Results 2005 O O HH II - HH HH II - HH Annual Report Servcorp Limited ABN 97 089 222 506 HI - HO HI - HO Servcorp’s aim is to be the World’s Finest Serviced Office Operator. The aim includes a commitment to be 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 continue 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 27 years experience, a profitable track record, a strong financial capability, an energetic team and a commitment to our clients. Servcorp Team Members at the coal face working to increase shareholder value Servcorp annual report 2005 It’s off to work we go...... Contents Positive cash flows the go Elf world Chairman Elf Chief Elf Alf Community service Elves are IT Little people Corporate governance Directors’ report Financial report Auditor’s report Shareholder information Corporate information 2 4 7 8 9 10 12 14 22 31 74 76 78 AA rr ee cc oo rr d yy ee aarr yy oo uu kk nn oo ww 1 HI - HO HI - HO Positive cash flows the go 2002 $’000 12 months ended 30 June 2003 $’000 2004 $’000 2005 $’000 Total revenues Profit before tax Net profit after tax Net cash flow from operating activities (before tax) Cash & interest earning financial assets 118,428 113,761 107,513 123,858 (188) (3,409) 19,208 46,385 5,251 2,455 16,132 39,173 13,650 9,443 22,522 44,317 22,258 15,293 33,019 48,697 Profit before tax Cash flow from operating activities (before tax) 2 Profit before tax mature location profit $26.9m immature location loss $4.7m mature location profit projected 2006 $30.0m Revenue 12 months to June 2004 $107.5m 12 months to June 2005 $123.9m 15.2% projected revenue growth 2006 12% Servcorp annual report 2005 Net profit before tax - mature floors Clients clients in residence virtual and serviced office 6,700 12 months growth in clients 16.4% Office numbers grew by 15% projected 2006 11% growth w 11 00 ffloo oo rrs jjuustt oo pp ee nn ee dd - w ee cc oo nn ttiinn uu ee ttoo ggrr oo 3 Locations Australia 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 25, Optus Centre 367 Collins Street Level 40, 140 William Street Level 50, 101 Collins Street North Ryde Level 9, Avaya House 123 Epping Road North Sydney Levels 4, 17, 21 & 22 201 Miller Street Perth Level 28, AMP Tower 140 St Georges Terrace Sydney Levels 25 & 29, Chifley Tower 2 Chifley Square Level 57, MLC Centre Martin Place Level 17, BNP Paribas Centre 60 Castlereagh Street New Zealand Auckland Level 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 4 Servcorp annual report 2005 Asia Shanghai, China Level 21, HSBC Tower 101 Yin Cheng East Road Pudong Level 29, Shanghai Kerry Centre 1515 Nanjing Road West Jingan Beijing, China Level 6, Office Tower W2 The Towers, Oriental Plaza No1 East Chang An Avenue Dong Cheng District Hong Kong Levels 25 & 30 Bank of China Tower 1 Garden Road, Central Kuala Lumpur, Malaysia Level 36, Menara Citibank 165 Jalan Ampang Level 20, Menara Standard Chartered Building 30 Jalan Sultan Ismail Singapore Levels 30 & 31 Six Battery Road Penthouse Level Suntec Tower Three 8 Temasek Boulevard Bangkok, Thailand Levels 8 & 9, Zuellig House 1 Silom Road Level 29, Central World Tower 999/9 Rama I Road Khwaeng Patumwan Khet Patumwan 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 Levels 16 & 27, Shiroyama JT Trust Tower 4-3-1 Toranomon Minato-ku Levels 9 & B1, AIG Building 1-1-3 Marunouchi Chiyoda-ku Level 14, Hibiya Central Building 1-2-9 Nishi Shimbashi Minato-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 Level 28, Shinagawa Intercity Building 2-15-1 Konan Minato-ku Level 27, Tokyo Sankei Building 1-7-2 Otemachi Chiyoda-ku Osaka Level 9, Edobori Center Building 2-1-1 Edobori Nishi-ku Level 19, Hilton Plaza West 2-2-2 Umeda, Kita-ku Nagoya Level 4, Nikko Shoken Building 3-2-3 Sakae Naka-ku Aichi 5 NN ee oo rrss:: oo kk yy oo,, ww FFlloo SS hh aa nn gg hh aaii,, TT NN aa gg oo yy aa oo tt sslloo ee aarr ee nn ww ww HI - HO HI - HO Places we hope to go Singapore China x 2 Paris The Middle East Japan x 2 Brisbane Sydney Let’s hope they quickly grow into strong, mature locations We are always searching for new opportunities 6 Chairman Elf 2005 was a record year for Servcorp, and our third consecutive year of consistent growth. Revenue for the year was $123.86 million, an increase of 15% on 2004. Net profit after tax also increased - up an impressive 62% on 2004, to $15.29 million. Our mature floors contributed $26.96 million profit before tax, with all geographic sectors contributing strongly. Earnings per share increased by 61% from 11.8 cents per share to 19.0 cents per share. The Directors have declared a fully franked final dividend of 4.00 cents per share, bringing total dividends for the year to 7.75 cents or $6.23 million. In the absence of any unforeseen circumstances, the Board expects to increase the interim dividend for financial year 2006 to a fully franked 4.50 cents per share. In 2005, we maintained focus on our strengths. We committed to further investment in our technology and, most importantly, continued to develop our people. Servcorp's business performs through strong financial and operating discipline, and we rely on our managers to apply this discipline. We support our people with meticulous training programmes and other cutting edge tools. The Servcorp team is the backbone of our business. 7 Servcorp annual report 2005 In November 2004 I travelled, with my fellow non-executive directors, to Japan to review Servcorp's operations in our most important market. Such visits are an important part of our commitment to continually reviewing our operations. We were deeply impressed by what we saw. Servcorp has real depth of management in Japan. The management team to whom we were extensively exposed are committed professionals who are so proud to be given the opportunity to represent our company. Servcorp is the dominant serviced office provider in Japan, and we are confident there will continue to be significant growth opportunities for us in that important market. The commitment we witnessed in Japan is indicative of Servcorp teams throughout the world. On behalf of the Board I thank our CEO, Alf Moufarrige, his management team and all the Servcorp team members for their dedication and contributions during the year. Their ongoing commitment to keeping Servcorp as the leader in technology and service has ensured that our company remains superior to our competition. We will continue to strive to maintain our position as the world's finest serviced office provider. The future for Servcorp is encouraging. We look forward to increasing shareholder wealth in the current financial year and beyond. Bruce Corlett C hhaiirr mm a nn’ss nn oott jjusstt hhapp pp yy, hh ee’ss ppllyy agglloo w ssii mm Chief Elf Alf The 2004/2005 year was a great year all around for Servcorp. Not only did we produce record profits but over the past 14 months have located and executed leases on 10 new top locations, 7 of which are in operation as immature floors. These locations are all performing well and, while they could put downward pressure on the first half of the year on NPBT, the second half of the financial year should show substantial profit growth. I continue to see low double digit growth on the mature floors but, as we settle and bring to maturity a number of those floors shown as immature this year, I would expect our NPBT to increase by approximately 15%. Revenue should also increase by 12% and client capacity in 2005 was increased by 15%. Our hardworking, talented team has achieved these spectacular results without substantially eroding our cash position and this is made all the more pleasing when it is realised that we bought back over 900,000 shares at $2.40 and paid dividends of just over $6 million. While I believe next year will be strong, even on the back of the past two spectacular years, markets can change but we are well positioned to handle all market conditions and have ready cash should opportunities in our industry arise. The IT development team continues to surprise us all with their achievements and dedication to Servcorp and the TechElfs allow us to proudly say we remain the world’s finest serviced office operator. I thank Bruce Corlett and the Board for their guidance and input. The teams across the world amaze me with their belief in Servcorp and our culture has grown, even as we expand. A G Moufarrige 8 Servcorp annual report 2005 We are proud of the fact that, as a small Aussie company, what we put back into the community is focused on bringing real change and benefits to people, in particular young people who suffer from debilitating diseases. We will keep you updated. FF uu nn dss ffoo rr tthh ee uu nniittyy c oo nn ttiinn uu ee ttoo ffloo c oo ww mm mm Community service Servcorp continues to support the Joan Salter Fund which is managed by the Rotary Club of Sydney. Joan was the Servcorp founding General Manager whose life was cut short at the age of 46 from liver and bowel cancer. The Fund maintained a balance for the year of about $570,000 while supporting a wide range of causes to the tune of over $150,000. The Joan Salter Fund's focus is to assist with continuing research into the prevention and cure of cancer, as well as having a particular interest in assisting young, seriously or terminally ill members of the community. Servcorp holds charity functions and balls, runs raffles and undertakes donation drives all year round in all locations. Every dollar that is raised by our teams on the floor is matched dollar for dollar by Servcorp. This year we supported the following organisations: The Rotary Club of Sydney • • MRC Cancer Research* The Cancer Council • Australian Red Cross Tsunami • Appeal • MS Society Unisearch • Austcare • • Starlight Foundation • Westmead Hospital • • • St Vincent's Hospital, Sydney The Mater Hospital Breast Cancer Foundation * Great studies are being made by Professor David Morris and his team at the University of New South Wales in the development of a drug called Albendazole, which initial indications show has low toxicity and indeed shrinks cancer tumors. Live tests are currently being carried out. Servcorp supports this ongoing cancer research. In 2004 the Joan Salter Fund, Sydney Rotary and the Cancer Council of NSW, established the Sydney Rotary Research Fellowship into the causes and prevention of cancer stemming from lifestyle choices. We have committed $150,000 to this project over three years. 2006 will be the third year of this project and we look forward to some positive results from the study. 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 9 Our IT solutions set the pace In the last year, Servcorp has deployed over 3,000 Cisco telephony handsets. We have enjoyed 99.9% up time of our global internet service, Smart Office®. We have over 5,000 active members of Servcorp's web services portal called Servcorp Hottdesk®. This year we deploy a greatly improved provisioning and information management system with the sole aim of reducing management administration so that our managers can increase turnover. Servcorp and the IT Team take responsibility for these services to ensure that our clients, and in turn Servcorp, have a competitive advantage. Dial *1 for IT H.E.L.P. Worksmart Screen Console Debtors O.T.I.I.S. Call Accounting Servcorp Smart Office® Servcorp Hottdesk® A Deloitte Technology Fast 50 winner, awarded for IT excellence. 10 Servcorp annual report 2005 Development Servcorp's competitive advantage revolves around the superior management of a multi-tenant environment. The ITS team elves have been focused on developing new systems to improve Servcorp's product from both a client perspective and from an internal management viewpoint. ITS has a view that making our managers’ lives easier will improve customer service, making acceptance of the Servcorp product easier. Servcorp believes that our clients outsource all of their office requirements to us and we should not subcontract those to a third party. As a result Servcorp's infrastructure, human, soft and hard have all grown in recent years. This growing team produces and maintains telecommunications, internet services, facilities management services and distributed web services for Servcorp's 6,700 clients. These systems have been specifically designed and built in-house to ensure the best level of service for not only a multi-tenant environment, but any office environment worldwide. 2005 awards Best Services Company in Singapore in the Singapore Austcham Awards. Best Services Company in Thailand in the Thailand Austcham Awards. m ee nn tt cc oo nn ttiinn uu eess aass yy oo uu DD ee vv eelloo pp oo nnllyy rr ee aa pp iiff yy oo uu ss oo ww 11 Little people The Board Bruce Corlett (*Mablung Meneldur) Chairman Rick Holliday-Smith (*Daeron Falassion) Non-Executive Director Julia King (*Nessa Narmolanya) Non-Executive Director Alf Moufarrige (*Beren Anwamane) Executive Director CEO Taine Moufarrige (*Mablung Anwamane) Executive Director GM Australia, New Zealand & Middle East The Board and Senior Management thank the hardworking Servcorp Team. They make SERVCORP the best! * The above elf names were sourced from the web site www.chriswhetherell.com/elf/ 12 Servcorp annual report 2005 Our Management Team Marcus Moufarrige BCom GM Asia & CIO Richard Baldwin Dip Ag, Dip Oen GM I.T.S. Olga Vlietstra BA GM Japan Sharon Tindale Dip Bus (Val), AAPI, LREA International Sales and Marketing Manager Wilma Wu BA (Hons) GM Greater China Kureha Ogawa BA Senior Manager Japan Greg Pearce BCom, CA, ACIS Company Secretary Steve Gainer Senior Manager Japan Thomas Wallace BBS, ACA Chief Financial Officer Liane Gorman Senior Manager Concepts Steve Lombardo BSc Chief Technology Officer Kikue Aoki Senior Manager Japan Warren James LREA, Qual. Valuer (NSW) Manager, International Property Portfolio OO OO HH II - HH II gg uu ess iitts bb aacc kk oo rr kk ww e gg oo HH II - HH ttoo ww 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. The Board is continually working to improve the Company’s governance policies and practices, where such practices will bring benefits or efficiencies to the Company. Details of Servcorp’s compliance are set out below, and in the ASX principles compliance statement on pages 17 to 21 of this report. Role of the Board The Board has adopted a formal statement of matters reserved for the Board. The central role of the Board is to set the Company’s strategic direction and to oversee the Company’s management and business activities. 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 responsibility; 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; 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. Responsibility for management of the Company’s business activities is delegated to the CEO and management. 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 only change to the Board since the last annual report was the appointment of Mr Taine Moufarrige on 25 November 2004. Mr T Moufarrige had acted as an Alternate Director for Mr A G Moufarrige since 4 February 2000. Mr T Moufarrige will retire at the 2005 annual general meeting and will make himself available for election by shareholders at that meeting. The Chairman of the Board, Mr Bruce Corlett, is an independent non-executive director. 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 skills, experience and expertise of each director in office at the date of this annual report is set out on page 22 of this annual report. The Board will continue to be made up of a majority of independent non-executive directors. The performance of non-executive directors was reviewed during the year. The Board comprises five directors (two executive and three non-executive). The non-executive directors are all independent. The names of the directors of the Company in office at the date of this annual report are set out below. Names of directors in office at the date of this annual report Director First appointed Non- executive Independent Retiring at 2005 AGM B Corlett 19 October 1999 R Holliday-Smith 19 October 1999 J King 24 August 1999 A G Moufarrige 24 August 1999 T Moufarrige 25 November 2004 Yes Yes Yes No No Yes Yes Yes No No Yes No No No Yes Seeking re-election at 2005 AGM Yes No No No Yes 14 Servcorp annual report 2005 corporate governance. Servcorp annual report 2005 Directors’ independence Ethical standards Continuous disclosure It is important that the Board is able to operate independently of executive management. The non-executive directors are considered by the Board to be independent of management. Independence is assessed by determining whether the director is free of any business interest or other relationship which could materially interfere with the exercise of their unfettered and independent judgement and their ability to act in the best interests of Servcorp. None of the non-executive directors have ever been employed by Servcorp. 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 A 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 since they were last elected, 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. 