n a g i T a c i l e g n A S I R A P n a d i r e h S a k n e v e N E N R U O B L E M 2011 Annual Report P R O C V R E S M O R F S T O H S P A N S o t E i m e d i H O Y K O T 6 0 5 2 2 2 9 8 0 7 9 N B A d e t i m i L p r o c v r e S Highlights 2011 in review Servcorp locations Global expansion Chairman’s message CEO statement New locations 2012 The environment Community service Servcorp services ITS The Servcorp team Corporate governance Directors’ report Financial report Auditor’s report Shareholder information Corporate information 1 2 4 7 8 9 10 11 12 14 15 16 18 28 47 102 104 106 About Servcorp Most of the pictures you see in this Annual Report were taken by Servcorp Team members from around the globe. Servcorp travels its young Teams as part of its commitment to being a pioneer in building a global brand. Sidney, the world’s wisest wombat 2011... highlights Servcorp’s biggest expansion year in its history... 40 floors opened in 29 cities across 12 countries New regions... Turkey, Lebanon, Philippines 1 E G A P o r a e f a C a d n a m A Y E N D Y S At Servcorp we are committed to being the world’s best Serviced Office and Virtual Office provider. Our business was founded on one principle – to help our clients’ businesses succeed. By reducing your costs and sharing your overheads, you can focus on growing your business while we give you the support you need to achieve your goals. Servcorp not only gives you the ability to run your business from the best locations in the best cities around the world, but we also give you the best facilities, the best technology and the best people crucial to making your business successful. Our team is proactive, efficient and on hand to support you. We believe in taking a genuine interest in the growth and success of your business. We are proud to be an innovator of the Serviced and Virtual Office industry in our development of technology driven solutions which benefit your business. 2011... our journey Net profit before tax ($ millions) Revenue ($ millions) Actual Forecast 34.1 47.3 44.6 Immature floors Mature floors Forecast $228.6 $219.1 $190.1 $185.8 $167.5 $160.8 $198.0 $182.1 $169.4 $168.8 $159.6 17.0 07 08 09 12 months to June 2011 $3.0 million 2.9 10 3.0 $6.7 $4.3 $9.5 $9.2 $12.7 11 12 07 08 09 10 11 12 12 months to June 2011 $182.1 million 2 E G A P 12 months ended 30 June 2007 $’000 2008 $’000 2009 $’000 2010 $’000 2011 $’000 Revenue & other income 167,518 190,142 228,646 168,837 182,056 Net profit before tax Net profit after tax Net operating cash flows Cash & cash equivalents 34,124 44,578 47,275 2,875 3,036 26,332 33,834 34,097 2,006 2,493 39,984 51,192 43,024 8,798 18,788 55,401 73,716 83,958 131,948 99,993 Interest earning financial assets 9,266 - - - - Net assets Earnings per share Dividends per share 111,152 127,651 145,291 212,610 192,612 $0.327 $0.420 $0.427 $0.022 $0.025 $0.230 $0.200 $0.250 $0.100 $0.100 Servcorp floors and locations (at 30 June) 128 116 113 103 77 82 73 68 60 59 66 51 07 08 09 10 11 12 Locations Floors Forecast locations Forecast floors Servcorp geographic spread (floors at 30 June 2011) United States of America (21) Turkey (3) Lebanon (1) Kuwait (1) Saudi Arabia (3) Qatar (2) Bahrain (2) United Arab Emirates (4) United Kingdom (2) Belgium (3) France (4) Japan (22) 3 E G A P (22) Australia (3) New Zealand (5) Singapore (6) China (3) Hong Kong (2) Malaysia (3) Thailand (1) Philippines (3) India Servcorp destinations Locations opened in the: 2011 financial year 2012 financial year 4 E G A P Australia Sydney Level 29, Chifley Tower 2 Chifley Square y e l l a m S d i v a D A N I H C Levels 56 & 57, MLC Centre 19-29 Martin Place Level 26, 44 Market Street Level 32, 101 Miller Street North Sydney Suite 2201, Level 22 Tower Two Westfield 101 Grafton Street Bondi Junction Suite F, Level 1 Octagon 110 George Street Parramatta Level 9, Avaya House 123 Epping Road North Ryde Melbourne Level 27, 101 Collins Street Level 40, 140 William Street Level 2, 710 Collins Street Docklands Level 2, Riverside Quay 1 Southbank Boulevard Southbank Brisbane Level 36, Riparian Plaza 71 Eagle Street Level 19, AMP Place 10 Eagle Street Perth Level 28, AMP Tower 140 St Georges Terrace Level 18, Central Park 152-158 St Georges Terrace Adelaide Levels 24 & 30, Westpac House 91 King William Street Canberra Level 11, St George Centre 60 Marcus Clarke Street Level 1, The Realm 18 National Circuit Barton New Zealand Auckland Level 27, PWC Tower 188 Quay Street Level 31, Vero Centre 48 Shortland Street Wellington Level 16, Vodafone on the Quay 157 Lambton Quay o r a e f a C a d n a m A Y E N D Y S Level 5, Nexus Norwest 4 Columbia Court Baulkham Hills Hobart Level 6, Reserve Bank Building THE SERVCORP NETWORK 111 Macquarie Street Your business network of locations, people and communications technology SERVCORP SAN FRANCISCO LOS ANGELES IRVINE CHICAGO TYSONS CORNER DALLAS HOUSTON MIAMI BOSTON NEW YORK CITY PHILADELPHIA WASHINGTON D.C. ATLANTA LONDON BRUSSELS PARIS ISTANBUL BEIRUT KUWAIT CITY MANAMA CHENGDU AL KHOBAR-DAMMAM RIYADH JEDDAH DOHA DUBAI ABU DHABI BEIJING NAGOYA FUKUOKA TOKYO YOKOHAMA OSAKA SHANGHAI HANGZHOU KOWLOON HONG KONG MUMBAI HYDERABAD BANGKOK MANILA KUALA LUMPUR SINGAPORE PERTH BRISBANE ADELAIDE MELBOURNE SYDNEY CANBERRA HOBART AUCKLAND WELLINGTON AUSTRALIA | NEW ZEALAND | INDIA | SOUTH EAST ASIA | CHINA | JAPAN | EUROPE | MIDDLE EAST | USA | UK United States of America New York City 1330 Avenue of the Americas Suite 23 Atlanta Terminus 200 3333 Piedmont Road Suite 2050 12th & Midtown 1075 Peachtree Street NE Suite 3650 Boston One International Place 100 Oliver Street Suite 1400 Chicago 155 North Wacker Drive Suite 4250 300 North LaSalle Street Suite 4925 Dallas JP Morgan International Plaza III 14241 Dallas Parkway Suite 650 Rosewood Court 2101 Cedar Springs Road Suite 1050 5500 Preston Road Suite 390 Houston Bank of America Center 700 Louisiana Street Suite 3950 Williams Tower 2800 Post Oak Boulevard Suite 4100 Irvine Irvine Towers 18100 Von Karman Avenue Suite 850 Los Angeles Figueroa at Wilshire 601 South Figueroa Street Suite 4050 Miami Southeast Financial Center 200 South Biscayne Boulevard Suite 2790 The Seagram Building 375 Park Avenue Suite 2607 Philadelphia BNY Mellon Center Suite 3750 1735 Market Street San Francisco 101 California Street Suite 2710 555 California Street Suite 4925 Virginia Corporate Office Center Tysons II Suite 1580 1650 Tysons Boulevard Tysons Corner Washington D.C. 1717 Pennsylvania Avenue NW Suite 1025 1155 F Street NW Suite 1050 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 45, Sunshine 60 3-1-1 Higashi-Ikebukuro, Toshima-ku Level 27, Otemachi 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, Cartier Building Shinsaibashi Plaza 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 South East Asia Singapore Penthouse Level & Level 42 Suntec Tower Three 8 Temasek Boulevard 5 E G A P Level 7, Wakamatsu Building 3-3-6 Nihonbashi-Honcho, Chuo-ku Levels 30 and 31 Six Battery Road Level 8, Nittochi Nishi-Shinjuku Building 6-10-1 Nishi-Shinjuku, Shinjuku-ku Level 9, Ariake Frontier Building Tower B 3-7-26 Ariake, Koto-ku 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 & 27, Shiroyama Trust Tower 4-3-1 Toranomon, Minato-ku Level 39, Marina Bay Financial Centre Tower 2 10 Marina Boulevard Malaysia Level 36, Menara Citibank 165 Jalan Ampang Kuala Lumpur Level 20, Menara Standard Chartered 30 Jalan Sultan Ismail Kuala Lumpur Thailand Levels 8 & 9, 1 Silom Road, Silom, Bangrak, Bangkok Level 29, The Offices at Centralworld 999/9 Rama I Road Khwaeng Pathumwan, Khet Pathumwan Bangkok Guangzhou Level 54, Guangzhou IFC West Tower 5 Zhujiang Road West Tianhe District 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 Kowloon Unit 1202 Level 12 1 Peking Road Tsimshatsui Kuwait Kuwait City Level 18 Sahab Tower Salhia Lebanon Beirut Suite 2029 Level 2 Beirut Souks Louis Vuitton Building Allenby Street Downtown Beirut France Paris Level 5, Louis Vuitton Building 101 Avenue des Champs Elysées Philippines Suite 22C, Level 22, Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City Manila India Levels 7 & 8, Vibgyor Towers G Block , C62 Bandra Kurla Complex Mumbai Level 7, Maximus Towers Building 2A, Mindspace Hyderabad China and Hong Kong Shanghai Level 23, Citigroup Tower 33 Huayuanshiqiao Road Pudong Level 29, Shanghai Kerry Centre Jin An District Shanghai 200040 No. 1515 Nanjing West Road 5/F Somekh Building Huangpu District Shanghai 200002 Rockbund, No. 149 Yuanmingyuan Road Chengdu Level 18, Shangri-La Office Tower No. 9 Binjiang East Road Jin Jiang District Beijing Level 24 Tower 3 China Central Place 77 Jianguo Road Chaoyang District Level 19, Tower E2 Oriental Plaza 1 East Chang An Avenue Dong Cheng District Hangzhou Level 1, Lyra No. 2 Science and Technology Park Road, Singapore-Hangzhou Science & Technology Park No. 6 Street HEDA United Arab Emirates Levels 2 & 3 17 Square Edouard VII Actualis, Level 2 21 & 23 Boulevard Haussmann United Kingdom London Level 17, Dashwood House 69 Old Broad Street 40 Bank Street Canary Wharf Level 18, 40 Bank Street (HQ3) Belgium Brussels Levels 20 & 21 Bastion Tower 5 Place du Champ de Mars Level 4 European Quarter - Schuman Rue de la Loi 227 Turkey Istanbul Levels 5 and 6 Louis Vuitton Orjin Building 15 Bostan Sokagi Tesvikiye (Corner Abdi Ipekci Cadessi) Nisantasi Level 8 Tekfen Tower 4. Levent Sisli Buyukdere St. No. 209 SAUDI ARABIA Wyndonelly David Abu Dhabi Level 4 Building B Al Mamoura Mohammed Bin Khalifa Street (15th St) Muroor District Dubai Levels 41 & 42, Emirates Towers Sheikh Zayed Road Level 28 Al Habtoor Business Tower Dubai Marina Kingdom of Bahrain Manama Levels 22 & 41, West Tower Bahrain Financial Harbour King Faisal Highway Qatar Doha Levels 14 & 15, Commercialbank Plaza West Bay Kingdom of Saudi Arabia Jeddah Level 9, Jameel Square Cnr of Tahlia & Al Andalus Street Riyadh Level 18 Al Faisaliah Office Tower King Fahad Highway Olaya District Al Khobar-Dammam Level 22 Al Hugayet Tower King Abdul Aziz Street e c r a e P g e r G I B A H D U B A n a g i T a c i l e g n A S I R A P n a d i r e h S a k n e v e N E N R U O B L E M i k a w I o k o r i H N A P A J 6 E G A P e c r a e P e a G L U B N A T S I 7 E G A P Servcorp... around the globe In 2009 the global market conditions created an opportunity to secure leases on what was expected to be very favourable terms. This represented an attractive opportunity for aggressive expansion. During October and November 2009 Servcorp challenge. During 2011, floors were opened in Atlanta, successfully undertook an equity capital raising of $80 million to fund a global expansion program. Servcorp has a strong track record of global organic growth since its IPO in 1999. At Washington, New York, Boston, Houston, Dallas, Philadelphia, Miami, Los Angeles, San Francisco, Irvine and Virginia. There are now 21 floors open in 13 cities giving Servcorp the required presence and scale. the time of the IPO, Servcorp operated in 8 Management continues to have confidence in the countries with 35 floors. In October 2009 it Servcorp business model and we are satisfied operated in 14 countries, with 74 floors. with the overall progress of new floor rollouts. In the 2010 financial year 13 new floors were opened in 8 countries. The 2011 financial year has been Servcorp’s biggest expansion year in its history, with 40 floors opening in 29 cities across 12 countries. The major expansion across multiple regions has been challenging. This year we have opened floors in Beirut, Istanbul, Riyadh, Al Khobar-Dammam, Dubai, London, Brussels, Yokohama, Osaka, Fukuoka, Manila, Singapore, Auckland, Sydney, Melbourne, Hobart and Brisbane. The greatest opportunity and difficulties have been experienced in the USA, our most significant new geographic market in this expansionary phase. Floor openings have taken longer than expected and acquiring and training new teams has been a n o s i r r a H n o m i S S I R A P Floor construction costs and monthly operating running costs for new floors are in line with budget expectations. We estimate we have executed the majority of leases at or near the bottom of the market which should ensure that Servcorp will be competitive if global business confidence recovers. Current strategy is to slow the pace of expansion in the 2012 financial year and consolidate operations in new and existing markets. New openings, beyond those already committed, will be limited to floors in established locations where expansion is expected to be expeditiously profitable. Management expects no more than 15 floors to open in the 2012 financial year. This will bring the total floor openings to 68 during this expansion phase. At 30 June 2011 Servcorp operated 116 floors in 51 cities across 21 countries. e c r a e P e a G L U B N A T S I Chairman’s message 2011 was Servcorp’s biggest expansion year in its history. Given the challenging trading conditions in world markets and the hurdles faced as a result of natural disasters in both Japan and Australia, we are satisfied with the overall result. We are cautiously optimistic about the outlook for Servcorp and have confidence in our business model. Global financial markets continue to be highly volatile and we will slow our new floor expansion in 2012 and focus on growing revenue. I 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. Servcorp’s record expansion over the past couple of years put great demands on their time and energy. Due to their efforts we continue to maintain our position as the world’s leading provider of serviced and virtual office solutions. Bruce Corlett Revenue for the year was $182.06 million, an increase of 8% on 2010, despite the strong Australian dollar. Our mature floors contributed $31.19 million profit before tax, an increase of 24%, and ahead of guidance. Due to our rapid expansion initiatives, immature floor losses were $27.98 million, better than our February 2011 guidance. As a result, net profit after tax increased marginally on 2010, to $2.49 million with a commensurate increase in earnings 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. Notwithstanding the current global trading conditions, when we released our 2011 results we forecast that mature floor net profit before tax for the 2012 financial year would increase by almost 19 per cent on 2011 to approximately $37 million. Encouragingly, monthly operating running costs for new floors are in line with budget expectations and forecast immature floor losses will be approximately $20 million for the 2012 financial year – an improvement of some $8 million on 2011. These forecasts assume constant currencies, stable global financial markets and no unforeseen circumstances. Directors anticipate the level of dividends for the 2012 financial year will be 15.00 cents per share, partially franked. Servcorp continues to enjoy financial strength. During the 2011 financial year the business generated strong net operating cash flows of $18.79 million, up 114% on 2010. Cash balances at 30 June 2011 were $99.99 million, materially above internal forecasts. $91.27 million of the cash balance was unencumbered and the Company has negligible debt. 8 E G A P CEO journal entry It could have been just a travelogue rather than a success story! We at Servcorp could have made many excuses had we failed to achieve our targets, retained our cash position or indeed had failed dismally in our expansion campaign. Tsunami, floods and earthquakes worldwide, recession and the strength of the Aussie dollar, all tested our management. Teams and those under pressure performed admirably. 