Wednesday 19 February 2003
See below
SERCO GROUP PLC
Preliminary results for the year ended 31 December 2002
2002 Restated
2001*
Turnover �1,325.9m �1,141.2m up 16.2%
Profit before tax - pre goodwill �57.0m �45.2m up 26.3%
Earnings per share - pre goodwill 9.58p 8.25p up 16.1%
Dividend per share 2.08p 1.86p up 11.8%
* The 2001 accounts have been restated after the adoption of UITF34
"Pre-contract costs" in 2002.
HIGHLIGHTS
- Serco delivers 15thsuccessive year of double-digit growth
- Excellent organic growth
- 64% of turnover growth from existing contract base
- Robust cash performance
- 75% of EBITDA converted to cash
- Continued success in winning contracts
- Contract wins totalling �1.2bn
- 122 new contracts awarded
- A further 180 contracts successfully rebid or extended, maintaining our 90%
success rate
- In January 2003 we won our largest-ever contract award: a 15-year extension
to the Atomic Weapons Establishment contract, adding over �1bn to our forward
order book
- Substantial range of future opportunities
- Currently addressing a further �12bn of opportunities
- Continuing high visibility of revenues
- 91% of 2003 turnover already secured
- Current order book stands at �7.1bn
Kevin Beeston, Executive Chairman, said:
"Serco has delivered another impressive performance - our 15th successive year
of strong and profitable growth. In addition we have already secured 91% of our
planned revenue for 2003 and 80% of our planned revenue for 2004.
Our markets remain buoyant. Our forward order book continues to grow, and at �
7.1bn, is roughly 5.5 times last year's turnover. We are currently addressing a
further �12bn of opportunities across a range and scale of activities that
ensures we can continue to bid selectively.
Our portfolio approach to a wide range of public sector markets has provided a
strong platform during this period of difficult global economic conditions. We
remain confident of achieving double-digit growth both this year and over the
longer term."
- Ends -
WEBCAST
A webcast of the results presentation will be available on from 17.00 hrs
(GMT) on 19 February.
CONFERENCE CALL
There will be a teleconference today for investors and analysts. It will begin
promptly at 16.30 hrs (GMT) and lines are open from 16.00 hrs. Early dial-in is
recommended.
Dial-in telephone numbers
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International +44 (0)20 7162 0125
US only +1 334 323 6203
Password Serco Group plc
A recording of the teleconference will be accessible immediately after the
conference ends, and will remain available up until 5 March 2003.
The European replay number is: +44 (0) 20 8288 4459 - PIN number 390852
The US replay number is: +1 334 323 6222 - PIN number 390852
BUSINESS REVIEW
A full review of operations in 2002 is available on www.serco.com
For further information please contact Serco Group plc: T: +44 (0)1932 755900
Kevin Beeston - Executive Chairman
Andrew Jenner - Finance Director
Ben Woodford - Corporate Communications Director
Chairman's Statement
I am delighted to report another excellent performance - our 15th successive
year of strong and profitable growth. Sales were up 16.2% and pre-tax profits
rose 26.3% before goodwill, maintaining our record of consistently high growth.
In delivering this growth we have continued to convert a high proportion of
profits into cash while funding the working capital required to bid
successfully and implement new business activities and contracts. This is a
very satisfying result for a year that proved unsettling for the support
services sector in the UK.
Our vigorous organic growth reflects Serco's key strengths: our long-term
contract base, ability to enhance customers' operations continuously, and long
experience of delivering outsourced public services across a wide range of
markets. We have a well-diversified portfolio, rigorous risk management
processes integrated with the way we do business, and a selective approach to
bidding.
Contract wins during the year totalled �1.2bn. We won 122 new contracts,
achieving our target of winning over half of new bids. In addition, we were
awarded 180 rebids or extensions to existing contracts, maintaining our success
rate of over 90% in this area.
Financial performance
Turnover grew 16.2% to �1.3bn. Pre-tax profits were up 26.3% to �57m before
goodwill amortisation and by 22.2% to �48.9m after goodwill amortisation. There
were no exceptional items in 2002.
Earnings per share rose 16.1% to 9.58p before goodwill and 10.4% to 7.66p after
goodwill.
Cash generation remains robust with 75.1% of group EBITDA converted into cash.
We raised �117.4m through an international placing of new shares in March. This
was partly to refinance the September 2001 acquisition of AEA Technology's
nuclear consulting business - now successfully integrated into Serco Assurance
- and partly to strengthen the Balance Sheet to facilitate future growth. Since
flotation in 1988 Serco has raised new equity totalling �161m, less than our
acquisition costs of �180m over the same period. Apart from this, we have
funded our growth from under �50m to over �1.3bn annual sales entirely from
internally-generated cash flow.
More sophisticated forms of contract inevitably mean more complex financial
statements. In response, we have introduced Financial Review sections to our
annual and interim results announcements and continue to extend our commentary
on relevant aspects of accounting and corporate governance. To help investors
understand better our Private Finance Initiative (PFI) projects we have also
published Our approach to PFIs. The latest edition, updated in September 2002,
is available on our website at www.serco.com or on request.
Dividend
The recommended final dividend of 1.44p per share gives a cumulative dividend
for the year of 2.08p - an increase of 11.8% over 2001. It is proposed that the
dividend will be paid on 13 May 2003 to shareholders on the register on 28
February 2003 (record date).
Pensions
The recent poor performance of the equity markets has impacted the group's
defined benefit pension schemes. A valuation at 31 December 2002 has identified
a net deficit of �73.6m in accordance with
FRS 17 on our defined benefit schemes. This will result in additional funding
and an additional profit and loss charge of �9m per annum. Notwithstanding this
increase in contributions we remain on course to achieve good growth going
forward.
Chairman's Statement
Operational performance
Our business is made up of five distinct areas: defence (which accounted for
27% of 2002 sales), transport (27%), civil government (27%), science (9%) and
private sector clients (10%). Within these sectors, revenues from PFI contracts
accounted for 12% of total sales.
The year was characterised by strong organic growth built on solid foundations:
a track record of effectiveness that attracts and convinces new customers,
strategic alliances with partners who enhance our capability and credibility,
and an approach to working with customers that encourages partnerships,
extensions and broadening of relationships. As in the past, a significant part
of our turnover growth has come from add-ons and extensions to existing
contracts.
Major contract awards in 2002 included an innovative partnership with the UK's
Ministry of Defence (MOD) Warship Support Agency to manage the Devonport,
Portsmouth and Clyde marine services contract. This three-year partnership,
worth up to �110m, builds on an earlier contract we have had since 1996. We
also won a partnership contract to provide communications and information
technology services to the Defence Scientific and Technical Laboratory, worth
some �10m annually for up to eight years.
As a member of the Paradigm Secure Communications team, which was selected in
February 2002 as preferred bidder to provide and operate Skynet 5 global
military satellite communications services, Serco will be providing network and
facilities management. This is the largest UK MOD PFI to date, potentially
worth some �220m to Serco over 15 years, and good progress continues to be made
towards contract signature.
As in any year there were a few disappointments - principally our unsuccessful
bid to manage the Army Training Estate and Essex County Council's decision not
to pursue the outsourcing of educational services. But disappointment over the
Essex decision was tempered by continuing growth for our education business in
Walsall: the local council transferred a further 300 staff to us, tripling the
value of our contract to �100m over the remaining 5� years. This followed a
very favourable review of our performance by Ofsted, the education regulator,
which led to a decision to transfer the majority of Walsall's Local Education
Authority's activities to Serco.
This was one of many cases where strong performance was rewarded with
substantial contract extensions. Others included the National Crime Squad,
which more than doubled the size of our partnership contract to support its IT
operations and to design and develop its Intelligence Management System. In the
US, the Federal Aviation Administration significantly broadened our role: we
are already one of its largest private providers of air traffic control
services, and it has now awarded us a contract to provide weather observation
services.
The largest addition of all - indeed, the largest contract ever awarded to the
group - was announced in January this year, a 15-year extension to the contract
under which we manage the UK's Atomic Weapons Establishment (AWE) in
partnership with Lockheed Martin and British Nuclear Fuels (BNFL). The contract
will now run until 2025, adding over �1bn to our forward order book.
Our stature as a light rail operator continues to grow. For an unprecedented
second year running we won the UK Rail Operator of the Year award, recognising
our operational excellence and innovative customer service on London's
Docklands Light Railway (DLR). We intend to build on our achievements with the
DLR, Manchester Metrolink and Copenhagen Metro by selectively addressing
additional rail operating opportunities. We have formed a joint venture with
NedRailways, the international arm of Dutch national rail operator Nederlandse
Spoorwegen, to pursue some of these.
In the UK our strategy is to build on our contract base and to expand into new
areas. While continuing to grow in our traditional markets, we seek out
contracts that require greater managerial or technological sophistication, with
structures that focus on outputs rather than specified inputs. We continue to
bid for selected PFIs and expect our PFI projects to deliver sustained
long-term benefits both to the public and to our investors. They and their
associated service contracts will provide an income stream to supplement our
revenues from traditional contracts. Under the auspices of the Confederation of
British Industry (CBI) public services strategy board, we have joined other
public service providers in a programme to promote better understanding of the
benefits of public private partnerships. This aims to stress their importance
and effectiveness in obtaining value for money and diversity in public service
delivery.
