Servcorp
Annual Report 2013

Plain-text annual report

Annual Report 2013 2IFC Hong Kong Six Battery Road Singapore Tornado Tower Doha Emirates Towers Dubai Hilton Plaza Osaka Marunouchi Trust Tower Tokyo A u s t r a l i a Servcorp Limited ABN 97 089 222 506 A R O U ND t he world WE G O PAGE 1 S E R VC O R P A N N U A L R E P O R T 2 013 – T H E J O U R N E Y 1 The Journey Welcome 2013 in review Global locations Chairman’s message CEO’s message Our global expansion New locations Green initiative Community service 3 6 8 10 11 14 18 20 21 Information & communication technology 24 Service, products and awards The Servcorp team Corporate governance Directors’ report Financial report Auditor’s report Shareholder information Corporate information 25 30 36 48 71 124 128 130 PAGE 2 Welcome Servcorp is committed to being not the biggest, just the best Serviced Office and Virtual Office provider. Our business was founded to help our clients’ businesses succeed. Reducing your costs and sharing overheads is the road to success. We are an innovator in the Serviced and Virtual Office industry, developing technology driven solutions. PAGE 3 S E R VC O R P A N N U A L R E P O R T 2 013 – T H E J O U R N E Y 3 N e w Z e a l a n d PAGE 4 PAGE 5 S E R VC O R P A N N U A L R E P O R T 2 013 – T H E J O U R N E Y 5 Around the World in 2013; an Adventure Net profit before tax ($ millions) Revenue ($ millions) 50 40 30 20 10 0 $47.3 $27.6 $18.3 $2.9 10 $3.0 11 09 12 13 250 200 150 100 50 0 $228.6 $200.8 $208.0 $182.1 $168.8 $219.1 $159.6 $169.4 $180.6 $188.5 $9.5 09 $9.2 10 $12.7 11 $20.2 $19.5 12 13 Actual Mature floors Immature floors 2009 $’000 2010 $’000 2011 $’000 2012 $’000 2013 $’000 12 months ended 30 June Revenue & other income 228,646 168,837 182,056 200,785 207,995 Net profit before tax 47,275 Net profit after tax 34,097 Net operating cash flows 43,024 2,875 2,006 8,798 Cash & cash equivalents 83,958 131,948 3,036 2,493 18,788 99,993 18,329 14,801 32,003 104,334 27,630 21,271 27,092 99,758 Net assets 145,291 212,610 192,612 198,709 207,900 Earnings per share $0.427 Dividends per share $0.250 $0.022 $0.100 $0.025 $0.100 $0.150 $0.150 $0.216 $0.150 PAGE 6 Servcorp floors and locations (at 30 June) 124 132 117 142 127 116 110 103 140 120 100 80 60 40 20 0 73 59 82 68 09 10 11 12 13 14 Locations Floors Locations forcast Floors forcast Servcorp geographic spread (at 30 June 2013) United States 22 Turkey 3 Lebanon 1 Kuwait 1 Saudi Arabia 7 Qatar 3 Bahrain 2 UAE 5 United Kingdom 2 Belgium 3 France 4 27 Australia 3 New Zealand 5 Singapore 2 Malaysia 4 Thailand 2 Philippines 3 India 9 China 3 Hong Kong 21 Japan S E R VC O R P A N N U A L R E P O R T 2 013 – T H E J O U R N E Y 7 Around the World in 140 Memorable Destinations Australia Sydney Level 29, Chifley Tower New Zealand Auckland Level 27, PWC Tower Japan Tokyo Level 11, Aoyama Palacio Tower Level 36, Gateway Level 31, Vero Centre Level 14, Hibiya Central Building Levels 56 & 57, MLC Centre Level 26, 44 Market Street Level 32, 101 Miller Street North Sydney Level 22, Tower Two Westfield Bondi Junction Level 1, The Octagon Parramatta Level 15, Deloitte Building Parramatta Level 9, Avaya House North Ryde Level 5, Nexus Norwest Baulkham Hills Melbourne Levels 18 & 27, 101 Collins Street Level 40, 140 William Street Level 2, 710 Collins Street Docklands Level 2, Riverside Quay Southbank Brisbane Level 36, Riparian Plaza Level 19, 10 Eagle Street Level 27, Santos Place Perth Levels 15 & 28, AMP Tower Level 18, Central Park Level 11, Brookfield Place Hobart Level 6, Reserve Bank Building Adelaide Levels 24 & 30, Westpac House Canberra Level 11, St George Centre Level 1, The Realm PAGE 8 Wellington Level 16, Vodafone on the Quay United States of America Atlanta Level 20, Terminus 200 Level 20, Marunouchi Trust Tower – Main Level 1, Marunouchi Yusen Building Level 7, Wakamatsu Building Level 8, Nittochi Nishi-Shinjuku Building Level 36, 12th & Midtown Level 9, Ariake Frontier Building Boston Level 14, One International Place Chicago Level 42, 155 North Wacker Drive Level 28, Shinagawa Intercity Tower A Level 32, Shinjuku Nomura Building Level 21, Shiodome Shibarikyu Building Level 49, 300 North LaSalle Street Level 27, Shiroyama Trust Tower Dallas Level 6, JP Morgan International Plaza III Level 45, Sunshine 60 Level 10, Rosewood Court Level 3, 5500 Preston Road Houston Level 39, Bank of America Center Level 41, Williams Tower Irvine Level 8, Irvine Towers Los Angeles Level 40, Figueroa at Wilshire Miami Level 27, Southeast Financial Center New York City Level 23, 1330 Avenue of the Americas Level 26, The Seagram Building Level 27, Tokyo Sankei Building Level 18, Yebisu Garden Place Tower Yokohama Level 10, TOC Minato Mirai Nagoya Level 40, Nagoya Lucent Tower Level 4, Nagoya Nikko Shoken Building Osaka Level 9, Edobori Center Building Level 19, Hilton Plaza West Office Tower Level 4, Cartier Building Shinsaibashi Plaza Fukuoka Level 15, Fukuoka Tenjin Fukoku Seimei Building Level 40, 17 State Street Level 2, NOF Hakata Ekimae Building Philadelphia Level 37, BNY Mellon Center San Francisco Level 27, 101 California Street Level 49, 555 California Street India Mumbai Levels 7 & 8, Vibgyor Towers Hyderabad Level 7, Maximus Towers Tysons Corner Level 15, Corporate Office Center Tysons II Washington D.C. Level 10, 1717 Pennsylvania Avenue Level 10, 1155 F Street Singapore Penthouse Level & Level 42, Suntec Tower Three Level 30, Six Battery Road Level 39, Marina Bay Financial Centre Level 26, PSA Building Malaysia Kuala Lumpur Level 36, Menara Citibank Level 20, Menara Standard Chartered Thailand Bangkok Levels 8 & 9, 1 Silom Road, Silom Level 29, The Offices at Centralworld Level 18, Park Ventures Ecoplex Philippines Manila Level 17, 6750 Ayala Avenue Office Tower Level 22, Tower One Ayala Triangle China Shanghai Level 23, Citigroup Tower Level 29, Jing An Kerry Centre 5/F Somekh Building, Rockbund Chengdu Level 18, Shangri-La Office Tower Level 28, One Aerospace Center Beijing Level 24, China Central Place Hong Kong Central Level 19, Two International Finance Centre Level 9, The Hong Kong Club Building Kowloon Level 12, One Peking Road United Arab Emirates Abu Dhabi Level 4, Al Mamoura Dubai Level 23, Boulevard Plaza Levels 41 & 42, Emirates Towers Levels 21 & 28, Al Habtoor Business Tower Kingdom of Bahrain Manama Levels 22 & 41, West Tower Bahrain Financial Harbour Qatar Doha Levels 14 & 15, Commercialbank Plaza Level 22, Tornado Tower Kingdom of Saudi Arabia Jeddah Level 9, Jameel Square Level 26, Kings Road Tower Riyadh Level 6, Akaria Plaza Level 18, Al Faisaliah Tower Level 19, Oriental Plaza Level 1, The Business Gate Hangzhou Level 3, Jiahua International Business Center Guangzhou Level 54, Guangzhou IFC Level 29, Olaya Towers Dammam Levels 20 & 22, Al Hugayet Tower Kuwait Kuwait City Level 18, Sahab Tower Lebanon Beirut Level 2, Beirut Souks Louis Vuitton Building Turkey Istanbul Levels 5 & 6, Louis Vuitton Orjin Building Level 8, Tekfen Tower France Paris Level 5, Louis Vuitton Building Avenue des Champs Elysées Levels 2 & 3, Square Edouard VII, Opera Actualis, Level 2, Boulevard Haussmann Belgium Brussels Levels 20 & 21, Bastion Tower Level 4, European Quarter - Schuman United Kingdom London Level 17, Dashwood House Level 18, 40 Bank Street PAGE 9 S E R VC O R P A N N U A L R E P O R T 2 013 – T H E J O U R N E Y 9 Chairman’s Telegram Over the last four years the Company has more than doubled its global footprint. Our aim in 2013 was to stabilise operations, improve occupancy, and increase shareholder wealth. We have made steady progress on achieving our goals. Despite the strong Australian dollar, revenue for the year was $208.00 million, an increase of 4% on 2012. Our mature floors contributed $42.22 million profit before tax, an increase of 13%. Immature floor losses were $14.59 million, an improvement of 23% compared to 2012. As a result, net profit after tax increased to $21.27 million with an increase in earnings per share to 21.6 cents, up 44% on 2012. Revenue and profit growth was achieved across most geographic segments. We are encouraged by the Company’s second half performance. Net profit before tax grew 22% in the second half of the financial year compared to the first half of the year, and most pleasing about the second half performance was the steadily increasing monthly revenue together with increased net cash generation. The Directors have declared a final dividend of 7.50 cents per share, 100% franked. This brings total dividends for the year to 15.00 cents per share, 100% franked, resulting in a payout to shareholders of approximately $14.76 million. Servcorp continues to enjoy financial strength. During the 2013 financial year the business generated strong net operating cash surpluses of $27.09 million. Cash balances at 30 June 2013 were $99.76 million; $90.62 million of the cash balance was unencumbered and the Company has negligible debt. When we released our 2013 results in August we did not provide a financial forecast for the 2014 financial year. We do expect our growth to continue and, as stated above, we are encouraged by the continued growth in revenue and the improvement in occupancy, particularly in the fourth quarter of the 2013 financial year. Directors anticipate the level of dividends for the 2014 financial year will be not less than 16.00 cents per share. Franking levels are currently uncertain and Directors will comment further on the Company’s dividend outlook at the Annual General Meeting in November this year. Whilst global markets remain volatile and uncertain, Servcorp has been able to continue its global growth thanks to critical mass, experienced management and an outstanding IT platform and propriety product offerings. It is a good story. We look forward to updating shareholders on how we are performing at our AGM. On behalf of the Board I want to acknowledge the outstanding efforts of our CEO, Alf Moufarrige, our leadership group and all the Servcorp team members for their dedication and commitment during the past year. Thanks to management we have achieved an enormous amount over the past four years. Due to their efforts we have an expanded global presence and continue to maintain our position as the world’s leading provider of serviced and virtual office solutions. We thank you, our shareholders, for your continuing support. Bruce Corlett AM PAGE 10 CEO’s Memoirs While I am not overjoyed with this year’s result, it is not a disaster when viewed against the financial and political turmoil across the globe. We have, as you know, doubled our size over a four year period, and 2013 was a year of consolidation and training. This year’s physical growth - 10% Cash spent on new floors - $16 million Dividends paid - $14.76 million Tax paid - $10 million Bank balance - decrease of only $4.5 million A more experienced team should continue to drive Servcorp’s revenue and profit growth in the coming year. The first two months of the new financial year show our revenue growth is continuing. The strong Australian dollar headwind appears to have slowed and this also should work in our favour. In the coming year we intend to add 10% to the number of offices we have across the globe and increase our dividend from 15 cents per share to at least 16 cents per share. Servcorp is well positioned financially, and from a personnel perspective, to take advantage of any further opportunities that may arise in our industry. As the CEO, I am happy with our underlying performance when benchmarked against all our major competitors. I am confident that our growth and impact in all our markets will continue. I wish to thank our Board; Bruce Corlett, Rick Holliday-Smith, Mark Vaile and Taine Moufarrige for their help and guidance. And a special thanks to our team. It has been a tough three years and they have performed admirably. A G Moufarrige S E R VC O R P A N N U A L R E P O R T 2 013 – T H E J O U R N E Y 11 J a p a n PAGE 12 S E R VC O R P A N N U A L R E P O R T 2 013 – T H E J O U R N E Y 13 Around the World on Our Global Quest 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 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 the time of the IPO, Servcorp operated in 8 countries with 35 floors. In October 2009, it operated in 14 countries, with 73 floors. At 30 June 2013, Servcorp operated 132 floors in 52 cities across 21 countries. In the 48 months to June 2013, 72 new floors have been opened, and Servcorp’s operations have expanded into 7 new countries. The 2011 financial year was Servcorp’s biggest expansion year in its history, with 40 floors opening in 29 cities across 12 countries. We have continued a steady pace of expansion over the subsequent years. With the majority of leases executed at or near the bottom of the market, Servcorp will be competitive if global business confidence recovers. We are well placed to move forward, with over 130 floors providing real critical mass. This year we have opened new floors in Singapore, Melbourne, Parramatta, Perth, Dubai, two in Riyadh, Dammam, New York and Manila, and expanded floors in Hong Kong and Fukuoka. ▪ In Melbourne we opened an additional floor in the prestigious 101 Collins Street, Melbourne’s “most influential business address”, surrounded by the city’s political, theatre, culinary and retail districts. ▪ New York’s new floor is on the 40th level of 17 State Street in the heart of the Financial District near Wall Street, with stunning, permanently protected views of the city. ▪ In Perth we opened a floor in Brookfield Place, one of Australia’s most significant commercial developments and the first major skyscraper to grace the City of Perth’s skyline in over 20 years. We expect to open approximately 10 floors in the 2014 financial year. This will bring the total floor openings to 82 during the 60 months of expansion. PAGE 14 New York - 17 State Street Hong Kong - One Peking Road Manila - 6750 Ayala Avenue Melbourne - 101 Collins Street Riyadh - Akaria Plaza Singapore - PSA Building Perth - Brookfield Place Riyadh - Business Gate Parramatta - Deloitte Building S E R VC O R P A N N U A L R E P O R T 2 013 – T H E J O U R N E Y 15 C h i n a PAGE 16 S E R VC O R P A N N U A L R E P O R T 2 013 – T H E J O U R N E Y 17 New Discoveries Around the World Total floors and locations as at 30 June Floors Locations 2010 2011 2012 2013 2014 projected 82 116 124 132 142 68 103 110 117 127 Total new floors by region for 12 months ended 30 June Region 2010 2011 2012 2013 Total 2014 (est) Total (est) Australia & New Zealand South East Asia Greater China Japan Europe & United Kingdom Middle East United States of America Total 0 0 4 3 1 3 2 13 7 2 0 3 2 7 19 40 2 1 4 0 0 2 0 9 3 2 0 0 0 4 1 10 12 5 8 6 3 16 22 72 1 0 1 1 1 5 1 10 13 5 9 7 4 21 23 82 Dubai - Level 23, Boulevard Plaza Tokyo - Level 1, Marunouchi Yusen Building PAGE 18 Sydney - Level 36, Gateway - the view 2013 - 2014 new floors Australia Sydney October 2013 China Beijing March 2014 Japan Tokyo September 2013 Middle East Dubai September 2013 Riyadh January 2014 Abu Dhabi February 2014 Dammam February 2014 Riyadh June 2014 United Kingdom London May 2014 United States New York June 2014 Sydney - Level 36, Gateway S E R VC O R P A N N U A L R E P O R T 2 013 – T H E J O U R N E Y 19 Green Initiatives Servcorp continues to recognise the seriousness of climate change and proactively contributes to the reduction of our environmental footprint. Through our six-year partnership with Greenfleet we have managed to make a significant change. There is a growing need for businesses to become sustainable to ensure the protection of the environment from further damage. The Green Offices Project is Servcorp’s ongoing global initiative aiming to reduce our impact on the environment. The project aims to reduce our carbon emissions and offset our existing footprint. As part of The Green Offices Project, Servcorp plants a tree for every Virtual Office sold online through the Servcorp website – as the significance of online search grows, so do our contributions to this initiative. Servcorp has already planted more than 25,084 trees which will offset 6,722.16 tonnes of carbon dioxide from the atmosphere during their lifespan. The Servcorp forest covers more than 100,000 square metres of regional land and has an environmental impact equivalent to removing more than 1,250 cars from the road. A significant part of the program is to educate our teams and clients on improving their day-to-day impact on the environment. We contribute to the environment by reducing our paper use in the office and choosing green buildings as a growing part of our property portfolio. Servcorp believes that clients value the Green Office Project and its contribution to the future. We believe that they appreciate working with a business partner who is committed to supporting the community and the planet with responsible corporate measures. PAGE 20 Around the World with Community Service 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. Over the last two years, Servcorp has raised and donated in excess of $1 million to help the below organisations. In Australia, Youngcare continues to be the main focus of our fundraising, and non-executive Director, Taine Moufarrige, continues to be heavily involved with this organisation. The other organisations we strongly supported globally this year included: ▪ Beyondblue ▪ Cancer Council ▪ Carers Australia – Pollie Pedal ▪ Cedar Creek Wombat Rescue ▪ Everyday Hero ▪ Exodus Foundation ▪ Lifestart – Kayak for Kids ▪ MS Research Australia ▪ Murdoch Childrens Research Institute ▪ New Israel Fund Australia Foundation ▪ OzHarvest ▪ Rotary Club of Sydney ▪ Sydney Children’s Hospital Foundation ▪ St Vincents & Mater Health – Sydney ▪ The Commonwealth Day Council of NSW ▪ The Mater Hospital – Sydney ▪ Assisi Hospice – Singapore ▪ Children’s Joy Foundation - Philippines ▪ Persatuan Rumah Sayangan - Kuala Lumpur Orphanage Home ▪ Rashid Pediatric Therapy Centre – Dubai ▪ The Family Thailand ▪ Think Pink – Breast Cancer Awareness – Bahrain and Qatar ▪ Tyler Foundation – Japan ▪ World Cancer Research Fund – Hong Kong Servcorp also contributed to many other local charitable organisations around the world, and sponsors and supports the Australian Chamber Orchestra, Museum of Contemporary Art, Opera Australia and Sydney Dance Company. Servcorp is a racially diverse company, supporting Christian, Buddhist, Muslim and Jewish causes. 