9 E G A P We lost a lot more than anticipated on the immature floor line (which impacted our net profit before tax) but that has been addressed and immature floor losses continue to reduce. In my opinion, the model works. The cash position is above the level anticipated and as at this date we are cash positive each and every month. We hold over $100 million in cash of which less than $10 million is encumbered. Mature floors beat guidance and the profit projection for the 2012 financial year on these floors, even allowing for current market volatility, forecast a 19% increase from $31 million to $37 million. Market conditions are uncertain, therefore we have slowed our speed of expansion. Forward visibility is impaired by the volatility in all markets. The competition remains aggressive but Servcorp’s product offering continues to lead the world and client recognition for Servcorp’s superior product offering seems to be gaining traction. The experienced management team and I have full confidence that this year will be another positive year for Servcorp. Welcome The Hon. Mark Vaile – appointed non-executive director on 27 June 2011. Mark should add strength and depth of experience, internationally and within the Real Estate environment. I might say we are focused on driving our core business and looking to improve our sustainability for Servcorp into the future through further improvements of our business model. Alf Moufarrige 0 1 E G A P 2011-2012... new destinations Australia Brisbane – November 2011 Perth – February 2012 China Shanghai – August 2011 Guangzhou – September 2011 Chengdu – March 2012 Middle East Doha – November 2011 South East Asia Bangkok – February 2012 Kuala Lumpur – June 2012 Kuala Lumpur – June 2012 i k a w I o k o r i H N A P A J o t o m a w I i k u Y N A P A J Fresh air... n a g i T a c i l e g n A S I R A P In the International Year of Forests, Servcorp continues to acknowledge the seriousness of climate change and proactive efforts to reduce our impact on the environment. ▪ We continue to convert paper-based manuals and corporate materials into online-only resources and actively monitor the reduction of internal printing. ▪ We continue to be an international supporter of the annual Earth Hour initiative to turn off the lights across our global network. 1 1 E G A P ▪ Via our partnership with tree-planting organization Greenfleet, we continued our commitment to the Servcorp Forest by planting a tree for every online Servcorp Virtual Office sale. ▪ The Servcorp Forest now boasts 20,029 trees which will offset a staggering 5,368 tonnes of carbon dioxide over its lifetime. This is equivalent to removing 1,248 cars from our roads for a whole year! ▪ We are still the only Virtual Office provider in the world that offers full online provisioning thereby eliminating more than 100 sheets of paper per client. m o z o D n a z a R E A U 2 1 E G A P Our community efforts Global disasters called for a global response... This year the natural disasters in Australia, New Zealand and Japan were the main focus of Servcorp’s fundraising. For the Queensland floods not only did Servcorp match dollar for dollar what was raised by our teams, but our CEO Alf Moufarrige matched this number as well. Over USD150,000 was raised for this cause. A majority of the money raised was used to purchase a new School bus for Milpera State High School in Queensland at a total cost of USD110,000. Milpera’s two buses were damaged beyond repair by the floods. The amount required to replace these buses was totally unattainable for Milpera. d o o l f d n a l s n e e u Q Milpera is a settlement school for new arrivals and refugees. The School’s success rates at increasing school completion for migrant and refugee students is second to none – many of their graduates have gone on to university and senior levels across a variety of professions. The buses function as mobile classrooms and are used daily to widen the student’s limited range of experiences, transporting students to various locations for curriculum and English-language learning as well as cultural and social immersion. The throughput of students at Milpera is over 300 in any given year. The students travel from over 60 suburbs in Brisbane and there is no local community to assist with travel. The buses play an important role in the settlement and the education of a most vulnerable group of new arrivals. The bus was presented to the School by Servcorp in September 2011. As you can see, the side of the bus acknowledges the funding by Servcorp, our clients and team members. Those generous clients who donated more than USD1,000 will have a plaque with their name on the back of a bus seat. Shortly after the floods in Queensland, CEO Alf Moufarrige received a phone call – with fear in her voice, Kureha one of our senior managers in Japan, called to ask permission to evacuate the premises because an earthquake had hit Japan – this was before any news appeared on CNN, where later we watched in horror as events unfolded. Servcorp’s telephone system stayed alive, so we were in constant communication during the evacuation – we had to admire the IT team who had to run down 56 floors (all elevators were stopped) and then back up 56 floors to kick start the system. Within days, the Servcorp team and clients had donated Yen 6.5 million (USD80,000) to the Red Cross Tsunami appeal. e k a u q h t r a e n a p a J Milpera State High School Bus Warren Jones Servcorp continues 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 our locations. Every dollar that is raised by our teams on the ground is matched dollar for dollar by Servcorp. Youngcare continues to be a main focus of our fundraising as Executive Director, Taine Moufarrige continues to be heavily involved with this organisation. The other organisations we strongly supported globally this year included: ▪ The Rotary Club of Sydney ▪ The Cancer Council ▪ Dry July ▪ St Vincent Hospital – Sydney ▪ The Mater Hospital – Sydney ▪ MRC Cancer Research ▪ Breast Cancer Illumination ▪ Breast Cancer Foundation ▪ Childhood Cancer ▪ Eden Monaro Cancer Support Group ▪ Home in Queanbeyan Christchurch earthquake Jacqueline Worthington Servcorp also contributed to many other local charitable organisations around the world. In 2010/2011 Servcorp raised and donated in excess of USD500,000 to help the above organisations. Servcorp also sponsors and supports the Australian Chamber Orchestra and The Art Gallery of NSW. 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. 3 1 E G A P ▪ Juvenile Diabetes Research Foundation We will keep you updated. ▪ Lord Mayors Community Trust & Guide Dogs Australia ▪ Mental Health Research Institute ▪ Open Family ▪ RSPCA ▪ Salvation Army ▪ Smith Family ▪ Starlight Foundation ▪ Red Cross Christchurch New Zealand Earthquake Appeal ▪ Cure Kids NZ ▪ Kuala Lumpur Orphanage Home “Rumah Kanak Kanak Ageles” ▪ Assisi Hospice - Singapore ▪ Tyler Foundation – Japan ▪ Japanese Red Cross ▪ World Cancer Research Fund - HK ▪ Seeing is Believing - HK NBCF Logo CMYK positive 4 1 E G A P Servcorp... focus on service Servcorp Serviced Offices Servcorp Serviced Offices provide businesses with a low-risk, premier office environment with the fully managed infrastructure, services and support on hand to make their business a success. As our global expansion has continued in the past financial year, our commitment to the highest standards of service, fit out and location choice have not wavered. We strive to provide the highest quality office fit outs including solid granite boardroom tables, sound proofing of office walls and leather chesterfields in the guest waiting area. Moving into new and different markets, we have also maintained our commitment to choosing only A-grade buildings thereby offering clients access to the best corporate addresses in the world at flexible and cost-effective rates. We also continue our dedication to selecting and training talented local office personnel to be tasked with client work. We insist on the highest levels of attention-to-detail, communication, discretion, punctuality, and enthusiasm from our teams. “Seamless access to their communications, services and business tools is the way of the future which entrepreneurs and small business are tapping into.” y e l l a m S d i v a D A N I H C Servcorp Virtual Office® Servcorp Virtual Office® offers clients the professional image, services and support of a serviced office without the overheads of a dedicated physical office. As our global expansion continues and our marketing and PR efforts take hold, we are seeing growing worldwide acceptance of the Servcorp Virtual Office® concept. Furthermore, as business people demand a better work/ life balance, less commuting and more cost effective services, businesses are looking for more flexible workspace solutions. Especially within the Small-to-Medium-Enterprise community, the Servcorp Virtual Office® message is becoming established as we notice particular interest from professional services, lawyers, accountants and consultants. Our IT investment enabling us to offer business services in the cloud is of particular interest to our Virtual Office clients. Seamless access to their communications, services and business tools is the way of the future which entrepreneurs and small business are tapping into. ITS... global travellers we are e g i r r a f u o M f l A N O D N O L After a substantial investment, we commend our IT department for its network development, scalability and worldwide roll-out. Now that we have a robust, cloud based system our job will be to ensure that we get a return on the capital invested to date. 5 1 E G A P m o z o D n a z a R E A U The simplicity of the system and the power that it brings to many small businesses will ensure our clients have a distinct commercial edge, and once they understand the value, we believe that increased incomes will flow Servcorp’s way. It is hard to imagine that a businessman can have a telephone number in Paris being answered in Sydney, as a local call. Or when a client travels from Sydney to New York, or New York to Paris, his local city telephone number stays with him – no roaming charges. If he is called by his home city, the call cost, no matter what country it is answered in, is just the cost of a local call. Clients now have video-telephones, giving them perfect reception, Servcorp to Servcorp location across the globe, together with lightning speed internet, giving them the power to double, treble, or quadruple their geographic spread at little cost, greatly benefiting the client and creating an income for Servcorp. In addition Servcorp has just started utilizing its ability to move voice and data across the globe exiting into the public network at the most cost effective tier one locations. The IT department is already a substantial profit contributor, and I believe the win/win Servcorp has created will, during the second half of the 2012 financial year, further add to Servcorp’s bottom line. Servcorp Board and Travel team g N e i b b e D E R O P A G N I S The Board and Executive Bruce Corlett Chairman Rick Holliday-Smith Non-Executive Director Julia King Non-Executive Director Mark Vaile Non-Executive Director Alf Moufarrige Executive Director, CEO Taine Moufarrige Executive Director Marcus Moufarrige BCom CIO & Sales Director Thomas Wallace BBS, ACA Chief Financial Officer Greg Pearce CA, ACIS Company Secretary g n e h Z a l e g n A Y E N D Y S 6 1 E G A P i k a w I o k o r i H N A P A J e c a l l a W s a m o h T K R O Y W E N Operational Executive Susie Martin BEc General Manager South East Asia Wilma Wu BA (Hons) General Manager Hong Kong Olga Vlietstra BA General Manager Japan Jennifer Goodwyn BA Vice President/General Manager USA Laudy Lahdo BCom General Manager Middle East Liane Gorman General Manager Australia Kureha Ogawa BA Senior Manager Japan Michaela Julian BA Senior Manager China Warren James Manager International Property Portfolio Lachlan Buchanan BCom International Property Project Manager Matthew Baumgartner BInfTech (SE), CCIE Head of Business Technology Daniel Kukucka BE, DipEngPrac Chief Technology Officer e c r a e P g e r G I B A H D U B A 7 1 E G A P 8 1 E G A P Corporate Governance The Board has responsibility for the long-term health and prosperity of Servcorp. The directors are responsible to the shareholders for the performance of the Company and the Consolidated Entity and to ensure that it is properly managed. The Board is committed to the principles underpinning the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations with 2010 Amendments (2nd edition) which became effective from 1 January 2011. The Board is continually working to improve the Company’s governance policies and practices, where such practices will bring benefits or efficiencies to the Company. Details of Servcorp’s compliance are set out below, and in the ASX principles compliance statement on pages 22 to 27 of this annual report. Role of the Board The Board has adopted a formal statement of matters reserved for the Board. The central role of the Board is to set the Company’s strategic direction and to oversee the Company’s management and business activities. Responsibility for management of the Company’s business activities is delegated to the CEO and management. Composition of the Board The size and composition of the Board is determined by the Board, subject to the limits set out in Servcorp’s Constitution which requires a minimum of three directors and a maximum of twelve directors. The Board comprises six directors (two executive and four non-executive). The non-executive directors are all independent. The only change to the Board since the last annual report was the appointment of The Hon. Mark Vaile on 27 June 2011. Mr Vaile will retire at the 2011 annual general meeting and will make himself available for election by shareholders at that meeting. The Chairman of the Board, Mr Bruce Corlett, is an independent non-executive director. The non-executive directors bring to the Board an appropriate range of skills, experience and expertise to ensure that Servcorp is run in the best interest of all stakeholders. The skills, experience and expertise of each director in office at the date of this annual report is set out on pages 28 and 29 of this annual report. The Board will continue to be made up of a majority of independent non-executive directors. The performance of non- executive directors was reviewed during the year. The Board’s primary responsibilities are: The names of the directors of the Company in office at the date of this annual report are set out in the following table. ▪ the protection and enhancement of long-term shareholder value; ▪ ensuring Servcorp has appropriate corporate governance structures in place; ▪ endorsing strategic direction; ▪ monitoring the company’s performance within that strategic direction; ▪ appointing the Chief Executive Officer and evaluating his performance and remuneration; ▪ monitoring business performance and results; ▪ identifying areas of significant risk and seeking to put in place appropriate and adequate control, monitoring and reporting mechanisms to manage those risks; ▪ establishing appropriate standards of ethical behaviour and a culture of corporate and social responsibility; approving senior executive remuneration policies; ratifying the appointment of the Chief Financial Officer and ▪ ▪ the Company Secretary; ▪ monitoring compliance with continuous disclosure policy in accordance with the Corporations Act 2001 and the Listing Rules of the Australian Securities Exchange; ▪ monitoring that the Company acts lawfully and responsibly; ▪ ▪ reporting to shareholders; addressing all matters in relation to issued securities of the Company including the declaration of dividends; ▪ ensuring the Board is, and remains, appropriately skilled to meet the changing needs of the Company. The Board Charter is available on the Company’s website; servcorp.com.au N E W Y O R K E m i l y S t e v e n s o n Names of directors in office at the date of this annual report Director First appointed Non- Independent executive Retiring at 2011 AGM Seeking re-election at 2011 AGM B Corlett 19 October 1999 R Holliday-Smith 19 October 1999 J King M Vaile 24 August 1999 27 June 2011 A G Moufarrige 24 August 1999 T Moufarrige 25 November 2004 Yes Yes Yes Yes No No Yes Yes Yes Yes No No Yes No No Yes No Yes Yes No No Yes No Yes 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 exercise of their unfettered and independent judgement and their ability to act in the best interests of Servcorp. Ethical standards None of the non-executive directors have ever been employed by Servcorp. Mrs J King is the sister of Mr A G Moufarrige, but she has no joint financial interests in Servcorp or otherwise. Mrs King is an experienced business woman who has held directorships on several other public company boards. Mrs King, and the other independent directors, believe her relationship with Mr A G Moufarrige does not impair her exercising independent judgement. All directors, managers and employees are expected to act with the utmost integrity and objectivity, striving at all times to enhance the reputation and performance of Servcorp. Codes of conduct, outlining the standards of personal and corporate behaviour to be observed, form part of Servcorp’s management and team manuals. Director and officer dealings in Company shares Election of directors Servcorp policy prohibits directors, officers and senior executives The Company’s Constitution specifies that an election of directors from dealing in Company shares or exercising options: must take place each year. One-third of the Board (excluding ▪ in the six weeks prior to the announcment to the ASX of the the Managing Director and rounded down to the nearest whole Company’s half-year and full-year results; or number), and any other director who has held office for three or ▪ whilst in possession of non-public price sensitive information. more years since they were last elected, must retire from office at each annual general meeting. The directors are eligible for Directors must discuss proposed purchases or sales of shares in re-election. Directors may be appointed by the Board during the the Company with the Chairman before proceeding. Directors year. Directors appointed by the Board must retire from office at must also notify the Company Secretary when they buy or sell the next annual general meeting. shares in the Company. This is reported to the Board. Any changes to directorships will be dealt with by the full In accordance with the provisions of the Corporations Act 2001 Board and accordingly a Nomination Committee has not and the Listing Rules of the ASX, each director has entered into been established. 