled, Servcorp used the difficult times to strengthen its position. Revenue was down approximately 4% to 113.76 million, however this decrease was due to the appreciation of the Australian dollar. After adjusting the currency effect, real revenue grew by 2% reflecting improved occupancy. The Company recorded a profit before tax of $5.25 million. As in 2002, this result was after expensing significant items principally associated with asset write-downs. These expenses totalled $2.91 million in 2003. Reflecting this result, the Company continued to generate substantial positive operating cash flow. Net cash provided by operating activities was $12.01 million allowing the Company to reward its shareholders with dividends totalling $6.34 million. Cash and interest bearing assets at 30 June totalled $39.17 million. 4 servcorp annual report 2003 During the year we took the opportunity of repurchasing 4.8 million shares in the Company at $1.11 per share. We believe this to be outstanding value to Servcorp and an appropriate use of the Company’s cash resources. Servcorp continues to outperform its major competitors and remains one of the few financially strong global serviced office operators. We believe we have the world’s leading serviced office offering, and are confident we are well placed for a successful future. Accordingly the Directors have declared a fully franked final dividend of 3.75 cents per share, to be paid in October 2003. Total dividends for the year were 7.50 cents per share. On behalf of the Directors I would like to thank our CEO, Alf Moufarrige, his management team and all Servcorp team members worldwide for their skill and dedication during another tough year. We have great faith in the fundamental strength of Servcorp and the potential for great success going forward. Bruce Corlett 5 why the smile? by the Chief Executive The last quarter was much more fun than the first. Competitors continue to close and our profit and enquiries are slowly growing. Our proprietary IT systems are stable and our Virtual product, although encountering some competition, is still the market leader. We have recommenced expansion in Tokyo opening Nihonbashi in June and have signed Shinagawa with a planned opening in December 2003. Our team is in an advanced stage in negotiations with a view to opening our first location in Beijing and we also continue to pursue opportunities in London. After two really tough years the competitive landscape has improved, our cost cutting is finally sending profit to the bottom line, and I am projecting that our mature floors will make $4.5million in the first half of 2004 moving to between $6.5million and $7million in the second half. The profit on mature floors of course will be tempered by initial losses on any new locations that we open. I am much more confident that our team will continue to smile through this year as our competitive advantage becomes more obvious. It's a great feeling to be CEO when profit increases, even though turnover decreased, in the past year. A G Moufarrige 6 servcorp annual report 2003 community service Servcorp continues to support the Joan Salter Fund which is managed by the Rotary Club of Sydney. The Fund currently has a balance of about $570,000 and we will continue to raise money to support this Fund in the 2003/2004 year. The Joan Salter Fund’s focus is to assist with continuing research into the prevention and cure of cancer and it also has a particular interest in assisting young, seriously or terminally ill members of the community, so that they are not placed in homes for the aged when they are struck down by their debilitating disease, while still having all their mental faculties. In the past year Servcorp with the Rotary Club of Sydney through the Joan Salter Fund has: 1. 2. 3. 4. 5. Funded the MS Society to enable them to build an internet lounge at one of their homes for young people who are receiving treatment and assistance for this debilitating disease. Continued to support the Salvation Army. Been heavily involved in researching a medical probe to reduce blood loss in major liver resections which may lead to a cure to liver cancer. This product is at live testing stage and is being undertaken by St George Hospital. Heavily supported MRC Holdings which is working on research for the inhibition of cancer tumours. Supported the Cancer Council of NSW Posh Auction. In 2003/2004 we intend to work even more closely with the Cancer Council of NSW, in Sydney Rotary’s name, to assist with more research grants. Assistance to the Arts This year we supported World Orchestra’s tour of Australia. We also have a close association with the Australian Chamber Orchestra, whose performance we have funded in Brussels and Tokyo. We are proud of the fact that as a small Aussie company the contributions that we are putting back into the community are focused on bringing real change and benefits to people, in particular young people who suffer from debilitating diseases. We will keep you updated. A G Moufarrige Peace on earth, good health and happiness for this new millennium. My life was full of friends, family, Servcorp and Rotary. The privilege to have known them knows no bounds. “Look for bubbles at midnight” Most Treasured Honour Paul Harris Fellow received in 1999 Epitaph written by Joan 1 month before she passed away at 4 pm 24/2/2000 7 something to smile about Our IT solutions continue to give us something to smile about and they have given us such a market lead that we have recommenced developing a new single point of entry system to improve our competitiveness in both the Virtual and Serviced Office environment. Translation of our IT solutions into Japanese, Chinese and French continues as does our training. Our products Debtors, Smart Office®, IP Billing, Per MB Billing, Call Accounting, Worksmart Screen Console, Servcorp Hottdesk®, Helpdesk and the new Single Point of Entry, create a smile as they make our lives easier but these in-house products continue to have a bottom line bias. We were again a Deloitte Technology Fast 50 winner and we are the only Serviced Office operator in the world that allows independent assessment of our IT capabilities. 8 A Deloitte Technology Fast 50 winner, awarded for IT excellence. servcorp annual report 2003 our clients laugh at the IT nightmare! At Servcorp the IT nightmare does not exist! Our clients can dial *1 for IT help, and we have 41 team members totally trained manning the helpdesk. Our team also smiles because we know as the market recovers the IT advantage will make sales easier and improve our bottom line. Dial *1 for IT H.E.L.P. Worksmart Screen Console Debtors Servcorp Hottdesk® Call Accounting Servcorp Smart Office® A Deloitte Technology Fast 50 winner, awarded for IT excellence. 9 locations Australia Sydney Levels 25 & 29, Chifley Tower 2 Chifley Square Levels 66 & 67, MLC Centre Martin Place Level 17, BNP Paribas Centre 60 Castlereagh Street New Zealand Auckland Levels 16 & 20, ASB Bank Centre 135 Albert Street Level 27, PWC Tower Quay Street France Paris Levels 2, 3 & 4 17 Square Edouard VII Belgium Brussels Levels 20 & 21, Bastion Tower 5, Place du Champ de Mars UAE Dubai Levels 41 & 42 Emirates Towers Sheikh Zayed Road Adelaide Level 24, Santos House 91 King William Street Brisbane Levels 24 & 30, AMP Place 10 Eagle Street Canberra Levels 6 & 11, St George Centre 60 Marcus Clarke Street Melbourne Level 40, 140 William Street Level 50, 101 Collins Street Level 25, Optus Centre 367 Collins Street North Ryde Level 9, Avaya House 123 Epping Road North Sydney Levels 4, 17, 21 & 22 201 Miller Street Perth Levels 22 & 23, St Martins Tower 44 St Georges Terrace 10 Asia Shanghai, China Level 21, HSBC Tower 101 Yin Cheng East Road Pudong Hong Kong Levels 25 & 30, Bank of China Tower 1 Garden Road, Central Kuala Lumpur, Malaysia Level 36, Menara Citibank 165 Jalan Ampang Singapore Levels 30 & 31, Six Battery Road Penthouse Level, Suntec Tower Three 8 Temasek Boulevard Bangkok, Thailand Level 23, CP Tower 313 Silom Road Level 27, Bangkok City Tower Cnr Chong Nonsi & South Sathorn Rd Japan Tokyo Level 32, Shinjuku Nomura Building 1-26-2 Nishi-Shinjuku Shinjuku-ku Level 11, Park West Building 6-12-1 Nishi-Shinjuku Shinjuku-ku Level 16, Shiroyama JT Trust Tower 4-3-1 Toranomon Minato-ku Levels 13 & 14, Hibiya Central Building 1-2-9 Nishi Shimbashi Minato-ku Level 9 & Basement 1, AIG Building 1-1-3 Marunouchi Chiyoda-ku Level 11, Omotesando Palacio Tower 3-6-7 Kita-Aoyama Minato-ku Level 15, JT Building 2-2-1 Toranomon Minato-ku Level 18, Yebisu Garden Place Tower 4-20-3 Ebisu Shibuya-ku Level 7, Wakamatsu Building 3-3-6 Nihonbashi Honcho, Chuo-ku Osaka Level 9, Edobori Center Building 2-1-1 Edobori Nishi-ku servcorp annual report 2003 new locations to open in 2004 Japan Shinagawa, Tokyo China Beijing December 2003 Mid 2004 11 the Servcorp team the board Bruce Corlett Chairman Rick Holliday-Smith Non-Executive Director Julia King Non-Executive Director Alf Moufarrige MD & CEO Bryan Pashby Non-Executive Director The Board and Senior Management perform thanks to the hardworking Servcorp Team. They make SERVCORP the best! 12 senior management Taine Moufarrige BA,LLB Alternate Director GM Australia, New Zealand & Middle East Marcus Moufarrige BCom GM Asia & CIO Susie Martin BEc GM Japan Greg Pearce BCom, CA Company Secretary Richard Baldwin Dip Ag, Dip Oen GM I.T.S. Sharon Tindale Dip Bus (Val), AAPI, LREA International Sales and Marketing Manager Steve Gainer Senior Manager Japan Tammy Palmer PGDIP(Mktg), MBA International Sales & Marketing Manager, Virtual Office Liane Gorman Senior Manager Concepts servcorp annual report 2003 13 corporate governance The Board has responsibility for the long-term health and prosperity of Servcorp. The directors are responsible to the shareholders for the performance of the Company and the Consolidated Entity and to ensure that it is properly managed. The Board is committed to the principles underpinning the ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations. We are continually working to improve our governance policies and practice. Role of the Board The Board's primary responsibilities are: • • • • • • • • • • • • • • the protection and enhancement of long-term shareholder value ensuring Servcorp has appropriate corporate governance structures in place providing strategic direction, including reviewing and determining goals for management monitoring management’s performance within that framework appointing the Managing Director and evaluating his performance and remuneration monitoring business performance and results identifying areas of significant risk and ensuring adequate controls are in place to manage those risks establishing appropriate standards of ethical behaviour and a culture of corporate and social responsbility approving executive remuneration policies ratifying the appointment of the Chief Financial Officer and the Company Secretary ensuring compliance with continuous disclosure policy in accordance with the Corporations Act 2001 and the Listing Rules of the Australian Stock Exchange (ASX) reporting to shareholders approval of the commitment to new locations ensuring the Board is, and remains, appropriately skilled to meet the changing needs of the Company. A formal statement of matters reserved for the Board and delegated authority to management has been adopted. Composition of the Board The size and composition of the Board is determined by the Board, subject to the limits set out in Servcorp’s Constitution which requires a minimum of three directors and a maximum of twelve directors. The Board comprises five directors (one executive and four non-executive) and one alternate director. Three non-executive directors are independent. The Chairman of the Board is an independent non-executive and does not carry out the role of Managing Director or Chief Executive Officer. The non-executive directors bring to the Board an appropriate range of skills, experience and expertise to ensure that Servcorp is run in the best interest of all stakeholders. The Board will continue to be made up of a majority of independent non-executive Directors. The names of the directors of the Company in office at the date of this statement are set out in the Directors’ report on pages 18 and 19 of this financial report. 14 corporate governance. Servcorp annual report 2003 Directors’ independence It is important that the Board is able to operate independently of executive management. Three of the non-executive directors are considered by the Board to be independent of management. This means that they are free from any business, interest or other relationship which could materially interfere with the exercise of their independent judgement and their ability to act in the best interests of Servcorp. The three independent directors are Mr B Corlett, Mr R Holliday-Smith and Ms J King. Ms J King is the sister of Mr A Moufarrige, but she has no joint financial interests in Servcorp or otherwise. Ms King is an experienced business woman who sits on several other public company Boards. Ms King, and the other independent directors, believe her relationship with Mr Moufarrige does not impair her exercising independent judgement. Election of directors The Company’s Constitution specifies that an election of directors must take place each year. One-third of the Board (excluding the Managing Director), and any other director who has held office for three or more years, must retire from office at each annual general meeting. The directors are eligible for re-election. Directors may be appointed by the Board during the year. Directors appointed by the Board must retire from office at the next annual general meeting. Any changes to directorships will be dealt with by the full Board and accordingly a Nomination committee has not been established. Independent professional advice Each director has the right to seek independent professional advice, at Servcorp's expense, to help them carry out their responsibilities. Prior approval of the Chairman is required, which will not be unreasonably withheld. A copy of advice received by the director is made available to all other members of the Board. Ethical standards All directors, managers and employees are expected to act with the utmost integrity and objectivity, striving at all times to enhance the reputation and performance of Servcorp. A code of conduct outlining the standards of personal and corporate behavior to be observed is in the process of being adopted. Director dealings in Company shares Servcorp policy prohibits directors from dealing in Company shares or exercising options: • • in the six weeks prior to the release of the Company's half-year and annual results to the ASX; or whilst in possession of price sensitive information. Directors must notify the Company Secretary before they sell or buy shares in the Company. This is reported to the Board. In accordance with the provisions of the Corporations Act 2001 and the Listing Rules of the ASX, each director has entered into an agreement with the Company that requires disclosure to the Company of all information needed for it to comply with the obligation to notify the ASX of directors’ holdings and interests in its securities. Conflict of interest In accordance with the Corporations Act 2001 and the Company’s Constitution directors must keep the Board advised, on an ongoing basis, of any interest that would potentially conflict with those of Servcorp. Where the Board believes that an actual or potential significant conflict exists, the director concerned, if appropriate, will not take part in any discussions on the matter and abstains from voting on the item being considered. The Board has developed procedures to assist directors to disclose potential conflicts of interest. Details of director related entity transactions with the Company and the Consolidated Entity are set out in Note 32. 