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. S E R VC O R P A N N U A L R E P O R T 2 013 – T H E J O U R N E Y 21 H o n g K o n g PAGE 22 2IFC Building PAGE 23 S E R VC O R P A N N U A L R E P O R T 2 013 – T H E J O U R N E Y 23 Information & Communication Technology S E A s i a Servcorp’s global network continues to lead the way, providing a fantastic competitive advantage for Servcorp, and a platform that is becoming more and more recognised by our clients as providing them with a competitive advantage as well. Servcorp’s cloud style voice solutions are enabling us to provide easy access to global markets, and the tools that are being developed to utilise this network will also help Servcorp’s bottom line. This year we have launched Gnee, a low cost Auto Attendant product; a product to enable Servcorp’s capabilities to be white labelled; and Onefone, enabling clients to connect directly to the Servcorp network with telephone numbers in multiple locations on their smart phone or tablet. 2013 / 2014 sees us embarking on an ambitious renewal of our back end systems to again push us further ahead of the competition, and improve both our clients’ and team members’ experience in dealing with the business. In doing this, Servcorp is truly embracing the Cloud. PAGE 24 Service & Products Local number Professional phone greetings Voicemail notification Automated attendant Call diversion Conference calling Extension rings on mobile Voicemail & fax to email Onefone Awards Premier’s NSW 2012 Large Services Export Winner Australian National 2012 Large Services Export Winner S E R VC O R P A N N U A L R E P O R T 2 013 – T H E J O U R N E Y 25 S E A s i a PAGE 26 S E R VC O R P A N N U A L R E P O R T 2 013 – T H E J O U R N E Y 27 Global Communications Network SAN FRANCISCO LOS ANGELES IRVINE CHICAGO TYSONS CORNER DALLAS HOUSTON ATLANTA MIAMI BOSTON NEW YORK CITY PHILADELPHIA WASHINGTON D.C. LONDON PARIS BRUSSELS ISTANBUL BEIRU T KUWAIT CI TY AL KHOBAR - DAMM AM R IYADH JED DAH BEIJING SHANGHAI HANGZHOU TOKYO YOKOHAMA NAGOYA OSAKA FUKUOKA MANAMA DUBAI ABU DHABI DOHA MUMBAI HYDERABAD CHENGDU GUANGZHOU HONG KONG BANGKOK MANILA KUALA LUMPUR SINGAPORE PAGE 28 BRISBANE SYDNEY CANBERRA PERTH ADELAIDE MELBOURNE HOBART AUCKLAND WELLINGTON CHICAGO TYSONS CORNER BOSTON NEW YORK CITY PHILADELPHIA WASHINGTON D.C. SAN FRANCISCO LOS ANGELES IRVINE DALLAS HOUSTON ATLANTA MIAMI LONDON PARIS BRUSSELS ISTANBUL BEIRU T KUWAIT CI TY AL KHOBAR - DAMM AM R IYADH JED DAH BEIJING SHANGHAI HANGZHOU TOKYO YOKOHAMA NAGOYA OSAKA FUKUOKA MANAMA DUBAI ABU DHABI DOHA MUMBAI HYDERABAD CHENGDU GUANGZHOU HONG KONG BANGKOK MANILA KUALA LUMPUR SINGAPORE BRISBANE SYDNEY CANBERRA PERTH ADELAIDE MELBOURNE HOBART AUCKLAND WELLINGTON PA GE 29 Our Captains The Board and Executive Bruce Corlett – Chairman Rick Holliday-Smith – Non-Executive Director Mark Vaile – Non-Executive Director Alf Moufarrige – Executive Director, CEO Taine Moufarrige – Non-Executive Director Marcus Moufarrige (BCom) – Chief Operating Officer Thomas Wallace (BBS, FCA) – Chief Financial Officer Greg Pearce (CA, ACSA, ACIS) – Company Secretary Head Office Executive Simon Smith (MA (Cantab), MBA) – Vice President Virtual Office Selene Ng (BCom, BA) – General Manager Serviced Offices Warren James – Manager International Property Portfolio Lachlan Buchanan (BCom) – International Property Project Manager Matthew Baumgartner (BInfTech (SE), CCIE) – Chief Information Officer Daniel Kukucka (BE, DipEngPrac) – Chief Technology Officer Operational Executive Olga Vlietstra (BA) – General Manager Japan Liane Gorman – General Manager Australia & New Zealand Laudy Lahdo (BCom) – General Manager Middle East Jennifer Goodwyn (BA) – Vice President / General Manager USA Michaela Julian (BA) – Senior Manager China Krystle Sulway – Senior Manager UK & Turkey Wilma Wu (BA Hons) – General Manager Hong Kong Anne Guinebault (BBus, MMR) – Senior Manager Paris Fabienne Hajjar (PharmD) – Senior Manager Qatar Manami Alberto (BA) – Senior Manager Japan A R O U ND t he world WE G O PA GE 30 A R O U ND t he Pworld OF SE R V C R O Tu r k e y PAG E 3 4 PAG E 3 5 S E R VC O R P A N N UA L R E P O R T 2 013 – C O R P O R AT E G OV E R N A N C E 3 5 Corporate Governance The Board has responsibility for the long term financial 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 Principles and Recommendations. The Board is continually working to improve the Company’s governance policies and practices, where such practices will bring benefits or efficiencies to the Company. Details of Servcorp’s compliance are set out below, and in the ASX principles compliance statement on pages 40 to 44 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. 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. Responsibility for management of the Company’s business activities is delegated to the CEO and management. The Board comprises five directors (one executive and four non-executive). Three non-executive directors are independent. The Board’s primary responsibilities are: ▪ 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 There has been no change to the Board since the last annual report. 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 are set out on pages 48 and 49 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 names of the directors of the Company in office at the date of this annual report are set out in the table on the following page. Directors’ independence It is important that the Board is able to operate independently of executive management. The non-executive directors, with the exception of Mr Taine Moufarrige, are considered by the Board to be independent of management. Independence is assessed by determining whether the director is free of any business interest or other relationship which could materially interfere with the exercise of their unfettered and independent judgement and their ability to act in the best interests of Servcorp. Mr Taine Moufarrige is the only non-executive director who has ever been employed by Servcorp. Mr Taine Moufarrige resigned as an executive of Servcorp on 31 December 2011 after 15 years of service. PAG E 3 6 Names of directors in office at the date of this annual report First Appointed Non-executive Independent Retiring at 2013 AGM Seeking re-election at 2013 AGM Director B Corlett 19 October 1999 R Holliday-Smith 19 October 1999 A G Moufarrige 24 August 1999 T Moufarrige 25 November 2004 M Vaile 27 June 2011 Yes Yes No Yes Yes Yes Yes No No Yes Yes No No No No Yes N/A N/A N/A N/A Election of directors The Company’s Constitution specifies that an election of directors must take place each year. One-third of the Board (excluding the Managing Director and rounded down to the nearest whole number), and any other director who has held office for three or more years since they were last elected, must retire from office at each annual general meeting. The directors are eligible for re-election. Directors may be appointed by the Board during the year. Directors appointed by the Board must retire from office at the next annual general meeting. Director and officer dealings in Company shares Servcorp policy prohibits directors, officers and senior executives from dealing in Company shares or exercising options: ▪ in the six weeks prior to the announcement to the ASX of the Company’s half-year and full-year results; or ▪ whilst in possession of non-public price sensitive information. Any changes to directorships will be dealt with by the full Board and accordingly a Nomination Committee has not been established. Conflict of interest In accordance with the Corporations Act 2001 and the Company’s Constitution, directors must keep the Board advised, on an ongoing basis, of any interest that would potentially conflict with those of Servcorp. Where the Board believes that an actual or potential significant conflict exists, the director concerned, if appropriate, will not take part in any discussions or decision making process on the matter and will abstain from voting on the item being considered. Details of director related entity transactions with the Company and the Consolidated Entity are set out in Note 26 to the Consolidated financial report. Independent professional advice Each director has the right to seek independent professional advice, at Servcorp’s expense, to help them carry out their responsibilities. Prior approval of the Chairman is required, which will not be unreasonably withheld. A copy of any written advice received by the director is made available to all other members of the Board. Directors must discuss proposed purchases or sales of shares in the Company with the Chairman before proceeding. The Chairman must receive approval from the next most senior director before proceeding. Directors must also notify the Company Secretary when they buy or sell shares in the Company. This is reported to the Board. In accordance with the provisions of the Corporations Act 2001 and the Listing Rules of the ASX, each director has entered into an agreement with the Company that requires disclosure to the Company of all information needed for it to comply with the obligation to notify the ASX of directors’ holdings and interests in its securities. The Company’s Securities Trading Policy is available on the Company’s website; servcorp.com.au Ethical standards All directors, managers and employees are expected to act with the utmost integrity and objectivity, striving at all times to enhance the reputation and performance of Servcorp. Codes of conduct, outlining the standards of personal and corporate behaviour to be observed, form part of Servcorp’s management and team manuals. S E R VC O R P A N N UA L R E P O R T 2 013 – C O R P O R AT E G OV E R N A N C E 37 Corporate Governance (continued) Auditor independence The Company’s auditor Deloitte Touche Tohmatsu (Deloitte) was appointed at the annual general meeting of the Company on 6 November 2003. Deloitte rotate their audit engagement partner every five years. 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. Diversity The Company has a culture that both embraces and achieves diversity in its global operations. The Company is culturally diverse in its employment practices and has a global culture of employing the best qualified available talent for any position regardless of gender, age or race. The Company benefits from the diversity of its team members and has training programs to assist with developing their skills and with career advancement. The Company travels team members to work in its global locations, giving them exposure to and understanding of various differing cultures and marketplaces. The Company has a high participation of women across all employment levels. Full time employees Consolidated entity Senior executives Board Total No. 763 21 5 Women % 82% 57% 0% Men % 18% 43% 100% Under the Workplace Gender Equality (WGE) Act, any employer with 100 or more employees must submit an Annual Compliance Report detailing the composition of its workplace profile in Australia. Servcorp has lodged its WGE Report for 2013 with the WGE Agency. Shareholders may access the report on the Company’s website; servcorp.com.au 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. Committees The Board does not delegate major decisions to committees. Committees are responsible for considering detailed issues and making recommendations to the Board. The Board has established two committees to assist in the implementation of its corporate governance practices. Audit and Risk Committee The members of the Audit and Risk Committee during the year were: ▪ Mr R Holliday-Smith (Chair) ▪ Mr B Corlett ▪ Mr T Moufarrige A majority of members are 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 auditor 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. PAG E 3 8 The Audit and Risk Committee met four 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 its charter, include: ▪ reviewing the financial reports and other financial information distributed externally; ▪ reviewing the Company’s policies and procedures for compliance with Australian equivalents to International Financial Reporting Standards; ▪ monitoring the procedures in place to ensure compliance with the Corporations Act 2001, ASX Listing Rules and all other regulatory requirements; ▪ assisting management in improving the quality of the accounting function; ▪ monitoring the internal control framework and compliance structures and considering enhancements; ▪ overseeing the risk management framework; ▪ reviewing external audit reports to ensure that, where major deficiencies or breakdown in controls or procedures have been identified, appropriate and prompt remedial action is taken by management; ▪ reviewing reports on any major defalcations, frauds and thefts from the Company; ▪ considering the appointment and fees of the external auditor; ▪ reviewing and approving the terms of engagement and fees of the external auditor at the start of each audit; ▪ considering and reviewing the scope of work, reports and activities of the external auditor; ▪ establishing appropriate policies in regard to the independence of the external auditor and assessing that independence; ▪ liaising with the external auditor to ensure that the statutory annual audit and half-yearly review are conducted in an effective manner; ▪ addressing with management any matters outstanding with the auditors, taxation authorities, corporate regulators, Australian Securities Exchange and financial institutions; ▪ monitoring the establishment of appropriate ethical standards. The Audit and Risk Committee Charter is available on the Company’s website; servcorp.com.au Remuneration Committee The Remuneration Committee members during the year were: ▪ The Hon. M Vaile (Chair) ▪ Mr R Holliday-Smith ▪ Mr T Moufarrige The primary function of the Remuneration Committee is to assist the Board in adopting remuneration policy and practices that: ▪ supports the Board’s overall strategy and objectives; ▪ attracts and retains key employees; ▪ links total remuneration to financial performance and the attainment of strategic objectives. Specifically this will include: ▪ making recommendations to the Board on appropriate 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; ▪ developing and recommending to the Board short term and long term incentive programs; ▪ monitoring superannuation arrangements for the Company; ▪ reviewing recruitment, retention and termination strategies and procedures; ▪ ensuring the total remuneration policy and practices are designed with proper consideration of accounting, legal and regulatory requirements for both local and foreign jurisdictions; ▪ 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 S E R VC O R P A N N UA L R E P O R T 2 013 – C O R P O R AT E G OV E R N A N C E 3 9 Corporate Governance (continued) ASX principles compliance statement This table provides a description of the manner in which Servcorp complies with the ASX Corporate Governance Principles and Recommendations or where applicable, an explanation of any departures from the Principles. Compliance has been measured against the 2nd edition of the Principles and Recommendations with 2010 Amendments. Principle 1 Recommendation 1.1 Lay solid foundations for management and oversight Establish and disclose the respective roles and responsibilities of board and management. 