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. Codes of conduct, outlining the standards of personal and corporate behaviour to be observed, form part of Servcorp’s management manuals. Director and officer dealings in Company shares Servcorp policy prohibits directors, officers and senior executives from dealing in Company shares or exercising options: • • in the six weeks prior to the release of the Company's half-year and full-year 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 or decision making process on the matter and abstains from voting on the item being considered. Details of director related entity transactions with the Company and the Consolidated Entity are set out in Note 32 to the financial statements. Servcorp is committed to ensuring that all shareholders and investors are provided with full and timely information and that all stakeholders have equal and timely access to material information concerning the company. 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. 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. The Company’s annual report, result releases and market announcements are placed on its website. Servcorp encourages effective participation at general meetings. The Managing Director provides a detailed report and is available to answer questions at the Company’s annual general meeting. The Company’s auditors are invited to attend the annual general meeting and be available to answer shareholder questions about the conduct of the audit, the preparation and content of the auditor’s report, accounting policies adopted and the independence of the auditor in relation to the conduct of the audit. Auditor independence The Company’s auditors Deloitte Touche Tohmatsu (Deloitte) were appointed at the annual general meeting of the Company on 6 November 2003. The Lead Partner, Mr P G Forrester, will be due for rotation following completion of the audit for the year ending 30 June 2008. Deloitte have established policies and procedures designed to ensure their independence, and provide the Audit and Risk Committee with an annual confirmation as to their independence. Servcorp annual report 2005 15 • • 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 the 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. • • 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 (Non-executive director) Mr M Moufarrige (General Manager Asia & CIO) Mr G Pearce (Company Secretary) 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. Audit and Risk Committee The members of the Audit and Risk Committee during the year were: • Mr R Holliday-Smith (Chairman) • Mr B Corlett • Ms J King The members are all independent non-executive directors. The chairman of the Audit and Risk Committee is independent and not the chairman of the Board. The role of the Audit and Risk Committee is to assist the Board to meet its oversight responsibilities in relation to the Company’s financial reporting, internal control structure, risk management procedures and the external audit function. In doing so, it is the committee’s responsibility to maintain free and open communication between the committee and the external auditors and the management of Servcorp. The external auditors, the Managing Director, the Chief Financial Officer and other senior management attend committee meetings by invitation. The Audit and Risk Committee met three times during the year. The committee meets with the external auditors at regular scheduled sessions without management being present. The responsibilities of the Audit and Risk Committee as stated in its charter 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 review are conducted in an effective manner; • monitoring the establishment of an appropriate internal control framework and considering enhancements; 16 Servcorp annual report 2005 corporate governance. Servcorp annual report 2005 ASX principles compliance statement This table provides a description of the manner in which Servcorp complies with the ASX Principles of Good Corporate Governance and Best Practice Recommendations, or where applicable, an explanation of any departures from the Principles. Principle 1 Lay solid foundations for management and oversight Recognise and publish the respective roles and responsibilities of board and management Recommendation 1.1 Formalise and disclose the functions reserved to the board and those delegated to management. Servcorp Board Response The Board has adopted a charter that sets out the responsibilities reserved by the Board and those delegated to the Managing Director. Principle 2 Structure the board to add value Have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties Recommendation 2.1 A majority of the board should be independent directors. Servcorp Board Reponse The Board has a majority of independent directors. All the currently serving non-executive directors are independent. Recommendation 2.2 The chairperson should be an independent director. Servcorp Board Response The Chairman is an independent director. Recommendation 2.3 The roles of chairperson and chief executive officer should not be exercised by the same individual. Servcorp Board Response The roles of Chairman and Managing Director/CEO are separated. Recommendation 2.4 The board should establish a nomination committee. Servcorp Board Response The Board has not established a nomination committee. Given the size of the current Board, efficiencies are not forthcoming from a separate committee structure. Selection and appointment of new directors is undertaken by consideration of the full Board. Any director appointed by the Board must retire from office at the next annual general meeting and seek re-election by shareholders. Recommendation 2.5 Provide the information indicated in Guide to reporting on Principle 2. Servcorp Board Response All relevant information is included in the corporate governance section on pages 14 to 21 of the annual report. Principle 3 Recommendation 3.1 Promote ethical and responsible decision-making Actively promote ethical and responsible decision making Establish a code of conduct to guide the directors, the chief executive officer (or equivalent), the chief financial officer (or equivalent) and any other key executives as to: 3.1.1 The practices necessary to maintain confidence in the company’s integrity. 3.1.2 The responsibility and accountability of individuals for reporting and investigating reports of unethical practices. Servcorp Board Response The Company has established codes of conduct and ethical standards which all directors, executives and employees are expected to uphold and promote. Recommendation 3.2 Disclose the policy concerning trading in company securities by directors, officers and employees. Servcorp annual report 2005 17 ASX principles compliance statement (cont) Servcorp Board Response The Board has approved a policy concerning trading in company securities, the details of which are disclosed in the corporate governance section of this annual report. Recommendation 3.3 Provide the information indicated in Guide to reporting on Principle 3. Servcorp Board Response The information is made publicly available by inclusion of the main provisions in the annual report. Complete versions are not available on the Company’s website as they form part of manuals which are proprietary and confidential. Principle 4 Recommendation 4.1 Safeguard integrity in financial reporting Have a structure to independently verify and safeguard the integrity of the company’s financial reporting Require the chief executive officer (or equivalent) and the chief financial officer (or equivalent) to state in writing to the board that the company’s financial reports present a true and fair view, in all material respects, of the company’s financial condition and operational results and are in accordance with relevant accounting standards. Servcorp Board Response The Chief Executive Officer and Chief Financial Officer provide such letters of assurance to the Board for each half-year and full-year result. Recommendation 4.2 The board should establish an audit committee. Servcorp Board Response The Board has established an Audit and Risk Committee. Recommendation 4.3 Structure the audit committee so that it consists of: • • • • only non-executive directors; a majority of independent directors; an independent chairperson, who is not chairperson of the board; at least three members. Servcorp Board Response All three members of the Audit and Risk Committee are independent and the Chairman of the committee is not the Chairman of the Board. Recommendation 4.4 The audit committee should have a formal charter. Servcorp Board Response The Audit and Risk Committee has a formal charter which sets out its specific roles and responsibilities and composition requirements. Recommendation 4.5 Provide the information indicated in Guide to reporting on Principle 4: • • details of the names and qualifications of those appointed to the audit committee; the number of meetings of the audit committee and names of the attendees. Servcorp Board Response This information is provided on pages 16, 22 and 23 of this annual report. Recommendation 4.5 (cont) • Procedures for the selection and appointment of the external auditor, and for the rotation of external audit engagement partners. Servcorp Board Response The external auditor, Deloitte Touche Tohmatsu, under the scrutiny of the Audit and Risk Committee, presently conducts the statutory audits in return for reasonable fees. Deloitte Touche Tohmatsu were appointed at the annual general meeting of the Company held on 6 November 2003. The committee also has specific responsibility for recommending the appointment or dismissal of external auditors and monitoring any non-audit work carried out by the external audit firm. No director has any association, past or present, with the external auditor. 18 Servcorp annual report 2005 corporate governance. Servcorp annual report 2005 ASX principles compliance statement (cont) Principle 5 Recommendation 5.1 Servcorp Board Response Make timely and balanced disclosure Promote timely and balanced disclosure of all material matters concerning the company Establish written policies and procedures designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior management level for that compliance. The Company has established a continuous disclosure compliance plan. The Board and management continually monitor information and events and their obligation to report any matters. Responsibility for communications to the ASX on all material matters rests with the Company Secretary following consultation with the Chairman and Managing Director. Recommendation 5.2 Provide the information indicated in Guide to reporting on Principle 5. Servcorp Board Response There is no further information to be provided. Principle 6 Respect the rights of shareholders Respect the rights of shareholders and facilitate the effective exercise of those rights Recommendation 6.1 Design and disclose a communications strategy to promote effective communication with shareholders and encourage effective participation at general meetings. Servcorp Board Response Servcorp aims to communicate clearly and transparently with shareholders and the community. Servcorp places all company announcements on its website and also displays annual and half-year reports. Shareholders are given a reasonable opportunity to ask questions at the annual general meeting. Recommendation 6.2 Request the external auditor to attend the annual general meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the auditor’s report. Servcorp Board Response Servcorp’s external auditor attends all annual general meetings and is available to answer shareholder questions. Principle 7 Recognise and manage risk Establish a sound system of risk oversight and management and internal control Recommendation 7.1 The board or appropriate board committee should establish policies on risk oversight and management. Servcorp Board Response The Company does not have formal written policies on risk oversight and management. The Board has established an Audit and Risk Committee that is comprised only of non-executive directors. The Committee reviews the Company’s risk management strategy, its adequacy and effectiveness and the communication of risks to the Board. Day to day responsibility is delegated to the Chief Executive Officer. The Chief Executive Officer is responsible for: Identification of risk; • • Monitoring risk; • • Communication of risk events to the Board; Responding to risk events, with Board authority. The Board defines risk to be any event that, if it occurs, will have a material impact on the ability of the Company to achieve its objectives. Risk is considered across the financial, operational and organisational aspects of the Company’s affairs. Recommendation 7.2 The chief executive officer (or equivalent) and the chief financial officer (or equivalent) should state to the board in writing that: Servcorp annual report 2005 19 ASX principles compliance statement (cont) Recommendation 7.2 (cont) 7.2.1 The statement given in accordance with best practice recommendation 4.1 (the integrity of financial statements) is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the board. 7.2.2 The company’s risk management and internal compliance and control system is operating efficiently and effectively in all material respects. Servcorp Board Response The Chief Executive Officer and Chief Financial Officer provide such assurance. Recommendation 7.3 Provide the information indicated in Guide to reporting on Principle 7. Servcorp Board Response This information is provided above. Principle 8 Encourage enhanced performance Fairly review and actively encourage enhanced board and management effectiveness Recommendation 8.1 Disclose the process for performance evaluation of the board, its committees and individual directors, and key executives. Servcorp Board Response Principle 9 Recommendation 9.1 The Board operates under a code of conduct which recognises that strong ethical values must be at the heart of director and Board performance. The Board as a whole evaluates individual director’s performance and also the Board’s performance. As a tool to evaluation a questionnaire is to be completed annually by the non-executive directors with the responses to be assessed and discussed by the Board as a whole. Remunerate fairly and responsibly Ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to corporate and individual performance is defined Provide disclosure in relation to the company’s remuneration policies to enable investors to understand (i) the costs and benefits of those policies and (ii) the link between remuneration paid to directors and key executives and corporate performance. Servcorp Board Response Servcorp’s remuneration policies are discussed in the remuneration report on pages 26 to 27 of this annual report. Recommendation 9.2 The board should establish a remuneration committee. Servcorp Board Response The Board has yet to establish a Remuneration Committee. It is the intention of the Board to establish a Remuneration Committee in the future. Currently 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. Recommendation 9.3 Clearly distinguish the structure of non-executive directors’ remuneration from that of executives. Servcorp Board Response This information is provided in the remuneration report on page 26 of this annual report. Recommendation 9.4 Ensure that payment of equity-based executive remuneration is made in accordance with thresholds set in plans approved by shareholders. Servcorp Board Response All equity-based remuneration has been made in accordance with Servcorp’s Executive and Employee Share Option Schemes. Both schemes had approval granted by shareholders at the November 2000 annual general meeting. 20 Servcorp annual report 2005 corporate governance. Servcorp annual report 2005 ASX principles compliance statement (cont) Recommendation 9.5 Provide the information indicated in Guide to reporting on Principle 9. • Disclosure of the company’s remuneration policies referred to in best practice recommendation 9.1 and in Box 9.1. Servcorp Board Response Details of Servcorp’s remuneration policies for fixed, short-term and long-term incentives are set out in the remuneration report on pages 26 to 27 of this annual report. Recommendation 9.5 (cont) • The names of the members of the remuneration committee and their attendance at meetings of the committee. Servcorp Board Response The Board has not established a Remuneration Committee. Recommendation 9.5 (cont) • The existence and terms of any schemes for retirement benefits, other than statutory superannuation, for non-executive directors. Servcorp Board Response There are no such schemes in existence. Prrinciple 10 Recognise the legitimate interests of stakeholders Recognise legal and other obligations to all legitimate stakeholders Recommendation 10.1 Establish and disclose a code of conduct to guide compliance with legal and other obligations to legitimate stakeholders. Servcorp Board Response The Board operates under a code of conduct which recognises that strong ethical values must be at the heart of the director and Board performance. They guide compliance with legal requirements and ethical responsibilities, and also set a standard for employees and directors dealing with Servcorp’s obligations to external stakeholders. In regard to stakeholders, the Company: Reports its financial performance twice a year to the Australian Stock Exchange; • • Maintains a website; • Publishes all external announcements to the website and maintains these announcements for at least two years; At general meetings, shareholders are given a reasonable opportunity to ask questions; Analyst briefings are held following the release of the half-year and full-year financial results. • • Servcorp annual report 2005 21 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 2005 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: Alf Moufarrige Managing director Chief Executive Officer Appointed August 1999 Alf is simply a good serviced office operator with over 25 years of experience in the serviced office industry. Alf is primarily responsible for Servcorp’s expansion, profitability, cash generation and currency management. Directorships of listed entities in the last three years: None. Bruce Corlett Chairman and independent non-executive director BA, LLB Member of Audit and Risk Committee Chairman of Governance Committee Appointed October 1999 Over the past 30 years Bruce has been a director of many publicly listed companies. His current directorships include Adsteam Marine Limited (Chairman), Stockland Trust Group and Trust Company of Australia Limited (Chairman). Bruce is also a Fellow of Senate at the University of Sydney. Directorships of listed entities in the last three years: • • • • Adsteam Marine Limited since March 1997; Stockland Trust Group since October 1996; Tooth and Co. Limited since September 1999; Trust Company of Australia Limited since October 2000. 