15 Continuous disclosure Servcorp has a policy that all shareholders and investors have equal and timely access to Company information. Procedures are in place to ensure that all price sensitive information is disclosed to the ASX in accordance with the continuous disclosure requirements of the Corporations Act 2001 and ASX Listing Rules. The Company Secretary has been appointed as the person responsible for communications with the ASX. Servcorp endorses the guidance principles contained in the Australian Securities & Investments Commission’s “Better disclosure for investors” publication. Communication with stakeholders Servcorp is committed to increasing the transparency and quality of its communication so that we are regarded as outstanding corporate citizens. At present, information is communicated to shareholders and financial markets through the distribution of the Annual Report, the release of the half-year and full-year results, and market announcements to the ASX when required. Servcorp does not currently utilise its website to communicate with shareholders. In keeping with the best practice recommendations of the ASX Corporate Governance Council, Servcorp is developing a corporate governance section on its website to facilitate disclosure of corporate policies and significant information. Committees The Board does not delegate major decisions to committees. Committees are responsible for considering detailed issues and making recommendations to the Board. The Board has established two committees to assist in the implementation of its corporate governance practices. The Company did not have a Remuneration Committee during the year. The Managing Director, Mr A Moufarrige, and the Chairman, Mr B Corlett, meet as required to discuss senior executives' performance and remuneration issues, and make recommendations to the Board on remuneration packages and policies. In keeping with good corporate governance practice the Board will assess the need to constitute a Remuneration Committee. Audit and Risk Management Committee The role of the Audit Committee is to advise on the establishment and maintenance of a framework of internal control and appropriate ethical standards for the management of the Consolidated Entity. It also gives the Board additional assurance regarding the quality and reliability of financial information prepared for use by the Board in determining policies or for inclusion in the financial report. The three independent non-executive directors were the members of the Audit Committee during the financial year. The chairman of the Audit Committee is independent and not the chairman of the Board. Mr R Holliday-Smith (Chairman) Mr B Corlett Ms J King The external auditors, the Managing Director, the Chief Financial Officer and other senior management are invited to Audit Committee meetings at the discretion of the Committee. The Chief Executive Officer and Chief Financial Officer provide a Management Questionnaire as assurance to the Audit Committee and the Board for half-year and full-year results. The Audit Committee met three times during the financial year. The external auditor met with the Audit Committee and the directors on several occasions during the year without management being present. 16 corporate governance. Servcorp annual report 2003 Audit and Risk Management Committee (cont.) The responsibilities of the Audit Committee include: • • • • • • • • • • • • reviewing the financial report and other financial information distributed externally reviewing accounting policies to ensure compliance with Australian Accounting Standards and generally accepted accounting principles reviewing external audit reports to ensure that where major deficiencies or breakdown in controls or procedures have been identified appropriate and prompt remedial action is taken by management reviewing the company’s policies and procedures for convergence with International Financial Reporting Standards for reporting periods beginning on 1 July 2005 reviewing the nomination, independence and performance of the auditor liaising with the external auditors and ensuring that the statutory annual audit and half-yearly reviews are conducted in an effective manner monitoring the establishment of an appropriate internal control framework and considering enhancements monitoring the establishment of appropriate ethical standards monitoring the procedures in place to ensure compliance with the Corporations Act 2001, ASX Listing Rules and all other regulatory requirements addressing any matters outstanding with auditors, Australian Taxation Office, Australian Securities & Investments Commission, ASX and financial institutions reviewing reports on any major defalcations, frauds and thefts from the Company improving the quality of the accounting function The role of the Audit Committee has been expanded to include risk management. A formal charter for the Audit and Risk Management Committee is currently being adopted. Governance Committee During the year the Board formed a Governance Committee. The Governance Committee’s charter is to progress the adoption of and ongoing compliance with the ASX Corporate Governance Council’s best practice recommendations. The Governance Committee members are two independent non-executive directors and two management representatives: Mr B Corlett (Chairman) Mr R Holliday-Smith Mr M Moufarrige (General Manager Asia & CIO) Mr G Pearce (Company Secretary) Auditor independence The Company’s auditors KPMG were appointed on 25 August 1999. KPMG were reappointed at the first annual general meeting of the Company on 17 November 2000. The Lead Partner, Mr R Amos, will be due for rotation for the year ended 30 June 2006. KPMG have established policies and procedures designed to ensure their independence, and provide the Audit and Risk Management Committee with an annual confirmation as to their independence. The Audit and Risk Management Committee is in the process of adopting an Auditor Engagement Policy. The Policy addresses external auditor independence, in order to prevent any real or perceived conflict of interest. 17 directors’ report The directors present their report together with the financial report of Servcorp Limited ("the Company") and the consolidated financial report of the “Consolidated Entity”, being the Company and its controlled entities, for the financial year ended 30 June 2003 and the auditor’s report thereon. Directors The directors of the Company at any time during or since the end of the financial year are: Name Experience, qualifications and special responsibilities Mr Alf Moufarrige Managing Director Chief Executive Officer Appointed August 1999 Alf is simply a good serviced office operator with over 20 years of experience in the serviced office industry. Alf is primarily responsible for Servcorp’s expansion and currency management. Mr R. Bruce Corlett Chairman and independent non-executive Director Member of Audit Committee Chairman of Governance Committee Appointed October 1999 Over the past 30 years Bruce has been a director of many publicly listed companies including TNT Limited, Advance Bank Limited and the Australian Maritime Safety Authority. Bruce is currently a director of a number of companies including Chairman of Adsteam Marine Limited, a director of Stockland Trust Group and Chairman of Trust Company of Australia Limited. Mr Roderic Holliday-Smith Independent non-executive Director Chairman of Audit Committee Member of Governance Committee Appointed October 1999 Rick has spent over 11 years in Chicago in the roles of Divisional President of global trading and sales for NationsBank, N.A. and, prior to that, Chief Executive Officer of Chicago Research and Trading Group Limited. Rick also spent over 4 years in London as Managing Director of HongKongBank Limited, a wholly owned merchant banking subsidiary of HSBC Bank. Rick is currently Chairman of SFE Corporation Limited and Exco Resources NL. He is a director of MIA Group Limited and Aegis Partners Pty. Limited. Rick has a Bachelor of Arts (Hons) from Macquarie University, is a Chartered Accountant and is a Fellow of the Australian Institute of Company Directors. 18 directors’ report. Servcorp annual report 2003 Directors (continued) Name Experience, qualifications and special responsibilities Ms Julia King Independent non-executive Director Member of Audit Committee Appointed August 1999 Julia was Chief Executive Officer of the LVMH Fashion Group in Oceania. Prior to that Julia was Managing Director of Lintas, a multinational advertising agency. Julia has worked in strategic marketing for more than thirty years and is currently a non-executive director of John Fairfax Holdings Limited, Opera Australia and Carla Zampatti. For the Australian Government Julia has worked on the Task Force for the restructure of the wool industry and been a member of the Council of the National Library. Mr Bryan Pashby Non-executive Director; previously Commercial Director Appointed August 1999 Bryan's career spans forty-three years of accounting and management. Prior to joining Servcorp, Bryan worked for Lend Lease Corporation in a number of management and accounting positions. Bryan joined Servcorp in 1991. He has managed three Servcorp floors and has been instrumental in their success. In 1995 Bryan was appointed to the position of Company Secretary for all of Servcorp's Australian businesses and in 1997 took on the finance role for all of the Servcorp businesses in Australia and overseas. In 1999 Bryan was appointed to the position of Finance Director. Upon the appointment of a Chief Financial Officer in January 2000, Bryan was appointed Commercial Director. Bryan ceased his executive role with Servcorp in June 2003 but remains as a non-executive director. Mr Taine Moufarrige Alternate to Mr Alf Moufarrige Alternate to Mr Bryan Pashby General Manager Australia, New Zealand & Middle East Appointed April 2000 Prior to joining Servcorp, Taine practiced as a solicitor. Taine joined Servcorp in 1996 as a trainee manager following which he became a manager and subsequently was appointed to his current position of General Manager in 2000. Taine played a key role in establishing Servcorp's Paris location. Taine holds a Bachelor of Laws from Bond University and a Bachelor of Arts from Macquarie University. 19 Principal activities The principal activities of the Consolidated Entity during the course of the financial year were the provision of executive serviced and virtual offices and communications and secretarial services. There were no significant changes in the nature of the activities of the Consolidated Entity during the year. Review and results of operations Operating profit after tax for the financial year was $2.45 million (2002: $3.41 million loss). Operating revenue was $113.76 million (2002: $118.42 million). The operating profit after tax included significant expenses totalling $2.91 million. The principal component of these expenses was $1.86 million in costs associated with the closure of the Exchange Square site, as announced on 29 April 2003. At the end of the financial year, Servcorp (including franchise locations) operated 51 floors, in 34 locations, spanning 11 countries. The Consolidated Entity operates in Australia, New Zealand, Japan, South-East Asia, China, France, United Arab Emirates and Belgium. During the year a new location has been established in: City Tokyo Location Wakamatsu Building Level 7 Offices 47 Opened June 2003 The number of office suites operated by the Consolidated Entity has increased to 1,898 with an average occupancy of 75%. On 28 April 2003 the Company commenced an on-market share buy-back. 4.8 million shares were bought back, and subsequently cancelled, at an average purchase price of $1.11, utilising $5.3 million in cash. The share buy-back was finalised on 14 July 2003. All share buy-backs occurred in the period to 30 June 2003. Currently the Consolidated Entity has cash and interest bearing financial assets in excess of $39 million and is well placed to take advantage of expansion opportunities when the timing is considered favourable. State of affairs There were no significant changes in the state of affairs of the Consolidated Entity during the financial year. Events subsequent to balance date The directors are not aware of any matter or circumstance, other than that referred to in the financial statements or notes thereto, that has arisen since the end of the year that has significantly affected, or may significantly affect, the operations of the Consolidated Entity, the results of those operations, or the state of affairs of the Consolidated Entity, in future financial years. On 26 August 2003 the directors declared a fully franked final dividend of 3.75 cents per share, payable on 1 October 2003. Likely developments The Consolidated Entity will continue to pursue its policy of seeking to increase the profitability and market share of its major business sectors during the next financial year. Further information about likely developments in the operations of the Consolidated Entity and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the Consolidated Entity. The directors are assessing the most appropriate method with respect to implementation of the tax consolidation regime from 1 July 2003 for the Company and its Australian wholly-owned controlled entities. 