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 for the Board and those delegated to the Managing Director and senior executives. Primary responsibilities are set out on page 36. Recommendation 1.2 Disclose the process for evaluating the performance of senior executives. The Board Charter is available on the Company’s website; servcorp.com.au Servcorp Board Response The process for evaluating the performance of senior executives is included in the remuneration report on pages 58 to 61 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 36 to 44 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. Three of the four 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 not exercised by the same individual. 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 the full Board. Any director appointed by the Board must retire from office at the next annual general meeting and seek re-election by shareholders. 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. 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 36 to 44 of this annual report. PAG E 4 0 Principle 3 Promote ethical and responsible decision-making Actively promote ethical and responsible decision-making. Recommendation 3.1 Servcorp Board Response Recommendation 3.2 Servcorp Board Response 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. 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. Establish a policy concerning diversity and disclose the policy or a summary of that policy. The policy should include requirements for the board to establish measurable objectives for achieving gender diversity for the board to assess annually both the objectives and progress in achieving them. The Company has not established a written policy concerning diversity. The Company has a culture that both embraces and achieves diversity in its global operations. The establishment of a written policy with measurable objectives for achieving gender diversity would not bring any efficiency or greater benefit to the current diverse culture. Recommendation 3.3 Disclose in each annual report the measurable objectives for achieving gender diversity set by the board in accordance with the diversity policy and progress towards achieving them. Servcorp Board Reponse The Board has not set measurable objectives for gender diversity. The Company is culturally diverse in its employment practices and has a global culture of employing the best qualified available talent for any position regardless of gender, age or race. The Company benefits from the diversity of its team members and has training programs to assist with developing their skills and with career advancement. The Company travels team members to work in its global locations, giving them exposure to and understanding of various differing cultures and marketplaces. Recommendation 3.4 Disclose in each annual report the proportion of women employees in the whole organisation, women in senior executive positions and women on the board. Servcorp Board Reponse The Company has a high participation of women across all employment levels, including in senior executive positions, however there are no women on the Board. The Board supports diversity in gender and is interested in having the best Board available, therefore appointment is based on merit, not gender. The proportion of women employees in the Company is provided in the table on page 38 of this annual report. Recommendation 3.5 Provide the information indicated in the Guide to reporting on Principle 3. An explanation of departures from Recommendations 3.2 and 3.3 is included in the respective responses. Servcorp Board Response The relevant 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. S E R VC O R P A N N UA L R E P O R T 2 013 – C O R P O R AT E G OV E R N A N C E 41 Corporate Governance (continued) 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 non-executive directors, and two members are independent directors. 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 38, and 48 to 50 of this annual report. Recommendation 4.4 (continued) ▪ procedures for the selection and appointment of the external auditor, and for the rotation of external audit engagement partners. Servcorp Board Response The external auditor, Deloitte Touche Tohmatsu (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. Principle 5 Make timely and balanced disclosure Promote timely and balanced disclosure of all material matters concerning the company. Deloitte rotate their audit engagement partner every five years. 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. PAG E 42 Principle 6 Recommendation 6.1 Respect the rights of shareholders Respect the rights of shareholders and facilitate the effective exercise of those rights. 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 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. Servcorp Board Response 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. Principle 7 Recommendation 7.1 Servcorp Board Response Recommendation 7.2 Recognise and manage risk Establish a sound system of risk oversight and management and internal control. Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies. 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 in which all executives 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. 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. 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: Servcorp Board Response ▪ 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 is working with management to ensure continuous improvement to the risk management and internal control systems. S E R VC O R P A N N UA L R E P O R T 2 013 – C O R P O R AT E G OV E R N A N C E 4 3 Corporate Governance (continued) ASX principles compliance statement (continued) Principle 7 (continued) Recognise and manage risk Establish a sound system of risk oversight and management and internal control. 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 Servcorp Board Response 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. All three members of the Remuneration Committee are non-executive directors and two members are independent 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 57 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 39 and 50 of this annual report. Recommendation 8.4 (continued) ▪ the existence and terms of any schemes for retirement benefits, other than superannuation, for non-executive directors. Servcorp Board Response There are no such schemes in existence. PAG E 4 4 M i d d l e E a s t PAG E 4 5 S E R VC O R P A N N UA L R E P O R T 2 013 – C O R P O R AT E G OV E R N A N C E 4 5 M i d d l e E a s t Emirates Towers Dubai Habtoor Business Tower Dubai Boulevard Plaza 2 Dubai Tornado Tower Doha Commercial Bank Plaza Doha Bahrain Financial Harbour Manama Al Mamoura Bldg Abu Dhabi Sahab Tower Kuwait Beirut Souks Beirut Servcorp’s Middle East skyline King’s Road Tower Jeddah Al Faisaliah Tower Riyadh Tekfen Tower Istanbul Al Hugayet Tower Al Khobar-Dammam Jameel Square Jeddah The Business Gate Riyadh Al Akaria Plaza Riyadh Louis Vuitton Orjin Building Istanbul S E R VC O R P A N N UA L R E P O R T 2 013 – D I R EC TO R S ’ R E P O R T 47 Directors’ Report The directors of Servcorp Limited (“the Company”) present their report together with the Consolidated financial report of the “Consolidated Entity”, being the Company and its controlled entities, for the financial year ended 30 June 2013. 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 35 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 Independent non-executive director BA, LLB Member of Audit and Risk Committee Appointed October 1999 For more than 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. Bruce is also Chair of the Mark Tonga Perpetual Relief Trust, Chair of Lifestart Co-operative Limited and an Ambassador of The Australian Indigenous Education Foundation. Directorships of listed entities in the last three years: ▪ The Trust Company Limited since October 2000 (Chair). Rick Holliday-Smith Independent non-executive director BA (Hons), CA, FAICD 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 Chair of ASX Limited and Cochlear 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 (Chair since March 2012); ▪ Cochlear Limited since February 2005 (Chair since July 2010). PAG E 4 8 Company Secretary Greg Pearce B Com, CA, ACSA, 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 10 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. The Hon. Mark Vaile AO Independent non-executive director Taine Moufarrige Non-executive director BA, LLB Member of Audit and Risk Committee Member of Remuneration Committee Appointed November 2004 Taine joined Servcorp in 1996 as a Trainee Manager. 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 resigned from his operational role at Servcorp effective 31 December 2011, but remains on the Board as a non-executive director. Taine still takes a role in the philanthropic activities of Servcorp. Directorships of listed entities in the last three years: ▪ None. Chair of Remuneration Committee Appointed June 2011 Mark had a distinguished career as an Australian 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 of Australia 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 Australia Holdings Limited, StamfordLand Limited and also Chair of Whitehaven Coal 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 (Aston Resources merged with Whitehaven Coal and was removed from the official list of ASX on 3 May 2012); ▪ CBD Energy Limited from August 2008 to February 2013 (Chair); ▪ StamfordLand Corporation Ltd (listed on SGX) since August 2009; ▪ Virgin Australia Holdings Limited since September 2008; ▪ Whitehaven Coal Limited since May 2012 (Chair). S E R VC O R P A N N UA L R E P O R T 2 013 – D I R EC TO R S ’ R E P O R T 4 9 Directors’ Report (continued) Directors’ meetings held and attendances at meetings The number of directors’ and board committee meetings held, 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. Only those directors who are members of the relevant committees have their attendance recorded. Other directors do attend committee meetings from time to time. Director Number of meetings held Number of meetings attended B Corlett R Holliday-Smith A G Moufarrige T Moufarrige M Vaile Board Audit & Risk Committee Remuneration Committee 6 6 6 6 6 6 4 4 3 4 1 1 1 1 The details of the function and membership of the committees are presented in the Corporate Governance statement on pages 38 and 39. 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. Ordinary shares in Servcorp Limited Director B Corlett R Holliday-Smith Direct - - A G Moufarrige (i) 547,436 T Moufarrige (i) M Vaile - - Indirect 413,474 250,000 49,566,667 1,800,000 - Options over ordinary shares - - - - - Notes: 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. PAG E 5 0 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, there are no unissued ordinary shares of the Company under option (2012: 140,000 options). Options expired During the year, 140,000 options over unissued shares expired and were cancelled. These options were granted under the Servcorp Executive Share Option Scheme on 22 February 2008 with an expiry date five years after the issue date of the option. Details of the options were: Grant date Expiry date Exercise price 22 February 2008 22 February 2013 $4.60 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. Share buy-back On 28 August 2012, the Company announced it was establishing an on-market buy-back program to enable the Company to repurchase shares in itself from 11 September 2013, for a maximum period of 12 months. The program sought to buy up to 5.0 million ordinary shares (being approximately 5% of the issued ordinary share capital). During the year, or since the end of the financial year, the Company has bought back the following shares: Number of shares Total consideration paid 8,532 $26,449.20 On 27 August 2013, the Company announced it would continue the share buy-back for a further 12 month period. S E R VC O R P A N N UA L R E P O R T 2 013 – D I R EC TO R S ’ R E P O R T 51 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 $21.27 million (2012: $14.80 million). Operating revenue was $208.00 million (2012: $200.79 million). Basic and diluted earnings per share was 21.6 cents (2012: 15.0 cents). Revenue & other income Net profit before tax Net profit after tax Net operating cash flows Cash & cash equivalents Net assets Earnings per share Dividends per share 2013 $’000 2012 $’000 207,995 200,785 27,630 21,271 27,092 99,758 18,329 14,801 32,003 104,334 207,900 198,709 $0.216 $0.150 $0.150 $0.150 Dividends Dividends totalling $14.76 million have been paid or declared by the Company in relation to the financial year ended 30 June 2013 (2012: $14.77 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: 2012 Interim Ordinary shares Final Ordinary shares In respect of the current financial year: 2013 Interim Ordinary shares Final Ordinary shares Cents per share Total amount $’000 Date of payment Franked % 7.50 7.50 7.50 7.50 7,383 7,383 7,382 7,382 4 April 2012 4 October 2012 4 April 2013 2 October 2013 50% 85% 100% 100% Tax rate for franking credit 30% 30% 30% 30% PAG E 5 2 Review of operations Revenue and other income from ordinary activities for the twelve months ended 30 June 2013 was $208.00 million, up 4% from the twelve months ended 30 June 2012. During the year the Australian dollar decreased by an average of 1% against the US dollar and increased 3% against the Euro and 10% against the Japanese yen. In constant currency terms revenue increased by 5% compared to the 2012 year. Net profit before tax for the twelve months to 30 June 2013 was $27.63 million, up 51% from $18.33 million in the prior year. When expressed in constant currency terms, net profit before tax increased by 53% compared to the 2012 year. Cash balances were $99.76 million at 30 June 2013 (30 June 2012: $104.33 million). Of this balance, $9.14 million has been pledged with banks as collateral for bank guarantees and facilities, leaving an unencumbered cash balance of $90.62 million in the business as at 30 June 2013 (30 June 2012: $95.77 million). The business generated strong net operating cash flows during the 2013 financial year of $27.09 million, down 15% compared to the 2012 financial year (2012: $32.00 million). Before tax payments, the business produced cash flows of $37.22 million (2012: $37.39 million). Mature business The mature floor profit before tax for the twelve months ended 30 June 2013 was $42.22 million (2012: $37.31 million). Business conditions remained challenging during the first half of the 2013 financial year. Aggressive price competition impacted the entry pricing point for new clients, and this adversely impacted revenue growth. Conditions improved in the second half of the 2013 financial year and this is evidenced by the net profit before tax growth of 22% compared to the first half. Despite the strong Australian dollar headwind, mature revenue increased by 4% compared to the 2012 financial year. Average mature floor occupancy for the 2013 financial year was 79% (2012: 78%). As previously stated, the Company’s current objective is to increase occupancy to approximately 85% to 90% by the end of the 2013 calendar year. The Company is encouraged by the progress to date and can confirm that mature occupancy had reached 81% by the fourth quarter of the 2013 financial year. The Company is satisfied with the performance of the Virtual Office business. Mature revenue & NPBT ($’000) Immature business The immature floor loss for the twelve months ended 30 June 2013 was $14.59 million (2012: $18.98 million). Revenue and occupancy continues to improve in the immature business. Immature NPBT ($’000) 0 -5,000 -10,000 -15,000 -20,000 -14,586 -18,978 NPBT 2013 2012 38 floors were immature at 30 June 2013 in the following regions. It is anticipated that 23 of these floors will mature early in the 2014 financial year. Immature floors by region USA 19 9 ANZ/SEA 4 North Asia 6 EMEA ANZ/SEA Australia, New Zealand and South East Asia North Asia Japan and Greater China EMEA Europe and the Middle East USA United States of America Change in depreciation rate The Board of Directors elected to change the depreciation rate of leasehold improvements from 15% to 10%, effective 1 July 2012. A depreciation rate of 10% more accurately reflects the actual life of a Servcorp floor, and also more closely aligns Servcorp’s depreciation policy to the industry standards. 