22 Servcorp annual report 2005 Rick Holliday-Smith Independent non-executive director BA (Hons), CA, FAICD Taine Moufarrige Executive director BA, LLB Chairman of Audit and Risk Committee Member of Governance Committee Appointed October 1999 General Manager Australia, New Zealand & the Middle East Appointed November 2004 Rick 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. 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. Directorships of listed entities in the last three years: None. 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 is set out in the table opposite. Company Secretary Greg Pearce B Com, CA, ACIS Appointed August 1999 Greg joined Servcorp in 1996 as Financial Controller and was appointed to his current role of Company Secretary during the Company’s IPO in 1999. Prior to joining Servcorp Greg spent ten years working in the information technology business and the 11 years prior to that working in audit and business services. Greg is a Chartered Accountant and is an Associate of Chartered Secretaries Australia. Rick is currently Chairman of SFE Corporation Limited and Exco Resources NL. He is a director of Cochlear Limited and DCA Group 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. Directorships of listed entities in the last three years: Cochlear Limited since February 2005; • DCA Group Limited since October 2004; • • Exco Resources NL since June 1998; • MIA Group Limited from May 2000 to September 2004; SFE Corporation Limited since April 2002. • Julia King Independent non-executive director Member of Audit and Risk Committee Appointed August 1999 Julia has had more than 30 years experience in strategic marketing and advertising. She was Chief Executive of the LVMH fashion group in Oceania and developed the business in this area. Prior to joining LVMH Julia was Managing Director of Lintas, a multinational advertising agency. Julia is currently a non-executive director of John Fairfax Holdings Limited, Opera Australia and Carla Zampatti. She has been on the Australian Government’s Task Force for the restructure of the wool industry and a member of the Council of the National Library. Directorships of listed entities in the last three years: • John Fairfax Holdings Limited since July 1995. directors’ report. Servcorp annual report 2005 Directors’ attendances at meetings Director Number of meetings held: Number of meetings attended: B Corlett R Holliday-Smith J King A G Moufarrige T Moufarrige* Board meetings Audit & Risk committee Governance committee 9 9 9 9 9 4 3 3 3 3 1 1 1 * T Moufarrige attended seven Board meetings during the year but only four after his appointment as a director on 25 November 2004. The details of the function and membership of the committees are presented in the corporate governance statement on page 16. Principle activities Consolidated results Dividends The principal activities of the Consolidated Entity during the course of the financial year were the provision of executive serviced and virtual offices and IT, communications and secretarial services. Operating profit after tax for the financial year was $15.29 million (2004: $9.44 million). Operating revenue was $123.86 million (2004: $107.51 million). Earnings per share was 19.0 cents (2004: 11.8 cents). There were no significant changes in the nature of the activities of the Consolidated Entity during the year. The operating profit after tax included significant expenses totalling $1.60 million (2004: $2.00 million). These expenses were costs directly related to the closure and relocation of floors. Dividends totalling $6.23 million have been paid or declared by the Company in relation to the financial year ended 30 June 2005 (2004: $6.03 million). The following table includes information relating to dividends in respect of the prior and current financial year, including dividends paid or declared by the Company since the end of the previous year. Dividends paid and declared Type Cents per share In respect of the previous financial year: 2004 Interim - ordinary shares Final - ordinary shares 3.75 3.75 In respect of the current financial year: 2005 Interim - ordinary shares Final - ordinary shares 3.75 4.00 Total amount $'000 Date of payment Franked % Tax rate for franking credit 3,005 3,022 3,015 3,216 8 April 2004 1 October 2004 1 April 2005 4 October 2005 100% 100% 100% 100% 30% 30% 30% 30% Servcorp annual report 2005 23 Review of operations At the end of the financial year, Servcorp operated 55 floors, in 40 locations, spanning 18 cities in 11 countries. The Consolidated Entity operates in Australia, New Zealand, Japan, South-East Asia, Greater China, France, United Arab Emirates and Belgium. During the year 8 new locations (9 floors) have been established and 2 floors closed, giving rise to a net increase of 15% in capacity. The number of office suites operated by the Consolidated Entity has increased to 2,202 with an average mature floor occupancy of 85%. Expansion plans underway at present are new locations in Shanghai and Brisbane. Further opportunities are being evaluated in China, Singapore, Paris, the Middle East, Japan and Sydney. Currently the Consolidated Entity has cash and interest earning financial assets in excess of $48 million and is well placed to take advantage of expansion opportunities when the timing is considered favourable. Asia also continued to grow strongly. During the period one floor in Bangkok closed with clients relocated to two new locations. Additional floors were opened in both Kuala Lumpur and Shanghai. Australia & New Zealand Europe & Middle East Revenue in Australia and New Zealand was generally consistent with the prior period, increasing by 7%. Operating profit increased by 28% to $7.07 million. During the period no new floors opened in Australia, however, Servcorp has committed to one additional floor that will open in December 2005. In New Zealand one floor closed with clients relocated to an existing floor. Japan & Asia Japan and Asia continued to perform well, recording an increase in revenue of 17% to $71.36 million. Operating profit increased by 41% to $13.95 million. Japan continued to grow with four new floors opening during the period. The performance of the Europe and Middle East segment has improved. Revenue increased by 31% to $14.50 million. For the twelve month period a profit of $0.41 million was recorded compared to a loss of $1.79 million for the year ended 30 June 2004. The Dubai location continued to perform at almost 100% occupancy throughout the entire period. Management continue to look for new opportunities in the region. The performance of the Paris location is improving. The Brussels market continues to experience difficult trading conditions with high levels of competition, and severe pricing pressures. New locations City Bangkok Bangkok Location Levels 8 and 9, Zuellig House Level 29, Central World Tower Kuala Lumpur Level 20, Menara Standard Chartered Nagoya Osaka Tokyo Tokyo Shanghai Level 4, Nikko Shoken Building Level 19, Hilton Plaza West Level 27, Tokyo Sankei Building Level 27, Shiroyama JT Trust Tower Level 29, Shanghai Kerry Centre Offices 49 52 45 42 51 35 32 42 Opened April 2005 April 2005 April 2005 October 2004 January 2005 April 2005 May 2005 May 2005 Events subsequent to balance date On 15 July 2005 a company in the Consolidated Entity acquired a business in Hong Kong. The consideration paid for the business, assets and customer licence agreements purchased was $1,810,721. On 25 August 2005 the directors declared a fully franked final dividend of 4.00 cents per share, payable on 4 October 2005. The financial effect of the above transactions have not been brought to account. It is intended to close the Brussels location and appropriate steps are in train to achieve this objective. The directors are not aware of any matter or circumstance, other than that referred to above or 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. 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. 24 Servcorp annual report 2005 directors’ report. Servcorp annual report 2005 Options Options on issue At the date of this report unissued ordinary shares of the Company under option are: • • • • Date option granted - 21 May 2004 Number of shares - 30,000 Exercise price - $2.00 Expiry date - 21 May 2009 Shares issued on the exercise of options Date options granted 30 November 1999 16 December 1999 The options may be exercised two years from date of issue and expire on the earlier of: Options granted (a) (b) 5 years from the date of issue; the date which the optionholder ceases to be an employee 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 of the Company or any of its subsidiaries. The 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 any options over unissued ordinary shares of the Company. Shares issued on the exercise of options 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. All shares were issued during the year ended 30 June 2005. No further shares have been issued since that date. No amounts are unpaid on any of the shares. Number of shares Amount paid 450,000 728,000 $1.50 $1.50 Indemnification and insurance of directors and officers The constitution of the Company provides that the Company must indemnify, on a full indemnity basis and to the full extent permitted by law, each current and former director, alternate director or executive officer against all losses or liabilities incurred in that capacity in defending any proceedings, whether civil or criminal, in which judgement is given in their favour or in which they are acquitted or in connection with any application in relation to any such proceedings in which relief is granted under the Corporations Act 2001. The Company has also agreed to indemnify the following current and former 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. The Company has not, during or since the financial year, indemnified or agreed to indemnify an auditor of the Company. 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 policies prohibit disclosure of the nature of the liability insured against and the amount of the premiums. 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: Servcorp Limited Director B Corlett R Holliday-Smith J King A Moufarrige T Moufarrige Direct 233,895 250,000 72,500 541,390 150,000 Ordinary shares Indirect 106,502 - 15,000 47,681,633 - Options over ordinary shares - - - - - Servcorp annual report 2005 25 Remuneration report Principles used to determine the nature and amount of remuneration The Board recognises that the Company’s performance is dependent on the quality of its people. To achieve its financial and operating objectives, Servcorp must be able to attract, retain and motivate highly-skilled executives. The objective of the Company’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with achievement of strategic objectives and the creation of value for shareholders. Servcorp’s executive remuneration policy and principles are designed to ensure that the Company: • • Provides competitive rewards that attract, retain and motivate executives of the highest calibre; Structures remuneration at a level that reflects the executives duties and accountabilities and is competitive within Australia and, for certain roles, internationally; • • Aligns executive incentive rewards with the creation of value for shareholders; Complies with applicable legal requirements and appropriate standards of governance. The framework may provide a mix of fixed and variable pay, and a blend of short and long term incentives. Non-executive directors Fees and payments to non-executive directors reflect the demands which are made on, and the responsibilities of, the directors. Non- executive directors’ fees and payments are reviewed by the Board. The Board ensures non-executive directors’ fees and payments are appropriate and in line with the market. Non-executive directors are not employed under a contract and do not receive share options or other equity based remuneration. Directors’ fees Non-executive directors’ fees are determined within an aggregate directors’ fee limit. The pool limit currently stands at $350,000 as approved at the time of Servcorp’s IPO in December 1999. This is inclusive of payments for superannuation. Non-executive directors’ fees were initially set in December 1999. That level of fees has not varied until the current base remuneration was reviewed with effect from 1 January 2005. Fees for each non-executive director were increased by $10,000 per annum. Additional fees are not paid for membership or chairmanship of board committees. Retirement allowances for directors Non-executive directors are not entitled to retirement allowances other than amounts previously contributed to complying superannuation funds. Details of remuneration Details of the nature and amount of each element of the remuneration of each director of Servcorp Limited for the year ended 30 June 2005 is set out in the following table. Directors’ remuneration Name A Moufarrige T Moufarrige B Corlett R Holliday-Smith J King Salary and fees $ 197,154 162,394 85,000 50,000 50,000 Primary Bonus $ - 45,000 - - - Non- monetary $ 113,302 6,697 - - - 544,548 45,000 119,999 Post Employment Super $ 28,007 15,277 7,650 4,500 4,500 59,934 Prescribed benefits $ - - - - - - Equity Options $ - - - - - - Total $ 338,463 229,368 92,650 54,500 54,500 769,481 26 Servcorp annual report 2005 directors’ report. Servcorp annual report 2005 Remuneration report (cont) Executive remuneration There are no guaranteed base remuneration increases for any senior executives. The executive remuneration and reward framework has three components: Retirement benefits Retirement benefits for Australian executives are delivered under the Servcorp Superannuation Fund. This fund provides accumulation benefits based on contributions and fund earnings. Executives may nominate for contributions to be made to another fund of their choice. Short-term incentives The short-term incentive component of executive remuneration may comprise an annual cash incentive which is linked to the performance of both Servcorp and the individual executive. Executives do not have a fixed proportion of their total remuneration that is performance related. Performance targets are agreed with executives at the start of each year to ensure they meet specific business objectives for which the individual is responsible. For the year ended 30 June 2005, short term incentive plans were based on two components: • The change in the price at which shares in the Company traded in the period to December 2004; and • Where the executive had responsibility for a region or business unit, attaining performance targets for operating profit. The short term incentive target is reviewed annually. Servcorp Executive Share Option Scheme The Board may grant options to eligible executives in accordance with the Servcorp Executive Share Option Scheme to provide long term incentives. Options do not form a fixed percentage of any executives remuneration. No options were granted during or since the 2005 financial year. Details of remuneration Cash incentives (bonuses) are generally payable following finalisation of half-year and full-year results. Using a profit target ensures variable reward is only available when value has been created for shareholders and when profit is consistent with the business plan. Details of the nature and amount of each element of the remuneration of each of the five officers of the Company and the Consolidated Entity receiving the highest remuneration for the year ended 30 June 2005 is set out in the following table. • • • Base remuneration and benefits; Short term performance incentives; Long term incentives through