20 directors’ report. Servcorp annual report 2003 Dividends Dividends paid or declared by the Company during the financial year were: Type Cents per share Total amount $'000 Date of payment % Franked Tax rate for franking credit In respect of the previous financial year: 2002 Final - ordinary shares 3.75 In respect of the current financial year: 2003 Interim - ordinary shares 3.75 3,168 1 October 2002 100% 30% 3,178 8 April 2003 100% 30% On 26 August 2003 the directors declared a fully franked final dividend, in respect of the current financial year, of 3.75 cents per share, payable on 1 October 2003. Directors' meetings The number of directors' meetings held (including meetings of committees of directors) and number of meetings attended by each of the directors of the Company during the financial year were: Director Board Meetings Audit Committee Governance Committee Number of meetings held: Number of meetings attended: B Corlett R Holliday-Smith J King A Moufarrige B Pashby T Moufarrige (alternate)* 9 9 9 9 9 7 1 3 3 3 3 n/a n/a n/a 1 1 1 n/a n/a n/a n/a * - T Moufarrige attended 5 Board meetings during the year but only 1 in his capacity as an alternate director. The details of the function and membership of the committees are presented in the Corporate Governance statement. 21 Directors' and senior executives' emoluments The Managing Director and the Chairman meet frequently to discuss remuneration issues, and are responsible for making recommendations to the Board on remuneration policies and packages applicable to the Board members and senior executives of the Company and the Consolidated Entity. The broad remuneration policy is to ensure the remuneration package properly reflects the person's duties and responsibilities and that remuneration is competitive in attracting, retaining and motivating people of the highest quality. Total remuneration for all non-executive directors is not to exceed $350,000 per annum. Directors' fees cover all main Board activities and membership of committees. Executive directors and senior executives may receive bonuses based on the achievement of specific goals related to the performance of the Consolidated Entity (including operational results and cash flow). Details of the nature and amount of each major element of the emolument of each director of the Company and each of the five named officers of the Company and the Consolidated Entity receiving the highest emolument are: Base emolument $ Bonuses $ Non-cash benefits $ Termination payment $ Super contribution $ Total $ Directors Non-executive B Corlett R Holliday-Smith J King Executive A Moufarrige B Pashby T Moufarrige 80,000 45,000 45,000 213,504 213,316 142,223 - - - - - - - - - - - - 7,200 4,050 4,050 87,200 49,050 49,050 73,006 8,182 - - 403,693 - 16,740 16,897 12,555 303,250 642,088 154,778 Executive officers (excluding directors) Consolidated and the Company Susie Martin Sharon Tindale Marcus Moufarrige Richard Baldwin Andrew Boss 149,054 141,804 141,456 140,759 140,759 34,987 - - - - 9,680 - - - - - - - - - - 12,618 12,555 12,500 12,500 193,721 154,422 154,011 153,259 153,259 During the year or since the end of the financial year, the Company has not granted options over any unissued ordinary shares to any directors or to any of the five most highly remunerated officers of the Company as part of their remuneration. During the year no directors or executive officers exercised options over ordinary shares of the Company. During the year 3 million options which had been issued to Mr A Moufarrige were forfeited at Mr Moufarrige’s request. No consideration was involved. 22 directors’ report. Servcorp annual report 2003 Options At the date of this report unissued ordinary shares of the Company under option are: Expiry date Type Exercise price Number of shares 29 November 2004 15 December 2004 B B $1.50 $1.50 450,000 929,000 Type B Options may be exercised two years from date of issue and expire on the earlier of: (a) (b) 5 years from the date of issue; the date which the optionholder ceases to be an employee or director of the Company or any of its subsidiaries other than as a result of the death of the optionholder or such later date as the Board in its absolute discretion determines on or before the date the optionholder ceases to be an employee or director of the Company or any of its subsidiaries. Type B options do not entitle the holder to participate in any share issue of the Company or any other body corporate. During the year or since the end of the financial year, the Company has not granted options over any unissued ordinary shares of the Company. During the year or since the end of the financial year, the Company has issued ordinary shares as a result of the exercise of options over unissued shares as follows: Type Number of shares Amount paid Amount unpaid A B 413,333 20,000 $1.50 $1.50 - - Directors' interests The relevant interest of each director in the share capital of the companies within the Consolidated Entity, as notified by the directors to the Australian Stock Exchange in accordance with s205G(1) of the Corporations Act 2001, at the date of this report is as follows: Ordinary shares Options over ordinary shares Servcorp Limited A Moufarrige B Corlett R Holliday-Smith J King B Pashby T Moufarrige (alternate director) 47,961,038 249,715 100,000 15,500 20,000 33,500 - - 150,000 150,000 150,000 150,000 23 Indemnification and insurance of officers Indemnification The Company has agreed to indemnify the following current directors of the Company, Mr A Moufarrige, Mr B Corlett, Mr R Holliday-Smith, Ms J King, Mr B Pashby and Mr T Moufarrige against any loss or liability that may arise from their position as directors of the Company and its Controlled Entities, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of any such liabilities to the extent permitted by law, including reasonable costs and expenses. Insurance premiums During the financial year the Company has paid insurance premiums in respect of directors' and officers' liability and legal expenses insurance contracts, for current and former directors, secretaries and officers of the Company and its controlled entities. The insurance premiums relate to: • • costs and expenses incurred by the relevant officers in defending proceedings, whether civil or criminal and whatever their outcome; and other liabilities that may arise from their position, with the exception of conduct involving a wilful breach of duty or improper use of information or position to gain personal advantage. The insurance policies outlined above do not contain details of the premiums paid in respect of individual officers of the Company. Environmental management The Consolidated Entity's operations are not subject to any significant environmental regulations under either Commonwealth or State legislation. However, the Board believes that the Consolidated Entity has adequate systems in place for the management of its environmental requirements and is not aware of any breach of those environmental requirements as they apply to the Consolidated Entity. Rounding off The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and, in accordance with that Class Order, amounts in the financial report and the directors' report have been rounded off to the nearest thousand dollars, unless otherwise stated. Dated at Sydney this 16th day of September 2003. Signed in accordance with a resolution of the directors A G Moufarrige Director 24 2003 financial report Statements of financial performance Statements of financial position Statements of cash flows Notes to the financial statements Directors' declaration Audit report 26 27 28 29 63 64 25 Statements of financial performance Servcorp Limited and its controlled entities for the financial year ended 30 June 2003 Note CONSOLIDATED 2002 2003 $'000 $'000 THE COMPANY 2002 $'000 2003 $'000 Revenues from rendering of services 111,327 114,337 - - Other revenues from ordinary activities 2,434 4,091 11,842 9,631 Total revenues Service expenses Marketing expenses Occupancy expenses Administrative expenses Borrowing costs expense Marketing support expense Provision for diminution in value of loan 2 113,761 118,428 11,842 9,631 (35,552) (36,764) (17) (5,046) (5,367) (56,053) (58,989) - - (11) (20) - (9,225) (10,122) (459) (490) 3 (451) (699) (4) - - - - (2,741) (2,783) - - - - Other expenses from ordinary activities (2,183) (6,675) - Total expenses (108,510) (118,616) (6,004) (521) Profit/(loss) from ordinary activities before income tax expense Income tax expense relating to ordinary activities Net profit/(loss) attributable to members of the parent entity Non-owner transaction changes in equity Net movement in foreign currency translation reserve Total revenues, expenses and valuation adjustments attributable to members of the parent entity recognised directly in equity 5 22 21 5,251 (188) 5,838 9,110 (2,796) (3,221) (1,626) (2,033) 2,455 (3,409) 4,212 7,077 (5,188) (3,172) (5,188) (3,172) - - - - Total changes in equity other than those resulting from transactions with owners as owners (2,733) (6,581) 4,212 7,077 Basic earnings per share Ordinary shares 8 $0.029 ($0.04) Diluted earnings per share Ordinary shares 8 $0.029 ($0.04) - - - - The statements of financial performance are to be read in conjunction with the notes to the financial statements. 26 financial statements. Servcorp annual report 2003 Statements of financial position Servcorp Limited and its controlled entities as at 30 June 2003 Current assets Cash assets Receivables Other Total current assets Non-current assets Receivables Other financial assets Property, plant and equipment Intangibles Deferred tax assets Other Total non-current assets Total assets Current liabilities Payables Current tax liabilities Provisions Interest bearing liabilities Total current liabilities Non-current liabilities Payables Interest bearing liabilities Provisions Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained profits Total equity Note CONSOLIDATED 2002 2003 $'000 $'000 THE COMPANY 2002 $'000 2003 $'000 9 10 11 10 12 13 14 5 15 16 5 19 17 16 17 19 5 20 21 22 26,125 10,055 3,929 46,385 11,213 4,198 1 11,613 214 - 4,698 8 40,109 61,796 11,828 4,706 - 13,098 23,964 15,943 4,839 15,829 - 50 32,821 16,915 4,498 18,298 62,630 19,076 - - 37 - 71,219 19,076 - - 26 - 73,673 113,782 72,582 134,378 81,743 93,571 90,321 95,027 23,953 949 1,179 1,933 26,005 1,965 4,296 2,711 3,499 682 - - 1,871 1,125 3,173 - 28,014 34,977 4,181 6,169 5,541 2,096 423 979 9,039 37,053 76,729 80,896 (5,621) 1,454 6,910 4,407 215 559 12,091 47,068 - 5,040 - 67 5,107 9,288 - 865 - 74 939 7,108 87,310 84,283 87,919 85,570 (433) 2,173 80,896 - 3,387 85,570 - 2,349 76,729 87,310 84,283 87,919 The statements of financial position are to be read in conjunction with the notes to the financial statements 27 Statements of cash flows Servcorp Limited and its controlled entities for the financial year ended 30 June 2003 Cash flows from operating activities Cash receipts in the course of operations Cash payments in the course of operations Dividends & royalties received Interest received Borrowing costs paid Income taxes paid Note CONSOLIDATED 2002 2003 $'000 $'000 THE COMPANY 2002 $'000 2003 $'000 107,206 (92,182) - 1,541 (433) (4,114) 114,084 (95,947) - 1,822 (751) (8,215) 384 (3,081) 9,426 1,760 (4) (2,088) 328 (283) 7,198 1,924 (1) (2,260) Net cash provided by operating activities 29(b) 12,018 10,993 6,397 6,906 Cash flows from investing activities Payments for financial assets Payments for property, plant and equipment Loans to other entities Loans to controlled entities Loans repaid by controlled entities Proceeds from disposal of property, plant and equipment (12,998) (5,247) - - - - (7,030) - - - - - - (43,799) 48,423 - - - (7,131) - 12 - - - Net cash (used in)/provided by investing activities (18,233) (7,030) 4,624 (7,131) Cash flows from financing activities Proceeds from issue of shares Share buy back Lease payments Dividends paid Net cash (used in)/provided by financing activities 650 (5,324) (2,156) (6,346) 988 - (3,198) (6,298) 650 (5,324) - (6,346) 988 - - (6,298) (13,176) (8,508) (11,020) (5,310) Net (decrease)/increase in cash held (19,391) (4,545) Cash at the beginning of the financial year Effects of exchange rate fluctuation on the balances of cash held in foreign currencies 46,385 51,450 (869) (520) Cash at the end of the financial year 29(a) 26,125 46,385 1 - - 1 (5,535) 5,535 - - The statements of cash flows are to be read in conjunction with the notes to the financial statements. 28 financial statements. Servcorp annual report 2003 Notes to the financial statements for the financial year ended 30 June 2003 1 (a) Statement of significant accounting policies The significant policies that have been adopted in the preparation of this financial report are: Basis of preparation The financial report is a general purpose financial report which has been prepared in accordance with Accounting Standards, Urgent Issues Group Consensus Views, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. It has been prepared on the basis of historical costs and, except where stated, does not take into account changing money values or fair valuations of non-current assets. These accounting policies have been consistently applied by each entity in the Consolidated Entity and, except where there is a change in accounting policy as set out in Note 1(r), are consistent with those in the previous year. Where necessary comparative information has been reclassified for consistency purposes. (b) Principles of consolidation The consolidated financial statements of the economic entity include the financial statements of the Company, being the parent entity Servcorp Limited, and its controlled entities ("the Consolidated Entity"). Where an entity either began or ceased to be controlled during the financial year, the results are included only from the date control commenced or up to the date control ceased. The balances and effects of transactions between controlled entities included in the consolidated financial statements have been eliminated. (c) Goodwill Goodwill, representing the excess of the purchase consideration plus incidental costs over the fair value of the identifiable net assets acquired on the acquisition of a controlled entity, is amortised over the period of time during which benefits are expected to arise. In establishing the fair value of the identifiable net assets acquired, a liability for restructuring costs is only recognised at the date of acquisition when there is a demonstrable commitment and a detailed plan. The liability is only recognised where there is little or no discretion to avoid payments to other parties in settlement of costs of the restructuring and a reliable estimate of the amount of the liability as at the date of acquisition can be made. Goodwill is amortised on a straight line basis over 20 years. The unamortised balance of goodwill is reviewed at least at each reporting date. Where the balance exceeds the value of expected future benefits, the difference is charged to the statements of financial performance. (d) Revenue recognition Sales revenue Sales revenue comprises revenue earned net of the amount of goods and services tax (GST) from the provision of services to entities outside the Consolidated Entity. Rental revenue is typically invoiced in advance and is recognised in the period in which the service is provided. Interest income Interest income is recognised as it accrues. Asset sales The gain or loss on disposal of fixed assets is calculated as the difference between the carrying amount of the asset at the time of disposal and the net proceeds on disposal. This gain or loss is booked directly to the Statement of Financial Performance. 