Annual Report 2010 Servcorp Limited ABN 97 089 222 506 Highlights 2010 in review Servcorp locations Global expansion Chairman’s message CEO statement New locations The environment Community service Servcorp services ITS The Servcorp team Corporate governance Directors’ report Financial report 1 2 4 6 7 8 9 10 11 12 13 14 16 26 43 Auditor’s report 100 Shareholder information 102 Corporate information 104 About Servcorp Servcorp offers the world’s finest Serviced and Virtual Office solutions. Founded in Sydney in 1978, Servcorp now operates an international network of prime CBD locations throughout Australia, New Zealand, Japan, China, South-East Asia, India, Europe, the Middle East, United Kingdom and United States including the prestigious Chifley Tower, Sydney; Shiroyama Trust Tower, Tokyo; Emirates Towers, Dubai; and Louis Vuitton Building, Paris. Servcorp’s office and IT solutions enable companies of any size to operate with the corporate presence, IT, infrastructure and support of a multi national organisation, without having the associated overheads normally required to do so. A Servcorp Smart Office® is a fully managed corporate office suite in a prime CBD building. It includes a dedicated, local receptionist, access to a worldwide network of meeting rooms, secretarial support on hand and exclusive access to an online portfolio of business services and tools. A Servcorp Virtual Office® gives clients access to the presence, facilities and services of a Servcorp Smart Office®, whilst they work from home or another location. 2010 Highlights ▪ Servcorp global expansion… new VIP floors begin to hatch ▪ New regions… USA, UK, Saudi Arabia, Kuwait ▪ Equity capital raising… $80 million to fund expansion ▪ Australian Export Awards Winner… Large Services category ▪ NSW Export Awards Winner… Large Services category 1 1 2010 We stretch our wings Net profit before tax ($ millions) Revenue ($ millions) Actual Forecast 35.2 34.1 44.6 47.3 Immature floors Mature floors Forecast $167.5 $160.8 $145.9 $141.7 $228.6 $219.1 $190.1 $185.8 $186.0 $168.8 $159.6 15.0 2.9 $4.2 $6.7 $4.3 $9.5 $9.2 06 07 08 09 10 11 06 07 08 09 10 11 12 months to June 2010 $2.9 million 12 months to June 2010 $168.8 million 12 months ended 30 June 2006 $’000 2007 $’000 2008 $’000 2009 $’000 2010 $’000 Revenue & other income 145,941 167,518 190,142 228,646 168,837 Net profit before tax 35,207 34,124 44,578 47,275 2,875 Net profit after tax 25,375 26,332 33,834 34,097 2,006 Net operating cash flows 35,345 39,984 51,192 43,024 8,798 Cash & cash equivalents 58,213 55,401 73,716 83,958 131,948 Interest earning financial assets 5,035 9,266 - - - Net assets 107,261 111,152 127,651 145,291 212,610 Earnings per share $0.316 $0.327 $0.420 $0.427 $0.022 Dividends per share $0.105 $0.230 $0.200 $0.250 $0.100 2 2011 Fly Servcorp floors and locations (at 30 June) 121 108 57 42 64 50 71 56 55 77 67 64 06 07 08 09 10 11 Locations Floors Forecast locations Forecast floors Servcorp geographic spread (at 30 June 2010) United States of America (2) Kuwait (1) Saudi Arabia (1) Qatar ( 2) Bahrain (2) United Arab Emirates (3) United Kingdom (1) Belgium (2) France (4) Japan (20) (17) Australia (3) New Zealand (4) Singapore (6) China (3) Hong Kong (2) Malaysia (3) Thailand 3 Locations opened in the: 2010 financial year 2011 financial year Servcorp...seeing beauty, colour and growth across the globe Australia Sydney Level 29 Chifley Tower 2 Chifley Square Levels 56 and 57 MLC Centre 19-29 Martin Place Level 26, 44 Market Street Levels 21 and 22 201 Miller Street North Sydney Level 32, 101 Miller Street North Sydney Suite 2201 Level 22 Tower Two Westfield Bondi Junction 101 Grafton Street Bondi Junction Suite F Level 1 Octagon 110 George Street Parramatta Level 9 Avaya House 123 Epping Road North Ryde Level 5 Nexus Building Norwest Business Park 4 Columbia Court Baulkham Hills Adelaide Levels 24 and 30 Westpac House 91 King William Street Canberra Level 11 St George Centre 60 Marcus Clarke Street Level 1 The Realm 18 National Circuit New Zealand Auckland Level 27 PWC Tower 188 Quay Street Japan Tokyo Level 11 Aoyama Palacio Tower 3-6-7 Kita-Aoyama Minato-ku Level 14 Hibiya Central Building 1-2-9 Nishi-Shimbashi Minato-ku Level 20 Marunouchi Trust Tower – Main 1-8-3 Marunouchi Chiyoda-ku Level 7 Wakamatsu Building 3-3-6 Nihonbashi-Honcho Chuo-ku Level 8 Nittochi Nishi-Shinjuku Building 6-10-1 Nishi-Shinjuku Shinjuku-ku Level 20 ASB Bank Centre 135 Albert Street Level 9 Ariake Frontier Building Tower B 3-7-26 Ariake Koto-ku Wellington Level 16 Vodafone on the Quay 157 Lambton Quay United States of America Chicago 155 North Wacker Drive 42nd floor 300 North LaSalle Street Suite 4925 49th floor Level 28 Shinagawa Intercity Tower A 2-15-1 Konan Minato-ku Level 32 Shinjuku Nomura Building 1-26-2 Nishi-Shinjuku Shinjuku-ku Level 21 Shiodome Shibarikyu Building 1-2-3 Kaigan Minato-ku Levels 16 and 27 Shiroyama Trust Tower 4-3-1 Toranomon Minato-ku Level 45 Sunshine 60 3-1-1 Higashi-Ikebukuro Toshima-ku Level 27 Tokyo Sankei Building 1-7-2 Otemachi Chiyoda-ku Level 18 Yebisu Garden Place Tower 4-20-3 Ebisu Shibuya-ku Yokohama Level 10 TOC Minato-Mirai 1-1-7 Sakuragi-cho Naka-ku Nagoya Level 40 Nagoya Lucent Tower 6-1 Ushijima-cho Nishi-ku Level 4 Nagoya Nikko Shoken Building 3-2-3 Sakae Naka-ku Osaka Level 9 Edobori Center Building 2-1-1 Edobori Nishi-ku Level 19 Hilton Plaza West Office Tower 2-2-2 Umeda Kita-ku Level 4 Shinsaibashi Plaza Building 3-12-21 Minami-Senba Chuo-ku Fukuoka Level 15 Fukuoka Tenjin Fukoku Seimei Building 1-9-17 Tenjin Chuo-ku Level 2 NOF Hakata Ekimae Building 1-15-20 Hakata-Ekimae Hakata-ku Melbourne Level 27, 101 Collins Street Level 40, 140 William Street Washington 1717 Pennsylvania Avenue NW Suite 1025 10th floor Brisbane Level 36 Riparian Plaza 71 Eagle Street Level 24 AMP Place 10 Eagle Street Perth Level 28 AMP Tower 140 St Georges Terrace Level 18 Central Park 152-158 St Georges Terrace 1155 F Street NW Suite 1050 10th floor Atlanta Terminus 200 3333 Piedmont Road Suite 2050 20th floor 1075 Peachtree Street NE Suite 3650 36th floor New York City Financial Times Building 1330 Avenue of the Americas 23rd floor McLean 1650 Tysons Boulevard 15th floor 4 4 Servcorp...seeing beauty, colour and growth across the globe China and Hong Kong Shanghai Level 23 Citigroup Tower 33 Huayuanshiqiao Road Level 29 Shanghai Kerry Centre 1515 Nanjing West Road Chengdu Level 18 Shangri-La Office Tower 9 Binjiang East Road Beijing Level 24 Tower 3 China Central Place 77 Jianguo Road Chaoyang District Level 19 Tower E2 Oriental Plaza 1 East Chang An Avenue Dongcheng District Hangzhou Level 1 Lyra 2 Science and Technology Park Road Singapore-Hangzhou Science & Technology Park HEDA Hong Kong Level 19 Two International Finance Centre 8 Finance Street Central Suite 901 Level 9 The Hong Kong Club Building 3A Chater Road Central Suite 1202 Level 12 One Peking 1 Peking Road Tsimshatsui Kowloon Middle East Abu Dhabi, United Arab Emirates Level 4 Al Mamoura Building B Muroor Road Dubai, United Arab Emirates Levels 41 and 42 Emirates Towers Sheikh Zayed Road Manama, Kingdom of Bahrain Levels 22 and 41 West Tower Bahrain Financial Harbour King Faisal Highway Doha, Qatar Levels 14 and 15 Commercialbank Plaza West Bay Jeddah, Kingdom of Saudi Arabia Level 9 Jameel Square Corner of Talhia Street and Al Andalus Street Riyadh, Kingdom of Saudi Arabia Level 18 Al Faisaliah Office Tower King Fahad Highway Olaya District Kuwait City, Kuwait Level 18 Sahab Tower Salhia Beirut, Lebanon Suite 2029 Level 2 Beirut Souks Louis Vuitton Building Allenby Street Downtown Beirut Europe South East Asia Singapore Penthouse and Level 42 Suntec Tower Three 8 Temasek Boulevard Levels 30 and 31 Six Battery Road Kuala Lumpur, Malaysia Level 36 Menara Citibank 165 Jalan Ampang Level 20 Menara Standard Chartered 30 Jalan Sultan Ismail Bangkok, Thailand Levels 8 and 9 1 Silom Road Bangrak Paris, France Level 5 Louis Vuitton Building 101 Avenue des Champs Elysées Level 29 The Offices at Centralworld 999/9 Rama 1 Road Pathumwan Levels 2 and 3 17 Square Edouard VII Level 2 Actualis Building 21 and 23 Boulevard Haussmann Manila, Philippines Suite 22C Level 22 Tower One Ayala Triangle 6767 Ayala Avenue (Corner Paseo de Roxas Avenue) Makati City London, United Kingdom Level 17 Dashwood House 69 Old Broad Street India Brussels, Belgium Levels 20 and 21 Bastion Tower 5 Place du Champ de Mars Istanbul, Turkey Levels 5 and 6 Louis Vuitton Orjin Building 15 Bostani Sokagi Tesvikiye (Corner Adbi Ipecki Cadessi) Nisantasi Mumbai Levels 7 and 8 Vibgyor Towers G Block C62 Bandra Kurla Complex Hyderabad Level 7 Maximus Towers Building 2A Mindspace Complex Hi-Tech City 5 5 Servcorp has a strong track record of global organic growth since its IPO in 1999. At the time of the IPO, Servcorp operated in 8 countries with 33 floors. In October 2009 it operated in 13 countries, with 67 floors. Over the past 30 years of operations, Servcorp has made a significant investment in proprietary business infrastructure and IT platforms which has transformed the range and depth of services available to Servcorp’s clients. This IT platform, which was built to complement Servcorp’s Serviced Office product, also enables Servcorp to offer its customers an attractive Virtual Office product. A new business model based on a smaller VIP floor which requires lower fixed costs and upfront capital outlays is expected to enable Servcorp to achieve margin uplift and potentially improve shareholder returns over the medium term. Servcorp’s systems and IT platform are now scalable, robust and able to accommodate the aggressive expansion plans for the VIP model. Growing the Servcorp garden Servcorp has undertaken a significant global expansion. The current global market conditions create an The proceeds of the capital raising plus existing opportunity to secure leases on very favourable available cash reserves will fund the roll-out terms and represent an attractive opportunity of at least 100 new floors to be targeted over for aggressive expansion. In October 2009, the decision was taken to substantially expand the Servcorp footprint globally with particular focus on the United States. During October and November 2009, an equity capital raising of $80 million was the period to 30 June 2013, the vast majority of which will be our new VIP floors. Between November 2009 and 30 June 2010 we opened 13 new floors, and a further 31 leases had been executed for locations expected to open during the 2011 financial year. successfully undertaken through UBS to fund The large number of immature floors as a this global expansion program. consequence of the expansion program is expected to have a material negative impact on profitability until the new floors reach maturity. We are on track to reach our floor opening targets of 35 new locations in the eighteen months to 31 December 2010, and 100 new locations in the thirty six months to 30 June 2013. 6 immature floor losses will be approximately $15 million for the 2011 financial year, significantly skewed toward the first half. This forecast assumes currencies remain constant, global financial markets remain stable and no unforeseen circumstances. Directors anticipate the level of dividends for the 2011 financial year will be 10.00 cents per share. Servcorp enjoys substantial financial strength. Cash generation from mature floors remains strong, cash balances at 30 June 2010 were almost $132 million and the Company has negligible debt. We continue to be optimistic about the new business model and look forward to updating shareholders on how we are performing at our annual general meeting in November. On behalf of the Board I thank our CEO, Alf Moufarrige, our leadership group and all the Servcorp team members for their dedication and commitment during the past year. 2010 has been one of Servcorp’s busiest years to date as we continue to maintain our position as the world’s finest serviced and virtual office provider. Bruce Corlett Chairman’s message 2010 was a difficult year for Servcorp. The tough economic climate and depressed global business sentiment significantly impacted serviced offices globally. Revenue for the year was $168.84 million, a decrease of 26% on 2009. Our mature floors contributed $25.13 million profit before tax, a decrease of 54%, but in line with guidance. Due to our rapid expansion initiatives, immature floor costs were $20.10 million. As a result, net profit after tax decreased by 94% on 2009, to $2.01 million. Earnings per share also decreased - down by 95% to 2.2 cents per share. The Directors have declared a fully franked final dividend of 5.00 cents per share, bringing total dividends for the year to 10.00 cents per share, resulting in a payout to shareholders of approximately $9.8 million. All dividends were fully franked. As mentioned in last year’s annual report, the global financial crisis created favourable market conditions for Servcorp to acquire new space on attractive terms. As detailed in the report on our global expansion, in October 2009, the decision was taken to substantially expand the Servcorp footprint globally. During October and November 2009, an equity capital raising of $80 million was successfully undertaken through UBS to fund this global expansion program. We appreciate the support this issue generated from our institutional and retail shareholders. Notwithstanding the current global trading conditions, when we released our 2010 results we forecast that mature floor net profit before tax for the 2011 financial year would increase by 20 per cent on 2010 to approximately $30 million, $13 million in the first half and $17 million in the second half. New floor openings will continue to have a material adverse impact on net profits, and forecast 7 CEO statement ...float like a butterfly, sting like a bee As everybody knows, in the majority of Servcorp locations, 2009/2010 was a most difficult year. For Servcorp it was a year of change; we raised $80 million, altered the business model and created a global roll-out plan that will allow us to grow our footprint by in excess of 70 centres over a 20 month period. We will double the number of Servcorp locations during the period November 2009 to November 2011. All our expansion will take place while the above $30 million, and we should not commercial real estate market faces rising incur more than $15 million in immature vacancies and falling rentals. This, combined floor losses. with the strength of the Australian dollar, makes the case for expansion compelling. In the 2011/2012 financial year I expect growth to be approximately 15%, taking the number of centres at the end of the calendar year 2012 to 150. With the smaller VIP floors, the task of gaining higher occupancy and bringing the floors to maturity should be a lot easier. We have opened 25 centres since November 2009, and intend opening, on average, one new centre per week from September 2010 to January 2011. Our performance on mature floors for 2010 was ahead of target, however losses on immature floors are higher than I would like, but I expect as the new floors open and our teams streamline the process for opening new centres, the costs The world is not out of the woods yet and competition is fierce, but Servcorp remains cash rich and cash positive, therefore our profit should grow substantially when the markets strengthen and I am sure our management, marketing and search engine optimization teams are capable of running the new centres. We will continue to mature in the global markets and our IT systems have shown they are scalable. Our sales at this stage are at the lower end of our expectations, but nevertheless within our target range. I believe Servcorp’s future prospects are good. We made many right decisions over the last 2 years that I think will stand us in good stead, maintaining our position as the second largest business centre operator across the globe. To the Serviced and Virtual Office Managers and their teams; thank you. It has been a trying year. To Taine and Marcus, Head Office, Bruce and the Board; thank you for your guidance, help and patience. will drop substantially. Our mature floor profits this year Alf Moufarrige should increase from $25 million to 8 8 2010-2011 New floors opening Australia Bondi Junction – July 2010 Parramatta – July 2010 Hobart – October 2010 Melbourne Docklands – November 2010 Melbourne Southbank – January 2011 Brisbane – January 2011 Japan Yokohama – August 2010 Osaka – September 2010 Fukuoka – September 2010 China Guangzhou – March 2011 New Zealand Christchurch – May 2011 United States of America Atlanta – July 2010 Washington – August 2010 Atlanta – August 2010 Virginia – September 2010 Washington – September 2010 New York City – September 2010 Boston – October 2010 Dallas – October 2010 Houston - October 2010 Houston - October 2010 Philadelphia – November 2010 New York City – November 2010 Dallas – November 2010 Dallas – November 2010 Miami – December 2010 San Francisco – December 2010 San Francisco – December 2010 Los Angeles – December 2010 Orange County – December 2010 Denver – TBC Middle East Beirut – July 2010 Riyadh – August 2010 Al Khobar, Damman – December 2010 Dubai – December 2010 Riyadh – December 2010 Cairo – February 2011 Europe Istanbul – August 2010 London Canary Wharf – November 2010 Istanbul – January 2011 Brussels – January 2011 South East Asia Manila – September 2010 Jakarta – January 2011 Singapore – January 2011 Taipei – February 2011 Beauty, colour, class – the design of the new V.I.P. floors 9 The environment ...to protect the butterflies and all species, we respect our environmental responsibilities Servcorp acknowledges the seriousness of climate change and the impact that high concentrations of greenhouse gases in the atmosphere is having on the planet. The Green Offices Project is our global platform for proactive initiatives that reduce our impact on the environment and highlight green issues within our teams and client base. The Green Offices Project focuses on three main facets: Reduce Servcorp aims to reduce our environmental Offset Servcorp partners with Greenfleet to plant a tree on behalf of every new Servcorp Virtual Office® client set up online. We also boost this tree-planting commitment through various corporate and client initiatives as part of the Green Offices Project. The interim goal of creating a Servcorp Forest with 10,000 trees was achieved in 2008/2009, and now the Servcorp Forest has more than 13,810 native trees planted across various Greenfleet locations throughout Australia. The Servcorp Forest now actively offsets more than 3,701 tonnes of carbon dioxide over the life of the trees. This is equivalent to removing 994 cars from the roads for one whole year or offsetting our Sydney Head footprint by developing greener technologies Office greenhouse gas emissions from waste and procedures for existing processes within for the equivalent of five years. the business. We are the only Virtual Office provider in the world to offer complete provision of client services online, eliminating the need for paper based documentation and administration. Our online sign-up facility eliminates more than 100 individual sheets of paper during the set up of a new Servcorp Virtual Office® client. Continuing on this path, the My Servcorp Manual is now available to clients via Servcorp Online rather than a printed document. Invoices, Rental Agreements and the majority of client communications are also now offered in electronic or online formats. These process improvements, along with the overall aim to reduce daily paper and energy consumption Educate Servcorp aims to educate and inform our teams and clients about global initiatives that they can join us in supporting locally. As an ongoing global supporter of Earth Hour (a World Wildlife Foundation initiative) we have successfully turned off all lights across our global network of locations for the past 3 years running. Whilst this is just a one-night initiative each year, we believe it helps increase awareness and local action for simple yet effective ways of being more environmentally responsible. in all locations, is helping Servcorp actively reduce our global environmental impact. Please see www.greenofficesproject.net for ongoing updates. 10 Broken wings Servcorp’s focus is to support and assist continuing research into the prevention and cure of cancer and 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 ground is matched dollar for dollar by Servcorp. In Australia, Youngcare continues to be the focus of our fundraising. For more information please visit their website at youngcare.com.au. Taine Moufarrige was appointed a Director of this organisation in June 2009. We are proud of the fact that as a global company we work with our local communities to bring about real change for good. We’d like to thank our clients and those who contributed to the success of our fundraising for the year. Servcorp also sponsors and supports the This year the organisations we strongly Australian Chamber Orchestra and The Art supported included: Gallery of NSW. ▪ The Rotary Club of Sydney ▪ Youngcare ▪ MRC Cancer Research ▪ Dry July ▪ MS Society ▪ The Cancer Council ▪ St Vincent Hospital - Sydney ▪ The Mater Hospital ▪ Breast Cancer Foundation ▪ MAKNA - KL Cancer Council ▪ Assisi Hospice - Singapore ▪ Tyler Foundation - Japan ▪ Seeing is Believing - Hong Kong Servcorp also contributed to many other local charitable organisations around the world. In 2009/2010 Servcorp donated in excess of $350,000. We will keep you updated. NBCF Logo CMYK positive 11 Servcorp services Servcorp Smart Office® Servcorp Smart Office® allows clients to run their businesses from the best CBD addresses and enjoy the benefits of team support and IT infrastructure, superior to that of a multi-national organisation. Clients have access to all of this without incurring the costs and financial commitment normally required to do so. Servcorp Virtual Office® Servcorp Virtual Office® allows clients to leverage all of the services and solutions within our global network of serviced offices (Servcorp Smart Office®) without having to take a physical office. Clients can work predominantly from home or another location, yet enjoy everything they need to run their business professionally and effectively, without the cost of a full time office. Servcorp continues to experience growth from a variety of sources and has received excellent reviews of the, now globally available, online sign up and set up process. Servcorp is the only Virtual Office provider in the industry to have full provision of all of our services and solutions, online from anywhere in the world. Servcorp continues to provide the highest quality serviced offices in the industry with the highest-quality fit-outs and services. All this The Servcorp world wide network Servcorp has invested more than while maintaining a cost effectiveness which US$40 million in infrastructure and continues meets the needs of start-ups, SMEs and larger to maintain and develop the exclusive corporations. Servcorp clients come from a Servcorp world wide network. Servcorp has wide range of industries and we are proud an international team of IT experts to ensure to support all professions from accountants 24 hour a day maintenance of the network and lawyers to recruiters and journalists. and provide clients with immediate support Whilst technology development remains the and assistance. driving force of the latest developments Servcorp’s technology developments and our ability to stay a cut above the maintain the single goal of providing new competition, Servcorp remains committed and innovative solutions and support to the proven, international Servcorp model. tools to make our clients’ jobs easier. We operate in only the best buildings in the These innovations form the backbone best locations around the world, we hire and of our increasingly broad portfolio of train only the best team of motivated and products including the recently launched service-orientated people and we provide Servcorp Onefax and Servcorp Onefone. services and solutions which genuinely save our clients time and money. By refusing to outsource such a core service, the Servcorp world wide network offers Servcorp clients unprecedented flexibility and control over all levels of service and support tools. 