participation in the Servcorp Executive Share Option Scheme. The combination of these comprises the executives total remuneration. Base remuneration The base component of executive remuneration comprises base salary, superannuation contribution and other components such as motor vehicles. It is determined by the scope of each executive’s role, their level of knowledge, skill and experience and individual performance. It is structured as a total employment cost package. Executives are offered a competitive base remuneration that comprises the fixed component of pay and rewards. Base remuneration is set to reflect the market for a comparable role. Base remuneration is reviewed annually to ensure the executive’s remuneration is competitive with the market. Remuneration is also reviewed on promotion. Executives’ remuneration Name M Moufarrige GM Asia and CIO R Baldwin GM ITS O Vlietstra GM Japan T Wallace CFO L Cataldo Senior Mgr Salary and fees $ 162,883 140,759 101,977 139,614 95,658 Primary Bonus $ 45,000 35,000 72,311 23,500 53,200 Non- monetary $ 6,972 - 11,766 - 8,842 640,891 229,011 27,580 Post Employment Super $ 18,428 14,750 - 7,199 13,376 53,753 Prescribed benefits $ - - - - - - Equity Options $ - - - Total $ 233,283 190,509 186,054 6,389 176,702 - 171,076 6,389 957,624 Servcorp annual report 2005 27 State of affairs There were no significant changes in the state of affairs of the Consolidated Entity during the financial year. Directors’ benefits Since the end of the previous financial year, no director of the Consolidated Entity has received or become entitled to receive a benefit (other than a benefit included in the aggregate amount of emoluments received or due and receivable by directors shown in the consolidated financial report, or the fixed salary of a full-time employee of the Consolidated Entity or of a related entity) by reason of a contract made by the Consolidated Entity or a related entity with the director or with a firm of which a director is a member, or with an entity in which a director has a substantial financial interest. Non-audit services During the year Deloitte Touche Tohmatsu, the Company’s auditor, has performed certain “non-audit services” in addition to their statutory duties. The Board of directors has considered the non-audit services provided during the year by the auditor and in accordance with written advice provided by resolution of the Audit and Risk Committee, is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: • • Non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed by the Audit and Risk Committee; and The non-audit services provided do not undermine the general principles relating to auditor independence as set out in Professional Statement F1 Professional Independence, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company or jointly sharing risks and rewards. A copy of the auditor’s independence declaration as required under Section 307C of the Corporations Act 2001 is set out on page 29 and forms part of this report. Details of the amounts paid or payable to the auditor of the Company, Deloitte Touche Tohmatsu and its related practices for audit and non-audit services provided during the year are set out in note 4 to the financial statements. Corporate governance A statement of the Board’s governance practices is set out on pages 14 to 21 of this report. Environmental management The Consolidated Entity's operations are not subject to any particular and significant environmental regulations under either Commonwealth or State legislation. Rounding off The Company is of a kind referred to in ASIC Class Order 98/0100 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. Signed in accordance with a resolution of the directors pursuant to section 298 of the Corporations Act 2001. A G Moufarrige Managing Director Dated at Sydney this 19th day of September 2005. 28 Servcorp annual report 2005 directors’ report. Servcorp annual report 2005 Deloitte Touche Tohmatsu A.B.N. 74 490 121 060 The Barrington Level 10 10 Smith Street Parramatta NSW 2150 PO Box 38 Parramatta NSW 2124 Australia DX 28485 Tel: +61 (0) 2 9840 7000 Fax: +61 (0) 2 9840 7001 www.deloitte.com.au The Board of Directors Servcorp Limited Level 17, BNP Paribas Centre 60 Castlereagh Street SYDNEY NSW 2000 16 September 2005 Dear Board Members Servcorp Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Servcorp Limited. As lead audit partner for the audit of the financial statements of Servcorp Limited for the financial year ended 30 June 2005, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU P G Forrester Partner Chartered Accountants Parramatta Liability limited by the Accountants' Scheme, approved under the Professional Standards Act 1994 (NSW). © Deloitte Touche Tohmatsu. September, 2005. All rights reserved. Servcorp annual report 2005 29 30 Servcorp annual report 2005 2005 Financial Report CONTENTS Statements of financial performance Statements of financial position Statements of cash flows Notes to the financial statements Directors' declaration Auditor’s report 32 33 34 35 73 74 Statements of financial performance Servcorp Limited and its controlled entities for the financial year ended 30 June 2005 Consolidated The Company Revenues Revenues from rendering of services Other revenues from ordinary activities Notes 2005 $'000 2004 $'000 120,684 3,174 104,247 3,266 Total revenues 2 123,858 107,513 Expenses Service expenses Marketing expenses Occupancy expenses Administrative expenses Borrowing expenses Provision for diminution in value of loans to controlled entities Other expenses from ordinary activities 3(a) (35,966) (6,140) (48,691) (9,358) (158) - (1,287) (31,860) (5,320) (46,702) (8,704) (225) - (1,052) Total expenses (101,600) (93,863) Profit from ordinary activities before income tax expense Income tax expense relating to ordinary activities 5(a) 22,258 (6,965) 13,650 (4,207) 2005 $'000 - 16,425 16,425 (36) - - (584) (142) (4,746) - (5,508) 10,917 (4,545) 2004 $'000 - 8,787 8,787 (7) - - (674) - - - (681) 8,106 (1,409) Net profit 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 Total changes in equity other than those resulting from transactions with owners as owners Earnings per share Basic (cents per share) Diluted (cents per share) 22 21 8 8 15,293 9,443 6,372 6,697 (3,118) (3,118) 812 812 - - - - 12,175 10,255 6,372 6,697 19.0 19.0 11.8 11.6 - - - - The statements of financial performance are to be read in conjunction with the notes to the financial statements. 32 Servcorp annual report 2005 Statements of financial position Servcorp Limited and its controlled entities as at 30 June 2005 Current assets Cash assets Receivables Other financial assets 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 Interest bearing liabilities Current tax liabilities Provisions Total current liabilities Non-current liabilities Payables Interest bearing liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained profits Total equity Consolidated The Company Notes 9 10 12 11 10 12 13 14 15 16 17 19 16 17 19 20 21 22 2005 $'000 42,966 12,538 5,731 7,556 68,791 227 - 24,952 14,354 6,628 17,910 64,071 2004 $'000 38,396 11,756 5,921 3,184 59,257 - - 22,496 15,265 5,774 17,594 61,129 2005 $'000 174 36,716 - 24 36,914 51,118 19,076 - - 1,395 - 71,589 132,862 120,386 108,503 29,051 1,872 5,806 3,181 39,910 4,984 15 473 564 6,036 45,946 86,916 80,694 (7,927) 14,149 86,916 25,947 1,778 2,638 2,023 32,386 4,823 741 675 495 6,734 39,120 81,266 81,182 (4,809) 4,893 81,266 15,459 - 5,354 - 20,813 543 1,996 42 - 2,581 23,394 85,109 80,694 - 4,415 85,109 2004 $'000 - 17,968 - 27 17,995 57,882 19,076 - - 1,285 - 78,243 96,238 6,872 2 2,037 - 8,911 - 2,009 56 - 2,065 10,976 85,262 81,182 - 4,080 85,262 The statements of financial position are to be read in conjunction with the notes to the financial statements. Servcorp annual report 2005 33 Statements of cash flows Servcorp Limited and its controlled entities for the financial year ended 30 June 2005 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 Consolidated The Company Notes 2005 $'000 2004 $'000 126,339 (94,648) - 1,408 (80) (5,165) 115,608 (94,487) - 1,632 (231) (3,632) 2005 $'000 - (836) 14,359 2,066 (142) (3,582) 11,865 - - - - - - 10,226 (31,868) 17,544 (839) 2004 $'000 371 (843) 7,158 1,285 - (2,714) 5,257 - - - - - - 6,675 (14,477) 14,165 (5,905) 1,139 352 7,161 - (6,868) (1,573) - - - - 211 (4,937) 458 286 - (1,978) (6,004) - (7,696) 11,405 26,125 519 38,049 1,539 (2,254) - (6,037) - (6,752) 176 (2) - 174 286 - - (6,004) - (5,718) (3) 1 - (2) Net cash provided by operating activities 29(b) 27,854 18,890 Cash flows from investing activities Proceeds from refund of lease deposits Proceeds from disposal of property, plant and equipment Proceeds from disposal of financial assets Payments for financial assets Payments for property, plant and equipment Payments for lease deposits Loans from controlled entities Loans to controlled entities Loans repaid by controlled entities Loans repaid to controlled entities Net cash provided by/(used in) investing activities Cash flows from financing activities Proceeds from issue of shares Share buy back Lease payments Dividends paid Other borrowings Net cash used in financing activities Net increase/(decrease) in cash held Cash at the beginning of the financial year Effects of exchange rate fluctuation on the balances of cash held in foreign currencies Cash at the end of the financial year 29(a) - 135 3,000 (3,000) (12,034) (3,382) - - - - (15,281) 1,539 (2,254) (1,314) (6,037) - (8,066) 4,507 38,049 (778) 41,778 The statements of cash flows are to be read in conjunction with the notes to the financial statements. 34 Servcorp annual report 2005 the world’s finest serviced offices Notes to the financial statements for the financial year ended 30 June 2005 1 Statement of significant accounting policies The significant policies that have been adopted in the preparation of this financial report are: (a) Basis of preparation The financial report is a general purpose financial report which has been prepared in accordance with the Corporations Act 2001, Accounting Standards, Urgent Issues Group Consensus Views, and complies with other requirements of the law. The financial report has been prepared on the basis of historical cost and, except where stated, does not take into account changing money values or fair valuations of non-current assets. Cost is based on the fair values of the consideration given in exchange for assets. These accounting policies have been consistently applied by each entity in the Consolidated Entity and 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 are prepared by combining the financial statements of all the entities that comprise the Consolidated Entity, being the Company (the parent entity) and its controlled entities. The controlled entities are listed in Note 27 to the financial statements. Consistent accounting policies are employed in the preparation and presentation of the consolidated financial statements. The consolidated financial statements include the information and results of each controlled entity from the date on which the Company obtains control and until such time as the Company ceases to control such entity. In preparing the consolidated financial statements, all intercompany balances and transactions, and unrealised profits arising within the Consolidated Entity are eliminated in full. (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 the period of time during which benefits are expected to arise or over 20 years, whichever is the shorter. 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 consumption tax 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 revenue Interest income is recognised as it accrues. Disposal of assets The profit and loss on disposal of assets is brought to account when ownership passes to a party external to the Consolidated Entity. 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 statements of financial performance. Servcorp annual report 2005 35 Notes to the financial statements for the financial year ended 30 June 2005 1 (e) (f) (g) Statement of significant accounting policies (continued) Foreign currency Transactions Foreign currency transactions are translated to Australian currency at the rates of exchange ruling at the dates of the transactions or at the hedge rates where applicable. Amounts receivable and payable in foreign currencies at balance date are translated at the rates of exchange ruling on that date. 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 of exchange 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 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, are carried forward in the statements of financial position as a deferred tax asset or a provision for deferred income tax. Deferred tax assets are not brought to account unless realisation of the asset is assured beyond reasonable doubt. Deferred tax assets 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. The directors elected that the Company and all its wholly-owned Australian resident entities would join a tax consolidation group for income tax purposes with effect from 1 July 2002. Due to the existence of a tax sharing agreement between the entities in the tax consolidated group, the current and deferred tax assets and liabilities of the Company are not affected by any amounts owing from or to subsidiary entities as these amounts are recognised as intercompany receivables and payables. 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. 36 Servcorp annual report 2005 the world’s finest serviced offices 1 (h) (i) (j) (k) Statement of significant accounting policies (continued) 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 allowance 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 in the statements of financial performance as they accrue. Interest bearing financial instruments Current Investments in interest bearing financial instruments held for sale are measured at fair market value. Income from these instruments are brought to account in the statements of financial performance as they accrue. Non-current Investments in non-current interest bearing instruments not held for sale 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 they accrue. 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 estimated useful lives used for each class of asset is as follows: Buildings Leasehold improvements Office furniture and fittings Office equipment Motor vehicles 40 years 6.7 years 7.7 years 3-4 years 6.7 years Servcorp annual report 2005 37 Notes to the financial statements for the financial year ended 30 June 2005 1 (k) (l) (m) (n) Statement of significant accounting policies (continued) Property, plant and equipment (cont) Depreciation and amortisation (cont) 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. 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. 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". Foreign currency hedge contracts The Company actively manages foreign currency exposure of revenue transactions generated offshore. Foreign exchange contracts taken out to manage foreign exchange exposure are designated to underlying transactions at the inception of the hedge. Foreign exchange risk is managed within the acceptable risk limits, agreed procedures and in compliance with policy guidelines as approved from time to time by the Board. Gains and losses that arise on a hedged instrument are deferred and included in the measurement of the hedged anticipated revenue. The unhedged portion of offshore revenue transactions are translated at the average rate for the month. In the event of early termination of a foreign currency hedge of an anticipated transaction, the deferred gains and losses that arose on the foreign exchange contract prior to its termination are: - deferred and included in the measurement of the transaction when it takes place, where the anticipated transaction is still expected to occur; or recognised in net profit or loss at the date of termination, if the anticipated transaction is no longer expected to occur. - (o) Provisions Provisions are recognised when the Consolidated Entity has a present obligation, the future sacrifice of economic benefits is probable, and the amount of the provision can be measured reliably. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is probable that recovery will be received and the amount of the receivable can be measured reliably. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cashflows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. Dividends A provision is recognised for dividends when they have been declared, determined or publicly recommended by the directors on or before the reporting date. 38 Servcorp annual report 2005 the world’s finest serviced offices 1 (o) (p) (q) (r) Statement of significant accounting policies (continued) Provisions (cont) Make good costs A provision is made for make good costs on leases that are expected to terminate within eighteen months of balance date, where those make good costs can be reliably measured, and can be reasonably expected to occur. Onerous contracts An onerous contract is considered to exist where the Consolidated Entity has a contract under which the unavoidable cost of meeting the contractual obligations exceed the economic benefits estimated to be received. Present obligations arising under onerous contracts are recognised as a provision to the extent that the present obligation exceeds unrecognised assets. Employee benefits Wages, salaries and annual leave The provisions for employee benefits in respect of 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 reporting date. The provisions have been calculated at undiscounted amounts based on expected wage and salary rates and include related on-costs. Long service leave The provision for employee benefits in respect of long service leave represents the present value of the estimated future cash outflows to be made by the Consolidated Entity resulting from employees' services provided up to the reporting date. Provisions for employee benefits 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 benefits, 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 has granted options to certain executives and employees under executive and employee share option schemes. Further information is set out in Notes 24 and 31 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. Lease incentives Floor rental is expensed in the accounting period in which it is due and payable in accordance with lease agreements entered into with landlords. Where a rent free period or other lease incentives exist under the terms of a lease agreement, the aggregate rent payable over the lease term is calculated and a charge is made to the statements of financial performance proportionately to reflect the benefit on a straight line basis over the term of the lease. Earnings per share (EPS) Basic earnings per share Basic EPS is 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. Diluted earnings per share Diluted EPS is calculated by only adjusting the basic EPS earnings by the effect of conversion to ordinary shares of the associated 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. Servcorp annual report 2005 39 Notes to the financial statements for the financial year ended 30 June 2005 1 (s) (t) (u) Statement of significant accounting policies (continued) Debt and equity instruments Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement. Adoption of new accounting standard Director and executive disclosures by disclosing entities Disclosure of remuneration is classified by each component of remuneration of specified directors and specified executives instead of classifications by bandings. Equity-based compensation is measured at fair value at grant date. Disclosure requirements for loans and other transactions with directors have also been extended to cover specified executives. Impacts of adopting Australian equivalents to International Financial Reporting Standards (A-IFRS) The Consolidated Entity will be required to prepare financial statements that comply with A-IFRS for annual reporting periods beginning on or after 1 January 2005. Accordingly, Servcorp Limited's first half-year report prepared under A-IFRS will be for the half year reporting period ending 31 December 2005, and its first annual financial report prepared under A-IFRS will be for the year ending 30 June 2006. This financial report has been prepared in accordance with current Australian Accounting Standards and other financial reporting requirements (Australian GAAP). The differences between Australian GAAP and A-IFRS identified to date as potentially having a significant effect on the Consolidated Entity's financial performance and financial position are summarised below. The directors have identified the following areas of significant difference affecting the Company and the Consolidated Entity on adoption of A-IFRS. All amounts disclosed are best estimates only, and reflect the directors' accounting policy decisions current at the date of this financial report. Users of the financial report should note that further developments in A-IFRS, if any, may result in changes to the accounting policy decisions made by the directors and consequently, the likely impacts outlined below. Regulatory bodies that promulgate Australian GAAP and A-IFRS have significant on-going projects that could affect the differences between Australian GAAP and A-IFRS, and the impact of these differences relative to the Consolidated Entity's financial reports in the future. Significant potential implications of the conversion to A-IFRS on the Consolidated Entity are as follows: First time adoption of A-IFRS On first time adoption of A-IFRS, the Consolidated Entity will be required to restate its comparative balance sheet such that the comparative balances presented comply with the requirements specified in the A-IFRS. That is, the balances that will be presented in the financial report for the year ended 30 June 2005 may not be the balances that will be presented as comparative numbers in the financial report for the following year, as a result of the requirement to retrospectively apply A-IFRS. In addition, certain assets and liabilities may not qualify for recognition under A-IFRS, and will need to be de-recognised. As most adjustments on first time adoption are to be made against opening retained earnings, the amount of retained earnings at 30 June 2004 presented in the 2005 financial report and the 2006 financial report available to be paid out as dividends may differ significantly. Various voluntary and mandatory exemptions are available to the Consolidated Entity on first time adoption of A-IFRS, which will not be available on an on-going basis. The exemptions provide relief from retrospectively accounting for certain balances, instruments and transactions in accordance with A-IFRS. Business combinations The Consolidated Entity did not acquire any new businesses during the financial year ended 30 June 2005. The directors have elected not to restate business combinations that occurred before 1 July 2004 and, accordingly, the impact on the adoption of A-IFRS on the financial report associated with business combinations will be limited to the cessation of goodwill amortisation. Impairment of assets Non-current assets are written down to recoverable amount when the asset's carrying value exceeds recoverable amount. Under A-IFRS both current and non-current assets are tested for impairment. In addition, A-IFRS has a more prescriptive impairment test, and requires discounted cash flows to be used where value in use is used to assess recoverable amount. The directors do not anticipate that this will have an impact on the recoverable value of assets at the date of transition, 1 July 2004. 40 Servcorp annual report 2005 the world’s finest serviced offices 1 (u) Statement of significant accounting policies (continued) Impacts of adopting Australian equivalents to International Financial Reporting Standards (A-IFRS) (cont) Hedge accounting The Consolidated Entity enters into forward foreign exchange contracts to manage foreign exchange exposure on revenue transactions generated offshore. It is expected that the required adjustments on 1 July 2005 will be attributable to derivatives designated as fair value hedges that will be recognised in the balance sheet at fair value. Changes in fair value will be recognised in the profit and loss from that date. Share-based payment Equity settled share-based compensation forms part of the remuneration of employees of the Consolidated Entity (including executives). The Consolidated Entity does not currently recognise an expense for any share-based compensation granted. Under A-IFRS, the Consolidated Entity will be required to recognise an expense for share-based compensation amounts. Share-based compensation is measured as the fair value of the share options determined at grant date and recognised over the expected vesting period of the options. A reversal of the expense will be permitted to the extent non-market based vesting conditions (e.g. service conditions) are not met. In accordance with AASB2 Share-based Payment, we have calculated an increase in contributed equity of $913 that requires recognition on the date of transition, 1 July 2004. Income tax The Consolidated Entity currently recognises deferred taxes by accounting for the differences between accounting profits and taxable income, which give rise to 'permanent' and 'timing' differences. Under A-IFRS, deferred taxes are measured by reference to the 'temporary differences' determined as the difference between the carrying amount and the tax base of assets and liabilities recognised in the balance sheet. The Consolidated Entity also has carried forward tax losses which have not been recognised as deferred tax assets as they do not satisfy the 'virtually certain' criteria under current Australian GAAP. Under A-IFRS, it may be easier to recognise these tax losses as deferred tax assets as they are recognised based on 'probable' recognition criteria. The impact of this difference may be to increase deferred tax assets and opening retained earnings, and result in a higher level of recognised deferred tax assets on a go-forward basis. Adjustments to the recognised amounts of deferred taxes will also result as a consequence of adjustments to the carrying amounts of assets and liabilities resulting from the adoption of other A-IFRS. The likely impact of these changes on deferred tax balances has not yet been determined. Servcorp operates in eleven different jurisdictions, and as such the impact on tax from an A-IFRS perspective needs to be given detailed consideration on a jurisdiction by jurisdiction basis. The A-IFRS tax review is still ongoing. It is expected that the full impact on retained earnings will be finalised by 31 December 2005. It is expected that the effects of the impact of tax consolidation and UIG1052 will also be determined by 31 December 2005. Goodwill Goodwill is currently amortised over a 20 year period. A-IFRS does not permit goodwill to be amortised, but instead requires the carrying amount to be tested for impairment annually and whenever there is an indication that goodwill may be impaired. The comparative goodwill expense for the year ended 30 June 2005 will decrease by $910,559. The directors have elected to adopt the country level as the cash generating unit level from 1 July 2004. Goodwill currently recognised on the balance sheet will be allocated to individual cash generating units (or groups of cash generating units) at that level. Goodwill will be impairment tested at each reporting date commencing 1 July 2004. This change in policy may result in increased volatility in the profit and loss, where impairment of goodwill is identified. Foreign currency translation reserve The directors have elected not to retrospectively apply AASB121 The Effects of Changes in Foreign Exchange Rates requirements with respect to not restating cumulative translation differences existing at the date of transition, 1 July 2004. Intangible capitalised software costs Capitalised in-house project costs of $334,814 that existed at 30 June 2004 were written off in the six months ended 31 December 2004. The full amount of this balance related to capitalised in-house wages and salaries. Under A-IFRS, it is required that this amount is adjusted through retained earnings at the date of transition, 1 July 2004. Servcorp annual report 2005 41 Notes to the financial statements for the financial year ended 30 June 2005 1 (u) Statement of significant accounting policies (continued) Impacts of adopting Australian equivalents to International Financial Reporting Standards (A-IFRS) (cont) Subject to completion of the A-IFRS transitional review regarding taxation balances, the following reconciliations outline the likely impacts on the current year result and financial position of the Company and Consolidated Entity had the financial statements been prepared using A-IFRS, based on the directors' accounting policy decisions current at the date of this financial report. Readers of the financial report should note that further developments in A-IFRS (for example, the release of further pronouncements by the Australian Accounting Standards Board and the Urgent Issues Group), if any, may result in changes to the accounting policy decisions made by the directors and consequently, the likely impacts outlined in the following reconciliations. Consolidated 2005 $'000 The Company 2005 $'000 Reconciliation of profit before tax Profit from ordinary activities before income tax expense (A-GAAP) Employee benefits (i) Amortisation expense (ii) Other - intangible capitalised project costs (iii) Profit from ordinary activities before income tax expense (A-IFRS) Reconciliation of total assets and total liabilities Total assets (A-GAAP) Other financial assets Property, plant and equipment Intangibles Total assets (A-IFRS) Total liabilities (A-GAAP) Provisions Other Total liabilities (A-IFRS) Reconciliation of equity Total equity (A-GAAP) Opening retained profits (iii) Current year profits (i), (ii) Contributed equity (i) Total equity (A-IFRS) 22,258 (6) 911 335 23,498 132,862 - - 911 133,773 45,946 - - 45,946 86,916 (336) 1,240 7 87,827 10,917 - - - 10,917 108,503 - - - 108,503 23,394 - - 23,394 85,109 - - - 85,109 Notes: (i) Share based payments Under A-IFRS equity settled share based payments are recognised at fair value. In 2005, this value was $6,389 (2004: $913). (ii) (iii) Goodwill Under A-IFRS goodwill is not required to be amortised, but must be tested for impairment at each reporting date and whenever there is an indication that goodwill may be impaired. As a result, amortisation expense will decrease by $910,559. Intangible capitalised project costs Write-back of capitalised in-house project costs that were written off in the six months ended 31 December 2004 that existed at 30 June 2004. 42 Servcorp annual report 2005 the world’s finest serviced offices Consolidated The Company 2005 $’000 2004 $’000 2005 $’000 2004 $’000 120,684 104,247 - - 2 Revenue from ordinary activities Rendering of services revenue from operating activities Other revenue from operating activities Royalty fees: Related parties Franchise fees: Other parties Dividends: Related parties Interest: Related parties Other parties Loss on disposal of fixed assets Foreign exchange (loss)/gains Other Total other revenues - 211 - - 1,862 (181) (98) 1,380 3,174 - 179 - - 1,476 (486) 798 1,299 3,266 Total revenue from ordinary activities 123,858 107,513 3 (a) Profit from ordinary activities before income tax expense Profit from ordinary activities before income tax expense has been arrived at after charging the following items: Borrowing costs: Interest Finance charges on capitalised leases Amortisation of non-current assets: Goodwill Leasehold improvements Depreciation of: Plant and equipment Net bad and doubtful debts expense including movements in provision for bad and doubtful debts Operating lease rental expense: Minimum lease payments (b) Individually significant expenses included in profit from ordinary activities before income tax expense: 67 91 158 911 4,212 5,123 18 207 225 679 4,393 5,072 3,508 3,388 450 627 42,725 40,865 Floor closure costs 1,597 2,002 12,359 7,369 - 2,000 2,052 14 - - - 16,425 16,425 - - 1,283 2 - 133 - 8,787 8,787 142 - 142 - - - - - - - - - - - - - - - - - Servcorp annual report 2005 43 Notes to the financial statements for the financial year ended 30 June 2005 4 (a) Auditors' remuneration Auditor of the parent entity 2005 (Deloitte Touche Tohmatsu Australia (DTT)) Audit and review of financial reports Other services - tax Other services - other (b) Other auditors 2005 (DTT International Associates) Audit and review of financial reports Other services - tax Other services - other (c) Other auditors 2005 (KPMG International Associates) Audit and review of financial reports (i) Other services (d) Auditor of the parent entity 2003 (KPMG Australia) Audit and review of financial reports Consolidated The Company 2005 $ 2004 $ 2005 $ 2004 $ 217,750 90,000 42,503 194,026 90,000 - 126,830 84,000 - 100,000 84,000 - 350,253 284,026 210,830 184,000 231,459 163,808 15,828 236,811 126,608 - 411,095 363,419 14,378 - 14,378 - - 81,372 33,031 114,403 12,304 12,304 - - - - - - - - - 16,304 - - 16,304 - - - - - 775,726 774,152 210,830 200,304 Notes: (i) KPMG resigned as auditors of Servcorp Paris SARL on 30 December 2004. 