29 notes to the financial statements for the financial year ended 30 June 2003 (e) Foreign currency Transactions Foreign currency transactions are translated to Australian currency at the rates of exchange ruling at the dates of the transactions. Amounts receivable and payable in foreign currencies at balance date are translated at the rates of exchange ruling on that date. (f) (g) Exchange differences relating to amounts payable and receivable in foreign currencies are brought to account as exchange gains or losses in the statements of financial performance in the financial year in which the exchange rates change. Translation of controlled foreign entities The statements of financial position of overseas controlled entities that are self-sustaining foreign operations are translated at the rates of exchange ruling at balance date. The statements of financial performance are translated at a weighted average rate for the year. Exchange differences arising on translation are taken directly to the foreign currency translation reserve. The balance of the foreign currency translation reserve relating to a controlled entity that is disposed of is transferred to retained earnings in the year of disposal. Borrowing costs Borrowing costs include interest, amortisation of discounts or premiums relating to borrowings, amortisation of ancillary costs incurred in connection with the arrangement of borrowings and lease finance charges. Borrowing costs are expensed as incurred. Taxation Income tax The Consolidated Entity adopts the income statement liability method of tax effect accounting. Income tax expense is calculated on operating profit adjusted for permanent differences between taxable and accounting income. The tax effect of timing differences, which arise from items being brought to account in different periods for income tax and accounting purposes, is carried forward in the statements of financial position as a future income tax benefit or a provision for deferred income tax. Future income tax benefits are not brought to account unless realisation of the asset is assured beyond reasonable doubt. Future income tax benefits relating to entities with tax losses are only brought to account when their realisation is virtually certain. The tax effect of capital losses is not recorded unless realisation is virtually certain. To the extent that dividends are proposed by controlled entities incorporated overseas, the Consolidated Entity has provided for withholding tax. A provision is also made for the withholding tax on the balance of unremitted profits, which eventually will be remitted to the Company. Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the Australian Tax Office (ATO). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from or payable to the ATO is included as a current asset or liability in the statements of financial position. Cash flows are included in the statements of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from or payable to the ATO are classified as operating cash flows. 30 financial statements. Servcorp annual report 2003 (h) (i) (j) (k) Recoverable amounts of non-current assets valued on cost basis The carrying amounts of non-current assets are reviewed to determine whether they are in excess of their recoverable amount at balance date. If the carrying amount of a non-current asset exceeds its recoverable amount, the asset is written down to the lower amount. The write down is expensed in the reporting period in which it occurs. In assessing recoverable amounts of non-current assets the relevant cash flows have not been discounted to their present value, except where specifically stated. Receivables Trade debtors Trade debtors to be settled within 30 days are carried at amounts due. The collectibility of debts is assessed at balance date and specific provision is made for any doubtful accounts. Other financial assets Controlled entities Investments in controlled entities are carried in the Company's financial statements at the lower of cost and recoverable amount. Dividends and distributions are brought to account in the statements of financial performance when they are declared by the controlled entities. Other companies Investments in other listed and unlisted companies are carried at the lower of cost and recoverable amount. Dividends are brought to account as they are received. Interest bearing financial instruments Investments in interest bearing financial instruments are carried at cost on the basis that they will be held until maturity. Income from these instruments are brought to account in the statements of financial performance as earned. Property, plant and equipment Acquisition Items of property, plant and equipment are initially recorded at cost and depreciated as outlined below. Cost is the fair value of consideration provided plus incidental costs incurred directly attributable to the acquisition. The cost of assets constructed (including leasehold improvements) includes the cost of materials and direct labour. Directly attributable overheads and other incidental costs are also capitalised to this asset. Property, plant and equipment are carried at the lower of cost less accumulated depreciation and recoverable amount. Subsequent additional costs Costs incurred on property, plant and equipment subsequent to initial acquisition are capitalised when it is probable that future economic benefits, in excess of the originally assessed performance of the asset will flow to the Consolidated Entity in future years. Where these costs represent separate components of a complex asset, they are accounted for as separate assets and are separately depreciated over their useful lives. Costs incurred on property, plant and equipment, which do not meet the criteria for capitalisation, are expensed as incurred. Depreciation and amortisation Items of property, plant and equipment, including buildings and leasehold property but excluding freehold land, are depreciated or amortised using the straight line method over their estimated useful lives. The depreciation rates used for each class of asset, for the current year is as follows: Leasehold improvements • Buildings • • Office equipment • Office furniture and fittings • Motor vehicles 2003 2.5% 15% 27% 13% 15% 2002 2.5% 15% 27% 13% 15% Assets are depreciated or amortised from the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and held ready for use. 31 notes to the financial statements for the financial year ended 30 June 2003 (k) Property, plant and equipment (continued) Leased plant and equipment Leases of plant and equipment under which the Company or its controlled entities assume substantially all the risks and benefits of ownership are classified as finance leases. Other leases are classified as operating leases. (l) (m) (n) Finance leases are capitalised. A lease asset and a lease liability equal to the present value of the minimum lease payments are recorded at the inception of the lease. Contingent rentals are written off as an expense of the accounting period in which they are incurred. Capitalised lease assets are amortised on a straight line basis over the term of the relevant lease, or where it is likely the Consolidated Entity will obtain ownership of the assets, the life of the asset. Lease liabilities are reduced by repayments of principal. The interest components of the lease payments are charged to the statements of financial performance. Payments made under operating leases are charged against profits in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased property. Accounts payable Liabilities are recognised for amounts to be paid in the future for goods or services received, whether or not billed to the Company or Consolidated Entity. Trade accounts payable are normally settled within 60 days. Bank loans Bank loans are carried on the statements of financial position at their principal amount, subject to set-off arrangements. Interest expense is accrued at the contracted rate and included in "Other creditors and accruals". Derivatives The Consolidated Entity is exposed to changes in interest rates and foreign exchange rates from its activities. The Consolidated Entity uses forward foreign exchange contracts to hedge these risks. Derivative financial instruments are not held for speculative purposes. The company uses forward foreign exchange contracts to mitigate its net actual or anticipated exposure to adverse foreign exchange rate movements in two respects. Forward contracts are entered into to protect the Australian dollar equivalent value of profits generated in foreign currencies. These profits form part of the net investment in the relevant foreign entity. These contracts are closed out without the physical delivery of cash, and the gain or loss on the contract arising from the difference in prevailing spot rate and the contract rate is recorded in the statements of financial performance, the net effect being that the foreign currency profit is translated into Australian dollars at the contract exchange rate. Forward contracts are also utilised to lock in exchange rates where known future transfers of funds throughout the group will occur. Physical delivery of cash against the forward contract occurs. 32 financial statements. Servcorp annual report 2003 (o) Employee entitlements Wages, salaries and annual leave The provisions for employee entitlements to wages, salaries and annual leave represents the amount which the Consolidated Entity has a present obligation to pay resulting from employees' services provided up to the balance date. The provisions have been calculated at undiscounted amounts based on current wage and salary rates and include related on-costs. Long service leave The provision for employee entitlements to long service leave represents the present value of the estimated future cash outflows to be made by the employer resulting from employees' services provided up to the balance date. Provisions for employee entitlements which are not expected to be settled within twelve months are discounted using the rates attaching to national government securities at balance date, which most closely match the terms of maturity of the related liabilities. In determining the provision for employee entitlements, consideration has been given to future increases in wage and salary rates, and the Consolidated Entity's experience with staff departures. Related on-costs have also been included in the liability. Executive and employee share option schemes Servcorp Limited granted options to certain executives and employees under executive and employee share option schemes. Further information is set out in Notes 24 and 32 to the financial statements. Other than the costs incurred in administering the schemes which are expensed as incurred, the schemes do not result in any expense to the Consolidated Entity. Superannuation plan The Company and other controlled entities contribute to a defined contribution superannuation plan. Contributions are charged against income as they are made. Further information is set out in Note 24. (p) Lease incentives Rent is expensed in the accounting period in which it is due and payable to lessors in accordance with lease agreements. Where there is a rent free period under the term of a lease agreement, the aggregate rent payable under the lease agreement is calculated and a charge is made to the statements of financial performance proportionately over the lease term. (q) Earnings per share Basic earnings per share Basic EPS earnings are calculated by dividing the net profit attributable to members of the Consolidated Entity for the reporting period, by the weighted average number of ordinary shares of the company, adjusted for any bonus issue. Diluted earnings per share Diluted EPS earnings are calculated by only adjusting the basic EPS earnings by the effect of conversion to ordinary shares associated of dilutive potential ordinary shares, rather than including the notional earnings on the funds that would have been received by the entity had the potential ordinary shares been converted. The diluted EPS weighted average number of shares includes the number of shares assumed to be issued for no consideration in relation to dilutive potential ordinary shares, rather than the total number of dilutive potential ordinary shares. The identification of dilutive potential ordinary shares is based on net profit or loss from continuing ordinary operations and is applied on a cumulative basis, taking into account the incremental earnings and incremental number of shares for each series of potential ordinary share. 