Chairman's Statement
Our commitment to international diversification - with 30% of our current
business turnover overseas - is one of the factors that differentiates us in
our sector. But the sheer scale of opportunities open to us in the UK means
that we have to be selective. In Europe we see particular opportunities in
Italy and Germany, and are making encouraging progress in both. In the Middle
East our activities and profile continue to develop well. In Asia Pacific we
are focusing principally on Australia and New Zealand, where state governments
continue to develop policies on public private partnerships. In North America
we see public private partnerships emerging in both the US and Canada: these
countries potentially represent a major long-term market for our skills and
experience.
To concentrate management and financial resources on the most promising
opportunities and markets at home and abroad, we continue to review our
business portfolio. This enables us to sharpen our focus on contracts offering
superior growth, margins and cash generation, and may lead to minor divestments
of certain activities.
Risk management
One of the keys to Serco's consistently robust performance is its management
system and control framework. Our operations are diversified across some 600
contracts and a range of business sectors. Few contracts represent more than 2%
of our turnover and the largest represents only 7%.
The high degree of autonomy that we give to our contract managers is balanced
by rigorous monitoring and unobtrusive but effective controls. In 2001 we set
up our Corporate Assurance Group (CAG) to integrate our approach to assessing
business risks and improving controls, and to ensure that we safeguard the
interests of shareholders, customers, staff and the wider community. Reporting
directly to the Board, CAG is proving a valuable asset in risk management.
Corporate social responsibility
Although Serco is a private sector business, we earn our living predominantly
by delivering public services. We need to demonstrate a public service ethos,
as a prerequisite of our partnership with public sector customers.
We take our corporate social responsibility (CSR) seriously. Under our
corporate governance framework every contract manager is directly accountable
for CSR performance. We have established a global network of CSR champions to
raise general awareness and support initiatives that range from developing an
alternative water supply for Goose Bay residents in Canada to collecting tonnes
of stationery for schools and orphanages in Kabul. We continue to refine our
approach and are currently developing a new structure for charitable giving.
This is designed to support initiatives by our contracts and individual
employees, direct resources towards the communities where we work and recognise
the personal commitment of Serco people.
People
Serco's continuing success comes from the outstanding dedication of our people
and their personal identification with what they do. In a MORI survey of a
cross section of staff, 95% regarded their work as `more than just a job'.
Other positive indications - given our drive for continuous improvement and
evolution to meet customer needs - were that around three quarters said they
understood workplace objectives and the need for change, and two thirds
actively supported the change process. We are grateful for all our people's
energy, enthusiasm and imagination - which add value both to our business and
to our customers' operations.
We continue to build constructive relationships with trade unions. In the UK we
support the Partnership Institute launched by the Trades Union Congress (TUC)
to foster co-operative relationships between employers and unions. We have
formed a number of `working partnerships' with unions at contract level and are
investigating further opportunities.
To support and sustain our growth, we attach great importance to training and
developing our managers. During the year the Serco Best Practice Centre
provided courses and workshops in the UK, Europe, North America and the Middle
East, and our global intranet played an important role by giving people access
to training and development online. In a ground-breaking partnership with the
UK's Institute of Directors (IoD) we have developed a joint IoD/Serco
Certificate in Company Direction assessed and recognised by the IoD. The first
19 Serco managers were awarded the qualification during the year.
Chairman's Statement
Outlook
The committed future income streams from our contracts give us the assurance of
highly visible revenues and profits. At the time of writing we have already
secured 91% of our planned revenue for 2003 and 80% of our planned revenue for
2004.
Our forward order book continues to grow. On 31 December it stood at �6.1bn,
and it now stands at �7.1bn - roughly 5.5 times last year's turnover. We are
currently addressing over �12bn of opportunities and our markets are buoyant.
Both at home and abroad, opportunities are emerging at a rate which continues
to allow us to bid selectively.
Our portfolio approach to a wide range of public sector markets has provided a
strong growth platform during this period of difficult global economic
conditions. We remain confident of achieving double-digit growth both this year
and over the longer term.
Financial Review
For the year ended 31 December 2002
1 PROFIT AND LOSS ACCOUNT
2002 was another year of strong performance and is further analysed below:
2002 Restated* Change
2001
�m �m %
Total turnover 1,325.9 1,141.2 16.2%
Group turnover 1,097.3 913.7
Joint venture turnover 228.6 227.5
Gross profit 150.0 124.0 20.9%
Other administrative expenses (112.8) (97.6)
Exceptional items - 5.2
Joint venture profit 23.9 18.7
Group interest (4.1) (5.1)
Profit before goodwill and tax 57.0 45.2 26.3%
Goodwill (8.1) (5.1)
Profit before tax 48.9 40.1
Tax (16.6) (13.0)
Profit after tax 32.3 27.1
Effective tax rate 34% 32.5%
Average number of shares 421.8m 389.6m
Earnings per share before goodwill 9.58p 8.25p 16.1%
Earnings per share after goodwill 7.66p 6.94p
* The 2001 accounts have been restated after the adoption of UITF Abstract 34
"Pre-contract costs" in 2002 (see `Bid costs' below for more information).
1.1 Turnover
Total turnover increased by 16.2% to �1,325.9m. This includes a contribution of
�43.3m (2001: �12.1m) from Serco Assurance (formerly the nuclear consulting
division of AEA Technology), which was acquired in September 2001.
1.2 Gross profit
Gross profit of �150.0m increased by 20.9% and represents a return on group
turnover of 13.7% (2001: 13.6%).
1.3 Pre tax profit
Pre tax profit before goodwill amortisation increased 26.3% to �57m.
Financial Review
For the year ended 31 December 2002
1.4 Underlying pre tax profit
There were no exceptional items in 2002. In order to allow comparison of the
year on year results the growth in underlying pre tax profit is shown below:
Restated
2002 2001 Change
�m �m %
Reported pre tax profit before goodwill 57.0 45.2 26.3%
amortisation
2001 Acquisition: Serco Assurance (2.1) (0.5)
Prior year adjustment: UITF Abstract 34 - 1.2
Net one-off items - (0.2)
Underlying pre tax profit before goodwill 54.9 45.7 20.1%
amortisation
Underlying pre tax profit grew 20.1% to �54.9m. Underlying profits are stated
after:
- a �2.1m (2001: �0.5m) contribution from Serco Assurance,
- a prior year adjustment of �1.2m in 2001 made on the adoption of UITF
Abstract 34 in 2002; this is explained in greater detail in `Bid costs', and
- a net contribution in 2001 of �0.2m from three one-off items.
1.5 Tax
The tax charge for 2002 was �16.6m (2001: �13.0m), representing an effective
tax rate of 34.0% (2001: 32.5%). The increase in the effective rate is largely
as a result of an increased year-on-year level of goodwill amortisation.
1.6 Earnings per share
Taking into account the above and the increased capital base resulting from the
equity placing in March, earnings per share before goodwill amortisation grew
by 16.1% to 9.58p.
2 DIVIDENDS
The proposed final dividend of 1.44p per share gives a cumulative dividend for
2002 of 2.08p, an 11.8% increase on 2001.
3 SHARE PLACEMENT
In March �117.4m (net of fees) was successfully raised through an international
bookbuilt placing of 39.5m new shares representing 9.9% of Serco's issued share
capital. This enabled the Serco Assurance acquisition finance to be repaid and
the Balance Sheet to be strengthened to facilitate future growth.
Since flotation in 1988 Serco has raised new equity totalling �161m, roughly
equivalent to our acquisition costs of �180m over the same period. Apart from
this, we have funded our growth from under �50m to over �1.3bn of annual sales
entirely from internally generated resources.
Financial Review
For the year ended 31 December 2002
4 CASH FLOW
During the year there was a net cash inflow of �105.2m. This inflow was after a
one-off payment of �15.5m into the Serco Pension & Life Assurance Scheme in
February and includes �117.4m from a share placing in March. This cash inflow
contributed to the reduction in Group net debt/funds, excluding non-recourse
PFI debt, from �(93.5)m to �6.3m respectively, as detailed below:
2002 2001
�m �m
Operating profit before one-off items 29.1 21.3
Non cash items - Depreciation and goodwill 23.6 18.3
Group EBITDA 52.7 39.6
Working capital movement (13.1) (13.9)
Operating cash flows before one-off items 39.6 25.7
Pension payment (15.5) -
Exceptional items - 6.1
Dividends from joint ventures 11.1 9.6
Interest and taxation (11.9) (12.0)
Capital expenditure (23.6) (17.6)
Disposals of tangible assets 8.1 4.6
Other items 1.9 (7.5)
Free cash flow 9.7 8.9
Acquisitions/disposals (10.3) (73.6)
Share issues 117.9 2.0
Other financing (3.8) (11.9)
Dividends paid (8.3) (6.7)
Net cash flow 105.2 (81.3)
Closing cash/(overdraft) 69.4 (35.8)
Long term loans (47.4) (45.6)
Other loans and finance leases (15.7) (12.1)
Recourse net cash/(debt) 6.3 (93.5)
4.1 Operating cash flow before one-off items
Operating cash flow, before one-off items, was up 54% to �39.6m (2001: �25.7m),
which converts 136% (2001: 121%) of our operating profit into cash.