12 ITS... innovation investment infrastructure After many years of developing new technologies to ensure our firm competitive advantage, Servcorp IT teams in the last year have been focusing on ensuring security and scalability for our system. From a hardware and software perspective, Servcorp’s world- leading hardware and software platform is now more robust than ever before. We have been totally committed this year to dramatically improving the performance of our products and preparing our business for the significant expansion that Servcorp is undertaking. Our teams are working to make sure our systems are faster, easier to use, and more mobile than ever before. We have strengthened our support teams and rollout teams by adopting, for the first time, an in-source and out-source model. Improving, growing and stabilizing our platform this year reinforces our competitive advantage and ensures successful growth. 13 The Servcorp Board and Management team The Board and Executive Bruce Corlett Chairman Rick Holliday-Smith Non-Executive Director Julia King Non-Executive Director Alf Moufarrige Executive Director, CEO Taine Moufarrige Executive Director Marcus Moufarrige BCom CIO Thomas Wallace BBS, ACA Chief Financial Officer Greg Pearce CA, ACIS Company Secretary Operational Executive Susie Martin BEc General Manager South East Asia Olga Vlietstra BA General Manager Japan Jennifer Goodwyn BA Vice President & General Manager USA Barry Barakat BE, MBA General Manager Middle East Wilma Wu BA (Hons) General Manager Hong Kong Laudy Lahdo BCom General Manager UAE & Bahrain Kureha Ogawa BA Senior Manager Japan Adeline Charles BBus Mktg Senior Manager Paris Liane Gorman International Training & Development Manager Bryn Sharp General Manager Virtual Office Kristie Thomas BArts, BBus International Sales Manager Warren James Manager International Property Portfolio Lachlan Buchanan BCom International Property Project Manager Ryoma Eguchi BBus, MIT Group Executive, IT & Solution Development Daniel Kukucka BE Group Executive, Unified Communications Sui Hua BCom Group Executive, Commercial Services 14 15 Corporate governance The Board has responsibility for the long-term health and Composition of the Board 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 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 The Board is committed to the principles underpinning the ASX of twelve directors. Corporate Governance Council’s Corporate Governance Principles and Recommendations (2nd edition) which became effective after The Board comprises five directors (two executive and three 1 January 2008. The Board is continually working to improve the Company’s governance policies and practices, where such non-executive). The non-executive directors are all independent. practices will bring benefits or efficiencies to the Company. This There has been no change to the Board since the last will include a review of the amended guidelines which will become annual report. effective after 1 January 2011. The Chairman of the Board, Mr Bruce Corlett, is an independent Details of Servcorp’s compliance are set out below, and in the non-executive director. ASX principles compliance statement on pages 20 to 25 of this annual report. Role of the Board 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 The Board has adopted a formal statement of matters reserved this annual report is set out on pages 26 and 27 of this annual for the Board. The central role of the Board is to set the report. The Board will continue to be made up of a majority of Company’s strategic direction and to oversee the Company’s independent non-executive directors. The performance of non- management and business activities. executive directors was reviewed during the year. Responsibility for management of the Company’s business The names of the directors of the Company in office at the date activities is delegated to the CEO and management. of this annual report are set out in the following table. 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 Chief Executive Officer 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 Securities 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. 16 Servcorp Annual Report 2010 ▪ Corporate Governance Names of directors in office at the date of this annual report Director First appointed Non- Independent executive Retiring at 2010 AGM Seeking re-election at 2010 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 No Yes No No No No Yes No No No Directors’ independence Independent professional advice It is important that the Board is able to operate independently of Each director has the right to seek independent professional executive management. advice, at Servcorp’s expense, to help them carry out their responsibilities. Prior approval of the Chairman is required, which The non-executive directors are considered by the Board to will not be unreasonably withheld. A copy of advice received by be independent of management. Independence is assessed by the director is made available to all other members of the Board. determining whether the director is free of any business interest or other relationship which could materially interfere with the Ethical standards 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 G Moufarrige, but she has no joint financial interests in Servcorp or otherwise. Ms King is an experienced business woman who has held 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 directorships on several other public company boards. Ms King, management and team manuals. and the other independent directors, believe her relationship with Mr A G 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 rounded down to the nearest whole number), 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. 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 discuss proposed purchases or sales of shares in the Company with the Chairman before proceeding. Directors must also notify the Company Secretary when they buy or sell 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. Servcorp Annual Report 2010 ▪ Corporate Governance 17 Corporate governance (continued) Conflict of interest Committees In accordance with the Corporations Act 2001 and the Company’s The Board does not delegate major decisions to committees. Constitution directors must keep the Board advised, on an Committees are responsible for considering detailed issues ongoing basis, of any interest that would potentially conflict and making recommendations to the Board. The Board has with those of Servcorp. Where the Board believes that an actual established two committees to assist in the implementation of its or potential significant conflict exists, the director concerned, corporate governance practices. if appropriate, will not take part in any discussions or decision making process on the matter and abstains from voting on Audit and Risk Committee the item being considered. Details of director related entity transactions with the Company and the Consolidated Entity are The members of the Audit and Risk Committee during the set out in Note 26 to the financial statements. year were: Continuous disclosure 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 ▪ ▪ ▪ Mr R Holliday-Smith (Chair) 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 is ensure that all price sensitive information is disclosed to the ASX not the chairman of the Board. 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. Auditor independence 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 Company’s auditors Deloitte Touche Tohmatsu (Deloitte) were appointed at the annual general meeting of the Company on 6 November 2003. The external auditors, the Chief Executive Officer, the Chief Financial Officer and other senior management may attend committee meetings by invitation. The Lead Partner at the time of Deloitte’s appointment, Mr P Forrester, completed his five year tenure upon signing the financial report for the year ended 30 June 2008. In accordance with the mandatory requirements under the Corporations Law, Mr Forrester rotated off the Servcorp audit engagement and was replaced by Mr S Gustafson as Lead Partner. Mr S Gustafson will be due for rotation following the completion of the audit for the year ending 30 June 2013. 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. The Audit and Risk Committee met three times during the year. The committee meets with the external auditors without management being present before signing off its reports each half year. The committee Chairman also meets with the auditors at regular intervals during the year. 18 Servcorp Annual Report 2010 ▪ Corporate Governance The responsibilities of the Audit and Risk Committee as stated in Remuneration Committee its charter include: The Remuneration Committee members during the year were: ▪ reviewing the financial reports and other financial information distributed externally; ▪ ▪ improving the quality of the accounting function; reviewing external audit reports to ensure that where major deficiencies or breakdown in controls or procedures have ▪ ▪ ▪ Ms J King (Chair, Non-Executive Director) Mr B Corlett (Non-Executive Director) Mr T Moufarrige (Executive Director) been identified appropriate and prompt remedial action is The role of the Remuneration Committee is to assist the Board by taken by management; adopting remuneration policy and practices that: ▪ reviewing the Company’s policies and procedures for compliance with Australian equivalents to International Financial Reporting Standards; ▪ reviewing the nomination, fees, independence and ▪ ▪ ▪ supports the Board’s overall strategy and objectives; attracts and retains key employees; links total remuneration to financial performance and the performance of the auditor; attainment of strategic objectives. ▪ liaising with the external auditors and ensuring that the statutory annual audit and half-yearly review are conducted Specifically this will include: in an effective manner; ▪ monitoring the internal control framework and compliance ▪ remuneration policy and its application to the Chief Executive structures and considering enhancements; Officer and those who report to the Chief Executive Officer; ▪ ▪ monitoring the compliance with appropriate ethical standards; monitoring the procedures in place to ensure compliance with ▪ ▪ adoption of short-term and long-term incentive plans; determination of levels of reward to the Chief Executive the Corporations Act 2001, ASX Listing Rules and all other Officer and approval of rewards to those who report to the regulatory requirements; Chief Executive Officer; ▪ addressing any matters outstanding with the auditors, ▪ ensuring the total remuneration policy and practices are taxation authorities, corporate regulators, Australian designed with full consideration of all tax, accounting, legal Securities Exchange and financial institutions; and regulatory requirements. ▪ reviewing reports on any major defalcations, frauds and thefts from the Company; The Remuneration Committee is committed to the principles of ▪ overseeing the risk management framework. accountability, transparency and to ensuring that remuneration arrangements demonstrate a clear link between reward and performance. The Remuneration Committee met once during the year. The Chief Executive Officer may attend committee meetings by invitation to assist the committee in its deliberations. Servcorp Annual Report 2010 ▪ Corporate Governance 19 ASX principles compliance statement This table provides a description of the manner in which Servcorp complies with the ASX Corporate Governance Principles and Recommendations (2nd edition), or where applicable, an explanation of any departures from the Principles. Compliance has not been measured against the amended guidelines which will be effective after 1 January 2011. The Board will undertake a transition to the updated guidelines. Principle 1 Lay solid foundations for management and oversight Establish and disclose the respective roles and responsibilities of board and management. Recommendation 1.1 Establish the functions reserved to the board and those delegated to senior executives and disclose those functions. 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 and senior executives. Primary responsibilities are set out on page 16. The Board charter is available on the Company’s website. Recommendation 1.2 Disclose the process for evaluating the performance of senior executives. Servcorp Board Response The process for evaluating the performance of senior executives is included in the remuneration report on pages 34 to 40 of this annual report. Recommendation 1.3 Provide the information indicated in the Guide to reporting on Principle 1. Servcorp Board Response All relevant information is included in the corporate governance section on pages 16 to 25 of this annual report. 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 Response The Board has a majority of independent directors. All the currently serving non-executive directors are independent. Recommendation 2.2 The chair should be an independent director. Servcorp Board Response The Chair is an independent director. Recommendation 2.3 The roles of chair and chief executive officer should not be exercised by the same individual. Servcorp Board Response The roles of Chair 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. A specific skills matrix has not been developed, however the current non-executive directors each bring a mix of skills and experience to the Board. The Board would endeavour to retain this skills mix if considering new appointments. Any director appointed by the Board must retire from office at the next annual general meeting and seek re-election by shareholders. 20 Servcorp Annual Report 2010 ▪ Corporate Governance Recommendation 2.5 Disclose the process for evaluating the performance of the board, its committees and individual directors. Servcorp Board Response 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 non-executive directors evaluate individual director’s performance and also the Board’s performance. As a tool to evaluation, a questionnaire is completed annually by the non-executive directors with the responses assessed and discussed by the non-executive directors. There is good interaction between all directors and with senior executives and it is considered that the non-executive directors have a solid understanding of the culture and values of the Company. Recommendation 2.6 Provide the information indicated in the Guide to reporting on Principle 2. Servcorp Board Response All relevant information is included in the corporate governance section on pages 16 to 25 of this annual report. Principle 3 Promote ethical and responsible decision-making Actively promote ethical and responsible decision-making. Recommendation 3.1 Establish a code of conduct and disclose the code or a summary of the code as to: ▪ ▪ the practices necessary to maintain confidence in the company’s integrity; the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders; ▪ 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. 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 Securities Exchange; maintains a website; publishes 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. Recommendation 3.2 Establish a policy concerning trading in company securities by directors, senior executives and employees, and disclose the policy or a summary of that policy. 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 on page 17 of this annual report. Recommendation 3.3 Provide the information indicated in the 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. Servcorp Annual Report 2010 ▪ Corporate Governance 21 ASX principles compliance statement (continued) Principle 4 Safeguard integrity in financial reporting Have a structure to independently verify and safeguard the integrity of the company’s financial reporting. Recommendation 4.1 The board should establish an audit committee. Servcorp Board Response The Board has established an Audit and Risk Committee. Recommendation 4.2 The audit committee should be structured so that it: ▪ ▪ ▪ ▪ consists only of non-executive directors; consists of a majority of independent directors; is chaired by an independent chair, who is not chair of the board; has at least three members. Servcorp Board Response All three members of the Audit and Risk Committee are independent non-executive directors, and the Chair of the committee is not the Chair of the Board. Recommendation 4.3 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. The Audit and Risk Committee charter is available on the Company’s website. Recommendation 4.4 Provide the information indicated in the Guide to reporting on Principle 4. ▪ the names and qualifications of those appointed to the audit committee, and their attendance at meetings of the committee; ▪ the number of meetings of the audit committee. Servcorp Board Response This information is provided on pages 18, 26 and 27 of this annual report. Recommendation 4.4 ▪ procedures for the selection and appointment of the external auditor, and for the rotation of (continued) external audit engagement partners. Servcorp Board Response The external auditor, Deloitte Touche Tohmatsu (Deloitte), under the scrutiny of the Audit and Risk Committee, presently conducts the statutory audits in return for reasonable fees. Deloitte 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. Deloitte rotate their audit engagement partner every five years. 22 Servcorp Annual Report 2010 ▪ Corporate Governance Principle 5 Make timely and balanced disclosure Promote timely and balanced disclosure of all material matters concerning the company. Recommendation 5.1 Establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies. Servcorp Board Response 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 Chair and Managing Director. Recommendation 5.2 Provide the information indicated in the 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 a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose the policy or a summary of that policy. Servcorp Board Response Servcorp aims to communicate clearly and transparently with shareholders and the community. Servcorp places 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. Briefings are held following the release of annual and half-year results and the time and location of these briefings are notified to the market. Recommendation 6.2 Provide the information indicated in the Guide to reporting on Principle 6. Servcorp Board Response The information has been provided in the response to recommendation 6.1. Servcorp Annual Report 2010 ▪ Corporate Governance 23 ASX principles compliance statement (continued) Principle 7 Recognise and manage risk Establish a sound system of risk oversight and management and internal control. Recommendation 7.1 Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies. Servcorp Board Response Management has a sound and comprehensive understanding of the inherent risks of the business which have been identified and managed through the experience of the Chief Executive Officer and long serving executives. Management have identified and documented the key risks of the business across the spectrum of strategic, information technology, human resources, operational, financial and legal/ compliance. The company does not have formal written policies for all aspects of its risk oversight and management. The company is a globally run business where senior executives have oversight through the systems and reporting mechanisms of all activities in all global locations. The systems infrastructure is centrally managed through a small group of senior executives. Management’s objective is to create a culture for all executives to focus on risk as a natural part of their day to day activities. The senior executives responsible for the day to day management of key risks have been identified. Many processes are documented through the Company’s manuals which are proprietary and confidential, and these are being strengthened and improved with time. Business processes are continually improved to reduce the potential for financial loss. Recommendation 7.2 The board should require management to design and implement the risk management and internal control system to manage the company’s material business risks and report to it on whether those risks are being managed effectively. The board should disclose that management has reported to it as to the effectiveness of the company’s management of its material business risks. Servcorp Board Response 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. The Committee is satisfied that the Company and management have a culture of risk control and are in the early stages of formalising the infrastructure of this culture. Although not all policies have been formally documented, the identified risks are tightly controlled and being managed effectively. The Company is heavily reliant on financial controls and senior executive controls. Day to day responsibility is delegated to the Chief Executive Officer and senior management. The Chief Executive Officer and senior management are responsible for: ▪ ▪ ▪ ▪ identification of risk; monitoring risk; communication of risk events to the Board; and 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. The Audit and Risk Committee are working with management to ensure continuous improvement to the risk management and internal control systems. 