44 Servcorp annual report 2005 the world’s finest serviced offices Consolidated The Company 2005 $’000 2004 $’000 2005 $’000 2004 $’000 6,677 4,095 3,275 2,432 5 (a) Taxation Income tax expense Prima facie income tax expense calculated at 30% (2004: 30%) on the profit from ordinary activities Increase/(decrease) in income tax expense due to: Amortisation of intangibles Restatement of deferred tax balances due to changes in tax rates Under/(over) provision in prior years Provision for writedown in the value of loans to controlled entities Sundry items Dividend income from a company in the tax consolidated group Foreign tax credits available Non-assessable local taxes Non-assessable exchange gains Tax losses of non-resident controlled entities not carried forward as a future income tax benefit Recognition of tax losses of controlled entities not previously recognised as a future income tax benefit Controlled foreign company attributed income Effect of differing rates of tax on overseas income Initial recognition of deferred tax balances of subsidiaries on implementation of the tax consolidation system Consideration paid or payable to subsidiaries in respect of transferred deferred tax balances Current and deferred taxes relating to transactions, events and balances of wholly-owned subsidiaries in the tax consolidated group Non-deductible/(non-assessable) amounts related to transactions within the tax consolidated group Net income tax benefit arising under tax sharing agreements with subsidiaries in the tax consolidated group 385 81 240 - 460 - (54) (156) (4) 557 (505) 59 (775) - - - - - 314 51 (242) - 193 - (38) (64) (46) 671 (497) 108 (338) - - - - - - - 232 1,424 (1) (600) - - - - - - - - - - - 559 - 12 - - - - - - - - 1,159 (1,159) 3,585 1,199 (1,140) 46 (2,230) (2,839) Income tax expense attributable to profit from ordinary activities 6,965 4,207 4,545 1,409 Servcorp annual report 2005 45 Notes to the financial statements for the financial year ended 30 June 2005 5 (b) Taxation (continued) Future income tax benefit not taken to account as assets Timing differences Tax losses - revenue The potential future income tax benefit will only be obtained if: Consolidated The Company 2005 $’000 2004 $’000 2005 $’000 2004 $’000 528 3,370 3,898 674 3,719 4,393 - - - - - - (i) (ii) the relevant companies derive future assessable income of a nature and an amount sufficient to enable the benefit to be realised; 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. (c) Tax consolidation system Legislation to allow groups, comprising a parent entity and its Australian resident wholly-owned entities, to elect to consolidate and be treated as a single entity for income tax purposes was substantially enacted on 21 October 2002. This legislation, which includes both mandatory and elective elements, is applicable to the Company. The directors have elected for those entities within the Consolidated Entity that are wholly-owned Australian resident entities to be taxed as a single entity from 1 July 2002. The adoption of the tax consolidation system has been formally notified to the Australian Taxation Office. The head entity within the tax consolidated group for the purposes of the tax consolidation system is Servcorp Limited. Entities within the tax consolidated group are in a tax-sharing agreement with the head entity. Under the terms of this agreement, Servcorp Limited and each of the entities in the tax consolidated group agree to pay a tax equivalent payment to or from the head entity, based on the net accounting profit or loss of the entity and the current tax rate. Such amounts are reflected in amounts receivable from or payable to other entities in the tax consolidated group. Due to the adoption of the transitional provisions, whereby tax values were not reset, the impact on the financial statements of the economic entity, arising from adoption of the tax consolidation regime, was not material. The tax consolidation regime has been applied with effect from 1 July 2003. 46 Servcorp annual report 2005 the world’s finest serviced offices 6 Segment information Inter-segment pricing is determined on an arm’s length basis. Segment revenue, 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 associated 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 $'000 Japan & Asia $'000 Europe & Middle East $'000 Eliminated Consolidated $'000 $’000 2005 Revenue External segment revenue Inter-segment revenue Total segment revenue Other unallocated revenue Total revenue Result Segment result Unallocated corporate profit Profit from ordinary activities before income tax Income tax expense Net profit 36,363 10,844 47,207 71,360 1,176 72,536 14,502 57 14,559 - (12,077) (12,077) 7,072 13,949 414 - Depreciation and amortisation Non-cash expenses other than depreciation and amortisation Individually significant items (i) 2,584 227 234 3,783 54 675 1,022 48 688 Assets Segment assets Unallocated corporate assets Consolidated total assets Acquisitions of non-current assets Liabilities Segment liabilities Unallocated corporate liabilities Consolidated total liabilities 31,564 84,276 15,933 1,295 10,217 23,215 40,398 522 7,565 1,242 986 - - - - 122,225 - 122,225 1,633 123,858 21,435 823 22,258 (6,965) 15,293 8,631 1,315 1,597 131,773 1,089 132,862 12,034 71,178 (25,232) 45,946 Servcorp annual report 2005 47 Notes to the financial statements for the financial year ended 30 June 2005 6 Segment information (continued) Geographical segments Australia & New Zealand $'000 Japan & Asia $'000 Europe & Middle East $'000 Eliminated Consolidated $'000 $’000 2004 Revenue External segment revenue Inter-segment revenue Total segment revenue Other unallocated revenue Total revenue Result Segment result Unallocated corporate profit Profit from ordinary activities before income tax Income tax expense Net profit 33,988 10,756 44,744 60,886 902 61,788 11,080 - 11,080 - (11,658) (11,658) 5,522 9,903 (1,786) - Depreciation and amortisation Non-cash expenses other than depreciation and amortisation Individually significant items (i) 2,608 47 837 3,627 401 - 1,220 555 1,165 Assets Segment assets Unallocated corporate assets Consolidated total assets Acquisitions of non-current assets Liabilities Segment liabilities Unallocated corporate liabilities Consolidated total liabilities 31,363 61,713 13,530 2,233 4,347 24,338 23,643 288 5,765 Notes: (i) Individually significant items are in respect to floor closure costs. Refer to Note 3(b). 1,005 43 - - - - 105,954 - 105,954 1,559 107,513 13,639 11 13,650 (4,207) 9,443 8,460 1,046 2,002 106,606 13,780 120,386 6,868 53,746 (14,626) 39,120 48 Servcorp annual report 2005 the world’s finest serviced offices 7 Dividends Dividends proposed (unrecognised) or paid (recognised) by the Company are: Cents per share Total amount $'000 Date of payment Tax rate for franking credit Percentage franked 2004 Interim - ordinary Final - ordinary 2005 Interim - ordinary 3.75 3.75 3.75 3,005 3,022 8 April 2004 1 October 2004 3,015 1 April 2005 30% 30% 30% 100% 100% 100% Subsequent events (unrecognised) Since the end of the financial year, the directors have declared the following dividend: Final - ordinary 4.00 3,216 4 October 2005 30% 100% Dividend franking account 30% franking credits available The Company 2005 $'000 2004 $'000 7,299 3,204 The balance of the franking account has been adjusted for franking credits that will arise from the payment of income tax provided for in the financial statements and for franking debits that will arise from the payment of dividends recognised as a liability at reporting date. The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. 8 Earnings per share Earnings reconciliation: Net profit Basic earnings Diluted earnings 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 Earnings per share: Basic (cents per share) Diluted (cents per share) Consolidated 2005 $’000 2004 $’000 15,293 15,293 15,293 9,443 9,443 9,443 Number Number 80,446,478 30,000 80,476,478 80,014,486 1,208,000 81,222,486 19.0 19.0 11.8 11.6 Classification of securities as potential ordinary shares Options As at 30 June 2005, the Company had on issue 30,000 (2004: 1,208,000) 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. Servcorp annual report 2005 49 Notes to the financial statements for the financial year ended 30 June 2005 9 Cash assets Cash Bank short term deposits Notes Consolidated The Company 2005 $'000 2004 $'000 2005 $'000 2004 $'000 8,202 34,764 42,966 15,072 23,324 38,396 174 - 174 - - - Bank short term deposits mature within an average of 145 days. These deposits and the interest-bearing portion of the cash balance earn interest at a weighted average rate of 5.27% (2004: 4.81%). 10 Receivables Current Trade receivables Less: allowance for doubtful debts Other debtors Amounts receivable from controlled entities Non-current Loans to controlled entities Provision for diminution in value of loan Other debtors 32 32 32 12,103 (245) 680 - 12,538 - - 227 227 11,627 (266) 395 - 11,756 - - - - - - 1,078 35,638 36,716 55,637 (4,746) 227 51,118 - - 211 17,757 17,968 57,882 - - 57,882 The unsecured loans to controlled entities bear interest at a floating rate. The weighted average rate for the year ended 30 June 2005 was 10.90% (2004: 10.85%). Trade receivables from controlled entities include amounts arising under the Company’s tax sharing agreement. 11 Other current assets Prepayments Lease deposits Other 12 Other financial assets Current Other investments Investment in fixed rate bonds Investment in reset preference securities Non-current Unlisted shares Controlled entities at cost 3,958 1,457 2,141 7,556 2,872 2,859 5,731 - - 2,491 189 504 3,184 5,921 - 5,921 24 - - 24 - - - 27 - - 27 - - - - - 19,076 19,076 19,076 19,076 Current investments in fixed rate bonds and reset preference securities are carried at fair market value. Non-current investments in floating rate notes, fixed rate bonds and reset preference shares are carried at cost on the basis that these instruments will be held to maturity. 50 Servcorp annual report 2005 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 the world’s finest serviced offices Consolidated The Company 2005 $'000 2004 $'000 2005 $'000 2004 $'000 743 (51) 692 829 (44) 785 29,926 (17,032) 26,488 (15,964) 12,894 6,293 (4,914) 1,379 8,082 (3,196) 4,886 1,283 (1,054) 229 13,011 (8,247) 4,764 1,001 (1,001) - 146 (38) 108 - 10,524 6,561 (4,221) 2,340 6,662 (2,744) 3,918 1,304 (911) 393 10,725 (7,078) 3,647 1,056 (1,013) 43 63 (21) 42 804 24,952 22,496 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Servcorp annual report 2005 51 Notes to the financial statements for the financial year ended 30 June 2005 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 52 Servcorp annual report 2005 Consolidated The Company 2005 $’000 2004 $’000 2005 $’000 2004 $’000 785 - - (12) (81) 692 10,524 6,732 (267) (3,379) 66 (782) 12,894 2,340 - - (833) - (128) 1,379 3,918 2,235 (25) (1,006) 2 (238) 4,886 393 - - (152) - (12) 229 746 - - (13) 52 785 10,470 3,875 (575) (3,498) (1) 253 10,524 3,150 - (20) (895) - 105 2,340 4,125 795 (141) (979) 61 57 3,918 644 - (8) (189) (63) 9 393 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - the world’s finest serviced offices Consolidated The Company 2005 $’000 2004 $’000 2005 $’000 2004 $’000 3,647 2,978 (57) (2,155) 446 (95) 4,764 43 - - (41) - (2) - 42 89 - (19) - (4) 108 804 35 - - (514) (325) - 4,128 1,854 (109) (2,272) 4 42 3,647 165 - - (128) - 6 43 64 10 (17) (16) - 1 42 472 335 - - - (3) 804 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 13 Property, plant and equipment (continued) Reconciliations (cont) Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below: 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 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 Aggregate depreciation and amortisation allocated during the year is recognised as an expense and disclosed in Note 3 to the financial statements. Servcorp annual report 2005 53 Notes to the financial statements for the financial year ended 30 June 2005 14 Intangibles Goodwill - at cost Accumulated amortisation Notes Consolidated The Company 2005 $'000 2004 $'000 2005 $'000 2004 $'000 19,434 (5,080) 14,354 19,434 (4,169) 15,265 - - - - - - Aggregate amortisation allocated during the year is recognised as an expense and disclosed in Note 3 to the financial statements. 15 Other non-current assets Lease deposits Other 16 Payables Current Trade creditors Security deposits Deferred income Other creditors and accruals Amounts payable to controlled entities Non-current Trade creditors Security deposits Loans from controlled entities - unsecured 17 Interest bearing liabilities Current Bank overdraft (i) Bank loans - secured (ii) Lease liabilities Non-current Bank loans - secured (ii) Lease liabilities Loans from controlled entities - unsecured (iii) 32 32 18, 25 18, 25 32 17,856 54 17,910 8,319 8,107 8,259 4,366 - 17,536 58 17,594 5,321 8,528 7,543 4,555 - 29,051 25,947 2,282 2,702 - 4,984 1,188 92 592 1,872 - 15 - 15 1,971 2,852 - 4,823 347 132 1,299 1,778 100 641 - 741 - - - - - - 470 14,989 15,459 - - 543 543 - - - - - - 1,996 1,996 - - - - - - 562 6,310 6,872 - - - - 2 - - 2 - - 2,009 2,009 Notes: (i) In the consolidated financial report, the bank overdraft is denominated in Yen and is unsecured. Interest at a rate of 1.90% is applicable to the outstanding balance. For the year ended 30 June 2004 the bank overdraft was denominated in Euro, and was secured by an Australian dollar term deposit, the value of which exceeded the value of the bank overdraft at 30 June 2004. Interest at a rate of 3.58% was applicable to the outstanding balance. (ii) (iii) The bank loan is denominated in Yen and is secured by a mortgage over property, the current market value of which exceeds the value of the bank loan. The interest rate on the loan is 1.45% (2004: 1.56%). The unsecured loans to controlled entities bear interest at a floating rate. The weighted average rate for the year ended 30 June 2005 was 10.90% (2004: 10.85%). 54 Servcorp annual report 2005 the world’s finest serviced offices Notes Consolidated The Company 2005 $'000 2004 $'000 2005 $'000 2004 $'000 9,141 4,735 1,274 4,168 6,707 2,234 7,369 2,916 9,141 1,250 986 4,168 6,707 500 4,375 2,916 19,318 19,226 15,545 14,498 7,129 1,188 607 8,924 2,012 3,547 667 4,168 5,054 347 1,940 7,341 1,653 1,887 5,429 2,916 10,394 11,885 7,129 - 318 7,447 2,012 1,250 668 4,168 8,098 5,054 - 1,018 6,072 1,653 500 3,357 2,916 8,426 18 Financing arrangements The Consolidated Entity and Company have access to the following lines of credit: Total facilities available: Bank guarantees (i) Bank overdraft (i) Lease facilities (ii) Bill acceptance / payroll / other facilities (iii) Facilities utilised at balance date: Bank guarantees (i) Bank overdraft (i) Lease facilities (ii) Facilities not utilised at balance date: Bank guarantees (i) Bank overdraft (i) Lease facilities (ii) Bill acceptance / payroll / other facilities (iii) Notes: (i) 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. A guarantee has also been established to secure an overdraft limit in the form of a term deposit. (ii) Lease facilities have been established to finance the fitout of new locations. The facilities are secured by the assets under lease, the current market value of which exceeds the value of the finance lease liability. Facilities established are both fixed and revolving in nature. (iii) Bill acceptance, payroll and other facilities have been established to facilitate the encashment of cheques drawn overseas, foreign currency dealing and to accommodate direct entry payroll. 19 Provisions Current Employee benefits Provision for make good costs (i) Provision for rental of surplus space (ii) Provision for litigation costs (iii) Provision for floor closure costs (iv) 24 1,190 653 - 40 1,298 3,181 1,039 231 610 143 - 2,023 - - - - - - - - - - - - Servcorp annual report 2005 55 Notes to the financial statements for the financial year ended 30 June 2005 19 Provisions (continued) Non-current Employee benefits Notes 24 Balance at 1 July 2004 Reductions arising from payments Reductions resulting from the re-measurement of the estimated future sacrifice or the settlement of the provision without cost to the entity Additonal provisions recognised Balance at 30 June 2005 Consolidated The Company 2005 $'000 2004 $'000 2005 $'000 2004 $'000 564 564 Make good costs $’000 231 (231) - 653 653 495 495 - - Consolidated Rental of surplus space $’000 610 - (610) - - Litigation costs $’000 143 (143) - 40 40 - - Floor closure costs $’000 - - - 1,298 1,298 Notes: (i) An amount of $653,000 (2004: $231,000) has been provided for the make good of two floors that are due to close within eighteen months of balance date. Under the terms of the lease contracts signed with the landlord, there is a requirement to restore the floors to the original condition in which they were leased. (ii) An amount of nil (2004: $610,000) had been provided for the cost of letting surplus space. The provision was calculated based on market conditions, commission payable to agents for obtaining a suitable tenant, and incentives payable to prospective tenants. (iii) An amount of $40,000 (2004: $143,000) has been provided for the expected legal cost of action taken by former employees against entities in the Consolidated Entity. (iv) An amount of $1,298,000 (2004: nil) has been provided for the closure of two floors in Brussels. The provision includes the amounts payable under the bank guarantee and the onerous lease contract. Consolidated The Company 2005 $'000 2004 $'000 2005 $'000 2004 $'000 80,694 81,182 80,694 81,182 81,182 80,896 81,182 80,896 1,767 (2,255) 80,694 286 - 81,182 1,767 (2,255) 80,694 286 - 81,182 20 Contributed equity Issued and paid-up capital 80,398,310 (2004: 80,146,354) ordinary shares, fully paid Movements in ordinary share capital Balance at beginning of year 80,146,354 (2004: 79,955,354) shares Shares issued 1,178,000 (2004: 191,000) from the exercise of options under Share Option Plans Shares bought back 926,044 (2004: Nil) shares Balance at end of year 56 Servcorp annual report 2005 the world’s finest serviced offices Consolidated The Company 2005 $'000 2004 $'000 2005 $'000 2004 $’000 20 Contributed equity (continued) Share buy-back On 4 May 2005, the Company completed the buy-back of 926,044 ordinary shares, representing approximately 1.1% of ordinary shares on issue at that date. The cost of the share buy-back included consideration of $2,222,506 and transaction costs of $31,668. The consideration was allocated in the following proportions: Share capital Retained profits $0 $2,254,174 Options Ordinary shares were issued pursuant to exercise of options as follows: 1,178,000 shares were issued at $1.50 per share (2004: 191,000 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. 