We believe that, as operating profit is calculated after deducting goodwill and
depreciation, the appropriate measure for operating cash flow performance is
the conversion of Group EBITDA (Earnings Before Interest, Tax, Depreciation and
Goodwill Amortisation) before one-off items into operating cash flows. For 2002
this was 75.1% (2001: 64.9%).
The working capital movement reflects the strong level of organic growth shown
by the Group in 2002 and equates to approximately one months incremental
turnover, reflecting the typical invoicing cycle of our contracts.
4.2 Joint ventures
Serco has two types of joint ventures: those which represent traditional
operating contracts, such as the Atomic Weapons Establishment (AWE) and Premier
Custodial Group (PCG); and those reflecting Serco's equity stakes of up to 50%
in PFI Special Purpose Companies (SPCs).
Dividends received from joint ventures during 2002 of �11.1m (2001: �9.6m)
represents a 67% (2001: 76%) conversion of profit of joint ventures, after tax,
into cash.
Financial Review
For the year ended 31 December 2002
4.3 Capital expenditure
Capital expenditure, excluding investment in PFI SPCs, for the year was �23.6m
(2001: �17.6m). As a proportion of Group turnover this expenditure represents
2% and has remained at a similar level to previous years.
4.4 Net debt
In addition to the recourse debt shown in the table above, the Group has a
non-recourse loan to fund the construction of the Traffic Control Centre (see
PFIs below). At the end of 2002 this loan was �29.7m (2001 �14.1m).
Non-recourse debt is excluded from the Group's banking facility covenants but
is presented as a liability in the Group's Balance Sheet.
5 PENSIONS
In 2002, two of Serco's pension schemes were accounted for as defined benefit
schemes.
The total 2002 pension charge for Serco was �29.1m (2001: �19.5m), with the two
UK defined benefit schemes having a cost of �12.5m (2001: �9.3m).
FRS 17 "Retirement Benefits" was issued in November 2000 to replace SSAP 24 for
accounting periods ending on or after 22 June 2003. In July 2002 the Accounting
Standards Board delayed the introduction of FRS 17 until 2005, following an
announcement by the International Accounting Standards Board that it would also
issue a new standard.
For 2002 we have continued to apply the transitional rules and disclosures. FRS
17 requires the market value of assets and liabilities for defined benefit
schemes to be calculated and included in the Balance Sheet. At 31 December 2002
we estimate there was a net deficit of �73.6m in relation to the defined
benefit schemes and an asset base of approximately �294.4m, whilst the Minimum
Funding Rate (MFR) funding level was 100%. Long term company contribution rates
will increase by approximately �9m per annum from 2003.
In February 2003 we merged Serco's two defined benefit pension schemes to
achieve cost and investment efficiencies. To assist this process �15.5m was
injected into the Serco Pension and Life Assurance Scheme in February 2002 to
achieve a similar funding level for both schemes. The investment profile of the
merged scheme will be kept under continuous review to match the asset and
liability profiles.
6 PRIVATE FINANCE INITIATIVES (PFIs)
6.1 Disclosure
The document `Our Approach to PFIs', which was originally issued in 2001, was
updated in September 2002 and provides a summary of our accounting for PFIs. It
is available on our website www.serco.com or in printed form on request.
6.2 PFI Profile
For 2002 PFIs contributed �154.0m to turnover and �17.7m to profit before tax
for the year, of which �110.4m of the turnover and �6.4m of the profit related
to the operating contracts, and �43.6m of the turnover and �11.3m of the profit
to Serco's share of the SPCs.
Financial Review
For the year ended 31 December 2002
6.3 SPC funding
SPC funding is via long term loans which are non-recourse to Serco.
- Our share of non-recourse debt of joint venture SPCs at the end of 2002 is �
206.7m. This is included as a liability within investments in joint ventures on
our Balance Sheet.
- Traffic Information Services (TIS) Limited is the first SPC where Serco has
chosen to own 100% of the equity. This SPC has the contract to deliver the
Traffic Control Centre (TCC) contract. A non-recourse loan of �29.7m to fund
the asset, currently in the course of construction, is included in long term
creditors in the Balance Sheet. Construction completion is anticipated in early
2004 when the non-recourse loan will equate to approximately �60m.
- In June 2002 the lenders to the Joint Services Command and Staff College
(JSCSC) PFI agreed to change the terms of the senior debt. This transaction had
no effect on profit but allowed �6.7m of cash to be paid from the SPC to Serco
by way of dividend and loan.
7 REVIEW OF JOINT VENTURE ACCOUNTING AND CONTROLS
In March 2002, in recognition of the perceived uncertainties arising from
certain joint venture accounting practices in the US, the Board undertook a
specific review, including asking Deloitte & Touche to undertake an independent
review of our accounting procedures and internal controls over our joint
ventures. This review confirms the Board's view that all our joint ventures
exist for genuine commercial reasons, are correctly accounted for and that our
controls and disclosures are appropriate.
8 BID COSTS
Urgent Issues Task Force (UITF) Abstract 34 " Pre-contract costs" was issued in
May 2002 for accounting periods ending on or after 22 June 2002. UITF Abstract
34 requires all bid costs to be expensed up to the point where award of a
contract is `virtually certain'. Bid costs incurred after this point may be
capitalised. At 31 December 2001 we had �1.2m of bid costs capitalised in
relation to contracts for which we had not reached preferred bidder status.
Applying the Abstract has resulted in a small prior year adjustment to treat
these capitalised costs as expensed in 2001. Having made this adjustment our
accounting policies now fully comply with UITF Abstract 34.
9 DEFERRED TAXATION
Financial Reporting Standard (FRS) 19 `Deferred Taxation' was issued in
December 2000 for accounting periods ended on or after 23 January 2002. FRS 19
requires full provision to be made for deferred tax assets and liabilities
arising from timing differences between the recognition of gains and losses in
the financial statements and their recognition in a tax computation.
The tax charge for the year has been calculated in accordance with FRS 19. The
adoption of FRS 19 has not had a material effect on the tax charge, as the
Group did not have a material level of unprovided deferred tax liabilities or
unrecognised deferred tax assets.
10 TREASURY POLICIES
10.1 Treasury management
The Group's tax and treasury function is responsible for managing the Group's
exposure to financial risk. It operates within policies approved and reviewed
by the Board, which include controls on the use of financial instruments. The
Group reviews the credit quality of counterparties and limits individual
aggregate credit exposures accordingly.
Financial Review
For the year ended 31 December 2002
10.2 Liquidity management
The Group funds its operations through bilateral bank credit facilities and a
long term US Private Placement of loan notes (`the US Notes'). Borrowings under
the bank facilities are floating rate, unsecured, obligations with covenants
and obligations typical of these type of arrangements.
At the end of 2002 bank facilities totalled �161m, of which �50m was committed
funding and of which �151m was undrawn. The committed bank facilities mature in
November 2005. The US Notes mature in December 2007.
10.3 Foreign exchange risk
Due to the nature of the Group's business, which in general does not involve a
significant amount of cross-border trade, the Group is not exposed to material
foreign currency transaction risk, as sales and costs are approximately matched
within overseas operations.
The Group does not hedge the sterling equivalent of the net assets of its
overseas operations on the grounds that the market value of these businesses
does not represent a significant proportion of the market value of the Group
and because foreign exchange differences are unlikely to have a material effect
on the consolidated net asset value of the Group.
The US Notes were issued in US Dollars but the principal obligation has been
swapped into sterling consistent with the risk profile set out above.
10.4 Interest rate risk
The Group's exposure to interest rate fluctuations on its borrowings and
deposits is selectively managed, using interest rate swaps. The element of the
US Notes that has not been swapped into floating rates is considered to offer
adequate protection from interest rate fluctuations in the current market and
given the Group's current low level of net debt. All shorter term debt is
maintained at floating rates of interest.