33 notes to the financial statements for the financial year ended 30 June 2003 (r) Changes in accounting policy Employee benefits The Consolidated Entity has applied the revised AASB 1028 “Employee Benefits” (issued in June 2001) for the first time from 1 July 2002. The liability for wages and salaries and annual leave is now calculated using the remuneration rates the Company expects to pay as at each reporting date, not wage and salary rates current at reporting date. The financial impact of adopting AASB 1028 “Employee Benefits” on opening retained earnings at 1 July 2002 was not material. Accordingly, no adjustment to opening retained earnings was made. Provisions, contingent liabilities and contingent assets The Consolidated Entity has applied AASB 1044 “Provisions, Contingent Liabilities and Contingent Assets” (issued October 2001) for the first time from 1 July 2002. Dividends are now recognised at the time they are declared, determined or publicly recommended. Previously, final dividends were recognised in the financial year to which they related, even though the dividends were announced after the end of the financial year. The adjustments to the consolidated financial report as at 1 July 2002 as a result of this change are: • • $3,168,388 increase in opening retained profits $3,168,388 decrease in provision for dividends There was no impact on profit or loss for the current financial year to 30 June 2003. CONSOLIDATED 2002 2003 $’000 $’000 (restated) (restated) (restated) (restated) THE COMPANY 2002 $’000 2003 $’000 Proforma restatement of retained profits Reported retained profits at the end of the previous year Increase/(decrease) in retained profits due to changes in accounting policies on adoption of: AASB 1044 “Provisions, Contingent Liabilities and Contingent Assets” Restated retained profits at the beginning of the year Restated net profit attributable to members of the parent entity Dividends recognised during the year Restated retained profits at end of year Proforma restatement of provision for dividends Balance at end of year - as previously reported Effect of change in accounting policy Restated balance at end of year 2,173 11,915 2,349 1,605 3,168 3,137 3,168 3,137 5,341 15,052 5,517 4,742 2,455 (6,342) 1,454 (3,409) (6,302) 5,341 4,212 (6,342) 3,387 7,077 (6,302) 5,517 - - - 3,168 (3,168) - - - - 3,168 (3,168) - 34 financial statements. Servcorp annual report 2003 2 Revenue from ordinary activities Rendering of services revenue from operating activities Other revenue from operating activities Franchise fees: Related parties Other parties Dividends: Related parties Interest: Related parties Other parties Loss on disposal of assets Foreign exchange gains CONSOLIDATED 2002 2003 $’000 $’000 THE COMPANY 2002 $’000 2003 $’000 111,327 114,337 - - - 173 - - 1,846 (652) 660 - 198 7,726 - 4,698 - - 1,700 2,500 - 1,752 (86) 509 1,723 37 - 656 1,736 96 - 586 Other revenue from outside operating activities Other 407 1,718 - 15 Total other revenues 2,434 4,091 11,842 Total revenue from ordinary activities 113,761 118,428 11,842 9,631 9,631 3 (a) Profit from ordinary activities before income tax expense Profit/(loss) from ordinary activities before income tax expense has been arrived at after charging/(crediting) the following items: Borrowing costs: Borrowings Finance charges on capitalised leases Depreciation of: Plant and equipment Amortisation of: Deferred expenditure Goodwill Leasehold improvements Net bad and doubtful debts expense including movements in provision for bad and doubtful debts Net expense from movements in provision for: Employee entitlements Interest charges Operating lease rental expense: Minimum lease payments 51 400 451 120 579 699 4,226 3,589 - 972 6,320 6,334 972 6,501 659 757 (264) - 5 (85) 48,657 51,306 4 - 4 - - - - - - - - - - - - - - - - - - - 35 notes to the financial statements for the financial year ended 30 June 2003 3 (b) Profit from ordinary activities before income tax expense (continued) Individually significant expenses included in profit/(loss) from ordinary activities before income tax expense: CONSOLIDATED 2002 2003 $’000 $’000 THE COMPANY 2002 $’000 2003 $’000 Early termination of a floor lease in Japan Write-down of investment in Rumble Group Pty Limited Write off of immovable fixed assets on floor in Brussels Accelerated amortisation of capitalised set-up costs Closure costs at Exchange Square Employee termination costs Provision for diminution in value of loan - - 622 - 1,866 427 - 1,114 950 1,110 3,872 - - - - - - - - - 2,783 - - - - - - - 4 Auditors' remuneration Audit services: Auditors of the Company - KPMG Australia - audit and review of financial statements Overseas KPMG Firms - audit and review of financial statements Other services: Auditors of the Company - KPMG Australia - other assurance services - taxation services Overseas KPMG Firms - other assurance services - taxation services CONSOLIDATED 2002 2003 $ $ THE COMPANY 2002 $ 2003 $ 208,389 201,122 113,200 62,432 397,609 605,998 494,309 695,431 - 113,200 - 62,432 - 16,841 134,796 40,308 78,168 19,744 114,753 30,404 197,919 403,427 - - - - - - 27,035 - - 27,035 36 financial statements. Servcorp annual report 2003 5 (a) Taxation Income tax expense Prima facie income tax expense calculated at 30% (2002:30%) on the operating profit Increase in income tax expense due to: CONSOLIDATED 2002 2003 $’000 $’000 THE COMPANY 2002 $’000 2003 $’000 1,575 (56) 2,586 2,733 Amortisation of goodwill 291 291 Restatement of deferred tax balances due to changes in tax rates Under/(over) provision in prior years Non deductible exchange gain Sundry items Decrease in income tax expense due to: Rebatable dividend income Foreign tax credits available Tax benefit on losses recovered by a controlled entity not recorded as a future income tax benefit in prior periods Non-assessable local taxes Non-assessable exchange gains Sundry items 375 (305) 23 5 - - (67) (16) - - - - (6) - - - 16 (63) - 3 (509) (750) 67 43 - - - (80) - (154) (445) (214) (18) (267) - - - - - - - - Income tax expense on operating profit before individually significant income tax items 1,881 (388) 1,626 1,939 Non (assessable)/non deductible deferred set-up costs 364 1,425 Non-deductible loss on disposal of investments - 285 Tax losses of non-resident controlled entities not carried forward as a future income tax benefit 788 2,066 Recognition of tax losses of controlled entities not previously recognised as a future income tax benefit Timing differences of controlled entities not previously brought to account - - Controlled foreign company attributed income 154 (579) (225) - Effect of differing rates of tax on overseas income Income tax expense attributable to profit from ordinary activities - - - - - - - - - - - 94 - - (391) 637 2,796 3,221 1,626 2,033 37 notes to the financial statements for the financial year ended 30 June 2003 5 (a) (cont.) Taxation (continued) Income tax expense attributable to profit from ordinary activities is made up of: Current income tax provision Under/(over) provision in prior year Deferred income tax provision Future income tax benefit (b) Provision for current income tax Movements during the year: Balance at beginning of year Income tax paid Operating activities CONSOLIDATED 2002 2003 $’000 $’000 THE COMPANY 2002 2003 $’000 $’000 3,350 (305) 503 (752) 2,796 4,700 43 (4) (1,518) 3,221 1,555 (6) (8) 85 1,626 1,908 31 43 51 2,033 1,965 5,512 1,125 1,540 (4,114) (8,215) (2,088) (2,260) (2,149) (2,703) (963) (720) Under/(over) provision in prior year (252) (32) 89 (63) Current year income tax expense on profit from ordinary activities (c) Provision for deferred income tax Provision for deferred income tax comprises the estimated expense at the applicable rate of 30% (2002:30%) on the following items: Difference in depreciation and amortisation of property, plant and equipment for accounting and income tax purposes Unrealised foreign exchange losses Expenditure currently deductible for tax but deferred and amortised for accounting purposes Income currently non-assessable for tax but recognised for accounting purposes Sundry items 3,350 4,700 1,556 1,908 949 1,965 682 1,125 209 116 123 84 - 11 349 305 979 333 8 559 - 67 - - - - 74 - - - 67 74 38 financial statements. Servcorp annual report 2003 CONSOLIDATED 2002 2003 $’000 $’000 THE COMPANY 2002 2003 $’000 $’000 5 (d) Taxation (continued) Future income tax benefit Future income tax benefit comprises the estimated future benefit at the applicable rate of 30% (2002:30%) on the following items: Provisions and accrued employee entitlements not currently deductible 1,383 1,368 37 26 Unrealised foreign exchange gains 189 58 Difference in depreciation and amortisation of property, plant and equipment for accounting and income tax purposes Tax losses carried forward Sundry items 2,969 1,921 234 64 1,115 36 - - - - - - - - 4,839 4,498 37 26 (e) Future income tax benefit not taken to account The potential future income tax benefit in controlled entities, which are companies, arising from timing differences and tax losses have not been recognised as an asset because recovery of tax losses is not virtually certain and recovery of timing differences is not assured beyond any reasonable doubt 3,677 3,677 2,724 2,724 - - - - The potential future income tax benefit will only be obtained if: (i) the relevant companies derive future assessable income of a nature and an amount sufficient to enable the benefit to be realised; (ii) the relevant companies and/or the Consolidated Entity continues to comply with the conditions for deductibility imposed by the law; and (iii) no changes in tax legislation adversely affect the relevant companies and/or the Consolidated Entity in realising the benefit. 39 notes to the financial statements for the financial year ended 30 June 2003 6 Segment information Inter-segment pricing is determined on an arm’s length basis. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items mainly comprise income-earning assets and revenue, interest bearing loans, borrowings and expenses, and corporate assets and expenses. Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period. Business segments The Consolidated Entity comprises only one business segment which is the provision of executive serviced and virtual offices and communications and secretarial services. Geographical segments In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets. Geographical segments Australia & New Zealand Japan & Asia Europe & Middle East Eliminated Consolidated $'000 $'000 $'000 $'000 $’000 2003 Revenue External segment revenue Inter-segment revenue Total segment revenue Other unallocated revenue Total revenue Result Segment result 34,059 10,992 45,051 66,634 1,688 11,007 1,972 - (14,652) 68,322 12,979 (14,652) 111,700 - 111,700 2,061 113,761 (35) 8,711 (4,320) 895 5,251 Unallocated corporate expenses Profit from ordinary activities before income tax Income tax expense Profit from ordinary activities after income tax Net profit Depreciation and amortisation Non-cash expenses other than depreciation and amortisation Individually significant items 3,481 69 2,293 - 5,251 (2,796) 2,455 2,455 3,774 2,218 2,045 11,518 (24) - 46 622 1 - - - - 92 2,915 99,835 13,947 113,782 65,018 (27,965) 37,053 5,247 Assets Segment assets Unallocated corporate assets Consolidated total assets Liabilities Segment liabilities Unallocated corporate liabilities Consolidated total liabilities Acquisitions of non-current assets 25,642 60,361 13,832 19,106 37,613 8,299 2,082 2,877 288 40 financial statements. Servcorp annual report 2003 6 Segment information (continued) Geographical segments Australia & New Zealand Japan & Asia Europe & Middle East Eliminated Consolidated $'000 $'000 $'000 $'000 $’000 2002 Revenue External segment revenue Inter-segment revenue Total segment revenue Other unallocated revenue Total revenue Result Segment result 36,190 11,018 47,208 69,341 149 12,252 17 - (11,184) 69,490 12,269 (11,184) 117,783 - 117,783 645 118,428 3,012 3,774 (4,049) (2,925) (188) Unallocated corporate expenses Loss from ordinary activities before income tax Income tax expense Loss from ordinary activities after income tax Net loss Depreciation and amortisation Non-cash expenses other than depreciation and amortisation Individually significant items 2,756 910 950 4,700 234 1,114 2,825 (14) 1,110 7,115 (100) 3,872 Assets Segment assets Unallocated corporate assets Consolidated total assets Liabilities Segment liabilities Unallocated corporate liabilities Consolidated total liabilities Acquisitions of non-current assets 29,905 70,048 16,713 15,474 32,824 9,279 2,934 1,298 2,966 - - - - (188) (3,221) (3,409) (3,409) 17,396 1,030 7,046 116,666 17,712 134,378 57,577 (10,509) 47,068 7,198 41 notes to the financial statements for the financial year ended 30 June 2003 7 Dividends Dividends proposed or paid by the Company are: 2002 Interim - ordinary Final - ordinary 2003 Interim - ordinary Cents per share 3.75 3.75 Total amount $'000 3,160 3,168 4 April 2002 1 October 2002 Date of payment Tax rate for franking credit Percentage franked 30% 30% 30% 50% 100% 100% 3.75 3,178 8 April 2003 Subsequent events Since the end of the financial year, the directors declared the following dividends: Final - ordinary 3.75 2,998 1 October 2003 30% 100% CONSOLIDATED 2002 2003 $'000 $'000 THE COMPANY 2002 $'000 2003 $'000 Dividend franking account Balance of franking account adjusted for franking credits which will arise from the payment of income tax provided for in the financial statements and after deducting franking credits to be used in payment of the above dividends and those dividends required to be treated as interest expense: 30% franking credits available 2,063 6,240 (23) 1,126 The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. From 1 July 2002 the New Business Tax System (Imputation) Act 2002 requires measurement of franking credits based on the amount of income tax paid, rather than on after tax profits. As a result the “franking credits available” were converted from $6,240,337 to $2,674,430 as at 1 July 2002 for the Consolidated Entity and $1,126,260 to $482,686 for the Company. This change in the basis of measurement does not change the value of franking credits to shareholders who may be entitled to franking credit benefits. 8 Earnings per share Earnings reconciliation Net profit/(loss) Basic earnings Diluted earnings CONSOLIDATED 2003 $’000 2,455 2,455 2,455 2002 $’000 (3,409) (3,409) (3,409) Weighted average number of ordinary shares used as the denominator: Number for basic earnings per share Effect of share options on issue Number for diluted earnings per share Number Number 83,847,977 - 83,847,977 83,969,632 1,917,333 85,886,965 Classification of securities as potential ordinary shares Options As at 30 June 2003, the Company had on issue 1,384,000 (2002: 4,917,333) options over unissued capital. The inclusion of these potential ordinary shares leads to a diluted earnings per share that is not materially different from the basic earnings per share. 42 financial statements. Servcorp annual report 2003 9 10 11 12 Cash assets Cash Bank short term deposits CONSOLIDATED 2002 2003 $'000 $'000 THE COMPANY 2002 2003 $'000 $'000 11,258 14,867 6,213 40,172 26,125 46,385 1 - 1 - - - Bank short term deposits maturing within an average of 60 days and paying interest at a weighted average rate of 4.57% (2002: 4.56%). Receivables Current Trade debtors Less: Provision for doubtful trade debtors Other debtors Trade receivables from controlled entities Non-current Loans to controlled entities Provision for diminution in value of loan 9,693 (138) 500 - 11,002 (159) 370 - - - - 11,613 - - - 4,698 10,055 11,213 11,613 4,698 - - - - - - 65,413 (2,783) 71,219 - 62,630 71,219 The unsecured loans to controlled entities and related entities bear interest at a floating rate. The weighted average rate at 30 June 2003 was 10.35% (2002: 10.35%). Other current assets Prepayments Lease deposits Other Other financial assets Non-current Unlisted shares Controlled entities at cost Other entities at cost Other investments Investment in floating rate notes Investment in fixed rate bonds Investment in reset preference securities 2,356 492 1,081 3,929 - 50 2,911 6,042 4,095 3,498 - 700 4,198 8 - 206 214 8 - - 8 - 50 19,076 - 19,076 - - - - - - - - - - 13,098 50 19,076 19,076 Investments in floating rate notes, fixed rate bonds and reset preference securities are carried at cost on the basis that these instruments will be held until maturity. 