24 Servcorp Annual Report 2010 ▪ Corporate Governance Recommendation 7.3 The board should disclose whether it has received assurance from the chief executive officer (or equivalent) and the chief financial officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. Servcorp Board Response The Chief Executive Officer and Chief Financial Officer provide such assurance. Recommendation 7.4 Provide the information indicated in the Guide to reporting on Principle 7. Servcorp Board Response This information is provided above. Principle 8 Remunerate fairly and responsibly Ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to performance is clear. Recommendation 8.1 The board should establish a remuneration committee. Servcorp Board Response The Board has established a Remuneration Committee. The Remuneration Committee consists of three members, two of whom are independent non-executive directors. The Chair of the Committee is an independent non-executive director. Recommendation 8.2 Clearly distinguish the structure of non-executive directors’ remuneration from that of executive directors and senior executives. Servcorp Board Response This information is provided in the remuneration report on page 34 of this annual report. Recommendation 8.3 Provide the information indicated in the Guide to reporting on Principle 8. ▪ the names of the members of the remuneration committee and their attendance at meetings of the committee. Servcorp Board Response This information is provided on pages 19 and 27 of this annual report. Recommendation 8.3 ▪ the existence and terms of any schemes for retirement benefits, other than superannuation, (continued) for non-executive directors. Servcorp Board Response There are no such schemes in existence. Servcorp Annual Report 2010 ▪ Corporate Governance 25 Directors’ report The directors present their report together with the Financial Rick Holliday-Smith Report of Servcorp Limited (“the Company”) and the Independent non-executive director consolidated Financial Report of the “Consolidated Entity”, being BA (Hons), CA, FAICD the Company and its controlled entities, for the financial year ended 30 June 2010. 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 one of the global leaders in the serviced office industry, with 30 years of experience. 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 Chair and independent non-executive director BA, LLB Member of Audit and Risk Committee Member of Remuneration Committee Appointed October 1999 Chair of Audit and Risk Committee Appointed October 1999 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 Hong Kong Bank Limited, a wholly owned merchant banking subsidiary of HSBC Bank. Rick is currently a director of ASX Limited and Cochlear Limited. He became Chair of Cochlear in July 2010. He is also Chair of Snowy Hydro 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: ▪ ▪ ▪ ASX Limited since July 2006; Cochlear Limited since February 2005 (Chair since July 2010); St George Bank Limited from February 2007 to December 2008. Julia King Independent non-executive director Member of Audit and Risk Committee Chair of Remuneration Committee Appointed August 1999 Over the past 30 years Bruce has been a director of many publicly Julia has had more than 30 years experience in strategic listed companies. He has an extensive business background involving a range of industries including banking, property and maritime. His current directorships include Trust Company 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 Limited (Chair). multinational advertising agency. Bruce is also chair of the Mark Tonga Perpetual Relief Trust, a Director of Lifestart Co-operative Limited and an Ambassador of The Australian Indigenous Education Foundation. Directorships of listed entities in the last three years: Julia was a non-executive director of Fairfax Media Limited, retiring in November 2009, and of Opera Australia, retiring in May 2010. She has been a director of Country Road and MMI Insurance, on the Australian Government’s Task Force for the restructure of the wool industry and a member of the Council of the National Library. ▪ ▪ Stockland Trust Group from October 1996 to October 2008; Tooth and Co. Limited since September 1999 (Tooth & Co was removed from the official list of ASX on 12 February 2010); ▪ Trust Company Limited since October 2000 (Chair). Directorships of listed entities in the last three years: ▪ Fairfax Media Limited from July 1995 to November 2009. 26 Servcorp Annual Report 2010 ▪ Directors’ Report Directors (continued) Company Secretary Taine Moufarrige Executive director BA, LLB Member of Remuneration Committee Appointed November 2004 Taine joined Servcorp in 1996 as a Trainee Manager. Taine is now responsible for operations in Australia, New Zealand, India and the Middle East and for the strategic growth of the Company in these regions. Taine played a key role in establishing Servcorp locations in Europe, the Middle East, New Zealand, throughout Australia 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. and in India through the Company’s franchise venture. Directors’ meetings Taine is also responsible for the philanthropic activities of Servcorp. 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 Directorships of listed entities in the last three years: set out in the following table. ▪ None. 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 Audit & Risk Remuneration meetings committee committee 3 3 3 3 11 11 11 11 11 11 1 1 1 1 The details of the function and membership of the committees are presented in the corporate governance statement on pages 18 and 19. Servcorp Annual Report 2010 ▪ Directors’ Report 27 Directors’ report (continued) 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 Securities Exchange in accordance with s205G (1) of the Corporations Act 2001, at the date of this report is set out in the following table. Director B Corlett R Holliday-Smith J King Direct - - - A G Moufarrige (i) 540,890 T Moufarrige (i) 65,446 Notes: Ordinary shares in Servcorp Limited Options over ordinary shares Indirect 413,474 250,000 105,165 49,251,221 1,800,000 - - - - - i. The 1.8 million shares shown as being an indirect interest of T Moufarrige are also included in the indirect interest of A G Moufarrige. 28 Servcorp Annual Report 2010 ▪ Directors’ Report Principal activities Dividends The principal activities of the Consolidated Entity during the Dividends totalling $9.84 million have been paid or declared by course of the financial year were the provision of executive the Company in relation to the financial year ended 30 June 2010 serviced and virtual offices and IT, communications and (2009: $19.92 million). secretarial services. There were no significant changes in the nature of the activities current financial year, including dividends paid or declared by of the Consolidated Entity during the year. the Company since the end of the previous year is set out in the Information relating to dividends in respect of the prior and following table. Consolidated results Net profit after tax for the financial year was $2.01 million (2009: $34.10 million). Operating revenue was $161.57 million (2009: $219.39 million). Basic and diluted earnings per share was 2.2 cents (2009: 42.7 cents). Dividends paid and declared Type In respect of the previous financial year: 2009 Cents per share Total Date of payment Franked Tax rate amount $’000 % for franking credit Special Ordinary shares 5.00 4,023 10 December 2008 100% Interim Ordinary shares 10.00 8,047 2 April 2009 100% Final Ordinary shares 10.00 7,847 1 October 2009 100% In respect of the current financial year: 2010 Interim Ordinary shares Final Ordinary shares 5.00 5.00 4,922 29 March 2010 100% 4,922 6 October 2010 100% 30% 30% 30% 30% 30% Servcorp Annual Report 2010 ▪ Directors’ Report 29 Directors’ report (continued) Review of operations Virtual Office Revenue from ordinary activities for the twelve months ended 30 June 2010 was $168.84 million, down 26% from the twelve months ended 30 June 2009. During the year the Australian dollar appreciated strongly against all major currencies. The Virtual Office package memberships increased by 20% during the twelve months ended 30 June 2010. Virtual Office revenue decreased by 1% for the twelve months to 30 June 2010, however when the translation effect of changes in currency is Australian dollar increased by an average of 17% against the US stripped out, Virtual Office revenue increased by 9% compared to dollar, 17% against the Euro and 8% against the Japanese yen. the 2009 year. The appreciation in the Australian dollar over the year has had a negative impact on the consolidated revenues and profit for the Expansion twelve months ended 30 June 2010. When expressed in constant currency terms, revenue decreased by 19% compared to the 2009 year. Thirteen floors were opened in the year ended 30 June 2010. At 30 June 2010 a further 31 leases had been executed for locations that are expected to open in the next six to nine months. Net profit before tax for the twelve months to 30 June 2010 was $2.88 million, down 94% compared to the prior year. When Servcorp is on track to reach its floor opening target of 35 new expressed in constant currency terms, net profit before tax decreased by 97% compared to the twelve months ended 30 June 2009. locations in the eighteen months to 31 December 2010. As outlined at Servcorp’s annual general meeting in November 2009, we are focussed on rapidly expanding the The result for the twelve months ended 30 June 2010 included Servcorp footprint into a number of new markets, in particular realised and unrealised foreign currency gains in the amount of North America. $0.49 million (gain for the twelve months ended 30 June 2009: $3.87 million). On a positive note the strong Australian dollar We are happy with the progress of new centre rollouts and early has enabled management to change Australian dollars to foreign indications are that sales are adhering to the business model currency at rates more favourable than budget estimates for the projections. Our focus is to build scale in each geographic location purpose of capital acquisitions. to spread marketing and web optimisation costs. Cash balances were $131.95 million at 30 June 2010 (30 June Immature floor expansion costs were $20.10 million for the year 2009: $83.96 million). Of this balance, $10.92 million has been ended 30 June 2010 (30 June 2009: $2.94 million). Included pledged with banks as collateral for bank guarantees, leaving an in the current year immature floor costs are head office costs unencumbered cash balance of $121.03 million in the business as associated with expansion in the amount of $8.57 million at 30 June 2010 (30 June 2009: $71.49 million). Serviced Offices (2009: $Nil). Office Squared As previously advised, trading conditions in the Serviced Office The Office Squared business has been significantly scaled back. business were very difficult in the 2010 financial year. Depressed Management is now focussing on our core business of Serviced global business sentiment, particularly in the commercial real estate market, caused a drop in demand for Serviced Offices and Virtual Offices. The Office Squared loss for the twelve months ended 30 June 2010 was $2.15 million (30 June 2009: globally which impacted office pricing and occupancy of the $4.14 million). mature Serviced Office business. This environment has created an opportunity for Servcorp to expand. Consolidated Serviced Office revenue was impacted by a strong Australian dollar throughout the year, recording a drop of 32% compared to the year ended 30 June 2009. When the effect of changes in foreign currency translation is stripped out revenue dropped by 26% compared to the 2009 year. Average mature floor occupancy for the twelve months softened to 76% (twelve months ended 30 June 2009: 79%). As at 30 June 2010 Servcorp operated 76 floors in 29 cities in 17 countries. 30 Servcorp Annual Report 2010 ▪ Directors’ Report Review of operations (continued) Middle East (continued) Australia & New Zealand Immature floors Mature floors Despite global economic market turmoil, Australia and New Locations were opened in Abu Dhabi, Jeddah and Kuwait during the twelve months ended 30 June 2010 and the performance of these floors is encouraging. Six floors in the Middle East were Zealand have performed well throughout the 2010 year and have immature during the year with losses in the twelve months ended not been impacted to the same extent as other markets. 30 June 2010 of $3.72 million. Mature floor revenue from ordinary activities decreased by 6% to Since the end of the financial year new locations have opened in $45.47 million when compared to the 2009 year. Mature floor net Beirut and Istanbul. A further location is expected to open by 31 profit before tax decreased by 21% to $10.77 million. The closure December 2010 in Saudi Arabia. cost associated with closing one floor in Australia had the effect of reducing the mature floor result by $0.63 million. Greater China An additional three floors are scheduled to open in Australia and Mature floors New Zealand by 31 December 2010. Immature floors Two floors in Australia and New Zealand were immature during the year. Immature floor losses in the twelve months ended 30 During the 2010 year, we experienced management problems in this region. Management has now been restructured in China and the region is on track to recovery. The Hong Kong market was significantly impacted by the global financial crisis but this market is now improving and we should return to profitability in the 2011 June 2010 were $0.63 million. financial year. Japan Mature floors Revenue from ordinary activities decreased by 54% to $13.19 million and net loss before tax was $0.40 million for the twelve months ended 30 June 2010. Japanese business sentiment continues to be depressed and as a result the commercial market and lease rates are now at cyclical Immature floors lows. There is an opportunity to expand in this market and Four floors in Greater China were immature as at 30 June 2010, Servcorp has secured space in three new locations that will open with a net loss before tax of $2.02 million for the twelve months prior to 31 December 2010. ended 30 June 2010. Revenue from mature locations decreased by 24% to $55.14 Southeast Asia million and net profit before tax decreased by 45% to $5.34 million for the twelve months ended 30 June 2010. Mature floors Immature floors During calendar year 2009, the Singapore and Kuala Lumpur markets saw dramatic falls in commercial property values and Four locations in Japan were immature during the year. The net commercial leasing rates. A recovery in Singapore is now evident, loss before tax on immature floors was $2.17 million. Middle East Mature floors The Dubai market which was in boom has suffered a material however Kuala Lumpur remains challenging. The Bangkok market has suffered as a result of the civil upheaval in April and May 2010 but it has now stabilised. Revenue from ordinary activities decreased by 39% to $14.58 million and net profit before tax decreased by 52% to $4.27 downturn with vacancy rates in this city now at ten year highs. million for the twelve months ended 30 June 2010. Servcorp still operates a profitable business in this city, but nowhere near the profits of boom time. Immature floors There were no immature floors in Southeast Asia during the The Serviced Office markets in both Bahrain and Qatar twelve months ended 30 June 2010. remain challenging. Mature floor revenue from ordinary activities decreased by 37% to $10.99 million when compared to the 2009 year. Mature floor net profit before tax decreased by 65% to $3.29 million. Servcorp Annual Report 2010 ▪ Directors’ Report 31 Directors’ report (continued) Review of operations (continued) Events subsequent to balance date Europe Mature floors Office Squared contract termination On 17 August 2010 a company in the Office Squared group issued The European market continues to be very difficult. The Paris a contract termination notice as a result of a fundamental breach. location continues to be impacted by pricing pressures as a As at the date of signing this report, negotiations are under result of heightened competition. The Brussels operation has way to settle approximately $1 million due to Office Squared. now stabilised. Management are confident that this amount will be recovered. Mature floor revenue from ordinary activities decreased by 33% Dividend to $12.76 million. The net loss before tax on mature floors was $3.29 million for the twelve months ended 30 June 2010. The On 26 August 2010 the directors declared a fully franked final loss before tax includes impairment of goodwill for the Paris dividend of 5.00 cents per share, payable on 6 October 2010. operation of $1.16 million. Immature floors The financial effects of the above transactions have not been brought to account in the financial statements for the year ended A new location was opened in London in December 2009. This 30 June 2010. location is performing to expectations. Immature floor losses for Europe were $0.99 million for the twelve months ended The directors are not aware of any matter or circumstance, 30 June 2010. USA 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 Two floors were opened in Chicago in the USA during the operations, or the state of affairs of the Consolidated Entity, in second half of 2010. An additional 19 leases have been future financial years. executed in this market and these floors are expected to open by 31 December 2010. Immature floors Immature floor losses of $2.05 million include the set-up of Likely developments The Consolidated Entity will continue to pursue its policy of seeking to increase the profitability and market share of its major business the USA head office infrastructure and the cost of sourcing and sectors during the next financial year. executing leases for new locations. India franchise The India property market collapsed in calendar year 2009 but is now starting to improve. New locations 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. City Location Offices Opened Hangzhou Abu Dhabi Tokyo London Jeddah Fukuoka Hong Kong Kuwait Chicago Tokyo Hong Kong Chicago Hong Kong Level 1, Lyra Building Level 4, Al Mamoura Building Level 20, Marunouchi Trust Tower Level 17, Dashwood House Level 9, Jameel Square Level 15, Da Vinci Building Level 19, Two International Finance Centre Level 18, Sahab Tower Level 42, 155 North Wacker Level 8, Nittochi Nishi Shinjuku Building Level 12, One Peking Road Level 49, 300 LaSalle Level 9, Hong Kong Club Building 4 79 52 38 60 15 82 14 58 12 2 11 8 July 2009 September 2009 December 2009 December 2009 December 2009 December 2009 January 2010 February 2010 March 2010 March 2010 April 2010 May 2010 May 2010 32 Servcorp Annual Report 2010 ▪ Directors’ Report Options granted During the year or since the end of the financial year, the Company has not granted options over unissued ordinary shares of the Company. Options on issue At the date of this report unissued ordinary shares of the Company under option are: Grant date Expiry date Exercise price Number of shares Earliest exercise date 22 February 2008 22 February 2013 $4.60 140,000 2 years from the date of issue The options expire on the earlier of: a. b. 5 years from the date of issue; the date on which the optionholder ceases to be an employee of the Company or any of its subsidiaries other than as a result of 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. Options granted on 22 September 2008 lapsed subsequent to the end of the 2009 financial year as the vesting conditions were not attained. Shares issued on the exercise of options No shares were issued by the Company during the year or since the end of the financial year as a result of the exercise of an option over unissued shares. Servcorp Annual Report 2010 ▪ Directors’ Report 33 Remuneration report Principles used to determine the nature and amount of remuneration The Board recognises that the Consolidated Entity’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 Consolidated Entity’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns 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. executive reward with achievement of strategic objectives and the Directors’ fees creation of value for shareholders. Executive remuneration packages involve a balance between fixed and incentive pay. In determining the appropriate balance an annual review is undertaken that involves cross referencing position descriptions to reliable accessible remuneration surveys and comparing current remuneration packages with the latest survey information. Servcorp’s executive remuneration policy and principles are designed to ensure that the Consolidated Entity: ▪ provides competitive rewards that attract, retain and motivate executives of the highest calibre; ▪ ▪ encourages a strong and long term commitment to Servcorp; builds a structure for long term growth and succession planning; ▪ structures remuneration at a level that reflects the executive’s 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. Non-executive directors’ fees are determined within an aggregate directors’ fee limit. The pool limit currently stands at $350,000 inclusive of payments for SGC superannuation. This was approved at the time of Servcorp’s IPO in December 1999. Non-executive directors’ fees were initially set in December 1999. That level of fees did not vary until they were reviewed with effect from 1 January 2005. Their remuneration was reviewed again with effect from 1 October 2006 and as at 1 July 2008. Effective 1 July 2008, non-executive directors’ fees were as follows: ▪ ▪ Chair - $131,890 per annum including superannuation; Non-executive - $76,300 per annum including superannuation. Effective 1 January 2010, non-executive directors’ fees have been set as: ▪ ▪ Chair - $150,000 per annum including superannuation; Non-executive - $80,000 per annum including superannuation. Also, from 1 January 2010 the Chair of the Audit and Risk Committee receives an additional $10,000 per annum The framework may provide a mix of fixed and variable pay, and including superannuation. a blend of short and long term incentives. Additional fees are not paid for membership of Board committees. The Board’s current policy regarding remuneration for key management personnel is summarised on pages 35 to 40. Non- executive directors are remunerated on a different basis to senior executives as set out below. An entity associated with Mr Holliday-Smith received consulting fees in respect of services performed for Office Squared. These consulting fees ceased effective February 2009. Since 2006 non-executive directors’ fees have increased by 39%. Over the same period dividends have decreased by 5% and EPS by 93%. 