Consolidated Profit and Loss Account
For the year ended 31 December 2002
Restated
2002 Restated 2001 Restated
2002 Joint 2002 2001 Joint 2001
Ventures Total Ventures
Group Group Total
Note �'000 �'000 �'000 �'000 �'000 �'000
Turnover: Group and 2 1,097,278 228,670 1,325,948 913,693 227,510 1,141,203
share of joint
ventures-continuing
operations
Less: Share of 2 - (228,670) (228,670) - (227,510) (227,510)
joint ventures
Group turnover 2 1,097,278 - 1,097,278 913,693 - 913,693
Cost of sales (947,313) - (947,313) (789,686) - (789,686)
Gross profit 149,965 - 149,965 124,007 - 124,007
Administrative (120,862) - (120,862) (102,753) - (102,753)
expenses
Amortisation of (8,098) - (8,098) (5,123) - (5,123)
intangible assets
Other (112,764) - (112,764) (97,630) - (97,630)
administrative
expenses
Exceptional item: - - - (10,187) - (10,187)
Unsuccessful NATS
acquisition
Operating 29,103 - 29,103 11,067 - 11,067
profit-continuing
operations
Exceptional Item: - - - 15,356 - 15,356
GSR refinancing
Share of operating - 21,883 21,883 - 17,374 17,374
profit in joint
ventures
Interest receivable 4 1,422 16,894 18,316 2,207 17,102 19,309
Group 1,422 - 1,422 2,207 - 2,207
Share of joint - 16,894 16,894 - 17,102 17,102
ventures
Interest payable 5 (5,486) (14,875) (20,361) (7,299) (15,768) (23,067)
and similar charges
Group (5,486) - (5,486) (7,299) - (7,299)
Share of joint - (14,875) (14,875) - (15,768) (15,768)
ventures
Profit on ordinary 6 25,039 23,902 48,941 21,331 18,708 40,039
activities before
taxation
Taxation on profit 7 (16,639) (13,012)
on ordinary
activities
Profit on ordinary 32,302 27,027
activities after
taxation
Dividends 8 (9,441) (7,265)
Retained profit for 23 22,861 19,762
the financial year
Earnings per Share 9
("EPS") per
Ordinary Share of
2p each
Basic EPS, after 7.66p 6.94p
amortisation of
goodwill
Basic EPS, before 9.58p 8.25p
amortisation of
goodwill
Diluted EPS, after 7.63p 6.91p
amortisation of
goodwill
Diluted EPS, before 9.54p 8.22p
amortisation of
goodwill
The basis of preparation of this preliminary announcement and the effect of the
prior year restatement is set out in Note 1.
The financial information set out herein does not constitute the Company's
statutory accounts for the years ended 31 December 2002 or 2001, but is derived
from those accounts. Statutory accounts for 2001 have been delivered to the
Registrar of Companies and those for 2002 will be delivered following the
Company's Annual General Meeting. The auditors have reported on those accounts,
their reports were unqualified and did not contain statements under s237 (2) or
(3) Companies Act 1985.
Consolidated Balance Sheet
At 31 December 2002
Restated
2002 2001
Note �'000 �'000
Fixed Assets
Intangible assets 10 147,473 141,170
Tangible assets 11 62,479 48,724
Investments in joint ventures 12 35,883 30,510
Share of gross assets 317,831 322,338
Share of gross liabilities (281,948) (291,828)
Investment in own shares 12 18,207 18,983
264,042 239,387
Current assets
Stocks 13 38,744 35,838
Debtors: Amounts due within one year 14 220,042 199,705
Debtors: Amounts due after more than one year 14 108,932 76,105
Cash at bank and in hand 17 71,774 34,812
439,492 346,460
Creditors: Amounts falling due within one year
Bank loans and overdrafts 16 2,386 70,647
Trade creditors 74,377 58,034
Other creditors including taxation and social 15 93,843 100,621
security
Accruals and deferred income 136,766 128,629
Proposed dividend 8 6,184 5,026
313,556 362,957
Net current assets/(liabilities) 125,936 (16,497)
Total assets less current liabilities 389,978 222,890
Creditors: Amounts falling due after more than 16 87,588 68,570
one year
Provisions for liabilities and charges 18 34,533 25,249
Net assets 267,857 129,071
Capital and reserves
Called up share capital 21 8,697 7,903
Share premium account 22 190,791 73,656
Capital redemption reserve 143 143
Profit and loss account 23 68,226 47,369
Equity shareholders' funds 20 267,857 129,071
This preliminary announcement was approved by the Board of Directors on 19
February 2003 and signed on behalf of the board:
Kevin Beeston Executive Chairman Andrew Jenner Finance Director
Company Balance Sheet
At 31 December 2002
2002 2001
Note �'000 �'000
Fixed Assets
Tangible assets 11 2,309 1,682
Investments in subsidiaries 12 141,418 35,598
143,727 37,280
Current Assets
Amounts owed by subsidiary companies due after 111,426 148,183
more than one year
Debtors: Amounts due within one year 14 21,669 14,820
Debtors: Amounts due after more than one year 14 1,297 -
Cash at bank and in hand 17,753 -
152,145 163,003
Creditors: Amounts falling due within one year
Bank loans and overdrafts 16 - 30,245
Trade creditors 1,066 757
Other creditors including taxation and social 15 688 1,077
security
Accruals and deferred income 6,395 5,098
Proposed dividend 8 6,184 5,026
14,333 42,203
Net current assets 137,812 120,800
Total assets less current liabilities 281,539 158,080
Creditors: Amounts falling due after more than one 16 43,784 41,420
year
Provisions for liabilities and charges 18 335 -
Net Assets 237,420 116,660
Capital and reserves
Called up share capital 21 8,697 7,903
Share premium account 22 190,791 73,656
Capital redemption reserve 143 143
Profit and loss account 23 37,789 34,958
Equity shareholders' funds 237,420 116,660
This preliminary announcement was approved by the Board of Directors on 19
February 2003 and signed on behalf of the Board:
Kevin Beeston Executive Chairman Andrew Jenner Finance Director
Consolidated Cash Flow Statement
For the year ended 31 December 2002
2002 Restated
2001
Note �'000 �'000
Operating profit before cost of unsuccessful NATS 29,103 21,254
acquisition
Exceptional item: Cost of unsuccessful NATS - (10,187)
acquisition
Operating profit 29,103 11,067
Depreciation and amortisation of goodwill 23,632 18,283
Net increase in working capital (13,124) (13,866)
One-off pension fund contribution (15,500) -
Net cash inflow from operating activities before 24,111 15,484
PFI asset expenditure
Expenditure on PFI asset under construction * (14,950) (13,733)
Net cash inflow from operating activities after PFI 24 9,161 1,751
asset expenditure
Dividends received from joint ventures 11,095 9,645
Returns on investment and servicing of finance
Interest received 1,223 578
Interest paid (7,362) (6,182)
Net cash outflow from returns on investments and (6,139) (5,604)
servicing of finance
Taxation
Tax paid (5,738) (6,417)
Capital expenditure and financial investment
Purchase of tangible and intangible fixed assets (23,596) (17,626)
Sale of tangible fixed assets 8,125 4,569
Exceptional item: GSR refinancing - 16,343
Security deposit on PFI asset under construction - (6,000)
Net cashflows with joint ventures 1,235 (1,945)
Purchase of own shares - (9,964)
Net cash outflow from capital expenditure and (14,236) (14,623)
financial investment
Acquisitions and disposals
Acquisitions 12 (11,353) (77,106)
Net cash acquired with acquisitions 397 3,558
Subscription for shares in joint ventures 12 (370) (38)
Proceeds on disposal of joint ventures 1,030 -
Net cash outflow from acquisitions and disposals (10,296) (73,586)
Equity dividends paid
Dividends paid (8,283) (6,664)
Net cash outflow from equity dividends paid (8,283) (6,664)
Net cash outflow before financing (24,436) (95,498)
Financing
Issue of Ordinary Share Capital 117,929 2,001
Debt due within one year: (Decrease)/increase in (300) 100
other loans
Debt due beyond one year: Increase in: 15,624 14,850
Other loans 24 750
Non-recourse debt financing PFI asset * 15,600 14,100
Capital element of finance lease repayments (3,594) (2,785)
Net cash inflow from financing 129,659 14,166
Increase/(decrease) in cash 105,223 (81,332)
Balance at 1 January (35,835) 45,497
Balance at 31 December 69,388 (35,835)
*PFI asset under construction financed by non-recourse loan
Consolidated Statement of Total Recognised Gains and Losses
For the year ended 31 December 2002
2002 Restated
2001
�'000 �'000
Profit on ordinary activities after taxation 32,302 27,027
Currency translation differences on foreign currency (1,911) (1,917)
net investments
Total recognised gains and losses for the year 30,391 25,110
Prior year adjustment (see Note 1) (806)
Total gains and losses recognised since last annual 29,585
report and financial statements
Notes to the Preliminary Announcement
For the year ended 31 December 2002
1 Accounting policies
This preliminary announcement has been prepared in accordance with applicable
UK accounting standards, and the particular accounting policies adopted are
detailed below. These have all been applied consistently with the exception of
bid costs which is explained in the restatement below.
Accounting convention
This preliminary announcement has been prepared under the historical cost
convention.
Basis of consolidation
The preliminary announcement consolidates the financial information of the
Company and its subsidiaries, and equity accounts for its share of joint
ventures made up to 31 December of each year, for the periods they are owned by
Serco Group plc.
Restatement
The 2001 financial information has been restated to reflect the impact of the
Urgent Issues Task Force Abstract 34 ("UITF34") - Pre-Contract Costs;
eliminating �1,193,000 of bid costs, previously disclosed within debtors, and
the associated tax effect of �387,000. The impact of this adjustment in the
2002 financial information is a reduction in amortisation of bid costs of �
400,000.
The Profit and Loss Account has been restated to reclassify `Other operating
costs relating to joint ventures' within `Other administrative expenses'.
Accounting for PFI Contracts
Within Public Private Partnership (PPP) projects (including Private Finance
Initiative (PFI) projects), where the concession agreement transfers limited
risks and rewards associated with ownership to the contractor, the costs
incurred during the period of initial asset construction, as a direct
consequence of financing, designing and constructing the asset, are shown as
"assets in the course of construction" within current assets. On completion of
the asset construction phase the asset is transferred to debtors as "amounts
receivable under PPP contracts".