21 Reserves Foreign currency translation (7,927) (4,809) Movements during the financial year Foreign currency translation reserve Balance at beginning of financial year Deferred exchange differences arising from monetary items considered part of the investment in self-sustaining foreign operations Translation adjustment on controlled foreign entities' financial statements (4,809) (5,621) (2,264) (854) 355 457 Balance at end of financial year (7,927) (4,809) - - - - - - - - - - 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 attributable to members of the parent entity Net effect on dividends from: Dividends paid Total dividends Retained profits at the end of the financial year 4,893 15,293 20,186 (6,037) (6,037) 14,149 1,454 9,443 10,897 (6,004) (6,004) 4,893 4,080 6,372 10,452 (6,037) (6,037) 4,415 3,387 6,697 10,084 (6,004) (6,004) 4,080 Servcorp annual report 2005 57 Notes to the financial statements for the financial year ended 30 June 2005 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 rates for the different classes of financial assets and financial liabilities are set out below: Floating interest rate Fixed interest maturing in 1 to 5 years 1 year or less $’000 $’000 $’000 More than 5 years $’000 Notes Weighted average interest rate % 9 10 11, 15 12 5.27% - - 6.06% 2005 Financial assets Cash Receivables Lease deposits Investments Financial liabilities Bank overdrafts and loans Payables Finance lease liabilities Employee benefits 17 16 25 24 1.87% - 7.16% - 2004 Financial assets Cash Receivables Lease deposits Investments 9 10 11, 15 12 4.81% - - 6.76% Financial liabilities Bank overdrafts and loans Payables Finance lease liabilities Employee benefits 17 16 25 24 2.77% - 7.34% - 2,702 - - - 2,702 1,188 - - - 1,188 1,514 8,842 - - - 8,842 347 - - - 34,764 - - 5,731 40,495 92 - 592 - 684 - - - - - - - 15 - 15 39,811 (15) 23,324 - - 5,921 29,245 132 - 1,299 - - - - - - 100 - 641 - 741 347 1,431 8,495 27,814 (741) 58 Servcorp annual report 2005 Non- interest bearing Total $’000 $’000 5,500 12,765 19,313 - 42,966 12,765 19,313 5,731 37,578 80,775 - 34,035 - 1,754 1,280 34,035 607 1,754 35,789 37,676 1,789 43,099 6,230 11,756 17,725 - 38,396 11,756 17,725 5,921 35,711 73,798 - 30,770 - 1,534 579 30,770 1,940 1,534 32,304 34,823 3,407 38,975 - - - - - - - - - - - - - - - - - - - - - - the world’s finest serviced offices 23 (b) Additional financial instruments disclosure (continued) Foreign exchange risk The Consolidated Entity actively manages foreign exchange risk. The policy involves entering into forward foreign currency exchange contracts to hedge anticipated transactions so as to manage foreign exchange risk. The following table sets out the details of foreign currency exchange contracts in place at the end of the financial year. Outstanding contracts Sell Japanese yen Not later than one year Sell US dollars Not later than one year Average Exchange Rate 2005 2004 Principal Amount 2004 2005 $'000 $'000 76.47 74.57 1,962 7,376 - 0.7322 - 683 (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 allowances for losses. 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 customer. Servcorp annual report 2005 59 Notes to the financial statements for the financial year ended 30 June 2005 23 (d) Additional financial instruments disclosures (continued) 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 basis: On-balance sheet financial instruments The net fair value of investments in interest bearing financial instruments are 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, other debtors, bank overdrafts, accounts payable, bank loans, lease liabilities, dividends payable and employee benefits approximate net fair value. The carrying amounts and net fair values of financial assets and liabilities as at the reporting date are as follows: Financial assets Cash Receivables Lease deposits Investments: Fixed rate bonds Reset preference securities Financial liabilities Bank overdrafts and loans Payables Finance lease liabilities Employee entitlements Consolidated Carrying amount 2005 $'000 2004 $'000 42,966 12,765 19,313 2,872 2,859 38,396 11,756 17,725 5,921 - Net fair value 2005 $'000 42,966 12,765 19,313 2,872 2,859 2004 $'000 38,396 11,756 17,725 5,921 - 80,775 73,798 80,775 73,798 1,280 34,035 607 1,794 37,716 579 30,770 1,940 1,534 34,823 1,280 34,035 607 1,794 37,716 579 30,770 1,940 1,534 34,823 (e) Hedges of anticipated future transactions The Consolidated Entity has entered into forward foreign exchange contracts to hedge the exchange risk arising from anticipated future transactions. At reporting date the aggregate amount of unrealised gains under forward foreign exchange contracts relating to anticipated future transactions was $178,935 (2004: $38,534). Unrealised gains will realise during the 2006 financial year when the anticipated future transactions take place. 60 Servcorp annual report 2005 the world’s finest serviced offices 24 Employee benefits Aggregate employee benefits Current Non-current Number of employees Number of employees at year end Notes 19 19 Consolidated The Company 2005 $'000 2004 $'000 2005 $'000 2004 $'000 1,190 564 1,754 1,039 495 1,534 - - - - - - 2005 Number 2004 Number 2005 Number 2004 Number 411 340 - - Superannuation fund Controlled entities in the Consolidated Entity contribute to a superannuation fund established for the benefit of employees. The Servcorp Superannuation Fund provides benefits which reflect accumulated contributions and plan earnings. Contributions by the company’s controlled entities are based on percentages of salaries. The Company’s controlled entities are legally obliged to contribute to the fund, unless an employee nominates a fund of their choice, or until notice of cessation is given. 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 fund during the year and contributions payable at 30 June 2005 are as follows: Employer contributions to the fund Employer contributions to other funds Employer contributions payable to the fund Consolidated The Company 2005 $'000 794 48 - 2004 $'000 680 26 - 2005 $'000 - - - 2004 $'000 - - - Options granted to employees Executive and Employee share option schemes An initial issue of options under these two schemes was granted on 16 December 1999. These options had an expiry date of 16 December 2004. The options were 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 expired on the earlier of five years from the date of issue or the date which the option holder ceased to be a director or employee of the Company or any of its controlled entities. A further issue of options under the Executive share option scheme was granted on 21 May 2004. 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 $2.00 per share. The options expire on the earlier of five years from the date of issue or the date which the option holder ceases to be an employee of the company or any of its controlled entities. The market value of shares under these options at 30 June 2005 was $2.90 (2004: $2.05). Share option schemes Balance at beginning of financial year Granted during the financial year Exercised during the financial year Lapsed during the financial year Balance at end of financial year The Company 2005 Number 2004 Number 1,208,000 - (1,178,000) - 1,384,000 30,000 (191,000) (15,000) 30,000 1,208,000 Servcorp annual report 2005 61 Notes to the financial statements for the financial year ended 30 June 2005 24 Employee benefits (continued) Options granted to employees (cont) Granted during the financial year No options were granted during the financial year ended 30 June 2005. 30,000 options were issued under the Executive share option scheme on 21 May 2004 with an exercise price of $2.00 and an expiry date of 21 May 2009. No amount was payable by the recipient on receipt of the option. Executive and Employee share option schemes carry no rights to dividends and no voting rights. Exercised during the financial year No. of options exercised 2005 200,000 150,000 62,000 20,000 45,000 50,000 32,000 10,000 11,000 150,000 5,000 10,000 150,000 130,000 90,000 63,000 1,178,000 2004 Grant date Exercise date Expiry date Exercise price 16/12/99 29/11/99 16/12/99 16/12/99 16/12/99 16/12/99 16/12/99 16/12/99 16/12/99 29/11/99 16/12/99 16/12/99 29/11/99 16/12/99 16/12/99 16/12/99 3/9/04 3/9/04 3/9/04 7/9/04 23/9/04 30/9/04 8/10/04 12/11/04 19/11/04 19/11/04 26/11/04 30/11/04 30/11/04 7/12/04 10/12/04 13/12/04 16/12/04 29/11/04 16/12/04 16/12/04 16/12/04 16/12/04 16/12/04 16/12/04 16/12/04 29/11/04 16/12/04 16/12/04 29/11/04 16/12/04 16/12/04 16/12/04 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 No. of shares issued 200,000 150,000 62,000 20,000 45,000 50,000 32,000 10,000 11,000 150,000 5,000 10,000 150,000 130,000 90,000 63,000 Fair value received Fair value at exercise date $300,000 $225,000 $93,000 $30,000 $67,500 $75,000 $48,000 $15,000 $16,500 $225,000 $7,500 $15,000 $225,000 $195,000 $135,000 $94,500 $490,000 $367,500 $151,900 $49,200 $112,500 $125,000 $75,520 $26,400 $27,720 $378,000 $12,250 $26,800 $402,000 $354,900 $243,000 $170,100 1,178,000 $1,767,000 $3,012,790 191,000 16/12/99 4/3/04 16/12/04 $1.50 191,000 $286,500 $401,100 Fair value of the consideration received is measured as the nominal value of cash receipts on conversion. The fair value at date of issue is measured as the market value at close of trade on the date of issue. Lapsed during the financial year Nil (2004: Nil) options expired under the Executive share option scheme (issued 16 December 1999) and Nil (2004: 15,000) options expired under the Employee share option scheme (issued 16 December 1999) during the year ended 30 June 2005. Balance at end of financial year Grant date Expiry date Vested Exercise price Number of options outstanding 2003 2004 2005 29 November 1999 16 December 1999 21 May 2004 29 November 2004 16 December 2004 21 May 2009 Yes Yes No $1.50 $1.50 $2.00 - - 30,000 450,000 728,000 30,000 450,000 934,000 - 30,000 1,208,000 1,384,000 62 Servcorp annual report 2005 the world’s finest serviced offices Notes Consolidated The Company 2005 $'000 2004 $'000 2005 $'000 2004 $'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 880 - - 880 903 - - 903 37,935 75,162 9,200 33,584 73,200 20,426 122,297 127,210 - - - - - - - - The Consolidated Entity leases property and equipment under operating leases expiring from one to eleven 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 17 17 647 19 - 666 (59) 607 592 15 607 1,405 716 - 2,121 (181) 1,940 1,299 641 1,940 - - - - - - - - - - - - - - - - - - - - - - - - - - The Consolidated Entity leases equipment under finance leases expiring from one to five years. 26 Contingent liabilities and contingent assets The details and estimated maximum amounts of contingent liabilities and contingent assets that may become payable or receivable respectively are set out below. Servcorp Smart Agents Rewards Programme The Consolidated Entity has a contingent liability for unredeemed Servcorp Smart Agents Rewards points (2004: formerly known as the Fly Away Programme). The Servcorp Smart Agents Rewards Programme is an incentive programme for agents to refer business to the Consolidated Entity. The Consolidated Entity provides awards 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 Smart Agents Rewards Programme liability 133 246 - - Servcorp annual report 2005 63 Notes to the financial statements for the financial year ended 30 June 2005 27 Particulars in relation to controlled entities Name Servcorp Limited Controlled entities Servcorp Australian Holdings Pty Ltd Servcorp Offshore Holdings Pty Ltd Servcorp Exchange Square Pty Ltd Servcorp (Miller Street) Pty Ltd Servcorp (North Ryde) Pty Ltd Servcorp Smart Office Pty Ltd Servcorp Smart Homes Pty Ltd Servcorp Business Service (Beijing) 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 Melbourne 50 Pty Ltd Servcorp Perth Pty Ltd Servcorp Brisbane Riverside Pty Ltd Beechreef (New Zealand) Limited Servcorp New Zealand Limited Company Headquarters Limited Servcorp Wellington 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 Business Services (Shanghai) Co. Ltd Servcorp Business Service (Beijing) Co. Ltd Amalthea Nominees (Malaysia) Sdn Bhd Servcorp Thai Holdings Limited Servcorp Company Limited Headquarters Co. Limited 64 Servcorp annual report 2005 Country of incorporation 2005 % 2004 % 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 Australia Australia Australia New Zealand New Zealand New Zealand New Zealand Singapore Singapore Singapore Singapore Singapore Hong Kong Hong Kong China China Malaysia Thailand Thailand Thailand 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - 100 100 100 - 100 100 100 100 100 100 100 100 100 100 100 100 100 the world’s finest serviced offices 27 Particulars in relation to controlled entities (continued) Country of incorporation 2005 % 2004 % Controlled entities (cont) Servcorp Japan KK Servcorp Tokyo KK Servcorp Nippon International KK Management International KK Servcorp Ginza KK Servcorp Shinagawa KK Servcorp Nagoya KK Servcorp Japan Holdings KK Servcorp Otemachi KK Servcorp Umeda KK Servcorp Paris SARL Servcorp Brussels SPRL Servcorp LLC (i) 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 Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan France Belgium UAE 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 49 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - - - - 100 100 49 100 100 100 100 100 100 100 100 100 100 Notes: (i) A Company in the Consolidated Entity exercises control over Servcorp LLC despite owning 49% of the issued capital. Arrangements are in place that entitle the Company or its controlled entities to all the benefits and risks of ownership not withstanding that the majority shareholding may be vested in another party. (ii) (iii) All of the above entities are audited by Deloitte Touche Tohmatsu (with the exception of dormant companies which do not require an appointed auditor). For the year ended 30 June 2004 Servcorp Paris SARL was audited by KPMG. KPMG resigned as auditors of Servcorp Paris SARL on 30 December 2004. Servcorp Holdings Pty Ltd and Servcorp Offshore Holdings Pty Ltd have each entered into a deed of guarantee and indemnity with Servcorp Limited in relation to loans owing from their respective subsidiaries. Servcorp Holdings Pty Ltd and Servcorp Offshore Holdings Pty Ltd have each entered into a deed of cross guarantee. Servcorp annual report 2005 65 Notes to the financial statements for the financial year ended 30 June 2005 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 from the acquisition date or up to the date of disposal: Consideration $'000 The Consolidated Entity's interest % - - - - - - - - - 100 100 100 100 100 100 100 100 100 Acquisitions 2005 Servcorp Brisbane Riverside Pty Ltd The entity was formed on 21 September 2004 Servcorp Wellington Limited The entity was formed on 8 June 2005 Servcorp Nagoya KK The entity was formed on 1 July 2004 Servcorp Japan Holdings KK The entity was formed on 5 August 2004 Servcorp Otemachi KK The entity was formed on 6 October 2004 Servcorp Umeda KK The entity was formed on 6 October 2004 Acquisitions 2004 Servcorp Perth Pty Ltd The entity was formed on 16 September 2003 Servcorp Shinagawa KK The entity was formed on 17 September 2003 Servcorp Business Service (Beijing) Co. Ltd The entity was formed on 2 March 2004 Disposals 2005 Nil Disposals 2004 Nil 66 Servcorp annual report 2005 the world’s finest serviced offices Consolidated The Company 2005 $'000 2004 $'000 2005 $'000 2004 $'000 8,202 34,764 (1,188) 41,778 15,293 974 8,631 181 3,239 (1,443) 160 - - - 15,072 23,324 (347) 38,049 9,443 1,046 8,460 486 1,658 (1,069) (165) 50 - - 174 - - 174 6,372 - - - 3,317 (124) - - 4,746 (2,230) - - (2) (2) 6,697 - - - 1,355 (1,259) - - - (1,401) 27,035 19,909 12,081 5,392 (3,103) (2,367) (4) 1,262 310 4,721 27,854 (6) (1,473) 18 687 169 (414) 18,890 3 - - - - (219) 11,865 (20) (211) 206 - - (110) 5,257 29 (a) (b) Notes to the statements of cash flows Reconciliation of cash For the purpose of the statements of cash flows, cash includes cash on hand and at bank, short-term deposits at call, net of outstanding bank overdrafts. Cash 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 Bank overdraft Reconciliation of profit after income tax to net cash provided by operating activities Profit 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)/loss Write-down in Rumble investment Provision for diminution in value of loan Effect of tax consolidations on tax balances Net cash provided by operating activities before change in assets and liabilities Change in assets and liabilities adjusted for the effect of purchase of controlled entities during the financial period: (Increase)/decrease in prepayments (Increase)/decrease in trade debtors (Increase)/decrease in current assets Increase in deferred income Increase/(decrease) in client security deposits Increase/(decrease) in accounts payable Net cash provided by operating activities (c) Financing facilities Refer Note 18. Servcorp annual report 2005 67 Notes to the financial statements for the financial year ended 30 June 2005 30 Directors' remuneration The CEO and Chairman review the remuneration packages of all specified directors on a regular basis, and make recommendations to the Board. The following table outlines the nature and amount of the elements of the remuneration of the specified directors of Servcorp Limited for the year ended 30 June 2005. The specified directors of Servcorp Limited during the year were: A Moufarrige T Moufarrige B Corlett R Holliday-Smith J King Managing Director Executive Director Chairman Non-Executive Director Non-Executive Director Salary and fees $ 197,154 213,504 Primary Bonus $ - - Non- monetary $ 113,302 137,754 162,394 147,665 45,000 - 6,697 6,723 85,000 80,000 50,000 45,000 50,000 45,000 - - - - - - - - - - - - Directors A Moufarrige 2005 2004 T Moufarrige 2005 2004 B Corlett 2005 2004 R Holliday-Smith 2005 2004 J King 2005 2004 28,007 16,740 15,277 13,118 7,650 7,200 4,500 4,050 4,500 4,050 Post Employment Super $ Prescribed benefits $ Equity Options Total $ $ - - - - - - - - - - - - - - - - - - - - - - - - 338,463 367,998 229,368 167,506 92,650 87,200 54,500 49,050 54,500 49,050 769,481 847,351 Aggregate 544,548 2005 Disclosed 2004 (ii) 686,976 45,000 - 119,999 107,674 59,934 52,701 Notes: (i) Directors’ and officers’ indemnity insurance has not been included in the above figures since it is impractical to determine an appropriate allocation basis. (ii) “Aggregate disclosed 2004” are the totals which were disclosed in the 2004 annual report. This disclosure is required under Accounting Standard AASB 1046. 