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 2010 is set out on page 38. 34 Servcorp Annual Report 2010 ▪ Directors’ Report Principles used to determine the nature and amount of remuneration (continued) Senior executives The senior executive remuneration and reward framework has three components: ▪ ▪ ▪ Fixed remuneration; Short term incentives; Long term incentives. Fixed remuneration This is targeted to be reasonable and fair, taking into account the Consolidated Entity’s legal and industrial obligations, labour market conditions and the scale of the Consolidated Entity. This fixed remuneration component reflects core performance requirements and expectations. Fixed remuneration is reviewed annually to ensure the executive’s remuneration is competitive with the market. Remuneration is also reviewed on promotion. There are no guaranteed fixed remuneration increases for any senior executives. The combination of these comprises the executive’s total remuneration. No senior executives are employed under Short term incentives a contract. In 2008 the Remuneration Committee undertook a review of the Consolidated Entity’s remuneration practices. A policy is in place which provides senior executives with a more structured scheme for long term and short term incentives, based on earnings, earnings growth and individual performance criteria. As part of this years review, the Remuneration Committee identified 10 key management personnel. The continued steady increase in the Consolidated Entity’s earnings has resulted in reward for those executives who have been essential to achieving this success. The success of Servcorp’s current executives is evident in the Consolidated Entity’s results over the previous four financial years. Net profit after tax increased from $25.37 million in 2006 to $34.10 million in 2009, an increase of 34%. Shareholder wealth also increased. Dividends paid had increased from 10.50 cents per share in 2006 to 25.0 cents per share in the 2009 financial year, an increase of 138%. The Consolidated Entity’s strong performance and healthy cash flow and balance sheet has been reflected in its ability to pay ‘special’ dividends in the previous three financial years. Earnings per share increased from 31.6 cents per share in 2006 to 42.7 cents per share in 2009, an increase of 35%. Over the same four year period, the average total remuneration paid to key management personnel including executive directors has increased by 20%. In the current financial year, Servcorp has commenced an aggressive expansion plan with the intention of doubling the size of its operations by December 2013. Accordingly, the Consolidated Entities results for the 2010 financial year have not continued the impressive growth of the previous 4 years. The short term incentive component of executive remuneration may comprise an annual cash incentive which is linked to the performance of both the Consolidated Entity and the individual executive. Executives do not have a fixed proportion of their total remuneration that is performance related. The short term incentive target is reviewed annually. 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. Cash incentives (bonuses) are payable following finalisation of 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. For the financial year ended 30 June 2010, the Remuneration Committee set the short term incentive component of remuneration of the key management personnel in the form of a cash bonus contingent upon attaining performance targets for net profit before tax for mature floors for their region of responsibility. ▪ Key management personnel who had responsibility for the Consolidated Entity overall were A G Moufarrige, T Moufarrige, M Moufarrige and T Wallace. Short term incentive components for these personnel were attainable as follows: Consolidated Entity NPBT on mature floors $m Short term incentive % of base salary >$45 to <$47 Range from 20% to 25% The Directors are pleased with the results achieved and the >$47 to <$49 Range from 25% to 30% Consolidated Entity is on target with its growth plan. The Consolidated Entity achieved its forecast net profit before tax on mature floors of $24 million. >$49 to <$51 Range from 30% to 35% >$51 Range from 35% to 40% Servcorp Annual Report 2010 ▪ Directors’ Report 35 Remuneration report (continued) Principles used to determine the nature and amount of remuneration (continued) Senior executives (continued) Short term incentives (continued) ▪ Key management personnel who had responsibility for a region were S Martin (Australia and New Zealand), O Vlietstra (Japan), B Barakat (Qatar) and L Lahdo (Middle East). Each region was set a performance target for net profit before tax for mature floors. Short term incentive components for these personnel were attainable as follows: Attainment of Short term incentive performance target (PT) % of base salary PT less $1m PT attained PT plus $1m PT plus $2m 20% 30% 40% 50% ▪ In addition, S Martin, O Vlietstra and L Lahdo were given short term incentive components based on the Consolidated Entity’s overall performance, attainable as follows: Consolidated Entity NPBT on mature floors $m Short term incentive % of base salary Long term incentives The Board may grant options to eligible executives in accordance with the Servcorp Executive Share Option Scheme. The purpose of the Scheme is to encourage participation in the Company through share ownership. The Board believes that an Executive Share Option Scheme is a cost effective and efficient means to attract, retain and further incentivise key executives and encourage them to achieve superior returns for shareholders. History of the Scheme ▪ The Executive Share Option Scheme was first approved by shareholders on 19 October 1999; ▪ Amendments to the Scheme were approved by shareholders on 17 November 2000; ▪ The Company afforded shareholders the opportunity to re-approve the Scheme at a general meeting of the Company in May 2001. Shareholders re-approved the scheme on 24 May 2001; ▪ In February 2008, in light of the age of the Scheme documentation, the Board conducted a review of the terms and conditions of the Scheme and resolved to update these terms and conditions to better facilitate the effective operation of the Scheme. These amendments were approved by shareholders on 26 May 2008; ▪ In September 2008, in response to the views of some shareholders, the Board amended the exercise period commencement date from 24 months after issue of Options under the Scheme to 36 months after issue. Shareholders approved this amendment at the annual general meeting held on 12 November 2008. The substantive amendment approved in May 2008 was the introduction of an earnings per share performance hurdle for the vesting of options. Pursuant to this amendment, options >$45 to <$47 Range from 10% to 15% will only vest (and hence be capable of being exercised) if the >$47 to <$49 Range from 15% to 20% >$49 to <$51 Range from 20% to 30% >$51 Range from 30% to 40% If the Consolidated Entity and all specified regions attained their performance targets for the financial year ended 30 June 2010, the total value of short term incentives payable to key management personnel was $729,856 (2009: $773,800). The range attainable was a minimum of $541,663 (2009: $572,959) and a maximum of $1,178,443 (2009: $1,232,734). Consolidated Entity meets specified earnings per share hurdles. The options will vest in increasing proportions, depending on the level of growth in the Consolidated Entity’s earnings per share. No options will vest unless the Consolidated Entity achieves earnings per share growth of at least 10% in the specified financial year. Pursuant to the terms and conditions of the Scheme, any person who is employed on a full or part time basis by the Company and any of its controlled entities in a management role and whom the Board determines is eligible to participate in the Scheme is entitled to participate in the Scheme. For the avoidance of doubt, non-executive directors are therefore ineligible to participate in the Scheme but executive directors are eligible to participate. Options do not form a fixed percentage of any executive’s remuneration. 36 Servcorp Annual Report 2010 ▪ Directors’ Report Principles used to determine the nature and amount of remuneration (continued) Senior executives (continued) Long term incentives (continued) In the current financial year, following a recommendation by the Remuneration Committee, the directors did not grant any options under the Scheme. The recommendation was on the basis of the uncertain taxation implications which may have arisen if options had been issued. Retirement benefits Retirement benefits for senior executives are provided to the extent required by the law of the country in which they reside. Senior executives are not entitled to any other retirement allowances. Details of remuneration Details of the nature and amount of each element of the remuneration of each member of the key management personnel and each of the five named executives of the Company and the Consolidated Entity receiving the highest remuneration for the financial year ended 30 June 2010 is set out in the table on pages 39 and 40. Servcorp Annual Report 2010 ▪ Directors’ Report 37 Remuneration report (continued) Directors’ remuneration Name Short term employee benefits Post employment Salary & fees $ Bonus Non - Other Super (iv) $ monetary $ $ $ Share based payments Equity options $ A G Moufarrige (i)(v) 2010 2009 T Moufarrige (i) 2010 2009 B Corlett (ii) 2010 2009 R Holliday-Smith (ii) (vi) 2010 2009 J King (ii) 2010 2009 Aggregate 2010 2009 Note: 465,083 - 458,359 30,000 144,167 138,344 392,325 356,596 - 70,000 13,724 7,517 129,307 121,000 76,284 70,000 73,950 70,000 1,136,949 - - - - - - - 1,075,955 100,000 - - - - - - 157,891 145,861 - - - - - - - 33,333 - - - 33,333 27,000 29,700 34,328 37,800 11,638 10,890 6,866 6,300 4,200 6,300 84,032 90,990 - - - - - - - - - - - - Total 636,250 656,403 440,377 471,913 140,945 131,890 83,150 109,633 78,150 76,300 1,378,872 1,446,139 i. Executive directors. ii. Non-executive directors. iii. Directors’ and officers’ indemnity insurance has not been included in the above figures since it is impractical to determine an appropriate allocation basis. iv. The short term bonus relates to performance targets for the current financial year, payable in the following financial year. The bonus is contingent upon attainment of performance targets, as detailed on page 35 of this report. Some discretion may be applied before bonus amounts paid are finalised. The percentage of the maximum attainable bonus which vested in respect of targets for the 2010 financial year was as follows. The balance of the bonus was forfeited. A G Moufarrige 0% (2009: 29%) T Moufarrige 0% (2009: 50%) v. The salary and fees of A G Moufarrige include a component paid in Yen. The increase in the 2010 year reflects the change in foreign currency exchange rate, not an increase in salary in base currency terms. vi. An entity associated with R Holliday-Smith received consulting fees in respect of services performed for Office Squared. These consulting fees ceased effective February 2009. These fees are disclosed under Other in short term employee benefits. 38 Servcorp Annual Report 2010 ▪ Directors’ Report Key management personnel and highly remunerated senior executive remuneration Name Short term employee benefits Post employment Bonus (v) Non - Other Super monetary $ $ $ $ Salary & fees $ 394,087 354,476 205,667 15,000 - - 13,724 7,517 - - 201,952 20,000 346,251 323,915 - 77,160 52,147 34,626 - - - - 246,693 80,000 192,041 190,660 - 10,000 - - - - - - - - - - 202,901 201,376 65,000 98,283 8,009 6,494 26,947 22,558 Total Share based payments Equity options (vi) $ 35,678 31,500 - - 458,489 393,493 18,000 19,800 13,487 237,154 20,772 262,524 - - - 13,487 411,885 20,772 456,473 - 351,989 4,128 - 330,821 - - - - 10,115 202,156 15,579 216,239 - - 302,857 328,711 M Moufarrige CIO (i) (ii) 2010 2009 S Martin GM Aust & NZ (i) 2010 2009 O Vlietstra GM Japan (i) (ii) 2010 2009 J Goodwyn GM USA (i) (ii) (iii) B Barakat GM Saudi Arabia (i) (ii) (iii) 2010 W Wu GM Hong Kong (i) 2010 2009 L Lahdo GM UAE & Bahrain (i) 2010 2009 T Wallace CFO (i) (ii) 2010 2009 2010 351,989 - 270,302 224,971 - 96,000 - - - - 23,798 29,865 10,115 304,215 15,579 366,415 Servcorp Annual Report 2010 ▪ Directors’ Report 39 L Gorman Intl Training & Dev Mgr (iv) 2009 Aggregate 2010 2009 Notes: Remuneration report (continued) Key management personnel and highly remunerated senior executive remuneration (continued) Name Short term employee benefits Post employment Salary & fees $ Bonus (v) Non - Other Super monetary $ $ $ $ Total Share based payments Equity options (vi) $ N Billet GM Sales (iv) 2009 190,572 28,000 - - - - 19,620 16,830 - - 238,192 201,659 167,829 17,000 2,209,931 160,000 73,879 26,947 81,604 47,205 2,599,567 1,855,751 346,443 48,637 22,558 117,615 72,702 2,463,706 i. Key management personnel other than directors. ii. Five relevant group executives who received the highest remuneration other than directors. iii. J Goodwyn and B Barakat were key management personnel from 1 July 2009. iv. L Gorman and N Billett were not key management personnel during the 2010 year. v. The short term bonus relates to performance targets for the current financial year, payable in the following financial year. The bonus is contingent upon attainment of performance targets, as detailed on pages 35 and 36 of this report. Some discretion may be applied before bonus amounts to be paid are finalised. The percentage of the maximum attainable bonus which vested in respect of targets for the 2010 financial year was as follows. The balance of the bonus was forfeited. M Moufarrige 0% (2009: 0%) S Martin 0% (2009: 13%) O Vlietstra 0% (2009: 36%) J Goodwyn B Barakat W Wu L Lahdo n/a n/a 0% (2009: 8%) 0% (2009: 68%) T Wallace 0% (2009: 108%) N Billett n/a (2009: 39%) L Gorman n/a (2009: 33%) M Moufarrige received a discretionary bonus in recognition of his efforts during Servcorp’s equity capital raising in October 2009. L Lahdo and B Barakat received discretionary bonuses based on their performance in their region during the year. vi. The amounts disclosed under ”Share based payments” relate to options issued on 22 February 2008. Based on the EPS performance of the Consolidated Entity for the 2008 financial year the options vested 100%. No options were forfeited. Options issued on 22 September 2008 did not vest as a result of the EPS performance of the Consolidated Entity for the 2009 financial year not meeting minimum EPS performance hurdles. All options were forfeited. No amount has been included in the remuneration of key management personnel with respect to these options. No options were issued in the 2010 financial year. 40 Servcorp Annual Report 2010 ▪ Directors’ Report Indemnification and insurance of directors and officers Corporate governance The constitution of the Company provides that the Company must indemnify, on a full indemnity basis and to the full extent A statement of the Board’s governance practices is set out on pages 16 to 25 of this annual report. permitted by law, each current and former director, alternate Environmental management director or executive officer against all losses or liabilities incurred in that capacity in defending any proceedings, whether civil The Consolidated Entity’s operations are not subject to any or criminal, in which judgement is given in their favour or in particular and significant environmental regulations under either which they are acquitted or in connection with any application in Commonwealth or State legislation. relation to any such proceedings in which relief is granted under the Corporations Act 2001. Rounding off The Company has agreed to indemnify the following current and former directors of the Company, Mr A G 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 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 as directors of the Company and its controlled entities, except otherwise stated. where the liability arises out of conduct involving a wilful breach of duty. 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. 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. 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. 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: State of affairs ▪ Non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed There were no significant changes in the state of affairs of the by the Audit and Risk Committee; and Consolidated Entity during the financial year. Directors’ benefits ▪ The non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants as they did not involve reviewing or auditing the auditor’s own Since the end of the previous financial year, no director of the work, acting in a management or decision making capacity Consolidated Entity has received or become entitled to receive a for the Company or jointly sharing risks and rewards. benefit (other than a benefit included in the aggregate amount of emoluments received or due and receivable by directors shown in A copy of the auditor’s independence declaration as required the consolidated financial report, or the fixed salary of a full-time under Section 307C of the Corporations Act 2001 is set out on employee of the Consolidated Entity or of a related entity) by page 42 and forms part of this report. 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 Details of the amounts paid or payable to the auditor of the member, or with an entity in which a director has a substantial Company, Deloitte Touche Tohmatsu and its related practices for financial interest. audit and non-audit services provided during the year are set out in note 4 to the financial statements. Signed in accordance with a resolution of the directors pursuant to section 298(2) of the Corporations Act 2001. A G Moufarrige CEO Dated at Sydney this 26th day of August 2010. Servcorp Annual Report 2010 ▪ Directors’ Report 41 Auditor’s independence statement 42 Servcorp Annual Report 2010 ▪ Directors’ Report 2010 Financial report Statement of comprehensive income 44 Statement of financial position Statement of changes in equity Statement of cash flows Notes to Consolidated financial report Directors’ declaration 45 46 47 48 99 Auditor’s report 100 Servcorp Annual Report 2010 ▪ Financial Report 4343 Statement of comprehensive income Servcorp Limited and its controlled entities for the financial year ended 30 June 2010 Revenue Other revenue and income Service expenses Marketing expenses Occupancy expenses Administrative expenses Borrowing expenses Other expenses Total expenses Profit before income tax expense Income tax expense Profit for the year Other comprehensive income Deferred exchange differences arising from monetary items considered part of the investment in foreign operations (net of tax) Exchange differences arising on translation of foreign operations (net of tax) Other comprehensive income for the period (net of tax) Total comprehensive income for the period Earnings per share Basic earnings per share Diluted earnings per share Note 2 2 5 8 8 Consolidated 2010 $’000 161,573 7,264 168,837 (51,573) (11,454) (82,590) (19,021) (167) (1,157) 2009 $’000 219,394 9,252 228,646 (58,886) (12,342) (92,361) (17,597) (185) - (165,962) (181,371) 2,875 (869) 2,006 47,275 (13,178) 34,097 316 3,495 (313) 3 2,009 $0.022 $0.022 2,913 6,408 40,505 $0.427 $0.427 The Statement of comprehensive income is to be read in conjunction with the notes to the Consolidated financial report. 44 Servcorp Annual Report 2010 ▪ Financial Report Statement of financial position Servcorp Limited and its controlled entities as at 30 June 2010 Consolidated Current assets Cash and cash equivalents Trade and other receivables Other financial assets Current tax assets Other Total current assets Non-current assets Other financial assets Property, plant and equipment Deferred tax assets Goodwill Total non-current assets Total assets Current liabilities Trade and other payables Other financial liabilities Current tax liabilities Provisions Total current liabilities Non-current liabilities Trade and other payables Other financial liabilities Provisions Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Equity attributable to equity holders of the parent Total equity Note 9 10 12 5 11 12 13 5 14 15 16 5 18 15 16 18 5 19 2010 $’000 131,948 17,160 1,008 2,695 8,347 161,158 31,105 56,639 14,544 14,805 117,093 278,251 29,742 20,015 1,588 5,883 57,228 6,904 169 869 471 8,413 65,641 2009 $’000 83,958 16,916 1,555 193 6,528 109,150 26,021 47,261 10,741 15,962 99,985 209,135 24,454 19,466 3,889 5,894 53,703 7,708 843 796 794 10,141 63,844 212,610 145,291 154,149 (8,417) 66,878 212,610 212,610 76,118 (8,467) 77,640 145,291 145,291 The Statement of financial position is to be read in conjunction with the notes to the Consolidated financial report. Servcorp Annual Report 2010 ▪ Financial Report 45 Statement of changes in equity Servcorp Limited and its controlled entities for the financial year ended 30 June 2010 Consolidated Issued capital Foreign Employee Retained Total currency equity earnings Balance at 1 July 2008 Profit for the period Deferred exchange differences arising from monetary items considered part of the investment in foreign operations (net of tax) Translation of foreign operations (net of tax) Total comprehensive income for the period Share based payment Share buy-back Payment of dividends Balance at 30 June 2009 Balance at 1 July 2009 Profit for the period Deferred exchange differences arising from monetary items considered part of the investment in foreign operations (net of tax) Translation of foreign operations (net of tax) Total comprehensive income for the period Share based payment Issue of shares Cost of capital raising Tax effect of capital raising Payment of dividends Balance at 30 June 2010 translation reserve $’000 $’000 80,948 (14,973) - - - - - (4,830) - - 3,495 2,913 6,408 - - - 76,118 (8,565) 76,118 (8,565) - - - - - 79,894 (2,662) 799 - - 316 (313) 3 - - - - - settled benefits reserve $’000 29 - - - - 69 - - 98 98 - - - - 47 - - - - 154,149 (8,562) 145 $’000 $’000 61,648 34,097 127,652 34,097 - - 34,097 - - (18,105) 77,640 3,495 2,913 40,505 69 (4,830) (18,105) 145,291 77,640 2,006 145,291 2,006 - - 2,006 - - - - (12,768) 66,878 316 (313) 2,009 47 79,894 (2,662) 799 (12,768) 212,610 The Statement of changes in equity is to be read in conjunction with the notes to the Consolidated financial report. 