Revenues received from the customer are apportioned between capital repayments
and operating revenue. The `finance income' element of the capital repayment is
shown within interest receivable.
Serco has one Special Purpose Company - TCC (Traffic Control Centre), where the
results are fully consolidated. All other SPCs are classified as joint ventures
and accounted for using the gross equity method.
Pension costs: Defined benefit schemes
Retirement benefits to employees of Group companies, except in Germany, are
funded by contributions from Group companies and employees. Payments are made
to trust funds which are financially separate from the Group in accordance with
periodic calculations by consulting actuaries. The expected cost to the Group
of providing defined benefit pensions is charged to the Profit and Loss Account
so as to spread the cost of pensions over the average service lives of
employees in the schemes, in such a way that the cost is a substantially level
percentage of payroll cost, with experience surpluses and deficits being
amortised on a straight line basis.
In Germany retirement benefits to employees are accrued for by Serco GmbH & Co.
KG. The expected cost to the Company for providing defined benefit pensions is
calculated in accordance with periodic valuations by consulting actuaries.
Pension costs: Defined contribution schemes
Contributions for the year in respect of defined contribution schemes are
charged to the Profit and Loss Account. Differences between charges accruing
during the year and cash payments are included as either accruals or
prepayments in the Balance Sheet.
The Group has adopted the transitional disclosure requirements of Financial
Reporting Standard 17 ("FRS17") - Retirement Benefits. For further information
see Note 31.
Turnover
Turnover represents net sales of goods and services to third parties together
with investment related income.
Goodwill
Goodwill arising on acquisitions is capitalised in the Consolidated Balance
Sheet in accordance with Financial Reporting Standard 10 ("FRS 10") - Goodwill
and Intangible Assets. Amortisation of goodwill is provided on a straight line
basis over a period of 20 years, which, in the opinion of the Directors is a
period not exceeding the economic useful life of the asset.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
1 Accounting policies (continued)
Current Tax
Current tax, including UK Corporation Tax and foreign tax, is provided at
amounts expected to be paid (or recovered) using the tax rates and laws that
have been enacted or substantially enacted at the Balance Sheet date.
Fixed asset investments: Subsidiaries
Investments held as fixed assets are stated at cost less provision for any
impairment in value.
Fixed asset investments: Joint ventures
In the consolidated preliminary announcement, investments in joint ventures are
accounted for using the gross equity method of accounting in accordance with
Financial Reporting Standard 9 ("FRS 9") - Associates and Joint Ventures.
The Group Consolidated Profit and Loss Account includes the Group's share of
joint ventures' operating profits and interest, and the attributable taxation.
In the Consolidated Balance Sheet, the Group's share of the net assets of its
joint ventures, which includes several PFIs, is included under the heading
"investments in joint ventures". The share of net assets is split between gross
assets and gross liabilities.
Fixed asset investment: Own shares
Investment in own shares represents shares in Serco Group plc held by the Serco
Group plc 1998 Employee Share Ownership Trust ("the Trust"). The dividends on
these shares have been waived. Investment in own shares is stated at cost less
provision for impairment.
The Trust is a discretionary trust for the benefit of the employees and shares
are held to satisfy the Group's liabilities to employees for share options and
long term incentive plans. The net cost to the Group of these schemes is
charged to the Profit and Loss Account over the performance period during which
the benefits are earned by employees.
Leases
Assets obtained under finance leases are capitalised at their fair value on
acquisition and depreciated over the shorter of their estimated useful lives or
lease term. The finance charges are allocated over the period of the lease in
proportion to the capital element outstanding. Rentals on assets under
operating leases are charged to the Profit and Loss Account in equal annual
amounts.
Depreciation
Depreciation is provided on a straight line basis at rates which, in the
opinion of the Directors, reduce the assets to their residual value over their
estimated useful lives.
The principal annual rates used are:
Freehold buildings 2.5%
Short leasehold building The higher of 10% or rate produced by lease
improvements term
Machinery 15% - 20%
Motor vehicles 18% - 50%
Furniture 10%
Office equipment 20% - 33%
Leased equipment The higher of the rate produced by either
lease term or useful life
Stocks
Stocks are stated at the lower of cost and net realisable value. Cost includes
an appropriate proportion of direct material and labour.
Long term contracts
Long term contract balances represent costs incurred on specific contracts, net
of amounts transferred to cost of sales in respect of work recorded as turnover
by reference to the value of the work carried out to date. No profit is
recognised until the contract has advanced to a stage where the total profit
can be assessed with reasonable certainty. Advance payments are included in
creditors to the extent that they exceed the related work in progress.
Pre-contract costs
All bid costs are expensed through the Profit and Loss Account up to the point
where contract award is virtually certain in accordance with UITF 34. Bid costs
incurred after this point are then capitalised within debtors. On contract
award these bid costs are amortised through the Profit and Loss Account on a
straight line basis over the contract period.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
1 Accounting policies (continued)
Deferred taxation
The charge for taxation takes account of taxation deferred because of
differences between the timing of recognition of certain items for taxation
purposes and for accounting purposes. Deferred tax is recognised in respect of
all timing differences that have originated but not reversed at the Balance
Sheet date where the transactions or events that give rise to an obligation to
pay more or less tax in the future have occurred by the Balance Sheet date. A
deferred tax asset is recognised only when it is considered more likely than
not that it will be recovered.
Deferred tax is recognised on a non-discounted basis using tax rates in force
at the Balance Sheet date. Financial Reporting Standard 19 ("FRS 19") -
Deferred Tax has been adopted for the first time in this preliminary
announcement and there is no material effect on the comparative figures.
Basis of translation of foreign currencies
Transactions of UK companies denominated in foreign currencies are translated
into Sterling at the rate ruling at the date of the transaction. Amounts
receivable and payable in foreign currencies at the Balance Sheet date are
translated at the rates ruling at that date and any differences arising are
taken to the Profit and Loss Account.
The financial information of overseas subsidiary companies and associated
undertakings is translated into Sterling at the closing rates of exchange at
the Balance Sheet date and any difference arising from the translation of the
opening net investment and matched long term foreign currency borrowings is
taken directly to reserves. The Profit and Loss Account is translated using
average exchange rates.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
2 Segmental Report
Classes of Business Joint
Group Ventures Total
2002 �'000 �'000 �'000
Turnover
Civil Government 267,127 89,220 356,347
Defence 228,579 134,654 363,233
Transport 347,815 4,796 352,611
Science 115,603 - 115,603
Private sector 138,154 - 138,154
Total 1,097,278 228,670 1,325,948
Profit before taxation and other costs
Civil Government 17,796 5,287 23,083
Defence 13,259 15,956 29,215
Transport 15,126 640 15,766
Science 9,845 - 9,845
Private sector 6,909 - 6,909
Total 62,935 21,883 84,818
Other costs
Common costs (25,734)
Amortisation of intangible assets (8,098)
Net interest - Group (4,064)
Net interest - Joint ventures 2,019
Profit on ordinary activities before taxation 48,941
Net assets
Civil Government 43,269
Defence 53,400
Transport 45,716
Science 69,771
Private sector 31,679
Total 243,835
Unallocated assets 24,022
Total 267,857
Notes to the Preliminary Announcement
For the year ended 31 December 2002
2 Segmental Report (continued)
Classes of Business Joint Restated
Group Ventures Total
2001 �'000 �'000 �'000
Turnover
Civil Government 202,605 107,917 310,522
Defence 218,001 115,349 333,350
Transport 275,888 4,244 280,132
Science 87,404 - 87,404
Private sector 129,795 - 129,795
Total 913,693 227,510 1,141,203
Profit before taxation and other costs
Civil Government 13,271 5,169 18,440
Defence 11,312 11,996 23,308
Transport 14,179 209 14,388
Science 4,907 - 4,907
Private sector 6,778 - 6,778
Total 50,447 17,374 67,821
Other costs
Common costs (24,070)
Exceptional item: Cost of unsuccessful NATS (10,187)
acquisition
Exceptional item: GSR refinancing 15,356
Amortisation of intangible assets (5,123)
Net interest - Group (5,092)
Net interest - Joint ventures 1,334
Profit on ordinary activities before taxation 40,039
Net assets
Civil Government 33,517
Defence 36,282
Transport 27,044
Science 903
Private sector 14,246
Total 111,992
Unallocated assets 17,079
Total 129,071
Notes to the Preliminary Announcement
For the year ended 31 December 2002
2 Segmental Report (continued)
Geographical segments Joint
Group Ventures Total
2002 �'000 �'000 �'000
Turnover
United Kingdom 752,247 178,207 930,454
Rest of Europe and Middle East 163,218 7,341 170,559
Asia Pacific 116,671 38,406 155,077
North America 65,142 4,716 69,858
Total 1,097,278 228,670 1,325,948
Profit before taxation and other costs
United Kingdom 35,065 19,029 54,094
Rest of Europe and Middle East 12,895 625 13,520
Asia Pacific 9,503 1,750 11,253
North America 5,472 479 5,951
Total 62,935 21,883 84,818
Other costs
Common costs (25,734)
Amortisation of intangible assets (8,098)
Net interest - Group (4,064)
Net interest - Joint ventures 2,019
Profit on ordinary activities before taxation 48,941
Net assets
United Kingdom 142,821
Rest of Europe and Middle East 43,951
Asia Pacific 40,057
North America 17,006
Total 243,835
Unallocated assets 24,022
Total 267,857
Note: Turnover is shown by geographical origin. Turnover analysed by
geographical destination is not materially different.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
2 Segmental Report (continued)
Geographical segments Joint Restated
Group Ventures Total
2001 �'000 �'000 �'000
Turnover
United Kingdom 618,559 175,641 794,200
Rest of Europe and Middle East 130,608 8,876 139,484
Asia Pacific 103,414 38,588 142,002
North America 61,112 4,405 65,517
Total 913,693 227,510 1,141,203
Profit before taxation and other costs
United Kingdom 26,988 14,068 41,056
Rest of Europe and Middle East 10,041 720 10,761
Asia Pacific 8,597 1,871 10,468
North America 4,821 715 5,536
Total 50,447 17,374 67,821
Other costs
Common costs (24,070)
Exceptional item: Cost of unsuccessful NATS (10,187)
acquisition
Exceptional item: GSR refinancing 15,356
Amortisation of intangible assets (5,123)
Net interest - Group (5,092)
Net interest - Joint ventures 1,334
Profit on ordinary activities before taxation 40,039
Net assets
United Kingdom 64,563
Rest of Europe and Middle East 9,278
Asia Pacific 30,919
North America 7,232
Total 111,992
Unallocated assets 17,079
Total 129,071
Note: Turnover is shown by geographical origin. Turnover analysed by
geographical destination is not materially different.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
3 Information regarding Directors and employees
2002 2001
�'000 �'000
a) Directors' remuneration:
Fees as Directors 97 83
Other emoluments 1,730 1,319
Total remuneration excluding pensions 1,827 1,402
The prior year comparative includes Directors who did not serve in 2002.