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. The Company’s Securities Trading Policy is available on the Company’s website; servcorp.com.au 9 1 E G A P Servcorp Annual Report 2011 Corporate Governance 0 2 E G A P 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 ensure that all price sensitive information is disclosed to the ASX in accordance with the continuous disclosure requirements of the Corporations Act 2001 and ASX Listing Rules. The Company Secretary has been appointed as the person responsible for communications with the ASX. Auditor independence The Company’s auditors Deloitte Touche Tohmatsu (Deloitte) were appointed at the annual general meeting of the Company on 6 November 2003. The Lead Partner 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. ▪ Mr R Holliday-Smith (Chair) ▪ Mr B Corlett ▪ Mrs J King The members are all independent non-executive directors. The chairman of the Audit and Risk Committee is independent and is not the chairman of the Board. The primary function of the Audit and Risk Committee is to assist the Board to meet its oversight responsibilities in relation to: ▪ ensuring the Company adopts, maintains and applies appropriate accounting and financial reporting processes and procedures; ▪ reviewing and monitoring the integrity of the Company’s financial reports and statements; ▪ ensuring the Company maintains an effective risk management framework and internal control systems; ▪ monitoring the performance and independence of the external audit process and addressing issues arising from the audit process. It is the Committee’s responsibility to maintain free and open communication between the Committee and the external auditors and the management of Servcorp. The external auditors attend all meetings of the Committee. The Chief Executive Officer, the Chief Financial Officer and other senior management may attend committee meetings by invitation. 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. 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; ▪ reviewing the Company’s policies and procedures for compliance with Australian equivalents to International ▪ Mrs J King (Chair, Non-Executive Director) ▪ Mr B Corlett (Non-Executive Director) ▪ Mr R Holliday-Smith (Non-Executive Director) (appointed 21 Financial Reporting Standards; February 2011) ▪ monitoring the procedures in place to ensure compliance with ▪ The Hon. M Vaile (Non-Executive Director) (appointed 27 the Corporations Act 2001, ASX Listing Rules and all other June 2011) regulatory requirements; ▪ Mr T Moufarrige (Executive Director) (ceased 21 February ▪ assisting management in improving the quality of the 2011) accounting function; ▪ monitoring the internal control framework and compliance The primary function of the Remuneration Committee is to assist ▪ ▪ structures and considering enhancements; overseeing the risk management framework; the Board in adopting remuneration policy and practices that: reviewing external audit reports to ensure that where major deficiencies or breakdown in controls or procedures have been identified appropriate and prompt remedial action is ▪ ▪ ▪ supports the Board’s overall strategy and objectives; attracts and retains key employees; links total remuneration to financial performance and the taken by management; attainment of strategic objectives. ▪ reviewing reports on any major defalcations, frauds and thefts from the Company; Specifically this will include: ▪ ▪ considering the appointment and fees of the external auditor; reviewing and approving the terms of engagement and fees ▪ making recommendations to the Board on appropriate of the external auditor at the start of each audit; ▪ considering and reviewing the scope of work, reports and activities of the external auditor; remuneration, in relation to both the amount and its composition, for the Chief Executive Officer and senior executives who report to the Chief Executive Officer; ▪ establishing appropriate policies in regard to the ▪ developing and recommending to the Board short-term and independence of the external auditor and assessing that long-term incentive programs; independence; ▪ monitoring superannuation arrangements for the Company; ▪ liaising with the external auditors to ensure that the statutory ▪ reviewing recruitment, retention and termination strategies annual audit and half-yearly review are conducted in an and procedures; effective manner; ▪ addressing with management any matters outstanding with the auditors, taxation authorities, corporate regulators, ▪ ensuring the total remuneration policy and practices are designed with proper consideration of accounting, legal and regulatory requirements for both local and foreign Australian Securities Exchange and financial institutions; jurisdictions; ▪ monitoring the establishment of appropriate ethical standards. The Audit and Risk Committee Charter is available on the Company’s website; servcorp.com.au SAUDI ARABIA Wyndonelly David ▪ reviewing the Remuneration Report for the Company and ensuring that publicly disclosed information meets all legal requirements and is accurate. The Remuneration Committee shall ensure the Company is committed to the principles of accountability and transparency and to ensuring that remuneration arrangements achieve a balance between shareholder and executive rewards. 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. The Remuneration Committee Charter is available on the Company’s website; servcorp.com.au 1 2 E G A P Servcorp Annual Report 2011 Corporate Governance 2 2 E G A P 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 apply to the first financial year commencing after 1 January 2011. The Board is undertaking 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 18. The Board Charter is available on the Company’s website; servcorp.com.au 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 37 to 44 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 18 to 27 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 has endeavoured to expand this skills mix when 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. 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 charter and 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 18 to 27 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; 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 19 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. 3 2 E G A P Servcorp Annual Report 2011 Corporate Governance 4 2 E G A P 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; servcorp.com.au 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 20, and 28 to 30 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. 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. o r a e f a C a d n a m A Y E N D Y S 5 2 E G A P Servcorp Annual Report 2011 Corporate Governance 6 2 E G A P 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 regularly 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 gradually 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. 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. Recommendation 8.2 The remuneration committee should be structured so that it: ▪ ▪ ▪ consists of a majority of independent directors; is chaired by an independent chair; has at least three members. Servcorp Board Response All four members of the Remuneration Committee are independent non-executive directors. The Chair of the Committee is an independent non-executive director. Recommendation 8.3 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 37 of this annual report. Recommendation 8.4 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 21 and 30 of this annual report. Recommendation 8.4 ▪ 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. NEW YORK Emily Stevenson 7 2 E G A P Servcorp Annual Report 2011 Corporate Governance 8 2 E G A P 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 2011. 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 33 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 AM 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 Member of Remuneration 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 listed companies. He has an extensive business background involving a range of industries including banking, property and maritime. His other publicly listed directorship is Chair of The Trust Company Limited. Julia has had more than 30 years experience in strategic marketing and advertising. She was Chief Executive of the LVMH fashion group in Oceania and developed the business in this area. Prior to joining LVMH Julia was Managing Director of Lintas, a multinational advertising agency. 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. Currently Julia is consulting with companies involved in sustainable development in Asia and mentoring young managers in Asia and France. Directorships of listed entities in the last three years: ▪ ▪ 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); ▪ The Trust Company Limited since October 2000 (Chair). 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. Directorships of listed entities in the last three years: ▪ Fairfax Media Limited from July 1995 to November 2009. Directors (continued) The Hon. Mark Vaile Independent non-executive director Member of Remuneration Committee Appointed June 2011 Mark had a distinguished career as a Federal Parliamentarian from 1993 to 2008. Ministerial Portfolios held by Mark during his five terms in Federal Parliament include Minister for Transport and Regional Development, Minister for Agriculture, Fisheries and Forestry, Minister for Trade, and Minister for Transport and Regional Services. Mark also served as Deputy Prime Minister from July 2005 through to December 2007. He was also instrumental in securing or initiating a range of free trade agreements between Australia and the United States, Singapore, Thailand, China, Malaysia and the ASEAN countries. Since leaving the Federal Parliament in July 2008 Mark has embarked on a career in the private sector utilising his extensive experience across a number of portfolio areas. His current directorships include Virgin Blue Holdings Limited, StamfordLand Limited and also Chair of CBD Energy Limited, Aston Resources Limited and GEMs Education Regional Board. Mark also provides corporate advice to a number of Australian companies in the international marketplace. Directorships of listed entities in the last three years: ▪ ▪ ▪ Aston Resources Limited since September 2009 (Chair); CBD Energy Limited since August 2008 (Chair); StamfordLand Corporation Ltd (listed on SGX) since August 2009; ▪ Virgin Blue Holdings Limited since September 2008. Taine Moufarrige Executive director BA, LLB Appointed November 2004 Taine joined Servcorp in 1996 as a Trainee Manager. Taine is now responsible for operations in Australia, New Zealand, India, China and Europe 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 and throughout Australia, and in India through the Company’s franchise venture. Taine is also responsible for the philanthropic activities of Servcorp. Directorships of listed entities in the last three years: ▪ None. Company Secretary Greg Pearce B Com, CA, ACIS Appointed August 1999 Greg joined Servcorp in 1996 as Financial Controller and was appointed to his current role of Company Secretary during the Company’s IPO in 1999. Prior to joining Servcorp Greg spent ten years working in the information technology business and the 11 years prior to that working in audit and business services. Greg is a Chartered Accountant and is an Associate of Chartered Secretaries Australia. BAHRAIN Tanya Dimitrieva 9 2 E G A P Servcorp Annual Report 2011 Directors’ Report 0 3 E G A P Directors’ report (continued) Directors’ meetings held and attendances at meetings The number of directors’ meetings held (including meetings of committees of directors) and the number of meetings attended by each of the directors of the Company during the financial year is set out in the following table. Director Number of meetings held: Number of meetings attended: B Corlett R Holliday-Smith J King M Vaile A G Moufarrige T Moufarrige Board Audit & Risk Remuneration meetings committee committee 3 3 3 3 1 1 1 1 1 9 9 9 9 1 9 8 The details of the function and membership of the committees are presented in the corporate governance statement on pages 20 and 21. 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 M Vaile Direct - - - - A G Moufarrige (i) 547,436 T Moufarrige (i) 65,446 Notes: Ordinary shares in Servcorp Limited Options over ordinary shares Indirect 413,474 250,000 105,165 - 49,351,221 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. Directors’ benefits Since the end of the previous financial year, no director of the Consolidated Entity has received or become entitled to receive a benefit (other than a benefit included in the aggregate amount of emoluments received or due and receivable by directors shown in the consolidated financial report, or the fixed salary of a full-time employee of the Consolidated Entity or of a related entity) by reason of a contract made by the Consolidated Entity or a related entity with the director or with a firm of which a director is a member, or with an entity in which a director has a substantial financial interest. 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. 