46 Servcorp Annual Report 2010 ▪ Financial Report Statement of cash flows Servcorp Limited and its controlled entities for the financial year ended 30 June 2010 Note 25(b) Consolidated 2010 $’000 2009 $’000 173,441 (159,700) 658 (9,140) 3,710 (171) 8,798 (25,200) (6,467) - 46 3,405 (28,216) 79,894 - (2,662) - (119) (12,769) 64,344 227,304 (175,004) 661 (12,987) 3,233 (183) 43,024 (7,883) (2,125) (1,068) 152 2,925 (7,999) - (4,830) - 122 (807) (18,105) (23,620) Cash flows from operating activities Receipts from customers Payments to suppliers and employees Dividends and royalties received Income tax paid Interest and other items of similar nature received Interest and other costs of finance paid Net operating cash flows Cash flows from investing activities Payments for property, plant and equipment Payments for lease deposits Payments for licence fee Proceeds from sale of property, plant and equipment Proceeds from refund of lease deposits Net investing cash flows Cash flows from financing activities Proceeds from issue of equity securities of the parent Payments for share buy-back Payments for share issue costs Proceeds from borrowings Repayment of borrowings Dividends paid Net financing cash flows Net increase in cash and cash equivalents 44,926 11,405 Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on the balance of cash and cash equivalents held in foreign currencies Cash and cash equivalents at the end of the financial year 83,726 73,449 2,679 (1,128) 25(a) 131,331 83,726 The Statement of cash flows is to be read in conjunction with the notes to the Consolidated financial report. Servcorp Annual Report 2010 ▪ Financial Report 47 Notes to consolidated financial report for the financial year ended 30 June 2010 Contents of the notes to the Consolidated financial report Note 1. Significant accounting policies ______________________________________________________________ 49 Note 2. Profit from operations _____________________________________________________________________ 59 Note 3. Significant transactions ____________________________________________________________________ 60 Note 4. Remuneration of auditors __________________________________________________________________ 60 Note 5. Income taxes ___________________________________________________________________________ 61 Note 6. Segment information _____________________________________________________________________ 64 Note 7. Dividends ______________________________________________________________________________ 66 Note 8. Earnings per share _______________________________________________________________________ 67 Note 9. Cash and cash equivalents _________________________________________________________________ 67 Note 10. Trade and other receivables ________________________________________________________________ 68 Note 11. Other assets ____________________________________________________________________________ 69 Note 12. Other financial assets _____________________________________________________________________ 69 Note 13. Property, plant and equipment ______________________________________________________________ 70 Note 14. Goodwill _______________________________________________________________________________ 71 Note 15. Trade and other payables __________________________________________________________________ 72 Note 16. Other financial liabilities ___________________________________________________________________ 72 Note 17. Financing arrangements ___________________________________________________________________ 73 Note 18. Provisions ______________________________________________________________________________ 74 Note 19. Issued capital ___________________________________________________________________________ 75 Note 20. Financial instruments _____________________________________________________________________ 76 Note 21. Employee benefits _______________________________________________________________________ 82 Note 22. Commitments for expenditure ______________________________________________________________ 85 Note 23. Subsidiaries ____________________________________________________________________________ 87 Note 24. Formation/deregistration of controlled entities __________________________________________________ 90 Note 25. Notes to statement of cash flows ____________________________________________________________ 93 Note 26. Related party disclosures __________________________________________________________________ 94 Note 27. Parent entity disclosures ___________________________________________________________________ 97 Note 28. Subsequent events _______________________________________________________________________ 98 48 Servcorp Annual Report 2010 ▪ Financial Report 1. Significant accounting policies Statement of compliance The financial report is a general purpose financial report which has been prepared in accordance with the Corporations Act 2001, Accounting Standards and Interpretations, and complies with other requirements of the law. The financial report comprise the consolidated financial statements of the Group. Accounting Standards include Australian equivalents to International Financial Reporting Standards (‘A-IFRS’). Compliance with A-IFRS ensures that the financial statements and notes of the Group comply with International Financial Reporting Standards (‘IFRS’). The financial statements were authorised for issue by the directors on 26 August 2010. Basis of preparation The financial report has been prepared on the basis of historical cost, except for the revaluation of certain non-current assets and financial instruments. Cost is based on the fair values of the consideration given in exchange for assets. All amounts are presented in Australian dollars, unless otherwise noted. The Company is a company of the 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 are rounded off to the nearest thousand dollars, unless otherwise indicated. Adoption of new and revised Accounting Standards In the current year, the Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that are relevant to its operations and effective for the current annual reporting period. Details of the impact of the adoption of these new accounting standards are set out in the individual accounting policy notes. At the date of authorisation of the financial report, the following Standards and Interpretations relevant to the Group were on issue but not yet effective: ▪ AASB9 ‘Financial Instruments’ AASB2009-11 Amendments to Australian Accounting Standards arising from AASB9. Effective for annual reporting periods beginning 1 January 2013. The directors anticipate that the adoption of these Standards and Interpretations and any other Standards and Interpretations on issue but not yet effective in future periods will have no material financial impact on the financial statements of the Consolidated Entity. Servcorp Annual Report 2010 ▪ Financial Report 49 Notes to consolidated financial report for the financial year ended 30 June 2010 1. Significant accounting policies (continued) The following significant accounting policies have been adopted in the preparation and presentation of the financial report: a. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). A list of subsidiaries appears in Note 23 to the financial statements. Consistent accounting policies are employed in the preparation and presentation of the consolidated financial statements. On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess in the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. If after reassessment, the fair values of the identifiable net assets acquired exceeds the cost of acquisition the difference is credited to the Statement of comprehensive income in the period of acquisition. The consolidated financial statements include the information and results of each subsidiary from the date on which the Company obtains control, and until such time as the Company ceases to control an entity. In preparing the consolidated financial statements, all intercompany balances and transactions, and unrealised profits arising within the Consolidated Entity are eliminated in full. Minority interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. b. Goodwill Goodwill arising on acquisition is recognised as an asset and initially recognised at cost, representing the excess of the cost of acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Goodwill is not amortised, but is tested for impairment at each reporting date and whenever there is an indication that goodwill may be impaired. Any impairment of goodwill is recognised immediately in the Statement of comprehensive income and is not subsequently reversed. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (CGUs), or groups of CGUs, expected to benefit from the synergies of the business combination. CGUs (or groups of CGUs) to which goodwill has been allocated are tested for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. If the recoverable amount of the CGU (or group of CGUs) is less than the carrying amount of the CGU, the impairment loss is allocated to reduce the carrying amount of any goodwill allocated to the CGU (or groups of CGUs) and then to the other assets of the CGUs pro-rata on the basis of the carrying amount of each asset in the CGU (or groups of CGUs). An impairment loss for goodwill is immediately recognised in profit or loss and is not reversed in a subsequent period. On disposal of an operation within a CGU, the attributable amount of goodwill is included in the determination of the profit or loss on disposal of the operation. 50 Servcorp Annual Report 2010 ▪ Financial Report 1. Significant accounting policies (continued) c. Impairment of tangible and intangible assets excluding goodwill At each reporting date, the Consolidated Entity reviews the carrying values of its tangible and intangible assets, to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Consolidated Entity estimates the recoverable amount of the cash generating unit to which the asset belongs. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at each reporting date and whenever there is an indication that the asset may be impaired. The recoverable amount is the higher of fair value, less costs to sell and value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value by using a pre-tax discount rate, that reflects the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. An impairment loss is recognised in the Statement of comprehensive income immediately, unless the relevant assets are carried at fair value, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or CGU) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or CGU) in prior years. A reversal of the impairment loss is recognised in the Statement of comprehensive income immediately, unless the relevant asset is carried at fair value, in which case the reversal of the impairment loss is treated as a revaluation increase. 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, telephone and services revenue is typically invoiced in advance and is recognised in the period in which the service is provided. e. Other income / expense Interest income Interest revenue is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable. Disposal of assets The profit and loss on disposal of assets is brought to account when the significant risks and rewards of ownership passes to a party external to the Consolidated Entity. f. Foreign currency Transactions Foreign currency transactions are translated to Australian currency at the rates of exchange ruling at the dates of the transactions. Amounts receivable and payable in foreign currencies at balance date are translated at the rates of exchange ruling on that date. Foreign currency monetary items at reporting date are translated at the exchange rates existing at reporting date. Non- monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not re-translated. Exchange differences are recognised in the profit and loss in the period in which they arise except exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned or likely to occur, which form part of the net investment in a foreign operation. Such exchange differences are recognised in the foreign currency translation reserve and in the profit and loss on disposal of the net investment. Servcorp Annual Report 2010 ▪ Financial Report 51 Notes to consolidated financial report for the financial year ended 30 June 2010 1. Significant accounting policies (continued) f. Foreign currency (continued) Translation of controlled foreign entities The individual financial statements of each group entity are presented in its functional currency being the currency of the primary economic environment in which the entity operates. For the purpose of the consolidated financial statements, the results and financial position of each entity are expressed in Australian dollars, which is the functional currency of Servcorp Limited and the presentation currency for the consolidated financial statements. The assets and liabilities of overseas operations are translated at the rates of exchange ruling at the Balance sheet date. Income and expense items are translated at the average exchange rate for the period. Exchange differences arising on translation are taken directly to the foreign currency translation reserve. The balance of the foreign currency translation reserve relating to an overseas operation that is disposed of is recognised in the profit and loss in the period of disposal. Goodwill and fair value adjustments arising on the acquisition of a foreign entity on or after the date of transition to A-IFRS are treated as assets and liabilities of the foreign entity and translated at exchange rates prevailing at the reporting date. Goodwill arising on acquisitions before the date of transition to A-IFRS is treated as an Australian dollar denominated asset. g. Borrowing costs Borrowing costs include interest, amortisation of discounts or premiums relating to borrowings, amortisation of ancillary costs using the effective interest rate method in connection with the arrangement of borrowings. Borrowing costs are expensed to the Statement of comprehensive income as incurred. h. Taxation Current tax Current tax is calculated by reference to the amount of income tax payable or recoverable in respect of the taxable profit or loss for the period. Income tax is calculated using tax rates and tax laws that have been enacted or substantively enacted by the reporting date. Current tax for current and prior periods is recognised as a liability or asset to the extent that it is unpaid or refundable. Deferred tax Deferred tax is accounted for using the comprehensive Balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items. In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arises from the initial recognition of assets and liabilities, other than as a result of a business combination, which affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from goodwill. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, branches and associates except where the Consolidated Entity is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with these investments are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise benefits of the temporary differences and they are expected to reverse in the foreseeable future. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the assets and liabilities giving rise to them are realised or settled, based on tax rates and tax laws that have been enacted or substantially enacted by the reporting date. 52 Servcorp Annual Report 2010 ▪ Financial Report 1. Significant accounting policies (continued) h. Taxation (continued) Deferred tax (continued) The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Consolidated Entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Consolidated Entity intends to settle its current tax assets and liabilities on a net basis. Current and deferred tax for the period Current and deferred tax is recognised as an expense or income in the Statement of comprehensive income, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised in equity. Tax consolidation The Company and all its wholly-owned Australian resident entities are part of a tax consolidated group under Australian taxation law. Servcorp Limited is the head entity in the tax consolidated group. Tax expense/ income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax consolidated group are recognised in the separate financial statements of the members of the tax consolidated group using the ‘separate tax payer within group’ approach. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of the members of the tax consolidated group are recognised by the Company. Under this method, each entity is subject to tax as part of the tax consolidated group. Due to the existence of a tax funding arrangement between entities in the tax consolidated group, amounts are recognised as payable to or receivable by the Company, and each member of the tax consolidated group in relation to the tax contribution amounts paid or payable between the parent entity, and the other members of the tax consolidated group in accordance with the arrangement. Where the tax contribution amount recognised by each member of the tax consolidated group for a particular period is different to the aggregate of the current tax liability or asset and any deferred tax asset arising from unused tax losses and tax credits in respect of that period, the difference is recognised as a contribution from (or distribution to) equity participants. 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 inclusive of GST. The net amount of GST recoverable from or payable to the ATO is included as a current asset or liability in the Statement of financial position. Cash flows are included in the Statement 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. i. Receivables Trade debtors to be settled within 30 days are carried at amounts due. The collectability of debts is assessed at balance date and a specific allowance is made for any doubtful amounts. j. Derivative financial instruments The Consolidated Entity enters into derivative financial instruments to manage its exposure to fluctuations in foreign exchange rates. Further details of derivative financial instruments are disclosed in Note 20 to the financial statements. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The resulting gain or loss is recognised immediately in the Statement of comprehensive income. Servcorp Annual Report 2010 ▪ Financial Report 53 Notes to consolidated financial report for the financial year ended 30 June 2010 1. Significant accounting policies (continued) k. Share based payments Equity-settled share-based payments with employees are measured at the fair value of the equity instrument at the grant date. Fair value is measured by use of a binomial tree model. The expected life used in the model has been adjusted, based on management’s best estimate for the effects of non-transferability, exercise restrictions, and behavioural considerations. Further details on how the fair value of equity-settled share-based transactions has been determined can be found in Note 21. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight line basis over the vesting period, based on the Group’s estimate of equity instruments that will eventually vest. At each reporting date, the Group revises its estimate of the number of equity instruments that are expected to vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss, with a corresponding adjustment to the equity-settled employee benefits reserve. l. Financial assets Subsequent to initial recognition, investments in subsidiaries are measured at cost. Investments are recognised and derecognised on trade date where the purchase or sale of the investment is under a contract whose terms require delivery of the investment within the time-frame established by the market concerned, and are initially measured at fair value, plus transaction costs except for those financial assets classified as at fair value through profit or loss which are initially measured at fair value. The classification of financial assets depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Other financial assets are classified into the following specified categories: Financial assets at fair value through profit or loss Financial assets are classified as financial assets at fair value through profit or loss where the financial asset: ▪ ▪ has been acquired principally for the purpose of selling in the near future; is part of an identified portfolio of financial investments that the Group manages together and has a recent actual pattern of short-term profit taking; or ▪ is a derivative that is not designated and effective as a hedging instrument. Loans and receivables Trade receivables, loans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as ‘Loans and receivables‘. Loans and receivables are measured at amortised costs using the effective interest method less impairment. Impairment of financial assets Financial assets, other than those at fair value through profit or loss, are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that as a result of one or more events that occurred after the initial recognition of the financial asset the estimated future cash flow of the investment have been impacted. Further details are disclosed in Note 14. Effective interest method The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that will exactly discount estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period. 54 Servcorp Annual Report 2010 ▪ Financial Report 1. Significant accounting policies (continued) m. Property, plant and equipment Acquisition Items of property, plant and equipment acquired are capitalised when it is probable that the future economic benefits associated with the item will flow to the entity and the cost can be measured reliably. 