200,000 150,000 100,000 50,000 0 188,472 180,630 The impact of the rate change was to increase net profit before tax by $6.13 million in the 2013 financial year. 42,216 37,307 Revenue NPBT 2013 2012 S E R VC O R P A N N UA L R E P O R T 2 013 – D I R EC TO R S ’ R E P O R T 5 3 Directors’ Report (continued) Review of operations (continued) Expansion Our intention in the 2013 financial year was to continue to grow the Servcorp footprint in established markets. In the 2013 financial year 10 new floors were opened, bringing total new floor openings to 72 floors in the 48 months to 30 June 2013. Expansion - 48 months to 30 June 2013 USA 22 17 ANZ/SEA Australia, New Zealand and Southeast Asia Mature floors During the 2013 financial year the performance in New Zealand, Thailand and Malaysia was consistent with the 2012 financial year. However, the performance in Perth, Sydney and Singapore was worse than anticipated. We were slow to react with pricing changes required in the Australian market and we believe a management restructure combined with a review of pricing has rectified these issues. The Perth market however continues to remain challenging. A floor in Singapore was closed in the second half of the 2013 financial year. Mature results ($’000) EMEA 19 14 North Asia There are plans to open a further eight large floors in the 2014 financial year, adding approximately 10% to office capacity. As at 30 June 2013, Servcorp operated 132 floors in 52 cities across 21 countries. Floors by region - 30 June 2013 80,000 60,000 40,000 20,000 0 68,474 68,225 20,693 17,916 Revenue NPBT 2013 2012 North Asia 33 31 EMEA Immature floors ANZ/SEA 43 22 USA 3 India (Franchise) Five new floors opened in Singapore, Manila, Melbourne, Parramatta and Perth during the 2013 financial year. Immature floor losses were $4.58 million for the 2013 financial year (2012: $2.36 million). PAG E 5 4 North Asia Mature floors North Asia produced a solid result in the 2013 financial year. The results from Shanghai and Hong Kong however continue to disappoint. The Company is now focused on rectifying the issues identified in each of these cities. The weak Japanese yen during the period had an impact on translated revenue and profits, however underlying earnings from Japan continue to remain robust. Europe and the Middle East Mature floors Europe and the Middle East remains a key growth market for Servcorp. Revenues and profits from the region continue to improve. London, Qatar, UAE, Saudi Arabia and Bahrain continue to grow in line with expectations. We now comply with licensing regulations in the Kingdom of Saudi Arabia and as at 30 June 2013 our financial investment into the Kingdom of Saudi Arabia was $13.72 million. A floor in Tokyo was closed during the first half of the 2013 financial year. Mature results ($’000) Mature results ($’000) 69,998 67,425 80,000 60,000 40,000 20,000 0 80,000 60,000 40,000 20,000 0 38,759 31,687 7,752 4,674 Revenue NPBT 12,576 10,123 Revenue NPBT 2013 2012 2013 2012 Immature floors Immature floor losses in North Asia were $1.90 million for the 2013 financial year (2012: $1.80 million). Immature floors Four new floors opened in Dubai, Riyadh (two) and Dammam in the 2013 financial year. Immature floor losses were $2.32 million in the 2013 financial year (2012: $2.99 million). USA Revenue from our USA business continues to improve. On a run rate basis, the USA business as a whole (excluding the floor opened in March 2013 in New York) is now cash neutral. All floors in the USA (except one new floor) will mature at the beginning of the 2014 financial year. Occupancy across the entire USA portfolio had reached 88% by June 2013. Results ($’000) 40,000 20,000 0 -20,000 -40,000 12,357 8,737 -5,792 -10,947 Revenue NPBT 2013 2012 S E R VC O R P A N N UA L R E P O R T 2 013 – D I R EC TO R S ’ R E P O R T 5 5 Directors’ Report (continued) New locations New locations opened by the Consolidated Entity during the course of the financial year are set out in the following table. City Singapore Melbourne Parramatta Perth Dubai Riyadh Riyadh Dammam New York Manila Location Offices Level 26, PSA Building Level 18, 101 Collins Street Level 15, Deloitte Building Level 11, Brookfield Place Level 21, Al Habtoor Business Tower, Dubai Marina Level 6, Akaria Plaza Level 1, The Business Gate Level 20, Al Hugayet Tower Level 40, 17 State Street Level 17, 6750 Ayala Avenue Office Tower 39 40 51 41 18 55 35 15 38 47 Opened July 2012 September 2012 November 2012 November 2012 December 2012 January 2013 January 2013 January 2013 March 2013 March 2013 Events subsequent to balance date Dividend On 27 August 2013 the directors declared a fully franked final dividend of 7.50 cents per share, payable on 2 October 2013. Key Executive Bonus Pool Scheme The Key Executive Bonus Pool Scheme which was effective from 1 July 2010 was wound up after the end of the year. The financial effect of the above transactions have not been brought to account in the financial statements for the year ended 30 June 2013. The directors are not aware of any matter or circumstance, other than that referred to above or in the financial statements or notes thereto, that has arisen since the end of the year that has significantly affected, or may significantly affect, the operations of the Consolidated Entity, the results of those operations, or the state of affairs of the Consolidated Entity, in future financial years. Likely developments The Consolidated Entity will continue to pursue its policy of seeking to increase the profitability and market share of its major business sectors during the next financial year. PAG E 5 6 Remuneration report Remuneration principles The Board recognises that the Consolidated Entity’s performance is dependent on the quality and contribution 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, regular reviews are undertaken that involve cross referencing position descriptions to reliable accessible remuneration surveys and comparing current remuneration packages with the latest survey information. Servcorp’s executive remuneration policy and principles are designed to ensure that the Consolidated Entity: ▪ provides competitive rewards that attract, retain and motivate the highest calibre executives; ▪ encourages a strong and long term commitment to Servcorp; ▪ builds a structure for long term growth and succession planning; ▪ structures remuneration at a level that reflects the executive’s duties and accountabilities and is competitive within Australia and, for certain roles, internationally; Non-executive directors Fees and payments to non-executive directors reflect the demands which are made on, and the responsibilities of, the directors. Non-executive directors’ fees and payments are reviewed by the Board. The Board ensures non-executive directors’ fees and payments are appropriate and in line with the market. Non-executive directors are not employed under a contract and do not receive share options or other equity based remuneration. Directors’ fees Non-executive directors’ fees are determined by the Board within an aggregate directors’ fees limit approved by shareholders. The fees limit currently stands at $500,000 per annum inclusive of payments for superannuation. This limit was approved at the 2011 Annual General Meeting. 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; ▪ Chair of the Audit and Risk Committee - an additional $10,000 per annum including superannuation. Additional fees are not paid for membership of Board committees other than as referred to in the previous paragraph. There was no increase in individual non-executive directors’ fees during the 2013 financial year. ▪ aligns executive incentive rewards with the creation of value for shareholders; Retirement allowances for directors ▪ complies with applicable legal requirements and appropriate standards of governance. Non-executive directors are not entitled to retirement allowances. The framework may provide a mix of fixed and variable pay, and a blend of short and long term incentives. The Board’s current policy regarding remuneration for key management personnel is summarised on pages 58 to 61. Non-executive directors are remunerated on a different basis to senior executives as set out below. Details of remuneration Details of the nature and amount of each element of the remuneration of each director of Servcorp Limited for the year ended 30 June 2013 are set out on pages 62 and 63. S E R VC O R P A N N UA L R E P O R T 2 013 – D I R EC TO R S ’ R E P O R T 5 7 Directors’ Report (continued) Remuneration report (continued) Key management personnel (other than non-executive directors) Remuneration structure 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. The Remuneration Committee frequently reviews the Consolidated Entity’s remuneration practices to ensure they provide key management personnel with a structured scheme for long term and short term incentives, based on earnings, earnings growth and individual performance criteria. The criteria for each year have been detailed in the remuneration report included in the respective year’s 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. The current scheme was developed by the Remuneration Committee to more closely link key management personnel remuneration to the Consolidated Entity’s performance and shareholder reward. Payment of incentives under this scheme commenced in the 2012 financial year. Following the first three years of operation, the Remuneration Committee has undertaken a review of the current scheme. Having carefully reflected on the design of the scheme, the Remuneration Committee resolved to wind up the current scheme following the 2013 financial year. The Remuneration Committee, in consultation with the Chief Executive Officer, will design a new scheme which will be more broadly based and reward key management personnel on the performance of both the Consolidated Entity and the individual. The new scheme will operate for the 2014 financial year. Details of incentive schemes are included on pages 60 and 61. Consolidated Entity performance 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, has taken into account the foreseen negative impact of the Consolidated Entity’s expansion program during those years. In October 2009 the Consolidated Entity began an aggressive expansion program to substantially expand the Servcorp footprint globally. Seventy new floors have opened between October 2009 and June 2013, more than doubling the number of floors that were operating at 30 June 2009. The large number of immature floors as a consequence of the expansion program has had a material negative impact on profitability from 2010 through to this year. The 2009 financial year witnessed a record result for the Consolidated Entity prior to the global financial crisis. The Consolidated Entity’s net profit after tax increased to $34.10 million in 2009. Largely due to the expansion program, net profit after tax decreased to $2.01 million in 2010. As the immature floors come to maturity, net profit after tax has steadily increased. In 2011, net profit after tax increased marginally to $2.49 million and this trend continued in 2012 with net profit after tax rising to $14.80 million. In 2013, net profit after tax increased by 44% to $21.27 million. After dropping to $25.13 million in 2010, mature floor net profit before tax increased to $31.19 million in 2011 and to $37.31 million in 2012, an increase of 24% and 20% in the respective years. It continued to increase to $42.22 million in 2013, an increase of 13% for the year. Shareholder wealth also increased in the 2009 financial year. Dividends paid were 25.0 cents per share in 2009, with the Consolidated Entity’s strong performance and healthy cash flow and balance sheet reflected in its ability to pay a ‘special’ dividend. Earnings per share increased to 42.7 cents per share in 2009. 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. Dividends increased to 15.0 cents per share in each of 2012 and 2013 and it is anticipated they will increase should higher profits be generated. Earnings per share increased to 15.0 cents in 2012 and to 21.6 cents in 2013, an increase of 44%. Over the same five year period, the average total remuneration paid to key management personnel, including executive directors, showed similar trends. The average decreased by 1.4% over 2009 and 2010 and decreased by 4% in the 2011 financial year. If the effects of termination benefits paid to T Moufarrige are removed, the increase in 2012 was 21%. The average total remuneration paid to key management personnel increased by 32% in 2013. The increase is predominantly due to payments made under the key executive bonus pool scheme. PAG E 5 8 Remuneration report (continued) Key management personnel (continued) Consolidated Entity performance (continued) 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 for the 2010 and 2011 years, except for exceptional circumstances. In 2012 discretionary bonuses totalling $0.59 million were paid to key management personnel. In recognition of the substantial efforts and commitment of key management personnel in achieving the Consolidated Entity’s improved results over the previous two years, the Remuneration Committee exercised its discretion under the executive bonus pool scheme, and paid bonuses totalling $1.36 million to key management personnel in 2013. This amount represents 6.4% of net profit after tax. Performance comparison Financial year Net profit after tax Mature floor net profit Earnings per share KMP average remuner- ation % increase (decrease) year on year 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. For the 2013 financial year, short term incentives were governed by the objectives and criteria set out in the Servcorp Key Executive Bonus Pool Scheme which became effective on 1 July 2010. Specific details of this Scheme are set out on pages 60 and 61. 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 to which the individual can contribute. 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. 0.8% 3.0% 1.7% (3.7%) Long term incentives 2009 2010 2011 2012 2013 (94.1%) (53.8%) (94.8%) 2.3% 24.3% 24.1% 13.6% (3.8%) 493.7% 19.6% 501.4% 21.4% 43.7% 13.2% 43.7% 31.8% Most of the Consolidated Entity’s key management personnel are long-serving employees. All but one have been employed for more than 10 years and (excluding the CEO) they have an average of 15 years of service. 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 and remain confident that shareholder wealth will continue to increase in the future. 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. The long term incentive component of key management personnel remuneration may comprise a cash incentive which is linked to the performance of the Consolidated Entity and to future service requirements of the individual key management personnel. In prior years, share options have also been utilised. For the 2013 financial year, long term incentives were governed by the objectives and criteria set out in the Servcorp Key Executive Bonus Pool Scheme which became effective on 1 July 2010. Specific details of this Scheme are set out on pages 60 and 61. Retirement benefits Retirement payments 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 contractually entitled to any other retirement allowances. The Board may, in its discretion, determine to make a termination payment to key management personnel taking into consideration matters such as length of service and their overall contribution to the Consolidated Entity. 