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. r o l y a T e s i u o L n y r a C K O K G N A B 1 3 E G A P Servcorp Annual Report 2011 Directors’ Report 2 3 E G A P Directors’ report (continued) Principal activities The principal activities of the Consolidated Entity during the course of the financial year were the provision of executive serviced and virtual offices and IT, communications and secretarial services. There were no significant changes in the nature of the activities of the Consolidated Entity during the year. Consolidated results Net profit after tax for the financial year was $2.49 million (2010: $2.01 million). Operating revenue was $182.06 million (2010: $168.84 million). Basic and diluted earnings per share was 2.5 cents (2010: 2.2 cents). Dividends Dividends totalling $9.84 million have been paid or declared by the Company in relation to the financial year ended 30 June 2011 (2010: $9.84 million). Information relating to dividends in respect of the prior and current financial year, including dividends paid or declared by the Company since the end of the previous year is set out in the following table. Dividends paid and declared Type In respect of the previous financial year: 2010 Interim Ordinary shares Final Ordinary shares In respect of the current financial year: 2011 Interim Ordinary shares Final Ordinary shares Cents per share 5.00 5.00 5.00 5.00 Total Date of payment Franked Tax rate amount $’000 % for franking credit 4,922 29 March 2010 100% 4,922 6 October 2010 100% 4,922 6 April 2011 100% 4,922 5 October 2011 100% 30% 30% 30% 30% a d a W a k i r E N A P A J Review of operations Immature Business Revenue from ordinary activities for the twelve months ended 30 June 2011 was $175.90 million, up 8% from the twelve months ended 30 June 2010. During the year the Australian dollar appreciated strongly against all major currencies. The Australian dollar increased by an average of 12% against the US dollar, 2% against the Euro and 14% against the Japanese yen. The appreciation in the Australian dollar over the year has had a negative impact on the consolidated revenues and profit for the twelve months ended 30 June 2011. When expressed in constant currency terms, revenue increased by 13% compared to the 2010 year. Net profit before tax for the twelve months to 30 June 2011 was $3.04 million, up 6% compared to the prior year. The result for the twelve months ended 30 June 2011 included realised and unrealised foreign currency losses in the amount of $0.37 million (gain for the twelve months ended 30 June 2010: $0.49 million). On a positive note the strong Australian dollar has enabled management to change Australian dollars to foreign currency at rates more favourable than budget estimates for the purpose of capital acquisitions. Immature floor losses were $27.98 million for the 2011 financial year (2010 financial year: loss of $20.10 million). These losses are better than guidance given in February 2011 of $30.00 million for the 2011 financial year. Offsetting immature floor losses in the 2011 financial year are cash incentives received from landlords totalling $5.64 million that cannot be recognised as income, but which are required under accounting standards to be spread over the life of the applicable leases. Floor construction costs and monthly operating running costs for new floors are in line with budget expectations. We estimate we have executed the majority of leases at or near the bottom of the market which should ensure that Servcorp will be competitive if global business confidence recovers. Of particular note, the economies of Europe and the USA are recovering at a slower pace than originally anticipated. Our immature floors in these regions have been adversely affected. Given the difficulties experienced, management continues to have confidence in the Servcorp business model and we are satisfied with the overall progress of new floor rollouts. Our focus continues to be on growing revenue. Cash balances were $99.99 million at 30 June 2011 (30 June 2010: $131.95 million). Of this balance, $8.72 million has been 46 floors were immature at 30 June 2011. pledged with banks as collateral for bank guarantees, leaving an unencumbered cash balance of $91.27 million in the business as Expansion at 30 June 2011 (30 June 2010: $121.03 million). Mature Business Given the challenging trading conditions in the mature business in the 2011 financial year management is satisfied with the overall result. The second half of the 2011 financial year saw an improvement in revenues and margins in several geographic regions. The hurdles faced as a result of the expansion were compounded by natural disasters in both Japan and Australia and also by the recent turmoil on global financial markets, all of which had a significant impact on business confidence and consumer demand. Notwithstanding adverse trading conditions and the strong Australian dollar headwind throughout the 2011 financial year, revenue increased by 8% compared to the 2010 financial year. During the first half of the 2011 financial year two new large floors were moved to the mature floor line (Hong Kong and Abu Dhabi). Both floors reached maturity ahead of expectations and their strong performance is encouraging. During the second half of the 2011 financial year four floors were moved to the mature floor line, including one large floor in Singapore that opened in January 2011. Australia and Southeast Asia continued to perform strongly. Average mature floor occupancy increased to 79% for the 2011 financial year (average for 2010 financial year: 76%). The 2011 financial year was Servcorp’s biggest expansion year in its history with the opening of 40 new Serviced Office floors across 29 cities in 12 countries. Available offices increased by 10% to 3,280 offices (2010 financial year: 2,974 offices). Our current strategy is to slow the pace of expansion in the 2012 financial year and consolidate operations in new and existing markets. We are limiting new openings, beyond those already committed, to new floors in established locations where expansion is expected to be expeditiously profitable. We expect to open no more than 15 floors in the 2012 financial year bringing the total expected floor openings to 68 as part of this expansion phase. As at 30 June 2011 Servcorp operated 116 floors in 51 cities across 21 countries. 3 3 E G A P Servcorp Annual Report 2011 Directors’ Report 4 3 E G A P Directors’ report (continued) Review of operations (continued) Australia & New Zealand Mature floors Australia and New Zealand continued to perform strongly throughout the 2011 financial year. Revenue and margins continued to increase in most capital cities reflecting the relatively strong state of the Australian economy. During the 2011 financial year mature floor revenue increased by 12% year on year to $51.09 million. Mature floor net profit before tax increased by 46% year on year to $15.71 million for the 2011 financial year. The cost associated with closing three floors in Australia and New Zealand had the effect of reducing the mature floor result by $0.53 million (2010 financial year: closure cost of $0.63 million). Middle East Mature floors Servcorp was largely unaffected by the recent civil unrest in the Middle Eastern region during the 2011 financial year. Business continues to improve in the new markets of Saudi Arabia and Turkey. Margins in the UAE remain strong. Our new location in Abu Dhabi became mature in the first half of the 2011 financial year and is now performing to expectations. We have seen an improvement in margins in our floors in Qatar. Mature floor revenue increased by 33% year on year to $14.65 million for the 2011 financial year, when compared to the 2010 financial year. Mature floor net profit before tax year on year increased by 29% to $4.24 million during the 2011 financial year. Immature floors Immature floors Seven new floors opened in Australia and New Zealand during the 2011 financial year, including a floor in Hobart, a new market for Servcorp. One floor in Brisbane that opened during the year became mature during the second half of the 2011 financial year. Six floors in Australia and New Zealand were immature as at 30 Seven new floors were opened during the 2011 financial year, including floors in the new markets of Beirut, Istanbul, Riyadh and Al Khobar. All these floors were immature as at 30 June 2011. Immature floor losses were $4.14 million in the 2011 financial year (2010 financial year: loss of $3.72 million). June 2011. Immature floor losses were $1.87 million for the 2011 financial year (2010 financial year: loss of $0.63 million). 2012 outlook 2012 outlook We are hopeful of holding revenue and margins in Australia and New Zealand at current levels in the 2012 financial year. Japan Mature floors The Fukushima earthquake in March 2011 and ensuing radiation issues had a major impact on business confidence in Japan, in particular on our business in Tokyo. The on-going ramifications are still being felt, and occupancy and margins continue to be depressed in this city. Occupancy and margins have improved in the southern Japanese cities of Nagoya, Osaka and Fukuoka. In light of the broader economic conditions of the Japanese market, It is anticipated that revenue and margins will continue to improve across the Middle Eastern region. Greater China Mature floors Servcorp’s business in China saw a significant turnaround in the 2011 financial year which translated directly into improved revenues and margins across the region. During the 2011 financial year, revenue increased by an impressive 42% year on year to $18.70 million. Net profit before tax was $3.25 million for the 2011 financial year (2010 financial year: a loss of $0.41 million). management is satisfied with the performance of this region. Immature floors During the 2011 financial year, revenue from mature locations decreased by 10% year on year to $49.59 million. Net profit No new floors were opened in Greater China during the 2011 financial year. Three floors were immature with losses of $0.56 million for the 2011 financial year (2010 financial year: loss of before tax increased by 3% year on year to $5.51 million for the $2.02 million). 2011 financial year. The cost associated with closing one full floor and two half floors in Japan had the effect of reducing the mature 2012 outlook floor result by $0.59 million (2010 financial year: closure costs of We anticipate revenue and margins will continue to grow in this $1.38 million). Immature floors region during the 2012 financial year. Southeast Asia Servcorp opened three new floors in Japan during the 2011 financial year, including one floor in the new market of Yokohama. Mature floors Immature floor losses were $2.08 million for the 2011 financial year (2010 financial year: loss of $2.17 million). 2012 outlook It is anticipated that trading conditions in Japan will continue to be difficult during the 2012 financial year. The Southeast Asian Serviced Office market was mixed during the 2011 financial year. Singapore saw an increase in revenue and margins and our new floor in the Marina Bay Financial Centre which opened in January 2011 was mature at 30 June 2011. The Malaysian market continues to be soft, whereas the performance of our locations in Thailand continues to be strong. Review of operations (continued) Southeast Asia (continued) Management was successful in opening 19 floors in the 2011 financial year, bringing the total number of floors to 21 across 12 cities in North America. Our expansion push in this market was helped by cash incentives received from landlords totalling $5.64 Revenue from ordinary activities increased modestly by 7% to million. $15.61 million in the 2011 financial year and net profit before tax decreased by 21% year on year to $3.38 million for the 2011 financial year (2010 financial year: $4.26 million). Immature floor losses were $11.67 million for the 2011 financial year (2010 financial year: loss of $2.05 million). Immature floor losses include the set-up of the USA head office infrastructure. Immature floors One floor was opened in the new market of Manila, The 2012 outlook Philippines during the 2011 financial year. The immature floor loss for the region was $0.39 million in the 2011 financial year (2010 We expect revenue to improve throughout the 2012 financial year and monthly losses to gradually reduce. financial year: $Nil). 2012 outlook Office Squared We anticipate a strong performance in Singapore. Operating results out of Thailand are expected to remain stable whilst Malaysia should improve modestly. The Office Squared business has been scaled back with the closure of operations in both Malaysia and China. Office Squared net loss before tax was $0.17 million for the 2011 financial year (2010 financial year: loss of $2.15 million). Europe Mature floors Events subsequent to balance date European business sentiment continues to be depressed and the Serviced Office market continues to be difficult. In Paris, Dividend aggressive competition continues to affect the Serviced Office market, however management has been able to increase revenue in this city. The commercial real estate market in Brussels has improved and we are now profitable. Mature floor revenue remained steady at $12.76 million for the 2011 financial year. The net loss before tax on mature floors was $0.33 million for the 2011 financial year (2010 financial year: a loss of $3.29 million). Immature floors Three floors in this region were immature at 30 June 2011 with a net loss before tax of $1.57 million for the 2011 financial year (2010 financial year: loss of $0.99 million). The large floor opened in London in the 2010 financial year is now at breakeven. On 24 August 2011 the directors declared a fully franked final dividend of 5.00 cents per share, payable on 5 October 2011. The financial effects of the above transactions have not been brought to account in the financial statements for the year ended 30 June 2011. The directors are not aware of any matter or circumstance, other than that referred to above or in the financial statements or notes thereto, that has arisen since the end of the year that has significantly affected, or may significantly affect, the operations of the Consolidated Entity, the results of those operations, or the state of affairs of the Consolidated Entity, in future financial years. 2012 outlook As a result of the challenging issues faced in the broader Likely developments European economy, we expect revenue to only increase modestly The Consolidated Entity will continue to pursue its policy of seeking from current levels during the 2012 financial year. to increase the profitability and market share of its major business sectors during the next financial year. USA Immature floors Further information about likely developments in the operations of the Consolidated Entity and the expected results of those The USA is a critical addition to the Servcorp global footprint operations in future financial years has not been included in this and is the most significant new geographic market in this report because disclosure of the information would be likely to expansionary phase. Construction delays in North America result in unreasonable prejudice to the Consolidated Entity. have affected floor opening times which adversely impacted our operating running costs during the 2011 financial year. Initial revenue generation is below budget expectations, however towards the end of the second half of the 2011 financial year we commenced gaining sales traction. There is risk that North America will not recover as quickly as anticipated, and that aggressive competition will impact the rate at which the business matures. 5 3 E G A P Servcorp Annual Report 2011 Directors’ Report 6 3 E G A P Directors’ report (continued) New locations City Location Offices Opened Parramatta Atlanta Level 1, Octagon Level 20, Terminus 200 Bondi Junction Level 22, Tower Two Westfield Bondi Junction Level 2, Beirut Souks Louis Vuitton Building Level 10, TOC Minato Mirai Levels 5 & 6, Orjin Building (above Louis Vuitton) 8 Beirut Yokohama Istanbul Riyadh Atlanta Washington Virginia Washington New York Osaka Manila Fukuoka Boston Hobart Houston Houston Dallas Dallas Dallas Philadelphia New York Melbourne Miami Dubai Singapore Los Angeles San Francisco San Francisco London Irvine Melbourne Brussels Brisbane Istanbul Auckland 12 9 26 8 13 18 22 16 5 16 11 11 5 16 16 12 14 20 18 1 19 12 8 16 11 10 18 13 12 11 10 14 16 Level 18, Al Faisaliah Tower Level 36, 12th and Midtown Level 10, 1155 F Street Level 15, Corporate Office Centre Tyson II Level 10, 1717 Pennsylvania Avenue Level 23, 1330 Avenue of the Americas Level 4, Shinsaibashi Plaza Building Shinkan Level 22, Tower One Ayala Triangle Level 2, NOF Hakata Ekimae Building Level 14, One International Place Level 6, Reserve Bank Building Level 39, Bank of America Center Level 41, Williams Tower Level 6, JP Morgan International Plaza III Level 3, 5500 Preston Road Level 10, Rosewood Court Level 37, BNY Mellon Center Level 26, The Seagram Building Level 2, 710 Collins Street Level 27, Southeast Financial Centre Level 28, Al Habtoor Business Tower Level 39, Marina Bay Financial Centre Tower 2 Level 40, Figueroa at Wilshire Level 27, 101 California Street Level 49, 555 California Street Level 18, 40 Bank Street, Canary Wharf Level 8, Irvine Towers Level 2, Riverside Quay, 1 Southbank Boulevard 18 Level 4, European Quarter, Schuman Level 19, AMP Place, 10 Eagle Street Level 8, Tekfen Business Complex Level 31, Vero Centre 8 12 31 25 July 2010 July 2010 July 2010 July 2010 August 2010 August 2010 August 2010 August 2010 August 2010 September 2010 September 2010 September 2010 September 2010 September 2010 September 2010 October 2010 October 2010 November 2010 November 2010 November 2010 November 2010 November 2010 December 2010 December 2010 December 2010 December 2010 December 2010 January 2011 January 2011 January 2011 February 2011 February 2011 February 2011 February 2011 February 2011 March 2011 April 2011 April 2011 June 2011 Al Khobar-Dammam Level 22, Al Hugayet Tower 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 executive reward with achievement of strategic objectives and the 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. Directors’ fees Non-executive directors’ fees are determined within an aggregate directors’ fees limit. The fees limit currently stands at $350,000 inclusive of payments for superannuation. This limit was approved at the time of Servcorp’s IPO in December 1999. The directors have resolved to propose that shareholders approve increasing the aggregate directors’ fees limit to $500,000 per annum inclusive of payments for superannuation. The most recent review of directors’ fees was effective 1 January 2010 when non-executive directors’ fees were 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 including superannuation. Servcorp’s executive remuneration policy and principles are designed to ensure that the Consolidated Entity: Additional fees are not paid for membership of Board committees other than as referred to in the previous paragraph. ▪ provides competitive rewards that attract, retain and motivate the highest calibre executives; ▪ ▪ encourages a strong and long term commitment to Servcorp; builds a structure for long term growth and succession In March 2011, in addition to his director fees, Mr B Corlett received a one-off consulting fee in respect of services performed over and above his Chairman role with respect to leadership of special projects. 