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 does not meet the criteria for capitalisation, are expensed as incurred. Property, plant and equipment, leasehold improvements and equipment under finance lease are stated at cost less accumulated depreciation, less impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the item. Depreciation Items of property, plant and equipment, including buildings and leasehold property but excluding freehold land, are depreciated using the straight line method over their estimated useful lives. Leasehold improvements are depreciated over the remaining lease term or estimated useful life, whichever is the shorter, using the straight line method. The estimated useful lives used for each class of asset are as follows: Buildings 40 years Leasehold improvements Shorter of the useful life of the asset or the remaining lease term Office furniture and fittings 7.7 years Office equipment Motor vehicles 3-4 years 6.7 years Depreciation rates and methods are reviewed annually and, where changed, are accounted for as a change in accounting estimate. Where depreciation rates or methods are changed, the net written down value of the asset is depreciated from the date of the change in accordance with the new depreciation rate or method. Assets are depreciated from the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and held ready for use. n. Leased assets Finance leases 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. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Lease liabilities are reduced by repayments of principal. The interest components of the lease payments are charged to the Statement of comprehensive income. Operating leases Operating lease payments are recognised as an expense on a straight line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Lease incentives Floor rental is expensed in the accounting period on a straight line basis over the period of the lease term 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 profit and loss on a straight line basis over the term of the lease. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. Servcorp Annual Report 2010 ▪ Financial Report 55 Notes to consolidated financial report for the financial year ended 30 June 2010 1. Significant accounting policies (continued) o. Payables Liabilities are recognised for amounts payable in the future for goods or services received, whether or not billed to the Consolidated Entity. Trade accounts payable are normally settled within 60 days. p. Borrowings costs Borrowings are recorded initially at fair value, net of transaction costs. Any difference between the initial recognised amount and the redemption value is recognised in the Statement of comprehensive income over the life of the borrowings using the effective interest rate method. q. Provisions Provisions are recognised when the Consolidated Entity has a present obligation (legal or constructive) as a result of a past event, 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 virtually certain 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 the reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. Make good costs A provision is made for make good costs on leases that are expected to terminate 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 the economic benefits estimated to be received. 56 Servcorp Annual Report 2010 ▪ Financial Report 1. Significant accounting policies (continued) r. 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. Provisions made in respect of employee benefits expected to be settled within twelve months, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. 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 the balance sheet 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 share option scheme Servcorp Limited has granted options to certain executives under the Executive Share Option Scheme. Further information is set out in Note 21 to the financial statements. Defined contribution superannuation fund The Company and other controlled entities contribute to defined contribution superannuation plans. Contributions are charged to the Statement of comprehensive income as they are made. Further information is set out in Note 21. Contributions to defined contribution superannuation plans are expensed as incurred. s. 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 adjusting the basic EPS earnings by the effect of conversion to ordinary shares of the associated dilutive potential ordinary shares. The notional earnings on the funds that would have been received by the entity had the potential ordinary shares been converted are not included. 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. t. 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. Servcorp Annual Report 2010 ▪ Financial Report 57 Notes to consolidated financial report for the financial year ended 30 June 2010 1. Significant accounting policies (continued) u. Cash and cash equivalents Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, which are subject to an insignificant risk of changes in value and have a maturity of three months or less. v. Critical accounting issues In the application of the Group’s accounting policies, management is required to make judgments, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments. Actual results may differ from these estimates. These estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The following are the critical judgments that management has made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements: Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. Further information on goodwill impairment is set out in Note 14. Useful lives of property, plant and equipment As described in Note 1(m), the Group reviews the estimated useful lives of property, plant and equipment at each reporting period. Make good provisions At each reporting date, management reviews leases that are expected to terminate to determine the present obligation in relation to floor closure costs including make good. Share options As described in Note 21, management uses their judgment in selecting an appropriate valuation technique for share options. Valuation techniques commonly used by market practitioners are applied. For share options, the Binomial Tree option valuation technique was applied. Tax losses Deferred tax assets for the carry forward of unused tax losses are recognised to the extent that it is probable that future taxable profits will be available against which the unused tax losses and unused tax credits can be utilised. This is assessed at each reporting date. Further information is set out in Note 5. 58 Servcorp Annual Report 2010 ▪ Financial Report 2. Profit from operations Consolidated 2010 $’000 2009 $’000 a. Revenue Revenue from continuing operations consisted of the following: Revenue from the rendering of services 161,573 219,394 b. Other revenue and income Interest income - bank deposits Franchise fees Net foreign exchange gains (realised and unrealised) Other income Total other income c. Profit before income tax Profit before income tax was arrived at after charging/(crediting) the following from/(to) continuing operations: Borrowing expenses: Interest on bank overdrafts and loans Depreciation of leasehold improvements Depreciation of property, plant and equipment Amortisation of licence fee Loss on disposal of property, plant and equipment Change in fair value of financial assets classified as fair value through the profit and loss Impairment of trade receivables arising from: Third parties Operating lease rental expense: Minimum lease payments Employee benefit expense: 4,502 658 486 1,618 7,264 167 8,329 5,044 112 874 1 658 3,199 607 3,870 1,576 9,252 185 7,468 5,202 - 1,566 (642) 782 67,865 76,237 Equity-settled share based payments 47 69 Servcorp Annual Report 2010 ▪ Financial Report 59 Notes to consolidated financial report for the financial year ended 30 June 2010 3. Significant transactions Individually significant transactions included in profit from ordinary activities before income tax expense: Impairment of goodwill - France Floor closure costs 4. Remuneration of auditors a. Auditor of the parent entity (Deloitte Touche Tohmatsu Australia (DTT)) Audit and review of financial reports Other services - tax Other services b. Other auditors (DTT International Associates) Audit and review of financial reports Other services - tax Other services The auditor of Servcorp Limited is Deloitte Touche Tohmatsu. Consolidated 2010 $’000 1,157 1,977 3,134 2009 $’000 - 4,617 4,617 Consolidated 2010 $ 2009 $ 451,653 163,000 56,825 671,478 536,032 93,577 33,206 662,815 368,560 177,600 22,223 568,383 548,437 210,822 32,656 791,915 1,334,293 1,360,298 60 Servcorp Annual Report 2010 ▪ Financial Report 5. Income taxes a. Income tax recognised in the profit and loss Tax expense comprises: Current tax expense (Over)/under provision in prior years - current tax Under provision in prior years - deferred tax Deferred tax income relating to the origination and reversal of temporary differences and previously unrecognised tax losses Income tax expense The prima facie income tax expense on pre-tax accounting profit from operations reconciles to the income tax expense in the financial statements as follows: Profit before income tax expense Income tax expense calculated at 30% Deductible local taxes Effect of different tax rates of subsidiaries operating in other jurisdictions Other non-deductible items Tax losses of controlled entities recovered Adjustment in deferred tax assets resulting from a change in accounting estimates Income tax (over)/under provision in prior years Unused tax losses and tax offsets not recognised as deferred tax assets Income tax expense Consolidated 2010 $’000 2009 $’000 4,551 (136) 35 (3,581) 869 11,728 712 1,324 (586) 13,178 2,875 47,275 863 (182) (1,638) 679 (40) - (101) 1,288 869 14,183 (149) (5,308) 1,179 (130) 1,321 715 1,367 13,178 The tax rate used in the above reconciliation is the Australian corporate tax rate of 30% (2009: 30%). b. Current tax assets and liabilities Current tax assets Tax refunds receivable Current tax payables/(receivables) Income tax attributable to: Parent entity Subsidiaries 2,695 193 (2,303) 3,891 1,588 2,376 1,513 3,889 Servcorp Annual Report 2010 ▪ Financial Report 61 Notes to consolidated financial report for the financial year ended 30 June 2010 5. Income taxes (continued) Consolidated 2010 $’000 c. Deferred tax balances Deferred tax assets comprise: Tax losses - revenue Temporary differences Deferred tax liabilities comprise: Temporary differences Net deferred tax assets The gross movement of the deferred tax accounts are as follows: Balance at the beginning of the financial year Movements in foreign exchange rates Statement of comprehensive income credit/(charge) Balance at the end of the financial year Deferred tax assets Movements in temporary differences: Accruals not currently deductible Doubtful debts Depreciable and amortisable assets Tax losses Foreign exchange Other Deferred tax assets Balance at the beginning of the financial year Movements in foreign exchange rates Statement of comprehensive income credit/(charge) Balance at the end of the financial year Deferred tax liabilities Movements in temporary differences: Depreciable and amortisable assets Accruals and provisions not currently deductible Other Deferred tax liabilities Balance at the beginning of the financial year Movements in foreign exchange Statement of comprehensive income (credit)/charge Balance at the end of the financial year 62 Servcorp Annual Report 2010 ▪ Financial Report 5,025 9,519 14,544 471 14,073 9,947 (210) 4,336 14,073 1,305 61 414 2,399 158 (318) 4,019 10,741 (216) 4,019 14,544 (95) 6 (228) (317) 794 (6) (317) 471 2009 $’000 2,626 8,115 10,741 794 9,947 9,212 1,472 (737) 9,947 (291) 80 1,350 (398) (1,285) 169 (375) 9,685 1,431 (375) 10,741 178 - 102 280 473 41 280 794 5. Income taxes (continued) d. Unrecognised deferred tax balances The following deferred tax assets have not been brought to account as assets: Temporary differences Tax losses - capital Tax losses - revenue Consolidated 2010 $’000 15 2,086 3,611 5,712 2009 $’000 - 2,086 2,394 4,480 Tax losses carried forward Deferred income tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable. The Consolidated Entity recognised deferred income tax assets of $5,024,890 (2009: $2,625,512) in respect to losses that can be carried forward against future taxable income. Servcorp Annual Report 2010 ▪ Financial Report 63 Notes to consolidated financial report for the financial year ended 30 June 2010 6. Segment information The Group has adopted AASB 8 Operating Segments and AASB 2008-3 Amendments to Australian Accounting Standards arising from AASB 8 with effect from 1 July 2009. AASB 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. In contrast, the predecessor Standard (AASB 114 Segment Reporting) required an entity to identify two sets of segments (business and geographical), using a risks and rewards approach, with the entity’s ‘system of internal financial reporting to key management personnel’ serving only as the starting point for the identification of the Group’s reportable segments. Servcorp Serviced Offices are fully-managed, fully-furnished CBD office suites in a prime location, with a receptionist, meeting rooms, IT infrastructure and support services available. Servcorp Virtual Office provides the services, facilities and IT to business without the cost of a physical office. In prior years, segment information reported externally was analysed on the basis of a primary and secondary segments. The primary segment was the geographic location of assets and the secondary segment was the provision of executive serviced and virtual offices and associated communications and secretarial services. The Group’s information reported to the Board of Directors is based on each segment manager directly responsible for the functioning of the operating segment. The segment manager has regular contact with members of the Board of Directors to discuss operating activities, forecasts and financial results. Segment managers are also responsible for disseminating management planning materials as directed by the Chief Operating Decision Maker. The segment manager motivates and rewards team members who meet/exceed sales targets. Seven reportable operating segments have been identified: Australia and New Zealand, Greater China, South East Asia, Japan, Europe, the Middle East and the United States of America which reflected the segment requirements under AASB 8. The Group’s reportable operating segments under AASB 8 are presented below. Amounts reported for the prior period have been restated to conform with the requirements of AASB 8. The accounting policies of the new reportable operating segments are the same as the Group’s accounting policies. The following is an analysis of the Group’s revenue and results by reportable operating segment for the periods under audit: Continuing operations Australia and New Zealand Greater China Southeast Asia Japan Europe Middle East USA Other Finance costs Interest revenue Foreign exchange gains and losses Unrecovered management fees Franchise fees Unallocated Profit before tax Income tax expense Revenue Segment Profit/(Loss) 30 June 2010 30 June 2009 30 June 2010 30 June 2009 $’000 $’000 $’000 $’000 46,578 16,202 14,654 56,218 13,190 14,770 30 912 51,913 31,715 23,725 72,727 18,901 21,195 - 617 162,554 220,793 - 4,502 486 - 658 637 - 3,199 3,870 - 607 177 10,143 (2,434) 4,265 3,166 (4,279) (427) (2,045) (1,873) 6,516 (167) 4,502 486 11,843 5,070 8,845 9,622 1,680 8,666 - (4,192) 41,534 (185) 3,199 3,870 (7,679) (1,064) 658 (1,441) 2,875 (869) 607 (686) 47,275 (13,178) Consolidated segment revenue and profit for the period 168,837 228,646 2,006 34,097 64 Servcorp Annual Report 2010 ▪ Financial Report 6. Segment information (continued) The revenue reported above represents revenue generated from external customers. Intersegment sales were eliminated in full. For the 12 months ended 30 June 2010, the Group’s Virtual Office revenue and Serviced Office revenue were $40,145,000 and $121,428,000, respectively (2009: $40,710,000 and $178,684,000, respectively). AASB 8 was amended in May 2009 by AASB 2009-5 ‘Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project’. The effect of this amendment is that the entities applying the revised standard are not required to disclose information regarding segment assets and liabilities where that information is not required to the chief operating decision maker. The directors resolved to early adopt the amendment in accordance with s.334(5) of the Corporations Act 2001. The accounting policies of the reportable segments are the same as the Group’s accounting policies described in note 1. Servcorp Annual Report 2010 ▪ Financial Report 65 Notes to consolidated financial report for the financial year ended 30 June 2010 7. Dividends Dividends proposed (unrecognised) or paid (recognised) by the Company are: Cents Total Date of Tax rate Percentage per share amount payment for franking franked $’000 credit 7.50 5.00 10.00 10.00 5.00 6,035 4,023 8,047 2 Oct 2008 10 Dec 2008 2 Apr 2009 7,847 4,922 1 Oct 2009 29 Mar 2010 30% 30% 30% 30% 30% 100% 100% 100% 100% 100% Recognised amounts 2009 Final Fully paid ordinary shares Special Fully paid ordinary shares Interim Fully paid ordinary shares 2010 Final Fully paid ordinary shares Interim Fully paid ordinary shares Unrecognised amounts Since the end of the financial year, the directors have declared the following dividend: Final Fully paid ordinary shares 5.00 4,922 6 Oct 2010 30% 100% In determining the level of future dividends, the directors will seek to balance growth objectives and rewarding shareholders with income. This policy is subject to the cash flow requirements of the Company and its investment in new opportunities aimed at growing earnings. The directors cannot give any assurances concerning the extent of future dividends, or the franking of such dividends, as they are dependent on future profits, the financial and taxation position of the Company and the impact of taxation legislation. Dividend franking account 30% franking credits available 2010 $’000 2009 $’000 4,284 8,465 Impact on franking account balance of dividends not recognised 2,109 3,363 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. 66 Servcorp Annual Report 2010 ▪ Financial Report 8. Earnings per share Earnings reconciliation: Net profit Earnings used in the calculation of basic and diluted EPS Weighted average number of ordinary shares used in the calculation of basic EPS Weighted average number of ordinary shares used in the calculation of diluted EPS Basic earnings per share Diluted earnings per share Options outstanding as at 30 June 2010 and 30 June 2009 were anti-dilutive. 9. Cash and cash equivalents Consolidated 2010 $’000 2,006 2,006 No. 2009 $’000 34,097 34,097 No. 91,918,843 79,870,050 91,918,843 79,870,050 $0.022 $0.022 $0.427 $0.427 Note 20 Consolidated 2010 $’000 16,955 114,993 131,948 2009 $’000 18,952 65,006 83,958 Cash (i) Bank short term deposits (ii) Notes: i. Australia and France have $3,454,000 and $7,513,000, respectively, in cash which is encumbered. ii. Bank short term deposits mature within an average of 176 days (2009: 87 days). These deposits and the interest earning portion of the cash balance earn interest at a weighted average rate of 5.85% (2009: 3.38%). Servcorp Annual Report 2010 ▪ Financial Report 67 Notes to consolidated financial report for the financial year ended 30 June 2010 10. Trade and other receivables Current At amortised cost Trade receivables (i) Less: allowance for doubtful debts held for trading Other debtors Notes: Consolidated 2010 $’000 16,115 (575) 1,620 17,160 2009 $’000 16,618 (697) 995 16,916 i. The average credit period on rendering of services is 7 days. An allowance has been made for estimated unrecoverable trade receivable amounts arising from the past rendering of services, determined by reference to past default experience. The Group has fully reviewed all receivables over 90 days. Receivables are assessed for impairment at each reporting date and where there is an indication of impairment, a provision is raised. Aging of trade receivables past due but not impaired 1 - 30 days 31 - 60 days 60 + days Total 14,346 1,013 756 16,115 15,067 853 698 16,618 In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the directors believe that there is no further credit provision required in excess of the allowance for doubtful debts. 68 Servcorp Annual Report 2010 ▪ Financial Report 11. Other assets Current Prepayments Other 12. Other financial assets Current At amortised cost Lease deposits Non-current At amortised cost Lease deposits Licence fees Other Consolidated 2010 $’000 6,733 1,614 8,347 1,008 1,008 29,898 1,131 76 31,105 2009 $’000 5,676 852 6,528 1,555 1,555 24,881 1,067 73 26,021 Servcorp Annual Report 2010 ▪ Financial Report 69 Notes to consolidated financial report for the financial year ended 30 June 2010 13. Property, plant and equipment Consolidated Land and Leasehold Leasehold Office Office buildings improve- improve- furniture furniture at cost ments ments & fittings & fittings Office equip- ment Office Motor Total equip- vehicles ment owned owned at cost at cost $’000 $’000 $’000 owned at cost $’000 leased owned leased at cost at cost at cost at cost $’000 $’000 $’000 $’000 $’000 Gross carrying amounts Balance at 30 June 2009 5,314 62,800 2,603 12,180 583 19,561 2,135 690 105,866 Additions Disposals Transfers Net foreign currency differences on translation of self-sustaining operations Balance at - - - 18,704 - (2,565) (1,368) 2,425 (595) - - - - 12 (12) 4,019 (870) - - - - 52 25,200 (57) (5,455) - - 334 (2,365) 38 (331) 4 (275) 60 (14) (2,549) 30 June 2010 5,648 76,574 1,273 13,691 575 22,435 2,195 671 123,062 Accumulated depreciation Balance at 30 June 2009 Depreciation expense Disposals Transfers Net foreign currency differences on translation of self-sustaining operations Balance at 30 June 2010 Net book value Balance at 30 June 2010 Balance at 30 June 2009 200 33,226 2,554 6,157 583 15,088 586 211 58,605 126 8,329 - (1,643) (1,368) 1,493 (370) - - - - 12 (12) - - 2,800 (672) - 524 - - 101 (40) - 13,373 (4,093) - 2 (988) 39 (259) 4 (275) 24 (9) (1,462) 328 38,924 1,225 7,033 575 16,941 1,134 263 66,423 5,320 37,650 5,114 29,574 48 49 6,658 6,023 - - 5,494 1,061 408 56,639 4,473 1,549 479 47,261 Aggregate depreciation expense allocated during the year is recognised as an expense and disclosed in Note 2 to the financial statements. 