43 notes to the financial statements for the financial year ended 30 June 2003 13 Property, plant and equipment Land and buildings At cost Accumulated depreciation Leasehold improvements - owned At cost Accumulated amortisation Leasehold improvements - leased At cost Accumulated amortisation Office furniture and fittings - owned At cost Accumulated depreciation Office furniture and fittings - leased At cost Accumulated depreciation Office equipment - owned At cost Accumulated depreciation Office equipment - leased At cost Accumulated depreciation Motor vehicles At cost Accumulated depreciation Capital works in progress At cost CONSOLIDATED 2002 2003 $'000 $'000 THE COMPANY 2002 2003 $'000 $'000 775 (29) 746 917 (20) 897 23,395 (12,925) 10,470 26,078 (10,396) 15,682 6,895 (3,745) 3,150 6,108 (1,983) 4,125 1,610 (966) 644 7,504 (2,603) 4,901 6,608 (1,268) 5,340 1,644 (644) 1,000 9,557 (5,429) 4,128 8,474 (3,961) 4,513 1,080 (915) 165 84 (20) 64 472 1,106 (647) 459 35 (6) 29 - 23,964 32,821 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 44 financial statements. Servcorp annual report 2003 CONSOLIDATED 2002 2003 $’000 $’000 THE COMPANY 2002 2003 $’000 $’000 13 Property, plant and equipment (continued) Reconciliations Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below: Land and buildings Carrying amount at beginning of year Additions Disposals Depreciation Net foreign currency differences on translation of self sustaining operations Carrying amount at end of year Leasehold improvements - owned Carrying amount at beginning of year Additions Disposals Amortisation Transfers (to) from other class of asset Net foreign currency differences on translation of self sustaining operations Carrying amount at end of year Leasehold improvements - leased Carrying amount at beginning of year Additions Disposals Amortisation Transfers (to) from other class of asset Net foreign currency differences on translation of self sustaining operations Carrying amount at end of year Office furniture and fittings - owned Carrying amount at beginning of year Additions Disposals Depreciation Transfers (to) from other class of asset Net foreign currency differences on translation of self sustaining operations Carrying amount at end of year Office furniture and fittings - leased Carrying amount at beginning of year Additions Disposals Depreciation Transfers (to) from other class of asset Net foreign currency differences on translation of self sustaining operations Carrying amount at end of year Office equipment - owned Carrying amount at beginning of year Additions Disposals Depreciation Transfers (to) from other class of asset Net foreign currency differences on translation of self sustaining operations Carrying amount at end of year 897 - - (12) (139) 746 15,682 2,068 (634) (5,028) - (1,618) 10,470 4,901 - (118) (1,291) - (342) 3,150 5,340 397 (132) (1,100) (2) (378) 4,125 1,000 - - (329) - (27) 644 4,513 2,237 (52) (2,297) 2 (275) 4,128 931 - - (10) (24) 897 13,972 5,056 (4) (5,258) 3,211 (1,295) 15,682 6,885 - - (1,244) (460) (280) 4,901 8,532 1,283 (34) (1,105) (3,066) (270) 5,340 809 205 - (208) 198 (4) 1,000 5,521 1,747 (55) (2,178) (277) (245) 4,513 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 45 notes to the financial statements for the financial year ended 30 June 2003 13 Property, plant and equipment (continued) Reconciliations Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below: Office equipment - leased Carrying amount at beginning of year Additions Disposals Depreciation Transfers (to) from other class of asset Net foreign currency differences on translation of self sustaining operations Carrying amount at end of year Motor vehicles Carrying amount at beginning of year Additions Disposals Depreciation Transfers (to) from other class of asset Net foreign currency differences on translation of self sustaining operations Carrying amount at end of year Capital works in progress Carrying amount at beginning of year Additions Disposals Depreciation Transfers (to) from other class of asset Net foreign currency differences on translation of self sustaining operations Carrying amount at end of year CONSOLIDATED 2002 2003 $’000 $’000 THE COMPANY 2002 2003 $’000 $’000 459 20 - (287) - (27) 165 29 52 - (14) - (3) 64 - 472 - - - - 472 353 13 - (299) 394 (2) 459 17 18 - (4) - (2) 29 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 46 financial statements. Servcorp annual report 2003 Notes CONSOLIDATED 2002 2003 $'000 $'000 THE COMPANY 2002 2003 $'000 $'000 14 15 16 Intangibles Goodwill - at cost Accumulated amortisation Other non-current assets Lease deposits Other Payables Current Trade creditors Security deposits Deferred income Other creditors and accruals Non-current Trade creditors Security deposits 17 Interest bearing liabilities Current Bank loans - secured Lease liabilities Non-current Bank loans - secured Lease liabilities Loans from controlled entities - unsecured 25 25 32 19,434 (3,491) 19,434 (2,519) 15,943 16,915 15,776 53 18,237 61 15,829 18,298 - - - - - - - - - - - - 5,238 8,121 6,640 3,954 6,485 9,311 6,879 3,330 - - - 3,499 - - - 1,871 23,953 26,005 3,499 1,871 2,834 2,707 5,541 125 1,808 1,933 217 1,879 - 2,096 3,807 3,103 6,910 148 2,563 2,711 404 4,003 - - - - - - - - - 5,040 4,407 5,040 - - - - - - - - 865 865 The bank loan is denominated in Yen and secured by a mortgage over property. The interest rate of the loan is 1.56% (2002: 1.56%). The unsecured loans from controlled entities bear interest at a floating rate. The weighted average rate at 30 June 2003 was 10.35% (2002: 10.35%). 47 notes to the financial statements for the financial year ended 30 June 2003 18 Financing arrangements The Consolidated Entity has access to the following lines of credit: Total facilities available: Bank guarantees Bank overdraft Lease facilities Bill acceptance / payroll / other facilities Facilities utilised at balance date: Bank guarantees Bank overdraft Lease facilities Bill acceptance / payroll / other facilities Facilities not utilised at balance date: Bank guarantees Bank overdraft Lease facilities Bill acceptance / payroll / other facilities CONSOLIDATED 2002 2003 $'000 $'000 THE COMPANY 2002 2003 $'000 $'000 4,058 500 15,615 2,128 3,503 500 18,647 1,334 4,058 500 8,988 2,128 3,503 500 11,428 1,334 22,301 23,984 15,674 16,765 4,058 500 6,016 - 3,503 500 10,770 - 4,058 500 3,190 - 3,503 500 6,064 - 10,574 14,773 7,748 10,067 - - 5,407 2,128 7,535 - - 5,104 1,334 - - 5,407 2,128 - - 5,055 1,334 6,438 7,535 6,389 Bank guarantees and overdraft Bank guarantees have been issued to secure rental bonds over premises. The guarantees are secured by a Cross Guarantee and Indemnity between Servcorp Limited and its Australian controlled entities. Lease facilities Lease facilities have been established to finance the fitout of new locations.The facilities are secured by the assets under lease. Facilities established are both fixed facilities and revolving facilities. Bill acceptance / payroll / other facilities These facilities have been established to facilitate the encashment of cheques drawn overseas, foreign currency dealing and to accommodate direct entry payroll. 48 19 Provisions Current Dividends Employee entitlements Non-current Employee entitlements Reconciliations Reconciliations of the carrying amounts of each class of provision, except for employee benefits are set out below: Dividends Carrying amount at beginning of year Adjustment on adoption of AASB 1044 “Provisions, Contingent Liabilities and Contingent Assets” Provisions made during the year: Final dividend 2002 Interim dividend 2003 Payments made during the period Carrying amount at the end of year 20 Contributed equity Issued and paid-up capital 79,955,354 (2002: 84,325,334) ordinary shares, fully paid Movements in ordinary share capital Balance at the beginning year 84,325,334 (2002: 83,666,667) shares Shares issued 433,333 (2002: 658,667) from the exercise of options under Share Option Plans Shares bought back 4,803,313 (2002: Nil) shares Balance at end of year financial statements. Servcorp annual report 2003 Notes CONSOLIDATED 2002 2003 $'000 $'000 THE COMPANY 2002 $'000 2003 $'000 7 24 24 - 1,179 1,179 3,173 1,123 4,296 423 215 - - - - 3,173 - 3,173 - 3,173 3,173 (3,173) 3,168 3,178 (6,346) - (3,173) 3,168 3,178 (6,346) - 80,896 85,570 80,896 85,570 85,570 84,582 85,570 84,582 650 988 650 988 (5,324) 80,896 - 85,570 (5,324) 80,896 - 85,570 Share buy-back On 14 July 2003, the Company completed the buy-back of 4,803,313 ordinary shares, representing approximately 6% of ordinary shares on issue on that date. The total consideration for shares bought back on the market was $5,324,495, being an average, including incidental costs, of $1.11 per share. The consideration was allocated in the following proportions. • Share Capital - $5,324,495 • Retained profits - $0 Options Ordinary shares were issued pursuant to exercise of options as follows: 433,333 shares were issued at $1.50 per share. Terms and conditions Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to vote at members meetings. In the event of winding up of the Company holders of ordinary shares are entitled to any excess after payment of all debts and liabilities of the Company and costs of winding up. 49 notes to the financial statements for the financial year ended 30 June 2003 21 Reserves Foreign currency translation Movements during the financial year Foreign currency translation Balance at beginning of financial year Deferred exchange gains arising from monetary items considered part of the investment in self-sustaining foreign operations Translation adjustment on controlled foreign entities' financial statements Balance at end of financial year Notes CONSOLIDATED 2002 2003 $'000 $'000 THE COMPANY 2002 $’000 2003 $'000 (5,621) (433) (433) 2,739 (2,239) 1,116 (2,949) (4,288) (5,621) (433) - - - - - - - - - - The foreign currency translation reserve records the foreign currency differences arising from the translation of self-sustaining foreign operations and the translation of monetary items forming part of the net investment in self-sustaining foreign operations. 22 Retained profits Retained profits at the beginning of the financial year Net profit/(loss) attributable to members of the parent entity Net effect on dividends from: Initial adoption of AASB 1044 “Provisions, Contingent Liabilities and Contingent Assets” Dividends recognised during the year Total dividends Retained profits at the end of the financial year 2,173 11,915 2,349 1,605 2,455 4,628 (3,409) 8,506 4,212 6,561 7,077 8,682 3,168 (6,342) (3,174) - (6,333) (6,333) 3,168 (6,342) (3,174) - (6,333) (6,333) 1,454 2,173 3,387 2,349 50 financial statements. Servcorp annual report 2003 23 (a) Additional financial instruments disclosure Interest rate risk Interest rate risk exposures The Consolidated Entity's exposure to interest rate risk and the effective weighted average interest rate for classes of financial assets and financial liabilities is set out below: Fixed interest maturing in: Notes Weighted Floating average interest interest rate rate $’000 1 year or less 1 to 5 years $’000 $’000 More than 5 years $’000 Non- interest bearing $’000 Total $’000 2003 Financial assets Cash Receivables Investments Financial liabilities Bank overdrafts and loans Payables Lease liabilities Dividends payable Employee entitlements 2002 Financial assets Cash Receivables Investments Financial liabilities Bank overdrafts and loans Payables Lease liabilities Dividends payable Employee entitlements 10 12 16 25 19 24 10 12 16 25 19 24 4.57% 6.46% 2,024 - 2,911 14,867 - 3,073 - - 7,064 4,935 17,940 7,064 1.56% 7.79% 4.56% 5.99% 7.03% - - - - - - 125 - 1,808 - 217 - 1,879 - - - 1,933 2,096 4,935 16,007 4,968 1,756 - - 40,172 - - 1,756 40,172 - - - - 931 - - - - 148 - 2,563 - 404 - 4,003 - - - 931 2,711 4,407 825 37,461 (4,407) - - - - - - - - - - - - - - - - - - - - - - 9,234 10,055 50 26,125 10,055 13,098 19,339 49,278 - 29,494 - - 342 29,494 3,687 - 1,602 1,602 31,096 35,125 (11,757) 14,153 5,388 11,213 50 47,316 11,213 50 16,651 58,579 - 32,915 - 3,173 1,483 32,915 6,566 3,173 1,338 1,338 37,426 45,475 (20,775) 13,104 51 notes to the financial statements for the financial year ended 30 June 2003 23 (b) Additional financial instruments disclosure (continued) Foreign exchange risk The Consolidated Entity actively manages its foreign exchange risk. This management policy involves utilising natural hedges and may involve entering into forward foreign currency exchange contracts. The following table sets out the details of foreign currency exchange contracts in place at the end of the financial year. Weighted average rate 2003 2002 CONSOLIDATED 2003 $'000 2002 $'000 Buy Japanese yen Not later than one year 0.725 0.663 2,757 2,000 The recognised gains and losses on hedges in the Foreign currency translation reserve are: 2003 Gains $’000 CONSOLIDATED 2002 2003 Gains Losses $’000 $’000 2002 Losses $’000 Not later than one year 206 - 3 - (c) Credit risk exposures Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted. On-balance sheet financial instruments The credit risk on financial assets, excluding investments, of the Consolidated Entity which have been recognised on the balance sheet, is the carrying amount, net of any provision for doubtful debts. The Consolidated Entity minimises concentrations of credit risk by undertaking transactions with a large number of customers and counterparties in various countries. The Consolidated Entity is not materially exposed to any individual overseas country or individual customer. (d) Net fair values of financial assets and liabilities Valuation approach Net fair values of financial assets and liabilities are determined by the Consolidated Entity on the following bases: On-balance sheet financial instruments The net fair value of investments in interest bearing financial instruments is determined at market price. Monetary financial assets and financial liabilities not readily traded in an organised financial market are determined by valuing them at the present value of contractual future cash flows on amounts due from customers (reduced for expected credit losses) or due to suppliers. Cash flows are discounted using standard valuation techniques at the applicable market yield having regard to the timing of the cash flows. The carrying amounts of bank term deposits, trade debtors, term debtors, other debtors, bank overdrafts, accounts payable, bank loans, lease liabilities, dividends payable and employee entitlements approximate net fair value. Off-balance sheet financial instruments The valuation of off-balance sheet financial instruments detailed in this note reflects the estimated amounts which the Consolidated Entity expects to pay or receive to terminate the contracts (net of transaction costs) or replace the contracts at their current market rates as at reporting date. This is based on independent market quotations and determined using standard valuation techniques. 