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. Since 2007 non-executive directors’ fees have increased by 32%. The three years 2007, 2008 and 2009 saw dividends per share increase by 138% and earnings per share by 31%. The 2010 and 2011 financial years have seen both dividends per share and earnings per share decrease due to the Company’s expansion program and the global financial crisis, as explained in the key management personnel remuneration section which follows. The framework may provide a mix of fixed and variable pay, and a blend of short and long term incentives. Retirement allowances for directors Non-executive directors are not entitled to retirement allowances. The Board’s current policy regarding remuneration for key management personnel is summarised on pages 38 to 44. Non- executive directors are remunerated on a different basis to senior Details of remuneration executives as set out below. Non-executive directors Details of the nature and amount of each element of the remuneration of each director of Servcorp Limited for the year ended 30 June 2011 is set out on page 42. 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. 7 3 E G A P Servcorp Annual Report 2011 Directors’ Report 8 3 E G A P Remuneration report (continued) Principles used to determine the nature and amount of remuneration (continued) Key management personnel (other than non-executive directors) The key management personnel remuneration and reward framework has three components: ▪ ▪ ▪ Fixed remuneration; Short term incentives; Long term incentives. The combination of these comprises the key management personnel’s total remuneration. No key management personnel are employed under a contract. In 2008 the Remuneration Committee undertook a review of the Consolidated Entity’s remuneration practices. A policy was put in place which provided key management personnel with a more structured scheme for long term and short term incentives, based on earnings, earnings growth and individual performance criteria. The criteria for each year has been detailed in the remuneration reports included in the respective years annual reports. The Remuneration Committee has continued to develop the incentive schemes to take into consideration the cyclical nature of the Consolidated Entity’s results caused by the ratio of mature to immature floors and also external economic factors. A new scheme has been developed which the Committee believes will more closely link key management personnel remuneration to Consolidated Entity’s performance and shareholder reward. Remuneration under this scheme will commence in the 2012 financial year. Further details are included at the end of the remuneration report. In October 2009 the Consolidated Entity began an aggressive expansion program to substantially expand the Servcorp footprint globally. Fifty one new floors have opened between October 2009 and June 2011 and the large number of immature floors as a consequence of the expansion program has had a material negative impact on profitability in 2010 and this year. Determination of the nature and amount of remuneration of key management personnel, and the relationship between such policy and the Consolidated Entity’s performance in this financial year and in the previous four financial years, takes into account this foreseen negative impact. The 2007, 2008 and 2009 financial years witnessed record results for Servcorp prior to the global financial crisis. The continued steady increase in the Consolidated Entity’s earnings in the 2007, 2008 and 2009 financial years resulted in reward for those key management personnel who had been essential to achieving the success. The Consolidated Entity’s results over those three financial years witnessed net profit after tax increase from $26.33 million in 2007 to $34.10 million in 2009, an increase of 29%. Net profit after tax decreased to $2.01 million in 2010 and increased marginally in 2011 to $2.49 million. This decrease was largely due to the expansion program and, as the immature floors come to maturity, it is expected that net profit after tax will steadily increase. Mature floor net profit before tax has increased from $25.13 million in 2010 to $31.19 million in 2011, an increase of 24%. Shareholder wealth had also increased over the 3 financial years to 2009. Dividends paid more than doubled to 23.0 cents per share in 2007 and increased to 25.0 cents per share in the 2009 financial year. The Consolidated Entity’s strong performance and healthy cash flow and balance sheet were reflected in its ability to pay ‘special’ dividends in the 2007, 2008 and 2009 financial years. Earnings per share increased from 32.7 cents per share in 2007 to 42.7 cents per share in 2009, an increase of 31%. Due to the decreased profits in 2010 and 2011, dividends per share also decreased, however management’s ability to closely manage cash flows and maintain a strong balance sheet in the high profit years meant that shareholders were still rewarded with dividends of 10.0 cents per share in each of the 2010 and 2011 financial years, despite earnings per share decreasing to 2.2 cents and 2.5 cents respectively. The directors expect dividends to increase in 2012 and continue to increase as higher profits return. The directors have announced that they expect to make payments of 15 cents per share to shareholders in the 2012 financial year. Over the same five year period, the average total remuneration paid to key management personnel, including executive directors, has increased by 3%. The average increased by 5% from 2007 to 2009, increased by 2% in 2010 and decreased by 4% in the 2011 financial year. In response to the expected negative impact of the expansion program on profitability, and the resultant decrease in financial rewards for shareholders, the directors and management agreed that short term and long term incentives should not be paid to key management personnel during this period, except for exceptional circumstances. Most of the Consolidated Entity’s key management personnel are long-serving employees with an average of 12 years of service (excluding the CEO). They are committed to the long term performance of the Consolidated Entity and the associated reward for its shareholders. Given the impact of the global financial crisis and the substantial expansion in the Consolidated Entity’s global footprint, the directors are satisfied with the results achieved. The Consolidated Entity exceeded its forecast net profit before tax on mature floors of $30 million, and immature floor losses were less than the February 2011 revised forecast and continue to decrease on a month to month basis. The Directors and management remain confident about the future of the business model and that shareholder wealth will increase in the future. Principles used to determine the nature and amount of remuneration (continued) Key management personnel (continued) 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 key management personnel’s remuneration is competitive with the market. Remuneration is also reviewed on promotion. There are no guaranteed fixed remuneration increases for any key management personnel. Short term incentives The short term incentive component of key management personnel remuneration may comprise an annual cash incentive which is linked to the performance of both the Consolidated Entity and the individual key management personnel. Key management personnel 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 KMP 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. As discussed above, for the financial year ended 30 June 2011, the Remuneration Committee and management agreed that short term incentives would not be paid due to the negative impact of the Company’s expansion program on profitability. Long term incentives Following recommendation by the CEO, the Board may grant options to eligible key management personnel 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; ▪ ▪ 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 will only vest (and hence be capable of being exercised) if the 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 key management personnel’s remuneration. In the current financial year, following a recommendation by the Remuneration Committee, the directors did not grant any options under the Scheme. As discussed above, the Remuneration Committee and management agreed that long term incentives would not be granted due to the negative impact of the Company’s expansion program on profitability. 9 3 E G A P Servcorp Annual Report 2011 Directors’ Report 0 4 E G A P Remuneration report (continued) Principles used to determine the nature and amount of remuneration (continued) ▪ if a general manager receives a bonus locally, this bonus will be deducted from their entitlement under this scheme such that the maximum bonus they will receive will be the amount Key management personnel (continued) under this scheme; Retirement benefits Retirement benefits for key management personnel are provided to the extent required by the law of the country in which they reside. Key management personnel 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 of the Company and the Consolidated Entity for the financial year ended 30 June 2011 is set out in the table on pages 43 and 44. Key executive bonus pool scheme For the 2012 financial year, the Remuneration Committee has developed a new key executive bonus scheme. The scheme objective is: ▪ to motivate key executives to maximise the profits of the Consolidated Entity and to enhance shareholder wealth; to retain the key executives of the Consolidated Entity; to formalise a transparent incentive structure for the key ▪ ▪ executives of the Consolidated Entity. The scheme acts as both a short term and long term incentive scheme. A bonus pool will be established that accumulates funds based on a percentage of both mature net profit before tax performance of the Consolidated Entity for each financial year and net profit before tax performance of the Consolidated Entity for each financial year. Accumulation of funds in the bonus pool started in the 2011 financial year based on the achievement of profit targets outlined in the schedule below. ▪ the discretionary bonus component of the scheme is defined as the difference between the base bonus percentage component payable to key executives and 85%; ▪ the discretionary component of the bonus scheme can only be distributed to participating key executives for each particular year; ▪ any additional bonus payable to key executives is directly linked to the key executive’s individual performance and is at the discretion of the Remuneration Committee, based on a written recommendation from the CEO; ▪ all of the discretionary bonus component must be distributed each performance year. The long term incentive scheme criteria will be: ▪ ▪ the long term incentive will be paid in cash; accumulated funds in relation to a financial year that remain in the bonus pool after the short term incentive cash distribution will be the basis of the long term incentive for participating key executives of that financial year; ▪ long term incentive funds will be ‘ring fenced’ and will vest in the qualifying key executives that participated in the bonus scheme for that year; ▪ the long term incentive cash component will be paid to qualifying key executives on the 5th anniversary of the base short term incentive payment date in relation to each financial year; ▪ on the 5th anniversary of each year, the long term incentive in relation to the financial year will be split amongst remaining (i.e. still in the employment of Servcorp) key executives that participated in the key executive bonus scheme for that particular year in direct proportion to key executives short term incentive entitlement (calculated by included base and discretionary short term incentive bonus amounts) for that financial year. The Remuneration Committee, on written recommendation from the CEO, will from time to time invite key executives to join the scheme. The maximum number of participants in any given year The short term incentive scheme criteria will be: will be 14 key executives. ▪ the first short term incentive distribution year will be based on the results for the 2012 financial year based on the metrics outlined in the schedule below; ▪ the minimum mature net profit before tax threshold before any distributions can be made from the bonus pool will be $40 million each financial year; ▪ if the minimum threshold of $40 million mature floor profit is not reached in each performance year, then accumulated bonus funds will be rolled forward to the next financial year; ▪ a minimum of 85% and a maximum of 90% of the bonus pool accumulated funds will be distributed to qualifying key executives in relation to each financial year; Scheme participants must be employed by the Consolidated Entity on the last day of the financial year to receive a short term incentive for that year. To qualify for the scheme each year, general managers will need to make a profit of greater than zero in their respective area. Scheme participants must be employed by the Consolidated Entity on the 5th anniversary of the performance year to receive a long term incentive payment / allocation for that year. The stewardship of the scheme will be the responsibility of the Remuneration Committee. Principles used to determine the nature and amount of remuneration (continued) Key management personnel (continued) Key executive bonus pool scheme (continued) Schedule 1: Initial scheme contribution metrics and percentages ▪ Funds will accumulate in the bonus pool. There is no minimum net profit before tax threshold for accumulation. ▪ For the initial 2011 and 2012 financial years, funds will accumulate in the bonus pool based on: - 2.0% of achieved mature floor net profit before tax - 3.0% of achieved net profit before tax ▪ Should mature floor net profit before tax in any given year exceed $75 million the following bonus pool accumulation percentages will apply: - 2.5% of achieved mature floor net profit before tax - 3.5% of achieved net profit before tax ▪ Should mature floor net profit before tax in any given year exceed $100 million the following bonus pool accumulation percentages will apply: - 3.0% of achieved mature floor net profit before tax - 4.0% of achieved net profit before tax. E m i l y S t e v e n s o n N E W Y O R K 1 4 E G A P Servcorp Annual Report 2011 Directors’ Report 2 4 E G A P Remuneration report (continued) Directors’ remuneration Name Short term employee benefits Post employment Bonus Non - Other Super (iv) $ monetary $ $ $ - - - - - - - - - - - - - 143,707 144,167 15,988 13,724 - - - - - - - - - - - 45,872 - - - - - - 27,000 27,000 37,156 34,328 16,513 11,638 7,431 6,866 - 4,200 102 159,695 157,891 45,872 - 88,202 84,032 Salary & fees $ 439,002 465,083 412,846 392,325 137,615 129,307 82,569 76,284 80,000 73,950 A G Moufarrige (i)(v) 2011 2010 T Moufarrige (i) 2011 2010 B Corlett (ii) (vi) 2011 2010 R Holliday-Smith (ii) 2011 2010 J King (ii) 2011 2010 M Vaile (ii) (vii) 2011 1,129 Aggregate 2011 2010 Note: 1,153,161 1,136,949 i. Executive directors. ii. Non-executive directors. Share based payments Equity options $ - - - - - - - - - - - - - Total 609,709 636,250 465,990 440,377 200,000 140,945 90,000 83,150 80,000 78,150 1,231 1,446,930 1,378,872 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. Short term bonus performance targets were not set for the current financial year. 