70 Servcorp Annual Report 2010 ▪ Financial Report 14. Goodwill Gross carrying amount and net book value Balance at the beginning of the financial year Impairment of goodwill - France Balance at the end of the financial year Consolidated 2010 $’000 15,962 (1,157) 14,805 2009 $’000 15,962 - 15,962 At the reporting date, the Consolidated Entity assessed the recoverable amount of goodwill and determined that $1,157,000 goodwill was impaired for France. The impairment loss was included in the ‘other expenses’ line item in the Statement of comprehensive income. Allocation of goodwill to cash generating units The following seventeen countries are cash generating units: Japan, Australia, New Zealand, China, Hong Kong, Malaysia, Singapore, Thailand, Belgium, United Arab Emirates, Bahrain, Qatar, Saudi Arabia, France, United States of America, Kuwait and United Kingdom. Goodwill was allocated to the countries in which goodwill arose. The carrying amounts of goodwill relating to each cash generating unit as at 30 June 2010 was as follows: Japan France Australia New Zealand Singapore Thailand China Consolidated 2010 $’000 9,161 1,030 2,636 785 706 326 161 2009 $’000 9,161 2,187 2,636 785 706 326 161 14,805 15,962 The recoverable amount of goodwill relating to each cash generating unit was determined based on value-in-use calculations, which uses cash flow projections based on financial forecasts approved by management, covering a five year period and terminal value. No growth factors were applied beyond year five of the forecast period. For the year ended 30 June 2010 the discount rate applied to the above countries, inclusive of country risk premium was as follows: Japan 16.4%, France 15.5%, Australia 15.5%, New Zealand 15.5%, Singapore 15.5%, Thailand 17.9% and China 16.9% (2009: Japan 15.9%, France 14.1%, Australia 14.1%, New Zealand 14.1%, Singapore 14.1%, Thailand 17.1% and China 16.2% ). Management have applied assumptions to the future forecast cash flows based on historic performance and historic growth. The assumptions did not include any acquisitions or capital expansions, but do include amounts relating to sustaining capital expenditure. Servcorp Annual Report 2010 ▪ Financial Report 71 Notes to consolidated financial report for the financial year ended 30 June 2010 15. Trade and other payables Note Consolidated 2010 $’000 Current At amortised cost Trade creditors Deferred income Deferred lease incentive Other creditors and accruals Non-current At amortised cost Deferred lease incentive 16. Other financial liabilities Current At amortised cost Bank loans - secured (i) Bank overdraft (ii) Security deposits Finance lease At fair value through profit or loss Forward foreign currency exchange contracts Non-current At amortised cost Bank loans - secured (i) Finance lease At fair value through profit or loss Forward foreign currency exchange contract 20 20 5,498 12,188 6,466 5,590 29,742 6,904 6,904 121 496 17,925 1,373 100 20,015 - 156 13 169 2009 $’000 3,743 12,135 2,195 6,381 24,454 7,708 7,708 117 - 18,533 702 114 19,466 115 728 - 843 Notes: i. The bank loan is denominated in JPY 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 1.79% (2009: 2.09%). ii. The bank overdraft in France is denominated in AUD and is secured. Interest at a rate of 4.70% is applicable to the outstanding balance. 72 Servcorp Annual Report 2010 ▪ Financial Report 17. Financing arrangements The Consolidated Entity has access to the following lines of credit: Total facilities available: Bank guarantees (i) Bank overdrafts and loans (iii) Bill acceptance / payroll / other facilities (ii) Facilities utilised at balance sheet date: Bank guarantees (i) Bank overdrafts and loans (iii) Facilities not utilised at balance sheet date: Bank guarantees (i) Bank overdrafts and loans (iii) Bill acceptance / payroll / other facilities (ii) Consolidated 2010 $’000 2009 $’000 21,612 3,434 4,125 29,171 14,890 645 15,535 6,722 2,789 4,125 13,636 14,276 1,109 3,975 19,360 14,075 262 14,337 201 847 3,975 5,023 The Group has access to financing facilities at reporting date as indicated above. The Group expects to meet its other obligations from operating cash flows and proceeds. Notes: i. Bank guarantees have been issued to secure rental bonds over premises. A guarantee has also been established to secure an overdraft limit in the form of a term deposit. ii. Bill acceptance, payroll and other facilities have been established to facilitate the encashment of cheques, to accommodate direct entry payroll and direct entry supplier payments. iii. Bank overdraft limits have been established to fund working capital as required. All bank overdraft facilities are unsecured and payable at call, including credit card facility utilised. Servcorp Annual Report 2010 ▪ Financial Report 73 Notes to consolidated financial report for the financial year ended 30 June 2010 18. Provisions Current Employee benefits (i) Other Non-current Employee benefits Other Notes: Consolidated 2010 $’000 5,211 672 5,883 428 441 869 2009 $’000 5,234 660 5,894 367 429 796 i. The current provision for employee benefits includes $3,800,000 of annual leave and vested long service leave entitlements accrued but not expected to be taken within 12 months (2009: $3,314,000). 74 Servcorp Annual Report 2010 ▪ Financial Report 19. Issued capital Fully paid ordinary shares 98,440,807 (2009: 78,467,310) Movements in issued capital Balance at the beginning of the financial year Share buy-back (i) Issue of shares (ii) Cost of capital raising Tax effect of capital raising Balance at the end of the financial year Notes: i. Share buy-back Consolidated 2010 $’000 2009 $’000 154,149 76,118 76,118 - 79,894 (2,662) 799 154,149 80,948 (4,830) - - - 76,118 On 20 April 2009, Servcorp Limited completed the on market buy-back of 2,000,000 ordinary shares, representing approximately 2.5% of ordinary shares on issue at that date. These shares were subsequently cancelled. ii. Equity capital raising Servcorp Limited completed an equity capital raising of $79,893,988 to fund global expansion. Capital raising costs amounted to $2,662,000. A total of 19,973,497 shares were issued. The components of the capital raising were as follows: Institutional component - during October 2009 $75,390,324 was raised from institutional investors following completion of the institutional offer including $51,360,420 under the institutional placement and $24,029,904 under the institutional entitlement offer. Retail component - during November 2009 $4,503,664 was raised under the retail entitlement offer. Servcorp Annual Report 2010 ▪ Financial Report 75 Notes to consolidated financial report for the financial year ended 30 June 2010 20. Financial instruments Servcorp’s Audit and Risk Committee oversees the establishment of the capital and financial risk management system which identifies, evaluates, classifies, monitors, qualifies and reports significant risks to the Servcorp Board. All controlled entities in the Servcorp Group apply this risk management system to manage their own risks. a. Financial risk management objectives The financial risks that result from Servcorp’s activities are credit risk and market risk (interest rate risk and foreign exchange risk). The Consolidated Entity’s corporate treasury function provides services to the business, co-ordinates access to domestic and international financial markets, and manages the financial risks relating to the operations of the Consolidated Entity. The Consolidated Entity does not enter into or trade financial instruments for speculative purposes. The Consolidated Entity does not apply hedge accounting. The use of financial derivatives is governed by the Consolidated Entity’s policies approved by the Board of Directors. The Consolidated Entity’s corporate treasury function reports to the Group’s Audit and Risk Committee, an independent body that monitors risks and policies implemented to mitigate risk exposures. b. Capital management Servcorp’s objective when managing capital is to ensure that entities within the Group will be able to continue as a going concern while maximising the return to stakeholders. The Group’s overall strategy remains unchanged from 2009. The capital structure of Servcorp consists of equity attributable to equity holders of the parent, company issued capital, reserves and retained earnings. Servcorp operates globally, primarily through subsidiary companies established in the markets in which Servcorp operates. Operating cash flows are used to maintain and expand Servcorp, as well as to make routine outflows of tax and dividend payments. c. Market risk Servcorp’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates. The Group enters into forward foreign currency exchange contracts to economically hedge anticipated transactions. i. Foreign exchange risk Servcorp operates internationally and is exposed to foreign exchange risk arising from various currency exposures. Servcorp’s foreign exchange risk arises primarily from: ▪ ▪ ▪ ▪ borrowings denominated in Japanese JPY; firm commitments of receipts and payments settled in foreign currencies or with prices dependent on foreign currencies; investments in foreign operations; and loans and trading accounts to foreign operations. Foreign currency assets and liabilities Servcorp manages its foreign exchange risk for its assets and liabilities denominated in foreign currency by borrowing in the same functional currency of its investment to form a natural economic hedge. For accounting purposes, net foreign operations are re-valued at the end of each reporting period with the movement reflected as a movement in the foreign currency translation reserve. Borrowings and forward exchange contracts not forming part of the net investment in foreign operations are re-valued at the end of each reporting period with the fair value movement reflected in the Statement of comprehensive income as exchange gains or losses. 76 Servcorp Annual Report 2010 ▪ Financial Report 20. Financial instruments (continued) c. Market risk (continued) i. Foreign exchange risk (continued) Foreign currency sensitivity analysis The following table summarises the material sensitivity of financial instruments held at balance date to movements in the exchange rate of the Australian dollar to foreign exchange rates, with all other variables held constant. The sensitivity is based on reasonably possible changes, over a financial year, using the observed range of actual historical rates for the preceding 5 year period. Pre-tax gain/(loss) AUD/USD (i) +10% (2009: +10%) AUD/USD (i) -10% (2009: -10%) AUD/JPY +10% (2009: +11%) AUD/JPY -10% (2009: -11%) AUD/EUR +8% (2009: +5%) AUD/EUR -8% (2009: -5%) AUD/RMB +7% (2009: +7%) AUD/RMB -7% (2009: -7%) Notes: Impact on profit Impact on equity Consolidated Consolidated 2010 $’000 2009 $’000 2010 $’000 2009 $’000 525 (559) (23) (57) (3) 4 (139) 159 353 (433) (80) 97 (82) 101 (9) 6 (1,126) (1,136) 1,368 1,417 (264) 292 (449) 519 26 (31) - - 5 (5) - - i. Servcorp is exposed to Dirhams (Dubai), Dinars (Bahrain), Rials (Qatar) and Riyals (Saudi Arabia). These currencies are pegged to the USD. Servcorp Annual Report 2010 ▪ Financial Report 77 Notes to consolidated financial report for the financial year ended 30 June 2010 20. Financial instruments (continued) c. Market risk (continued) i. Foreign exchange risk (continued) Forward foreign currency exchange contracts The following table sets out the details of forward foreign currency exchange contracts in place as at 30 June 2010. These are level 2 fair value measurements derived from quoted prices in active markets. Average exchange rate 2010 2009 Foreign currency Fair value 2010 million 2009 million 2010 $’000 2009 $’000 Outstanding contracts Consolidated Sell JPY Not later than one year 74.29 76.89 200 500 (84) (114) Later than one year and not later than five years Sell USD Not later than one year ii. Interest rate risk 66.46 0.83 - - 50 2 - - (13) (16) - - Interest rate risk on cash or short term deposits is not considered to be a material risk due to the short term nature of these financial instruments. Risk is managed by maintaining an appropriate mix between fixed and floating rate for secured and unsecured debt. The following table summarises the sensitivity of the financial instruments held at balance date, following a movement to interest rates, with all other variables held constant. The sensitivity is based on reasonably possible changes over a financial year, using the observed range of actual historical rates. Pre tax gain/(loss) AUD balances 125 basis point increase 125 basis point decrease Other balances 250 basis point increase 250 basis point decrease Impact on profit Consolidated 2010 $’000 1,484 (1,437) 92 (62) 2009 $’000 820 (810) 51 (40) 78 Servcorp Annual Report 2010 ▪ Financial Report 20. Financial instruments (continued) c. Market risk (continued) iii. Liquidity risk Ultimate responsibility for liquidity risk management rests with the board of directors, who have built an appropriate liquidity risk management framework for the management of the Consolidated Entity’s short, medium and long-term funding. The Consolidated Entity manages liquidity risk by maintaining adequate reserves, banking facilities and borrowing facilities. The following table details the Consolidated Entity’s expected maturity for its financial assets. The table below was drawn up based on the undiscounted contractual maturities of the financial assets including interest that will be earned. Less 1 to 3 3 than months months 1 to 5 years 1 month to 1 year 5 + Total Weighted years average effective interest rate % $’000 $’000 $’000 $’000 $’000 $’000 Consolidated 2010 Non-interest bearing Cash and cash equivalents Receivables Lease deposits 16,955 17,160 - - - - - - - - 859 1,163 3,483 19,852 4,849 Forward foreign currency exchange contracts - - 5,100 752 16,955 17,160 30,206 5,852 116,706 5.85% - - 7,418 42,392 8,793 9,956 100,495 109,078 - 20,604 4,849 186,879 Interest bearing Cash and cash equivalents (i) 2009 Non-interest bearing Cash and cash equivalents Receivables Lease deposits 18,952 16,916 1,109 - - - - - - - - 4,189 9,115 9,610 2,295 18,952 16,916 26,318 6,503 65,345 3.38% - - - - 533 Forward foreign currency exchange contracts - - 6,503 Interest bearing Cash and cash equivalents (i) 17,252 54,229 47,560 51,749 Notes: i. Fixed interest rate instruments. 16,151 9,610 2,295 134,034 Servcorp Annual Report 2010 ▪ Financial Report 79 Notes to consolidated financial report for the financial year ended 30 June 2010 20. Financial instruments (continued) c. Market risk (continued) iii. Liquidity risk (continued) The following table details the Consolidated Entity’s remaining contractual maturity for its financial liabilities. The table was based on the earliest date on which undiscounted cash flows of financial liabilities are contractually to be paid. The table includes both principal and interest cash flows. 1-3 3 1-5 5+ Total Weighted Less than 1 month months months years years to 1 year average effective interest rate % 5.84% 1.79% 5.84% 2.17% $’000 $’000 $’000 $’000 $’000 $’000 - - - 871 526 12,993 - - 34 - - 17,975 - - 5,190 775 467 2 156 89 1,397 13,027 23,634 1,020 5 - - 116 29 150 12,039 - - - 33 1 18,411 6,617 454 91 12,073 25,573 - - - 756 120 876 - - - 1 - 1 - - - - - - 12,993 17,975 5,965 1,529 617 39,079 12,044 18,411 6,617 1,359 241 38,672 Consolidated 2010 Non-interest bearing Payables Security deposits (i) Forward foreign currency exchange contracts Interest bearing Finance lease Bank overdrafts and loans (ii) 2009 Non-interest bearing Payables Security deposits (i) Forward foreign currency exchange contracts Interest bearing Finance lease Bank overdrafts and loans (ii) Notes: i. Fixed interest rate instruments. ii. Variable interest rate instruments. 80 Servcorp Annual Report 2010 ▪ Financial Report 20. Financial instruments (continued) d. Credit risk The maximum credit risk on financial assets, excluding investments, of the Consolidated Entity which have been recognised on the Statement of financial position, is the carrying amount, net of any allowances for losses. Credit risk refers to the risk that the counterparty will default on its contractual obligations resulting in financial loss to the Consolidated Entity. The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable. The Group does not have any significant credit risk exposure to any single counterparty or any group of any counterparties having similar characteristics. Details of credit enhancements in the form of serviced office security deposits retained from customers are further disclosed in Note 16. e. Fair value of financial instruments The directors consider that the carrying amount of financial assets and financial liabilities approximate their fair value other than investment in subsidiaries. Financial instruments are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3 based on the degree to which fair value is observable: ▪ Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. ▪ Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e as prices) or indirectly (i.e derived from prices). ▪ Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). f. I-City Malaysia - Incorporated JV Under the joint venture agreement, a subsidiary has a ‘call option’ giving it the right but not the obligation to require the minority holder to sell to it all of its subscription capital for the exercise price (as defined) and the minority holder has a ‘put option’ giving it the right but not the obligation to sell to a subsidiary its subscription capital for the exercise price. The exercise price cannot be less than $1 and is calculated as USD350,000 less the aggregate amount of dividends paid by the subsidiary to the minority holder prior to the commencement of the option exercise period. The option exercise period is defined as being between the period 1 July 2012 to 31 December 2012, provided USD350,000 in dividends has not been paid to the minority holder prior to the commencement of the option period (as the option ceases to exist once dividends to this value have been paid). Further, a subsidiary has provided a bank guarantee to the minority holder with a face value of USD350,000 as security for the exercising of the put option noted above. The consolidated entity has guaranteed the subscription capital paid by the minority shareholder and therefore has recorded a liability of USD350,000 as at 30 June 2010 in relation to the put option and guarantee. As such, no separate fair value has been attributed to the put option. As the venture commenced in August 2007 and is an investment in a private company which is a start-up in nature, the fair value of the call option cannot be reliably measured as at 30 June 2010. Servcorp Annual Report 2010 ▪ Financial Report 81 Notes to consolidated financial report for the financial year ended 30 June 2010 21. Employee benefits Defined contribution fund Contributions to defined contribution superannuation plans are expensed when employees have rendered services entitling them to the contributions. The Company’s controlled entities are legally obliged to contribute to employee nominated defined contribution superannuation plans. Details of contributions to funds during the year ended 30 June 2010 are as follows: Employer contributions As at 30 June 2010, there were no outstanding employer contributions payable to other funds. Consolidated 2010 $’000 1,653 2009 $’000 1,982 Options granted to employees Share option scheme Balance at the beginning of the financial year Forfeited during the financial year Granted during the financial year Balance at the end of the financial year Consolidated 2010 No. 140,000 - - 140,000 2009 No. 160,000 (260,000) 240,000 140,000 The Consolidated Entity has an ownership based remuneration scheme for key management personnel (including executive directors). Each key management personnel’s share option converts into one ordinary share of Servcorp Limited when exercised. No amounts are paid or payable by the recipient of the option. The options carry neither rights to dividends or voting rights. Further details on option conditions are included later in this Note. 82 Servcorp Annual Report 2010 ▪ Financial Report 21. Employee benefits (continued) Options granted to employees (continued) Executive share options issued by Servcorp Limited Balance at Granted Forfeited Exercised Balance at Vested and No. No. No. No. No. 30/06/10 exercisable T Wallace O Vlietstra S Martin W Wu 1/7/09 No. 30,000 40,000 40,000 30,000 140,000 - - - - - - - - - - - - - - - 30,000 40,000 40,000 30,000 30,000 40,000 40,000 30,000 140,000 140,000 140,000 Net vested No. 30,000 40,000 40,000 30,000 Options granted during the financial year Nil options were issued during the financial year ended 30 June 2010. Options issued under the Executive Share Option Scheme carry no rights to dividends and have no voting rights. Options exercised during the financial year Nil (2009: Nil) options were exercised into ordinary shares in Servcorp Limited during the financial year ended 30 June 2010. Options lapsed during the financial year Nil (2009: 260,000) options were forfeited under the Executive Share Option Scheme during the financial year ended 30 June 2010. Servcorp Annual Report 2010 ▪ Financial Report 83 Notes to consolidated financial report for the financial year ended 30 June 2010 21. Employee benefits (continued) Options granted to employees (continued) Balance at the end of the financial year Grant date Expiry date Vested Exercise price Number of options 22 February 2008 22 February 2013 Yes $4.60 outstanding 2010 2009 140,000 140,000 140,000 140,000 The fair value of the services received is measured by the fair value of the equity instruments granted. Nil options were granted during the financial year. Options were valued using the Binomial Tree option pricing model. Where relevant, the expected life used in the model has been adjusted based on management’s best estimate for the effects of non- transferability, exercise restrictions and behavioural considerations. Expected volatility is based on the historical market price of the Company’s share. Inputs into the options model Award type Grant date Expiry date Share price at grant date Exercise price Expected life Volatility Risk free interest rate Dividend yield Options 22/2/08 22/2/13 $4.60 $4.60 3.5 years 25% 6.66% 2.6% Vesting Conditions The options will vest in the proportions detailed in the following table: EPS performance <10% >10% to <15% >15% Percentage of options that will vest 0% 50% to 100% determined on pro-rata basis 100% 84 Servcorp Annual Report 2010 ▪ Financial Report 22. Commitments for expenditure Capital expenditure commitments - property, plant and equipment 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 Non-cancellable 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 Consolidated 2010 $’000 2009 $’000 16,251 1,096 - - - - 16,251 1,096 78,396 194,570 68,350 341,316 50,713 108,398 28,715 187,826 The Consolidated Entity leases property under operating leases expiring from one to 14 years. Liabilities in respect of lease incentives are disclosed in Note 15 to the financial statements. Operating leases Leasing arrangements Operating leases have been entered into to operate serviced office floors. The average lease term is seven years with market review clauses and options to renew. The Consolidated Entity does not have an option to purchase the leased asset at the expiry of the lease period. Finance lease liabilities During the financial year ended 30 June 2009, the Group acquired $2,241,000 of equipment under a finance lease. This acquisition is reflected in the cash flow statement over the term of the finance lease via lease repayments. Servcorp Annual Report 2010 ▪ Financial Report 85 Notes to consolidated financial report for the financial year ended 30 June 2010 22. Commitments for expenditure (continued) Not later than one year Later than one year and not later than five years Later than five years Minimum lease payments (i) Less future finance charges Present value of minimum lease payments Included in the financial statements as Note 16: Current borrowings Non current borrowings Minimum future lease Present value of payments minimum future lease payments Consolidated Consolidated 2010 $’000 2009 $’000 2010 $’000 2009 $’000 1,380 149 - 735 760 - 1,380 149 - 699 731 - 1,529 1,495 1,529 1,430 (67) 1,462 (65) 1,430 - - 1,529 1,430 1,373 156 1,529 702 728 1,430 Notes: i. Minimum future lease payments includes the aggregate of all lease payments and any guaranteed residual. 