52 financial statements. Servcorp annual report 2003 23 (d) Additional financial instruments disclosures (continued) Net fair values of financial assets and liabilities (continued) Net fair values On-balance sheet financial instruments The carrying amounts and net fair values of financial assets and liabilities as at the reporting date are as follows: Financial assets Cash Receivables Investments: Shares in other corporations - unlisted Floating rate notes Fixed rate bonds Reset preference securities Financial liabilities Bank overdrafts and loans Payables Lease liabilities Dividends payable Employee entitlements CONSOLIDATED 2003 2002 Carrying amount $'000 2003 2002 Net fair value $'000 26,125 10,055 47,316 11,213 26,125 10,055 47,316 11,213 50 2,911 6,042 4,095 342 29,494 3,687 - 1,602 50 - - - 1,483 32,915 6,566 3,173 1,338 50 2,902 6,078 4,132 342 29,494 3,687 - 1,602 50 - - - 1,483 32,915 6,566 3,173 1,338 Investments are carried at cost on the basis that they will be held until maturity whereby par value will be restored. Off-balance sheet financial instruments The net fair value of off-balance sheet financial instruments held as at the reporting date are: Forward foreign exchange contract 2,963 2,003 CONSOLIDATED 2002 $'000 2003 $'000 53 notes to the financial statements for the financial year ended 30 June 2003 24 Employee entitlements Aggregate employee entitlements - Current - Non-current Number of employees Number of employees at the year end Note 19 19 CONSOLIDATED 2002 2003 $'000 $'000 THE COMPANY 2002 $'000 2003 $'000 1,179 423 1,602 No. 339 1,123 215 1,338 No. 350 - - - - - - No. - No. - Options granted to employees Chief Executive Officer The grant to the Chief Executive Officer, Alfred Moufarrige, of 3,000,000 options to subscribe for fully paid ordinary shares in the Company, was approved by a General Meeting of Shareholders on 24 May 2001. The options were issued on 22 June 2001. These options were forfeited on 18 December 2002 by Alfred Moufarrige, at his request. Executive & Employee share option schemes The Company has previously granted options over 2,110,000 unissued ordinary shares to 4 directors and 48 executives under the Executive Share Option Scheme, and 170,000 unissued ordinary shares to 34 employees under the Employee Share Option Scheme. The options are exercisable, any time after the expiration of two years from the issue of the options and prior to the expiry of the options, at a price of $1.50 per share. The options expire on the earlier of 5 years from the date of issue or the date which the optionholder ceases to be a director or employee of the Company or any of its controlled entities. The market value of shares under these options at 30 June 2003 was $1.16. No options were issued under either of these schemes during the year ended 30 June 2003. 90,000 (2002: 90,000) options expired under the Executive Share Option Scheme and 10,000 (2002: 2,000) options expired under the Employee Share Option Scheme during the year ended 30 June 2003. 20,000 (2002: 438,000) ordinary shares were issued under the Executive Share Option Scheme and Nil (2002: 34,000) were issued under the Employee Share Option Scheme during the year ended 30 June 2003. Unissued ordinary shares of the Company under option to executives and employees as at 30 June 2003 are: Expiry date Exercise price Number of options 2002 2003 29 November 2004 15 December 2004 21 June 2009 $1.50 450,000 450,000 $1.50 934,000 1,054,000 3,000,000 $6.00 - Superannuation Fund The Company and certain controlled entities contribute to a defined contribution superannuation fund. In the case of the Servcorp Superannuation Fund, the Company has a legally enforceable obligation to contribute to the fund. The directors, based on the advice of the trustees of the fund, are not aware of any changes in circumstances since the date of the most recent financial statements of the fund which would have a material impact on the overall financial position of the fund. Details of contributions to the defined contribution fund during the year and contributions payable at 30 June 2003 are as follows: CONSOLIDATED 2002 2003 $'000 $'000 THE COMPANY 2002 $'000 2003 $'000 692 14 55 666 17 1 - - - - - - Employer contributions to the fund Employer contributions to other funds Employer contributions payable to the fund 54 financial statements. Servcorp annual report 2003 Note CONSOLIDATED 2002 2003 $'000 $'000 THE COMPANY 2002 $'000 2003 $'000 25 Commitments Capital expenditure commitments Contracted but not provided for and payable: Not later than one year Later than one year but not later than five years Later than five years Operating lease commitments Future operating lease rentals not provided for in the financial statements and payable: Not later than one year Later than one year but not later than five years Later than five years 311 - - 311 43 - - 43 37,355 75,535 25,411 44,070 91,601 52,349 138,301 188,020 - - - - - - - - - - - - - - - - The Consolidated Entity leases property and equipment under operating leases expiring from one to twelve years. Finance lease commitments Finance lease rentals are payable as follows: Not later than one year Later than one year but not later than five years Later than five years Less: Future lease finance charges Lease liabilities provided for in the financial statements: Current Non-current Total lease liability 2,024 2,042 - 4,066 (379) 3,010 4,373 - 7,383 (817) 3,687 6,566 17 17 1,808 1,879 3,687 2,563 4,003 6,566 - - - - - - - - - - - - - - - - - - The Consolidated Entity leases equipment under finance leases expiring from one to five years. At the end of the lease term the Consolidated Entity has the option to purchase the equipment at a price deemed to be a bargain purchase option. 26 Contingent liabilities The details and estimated maximum amounts of contingent liabilities that may become payable are set out below. The directors are not aware of any circumstance or information which would lead them to believe that these liabilities will crystallise and consequently no provisions are included in the financial statements in respect of these matters. Previous Executive Director’s Termination The termination package offered to Bryan Pashby includes a performance based element. The Company’s liability under this package ranges from zero to $225,000, dependent on the performance of the Company. Director’s termination liability 225 - - - Drive Away Program The Company has a contingent liability for unredeemed drive away points. The Drive Away program is an incentive program for agents to refer business to the Company. The Company provides overseas travel to agents who reach a set level of points. The contingent liability is based on the average cost of awards for agents in each band of points with points accruing incrementally within bandings. Unredeemed drive away liability 254 327 - - 55 notes to the financial statements for the financial year ended 30 June 2003 27 Particulars in relation to controlled entities Country of Incorporation 2003 % 2002 % Australia Name Servcorp Limited Controlled entities Servcorp Australian Holdings Pty Ltd Servcorp Offshore Holdings Pty Ltd Servcorp Exchange Square Pty Ltd (formerly Servcorp ASX P/L) Servcorp (Miller Street) Pty Limited Servcorp (North Ryde) Pty Ltd Servcorp Smart Office Pty Ltd Servcorp Smart Homes Pty Limited XSQ Pty Ltd Servcorp Virtual Pty Ltd Servcorp Holdings Pty Ltd Servcorp Administration Pty Ltd Servcorp Adelaide Pty Ltd Servcorp Bridge Street Pty Ltd Servcorp Brisbane Pty Ltd Servcorp Castlereagh Street Pty Ltd Servcorp Chifley 25 Pty Ltd Servcorp Chifley 29 Pty Ltd Servcorp Communications Pty Ltd Servcorp IT Pty Ltd Servcorp Melbourne Virtual Pty Ltd Servcorp MLC Centre Pty Ltd Servcorp Optus Centre Pty Ltd Servcorp Sydney Virtual Pty Ltd Servcorp William Street Pty Ltd Servcorp 101 Collins Street Pty Ltd Beechreef (New Zealand) Limited Servcorp New Zealand Limited Company Headquarters Limited Servcorp Serviced Offices Pte Ltd Servcorp Battery Road Pte Ltd Servcorp Marina Pte Ltd Servcorp Franchising Pte Ltd Servcorp Singapore Holdings Pte Ltd Servcorp Hong Kong Limited Servcorp Communications Limited Servcorp LLC Amalthea Nominees (Malaysia) Sdn Bhd Servcorp Thai Holdings Limited Servcorp Company Limited Headquarters Co. Limited Servcorp Japan KK Servcorp Tokyo KK Servcorp Nippon International KK Management International KK Servcorp Ginza KK (formerly Servcorp Marunouchi KK) Servcorp Paris SARL Servcorp Brussels SPRL Servcorp Business Services (Shanghai) Co. Ltd Servcorp UK Limited Servcorp Communications Limited Servcorp Consultancy Limited Servcorp Hammersmith Limited Servcorp Lombard Street Limited Servcorp Management Limited Servcorp Serviced Offices Limited Servcorp Virtual Limited Servcorp Wyvols Limited Servcorp Minories Limited Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand New Zealand New Zealand Singapore Singapore Singapore Singapore Singapore Hong Kong Hong Kong UAE Malaysia Thailand Thailand Thailand Japan Japan Japan Japan Japan France Belgium China United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 49 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - - - - - - - - - - - - - - - - 100 100 100 100 100 100 100 - 100 100 49 100 100 100 100 100 100 100 100 100 100 100 100 100 - - - - - - - - - The Company or its controlled entities exercises control over Servcorp LLC despite owning 49% of the issued capital as arrangements are in place that, in substance, entitle the Company or its controlled entities to the majority of the benefits and risks of ownership not withstanding that control may be vested in another party. 56 financial statements. Servcorp annual report 2003 28 Acquisition / disposal of controlled entities The following controlled entities were acquired or disposed of during the financial year and the operating results of each entity have been included in the consolidated operating profit/(loss) from the acquisition date or up to the date of disposal: Consideration $'000 The consolidated entity's interest % Acquisitions 2003 Servcorp Holdings Pty Ltd The entity was acquired for cash on 25 October 2002. Servcorp Administration Pty Ltd Servcorp Adelaide Pty Ltd Servcorp Bridge Street Pty Ltd Servcorp Brisbane Pty Ltd Servcorp Castlereagh Street Pty Ltd Servcorp Chifley 25 Pty Ltd Servcorp Chifley 29 Pty Ltd Servcorp Communications Pty Ltd Servcorp IT Pty Ltd Servcorp Melbourne Virtual Pty Ltd Servcorp MLC Centre Pty Ltd Servcorp Optus Centre Pty Ltd Servcorp Sydney Virtual Pty Ltd Servcorp William Street Pty Ltd Servcorp 101 Collins Street Pty Ltd The entities were acquired for cash on 28 October 2002. Servcorp Singapore Holdings Pte Ltd The entity was acquired for cash on 31 December 2002. Servcorp Communications Limited Servcorp Consultancy Limited Servcorp Hammersmith Limited Servcorp Lombard Street Limited Servcorp Management Limited Servcorp Serviced Offices Limited Servcorp Virtual Limited Servcorp Wyvols Limited The entities were acquired for cash on 31 January 2003. Servcorp Minories Limited The entity was acquired for cash on 13 February 2003. Acquisitions 2002 Servcorp Virtual Pty Ltd The entity was acquired for cash on 7 September 2001. - - - - - - - - - - - - - - - - - - - - - - - - - - - 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 57 notes to the financial statements for the financial year ended 30 June 2003 29 Notes to the statements of cash flows (a) Reconciliation of cash For the purpose of the statements of cash flows, cash includes cash on hand and at bank and short-term deposits at call, net of outstanding bank overdrafts. Cash as at the end of the financial year as shown in the statements of cash flows is reconciled to the related items in the statements of financial position as follows: Cash Short term deposits (b) Reconciliation of operating profit/(loss) after income tax to net cash provided by operating activities Operating profit/(loss) after income tax Add/(less) non-cash items: Amounts set aside to provisions Depreciation and amortisation (Profit)/loss on sale of assets Income taxes payable Deferred taxes Unrealised foreign exchange gain Write-down in Rumble investment Provision for diminution in value of loan Net cash provided by operating activities before change in assets and liabilities Change in assets and liabilities adjusted for effects of purchase and disposal of controlled entities during the financial period: Decrease/(increase) in prepayments Decrease in trade debtors Increase in current assets Increase in deferred income Decrease in client security deposits Decrease in accounts payable CONSOLIDATED 2002 2003 $'000 $'000 THE COMPANY 2002 $'000 2003 $'000 11,258 14,867 26,125 6,213 40,172 46,385 1 - 1 - - - 2,455 (3,409) 4,212 7,077 92 11,518 650 (1,052) (290) (509) - - 80 17,396 80 (3,328) (1,679) 22 950 - - - - (444) (18) - - 2,783 - - - (415) 188 91 - - 12,864 10,112 6,533 6,941 778 312 (1,391) 497 (332) (710) 1,679 4,056 (1,367) 1,522 (2,393) (2,616) - - - - - (136) (5) - - - - (30) Net cash provided by operating activities 12,018 10,993 6,397 6,906 (c) Non-cash financing and investment activities During the financial year the Consolidated Entity acquired property, plant and equipment by means of finance leases. These acquisitions are not reflected in the statements of cash flows. Aggregate fair value of leased assets acquired (d) Financing facilities Refer Note 18. - 168 - - 58 financial statements. Servcorp annual report 2003 30 Directors' remuneration Directors' income The number of directors of the Company whose income from the Company or any related party falls within the following bands: $ 40,000 - $ 49,999 $ 80,000 - $ 89,999 $ 150,000 - $ 159,999 $ 230,000 - $ 239,999 $ 300,000 - $ 309,999 $ 640,000 - $ 649,999 THE COMPANY 2002 2003 2 1 1 - 1 1 2 1 1 1 1 - The remuneration bands are not consistent with the emoluments disclosed in the Directors' Report as the basis of calculation differs due to the differing requirements of the Corporations Act 2001 and the Accounting Standards. CONSOLIDATED 2002 2003 $ $ THE COMPANY 2002 $ 2003 $ Total income paid or payable, or otherwise made available, to all directors of the Company and controlled entities from the Company or any related party 1,307,678 900,937 262,062 256,251 Directors' income includes amounts paid by the Company during the year to indemnify directors' and officers' liabilities and legal expenses' insurance contracts, in accordance with common commercial practice. 