2002 2001
�'000 �'000
b) Employee costs including Directors:
Wages and salaries 444,693 399,447
Social security costs 36,713 36,376
Other pension costs (Note 31) 29,096 19,544
Long Term Incentive Scheme costs 776 661
511,278 456,028
2002 2001
c) Number of persons employed by Serco Group plc and its
subsidiaries
Average number of persons employed in the provision of
services:
Civil Government 7,138 6,738
Defence 6,251 6,491
Transport 4,442 4,653
Science 1,665 1,460
Private sector 2,999 2,445
Non-specific 202 116
22,697 21,903
Notes to the Preliminary Announcement
For the year ended 31 December 2002
4 Interest receivable
2002 2001
�'000 �'000
Short term deposits 818 1,484
Loans to joint ventures 604 723
Total Group 1,422 2,207
Share of joint venture interest 16,894 17,102
18,316 19,309
5 Interest payable and similar charges
2002 2001
�'000 �'000
Bank loans and overdrafts 5,486 7,299
Share of joint venture interest 14,875 15,768
20,361 23,067
6 Profit on ordinary activities before taxation
2002 2001
�'000 �'000
Profit on ordinary activities before taxation is after
charging:
Rentals under operating leases:
Land and buildings 12,599 11,790
Plant and machinery 20,686 17,586
Depreciation on tangible assets:
Owned 12,307 10,861
Held under finance leases 3,227 2,299
Finance lease interest on operational assets 721 454
Amortisation of goodwill and intangible assets 8,098 5,123
Auditors' remuneration:
Deloitte & Touche 514 444
Other auditors 175 125
Other fees paid to Deloitte & Touche:
Bid support 1,170 659
Tax 490 544
Other 595 432
Other fees paid to other accountancy firms:
Internal audit 152 183
Other 555 391
Notes to the Preliminary Announcement
For the year ended 31 December 2002
7 Taxation on profit on ordinary activities
2002 Restated
2001
�'000 �'000
The taxation charge on the profit for the year is made up
as follows:
United Kingdom corporation tax 1,654 3,010
Double tax relief - (349)
Overseas taxation:
Operating income 1,950 2,777
Exceptional item: GSR refinancing - 1,219
Deferred taxation 4,120 (504)
Adjustment in respect of prior years:
United Kingdom corporation tax (750) 292
Overseas taxation (37) -
Deferred taxation 2,375 501
Share of joint ventures' taxation charge 7,327 6,066
16,639 13,012
The current tax recognised for the year is higher than the United Kingdom
corporation tax rate of 30%. The main reasons for this are set out below:
2002 Restated
2001
�'000 �'000
Profit on ordinary activities before taxation multiplied by 14,682 12,012
the UK Corporation Tax rate of 30%
Effect on the reported tax charge of:
Expenses not deductible for tax purposes (primarily 3,463 4,450
goodwill amortisation)
Tax allowances in excess of depreciation (1,828) (2,610)
Other short term timing differences (1,953) (2,109)
Unrelieved tax losses and higher tax rates on overseas 255 2,458
earnings
Tax exempt income and the effect of the use of unrecognised (634) (519)
tax losses
Tax incentives including Tonnage Tax and Research & (3,054) (959)
Development Tax Credits
Current tax charge for the year 10,931 12,723
Deferred tax 6,495 (3)
Adjustment in respect of prior years (787) 292
Taxation on profit on ordinary activities 16,639 13,012
Notes to the Preliminary Announcement
For the year ended 31 December 2002
8 Dividends
2002 2001
�'000 �'000
Interim dividend of 0.64p per share on 429,260,960 Ordinary
Shares
(2001 - 0.57p on 392,551,903 Ordinary Shares) of 2p each
fully paid
- paid 11 October 2002 2,747 2,238
Proposed final dividend of 1.44p per share on 429,448,207
Ordinary Shares
(2001 - 1.29p on 389,613,782 Ordinary Shares) of 2p each
fully paid
- proposed payment on 13 May 2003 6,184 5,026
8,931 7,264
2001 final dividend of 1.29p on 39,547,465 shares issued
between
31 December 2001 and 13 March 2002 (record date) 510 -
2000 final dividend of 1.13p on 50,212 shares relating to
shares issued between
31 December 2000 and 6 April 2001 (record date) - 1
9,441 7,265
A dividend waiver is effective for those shares held on behalf of the Company
by its Employee Share Ownership Trust.
9 Earnings per Ordinary Share
Basic and diluted earnings per Ordinary Share after goodwill have been
calculated in accordance with Financial Reporting Standard 14 - Earnings Per
Share. Earnings per share is shown both before and after goodwill to assist in
the understanding of the impact of FRS 10 on the preliminary announcement.
The calculation of basic earnings per Ordinary Share after goodwill is based on
profits of �32,302,000 for the year ended 31 December 2002 (2001 restated - �
27,027,000) and the weighted average number of 421,813,107 (2001 - 389,552,980)
Ordinary Shares of 2p each in issue during the year.
The calculation of basic earnings per Ordinary Share before goodwill is based
on profits of �40,400,000 (adjusted for the effect of goodwill amortisation of
�8,098,000) for the year ended 31 December 2002 (2001 restated - �32,150,000
adjusted for the effect of goodwill amortisation of �5,123,000) and the
weighted average number of 421,813,107 (2001 - 389,552,980) Ordinary Shares of
2p each in issue during the year.
The calculation of diluted earnings per Ordinary Share after goodwill is based
on profits of �32,302,000 for the year ended 31 December 2002 (2001 restated -
�27,027,000) and the weighted average number of 423,288,423 (2001 -
391,115,673) Ordinary Shares of 2p each assuming that the options are all
exercised.
The calculation of diluted earnings per Ordinary Share before goodwill is based
on profits of �40,400,000 (adjusted for the effect of goodwill amortisation of
�8,098,000) for the year ended 31 December 2002 (2001 restated - �32,150,000
adjusted for the effect of goodwill amortisation of �5,123,000) and the
weighted average number of 423,288,423 (2001 - 391,115,673) Ordinary Shares of
2p each assuming that the options are all exercised.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
10 Intangible assets
Goodwill Other Group
Total
�'000 �'000 �'000
Cost:
At 1 January 2002 152,889 - 152,889
Additions during the year 13,029 1,775 14,804
Adjustments to goodwill capitalised on (403) - (403)
acquisitions prior to 1 January 2002
At 31 December 2002 165,515 1,775 167,290
Accumulated amortisation:
At 1 January 2002 11,719 - 11,719
Charge for the year 7,777 321 8,098
At 31 December 2002 19,496 321 19,817
Net book value:
At 31 December 2002 146,019 1,454 147,473
At 31 December 2001 141,170 - 141,170
Other intangible assets comprise a �1,775,000 premium for the acquisition of
two, five-year, licences and are amortised over the licence life.