86 Servcorp Annual Report 2010 ▪ Financial Report 23. Subsidiaries Name of entity Country of incorporation Ownership interest 2010 % 2009 % Parent entity Servcorp Limited (i) 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 Melbourne 27 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 Servcorp Market Street Pty Ltd Office Squared Pty Ltd Servcorp WA Pty Ltd Servcorp Parramatta Pty Ltd (iii) Servcorp Sydney 56 Pty Ltd Servcorp Norwest Pty Ltd Servcorp Level 12 Pty Ltd Servcorp Western Australia Pty Ltd Office Squared (Nexus) Pty Ltd Servcorp SA 30 Pty Ltd Servcorp Gold Coast Pty Ltd Servcorp North Sydney 32 Pty Ltd Servcorp Docklands Pty Ltd Servcorp Sydney 22 Pty Ltd Servcorp Hobart Pty Ltd Beechreef (New Zealand) Limited Servcorp New Zealand Limited Company Headquarters Limited Servcorp Wellington Limited Servcorp Christchurch Limited Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 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 New Zealand 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 - - - 100 100 100 100 - Servcorp Annual Report 2010 ▪ Financial Report 87 Notes to consolidated financial report for the financial year ended 30 June 2010 23. Subsidiaries (continued) Name of entity Controlled entities (continued) Servcorp Serviced Offices Pte Ltd Servcorp Battery Road Pte Ltd Servcorp Marina Pte Ltd Servcorp Franchising Pte Ltd Servcorp Singapore Holdings Pte Ltd Office Squared Pte Ltd Servcorp Hottdesk Singapore Pte Ltd Servcorp Jeddah Pte Ltd (v) Servcorp Square Pte Ltd Servcorp SR Pte Ltd Servcorp Hong Kong Limited Servcorp Communications Limited Servcorp HK Central Limited Servcorp Business Services (Shanghai) Co. Ltd Servcorp Business Service (Beijing) Co. Ltd Servcorp Business Service (Chengdu) Co. Ltd Servcorp Business Service (Sihui) Co. Ltd Office Squared Network Technology Services (Hangzhou) Co. Ltd Amalthea Nominees (Malaysia) Sdn Bhd Office Squared Malaysia Sdn Bhd I-Office2 Sdn Bhd Servcorp Thai Holdings Limited Servcorp Company Limited Headquarters Co. Limited Servcorp Japan KK Servcorp Tokyo KK Servcorp Nippon International KK Servcorp Marunouchi KK (iv) Servcorp Ginza KK Servcorp Shinagawa KK Servcorp Nagoya KK Servcorp Fukuoka KK Servcorp Seoul LLC Servcorp Paris SARL Servcorp Edouard VII SARL Servcorp Brussels SPRL Servcorp UK Limited Servcorp LLC (ii) Servcorp Administration Services WLL (ii) Servcorp Business Centres Operation Limited Liability Partnership Servcorp BFH WLL Servcorp Qatar LLC (ii) Servcorp Aswad Company WLL (ii) Servcorp Phoenicia SAL Servcorp US Holdings, Inc. Ownership interest Country of incorporation 2010 % 2009 % Singapore Singapore Singapore Singapore Singapore Singapore Singapore Singapore Singapore Singapore Hong Kong Hong Kong Hong Kong China China China China China Malaysia Malaysia Malaysia Thailand Thailand Thailand Japan Japan Japan Japan Japan Japan Japan Japan Korea France France Belgium United Kingdom UAE UAE Turkey Bahrain Qatar Kuwait Lebanon United States 100 100 100 100 100 100 100 - 100 100 100 100 100 100 100 100 100 100 100 100 65 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 49 49 100 100 49 49 100 100 100 100 100 100 100 100 100 100 100 - 100 100 100 100 100 100 100 100 100 100 65 100 100 100 100 100 100 100 100 100 100 100 - 100 100 100 100 49 49 - 100 49 - - 100 88 Servcorp Annual Report 2010 ▪ Financial Report 23. Subsidiaries (continued) Name of entity Controlled entities (continued) Servcorp America LLC Servcorp Atlanta LLC Servcorp Boston LLC Servcorp New York LLC Servcorp Washington LLC Servcorp Philadelphia LLC Servcorp Dallas LLC Servcorp Houston LLC Servcorp Los Angeles LLC Servcorp Denver LLC Servcorp Miami LLC Servcorp San Francisco LLC Notes: Ownership interest Country of incorporation 2010 % 2009 % United States United States United States United States United States United States United States United States United States United States United States United States 100 100 100 100 100 100 100 100 100 100 100 100 - - - - - - - - - - - - i. Servcorp Limited is the head entity within the Australian tax consolidated group. ii. A Company in the Consolidated Entity exercises control over Servcorp LLC, Servcorp Qatar LLC, Servcorp Aswad Company WLL and Servcorp Administration Services WLL 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 notwithstanding that the majority shareholding may be vested in another party. iii. Servcorp Parramatta Pty Ltd changed its name from Servcorp Melbourne 36 Pty Ltd on 18 December 2009. iv. Servcorp Marunouchi KK changed its name from Management International KK on 29 September 2009. v. Servcorp Jeddah Pte Ltd was incorporated on 24 September 2008 and subsequently deregistered on 7 August 2009. Servcorp Annual Report 2010 ▪ Financial Report 89 Notes to consolidated financial report for the financial year ended 30 June 2010 24. Formation/deregistration of controlled entities Consideration $’000 The Consolidated Entity’s interest % - - - - - - - - - - - - - 100 100 100 100 100 100 100 100 100 100 100 100 100 Formations 2010 Servcorp America LLC The entity was formed on 8 July 2009 Servcorp New York LLC The entity was formed on 8 July 2009 Servcorp SR Pte. Ltd The entity was formed on 14 July 2009 Servcorp Atlanta LLC The entity was formed on 17 November 2009 Servcorp Washington LLC The entity was formed on 17 November 2009 Servcorp Boston LLC The entity was formed on 23 November 2009 Servcorp Docklands Pty Ltd The entity was formed on 13 January 2010 Servcorp Philadelphia LLC The entity was formed on 13 January 2010 Servcorp Sydney 22 Pty Ltd The entity was formed on 14 January 2010 Servcorp Seoul LLC The entity was formed on 22 February 2010 Servcorp Dallas LLC The entity was formed on 22 February 2010 Servcorp Houston LLC The entity was formed on 22 February 2010 Servcorp Los Angeles LLC The entity was formed on 14 April 2010 90 Servcorp Annual Report 2010 ▪ Financial Report 24. Formation/deregistration of controlled entities (continued) Consideration $’000 The Consolidated Entity’s interest % Formations (continued) 2010 Servcorp Denver LLC The entity was formed on 14 April 2010 Servcorp Miami LLC The entity was formed on 14 April 2010 Servcorp San Francisco LLC The entity was formed on 14 April 2010 Servcorp Phoenicia SAL The entity was formed on 21 April 2010 Servcorp Hobart Pty Ltd The enitity was formed on 21 April 2010 Servcorp Aswad Company WLL The entity was formed on 4 May 2010 Servcorp Business Centres Operation Limited Liability Partnership The entity was formed on 14 May 2010 Servcorp Christchurch Limited The entity was formed on 20 May 2010 - - - - - - - - 100 100 100 100 100 49 100 100 Servcorp Annual Report 2010 ▪ Financial Report 91 Notes to consolidated financial report for the financial year ended 30 June 2010 24. Formation/deregistration of controlled entities (continued) The Consolidated Entity’s interest % 100 100 100 100 100 49 100 100 Consideration $’000 - - - - - - - - Country of incorporation Singapore Formation 2009 Servcorp Edouard VII SARL The entity was formed on 2 July 2008 Servcorp North Sydney 32 Pty Ltd The entity was formed on 9 July 2008 Office Squared Network Technology Services (Hangzhou) Co. Ltd The entity was formed on 28 August 2008 Servcorp Jeddah Pte Ltd The entity was formed on 24 September 2008 Servcorp Square Pte Ltd The entity was formed on 9 October 2008 Servcorp Administration Services WLL The entity was formed on 28 October 2008 Servcorp US Holdings, Inc. The entity was formed on 14 May 2009 Servcorp HK Central Limited The entity was formed on 16 June 2009 Deregistration 2010 Servcorp Jeddah Pte Ltd The entity was deregistered on 7 August 2009 Deregistration 2009 Nil 92 Servcorp Annual Report 2010 ▪ Financial Report 25. Notes to statement of cash flows a. Reconciliation of cash and cash equivalents For the purpose of the statement of cash flows, cash and cash equivalents includes cash on hand and at bank, short-term deposits at call, net of outstanding bank overdrafts. Cash and cash equivalents at the end of the financial year as shown in the Cash flow statement are reconciled to the related items in the Statement of financial position as follows: Cash Short term deposits Bank overdraft and bank loans b. Reconciliation of profit for the period to net cash flows from operating activities Profit after income tax Add/(less) non-cash items: Movements in provisions Depreciation of non-current assets Amortisation of licence fees Goodwill impairment Loss on disposal of non-current assets (Decrease)/increase in current tax liability (Decrease)/increase in deferred tax balances Unrealised foreign exchange loss Equity-settled share based payment Changes in net assets and liabilities during the financial period: Increase in prepayments and receivables Decrease in trade debtors (Increase)/decrease in current assets Increase/(decrease) in deferred income (Decrease) in client security deposits Increase/(decrease) in accounts payable Net cash provided from operating activities Consolidated 2010 $’000 2009 $’000 16,955 114,993 (617) 131,331 18,952 65,006 (232) 83,726 2,006 34,097 232 12,625 112 1,157 874 (4,723) (6,435) 874 47 (1,308) 214 (1,801) 190 (137) 4,871 8,798 (736) 13,018 - - 1,566 129 541 60 69 (1,427) 2,204 1,162 (2,393) (1,823) (3,443) 43,024 c. Non-cash financing and investing activities During the financial year ended 30 June 2009, the Group acquired $2,241,000 of equipment under a finance lease. This acquisition will be reflected in the cash flow statement over the term of the finance lease via lease repayments. Servcorp Annual Report 2010 ▪ Financial Report 93 Notes to consolidated financial report for the financial year ended 30 June 2010 26. Related party disclosures Other than the details disclosed in this note, no key management personnel have entered into any other material contracts with the Consolidated Entity or the Company during the financial year, and no material contracts involving directors’ interests or specified executives existed at balance sheet date. Key management personnel holdings of shares Fully paid ordinary shares of Servcorp Limited Specified directors B Corlett R Holliday-Smith J King A G Moufarrige (i) T Moufarrige (i) Specified executives M Moufarrige (i) S Martin O Vlietstra L Lahdo T Wallace L Gorman Notes: Balance at Received on Net Balance at 01/07/09 exercise of change 30/06/10 No. options No. No. No. 413,474 250,000 96,400 48,502,935 1,859,992 1,928,842 27,000 30,000 5,000 10,000 11,000 53,134,643 - - - - - - - - - - - - - - 8,765 413,474 250,000 105,165 1,287,161 49,790,096 5,454 1,865,446 - - - - (10,000) 1,928,842 27,000 30,000 5,000 - - 11,000 1,291,380 54,426,023 i. T Moufarrige and M Moufarrige have a relevant interest in 1.8 million shares each in the Company. The total of 3.6 million shares is also included as a relevant interest of A G Moufarrige. Key management personnel benefits The aggregate compensation of the key management personnel of the Consolidated Entity, are as follows: Salary and fees, bonus and non-monetary benefits Post employment benefits - superannuation Share based payment - equity options and shares Consolidated 2010 $’000 3,766 166 47 2009 $’000 3,629 209 73 94 Servcorp Annual Report 2010 ▪ Financial Report 26. Related party disclosures (continued) Loans to key management personnel The following loan balances are in respect of loans made to key management personnel of the Group. Balance at the Loan Interest Balance at the Number in beginning of repayment charged/paid end of group financial year financial year $ $ 31,995 34,739 (32,000) (5,448) $ 5 $ - 2,704 31,995 1 1 2010 2009 Key management personnel are charged interest on loans provided by the Group at 8.05% p.a., which is comparable to the average commercial rate of interest. Equity interests in subsidiaries Details of the percentage of ordinary shares held in subsidiaries are disclosed in Note 23 to the financial statements. Other transactions with the Company and its controlled entities From time to time directors of the Company and 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. 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 G Moufarrige, has an interest in and is a director of Tekfon Pty Ltd. Enideb Pty Ltd operates the Servcorp franchise in Canberra. A relative of a director of the Company, Mr A G Moufarrige, has an interest in Enideb Pty Ltd. Mr A G 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 on arms length terms. A director of the Company, Mr A G Moufarrige, has an interest in and is a director of Rumble Australia Pty Ltd. A director of the Company, Mr A G Moufarrige, has an interest in and is a director of Sovori Pty Ltd. Mr T Moufarrige, a director of the Company, is also a director of Sovori Pty Ltd. A director of the Company, Mr A G Moufarrige, has an interest in and is a director of MRC Biotech Pty Ltd. Aegis Partners Pty Ltd provided consulting services to Office Squared Pty Ltd. Consulting fees of Nil (2009: $33,336) were paid on arms length terms. A director of the Company, Mr R Holliday-Smith has an interest in and is a director of Aegis Partners 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. Servcorp Annual Report 2010 ▪ Financial Report 95 Notes to consolidated financial report for the financial year ended 30 June 2010 26. Related party disclosures (continued) Other transactions with the Company and its controlled entities (continued) The value of the transactions during the year with directors and their director-related entities were as follows: Director Director-related Transaction entity A G Moufarrige Tekfon Pty Ltd Premises rental A G Moufarrige Enideb Pty Ltd Franchisee A G Moufarrige Rumble Australia Pty Consulting Limited A G Moufarrige, Sovori Pty Ltd Reimbursements T Moufarrige A G Moufarrige MRC Biotech Reimbursements R Holliday-Smith Aegis Partners Pty Ltd Consulting Pty Ltd Consolidated 2010 $’000 68 677 21 76 202 - 2009 $’000 66 966 15 24 370 33 Amounts receivable from and payable to directors and their director-related entities at balance sheet date arising from these transactions were as follows: Current receivable Enideb Pty Ltd Current payable Enideb Pty Ltd Tekfon Pty Ltd 66 11 6 83 - - 96 Servcorp Annual Report 2010 ▪ Financial Report 27. Parent entity disclosures Financial Position Assets Current assets Non-current assets Liabilities Current liabilities Equity Issued capital Retained earnings Reserves Equity settled employee benefits Financial performance Profit for the year Total comprehensive income As at 30 June 2010: The Company 2010 $’000 165,321 19,817 185,138 13,898 13,898 154,147 16,947 146 171,240 13,980 13,980 2009 $’000 80,712 29,590 110,302 18,347 18,347 76,118 15,739 98 91,955 21,747 21,747 i. Servcorp Limited guaranteed Company Headquarters Limited (a subsidiary) as part of a New Zealand lease negotiated in 2002. ii. On 4 February 2010 Servcorp Limited renewed a Corporate Guarantee and Indemnity with the Australian and New Zealand Banking Group Limited, pursuant to which the bank agreed to make available to the Australian and New Zealand companies a $16,406,000 interchangable facility for general corporate purposes. The liability under the deed by and between the Australian and New Zealand companies is limited to $30,000,000. As at 30 June 2010 the fair value of the these committments was Nil (2009:Nil). There were no contigent liabilities of the parent entity. There were no commitments for the acquisition of property, plant and equipment by the parent entity. iii. iv. Servcorp Annual Report 2010 ▪ Financial Report 97 Notes to consolidated financial report for the financial year ended 30 June 2010 28. Subsequent events Other than the matters noted below, there has not arisen in the interval between reporting date and the date of this Financial Report, any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of the Company, to affect significantly the operations of the Consolidated Entity, the results of those operations, or the state of affairs of the Consolidated Entity in future financial years. Office Squared contract termination On 17 August 2010 a company in the Office Squared group issued a contract termination notice as a result of a fundamental breach. As at the date of signing this report, negotiations are under way to settle approximately $1 million due to Office Squared. Management are confident that this amount will be recovered. Dividend On 26 August 2010 the directors declared a fully franked final dividend of 5.00 cents per share, payable on 6 October 2010. The financial effect of the above transactions have not been brought to account in the financial statements for the year ended 30 June 2010. 98 Servcorp Annual Report 2010 ▪ Financial Report Directors’ declaration The directors declare that: a. in the directors’ opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; b. the attached financial statements are in compliance with International Financial Reporting Standards, as stated in note 1 to the financial statements; c. in the directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the consolidated entity; and d. 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 CEO Dated at Sydney this 26th day of August 2010. Servcorp Annual Report 2010 ▪ Financial Report 99 Auditor’s report 100 Servcorp Annual Report 2010 Servcorp Annual Report 2010 101 Shareholder information As at 7 September 2010 The shareholder information set out below is provided in Options accordance with the Listing Rules and was applicable as at There were 4 holders of options over 140,000 unissued ordinary 7 September 2010. shares granted to employees under the Executive Share Class of shares and voting rights Ordinary shares Option Scheme. There are no voting rights attached to the options. Voting rights will be attached to the unissued ordinary shares when the options There were 2,657 holders of the ordinary shares of the Company. have been exercised. The options are unquoted. At a general meeting: On-market buy-back ▪ ▪ On a show of hands, every member present has one vote; There is no current on-market buy-back. On a poll, every member present has one vote for each fully paid share held. Distribution of shareholders and optionholders Size of holding 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Totals Ordinary shares Options Number of Number of % of Number of Number of % of holders shares shares holders options options 704 417,340 1,348 3,539,264 328 246 2,435,195 6,068,772 0.42% 3.60% 2.47% 6.17% 31 85,980,236 87.34% 2,657 98,440,807 100% - - - 4 - 4 - - - - - - 140,000 100% - - 140,000 100% There were 84 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 Perpetual Limited Acorn Capital Limited Orbis Investment Management (Australia) Pty Ltd Number of % of voting shares power advised 49,812,927 51.19% 12,632,961 12.83% 6,906,378 5,108,203 7.02% 5.19% 102 Servcorp Annual Report 2010 ▪ Shareholder Information Shareholder information Twenty largest shareholders Name AMP Life Limited ANZ Nominees Limited (Cash Income Account) Brazil Farming Pty Ltd Citicorp Nominees Pty Limited Citicorp Nominees Pty Limited (Commonwealth Bank Off Super Account) Cogent Nominees Pty Limited (SMP Accounts) Cogent Nominees Pty Limited Elmslie K Eniat Pty Ltd HSBC Custody Nominees (Australia) Limited Number of Percentage of ordinary shares capital held held 1,695,921 325,157 273,575 2,226,498 626,170 909,150 779,438 417,500 1,800,000 2,593,971 1.72% 0.33% 0.28% 2.26% 0.64% 0.92% 0.79% 0.42% 1.83% 2.64% JP Morgan Nominees Australia Limited 10,071,854 10.23% MFLE Pty Ltd Moufarrige A G National Nominees Limited Queensland Investment Corporation RBC Dexia Investor Services Australia Nominees Pty Limited (Pipooled Account) RBC Dexia Investor Services Australia Nominees Pty Limited (Piselect Account) Sovori Pty Limited UBS Wealth Management Australia Nominees Pty Limited Uvira Superannuation Pty Limited (Uvira Holdings Employees Super Fund Account) Totals for Top 20 Options Category Options expiring 22 February 2013 (SRVAI) 1,800,000 540,890 1.83% 0.55% 9,842,933 10.00% 304,609 3,296,987 297,346 0.31% 3.35% 0.30% 45,563,859 46.29% 1,035,531 413,474 1.05% 0.42% 84,814,863 86.16% Number on Number of issue 140,000 holders 4 Servcorp Annual Report 2010 ▪ Shareholder Information 103 Corporate information Directors Bruce Corlett Alf Moufarrige Share registry Chairman & non-executive director Registries Limited CEO & Managing director Level 7 Rick Holliday-Smith Non-executive director Julia King Non-executive director Taine Moufarrige Executive director Company secretary Greg Pearce Registered office and principal office Level 12, MLC Centre 19 Martin Place Sydney NSW 2000 Telephone: Facsimile: + 61 (2) 9231 7500 + 61 (2) 9231 7665 Auditors Deloitte Touche Tohmatsu Grosvenor Place 225 George Street Sydney NSW 2000 207 Kent Street Sydney NSW 2000 GPO Box 3993 Sydney NSW 2001 Telephone: + 61 (2) 9290 9600 1300 737 760 Facsimile: + 61 (2) 9279 0664 1300 653 459 Email: registries@registries.com.au Stock exchange Servcorp Limited shares are quoted on the Australian Securities Exchange under the code SRV. The Home Exchange is Sydney. Annual general meeting The annual general meeting of Servcorp Limited will be held at The Grace Hotel, 77 York Street, Sydney at 5pm on Wednesday 17 November 2010. 104 Servcorp Annual Report 2010 ▪ Corporate Information Cert no. SGS-COC-006189 105
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