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 2010: 0% T Moufarrige 2010: 0% v. The salary and fees of A G Moufarrige include a component paid in Yen. The decrease in the 2011 year reflects the change in foreign currency exchange rate, not a change in salary in base currency terms. vi. B Corlett received consulting fees in respect of services performed over and above his Chairman role with respect to leadership of special projects. These fees are disclosed under Other in short term employee benefits. vii. M Vaile was appointed as a non-executive director on 27 June 2011. Key management personnel remuneration Name Short term employee benefits Post employment Salary & fees $ Bonus (iv) Non - Other Super monetary $ $ $ $ Total Share based payments Equity options (vi) $ M Moufarrige CIO & Sales Director (i) 2011 2010 S Martin GM South East Asia (i) 2011 2010 O Vlietstra GM Japan (i) 2011 2010 J Goodwyn VP & GM USA (i) (v) 2011 2010 L Lahdo GM Middle East (i) (v) 2011 2010 T Wallace CFO (i) 2011 2010 412,846 394,087 - 15,000 15,988 13,724 216,618 205,667 - - 23,128 - 360,410 346,251 279,356 351,989 174,976 202,901 300,000 270,302 5,792 - - - - 65,000 43,000 - - - 37,900 52,147 - - 6,606 8,009 - - 5,293 - L Gorman GM Australia (i) (ii) 2011 165,957 B Sharp GM Virtual (i) (ii) 2011 250,000 - - - - - - - - - - - - - - 37,156 35,678 - - 465,990 458,489 19,725 18,000 - 259,471 13,487 237,154 - - - 404,102 13,487 411,885 6,942 - 29,395 26,947 - - - - 286,298 351,989 210,977 302,857 30,870 23,798 - 373,870 10,115 304,215 15,413 - 186,663 22,500 - 272,500 Servcorp Annual Report 2011 Directors’ Report 3 4 E G A P 4 4 E G A P Remuneration report (continued) Key management personnel remuneration (continued) Name Short term employee benefits Post employment Salary & fees $ Bonus (iv) Non - Other Super monetary $ $ $ $ Total Share based payments Equity options (vi) $ W Wu GM Hong Kong (iii) 2010 B Barakat GM Middle East (iii) 2010 Aggregate 2011 2010 Notes: 192,041 - 246,693 80,000 - - 2,160,163 48,792 2,209,931 160,000 88,915 73,880 - - - - - 10,115 202,156 4,128 162,001 108,551 - - 330,821 2,459,871 47,204 2,599,566 i. Key management personnel other than directors. ii. L Gorman and B Sharp were key management personnel from 1 July 2010. iii. B Barakat and W Wu were not key management personnel during the 2011 year. iv. Short term bonus performance targets were not set for the current financial year. 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 2010: 0% S Martin O Vlietstra J Goodwyn L Lahdo T Wallace L Gorman B Sharp W Wu B Barakat 2010: 0% 2010: 0% 2010: n/a 2010: 0% 2010: 0% 2010: n/a 2010: n/a 2010: 0% 2010: n/a M Moufarrige received a discretionary bonus in 2010 in recognition of his efforts during Servcorp’s equity capital raising in October 2009. T Wallace received a discretionary bonus in 2011 in recognition of his efforts on special projects during the 2011 year. O Vlietstra, L Lahdo and B Barakat received discretionary bonuses based on their performance in their region during the 2010 year. v. The salary and fees of J Goodwyn and L Lahdo are paid in USD and AED respectively. The decrease in the 2011 year reflects the change in foreign currency exchange rate, not a change in salary in base currency terms. 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. No amount has been included in the remuneration of key management personnel with respect to these options. No options were issued in the 2011 financial year. Indemnification and insurance of directors and officers Environmental management The Consolidated Entity’s operations are not subject to any The constitution of the Company provides that the Company particular and significant environmental regulations under either must indemnify, on a full indemnity basis and to the full extent Commonwealth or State legislation. permitted by law, each current and former director, alternate director or executive officer against all losses or liabilities incurred in that capacity in defending any proceedings, whether civil or criminal, in which judgement is given in their favour or in which they are acquitted or in connection with any application in relation to any such proceedings in which relief is granted under the Corporations Act 2001. The Company has agreed to indemnify the following current and former directors of the Company, Mr A G Moufarrige, Mr B Rounding off The Company is of a kind referred to in ASIC Class Order 98/0100 dated 10 July 1998 and, in accordance with that Class Order, amounts in the financial report and the directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated. Corlett, Mr R Holliday-Smith, Mrs J King, The Hon. Mark Vaile, Mr Non-audit services T Moufarrige and Mr B Pashby against any loss or liability that may arise from their position as directors of the Company and its During the year Deloitte Touche Tohmatsu, the Company’s controlled entities, except where the liability arises out of conduct auditor, has performed certain “non-audit services” in addition to involving a wilful breach of duty. The agreement stipulates that their statutory duties. the Company will meet the full amount of any such liabilities to the extent permitted by law, including reasonable costs and expenses. The Company has not, during or since the financial year, indemnified or agreed to indemnify an auditor of the Company. During the financial year the Company has paid insurance premiums in respect of directors’ and officers’ liability and legal expenses insurance contracts, for current and former directors, secretaries and officers of the Company and its controlled entities. The insurance policies prohibit disclosure of the nature of The 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 the general standard of independence for auditors, and did not compromise the auditor independence requirements of, the Corporations Act 2001 for the following reasons: ▪ Non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed the liability insured against and the amount of the premiums. by the Audit and Risk Committee; and State of affairs There were no significant changes in the state of affairs of the Consolidated Entity during the financial year. ▪ 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 work, acting in a management or decision making capacity for the Company or jointly sharing risks and rewards. Corporate governance A copy of the auditor’s independence declaration as required under Section 307C of the Corporations Act 2001 is set out on A statement of the Board’s governance practices is set out on page 46 and forms part of this report. pages 18 to 27 of this annual report. Details of the amounts paid or payable to the auditor of the Company, Deloitte Touche Tohmatsu and its related practices for audit and non-audit services provided during the year are set out in note 4 to the financial statements. 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 24th day of August 2011. 5 4 E G A P Servcorp Annual Report 2011 Directors’ Report 6 4 E G A P Auditor’s independence declaration Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 46 Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX: 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7021 www.deloitte.com.au 24 August 2011 Dear Board Members Servcorp Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Servcorp Limited. As lead audit partner for the audit of the financial statements of Servcorp Limited for the financial year ended 30 June 2011, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU S C Gustafson Partner Chartered Accountants The Board of Directors Servcorp Limited Level 12, MLC Centre 19 Martin Place Sydney, NSW 2000 2011 Financial Report Contents Statement of comprehensive income Statement of financial position Statement of changes in equity Statement of cash flows Notes to Consolidated financial report Directors’ declaration Auditor’s report 48 49 50 51 52 101 102 y e l l a m S d i v a D A N I H C n o s n e v e t S y l i m E K R O Y W E N 7 4 E G A P Servcorp Annual Report 2011 Financial Report 8 4 E G A P Statement of comprehensive income Servcorp Limited and its controlled entities for the financial year ended 30 June 2011 Revenue Other 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 (loss) / income Translation of foreign operations (net of tax) Other comprehensive (loss) / income for the period (net of tax) Total comprehensive (loss) / income for the period Earnings per share Basic earnings per share Diluted earnings per share Note 2 2 5 8 8 Consolidated 2011 $’000 175,900 6,156 182,056 (56,965) (13,729) (86,193) (22,048) (85) - 2010 $’000 162,231 6,606 168,837 (51,573) (11,454) (82,590) (19,021) (167) (1,157) (179,020) (165,962) 3,036 (543) 2,493 (12,647) (12,647) (10,154) $0.025 $0.025 2,875 (869) 2,006 3 3 2,009 $0.022 $0.022 The Statement of comprehensive income is to be read in conjunction with the notes to the Consolidated financial report. u b o n i h S o k o Y N A P A J Statement of financial position Servcorp Limited and its controlled entities as at 30 June 2011 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 2011 $’000 99,993 20,131 167 334 8,467 129,092 25,008 73,987 18,838 14,805 132,638 261,730 27,877 17,724 2,474 5,437 53,512 14,600 - 173 833 15,606 69,118 192,612 154,149 (21,064) 59,527 192,612 192,612 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 65,641 212,610 154,149 (8,417) 66,878 212,610 212,610 The Statement of financial position is to be read in conjunction with the notes to the Consolidated financial report. 9 4 E G A P Servcorp Annual Report 2011 Financial Report 0 5 E G A P Statement of changes in equity Servcorp Limited and its controlled entities for the financial year ended 30 June 2011 Consolidated Issued capital Foreign Employee Retained Total currency equity earnings Balance at 1 July 2009 Profit for the period 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 Balance at 1 July 2010 Profit for the period Translation of foreign operations (net of tax) Total comprehensive loss for the period Payment of dividends Balance at 30 June 2011 translation reserve $’000 $’000 76,118 (8,565) - - - - 79,894 (2,662) 799 - - 3 3 - - - - - 154,149 (8,562) 154,149 (8,562) - - - - (12,647) (12,647) settled benefits reserve $’000 $’000 $’000 98 - - - 47 - - - - 145 145 - - - - 77,640 2,006 - 2,006 - - - - (12,768) 66,878 66,878 2,493 - 2,493 (9,844) 59,527 145,291 2,006 3 2,009 47 79,894 (2,662) 799 (12,768) 212,610 212,610 2,493 (12,647) (10,154) (9,844) 192,612 154,149 (21,209) 145 The Statement of changes in equity is to be read in conjunction with the notes to the Consolidated financial report. S A U D I A R A B I A W y n d o n e l l y D a v i d Statement of cash flows Servcorp Limited and its controlled entities for the financial year ended 30 June 2011 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Franchise fees 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 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 issue costs Proceeds from borrowings Repayment of borrowings Dividends paid Landlord capital incentives received Net financing cash flows Note 25(b) Consolidated 2011 $’000 2010 $’000 190,161 (174,124) 616 (2,497) 4,722 (90) 18,788 (40,710) (1,468) 47 3,251 (38,880) - - 2,504 (3,437) (9,844) 5,021 (5,756) 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 Net (decrease)/ increase in cash and cash equivalents (25,848) 44,926 Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash transactions in foreign currencies Cash and cash equivalents at the end of the financial year 131,331 (5,634) 83,726 2,679 25(a) 99,849 131,331 The Statement of cash flows is to be read in conjunction with the notes to the Consolidated financial report. 1 5 E G A P Servcorp Annual Report 2011 Financial Report 2 5 E G A P Notes to consolidated financial report for the financial year ended 30 June 2011 Contents of the notes to the Consolidated financial report Note 1. Significant accounting policies Note 2. Profit from operations Note 3. Significant transactions Note 4. Remuneration of auditors Note 5. Income taxes Note 6. Segment information Note 7. Dividends Note 8. Earnings per share Note 9. Cash and cash equivalents Note 10. Trade and other receivables Note 11. Other assets Note 12. Other financial assets Note 13. Property, plant and equipment Note 14. Goodwill Note 15. Trade and other payables Note 16. Other financial liabilities Note 17. Financing arrangements Note 18. Provisions Note 19. Issued capital Note 20. Financial instruments Note 21. Employee benefits Note 22. Commitments for expenditure Note 23. Subsidiaries Note 24. Formation/deregistration of controlled entities Note 25. Notes to statement of cash flows Note 26. Related party disclosures Note 27. Parent entity disclosures Note 28. Subsequent events 53 63 64 64 65 68 69 70 70 71 72 72 73 74 75 75 76 77 78 79 85 88 90 93 95 96 99 100 s a m o T e n o m i S E N R U O B L E M 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 comprises the consolidated financial statements of Servcorp Limited and its controlled entities (‘Group’ or ‘Consolidated Entity’). 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 24 August 2011. Basis of preparation The financial report has been prepared on the basis of historical cost, except for financial instruments that are measured at their fair value as explained below. 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 in 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. ▪ AASB2010-8 ‘Amendments to Australian Accounting Standards - Deferred Tax: Recovery of underlying assets”. Effective for annual reporting periods beginning 1 January 2012. ▪ AASB124 ‘Related Party Disclosures’ (revised December 2009), AASB2009-12 ‘Amendments to Australian Accounting Standards’. ▪ AASB10 ‘Consolidated Financial Statements’. 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. 3 5 E G A P Servcorp Annual Report 2011 Financial Report 4 5 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 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). Control is achieved when the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. 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. 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. A l f M o u f a r r i g e C H I C A G O 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. 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. d. Revenue recognition Services revenue Services revenue comprises revenue earned net of the amount of goods and services tax from the provision of services to entities outside the Consolidated Entity. Rental, telephone and services revenue are typically invoiced in advance and are recognised in the period in which the services are provided. e. Other income / expense Interest income Interest income 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 are passed 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 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. 5 5 E G A P Servcorp Annual Report 2011 Financial Report 6 5 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 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. 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 profit or loss. 7 5 E G A P Servcorp Annual Report 2011 Financial Report 8 5 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 1. Significant accounting policies (continued) k. Share based payments The Board may grant options to eligible executives in accordance with the Servcorp Executive Share Option Scheme. These equity-settled-share-based payments are non-market based and have earnings per share performance hurdles for the vesting of options. 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, Servcorp Limited’s investments in subsidiaries are measured at cost. 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: 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 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. 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. CHARMINAR _Teresa Nair 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 from the time an asset is completed and 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. 9 5 E G A P Servcorp Annual Report 2011 Financial Report 0 6 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 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. BANGKOK Alf Moufarrige 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. Contributions to Australian superannuation funds The Company and other Australian controlled entities contribute to defined contribution superannuation plans. Contributions are charged to the Statement of comprehensive income as they are incurred. 