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 2013 are set out in the table on pages 64 and 65. S E R VC O R P A N N UA L R E P O R T 2 013 – D I R EC TO R S ’ R E P O R T 5 9 Directors’ Report (continued) Remuneration report (continued) Key executive bonus pool scheme Effective 1 July 2010, the Remuneration Committee adopted a new key executive bonus pool scheme. As stated on page 58, the key executive bonus pool scheme was wound up following the end of the 2013 financial year. A new scheme to be effective for the 2014 financial year and beyond will be designed by the Remuneration Committee in consultation with the Chief Executive Officer. The terms of the scheme operating for the 2013 financial year are summarised below. Objectives The scheme objectives were: ▪ to motivate key executives to maximise the profits of the Consolidated Entity and to enhance shareholder return; ▪ to retain the key executives of the Consolidated Entity; ▪ to formalise a visible and transparent incentive structure for the key executives of the Consolidated Entity. The scheme acted as both a short term and long term incentive scheme. Accumulation of funds A bonus pool was established that accumulated funds based on a percentage of both mature floor net profit before tax performance 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 percentages of profit outlined below. There was no minimum net profit before tax threshold for accumulation. Accumulating parameters were: ▪ for the 2011, 2012 and 2013 financial years, funds accumulated in the bonus pool based on: - 2.0% of achieved mature floor net profit before tax; plus - 3.0% of achieved net profit before tax. ▪ should mature floor net profit before tax in any given year have exceeded $75 million, the following bonus pool accumulation percentages would have applied: - 2.5% of achieved mature floor net profit before tax; plus - 3.5% of achieved net profit before tax. ▪ should mature floor net profit before tax in any given year have exceeded $100 million, the following bonus pool accumulation percentages would have applied: - 3.0% of achieved mature floor net profit before tax; plus - 4.0% of achieved net profit before tax. Over the term of the scheme, the accumulation of funds was: Financial year Funds accumulated $ 2011 2012 2013 PAG E 6 0 714,930 1,296,047 1,405,071 Scheme participation The Remuneration Committee, on written recommendation from the CEO, could from time to time invite key executives to join the scheme. The maximum number of participants in any given year was 14 key executives. The following base distribution participation levels applied to the scheme for key management personnel: Title Scheme base distribution level Executive Directors (excluding CEO) Chief Operating Officer General Managers Chief Financial Officer 7% 7% 6% 5% It is important to note that the CEO, Alf Moufarrige, elected not to participate in the scheme. Short term incentive sheme The short term incentive scheme criteria were: ▪ the first short term incentive distribution year was based on the results for the 2012 financial year; ▪ the minimum mature net profit before tax thresholds before any distributions (other than discretionary distributions) could be made from the bonus pool each financial year were as follows: - 2012 financial year - $40 million; - 2013 financial year - $40 million; - 2014 financial year - $44 million; - 2015 and subsequent financial years - the previous year’s threshold increased by 10%. ▪ if the minimum threshold of mature floor net profit before tax was not reached in any performance year, then accumulated bonus pool funds rolled forward to the next financial year; ▪ a minimum of 85% and a maximum of 90% of the bonus pool accumulated funds could be distributed as short term incentive to qualifying key executives in relation to each financial year; ▪ short term incentive payments were inclusive of any superannuation guarantee or equivalent local payments; ▪ if a general manager received a bonus locally, this bonus was deducted from their entitlement under this scheme such that the maximum bonus they received would be the amount under this scheme; ▪ discretionary cash bonuses could also be paid; ▪ the discretionary bonus component of the scheme was defined as the difference between the total base bonus percentage component payable to key executives and 85%; ▪ the discretionary component of the bonus scheme could only be distributed to participating key executives for each particular year; ▪ any discretionary bonus payable to a key executive was directly linked to the key executive’s individual performance and was at the discretion of the Remuneration Committee, based on a written recommendation from the Chief Executive Officer; ▪ all or a portion of the discretionary bonus component could be distributed each performance year notwithstanding that minimum thresholds for base short term incentive distributions were not met. Remuneration report (continued) Key executive bonus pool scheme (continued) Long term incentive scheme The long term incentive scheme criteria were: ▪ the long term incentive would be paid in cash; ▪ long term incentive funds would vest in the qualifying key executives in direct proportion to the executive’s short term incentive component for that year; ▪ the long term incentive cash component would be paid to qualifying key executives on the fifth anniversary of the base short term incentive payment date in relation to each financial year. Vesting criteria The vesting criteria for the scheme were: ▪ base short term incentive bonuses would vest in participating key executives and, if the profit targets for the year were achieved, would be paid no later than 5 business days after the Consolidated Entity released its full-year financial results to the ASX; ▪ if the profit targets for the year were not achieved, the vested short term incentive bonuses rolled forward to each subsequent financial year until the profit targets were achieved; ▪ vested long term incentive bonuses would be paid on the fifth anniversary of the performance year, but only if the short term incentive component was paid to the key executive in relation to the performance year; ▪ if by the fifth anniversary the short term incentive had not been paid, the long term incentive payment date would coincide with the payment date for the short term incentive; ▪ unvested discretionary short term incentive amounts (and associated long term incentive amounts) would carry forward to the following performance year and would add to the general pool for the following performance year; ▪ scheme participants must have been 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 would need to make a profit of greater than zero in their respective area; ▪ scheme participants must have been employed by the Consolidated Entity on the fifth anniversary of the performance year to receive a long term incentive payment for that year; ▪ notwithstanding the above, the Remuneration Committee, on written recommendation from the Chief Executive Officer, had the discretion to pay departing key executives their vested base short term incentive amounts in relation to previous performance years, a pro-rated base short term incentive in relation to the current performance year and vested long term incentive amounts in relation to previous performance years. The stewardship of the scheme was be the responsibility of the Remuneration Committee. Wind up of scheme As stated on page 58, the Remuneration Committee has resolved to wind up the current key executive bonus pool scheme following the 2013 financial year. Prior to winding up the scheme, the Remuneration Committee exercised its discretion to pay participating executives, including key management personnel, their cumulative short term incentive entitlement. This decision took into account a recommendation from the Chief Executive Officer. The Consolidated Entity had achieved a mature floor net profit before tax of just over $38 million (adjusted to remove the impact of the change in depreciation rate of leasehold improvements from 15% to 10% effective 1 July 2012). Based on the performance of the key management personnel over the previous three years in difficult economic conditions and especially their commitment during the Consolidated Entity’s expansion phase, the directors believed the results achieved warranted payment of bonus entitlements. Amounts paid to key management personnel are disclosed in the remuneration table on pages 64 and 65. All participants in the scheme agreed to forfeit any accumulated long term incentive entitlements. Executive share option scheme The Consolidated Entity also has in place an executive share option scheme. The scheme was first approved by shareholders on 19 October 1999 and was subject to various amendments until November 2008. Options do not form a fixed percentage of any key management personnel’s remuneration. The Board may grant options to eligible key management personnel in accordance with the executive share option 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. Non-executive directors are therefore ineligible to participate in the scheme but executive directors are eligible to participate. Pursuant to the scheme, 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. The exercise period for vested options commences three years after issue date and expires five years after issue date. In the current financial year, the directors did not grant any options under the scheme. Options were last granted under the scheme on 22 September 2008, but these lapsed as the vesting criteria was not met. Options on issue under the scheme at 30 June 2012, which were issued on 22 February 2008 at an exercise price of $4.60, expired on 22 February 2013 and were cancelled. S E R VC O R P A N N UA L R E P O R T 2 013 – D I R EC TO R S ’ R E P O R T 61 Directors’ Report (continued) Directors’ remuneration Name and title Notes Year Short term employee benefits Post-employment benefits Salary and fees Short term cash profit- sharing and bonuses Non- monetary benefits Other short term benefits Super benefits Other post- employment benefits $ $ $ $ A G Moufarrige Chief Executive Officer (ii) B Corlett Non-executive director R Holliday-Smith Non-executive director J King Non-executive director T Moufarrige Non-executive director Non-executive director Executive director M Vaile Non-executive director Aggregate $ 430,947 448,350 137,615 137,615 82,569 82,569 2013 2012 2013 2012 2013 2012 (iii) 2012 33,333 $ - - - - - - - - - 99,802 145,568 - - - - - - - (iv) (v) 2013 2012 2012 2013 2012 2013 2012 73,395 36,697 240,346 200,000 9,938 73,395 73,395 797,921 - - - - - 99,802 1,052,305 200,000 155,506 - - - - - - - - - - - - - - 27,000 27,000 12,385 12,385 7,431 7,431 - 6,605 3,303 36,578 6,605 6,605 60,026 93,302 - - - - - - - - - - - - - - Notes: i. Directors’ and officers’ indemnity insurance has not been included in the above figures since it is impractical to determine an appropriate allocation basis. ii. The salary and fees of A G Moufarrige include a component paid in Yen. The decrease in the 2013 year reflects the change in foreign currency exchange rate, not a change in salary in base currency terms. iii. J King retired as a director effective 16 November 2011. iv. T Moufarrige was an executive director until 31 December 2011. He resigned from his operational role at Servcorp effective 31 December 2011 but remained as a non-executive director. His remuneration for 2012 has been disclosed for each of these two roles. v. The Board resolved to exercise its discretion to approve the following payments to T Moufarrige upon his resignation as an executive: - Bonus - Termination payment $378,922 (based on one year’s salary reduced by annual leave entitlement); - Long service leave $105,230 (disclosed under Termination benefits). $200,000 (including $70,834, being 50% of his entitlement from the executive bonus pool scheme); PAG E 6 2 Termin- ation benefits Total payments and benefits Long term employee benefits Long term incentive plan STI paid in cash $ - - - - - - - - - - - - - - $ - - - - - - - - - $ % 557,749 620,918 150,000 150.000 90,000 90,000 33,333 80,000 40,000 - - - - - - - - - 484,152 971,014 50.0% - - - 80,000 80,000 957,749 - - - 484,152 1,985,265 50.0% Short term incentive grants Long term incentive grants STI accrued and not yet due % STI forfeited % Maximum future value of vested STI $ LTI accrued and not yet due % LTI forfeited % Maximum future value of vested LTI $ - - - - - - - - - - - - - - - - - - - - - - - 50.0% - - - 50.0% - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - S E R VC O R P A N N UA L R E P O R T 2 013 – D I R EC TO R S ’ R E P O R T 6 3 Directors’ Report (continued) Key management personnel remuneration Name and title Notes Year Short term employee benefits Post-employment benefits Salary and fees Short term cash profit- sharing and bonuses (i) (ii) Non- monetary benefits Other short term benefits Super benefits Other post- employment benefits $ $ $ $ $ $ M Moufarrige Chief Operating Officer T Wallace Chief Financial Officer S Martin GM Southeast Asia (iii) (vii) (iv) (v) (vi) O Vlietstra GM Japan J Goodwyn VP / GM USA L Lahdo GM Middle East L Gorman GM Australia & NZ Aggregate 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 531,002 250,494 16,941 462,845 64,220 17,982 348,306 178,924 300,000 32,110 318 - 260,981 214,709 40,648 222,308 60,000 41,306 347,746 214,709 31,291 390,325 60,000 25,481 323,450 25,000 294,377 30,000 2,022 1,576 246,640 214,709 21,378 208,437 50,000 15,955 236,777 214,709 16,245 227,096 95,872 6,238 2,294,902 1,313,254 128,843 2,105,388 392,202 108,538 - - - - - - - - - - - - - - - - 47,790 47,436 31,376 29,890 21,240 19,920 - - 4,981 6,202 54,771 17,326 22,500 29,628 182,658 150,402 - - - - - - - - - - - - - - - - Notes: i. Amounts disclosed as short-term cash profit-sharing and bonuses in the 2013 year represent bonuses paid in August 2013 from the executive bonus scheme pool. ii Amounts disclosed as short-term cash profit-sharing and bonuses in the 2012 year represent discretionary bonuses paid in August 2012 from the executive bonus scheme pool at the discretion of the Remuneration Committee. L Gorman also received an additional $50,000 (included in the 2012 amount) which was paid in August 2011 with respect to her performance in the 2011 year. iii. The salary and fees of S Martin are paid in SGD. The increase in the 2013 year predominantly reflects the change in foreign currency exchange rate, with a minor change in salary in base currency terms. iv. The salary and fees of O Vlietstra are paid in JPY. The decrease in the 2013 year reflects the change in foreign currency exchange rate, not a change in salary in base currency terms. v. The salary and fees of J Goodwyn are paid in USD. The increase in the 2013 year reflects the change in foreign currency exchange rate, not a change in salary in base currency terms. vi. The salary and fees of L Lahdo are paid in AED. The increase in the 2013 year predominantly reflects the change in foreign currency exchange rate, with a minor change in salary in base currency terms. vii. S Martin ceased employment with Servcorp effective 16 August 2013. Under the terms of her resignation, the Board agreed to pay her long term incentive entitlements. viii.The Maximum future value of vested STI and LTI grants represents the maximum amount of remuneration that could arise in the event that mature floor net profit before tax threshholds, as outlined on page 60, are achieved. Minimum future value of vested STI and LTI grants is nil. PAG E 6 4 Long term employee benefits Long term incentive plan $ - - - - 48,478 - - - - - - - - - 48,478 - - - - - - - - - - - - - - - - - Termin- ation benefits Total payments and benefits STI paid in cash $ $ % STI accrued and not yet due % Short term incentive grants Long term incentive grants STI forfeited % - - - - - - - - 79.0% 80.1% - - - - Maximum future value of vested STI $ LTI accrued and not yet due % LTI forfeited % Maximum future value of vested LTI $ - - 100.0% - 140,768 100.0% - 37,194 - - 100.0% - 100,549 100.0% - - 120,659 100.0% - - - 23,920 - 31,881 - - 100.0% - 120,659 100.0% - 31,881 - - - - 100.0% - 19.9% 80.1% 5,294 - 100.0% - 120,659 100.0% - 30,116 - - 100.0% - 120,659 100.0% - 30,116 846,227 100.0% - 592,483 33.2% 66.8% 558,924 100.0% - 362,000 25.8% 74.2% 586,056 100.0% - 343,534 33.2% 66.8% 593,746 100.0% - 475,806 33.2% 66.8% 355,453 21.0% 332,155 19.9% 537,498 100.0% - - - 291,718 29.3% 70.7% 490,231 100.0% - 358,834 29.3% 70.7% 3,968,135 86.2% - 13.8% - - 86.2% - 2,756,530 29.6% 60.3% 10.1% 723,953 89.9% 10.1% 190,402 S E R VC O R P A N N UA L R E P O R T 2 013 – D I R EC TO R S ’ R E P O R T 6 5 Directors’ Report (continued) Indemnification and insurance of directors and officers The constitution of the Company provides that the Company must indemnify, on a full indemnity basis and to the full extent permitted by law, each current and former director, alternate director or executive officer against all losses or liabilities incurred in that capacity in defending any proceedings, whether civil or criminal, in which judgement is given in their favour or in which they are acquitted or in connection with any application in relation to any such proceedings in which relief is granted under the Corporations Act 2001. The Company has agreed to indemnify the following current and former directors of the Company, Mr A G Moufarrige, Mr B Corlett, Mr R Holliday-Smith, Mrs J King, The Hon. M Vaile, Mr T Moufarrige and Mr B Pashby against any loss or liability that may arise from their position as directors of the Company and its controlled entities, except where the liability arises out of conduct involving a wilful breach of duty. The agreement stipulates that the Company will meet the full amount of any such liabilities to the extent permitted by law, including reasonable costs and expenses. The Company has not, during or since the financial year, indemnified or agreed to indemnify an auditor of the Company. During the financial year the Company has paid insurance premiums in respect of directors’ and officers’ liability and legal expenses insurance contracts, for current and former directors, secretaries and officers of the Company and its controlled entities. The insurance policies prohibit disclosure of the nature of the liability insured against and the amount of the premiums. State of affairs There were no significant changes in the state of affairs of the Consolidated Entity during the financial year. Corporate governance A statement of the Board’s governance practices is set out on pages 36 to 44 of this annual report. Environmental management The Consolidated Entity’s operations are not subject to any particular and significant environmental regulations under either Commonwealth or State legislation. Rounding off The Company is of a kind referred to in ASIC Class Order 98/0100 dated 10 