11 Tangible assets
Group Freehold Short Machinery,
leasehold motor
vehicles,
land and building furniture and
buildings improvements equipment Total
�'000 �'000 �'000 �'000
Cost:
At 1 January 2002 7,567 10,128 97,846 115,541
Subsidiaries acquired - - 838 838
Transfer from asset held 5,532 - - 5,532
for resale
Capital expenditure 63 3,749 25,619 29,431
Disposals (5,535) (214) (5,799) (11,548)
Foreign exchange 405 73 1,916 2,394
differences
At 31 December 2002 8,032 13,736 120,420 142,188
Accumulated depreciation:
At 1 January 2002 2,234 4,074 60,509 66,817
Subsidiaries acquired - - 483 483
Provided during the year 181 1,153 14,200 15,534
Disposals - (175) (4,458) (4,633)
Foreign exchange 143 17 1,348 1,508
differences
At 31 December 2002 2,558 5,069 72,082 79,709
Net book value:
At 31 December 2002 5,474 8,667 48,338 62,479
At 31 December 2001 5,333 6,054 37,337 48,724
The cost of assets held by the Group under finance leases at 31 December 2002
was �24,977,000 (2001 - �18,905,000). The accumulated depreciation provided for
those assets at 31 December 2002 was �9,168,000 (2001 - �6,903,000).
Notes to the Preliminary Announcement
For the year ended 31 December 2002
11 Tangible assets (continued)
Company Short Machinery,
leasehold motor
vehicles,
building furniture and
improvements equipment Total
�'000 �'000 �'000
Cost:
At 1 January 2002 1,117 2,624 3,741
Transfers from subsidiary undertakings 1,161 2,329 3,490
Transfers to subsidiary undertakings (1,049) (1,897) (2,946)
Capital expenditure 36 1,054 1,090
Disposals - (27) (27)
At 31 December 2002 1,265 4,083 5,348
Accumulated depreciation:
At 1 January 2002 355 1,704 2,059
Transfers from subsidiary undertakings 365 1,398 1,763
Transfers to subsidiary undertakings (323) (1,160) (1,483)
Provided during the year 151 566 717
Disposals - (17) (17)
At 31 December 2002 548 2,491 3,039
Net book value:
At 31 December 2002 717 1,592 2,309
At 31 December 2001 762 920 1,682
The cost of assets held by the Company under finance leases at 31 December 2002
was �872,000 (2001 - �Nil). The accumulated depreciation provided for those
assets at 31 December 2002 was �71,307 (2001 - �Nil).
Notes to the Preliminary Announcement
For the year ended 31 December 2002
12 Investments held as fixed assets
Company
�'000
a) Shares in subsidiary companies at cost:
At 1 January 2002 35,598
Transfer of investments from Group companies 115,890
Transfer of investments to Group companies (29,437)
Equity subscriptions for shares in Group companies 22,908
Redemption of Serco Australia Pty Ltd preference shares (3,541)
At 31 December 2002 141,418
Group
�'000
b) Group investments in joint ventures:
At 1 January 2002 30,510
Dividends receivable (11,095)
Acquisitions 370
Disposals (139)
Foreign exchange translation difference (338)
Share of profits after tax 16,575
At 31 December 2002 35,883
Group
�'000
c) Investment in own shares:
At 1 January 2002 18,983
Amortisation (776)
At 31 December 2002 18,207
Investment in own shares represents 5,414,630 (2001 - 5,557,033) shares in
Serco Group plc held by the Employee Share Ownership Trust ("the Trust") equal
to 1.25% of current allotted share capital (2001 - 1.4%). The market value of
shares held by the Trust at 31 December 2002 was �8,284,384 (2001 - �
20,283,170). 142,403 shares were allotted during the year, all of which were at
nil value (2001 - 52,308, of which 9,864 were allotted at �4.26 and 42,444 at
nil value).
d) Joint ventures:
The Group's share of its joint ventures is summarised as follows:
2002 2001
AWE* PCG** Other Total Total
�'000 �'000 �'000 �'000 �'000
Turnover 91,386 52,504 84,780 228,670 227,510
Profit before Tax 7,801 4,993 11,108 23,902 18,708
Tax (1,832) (2,070) (3,425) (7,327) (6,066)
Fixed assets - 2,288 31,278 33,566 54,147
Current assets 21,861 124,266 138,138 284,265 268,191
21,861 126,554 169,416 317,831 322,338
Liabilities due within one 17,660 17,518 27,313 62,491 62,817
year
Liabilities due after more 1,066 94,446 123,945 219,457 229,011
than one year
18,726 111,964 151,258 281,948 291,828
Net assets 3,135 14,590 18,158 35,883 30,510
* Atomic Weapons Establishment Management Ltd
** Premier Custodial Group Ltd
Adjustments have been made to joint venture results to ensure they are
consistent with Group accounting policies.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
12 Investments held as fixed assets (continued)
e) A list of the principal undertakings of Serco Group plc is shown in Note 32.
All the subsidiaries of the Group have been consolidated.
f) At 31 December 2002, Group companies had branches in Abu Dhabi, Bahrain,
Chile, Dubai, Korea, Ras Al Khaimah, Saudi Arabia, Sharjah and Switzerland.
g) The subsidiaries of Serco Group plc and its joint venture undertakings are
primarily engaged in the provision of services with the exception of Serco
Investments Limited and certain other holding companies, which manage equity
investments.
h) Acquisitions:
All acquisitions made during the year have been accounted for using the
acquisition method of accounting. The goodwill arising on all acquisitions made
in the year is being amortised over a period of 20 years.
i) CCM Software Services Limited
All the issued share capital of CCM Software Services Limited was acquired by
Serco International Limited on 3 December 2002 for cash consideration of �
8,647,000 and deferred cash consideration, contingent on achievement of certain
financial targets post acquisition, valued at �2,068,000. Acquisition costs of
�515,000 were incurred.
The fair value of net assets acquired was �631,000 after taking account of
adjustments of �448,000 required to recognise obligations for which no
liability had been booked at the date of acquisition.
The goodwill arising on consolidation is �10,599,000.
ii) Other acquisitions
The issued share capital of Euromedic Ltd and the assets and liabilities of
SDC, a partnership, were acquired by Serco Holdings Ltd on 13 March 2002 and 31
May 2002 respectively for a total cash consideration of �2,088,000 and deferred
cash consideration, contingent of achievement of certain financial targets post
acquisition, valued at �223,000. Acquisition costs of �103,000 were incurred.
The fair values of assets and liabilities acquired are considered to be the
same as their book values. The total goodwill arising on consolidation is �
2,430,000.
13 Stocks
Group Group
2002 2001
�'000 �'000
Service spares 10,065 10,093
Long term contract balances 28,679 25,745
38,744 35,838
Notes to the Preliminary Announcement
For the year ended 31 December 2002
14 Debtors
Restated
Group Group Company Company
2002 2001 2002 2001
�'000 �'000 �'000 �'000
a) Amounts due within one year:
Amounts recoverable on contracts 168,820 150,342 - -
Other debtors 18,425 21,224 21,089 14,747
Prepayments and accrued income 30,131 19,148 580 73
Amounts owed by joint ventures 2,666 4,257 - -
Building held for re-sale - 4,734 - -
220,042 199,705 21,669 14,820
Restated
Group Group Company Company
2002 2001 2002 2001
�'000 �'000 �'000 �'000
b) Amounts due after more than
one year:
Amounts recoverable on contracts 18,412 11,847 - -
Other debtors 16,297 14,131 1,297 -
Pensions prepayment (Note 31) 28,350 26,460 - -
Amounts owed by joint ventures 12,033 9,567 - -
PFI asset in the course of 33,840 14,100 - -
construction*
108,932 76,105 1,297 -
Total debtors 328,974 275,810 22,966 14,820
Included in amounts recoverable on contracts is �7,978,000 (2001 - �14,710,000)
in respect of items procured on behalf of customers. This is offset by an
amount of �8,792,000 (2001 - �12,038,000) in trade creditors and an amount of �
945,000 (2001 - �1,611,000) in accruals.