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. 1 6 E G A P Servcorp Annual Report 2011 Financial Report 2 6 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 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 six 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. S Y D N E Y _ L a n a S h e l e s t 2. Profit from operations a. Revenue Revenue from continuing operations consisted of the following: Revenue from the rendering of services Franchise fees b. Other income Interest income - bank deposits Net foreign exchange (loss) / 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: Lease payments Employee benefit expense: Consolidated 2011 $’000 2010 $’000 175,284 616 175,900 5,102 (368) 1,422 6,156 85 10,722 4,561 72 434 (279) 983 161,573 658 162,231 4,502 486 1,618 6,606 167 8,329 5,044 112 874 1 658 68,677 67,865 Equity-settled share based payments - 47 3 6 E G A P Servcorp Annual Report 2011 Financial Report 4 6 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 3. Significant transactions Consolidated 2011 $’000 - 1,327 1,327 2010 $’000 1,157 1,977 3,134 Consolidated 2011 $ 2010 $ 533,935 148,154 - 682,089 558,619 208,591 54,062 821,272 451,653 163,000 56,825 671,478 536,032 93,577 33,206 662,815 1,503,361 1,334,293 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. T h o m a s W a l l a c e M O U N T F U J I 5. Income taxes a. Income tax recognised in the income statement Tax expense comprises: Current tax expense Under/(Over) 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 Income tax under/(over) provision in prior years Unused tax losses and tax offsets not recognised as deferred tax assets Income tax expense Consolidated 2011 $’000 5,510 392 347 (5,706) 543 2010 $’000 4,551 (136) 35 (3,581) 869 3,036 2,875 911 (173) (1,777) 471 (171) 739 543 543 863 (182) (1,638) 679 (40) (101) 1,288 869 The tax rate used in the above reconciliation is the Australian corporate tax rate of 30% (2010: 30%). b. Current tax assets and liabilities Current tax assets Tax refunds receivable Current tax payables/(receivables) Income tax attributable to: Parent entity Subsidiaries 334 2,695 1,452 1,022 2,474 (2,303) 3,891 1,588 5 6 E G A P Servcorp Annual Report 2011 Financial Report 6 6 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 5. Income taxes (continued) Consolidated 2011 $’000 c. Deferred tax balances Deferred tax assets comprises: Tax losses - revenue Temporary differences Deferred tax liabilities comprises: 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 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 Deferred rent incentive Other Deferred tax assets Balance at the beginning of the financial year Movements in foreign exchange rates Statement of comprehensive income credit 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 charge/ (credit) Balance at the end of the financial year 5,431 13,407 18,838 833 18,005 14,073 (1,427) 5,359 18,005 242 (146) 407 406 2,202 3,101 (441) 5,771 14,544 (1,477) 5,771 18,838 273 133 6 412 471 (50) 412 833 2010 $’000 5,025 9,519 14,544 471 14,073 9,947 (210) 4,336 14,073 1,305 61 414 2,399 158 (335) 17 4,019 10,741 (216) 4,019 14,544 (95) 6 (228) (317) 794 (6) (317) 471 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 2011 $’000 13 2,086 3,358 5,457 2010 $’000 15 2,086 3,611 5,712 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 $5,430,806 (2010: $5,024,890) in respect to losses that can be carried forward against future taxable income. HONG KONG Johann Florido 7 6 E G A P Servcorp Annual Report 2011 Financial Report 8 6 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 6. Segment information Servcorp Serviced Offices are fully-managed, fully-furnished CBD office suites in prime locations, with a receptionist, meeting rooms, IT infrastructure and support services available. Servcorp Virtual Office provides the services, facilities and IT to businesses without the cost of a physical office. 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, the United States of America and other which reflect the segment requirements under AASB 8. The Group’s reportable operating segments under AASB 8 are presented below. The accounting policies of the 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: Segment Revenue Segment Profit/(Loss) 30 June 2011 $’000 30 June 2010 $’000 30 June 2011 $’000 30 June 2010 $’000 Continuing operations Australia and New Zealand Greater China Southeast Asia Japan Europe Middle East USA Other Finance costs Interest revenue Foreign exchange (losses) / gains Centralised unrecovered head office overheads Franchise fees Unallocated Profit before tax Income tax expense 53,119 19,445 15,740 52,591 14,188 18,151 2,334 852 46,578 16,202 14,654 56,218 13,190 14,770 30 912 176,420 162,554 - 4,502 486 - 5,102 (368) - 616 286 13,834 2,689 2,989 3,431 (1,904) 99 (11,671) (150) 9,317 (85) 5,102 (368) 10,143 (2,434) 4,265 3,166 (4,279) (427) (2,045) (1,873) 6,516 (167) 4,502 486 - (10,633) (7,679) 658 637 616 (913) 3,036 (543) 658 (1,441) 2,875 (869) Consolidated segment revenue and profit for the period 182,056 168,837 2,493 2,006 The revenue reported above represents revenue generated from external customers. Intersegment sales were eliminated in full. For the 12 months ended 30 June 2011, the Group’s Virtual Office revenue and Serviced Office revenue were $46,376,000 and $128,908,000 respectively (2010: $40,145,000 and $121,428,000, respectively). 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 10.00 5.00 7,847 4,922 1 Oct 2009 29 Mar 2010 5.00 5.00 4,922 4,922 6 Oct 2010 6 April 2011 30% 30% 30% 30% 100% 100% 30% 100% Recognised amounts 2010 Final Fully paid ordinary shares Interim Fully paid ordinary shares 2011 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 5 Oct 2011 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 2011 $’000 2010 $’000 2,865 4,284 Impact on franking account balance of dividends not recognised 2,109 2,109 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. NEW YORK Alf Moufarrige 9 6 E G A P Servcorp Annual Report 2011 Financial Report 0 7 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 8. Earnings per share Earnings reconciliation: Net profit Earnings used in the calculation of basic and diluted EPS Consolidated 2011 $’000 2,493 2,493 No. 2010 $’000 2,006 2,006 No. Weighted average number of ordinary shares used in the calculation of basic EPS 98,440,807 91,918,843 Weighted average number of ordinary shares used in the calculation of diluted EPS Basic earnings per share Diluted earnings per share 98,440,807 91,918,843 $0.025 $0.025 $0.022 $0.022 Options outstanding as at 30 June 2011 and 30 June 2010 were anti-dilutive. 9. Cash and cash equivalents Note 20 Consolidated 2011 $’000 26,216 73,777 99,993 2010 $’000 16,955 114,993 131,948 Cash (i) Bank short term deposits (ii) Notes: i. Australia and France have $4,622,000 (2010: $3,454,000) and $4,102,000 (2010: $7,513,000), respectively, in cash which is encumbered. ii. Servcorp’s unencumbered cash balance is $91,269,000 as at 30 June 2011. iii. Bank short term deposits mature within an average of 175 days (2010: 176 days). These deposits and the interest earning portion of the cash balance earn interest at a weighted average rate of 5.72% (2010: 5.85%). 10. Trade and other receivables Current At amortised cost Trade receivables (i) Less: allowance for doubtful debts Other debtors Notes: Consolidated 2011 $’000 17,041 (667) 3,757 20,131 2010 $’000 16,115 (575) 1,620 17,160 i. The average credit period allowed 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 14,992 1,490 559 17,041 14,346 1,013 756 16,115 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. n a g i T a c i l e g n A S I R A P 1 7 E G A P Servcorp Annual Report 2011 Financial Report 2 7 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 Consolidated 2011 $’000 7,096 1,371 8,467 2010 $’000 6,733 1,614 8,347 - 1,008 167 167 24,943 - 65 25,008 - 1,008 29,898 1,131 76 31,105 11. Other assets Current Prepayments Other 12. Other financial assets Current At amortised cost Lease deposits At fair value through profit or loss Forward foreign currency exchange contracts Non-current At amortised cost Lease deposits Licence fees Other M E L B O U R N E S i m o n e T o m a s 13. Property, plant and equipment Consolidated Land and Leasehold Leasehold Office Office Office Office Motor Total buildings improve- improve- furniture furniture equip- equip- vehicles at cost ments ments & fittings & fittings ment 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 2010 5,648 76,574 1,273 13,691 575 22,435 2,195 671 123,062 Additions Disposals Transfers Effect of foreign currency exchange differences Balance at - - - 32,781 (2,610) (15) - - - 2,756 (392) (29) - 5,074 - 99 40,710 (17) (964) (1,672) (16) (5,671) - 44 - - - (431) (8,742) (160) (1,560) (19) (2,110) (296) (50) (13,368) 30 June 2011 5,217 97,988 1,113 14,466 539 24,479 227 704 144,733 Accumulated depreciation Balance at 30 June 2010 Depreciation expense Disposals Transfers Effect of foreign currency exchange differences Balance at 30 June 2011 Net book value Balance at 30 June 2011 Balance at 30 June 2010 328 38,924 1,225 7,033 575 16,941 1,134 263 66,423 123 10,722 - - (2,115) - - - - 1,543 (285) - - (17) - 2,797 (736) - - (764) - 98 (6) - 15,283 (3,923) - (9) (4,429) (160) (802) (19) (1,456) (143) (19) (7,037) 442 43,102 1,065 7,489 539 17,546 227 336 70,746 4,775 54,886 5,320 37,650 48 48 6,977 6,658 - - 6,933 - 368 73,987 5,494 1,061 408 56,639 Aggregate depreciation expense allocated during the year is recognised as an expense and disclosed in Note 2 to the financial statements. 3 7 E G A P Servcorp Annual Report 2011 Financial Report 4 7 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 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 2011 $’000 14,805 - 14,805 2010 $’000 15,962 (1,157) 14,805 As at 30 June 2010, 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 twenty countries are cash generating units: Japan, Australia, New Zealand, China, Hong Kong, Malaysia, Singapore, Thailand, Belgium, United Arab Emirates, Bahrain, Qatar, Saudi Arabia, Philippines, Lebanon, Turkey, 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 2011 was as follows: Japan France Australia New Zealand Singapore Thailand China Consolidated 2011 $’000 9,161 1,030 2,636 785 706 326 161 2010 $’000 9,161 1,030 2,636 785 706 326 161 14,805 14,805 The recoverable amount of goodwill relating to each cash generating unit was determined based on value-in-use calculations, which uses cash flow projections, 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 2011 the discount rate applied to the above countries, inclusive of country risk premium was as follows: Japan 16.1%, France 15.4%, Australia 15.4%, New Zealand 15.4%, Singapore 15.4%, Thailand 17.6% and China 16.4% (2010: Japan 16.4%, France 15.5%, Australia 15.5%, New Zealand 15.5%, Singapore 15.5%, Thailand 17.9% and China 16.9% ). 15. Trade and other payables Note Consolidated 2011 $’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 Finance lease At fair value through profit or loss Forward foreign currency exchange contract 20 20 3,183 12,731 5,965 5,998 27,877 14,600 14,600 - 144 17,580 - - 17,724 - - - 2010 $’000 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 Notes: i. During the year ended 30 June 2011, the bank loan denominated in JPY was fully repaid. ii. The bank overdraft in France is denominated in EUR and is secured. Interest at a rate of 4.36% is applicable to the outstanding balance. 5 7 E G A P Servcorp Annual Report 2011 Financial Report 6 7 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 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 2011 $’000 2010 $’000 18,929 1,832 4,125 24,886 13,540 1,416 14,956 5,389 416 4,125 9,930 21,612 3,434 4,125 29,171 14,890 645 15,535 6,722 2,789 4,125 13,636 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. 18. Provisions Current Employee benefits (i) Other Non-current Employee benefits Other Notes: Consolidated 2011 $’000 5,137 300 5,437 173 - 173 2010 $’000 5,211 672 5,883 428 441 869 i. The current provision for employee benefits includes $3,914,000 of annual leave and vested long service leave entitlements accrued but not expected to be taken within 12 months (2010: $3,800,000). s a m o T e n o m i S E N R U O B L E M 7 7 E G A P Servcorp Annual Report 2011 Financial Report 8 7 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 19. Issued capital Fully paid ordinary shares 98,440,807 (2010: 98,440,807) Movements in issued capital Balance at the beginning of the financial year Issue of shares (i) Cost of capital raising Tax effect of capital raising Balance at the end of the financial year Notes: i. Equity capital raising Consolidated 2011 $’000 2010 $’000 154,149 154,149 154,149 - - - 154,149 76,118 79,894 (2,662) 799 154,149 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. r i a N a s e r e T A I D N I a v e i r t i m i D a y n a T N I A R H A B 20. Financial instruments The Group’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 Board of Directors. 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 2010. 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. 9 7 E G A P Servcorp Annual Report 2011 Financial Report 0 8 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 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) +15% (2010: +10%) AUD/USD (i) -15% (2010: -10%) AUD/JPY +12% (2010: +10%) AUD/JPY -12% (2010: -10%) AUD/EUR +9% (2010: +8%) AUD/EUR -9% (2010: -8%) AUD/RMB +10% (2010: +7%) AUD/RMB -10% (2010: -7%) AUD/SGD +7% (2010: +6%) AUD/SGD -7% (2010: -6%) AUD/HKD +15% (2010: +10%) AUD/HKD -15% (2010: -10%) Notes: Impact on profit Impact on equity Consolidated Consolidated 2011 $’000 2010 $’000 2011 $’000 2010 $’000 39 (51) 66 248 (126) 150 (296) 363 (73) 84 190 (259) 525 (559) (23) (57) (3) 4 (139) 159 (200) 225 209 (257) (165) 230 (80) 97 (1,510) (1,126) 1,935 1,368 349 (415) - - 26 (31) - - (244) 473 169 (189) - - - - i. Servcorp is exposed to Dirhams (Dubai), Dinars (Bahrain), Rials (Qatar) and Riyals (Saudi Arabia). These currencies are pegged to the USD. S Y D N E Y _ L a n a S h e l e s t 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 2011. These are level 2 fair value measurements derived from inputs as defined in note 20(e). Average exchange rate 2011 2010 Foreign currency Fair value 2011 million 2010 million 2011 $’000 2010 $’000 Outstanding contracts Consolidated Sell JPY Not later than one year 81.58 74.29 400 200 (42) (84) Later than one year and not later than five years Sell USD 73.38 66.46 150 50 (123) (13) Not later than one year - 0.83 - 2 - (16) ii. Interest rate risk 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. 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 2011 $’000 914 (957) 191 (145) 2010 $’000 1,484 (1,437) 92 (62) 1 8 E G A P Servcorp Annual Report 2011 Financial Report 2 8 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 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 2011 Non-interest bearing Cash and cash equivalents Receivables Lease deposits Forward foreign currency exchange contracts Interest bearing Cash and cash equivalents (i) 2010 Non-interest bearing Cash and cash equivalents Receivables Lease deposits Forward foreign currency exchange 26,216 20,131 - - - - - - - - 1,070 3,767 16,196 4,234 - - - 4,903 2,044 32,865 79,212 26,034 27,104 17,408 26,078 18,240 4,234 154,868 26,216 20,131 25,267 6,947 76,307 5.72% 16,955 17,160 30,206 5,852 116,706 5.85% - - - - - - 16,955 17,160 - - - - - - - - 859 1,163 3,483 19,852 4,849 contracts - - 5,100 752 Interest bearing Cash and cash equivalents (i) Notes: i. Fixed interest rate instruments. 7,418 42,392 8,793 9,956 100,495 109,078 20,604 4,849 186,879 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 % $’000 $’000 $’000 $’000 $’000 $’000 Consolidated 2011 Non-interest bearing Payables Security deposits (i) Forward foreign currency exchange contracts Interest bearing Bank overdrafts and loans (ii) 2010 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. - - - 144 144 - - - 871 526 10,406 - - - - 17,905 - - 4,860 1,920 - - 10,406 22,765 1,920 12,993 - 17,975 - - - - 34 - 5,190 775 467 2 156 89 1,397 13,027 23,634 1,020 - - - - - - - - 1 - 1 10,406 17,905 6,780 144 4.36% 35,235 12,993 17,975 5,965 1,529 617 39,079 5.84% 1.79% 3 8 E G A P Servcorp Annual Report 2011 Financial Report 4 8 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 20. Financial instruments (continued) d. Credit risk 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. Credit risk on cash and short term fixed deposits is limited because counterparties are banks with high credit ratings assigned by international credit rating agencies. These liquid funds are managed centrally by Servcorp’s senior management on a daily basis. 