July 1998 and, in accordance with that Class Order, amounts in the financial report and the directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated. Non-audit services During the year Deloitte Touche Tohmatsu, the Company’s auditor, has performed certain “non-audit services” in addition to their statutory duties. The Board of directors has considered the non-audit services provided during the year by the auditor and in accordance with written advice provided by resolution of the Audit and Risk Committee, is satisfied that the provision of those non-audit services during the year by the auditor is compatible with 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 by the Audit and Risk Committee; and ▪ The non-audit services provided do not undermine the general principles relating to auditor independence as set out in 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. A copy of the auditor’s independence declaration as required under Section 307C of the Corporations Act 2001 is set out on page 67 and forms part of this report. Details of the amounts paid or payable to the auditor of the Company, Deloitte Touche Tohmatsu and its related practices for audit and non-audit services provided during the year are set out in Note 4 to the Consolidated financial report. Signed in accordance with a resolution of the directors pursuant to section 298(2) of the Corporations Act 2001. A G Moufarrige Managing Director and CEO Dated at Sydney this 27th day of August 2013. PAG E 6 6 PAG E 6 6 S E R VC O R P A N N UA L R E P O R T 2 013 – D I R EC TO R S ’ R E P O R T 6 76 7 PAGE 68 Europe PAGE 69 S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 69 U K PAGE 70 2013 Financial Report Contents Statement of comprehensive income Statement of financial position Statement of changes in equity Statement of cash flows Notes to the Consolidated financial report Directors’ declaration Auditor’s report 72 73 74 75 76 123 124 S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 71 Financial Report (continued) Statement of comprehensive income Servcorp Limited and its controlled entities for the financial year ended 30 June 2013 Revenue Other income Service expenses Marketing expenses Occupancy expenses Administrative expenses Borrowing expenses Total expenses Profit before income tax expense Income tax expense Profit for the year Other comprehensive income / (loss) Translation of foreign operations (Item may be reclassified subsequently to profit or loss) Other comprehensive income / (loss) for the period (net of tax) Total comprehensive income / (loss) for the period Earnings per share Basic earnings per share Diluted earnings per share Note 2 2 2 5 8 8 Consolidated 2013 $’000 2012 $’000 199,341 192,800 8,654 7,985 207,995 200,785 (56,736) (58,707) (13,118) (13,223) (90,500) (91,302) (20,006) (19,199) (5) (25) (180,365) (182,456) 27,630 (6,359) 21,271 18,329 (3,528) 14,801 2,713 3,601 2,713 3,601 23,984 18,402 $0.22 $0.22 $0.15 $0.15 The Statement of comprehensive income is to be read in conjunction with the notes to the Consolidated financial report. PAGE 72 Statement of financial position Servcorp Limited and its controlled entities for the financial year ended 30 June 2013 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 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 18 5 19 2013 $’000 99,758 22,960 3,712 1,138 10,679 138,247 24,183 84,921 24,129 14,805 148,038 286,285 34,519 21,653 2,006 4,629 62,807 14,398 655 525 15,578 78,385 207,900 154,122 (14,750) 68,528 207,900 207,900 Consolidated 2012 $’000 104,334 20,664 2,843 65 8,364 136,270 24,329 74,449 24,874 14,805 138,457 274,727 31,465 19,132 5,862 5,346 61,805 12,974 499 740 14,213 76,018 198,709 154,149 (17,463) 62,023 198,709 198,709 The Statement of financial position is to be read in conjunction with the notes to the Consolidated financial report. S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 73 Financial Report (continued) Statement of changes in equity Servcorp Limited and its controlled entities for the financial year ended 30 June 2013 Balance at 1 July 2011 Profit for the period Translation of foreign operations (net of tax) Total comprehensive gain for the period Payment of dividends Balance at 30 June 2012 Balance at 1 July 2012 Profit for the period Translation of foreign operations (net of tax) Total comprehensive gain for the period Share buy-back Payment of dividends Balance at 30 June 2013 Issued capital Foreign currency translation reserve Employee equity settled benefits reserve Retained earnings Total $’000 154,149 - - - - 154,149 154,149 - - - (27) - $’000 (21,209) - 3,601 3,601 - (17,608) (17,608) - 2,713 2,713 - - $’000 145 - - - - 145 145 - - - - 154,122 (14,895) 145 $’000 59,527 14,801 - 14,801 (12,305) 62,023 62,023 21,271 - 21,271 - (14,766) 68,528 $’000 192,612 14,801 3,601 18,402 (12,305) 198,709 198,709 21,271 2,713 23,984 (27) (14,766) 207,900 The Statement of changes in equity is to be read in conjunction with the notes to the Consolidated financial report. PAGE 74 Statement of cash flows Servcorp Limited and its controlled entities for the financial year ended 30 June 2013 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Franchise fees received Income tax paid Interest and other items of similar nature received Interest and other costs of finance paid Net operating cash flows Cash flows from investing activities Payments for variable rate bonds 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 Payment for share buy-back Dividends paid Landlord capital incentives received Net financing cash flows Note 25(b) 2013 $’000 208,762 (176,743) 587 (10,131) 4,622 (5) 27,092 (2,997) (21,059) (760) (6) 3,433 Consolidated 2012 $’000 205,759 (173,893) 621 (5,394) 4,935 (25) 32,003 - (16,340) (909) - 438 (21,389) (16,811) (26) (14,766) 2,375 (12,417) - (12,305) 936 (11,369) Net (decrease) / increase in cash and cash equivalents (6,714) 3,823 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 25(a) 104,334 2,138 99,758 99,849 662 104,334 The Statement of cash flows is to be read in conjunction with the notes to the Consolidated financial report. S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 75 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 Contents of the notes to the Consolidated financial report Note 1. Note 2. Note 3. Note 4. Note 5. Note 6. Note 7. Note 8. Note 9. Significant accounting policies Profit from operations Significant transactions Remuneration of auditors Income taxes Segment information Dividends Earnings per share 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. Note 25. Formation / deregistration of controlled entities Notes to Statement of cash flows Note 26. Related party disclosures Note 27. Note 28. Parent entity disclosures Subsequent events PAGE 76 77 87 88 88 89 92 93 94 94 95 96 96 97 98 99 99 100 101 102 103 109 112 113 116 117 118 121 122 Notes to the Consolidated financial report for the financial year ended 30 June 2013 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’). For the purposes of preparing the consolidated financial statements, the company is a for-profit 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 27 August 2013. 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 value 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. The adoption of these new accounting standards did not have any material impact. At the date of authorisation of the financial report, the following Standards and Interpretations relevant to the Group were on issue but not yet effective: ▪ AASB 9 ‘Financial Instruments’ AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9. Effective for annual reporting periods beginning 1 January 2015. ▪ AASB 13 ‘Fair Value Measurement’ and AASB 2011-8 ‘Amendments to Australian Accounting Standards arising from AASB 13’. ▪ AASB 10 ‘Consolidated Financial Statements’. Effective for annual reporting periods beginning 1 January 2013. ▪ AASB 119 ‘Employee Benefits’ (2011) and AASB 2011-10 ‘Amendments to Australian Accounting Standards arising from AASB 119(2011)’. Effective for annual reporting periods beginning 1 January 2013. ▪ AASB 12 ‘Disclosure of Interests in Other Entities’. Effective for annual reporting periods beginning 1 January 2013. The directors anticipate that the adoption of these 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. S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 77 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 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 value of the identifiable net assets acquired is recognised as goodwill. If after reassessment, the fair value 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 group 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 group 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. PAGE 78 Notes to the Consolidated financial report for the financial year ended 30 June 2013 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. S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 79 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 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, and 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. PAGE 80 Notes to the Consolidated financial report for the financial year ended 30 June 2013 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 sheet 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 Consolidated financial report. 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. S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 81 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 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. PAGE 82 Notes to the Consolidated financial report for the financial year ended 30 June 2013 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. Rent incurred in bringing floors to a state of operational readiness is capitalised to leasehold improvements and depreciated over the useful life of the asset. 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 useful life of the asset using the straight line method. The estimated useful lives used for each class of asset are as follows: 40 years Buildings Useful life of the asset Leasehold improvements 7.7 years Office furniture and fittings 3-4 years Office equipment 3.7 years Software 6.7 years Motor vehicles 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. The Group has reviewed the estimated useful life of leasehold improvements. Historically this asset has been depreciated over the useful life of the asset on a straight line basis on an average of 6.7 years. As a result of the expansion from 2009 to 2012 a significant number of longer term leases have been entered into. Effective 1 July 2012 a more appropriate estimated useful life of 10 years has been applied. The impact of the change in depreciation estimate resulted in a $6,131,228 increase to net profit before tax in the financial year ended 30 June 2013. 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 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. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis. S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 83 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 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. Borrowing 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 costs 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. PAGE 84 Notes to the Consolidated financial report for the financial year ended 30 June 2013 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 reporting 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. 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. S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 85 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 1. Significant accounting policies (continued) u. Cash and cash equivalents Cash comprises cash on hand and demand deposits. Cash equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash, which are subject to an insignificant risk of changes in value and have a maturity of three months or less. v. Critical accounting issues In the application of the Group’s accounting policies, management is required to make judgments, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments. Actual results may differ from these estimates. These estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The following are the critical judgments that management has made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements: Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. Further information on goodwill impairment is set out in Note 14. Useful lives of property, plant and equipment As described in Note 1(m), the Group reviews the estimated useful lives of property, plant and equipment at each reporting period. Make good provisions At each reporting date, management reviews leases that are expected to terminate to determine the present obligation in relation to floor closure costs including make good, which is set out in Note 3. 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. PAGE 86 Notes to the Consolidated financial report for the financial year ended 30 June 2013 2. Profit from operations a. Revenue Revenue from continuing operations consisted of the following: Revenue from the rendering of services Franchise fee income b. Other income Interest income - bank deposits Net foreign exchange gain / (loss) 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 (Gains) / loss on disposal of property, plant and equipment Change in fair value of financial assets classified as fair value through the profit and loss Bad debts written off Operating lease payments 2013 $’000 198,754 587 199,341 3,827 3,348 1,479 8,654 5 7,890 6,348 (63) 203 691 76,056 Consolidated 2012 $’000 192,179 621 192,800 4,845 1,488 1,652 7,985 25 13,122 5,482 175 (11) 922 72,436 S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 87 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 3. Significant transactions Individually significant transactions included in profit from ordinary activities before income tax expense: 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 b. Other auditors (DTT International Associates) Audit and review of financial reports Other services - tax Other services - financial statements preparation 2013 $’000 90 90 2013 $ 543,385 83,700 627,085 464,025 158,921 96,905 719,851 Consolidated 2012 $’000 1,007 1,007 Consolidated 2012 $ 520,468 68,011 588,479 457,254 234,822 88,359 780,435 The auditor of Servcorp Limited is Deloitte Touche Tohmatsu. 1,346,936 1,368,914 PAGE 88 Notes to the Consolidated financial report for the financial year ended 30 June 2013 5. Income taxes a. Income tax recognised in the income statement Tax expense comprises: Current tax expense (Over) / under provision in prior years - current tax Under / (over) 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 / (deductible) items Tax losses of controlled entities recovered Income tax (over) / under provision in prior years Unused tax losses and tax offsets not recognised as deferred tax assets Income tax expense The tax rate used in the above reconciliation is the Australian corporate tax rate of 30% (2012: 30%). b. Current tax assets and liabilities Current tax assets Tax refunds receivable Current tax payables Income tax attributable to: Parent entity Subsidiaries 2013 $’000 5,998 (705) 238 828 6,359 27,630 8,289 (69) (1,361) (212) (148) (467) 327 6,359 Consolidated 2012 $’000 8,996 14 (846) (4,636) 3,528 18,329 5,499 (253) (3,975) 3,022 (381) (832) 448 3,528 1,138 65 824 1,182 2,006 3,254 2,608 5,862 S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 89 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 5. Income taxes (continued) 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) / charge Balance at the end of the financial year Deferred tax assets Movements in temporary differences: Accruals not currently deductible Doubtful debts Depreciable and amortisable assets Tax losses Foreign exchange 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) / charge Balance at the end of the financial year Deferred tax liabilities Movements in temporary differences: Depreciable and amortisable assets Accruals and provisions not currently deductible Other Deferred tax liabilities Balance at the beginning of the financial year Movements in foreign exchange rates Statement of comprehensive income (credit) / charge Balance at the end of the financial year PAGE 90 2013 $’000 15,281 8,848 24,129 525 23,604 24,134 536 (1,066) 23,604 (1,209) (117) (577) 2,071 (1,504) (191) 186 (1,341) 24,874 596 (1,341) 24,129 (81) (288) 94 (275) 740 60 (275) 525 Consolidated 2012 $’000 13,210 11,664 24,874 740 24,134 18,005 647 5,482 24,134 393 111 1,281 7,779 (788) (3,462) 53 5,367 18,838 669 5,367 24,874 (503) 156 232 (115) 833 22 (115) 740 Notes to the Consolidated financial report for the financial year ended 30 June 2013 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 Tax losses carried forward 2013 $’000 37 2,086 1,720 3,843 Consolidated 2012 $’000 (2) 2,086 1,897 3,981 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 $15,280,959 (2012: $13,210,270) in respect to losses that can be carried forward against future taxable income. S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 91 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 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 or exceed sales targets. Four reportable operating segments have been identified: Australia, New Zealand and Southeast Asia (ANZ/SEA); USA; Europe and Middle East (EMEA); North Asia and other which reflect the segment requirements under AASB 8. The Group has changed the internal organisation during the current financial year in a manner that has caused the composition of its reportable segments to change. Prior year comparatives have been restated to reflect the segment information on a comparable basis to the new reportable segments. 