31 Executives' remuneration The remuneration of executives who work wholly or mainly outside Australia is not included in this disclosure. Executive officers are those officers involved in the strategic direction, general management or control of the business at a company or operating division level. The number of executive officers of the Company and of controlled entities, whose remuneration from the Company or related parties, and from entities in the Consolidated Entity, falls within the following bands: $ 100,000 - $ 109,999 $ 110,000 - $ 119,999 $ 120,000 - $ 129,999 $ 130,000 - $ 139,999 $ 140,000 - $ 149,999 $ 150,000 - $ 159,999 $ 230,000 - $ 239,999 $ 300,000 - $ 309,999 $ 640,000 - $ 649,999 1 1 3 - - 6 - 1 1 - 3 - 2 1 4 1 1 - - - - - - - - - - - - - - - - - - - The remuneration bands are not consistent with the emoluments disclosed in the Directors' Report as the basis of calculation differs due to the differing requirements of the Corporations Act 2001 and the Accounting Standards. CONSOLIDATED 2002 2003 $ $ THE COMPANY 2002 $ 2003 $ Total income received, or due and receivable, from the Company, entities in the Consolidated Entity or related parties by executive officers of the Company and of controlled entities whose income is $100,000 or more 2,464,209 1,920,977 63,405 61,460 Executives' remuneration includes amounts paid by the Company during the year to indemnify executives, and an allocation of insurance premiums paid by the Company or related parties in respect of directors' and officers' liabilities and legal expenses' insurance contracts, in accordance with common commercial practice. 59 notes to the financial statements for the financial year ended 30 June 2003 32 Related parties Directors The names of each person holding the position of director of Servcorp Limited during the financial year are Messrs A Moufarrige, B Corlett, R Holliday-Smith and B Pashby, Ms J King, and Mr T Moufarrige (alternate for A Moufarrige and B Pashby). Details of directors' remuneration are set out in Note 30. Apart from the details disclosed in this note, no director has entered into a material contract with the Company or the Consolidated Entity during the financial year and there were no material contracts involving directors' interests subsisting at balance date. Directors' holdings of shares and share options The interests of directors of the reporting entity and their director-related entities in shares and share options of entities within the Consolidated Entity at year end are set out below. Servcorp Limited: Ordinary shares Options over ordinary shares Number held 2003 2002 48,379,753 600,000 47,697,499 3,600,000 Directors' transactions in shares and share options During the year no directors exercised options over ordinary shares in the company. Other transactions with the Company or its controlled entities The Consolidated Entity has a lease with Tekfon Pty Ltd for the use of Tekfon's premises for storage. A director of the Company, Mr A Moufarrige, has an interest in and is a director of Tekfon Pty Ltd. Mr B Pashby, also a director of the Company was a director of Tekfon Pty Ltd. 67 Fitness Pty Ltd provides gymnasium services at a discount to clients and staff of the Consolidated Entity. A director of the Company, Mr A Moufarrige, has an interest in and is a director of 67 Fitness Pty Ltd. Mr B Pashby, also a director of the Company was a director of 67 Fitness Pty Ltd. Enideb Pty Ltd operates the Servcorp franchise in Canberra. A relative of a director of the Company, Mr A Moufarrige, has an interest in Enideb Pty Ltd. Mr A Moufarrige has no interest in the affairs of Enideb Pty Ltd. Three directors of the Company, Mr B Corlett, Mr R Holliday-Smith and Mr A Moufarrige, each hold an interest in Rumble Group Pty Limited either directly or through entities that are controlled by them. Mr R Holliday-Smith and a relative of Mr A Moufarrige are directors of Rumble Group Pty Limited. In addition the Consolidated Entity engaged Rumble Group Pty Limited to provide services for the development of proprietary software and paid $17,980 (2002: $136,876), at arm’s length terms, in consulting fees. A director of the Company, Mr A Moufarrige, has an interest in and is a director of Sovori Pty Ltd. Mr T Moufarrige, an alternate director of the Company is a director of Sovori Pty Ltd. The terms and conditions of the transactions with directors and their director related entities were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-director related entities on an arm's length basis. 60 financial statements. Servcorp annual report 2003 32 Related parties (continued) Other transactions with the Company or its controlled entities (continued) The value of the transactions during the year with directors and their director-related entities were as follows: Director Director-related entity Transaction CONSOLIDATED 2002 2003 $’000 $’000 THE COMPANY 2002 $’000 2003 $’000 R Holliday-Smith A Moufarrige B Corlett A Moufarrige B Pashby Rumble Group Pty Limited Investment Consulting - - 18 137 Tekfon Pty Ltd Premises rental 29 20 A Moufarrige Enideb Pty Ltd Franchisee 312 A Moufarrige SDS (Digital Strategy) Telecommunication - Pty Ltd user 187 699 A Moufarrige Sovori Pty Ltd Telecommunication user 17 - - - - - - - - - - - - - Amounts receivable from and payable to directors and their director-related entities at balance date arising from these transactions were as follows: Current receivable Enideb Pty Ltd SDS (Digital Strategy) Pty Ltd Rumble Group 67 Fitness (Gym) Sovori Pty Ltd 27 - 2 1 10 16 420 - - - - - - - - - - - - - From time to time directors of the Company or its controlled entities, or their director-related entities, may purchase goods from or provide services to the Consolidated Entity. These purchases or sales are on the same terms and conditions as those entered into by other employees, suppliers or customers of the Consolidated Entity and are trivial or domestic in nature. 61 notes to the financial statements for the financial year ended 30 June 2003 32 Related parties (continued) Wholly-owned group Details of interests in wholly-owned controlled entities are set out at Note 27. Details of dealings with these entities are set out below. THE COMPANY 2002 $'000 2003 $'000 Loans Loans between entities in the wholly-owned group are repayable at call. Interest is charged monthly at the rate of 10.35% pa (2002: 10.35% pa) on the outstanding balance. Interest brought to account by the Company in relation to these loans during the year: Net interest revenue 1,723 1,736 Balances with entities within the wholly-owned group The aggregate amounts receivable from, and payable to, wholly-owned controlled entities by the Company at balance date and the significant transactions comprising the movement in the balance are: Receivables - non-current Other loans Provision for diminution in value of loan Loans comprise funding for new office locations, the transfer of funds for investment purposes, royalties, dividends and interest. Payables - current Trade creditors Payables - current comprise day-to-day funding of expenses. Payables - non-current Other loans Payables non-current comprise the transfer of funds for investment purposes and interest. Dividends Dividends received or due and receivable by the Company from wholly-owned controlled entities Royalties Royalties received or due and receivable by the Company from wholly-owned controlled entities Marketing support fee Marketing support fee paid or due and payable by the Company to wholly-owned controlled enitites 65,413 (2,783) 71,219 - 2,827 1,650 5,040 865 1,700 2,500 7,726 4,698 2,741 - 62 Directors' declaration servcorp annual report 2003 In the opinion of the directors of Servcorp Limited: (a) the financial statements and notes, set out on pages 26 to 62, are in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the financial position of the Company and Consolidated Entity as at 30 June 2003 and of their performance, as represented by the results of their operations and cash flows, for the financial year ended on that date; and complying with Accounting Standards in Australia and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. Dated at Sydney this 16th day of September 2003. Signed in accordance with a resolution of directors A G Moufarrige Director 63 Independent audit report to the members of Servcorp Limited Scope We have audited the financial report of Servcorp Limited (the Company) for the financial year ended 30 June 2003, consisting of the statements of financial performance, statements of financial position, statements of cash flows, accompanying notes 1 to 32, and the directors' declaration set out on pages 26 to 63. The financial report includes the consolidated financial statements of the consolidated entity, comprising the Company and the entities it controlled at the end of the year or from time to time during the financial year. The Company's directors are responsible for the financial report. We have conducted an independent audit of this financial report in order to express an opinion on it to the members of the Company. Our audit has been conducted in accordance with Australian Auditing Standards to provide reasonable assurance whether the financial report is free of material misstatement. Our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial report, and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion whether, in all material respects, the financial report is presented fairly in accordance with Accounting Standards and other mandatory professional reporting requirements in Australia and statutory requirements so as to present a view which is consistent with our understanding of the Company's and the consolidated entity's financial position, and performance as represented by the results of their operations and their cash flows. The audit opinion expressed in this report has been formed on the above basis. Audit opinion In our opinion, the financial report of Servcorp Limited is in accordance with: (a) the Corporations Act 2001, including: i. ii. giving a true and fair view of the Company's and the consolidated entity's financial position as at 30 June 2003, and of their performance for the year ended on that date; and complying with Accounting Standards in Australia and the Corporations Regulations 2001; and (b) other mandatory professional reporting requirements in Australia. KPMG Roger Amos Partner Sydney, 16 September 2003 64 Shareholder information servcorp annual report 2003 The shareholder information set out below is provided in accordance with the Listing Rules and was applicable as at 5 September 2003. Class of shares and voting rights Ordinary shares At 5 September 2003 there were 604 holders of the ordinary shares of the Company. At a general meeting: • On a show of hands, every member present has one vote • On a poll, every member present has one vote for each fully paid share held. Options At 5 September 2003, there were 36 holders of options over 1,379,000 unissued ordinary shares granted to employees and directors under Executive and Employee Share Option Schemes. There are no voting rights attached to the options. Voting rights will be attached to the unissued ordinary shares when the options have been exercised. The options are unquoted. Distribution of shareholders and optionholders Category 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Ordinary shares Number of holders 142 274 81 84 23 Number of shares 95,268 830,737 647,022 2,579,567 75,802,760 % of total 0.12 1.04 0.81 3.22 94.81 Options Number of holders 1 4 11 15 5 Number of options 1,000 15,000 106,000 507,000 750,000 % of total 0.07 1.09 7.69 36.76 54.39 Totals 604 79,955,354 36 1,379,000 At 5 September 2003 there were 26 holders of ordinary shares holding less than a marketable parcel, based on the closing market price at that date. Substantial shareholders The following organisations have disclosed a substantial shareholder notice to Servcorp: Name Sovori Pty Ltd Commonwealth Bank Group Deutsche Bank Group On-market buy-back There is no current on-market buy-back. Number of shares 48,379,753 13,758,965 8,444,087 % of voting power advised 60.50% 16.23% 9.96% 65 Shareholder information Twenty largest shareholders Name Number of ordinary shares held Percentage of capital held Citicorp Nominees Pty Limited (CFS Future Leaders Fund) Citicorp Nominees Pty Limited (CFS WSLE Imputation Fund) Citicorp Nominees Pty Limited (CFS Imputation Fund) Citicorp Nominees Pty Limited Corlett R B Fortis Clearing Nominees P/L Government Superannuation Office (State Super Fund) Gumnut Farms Pty Ltd Huntley Investment Company Limited International Business Centre Ltd JP Morgan Nominees Australia Limited Moufarrige A G National Nominees Limited RBC Global Services Australia Nominees Pty Limited (DE A/C) RBC Global Services Australia Nominees Pty Limited (RA A/C) Sovori Pty Limited Transport Accident Commission Victorian Workcover Authority UBS Private Clients Australia Nominees Pty Ltd Westpac Custodian Nominees Limited Totals for Top 20 Options Category Vendor Executive and employee CEO 8,935,062 2,986,253 1,616,500 177,746 220,000 149,319 805,823 133,600 140,365 227,921 8,186,634 1,141,390 237,166 1,841,558 531,639 46,819,648 462,243 543,756 352,005 184,800 75,693,428 11.175% 3.735% 2.022% 0.222% 0.275% 0.187% 1.008% 0.167% 0.176% 0.285% 10.239% 1.428% 0.297% 2.303% 0.665% 58.557% 0.578% 0.680% 0.440% 0.231% 94.67% Number Number on issue of holders 0 1,379,000 0 0 36 0 There were no persons holding 20% or more of any category of option. 66 Offices and officers servcorp annual report 2003 Directors Alf Moufarrige Bruce Corlett Rick Holliday-Smith Julia King Bryan Pashby Taine Moufarrige (alternate to A Moufarrige and B Pashby) Company secretary Greg Pearce Registered office and principal office Level 17 BNP Paribas Centre 60 Castlereagh Street Sydney NSW 2000 Telephone: Facsimile: (02) 9231 7500 (02) 9231 7660 Share registry Registries Limited Level 2 28 Margaret Street Sydney NSW 2000 Telephone: Facsimile: (02) 9279 0677 (02) 9279 0664 Auditors KPMG The KPMG Centre 45 Clarence Street Sydney NSW 2000 Stock exchange PO Box R67 Royal Exchange Sydney NSW 1223 Servcorp Limited shares are quoted on the Australian Stock Exchange under the code SRV. The Home Exchange is Sydney. Annual general meeting The Annual General Meeting of Servcorp Limited will be held at Level 29 The Chifley Tower, 2 Chifley Square, Sydney at 5pm on Thursday 6 November 2003. 67 acknowledgements: illustrations by Steve Panozzo, Age 39½ Noz Productions. 

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