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 in respect of Servcorp Limited’s 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). Y O K O H A M A _ K a o r i S u z u k i 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 2011 are as follows: Employer contributions As at 30 June 2011, there were no outstanding employer contributions payable to other funds. Consolidated 2011 $’000 1,744 2010 $’000 1,653 Options granted to employees Share option scheme Balance at the beginning of the financial year Balance at the end of the financial year Consolidated 2011 No. 140,000 140,000 2010 No. 140,000 140,000 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. 5 8 E G A P Servcorp Annual Report 2011 Financial Report 6 8 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 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. 30/06/11 exercisable T Wallace O Vlietstra S Martin W Wu 1/7/10 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 2011. 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 (2010: Nil) options were exercised into ordinary shares in Servcorp Limited during the financial year ended 30 June 2011. Options lapsed during the financial year Nil (2010: Nil) options were forfeited under the Executive Share Option Scheme during the financial year ended 30 June 2011. BANGKOK Caryn Louise Taylor 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 2011 2010 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% 7 8 E G A P Servcorp Annual Report 2011 Financial Report 8 8 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 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 2011 $’000 2010 $’000 1,588 16,251 - - - - 1,588 16,251 68,130 161,965 48,787 278,882 78,396 194,570 68,350 341,316 The Consolidated Entity leases property under operating leases expiring from one to 13 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. R i z l e n e E l M o u m e n P A R I S 22. Commitments for expenditure (continued) Finance lease liabilities 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 2011 $’000 2010 $’000 2011 $’000 2010 $’000 - - - - - - 1,380 149 - 1,529 (67) 1,462 - - - - - - - - - 1,380 149 - 1,529 - 1,529 1,373 156 1,529 Notes: i. Minimum future lease payments includes the aggregate of all lease payments and any guaranteed residual. 9 8 E G A P Servcorp Annual Report 2011 Financial Report 0 9 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 23. Subsidiaries Name of entity Country of incorporation Ownership interest 2011 % 2010 % 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 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 Servcorp Brisbane 400 Pty Ltd Servcorp Southbank Pty Ltd Office Squared (Atlas) 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 Australia Australia Australia New Zealand New Zealand New Zealand New Zealand New Zealand 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - - - 100 100 100 100 100 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 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 Manila Inc Servcorp Thai Holdings Limited Servcorp Company Limited Headquarters Co. Limited Servcorp Japan KK Servcorp Tokyo KK Servcorp Nippon International KK Servcorp Marunouchi KK 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 Real Estate Company WLL (ii) Servcorp Phoenicia SAL Servcorp US Holdings, Inc. Ownership interest Country of incorporation 2011 % 2010 % Singapore Singapore Singapore Singapore Singapore Singapore Singapore Singapore Singapore Hong Kong Hong Kong Hong Kong China China China China China Malaysia Malaysia Malaysia Philippines 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 20 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 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 - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 49 49 100 100 49 49 100 100 1 9 E G A P Servcorp Annual Report 2011 Financial Report 2 9 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 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 2011 % 2010 % United States United States United States United States United States United States United States United States United States United States United States United States 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 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 Real Estate 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. n a g i T a c i l e g n A S I R A P 24. Formation/deregistration of controlled entities Consideration $’000 Formations 2011 Servcorp Brisbane 400 Pty Ltd The entity was formed on 7 July 2010 Servcorp Southbank Pty Ltd The entity was formed on 23 July 2010 Servcorp Manila Inc The entity was formed on 30 July 2010 Office Squared (Atlas) Pty Ltd The entity was formed on 6 December 2010 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 - - - - - - - - - - - - - - - - The Consolidated Entity’s interest % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 3 9 E G A P Servcorp Annual Report 2011 Financial Report 4 9 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 24. Formation/deregistration of controlled entities (continued) Consideration $’000 - - - - - - - - - Country of incorporation The Consolidated Entity’s interest % 100 100 100 100 100 100 49 100 100 Formations (continued) 2010 Servcorp Los Angeles LLC The entity was formed on 14 April 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 Real Estate 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 Deregistration 2011 Nil Deregistration 2010 Servcorp Jeddah Pte Ltd The entity was deregistered on 7 August 2009 Singapore 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 at bank Short term deposits Cash and cash equivalents 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 Increase/(decrease) in current tax liability Decrease 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 (Increase)/decrease in trade debtors (Increase)/decrease in current assets Increase in deferred income Increase/(decrease) in client security deposits Increase in accounts payable Net cash provided from operating activities Consolidated 2011 $’000 2010 $’000 26,216 73,777 99,993 (144) 99,849 16,955 114,993 131,948 (617) 131,331 2,493 2,006 (849) 15,283 72 - 434 3,368 (5,155) 1,006 - (351) (4,778) 727 1,974 1,706 2,858 18,788 232 12,625 112 1,157 874 (4,723) (6,435) 874 47 (1,308) 214 (1,801) 190 (137) 4,871 8,798 5 9 E G A P Servcorp Annual Report 2011 Financial Report 6 9 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 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 M Vaile A G Moufarrige (i) T Moufarrige (i) Specified executives M Moufarrige (i) S Martin J Goodwyn O Vlietstra L Lahdo T Wallace B Sharp L Gorman Notes: Balance at Received on Net Balance at 01/07/10 exercise of change 30/06/11 No. options No. No. No. 413,474 250,000 105,165 - 49,790,096 1,865,446 1,928,842 27,000 - 30,000 5,000 - - 11,000 54,426,023 - - - - - - - - - - - - - - - - - - - 413,474 250,000 105,165 - 108,561 49,898,657 - - - - - - - - - 1,865,446 1,928,842 27,000 - 30,000 5,000 - - 11,000 108,561 54,534,584 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 2011 $’000 3,657 250 - 2010 $’000 3,739 193 47 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 (32,000) $ - 5 $ - - - 1 2011 2010 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 on arms length terms. 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. A relative of a director of the Company, Mr B Corlett, has an interest in TDM Asset Management Pty Ltd. TDM Asset Management Pty Ltd is a client of Servcorp in Sydney and in New York. Mr Corlett has no interest in the affairs of TDM Asset Management Pty Ltd nor any involvement in the negotiation of the terms of the arrangement with TDM Asset Management Pty Ltd. A director of the Company, Mr B Corlett, has an interest in and is the Chairman of Australian Maritime Systems Limited. Australian Maritime Systems Limited is a client of Servcorp in Perth. Mr Corlett did not have any involvement in the negotiation of the terms of the arrangement with Australian Maritime Systems Limited. A director of the Company, Mr B Corlett, has an interest in and is the Chairman of The Trust Company Limited. The Trust Company Limited is a client of Servcorp in Perth. Mr Corlett did not have any involvement in the negotiation of the terms of the arrangement with The Trust Company Limited. A director of the Company, Mr R Holliday-Smith, has an interest in and is a director of Aegis Partners Pty Ltd. Aegis Partners Pty Ltd is a client of Servcorp in Sydney. 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. 7 9 E G A P Servcorp Annual Report 2011 Financial Report 8 9 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 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 Consolidated 2011 $ 77,500 649,000 7,000 2010 $ 68,000 677,000 21,000 A G Moufarrige, Sovori Pty Ltd Reimbursements 201,000 76,000 T Moufarrige A G Moufarrige MRC Biotech Reimbursements Pty Ltd B Corlett TDM Asset Management Client Pty Ltd B Corlett Australian Maritime Client Systems Limited B Corlett The Trust Company Client Limited R Holliday-Smith Aegis Partners Pty Ltd Client 13,000 36,000 87,000 80,000 2,000 202,000 22,000 16,000 - 2,000 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 TDM Asset Management Pty Ltd Australian Maritime Systems Limited The Trust Company Limited Current payable Enideb Pty Ltd Tekfon Pty Ltd 64,000 314 8,000 10,000 - - 66,000 4,000 5,000 - 11,000 6,000 S A N F R A N C I S C O E m i l y S t e v e n s o n 27. Parent entity disclosures Financial Position The Company Assets Current assets Non-current assets Total 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 2011: 2011 $’000 157,285 19,634 176,919 5,702 5,702 154,149 16,922 146 171,217 10,524 10,524 2010 $’000 165,321 19,817 185,138 13,898 13,898 154,147 16,947 146 171,240 13,980 13,980 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 2011 the fair value of the these committments was Nil (2010:Nil). iii. There were no contingent liabilities of the parent entity. iv. There were no commitments for the acquisition of property, plant and equipment by the parent entity. 9 9 E G A P Servcorp Annual Report 2011 Financial Report 0 0 1 E G A P Notes to consolidated financial report (continued) for the financial year ended 30 June 2011 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 Enitity in future financial years: Dividend On 24 August 2011 the directors declared a fully franked final dividend of 5.00 cents per share, payable on 5 October 2011. The financial effect of the above transactions have not been brought to account in the financial statements for the year ended 30 June 2011. A n g e l i c a T i g a n P A R I S d r i a L m a S N O D N O L 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 24th day of August 2011. 1 0 1 E G A P Servcorp Annual Report 2011 Financial Report 2 0 1 E G A P Auditor’s report Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 102 Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX: 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au Independent Auditor’s Report to the Members of Servcorp Limited Report on the Financial Report We have audited the accompanying financial report of Servcorp Limited, which comprises the statement of financial position as at 30 June 2011, the statement of comprehensive income, the statement of cash flows and the statement of changes in equity for the year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity, comprising the company and the entities it controlled at the year’s end or from time to time during the financial year as set out on pages 48 to 101. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control, relevant to the entity’s preparation of the financial report that gives a true and fair view, in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 3 0 1 E G A P Servcorp Annual Report 2011 103 Auditor’s Independence Declaration In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of Servcorp Limited, would be in the same terms if given to the directors as at the time of this auditor’s report. Opinion In our opinion: (a) the financial report of Servcorp Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2011 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) the consolidated financial statements also comply with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the Remuneration Report included in pages 37 to 44 of the directors’ report for the year ended 30 June 2011. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Opinion In our opinion the Remuneration Report of Servcorp Limited for the year ended 30 June 2011, complies with section 300A of the Corporations Act 2001. DELOITTE TOUCHE TOHMATSU S C Gustafson Partner Chartered Accountants Sydney, 24 August 2011 4 0 1 E G A P Shareholder information As at 7 September 2011 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 2011. shares granted to employees under the Executive Share Option Scheme. Class of shares and voting rights Ordinary shares There were 2,126 holders of the ordinary shares of the Company. There are no voting rights attached to the options. Voting rights will be attached to the unissued ordinary shares when the options have been exercised. The options are unquoted. 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 580 338,182 1,064 2,787,567 254 197 1,878,515 5,079,680 0.34% 2.83% 1.91% 5.16% 31 88,356,863 89.76% 2,126 98,440,807 100% - - - 4 - 4 - - - - - - 140,000 100% - - 140,000 100% There were 87 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 Orbis Investment Management (Australia) Pty Ltd Acorn Capital Limited Number of % of voting shares power advised 49,812,927 51.19% 12,817,526 13.02% 10,831,589 11.00% Twenty largest shareholders Name AMP Life Limited BFLI Pty Ltd (The MM Account) Bond Street Custodians Limited (Officium Special Situat Account) Citicorp Nominees Pty Limited Citicorp Nominees Pty Limited (Commonwealth Bank Off Super Account) Cogent Nominees Pty Limited (SMP Accounts) Cogent Nominees Pty Limited Eniat Pty Ltd HSBC Custody Nominees (Australia) Limited JP Morgan Nominees Australia Limited JP Morgan Nominees Australia Limited (Cash Income Account) MFLE Pty Ltd Moufarrige A G National Nominees Limited Queensland Investment Corporation Smallco Investment Manager Ltd (The CUT Account) Sovori Pty Limited Spigoli Pty Ltd (The TM Account) UBS Wealth Management Australia Nominees Pty Limited Uvira Superannuation Pty Limited (Uvira Holdings Employees Super Fund Account) Number of Percentage of ordinary shares capital held held 1,963,670 1,800,000 315,137 6,678,996 893,578 1,154,719 406,062 1,800,000 2,068,575 7,888,975 407,955 1,800,000 547,436 2.00% 1.83% 0.32% 6.78% 0.91% 1.17% 0.41% 1.83% 2.10% 8.01% 0.41% 1.83% 0.56% 13,210,504 13.42% 650,061 643,818 0.66% 0.65% 41,963,859 42.63% 1,800,000 477,872 413,474 1.83% 0.49% 0.42% Totals for Top 20 86,884,691 88.26% Options Category Options expiring 22 February 2013 (SRVAI) Number on Number of issue 140,000 holders 4 5 0 1 E G A P Servcorp Annual Report 2011 Shareholder Information 6 0 1 E G A P Corporate information Directors Bruce Corlett Alf Moufarrige Share registry Chairman & non-executive director Boardroom Pty Limited CEO & Managing director Level 7 Rick Holliday-Smith Non-executive director Julia King Mark Vaile Non-executive director Non-executive director Taine Moufarrige Executive director 207 Kent Street Sydney NSW 2000 GPO Box 3993 Sydney NSW 2001 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 Telephone: 1300 737 760 + 61 (2) 9290 9600 Facsimile: 1300 653 459 + 61 (2) 9279 0664 Email: enquiries@boardroomlimited.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 5:00pm on Wednesday 16 November 2011. S Y D N E Y S a m L a i r d A B U D H A B I G r e g P e a r c e y e l l a m S d i v a D A N I H C 7 0 1 E G A P Servcorp Annual Report 2011 Corporate Information Cert no. SGS-COC-006189 u a . m o c . p r o c v r e s y e l l a m S d i v a D I A H G N A H S S E R V C O R P A n n u a l R e p o r t 2 0 1 1 s a m o T e n o m i S E N R U O B L E M PARIS Angelica Tigan
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