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 2013 $’000 30 June 2012 $’000 30 June 2013 $’000 30 June 2012 $’000 Continuing operations Australia, New Zealand and Southeast Asia USA Europe and Middle East North Asia Other Finance costs Interest revenue Foreign exchange gains / (losses) Centralised unrecovered head office overheads Franchise fee income Unallocated Profit before tax Income tax expense 74,601 12,357 43,209 69,383 1,007 74,375 8,737 37,158 72,785 944 200,557 193,999 - 3,827 3,348 - 587 (324) - 4,845 1,488 - 621 (168) Consolidated segment revenue and profit for the period 207,995 200,785 13,336 (5,792) 5,436 10,671 195 23,846 (5) 3,827 3,348 (4,571) 614 571 27,630 (6,359) 21,271 18,336 (10,947) 1,684 8,328 143 17,544 (25) 4,845 1,488 (4,626) 621 (1,518) 18,329 (3,528) 14,801 The revenue reported above represents revenue generated from external customers. Intersegment sales were eliminated in full. For the 12 months ended 30 June 2013, the Group’s Virtual Office revenue and Serviced Office revenue were $56,366,000 and $144,191,000 respectively (2012: $53,669,000 and $140,330,000, respectively). PAGE 92 Notes to the Consolidated financial report for the financial year ended 30 June 2013 7. Dividends Dividends proposed (unrecognised) or paid (recognised) by the Company are: Recognised amounts 2012 Final Fully paid ordinary shares Interim Fully paid ordinary shares 2013 Final Fully paid ordinary shares Interim Fully paid ordinary shares Cents per share Total amount $’000 Date of payment Tax rate for franking credit Percentage franked 5.00 7.50 7.50 7.50 4,922 7,383 5 Oct 2011 4 Apr 2012 7,383 7,382 4 Oct 2012 4 Apr 2013 30% 30% 30% 30% 100% 50% 85% 100% Unrecognised amounts Since the end of the financial year, the directors have declared the following dividend: Final Fully paid ordinary shares 7.50 7,382 2 Oct 2013 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 credit available Impact on franking account balance of dividends not recognised 2013 $’000 2,048 3,164 2012 $’000 4,115 2,689 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. S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 93 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 8. Earnings per share Earnings reconciliation: Net profit Earnings used in the calculation of basic and diluted EPS 2013 $’000 21,271 21,271 No. Consolidated 2012 $’000 14,801 14,801 No. Weighted average number of ordinary shares used in the calculation of basic EPS 98,434,168 98,440,807 Weighted average number of ordinary shares used in the calculation of diluted EPS 98,434,168 98,440,807 Basic earnings per share Diluted earnings per share $0.22 $0.22 $0.15 $0.15 Options outstanding as at 30 June 2013 and 30 June 2012 were anti-dilutive. 9. Cash and cash equivalents Cash (i) Bank short term deposits (ii),(iii) Note 20 2013 $’000 17,559 82,199 99,758 Consolidated 2012 $’000 14,490 89,844 104,334 Notes: i. Australia and France have $5,000,000 (2012: $4,102,000) and $4,142,000 (2012: $4,467,000), respectively, in cash which is encumbered. ii. Servcorp’s unencumbered cash balance is $90,616,000 as at 30 June 2013 (2012: $95,765,000). iii. Bank short term deposits mature within an average of 178 days (2012: 203 days). These deposits and the interest earning portion of the cash balance earn interest at a weighted average rate of 3.97% (2012: 5.43%). PAGE 94 Consolidated 2012 $’000 19,471 (663) 1,856 20,664 17,275 1,442 754 19,471 Notes to the Consolidated financial report for the financial year ended 30 June 2013 10. Trade and other receivables Current At amortised cost Trade receivables (i) Less: allowance for doubtful debts Other debtors 2013 $’000 19,924 (356) 3,392 22,960 Notes: 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 17,902 1,548 474 19,924 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. S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 95 2013 $’000 6,100 4,579 10,679 619 2,981 112 3,712 24,121 62 24,183 Consolidated 2012 $’000 6,582 1,782 8,364 130 - 2,713 2,843 24,261 68 24,329 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 11. Other assets Current Prepayments Other 12. Other financial assets Current At fair value through profit or loss Forward foreign currency exchange contracts Investment in variable rate bonds At amortised cost Lease deposits Non-current At amortised cost Lease deposits Other PAGE 96 Notes to the Consolidated financial report for the financial year ended 30 June 2013 13. Property, plant and equipment Land and buildings at cost Leasehold improve- ments owned at cost Leasehold improve- ments at cost Office furniture & fittings owned at cost Office furniture & fittings leased at cost Consolidated Office equip- ment & software owned at cost Office equip- ment leased at cost Motor vehicles owned at cost Total $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Gross carrying amounts Balance at 30 June 2012 Additions Disposals Transfers (to) / from other class of asset Effect of foreign currency exchange differences Balance at 30 June 2013 5,276 109,030 1,188 16,164 548 29,521 234 769 162,730 - - - 14,346 (2,349) - - - - (110) 4,129 (140) 2,082 (389) 202 518 - 2,745 - 94 19,267 (210) (481) (116) (81) (3,626) (202) - - - - (15) 1,103 (13) 22 5,494 5,166 125,156 1,048 18,577 121 32,888 105 804 183,865 Accumulated depreciation Balance at 30 June 2012 Depreciation expense Disposals Transfers (to) / from other class of asset Effect of foreign currency exchange differences Balance at 30 June 2013 Net book value Balance at 30 June 2013 Balance at 30 June 2012 571 123 - - (12) 682 56,431 1,140 9,147 548 19,769 234 441 88,281 7,890 (3,977) - - - - 779 (138) 1,835 (349) 202 234 - 4,270 - 120 14,238 (209) (409) (116) (78) (5,138) (202) - - (16) 722 (14) - 8 - 1,563 61,123 1,002 11,069 121 24,352 104 491 98,944 4,484 64,033 4,705 52,599 46 48 7,508 7,017 - - 8,536 9,752 1 - 313 84,921 328 74,449 This note should be read in conjunction with Note 1 Significant accounting policies “Useful lives of property, plant and equipment”. S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 97 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 14. Goodwill Gross carrying amount and net book value Balance at the beginning of the financial year Balance at the end of the financial year 2013 $’000 14,805 14,805 Consolidated 2012 $’000 14,805 14,805 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 2013 was as follows: Japan France Australia New Zealand Singapore Thailand China 2013 $’000 9,161 1,030 2,636 785 706 326 161 Consolidated 2012 $’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 use cash flow projections, covering a five year period and terminal value. No growth factors were applied beyond year one of the forecast period. For the year ended 30 June 2013, the discount rate applied to the above countries, inclusive of country risk premium, was as follows: Japan 14.8%, France 15%, Australia 14.2%, New Zealand 13.9%, Singapore 13.9%, Thailand 15% and China 14.4% (2012: Japan 16.5%, France 15.5%, Australia 15.5%, New Zealand 15.5%, Singapore 15.5%, Thailand 17.7% and China 16.5%). PAGE 98 Notes to the Consolidated financial report for the financial year ended 30 June 2013 15. Trade and other payables 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 Security deposits 2013 $’000 5,691 16,059 5,204 7,565 34,519 14,398 14,398 Consolidated 2012 $’000 4,519 14,135 4,939 7,872 31,465 12,974 12,974 21,653 21,653 19,132 19,132 S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 99 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 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) 2013 $’000 19,690 1,218 4,510 25,418 16,571 - 16,571 3,119 1,218 4,510 8,847 Consolidated 2012 $’000 19,259 1,178 4,125 24,562 14,351 560 14,911 4,908 618 4,125 9,651 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, and 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. PAGE 100 Notes to the Consolidated financial report for the financial year ended 30 June 2013 18. Provisions Current Employee benefits (i) Other Non-current Employee benefits 2013 $’000 4,413 216 4,629 655 655 Consolidated 2012 $’000 4,240 1,106 5,346 499 499 Notes: i. The current provision for employee benefits includes $3,877,997 of annual leave and vested long service leave entitlements accrued (2012: $3,509,373). S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 101 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 19. Issued capital Fully paid ordinary shares 98,432,275 (2012: 98,440,807) Movements in issued capital Balance at the beginning of the financial year Share buy-back Balance at the end of the financial year 2013 $’000 Consolidated 2012 $’000 154,122 154,149 154,149 (27) 154,122 154,149 - 154,149 PAGE 102 Notes to the Consolidated financial report for the financial year ended 30 June 2013 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 2012. 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: ▪ risk of fluctuations in foreign exchange rates to the Australian dollar (the reporting currency); ▪ 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 For accounting purposes, net foreign operations are revalued 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 revalued at the end of each reporting period with the fair value movement reflected in the Statement of comprehensive income as exchange gains or losses. S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 103 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 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 five year period. Pre-tax gain / (loss) AUD/USD (i) +12% (2012: +14%) AUD/USD (i) -12% (2012: -14%) AUD/JPY +13% (2012: +10%) AUD/JPY -13% (2012: -10%) AUD/EUR +10% (2012: +9%) AUD/EUR -10% (2012: -9%) AUD/RMB +12% (2012: +11%) AUD/RMB -12% (2012: -11%) AUD/SGD +7% (2012: +6%) AUD/SGD -7% (2012: -6%) AUD/HKD +12% (2012: +14%) AUD/HKD -12% (2012: -14%) Impact on profit Impact on equity Consolidated Consolidated 2013 $’000 158 1,456 2012 $’000 189 (250) 2013 $’000 (995) 4,991 2012 $’000 (1,273) 1,693 2,976 1,115 (1,125) (2,262) (1,363) 1,473 (158) 65 (128) 1,117 12 (21) 340 (399) (140) 167 (381) 477 (70) 79 231 (308) (1,320) (373) (116) 567 (515) 591 - - (807) 982 346 (412) - - (459) 519 - - Notes: i. Servcorp is exposed to Dirhams (Dubai), Dinars (Bahrain), Rials (Qatar), Riyals (Saudi Arabia), Pounds (Lebanon) and Hong Kong Dollars (Hong Kong). These currencies are pegged to the USD. PAGE 104 Notes to the Consolidated financial report for the financial year ended 30 June 2013 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 2013. These are Level 2 fair value measurements derived from inputs as defined in Note 20(e). Average exchange rate Foreign currency Fair value 2013 2012 2013 million 2012 million 2013 $’000 2012 $’000 Outstanding contracts Consolidated Sell JPY Not later than one year Later than one year and not later than five years 78.21 84.43 75.75 72.97 Sell USD Not later than one year 0.90 0.96 Sell EUR Later than one year and not later than five years 0.73 - 450 950 1 1 320 650 1 - (612) 90 (103) (47) (7) (27) 149 - 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 2012 $’000 1,128 (1,114) 165 (132) 2013 $’000 1,000 (987) 156 (137) S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 105 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 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 than 1 month 1 to 3 months 3 months to 1 year 1 to 5 years 5 + years Total $’000 $’000 $’000 $’000 $’000 $’000 Weighted average effective interest rate % Consolidated 2013 Non-interest bearing Cash and cash equivalents Receivables Lease deposits 17,559 22,960 1,273 - - - - - - - - 2,040 3,670 15,765 1,849 Forward foreign currency exchange contracts - - 6,794 12,499 17,559 22,960 24,597 19,293 84,267 2,981 4.02% 6.77% 14,490 20,664 24,409 14,174 92,163 4.24% - - - - - 6,136 2,981 914 - 77,217 - - - 50,909 2,954 87,681 28,264 1,849 171,657 14,490 20,664 - - - - - - - - - - 1,179 5,549 15,940 1,741 - 5,267 8,907 3,911 39,065 43,033 44,212 45,219 56,035 - 24,847 1,741 165,900 Interest bearing Cash and cash equivalents (i) Fixed rate bond 2012 Non-interest bearing Cash and cash equivalents Receivables Lease deposits Forward foreign currency exchange contracts Interest bearing Cash and cash equivalents (i) Notes: i. Fixed interest rate instruments. PAGE 106 Notes to the Consolidated financial report for the financial year ended 30 June 2013 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 is 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. Less than 1 month 1 to 3 months 3 months to 1 year 1 to 5 years 5+ years Total $’000 $’000 $’000 $’000 $’000 $’000 Weighted average effective interest rate % Consolidated 2013 Non-interest bearing Payables Security deposits (i) Forward foreign currency exchange contracts Interest bearing Bank overdrafts and loans (ii) 2012 Non-interest bearing Payables Security deposits (i) Forward foreign currency exchange contracts Interest bearing Bank overdrafts and loans (ii) Notes: i. Fixed interest rate instruments. ii. Variable interest rate instruments. 5,691 13,303 - - - - - - - 21,653 - - 5,989 11,776 - - 5,691 13,303 27,642 11,776 4,519 13,122 - - 568 5,087 - 19,297 - - 5,137 8,860 - - - - - 13,122 24,434 8,860 - - - - - - - - - - 18,994 21,653 17,765 - 58,412 17,641 19,297 13,997 568 51,503 3.55% S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 107 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 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). PAGE 108 Notes to the Consolidated financial report for the financial year ended 30 June 2013 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 2013 are as follows: Employer contributions As at 30 June 2013, there were no outstanding employer contributions payable to other funds. Options granted to employees Share option scheme Balance at the beginning of the financial year Options lapsed during the financial year Balance at the end of the financial year 2013 $’000 1,726 Consolidated 2012 $’000 1,740 2013 No. 140,000 (140,000) - Consolidated 2012 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 of option conditions are included later in this Note. S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 109 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 21. Employee benefits (continued) Options granted to employees (continued) Executive share options issued by Servcorp Limited T Wallace O Vlietstra S Martin W Wu Balance at 1/07/12 No. 30,000 40,000 40,000 30,000 140,000 Granted Forfeited Exercised No. - - - - - No. (30,000) (40,000) (40,000) (30,000) (140,000) No. - - - - - Balance at 30/06/13 No. Vested and exercisable No. Net vested No. - - - - - - - - - - - - - - - Options granted during the financial year Nil (2012: Nil) options were issued during the financial year ended 30 June 2013. 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 (2012: Nil) options were exercised into ordinary shares in Servcorp Limited during the financial year ended 30 June 2013. Options lapsed during the financial year 140,000 (2012: Nil) options were forfeited under the Executive Share Option Scheme during the financial year ended 30 June 2013. 