68 Servcorp annual report 2005 the world’s finest serviced offices 31 Executives’ benefits The CEO and Chairman review the remuneration packages of all specified executives on a regular basis, and make recommendations to the Board. The following table outlines the nature and amount of the elements of remuneration of the specified executives of Servcorp Limited for the year ended 30 June 2005. The specified executives of Servcorp Limited during the year were: M Moufarrige R Baldwin O Vlietstra T Wallace S Lombardo General Manager Asia and CIO General Manager ITS General Manager Japan Chief Financial Officer Chief Technology Officer Salary and fees $ Primary Bonus $ Non- monetary $ Post Employment Super $ Prescribed benefits $ Specified executives M Moufarrige 2005 2004 162,883 146,555 45,000 - 35,000 - 6,972 7,318 - - 18,428 13,118 14,750 12,500 140,759 140,759 101,977 72,311 11,766 - 139,614 121,430 23,500 3,000 127,819 21,209 - - - Aggregate 2005 673,052 Disclosed 2004 (iv) 881,928 197,020 37,987 18,738 35,979 7,199 - 13,391 53,768 56,222 R Baldwin 2005 2004 O Vlietstra 2005 T Wallace 2005 2004 (ii) (iii) S Lombardo 2005 Equity Options $ - - - - - Total $ 233,283 166,991 190,509 153,259 186,054 6,389 913 176,702 125,343 - 162,419 6,389 827 948,967 1,012,943 - - - - - - - - - - Notes: (i) Bonuses relate to performance bonuses paid for the financial year ended 30 June 2005. The performance criteria varies, however they are generally based on reaching profit targets, or on changes in the price at which shares in the Company are traded over given periods. Refer to the remuneration report on pages 26 and 27 for further details. (ii) For T Wallace, 2004 amounts include remuneration for a position held with the Company prior to his appointment as CFO, on 7 February 2004. (iii) The options value has been restated as a consequence of applying new measurements under AASB 1046A. Details of terms and conditions are set out in Note 24 of the financial statements. (iv) “Aggregate disclosed 2004” are the totals which were disclosed in the 2004 annual report. This disclosure is required under Accounting Standard AASB 1046. Servcorp annual report 2005 69 Notes to the financial statements for the financial year ended 30 June 2005 32 Related parties Directors and executives The names of each person holding the position of director of Servcorp Limited during the financial year were Messrs A Moufarrige, B Corlett, R Holliday-Smith, Ms J King, and Mr T Moufarrige. The specified executives are set out in Note 31. Details of directors' and executives’ remuneration are set out in Note 30 and Note 31. Apart from the details disclosed in this note, no director or specified executive 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 or specified executives’ existing at balance date. Directors’ and executives’ holdings of shares and share options Fully paid ordinary shares issued by Servcorp Limited Specified directors B Corlett R Holliday-Smith J King A G Moufarrige T Moufarrige Specified executives R Baldwin S Lombardo M Moufarrige O Vlietstra T Wallace Balance at 1/7/04 No. 326,502 100,000 30,500 48,127,023 33,500 5,000 - 187,500 10,000 - 48,820,025 Received on exercise of options No. - 150,000 150,000 - 150,000 40,000 10,000 - - - 500,000 Executive Share Options issued by Servcorp Limited Net other change No. - - (93,000) 96,000 (33,500) - (10,000) (15,000) - - (55,500) Balance at 30/6/05 No. 326,502 250,000 87,500 48,223,023 150,000 45,000 - 172,500 10,000 - 49,264,525 Balance at 1/7/04 No. Granted as remuneration No. Exercised No. Balance at 30/6/05 No. Vested and exercisable No. Not vested No. Specified directors B Corlett R Holliday-Smith J King A G Moufarrige T Moufarrige Specified executives R Baldwin S Lombardo M Moufarrige O Vlietstra T Wallace - 150,000 150,000 - 150,000 40,000 10,000 - - 30,000 530,000 - - - - - - - - - - - - (150,000) (150,000) - (150,000) (40,000) (10,000) - - - (500,000) - - - - - - - - - 30,000 30,000 - - - - - - - - - - - - - - - - - - - - 30,000 30,000 Each executive share option converts into 1 ordinary share of Servcorp Limited when exercised. No amounts are paid or payable by the recipient on receipt of the option. Refer to Note 24. 70 Servcorp annual report 2005 the world’s finest serviced offices 32 Related parties (continued) Directors and executives (cont) During the financial year 500,000 (2004: 150,000) options were exercised by specified directors and executives for 500,000 (2004: 150,000) ordinary shares in Servcorp Limited. The exercise price of each option was $1.50. No amounts remain unpaid on options exercised during the financial year at 30 June 2005. No options were issued to specified directors and executives during the year. 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. 67 Fitness Pty Ltd provided gymnasium services at a discount to clients and staff of the Consolidated Entity during the 2004 year. No services were provided during the 2005 year. A director of the Company, Mr A Moufarrige, has an interest in and is 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. Rumble Australia Pty Ltd provided consulting services for the development of proprietary software to a company in the Consolidated Entity. Consulting fees of $17,631 (2004: $13,506) were paid on arms length terms. A director of the Company, Mr A Moufarrige, has an interest in and is a director of Rumble Australia Pty Ltd. The Consolidated Entity returned unclaimed security deposits held in relation to clients that terminated prior to Servcorp’s IPO to Renlana Pty Ltd, on behalf of the various entities that had operated the Servcorp business at that time. A director of the Company, Mr A Moufarrige, has an interest in and is a director of Renlana Pty Ltd. A director of the Company, Mr A Moufarrige, has an interest in and is a director of Sovori Pty Ltd. Mr T Moufarrige, a director of the Company is a director of Sovori Pty Ltd. Lapstream Pty Ltd was paid consulting fees by a company in the Consolidated Entity during the 2004 year. No fees were paid during the 2005 year. Mr B Pashby, a director of the Company until 26 March 2004, has an interest in and is a director of Lapstream 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. The value of the transactions during the year with directors and their director-related entities were as follows: Director A Moufarrige A Moufarrige A Moufarrige A Moufarrige A Moufarrige B Pashby Director-related entity Tekfon Pty Ltd Enideb Pty Ltd Rumble Australia Pty Limited Renlana Pty Ltd Sovori Pty Ltd Lapstream Pty Ltd Transaction Premises rental Franchisee Consulting Security deposit return Reimbursements Consulting Consolidated The Company 2005 $’000 2004 $’000 2005 $’000 2004 $’000 44 422 18 253 6 - 34 357 14 - 7 72 - - - - - - - - - - - - Amounts receivable from and payable to directors and their director-related entities at balance date arising from these transactions were as follows: Current receivable 67 Fitness Pty Ltd Enideb Pty Ltd Rumble Australia Pty Ltd - 34 - 3 30 4 - - - - - - Servcorp annual report 2005 71 Notes to the financial statements for the financial year ended 30 June 2005 32 Related parties (continued) The Company 2005 $'000 2004 $'000 Other transactions with the Company or its controlled entities (cont) 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. 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. Loans Loans between entities in the wholly-owned group are repayable at call. Interest is charged monthly on the outstanding balance. The weighted average interest rate for the year ended 30 June 2005 was 10.90% (2004: 10.85%). Interest brought to account by the Company in relation to these loans during the year: Net interest revenue 2,052 1,283 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 - current Trade receivables Receivables current comprise day to day funding of expenses 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 35,638 17,757 55,637 (4,746) 57,882 - 14,989 6,310 2,539 2,009 2,000 - 12,359 7,369 33 Subsequent events On 15 July 2005 a company in the Consolidated Entity acquired a business in Hong Kong. The consideration paid for the business, assets and customer licence agreements purchased was $1,810,721. 72 Servcorp annual report 2005 the world’s finest serviced offices Directors' declaration In the opinion of the directors of Servcorp Limited: (a) the financial statements and notes, set out on pages 32 to 72, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the financial position of the Company and Consolidated Entity as at 30 June 2005 and of their performance, as represented by the results of their operations and their cash flows, for the financial year ended on that date; and (ii) 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. The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295 (5) of the Corporations Act 2001. On behalf of the directors A G Moufarrige Managing Director Dated at Sydney this 19th day of September 2005. Servcorp annual report 2005 73 Independent audit report to the members of Servcorp Limited Deloitte Touche Tohmatsu A.B.N. 74 490 121 060 The Barrington Level 10 10 Smith Street Parramatta NSW 2150 PO Box 38 Parramatta NSW 2124 Australia DX 28485 Tel: +61 (0) 2 9840 7000 Fax: +61 (0) 2 9840 7001 www.deloitte.com.au Scope The financial report and directors' responsibility The financial report comprises the statement of financial position, statement of financial performance, statement of cash flows, accompanying notes to the financial statements, and the directors' declaration for both Servcorp Limited (the Company) and the consolidated entity, for the financial year ended 30 June 2005 as set out on pages 32 to 73. The Consolidated Entity comprises the Company and the entities it controlled at the year's end or from time to time during the financial year. The directors of the Company are responsible for the preparation and true and fair presentation of the financial report in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report. Audit approach We have conducted an independent audit of the 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. The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal controls, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected. We performed procedures to form an opinion whether, in all material respects, the financial report is presented fairly in accordance with the Corporations Act 2001 and Accounting Standards and other mandatory professional reporting requirements in Australia 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. 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 made by the directors. While we considered the effectiveness of management's internal controls over financial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls. The audit opinion expressed in this report has been formed on the above basis. Liability limited by the Accountants' Scheme, approved under the Professional Standards Act 1994 (NSW). © Deloitte Touche Tohmatsu. September, 2005. All rights reserved. 74 Servcorp annual report 2005 Auditor's Independence Declaration The independence declaration provided to the Directors of Servcorp Limited on 16 September 2005 would be in the same terms if it was given to the Directors on the date this audit report is made out. Audit Opinion In our opinion, the financial report of Servcorp Limited is in accordance with: (a) the Corporations Act 2001, including: (i) giving a true and fair view of the Company's and consolidated entity's financial position as at 30 June 2005 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and (b) other mandatory professional reporting requirements in Australia. DELOITTE TOUCHE TOHMATSU P G Forrester Partner Chartered Accountants Parramatta, 19 September 2005 Servcorp annual report 2005 75 Shareholder information As at 1 September 2005 The shareholder information set out below is provided in accordance with the Listing Rules and was applicable as at 1 September 2005. On-market buy-back Class of shares and voting rights Ordinary shares There were 656 holders of the ordinary shares of the Company. There is no current on-market buy-back. 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. Distribution of shareholders and optionholders Options There was 1 holder of options over 30,000 unissued ordinary shares granted to employees 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. Size of holding 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Totals Number of holders Ordinary shares Number of shares 123 303 108 95 27 656 74,632 918,085 869,375 2,935,779 75,600,439 80,398,310 % of shares 0.10% 1.14% 1.08% 3.65% 94.03% 100% Number of holders Options Number of options - - - 1 - 1 - - - 30,000 - 30,000 % of options - - - 100% - 100% There were 16 holders of ordinary shares holding less than a marketable parcel, based on the closing market price at the specified date. Substantial shareholders The following organisations have disclosed a substantial shareholder notice to Servcorp: Name Sovori Pty Ltd Commonwealth Bank Group Deutsche Bank Group Number of shares 48,379,753 13,845,866 7,719,767 % of voting power advised 60.51% 17.28% 9.60% 76 Servcorp annual report 2005 Shareholder information (cont) Twenty largest shareholders Name ANZ Nominees Limited (Cash Income Account) Citicorp Nominees Pty Limited (CFS Developing Companies Account) Citicorp Nominees Pty Limited (CFS WSLE Imputation Fund Account) Citicorp Nominees Pty Limited (CFS Imputation Fund Account) Citicorp Nominees Pty Limited (CFSIL CFS WS Small Companies Account) Citicorp Nominees Pty Limited Corlett R B Government Superannuation Office (State Super Fund Account) Guild Insurance Limited Holliday-Smith R HSBC Custody Nominees (Australia) Limited - GSI EDA JP Morgan Nominees Australia Limited Moufarrige A G National Nominees Limited Sovori Pty Limited Transport Accident Commission UBS Private Clients Australia Nominees Pty Limited VBS Exchange Pty Limited Victorian Workcover Authority Westpac Custodian Nominees Limited Totals for Top 20 Options Category Executive and employee the world’s finest serviced offices Number of ordinary shares held Percentage of capital held 180,000 5,688,000 4,802,644 3,217,311 660,017 286,518 233,895 833,208 335,000 250,000 265,000 5,116,621 541,390 188,564 47,681,633 367,521 712,037 350,000 551,673 2,648,214 74,909,246 Number on issue 30,000 0.22% 7.07% 5.97% 4.00% 0.82% 0.36% 0.29% 1.04% 0.42% 0.31% 0.33% 6.36% 0.67% 0.23% 59.31% 0.46% 0.89% 0.44% 0.69% 3.29% 93.17% Number of holders 1 The name of the holder and number of options held by persons holding 20% or more of each category of option: Option holder Wallace T Number of options Percentage 30,000 100% Servcorp annual report 2005 77 Corporate information Directors Alf Moufarrige Bruce Corlett Rick Holliday-Smith Julia King Taine Moufarrige 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 PO Box R67 Royal Exchange Sydney NSW 1223 Telephone: Facsimile: Auditors (02) 9290 9600 (02) 9279 0664 Deloitte Touche Tohmatsu Grosvenor Place 225 George Street Sydney NSW 2000 Stock exchange 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 Tuesday 8 November 2005. 78 Servcorp annual report 2005 Creating value Acknowledgements: Illustrations by Steve Panozzo, Noz Productions, http://www.noz.com.au Thinking... Thinking... Thinking...
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