140,000 unlisted options expired effective 22 February 2013, and have been cancelled. PAGE 110 Notes to the Consolidated financial report for the financial year ended 30 June 2013 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 outstanding 22 February 2008 22 February 2013 No $4.60 2013 2012 - - 140,000 140,000 The fair value of the services received is measured by the fair value of the equity instruments granted. No 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 shares. Inputs into the options model Vesting Conditions Award type Grant date Expiry date Share price at grant date Exercise price Expected life Volatility Risk free interest rate Dividend yield The options will vest in the proportions detailed in the following table: EPS performance Percentage of options that will vest <10% >10% to <15% >15% 0% 50% to 100% determined on pro-rata basis 100% Options 22/2/08 22/2/13 $4.60 $4.60 3.5 years 25% 6.66% 2.6% S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 111 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 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 2013 $’000 Consolidated 2012 $’000 9,822 7,622 - - - - 9,822 7,622 85,094 162,885 45,874 293,853 76,897 153,383 35,688 265,968 The Consolidated Entity leases property under operating leases expiring from 1 to 10 years. Liabilities in respect of lease incentives are disclosed in Note 15 to the Consolidated financial statements. Operating leases Leasing arrangements Operating leases have been entered into to operate serviced office floors. The Consolidated Entity does not have an option to purchase the leased asset at the expiry of the lease period. PAGE 112 Notes to the Consolidated financial report for the financial year ended 30 June 2013 23. Subsidiaries Name of entity 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 Brisbane George Street Pty Ltd (formerly Servcorp Bridge Street Pty Ltd) Servcorp Brisbane Pty Ltd Servcorp Castlereagh Street Pty Ltd Servcorp Gateway Pty Ltd (formerly 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 18 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 Ownership interest Country of incorporation 2013 % 2012 % 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 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 S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 113 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 23. Subsidiaries (continued) Name of entity Controlled entities (continued) Servcorp SA 30 Pty Ltd Servcorp City Square Pty Ltd (formerly 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 Gnee Pty Ltd Beechreef (New Zealand) Limited Servcorp New Zealand Limited Company Headquarters Limited Servcorp Wellington Limited Servcorp Christchurch Limited 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 Chengdu Servcorp Business Service Co. Ltd Beijing Servcorp Sihui Business Services Co. Ltd Office Squared Network Technology Services (Hangzhou) Co. Ltd Guangzhou Servcorp Business Service Co. Ltd Chengdu Servcorp Aerospace Business Service Co. Ltd Hangzhou Servcorp Business Consulting Co. Ltd Amalthea Nominees (Malaysia) Sdn Bhd Office Squared Malaysia Sdn Bhd Servcorp Manila, Inc Servcorp Thai Holdings Limited Servcorp Company Limited Headquarters Co. Limited PAGE 114 Ownership interest Country of incorporation 2013 % 2012 % Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand New Zealand New Zealand New Zealand New Zealand Singapore Singapore Singapore Singapore Singapore Singapore Singapore Singapore Singapore Hong Kong Hong Kong Hong Kong China China China China China China China China Malaysia Malaysia Philippines Thailand Thailand Thailand 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Notes to the Consolidated financial report for the financial year ended 30 June 2013 Name of entity Controlled entities (continued) 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 Call Centre Enterprises 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 Jeddah Branch of Servcorp Square Pte Ltd Servcorp US Holdings, Inc. 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 Servcorp State Street LLC Ownership interest Country of incorporation 2013 % 2012 % Japan Japan Japan Japan Japan Japan Japan Japan Japan Korea France France Belgium United Kingdom UAE UAE Turkey Bahrain Qatar Kuwait Lebanon Saudi Arabia United States United States 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 49 49 100 100 49 49 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 49 49 100 100 49 49 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Notes: 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. S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 115 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 24. Formation / deregistration of controlled entities Consideration $’000 The Consolidated Entity’s interest % - - - - - - 100 100 100 100 100 100 Country of incorporation Formations 2013 There were no new entities formed during the financial year Formations 2012 Guangzhou Servcorp Business Service Co. Ltd The entity was formed on 9 October 2011 Gnee Pty Ltd The entity was formed on 28 November 2011 Call Centre Enterprises KK The entity was formed on 8 December 2011 Chengdu Servcorp Aerospace Business Service Co. Ltd The entity was formed on 21 March 2012 Hangzhou Servcorp Business Consulting Co. Ltd The entity was formed on 13 June 2012 Servcorp State Street LLC The entity was formed on 22 June 2012 Deregistrations 2013 Nil Deregistrations 2012 Nil PAGE 116 Notes to the Consolidated financial report for the financial year ended 30 June 2013 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, and 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 Statement of cash flows are reconciled to the related items in the Statement of financial position as follows: Cash at bank Short term deposits Cash and cash equivalents 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 (Gain) / loss on disposal of non-current assets (Decrease) / increase in current tax liability (Increase) in deferred tax balances Unrealised foreign exchange (gain) / loss Changes in net assets and liabilities during the financial period: (Increase) / decrease in prepayments and receivables (Increase) in trade debtors (Increase) in current assets Increase in deferred income Increase in client security deposits Increase in accounts payable Consolidated 2012 $’000 2013 $’000 17,559 82,199 99,758 14,490 89,844 104,334 21,271 14,801 1,120 14,238 (64) (6,359) (530) (1,400) (2,938) (1,087) (433) 917 1,818 539 106 18,604 175 3,606 (5,293) 64 740 (74) (3,216) 988 1,072 430 Net cash provided from operating activities 27,092 32,003 S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 117 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 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 Balance at 01/07/12 No. Received on exercise of options No. Net change Balance at 30/06/13 No. No. Specified directors B Corlett R Holliday-Smith M Vaile A G Moufarrige (i) T Moufarrige (i) Specified executives M Moufarrige (i) S Martin J Goodwyn O Vlietstra L Lahdo T Wallace L Gorman 413,474 250,000 - 50,014,103 1,800,000 1,928,842 27,000 - 30,000 5,000 - 11,000 54,479,419 - - - - - - - - - - - - - - - - 413,474 250,000 - 100,000 50,114,103 - - - - - - - - 1,800,000 1,928,842 27,000 - 30,000 5,000 - 11,000 100,000 54,579,419 Notes: 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 2013 $’000 4,683 243 Consolidated 2012 $’000 4,498 244 PAGE 118 Notes to the Consolidated financial report for the financial year ended 30 June 2013 26. Related party disclosures (continued) 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. A director of the Company, Mr A G Moufarrige, has an interest in and is a director of Tekfon Pty Ltd. The Consolidated Entity has a lease on arm’s length terms with Tekfon Pty Ltd for the use of Tekfon’s premises for storage. 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. Enideb Pty Ltd operates the Servcorp franchise in Canberra on arm’s length terms. A director of the Company, Mr A G Moufarrige, has an interest in and is a director of Rumble Australia Pty Ltd. Rumble Australia Pty Ltd provided consulting services for the development of proprietary software to a company in the Consolidated Entity on arm’s length terms. 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 director of the Company, Mr A G Moufarrige, has an interest in Thru, Inc. A director of the Company, Mr R Holliday-Smith, has an interest in and is a director of Thru, Inc. Thru, Inc. provides IT services to Servcorp on arm’s length terms. Mr A G Moufarrige and Mr R Holliday-Smith did not have any involvement in the negotiation of the terms of the arrangement with Thru, Inc. A director of the Company, Mr A G Moufarrige, has an interest in and is a director of Air Office Pty Ltd. Air Office Pty Ltd provides IT services to the Consolidated Entity. A director of the Company, Mr T Moufarrige, has an interest in and is the CEO of Light Energy Australia Pty Ltd. Light Energy Australia Pty Ltd is a client of Servcorp in Sydney and in Beijing. Light Energy Australia Pty Ltd also provides lighting solutions to the Consolidated Entity on arm’s length terms. A director of the Company, Mr T Moufarrige, is a consultant to Cutting Edge Post Pty Ltd. Cutting Edge Post Pty Ltd provides advice on online training programs to the Consolidated Entity on arm’s length terms. A director of the Company, Mr T Moufarrige, has an interest in and is a director of Spigoli Pty Ltd. Mr T Moufarrige and Spigoli Pty Ltd are clients of Servcorp in Sydney. 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 was 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 was 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. S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 119 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 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: Consolidated Director Director-related entity Transaction A G Moufarrige Tekfon Pty Ltd Premises rental A G Moufarrige Enideb Pty Ltd A G Moufarrige Rumble Australia Pty Limited A G Moufarrige, T Moufarrige Sovori Pty Ltd Franchisee Consulting Reimbursements A G Moufarrige MRC Biotech Pty Ltd Reimbursements A G Moufarrige, R Holliday-Smith Thru, Inc. A G Moufarrige Air Office Pty Ltd IT services IT services A G Moufarrige Air Office Pty Ltd Reimbursements T Moufarrige Light Energy Australia Pty Ltd T Moufarrige Light Energy Australia Pty Ltd T Moufarrige Cutting Egde Post Pty Ltd T Moufarrige Spigoli Pty Ltd B Corlett B Corlett B Corlett TDM Asset Management Pty Ltd Australian Maritime Systems Limited The Trust Company Limited R Holliday-Smith Aegis Partners Pty Ltd Client Supplier Supplier Client Client Client Client Client 2013 $ 82,916 767,888 - 214,717 - 116,693 49,500 1,938 18,006 61,746 96,737 37,059 - 102,621 115,961 - 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 Air Office Pty Ltd TDM Asset Management Pty Ltd Australian Maritime Systems Limited The Trust Company Limited Light Energy Australia Pty Ltd Spigoli Pty Ltd Current payable Enideb Pty Ltd Sovori Pty Ltd Cutting Edge Post Pty Ltd PAGE 120 113,232 1,938 - 8,499 12,646 389 697 6,848 - 94 2012 $ 81,000 695,000 5,000 241,000 4,000 65,517 - - - - - - 10,000 101,000 108,000 1,000 72,000 - 517 8,000 9,000 - - 7,000 1,000 - Notes to the Consolidated financial report for the financial year ended 30 June 2013 27. Parent entity disclosures Financial position 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 2013 $’000 169,222 19,296 188,518 11,482 11,482 154,122 22,768 146 177,036 18,464 18,464 The Company 2012 $’000 163,160 19,507 182,667 9,302 9,302 154,149 19,070 146 173,365 14,453 14,453 As at 30 June 2013: i. Servcorp Limited guaranteed Company Headquarters Limited (a subsidiary) as part of a New Zealand lease negotiated in 2002. ii. On 28 August 2012 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 $17,000,000 interchangeable 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 2013 the fair value of these commitments was Nil (2012: 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. S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 121 Financial Report (continued) Notes to the Consolidated financial report for the financial year ended 30 June 2013 28. Subsequent events Other than the matters noted below, there has not arisen in the interval between reporting date and the date of this Financial Report, any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to affect significantly the operations of the Consolidated Entity, the results of those operations, or the state of affairs of the Consolidated Entity in future financial years: Dividend On 27 August 2013 the directors declared a final dividend of 7.50 cents per share, franked to 100%, payable on 2 October 2013. The financial effect of the above transaction has not been brought to account in the financial statements for the year ended 30 June 2013. Key Executive Bonus Pool Scheme The Key Executive Bonus Pool Scheme which was effective from 1 July 2010 was wound up following the 2013 financial year. PAGE 122 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, set out on pages 71 to 122, are in compliance with International Financial Reporting Standards, as stated in Note 1 to the Consolidated financial report; c. in the directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including: i. compliance with accounting standards; and ii. giving a true and fair view of the financial position and performance of the Consolidated Entity; 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 pursuant to section 295(5) of the Corporations Act 2001. A G Moufarrige Managing Director and CEO Dated at Sydney this 27th day of August 2013. S E R VC O R P A N N U A L R E P O R T 2 013 – F I N A N C I A L R E P O R T 123 PAGE 124 S E R VC O R P A N N U A L R E P O R T 2 013 125 U S A The Seagram Building, 375 Park Avenue 1330 Avenue of the Americas Servcorp’s New York skyline 17 State Street PAGE 127 S E R VC O R P A N N U A L R E P O R T 2 013 – S H A R E H O L D E R I N FO R M AT I O N 127 Shareholder Information As at 3 September 2013 The shareholder information set out below is provided in accordance with the Listing Rules and was applicable as at 3 September 2013. On-market buy-back There is a current on-market buy-back. On 28 August 2012, the Company announced its intention to buy back up to 5 million shares, commencing 11 September 2012. On 27 August 2013, the Company announced it would continue the buy-back for a further 12 months. Class of shares and voting rights Ordinary shares There were 1,958 holders of the ordinary shares of the Company. At a general meeting: ▪ On a show of hands, every member present in person or by direct vote, proxy, attorney or representative has one vote; ▪ On a poll, every member present has one vote for each fully paid share held. Options There were no holders of options over unissued ordinary shares of the Company. Distribution of shareholders and optionholders Ordinary shares Options % of shares Number of holders Number of options % of options Size of holding 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Totals Number of holders 515 984 257 175 27 Number of shares 279,874 2,538,160 1,905,508 4,343,667 0.28% 2.58% 1.94% 4.41% 89,365,066 90.79% 1,958 98,432,275 100.00% - - - - - - - - - - - - - - - - - - There were 76 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 shares 49,812,927 13,822,555 10,831,589 % of voting power advised 51.19% 14.04% 11.00% PAGE 128 Twenty largest shareholders Holder name AMP Life Limited BNP Paribas Nominees Pty Ltd (DRP) BNP Paribas Nominees Pty Ltd ACF Pengana (DRP A/C) Number of ordinary shares held Percentage of capital held 468,713 356,379 1,500,000 0.48% 0.36% 1.52% Citicorp Nominees Pty Limited 10,662,789 10.83% Citicorp Nominees Pty Limited (Colonial First State Inv A/C) Eniat Pty Ltd HSBC Custody Nominees (Australia) Limited HSBC Custody Nominees (Australia) Limited (Nt-Comnweallth Super Corp A/C) JP Morgan Nominees Australia Limited JP Morgan Nominees Australia Limited (Cash Income A/C) MFLE Pty Ltd Moufarrige, Alfred George National Nominees Limited Omnioffices Pty Limited QIC Limited Sidekick No 2 Pty Limited (R Holliday-Smith Super Fund Account) 940,989 1,800,000 8,719,885 1,227,032 6,645,643 370,037 1,800,000 547,436 9,450,860 302,808 618,485 250,000 0.96% 1.83% 8.86% 1.25% 6.75% 0.38% 1.83% 0.56% 9.60% 0.31% 0.63% 0.25% Sovori Pty Ltd 42,063,859 42.73% UBS Wealth Management Australia Nominees Pty Ltd Uvira Superannuation Pty Limited (Uvira Holdings Employees Super Fund Account) Vanward Investments Limited Totals for Top 20 Options Category Executive options 442,966 413,474 295,000 0.45% 0.42% 0.30% 88,876,355 90.29% Number on issue - Number of holders - S E R VC O R P A N N U A L R E P O R T 2 013 – S H A R E H O L D E R I N FO R M AT I O N 129 Corporate Information Directors Bruce Corlett Rick Holliday-Smith Non-executive director Alf Moufarrige Taine Moufarrige Mark Vaile CEO & Managing director Non-executive director Non-executive director Chairman & non-executive director Company secretary Greg Pearce Registered office and principal office Level 12, MLC Centre 19 Martin Place Sydney NSW 2000 Telephone: Facsimile: + 61 (2) 9231 7500 + 61 (2) 9231 7665 Auditor Deloitte Touche Tohmatsu Grosvenor Place 225 George Street Sydney NSW 2000 PAGE 130 Share registry Boardroom Pty Limited Level 7 207 Kent Street Sydney NSW 2000 GPO Box 3993 Sydney NSW 2001 Telephone: 1300 737 760 + 61 (2) 9290 9600 Facsimile: 1300 653 459 Email: + 61 (2) 9279 0664 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 Level 36, Gateway, 1 Macquarie Place, Sydney at 5:00pm on Wednesday 13 November 2013. A R O U ND t he world WE W E N T Park Avenue New York MLC Centre Sydney One Aerospace Center Chengdu Dashwood House London Champs-Elysées Paris 

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