*PFI asset in the course of construction
The impact on the preliminary announcement of the PFI asset in the course of
construction in relation to the Traffic Control Centre contract is summarised
as follows:
Balance at Movement Balance at
1 January during the 31 December
year 2002
2002
�'000 �'000 �'000
Balances in relation to asset in course of
construction:
PFI asset in the course of construction 13,733 18,355 32,088
excluding capitalised interest
Interest included in PFI asset in the 367 1,385 1,752
course of construction
Total PFI in asset in the course of 14,100 19,740 33,840
construction
Cash - 270 270
Other debtors - 1,447 1,447
Accruals and deferred income - (4,852) (4,852)
14,100 16,605 30,705
Funded by:
Non-recourse loan (14,100) (15,600) (29,700)
Profits retained within Special Purpose - (1,005) (1,005)
Company
(14,100) (16,605) (30,705)
Notes to the Preliminary Announcement
For the year ended 31 December 2002
15 Other creditors including taxation and social security
Group Group Company 2002 Company
2002 2001 2001
�'000 �'000 �'000 �'000
Obligations under finance 4,836 2,557 267 -
leases
Corporation tax 2,195 4,418 - -
Other taxes and social 31,432 30,464 304 631
security costs
Other creditors 38,034 47,689 117 446
Amounts owed to joint ventures 16,974 14,864 - -
Other loans 372 629 - -
93,843 100,621 688 1,077
16 Creditors: Amounts falling due after more than one year
Group Group Company Company
2002 2001 2002 2001
�'000 �'000 �'000 �'000
a) Bank loans and overdrafts 2,386 70,647 - 30,245
Obligations under finance 15,291 11,385 792 -
leases
Other loans 77,505 60,371 43,259 41,420
Total loans 95,182 142,403 44,051 71,665
Less: amounts included in 7,594 73,833 267 30,245
creditors falling due within
one year
Amounts falling due after more 87,588 68,570 43,784 41,420
than one year
Group Group Company Company
2002 2001 2002 2001
�'000 �'000 �'000 �'000
b) Analysis of loan repayments
due:
Bank loans and overdrafts:
Within one year or on demand 2,386 70,647 - 30,245
Obligations under finance
leases:
Within one year or on demand 4,836 2,557 267 -
Between one and two years 4,667 2,543 525 -
Between two and five years 4,291 3,826 - -
After five years 1,497 2,459 - -
Other loans:
Within one year or on demand 372 629 - -
Between one and two years 1,687 1,618 - -
Between two and five years 70,735 14,681 43,259 -
Non-recourse debt to fund 25,200 14,100 - -
PFI asset
Other 45,535 581 43,259 -
After five years 4,711 43,443 - 41,420
Non-recourse debt to fund PFI 4,500 - - -
asset
Other 211 43,443 - 41,420
95,182 142,403 44,051 71,665
c) Finance lease obligations are secured by retention of title to the relevant
assets.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
17 Treasury policies and risk management
The principal risks arising from the Group's financing activities are interest
rate risk and foreign currency risk. Treasury operations are conducted within a
framework of policies set and reviewed by the Board. There has been no material
change during the year or since the year end to the major financial risks faced
by the Group or the Group's approach to the management of these risks.
As permitted by Financial Reporting Standard 13 - "Derivatives and other
Financial Instruments: Disclosures" short term debtors and non interest bearing
short term creditors and loans from joint ventures have been excluded from the
following disclosures other than the disclosure of the currency profile of
financial assets and liabilities.
The fundamental purpose of interest rate and foreign currency financial
instruments entered into is to hedge monetary assets and liabilities, the
details of which are set out below.
Interest rate risk
The Group borrows at both fixed and floating rates of interest. The Group's
exposure to interest rate fluctuations on its long term borrowings is managed
by using interest rate swaps and forward rate agreements. At 31 December 2002,
after taking account of interest rate swaps, the proportion of the Group's
fixed rate borrowings was 66.6% (2001 - 33.3%).
Foreign currency risk
The Group's policy is not to hedge the net assets of overseas subsidiaries as
they represent a small proportion of the market value of the Group and because
exchange rate fluctuations thereon are unlikely to have a material effect on
the consolidated net asset value of the Group.
Business units are required to hedge their material trading transactions (sales
and purchases in currencies other than their functional currency) by using
forward contracts. There were no material debtors or creditors as at 31
December 2002 with unhedged transactional exposure.
Financial assets and liabilities
i) Assets
Sterling Euro Australian US Other Total
Dollar currencies
Dollar
31 December 2002 �'000 �'000 �'000 �'000 �'000 �'000
Cash and short 43,024 13,468 2,009 2,868 10,405 71,774
term deposits
Long term 8,009 - 4,024 - - 12,033
interest-bearing
loans to joint
ventures
Other long term 87,918 7,285 1,696 - - 96,899
debtors
Total long term 95,927 7,285 5,720 - - 108,932
assets
Australian US Other
Sterling Euro Dollar Dollar currencies Total
31 December 2001 �'000 �'000 �'000 �'000 �'000 �'000
Cash and short 12,782 11,282 2,450 5,670 2,628 34,812
term deposits
Long term 8,817 - 750 - - 9,567
interest-
bearing loans to
joint ventures
Other long term 64,564 - 1,363 611 - 66,538
debtors
Total long term 73,381 - 2,113 611 - 76,105
assets
Included in the above is �4,095,000 (2001 - �4,117,000) of loans to joint
ventures which carry a fixed interest rate of 13.0% for a weighted average
period of 13 years (2001 - 14 years). All other interest bearing assets are
held at floating rates of interest. Of total short term debtors 79% (2001 -
93%) is denominated in Sterling.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
17 Treasury policies and risk management (continued)
ii) Liabilities
Fixed Rate Liabilities
Weighted Weighted
average
Total Floating Fixed rate average time for which
rate
liabilities liabilities liabilities interest rate rate is fixed
31 December 2002 �'000 �'000 �'000 % Years
Sterling 44,586 14,886 29,700 5.46 3
Australian 3,075 3,075 - - -
Dollar
US Dollar 46,885 13,182 33,703 7.33 5
Euro 636 636 - - -
Total 95,182 31,779 63,403 - -
Fixed Rate Liabilities
Weighted Weighted
average
Total Floating Fixed rate average time for which
rate
liabilities liabilities liabilities interest rate rate is fixed
31 December 2001 �'000 �'000 �'000 % Years
Sterling 98,077 83,977 14,100 5.46 3
Australian 2,451 2,451 - - -
Dollar
US Dollar 41,420 8,038 33,382 7.34 6
Euro 455 455 - - -
Total 142,403 94,921 47,482 - -
Of total short term creditors 80% (2001 - 81%) is denominated in sterling.
The maturity of the Group's financial liabilities at 31 December 2002 and 31
December 2001:
Maturing Maturing Maturing
Maturing between one between two after more
within one and two and five than five Total
year years years years
31 December 2002 �'000 �'000 �'000 �'000 �'000
Sterling 4,105 3,884 30,677 5,920 44,586
Australian Dollar 768 1,255 829 223 3,075
US Dollar 2,085 1,215 43,520 65 46,885
Euro 636 - - - 636
Total 7,594 6,354 75,026 6,208 95,182
Maturing Maturing Maturing
Maturing between one between two after more
within one and two and five than five Total
year years years years
31 December 2001 �'000 �'000 �'000 �'000 �'000
Sterling 72,677 3,216 17,777 4,407 98,077
Australian Dollar 701 945 730 75 2,451
US Dollar - - - 41,420 41,420
Euro 455 - - - 455
Total 73,833 4,161 18,507 45,902 142,403
Notes to the Preliminary Announcement
For the year ended 31 December 2002
17 Treasury policies and risk management (continued)
iii) Fair Values
The book value and fair value of the Group's financial assets and liabilities
at 31 December 2002 and 31 December 2001 were:
2002 2001
Book value Fair value Book value Fair value
�'000 �'000 �'000 �'000
Assets
Cash and short term deposits 71,774 71,774 34,812 34,812
Long term loans to joint 12,033 12,033 9,567 9,567
ventures
Other long term debtors 96,899 96,899 66,538 66,538
Derivatives held to manage - 1,716 - 4,492
currency and interest rate risk
Total 108,932 110,648 76,105 80,597
Liabilities
Long term borrowing:
Sterling 40,481 40,481 25,400 25,400
Australian Dollar 2,307 2,307 1,750 1,750
US Dollar 44,800 49,091 41,420 48,991
Total 87,588 91,879 68,570 76,141
Short term borrowing:
Sterling 4,105 4,105 72,677 72,677
Australian Dollar 768 768 701 701
US Dollar 2,085 2,085 - -
Euro 636 636 455 455
Total 7,594 7,594 73,833 73,833
Foreign currency assets which are hedged using forward foreign exchange
contracts are translated at the contracted rates. The fair value of other
foreign currency contracts, interest rate swaps, and the US$70,000,000 loan
notes, have been determined by reference to prices available from the markets
on which the instruments involved are traded.
Gains and losses on hedges
Changes in the fair value of financial instruments used as hedges are not
recognised until the hedged position matures. There was an unrecognised gain of
�1,716,000 (2001 - gain of �4,492,000) on hedges as at 31 December 2002. The
unrecognised gain is not expected to be recognised in the Profit and Loss
account in the next period.
Borrowing facilities
The Group had committed bank credit facilities of �50,000,000 at 31 December
2002. The Group also had annually renewable uncommitted bank facilities
totalling �111,000,000, all of which were undrawn at 31 December 2002.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
18 Provisions for liabilities and charges
Restated
Balance Charged to Foreign Balance
1 January the profit exchange 31 December
and
2002 Utilised loss account differences 2002
Group �'000 �'000 �'000 �'000 �'000
Pensions 23,003 (463) 1,663 1,605 25,808
provision
Deferred 2,246 - 6,495 (16) 8,725
taxation
25,249 (463) 8,158 1,589 34,533
Balance Charged to Foreign Balance
1 January the profit exchange 31 December
and
2002 Utilised loss account differences 2002
Company �'000 �'000 �'000 �'000 �'000
Deferred tax - - 335 - 335
19 Deferred taxation
Group Restated Company Company
Group
2002 2001 2002 2001
�'000 �'000 �'000 �'000
The amounts of deferred taxation
provided in the accounts are:
Tax allowances in excess of 2,650 332 (77) -
depreciation
Overseas timing differences 1,967 692 - -
Other timing differences 4,108 1,222 412 -
8,725 2,246 335 -
Potential amounts of deferred
taxation for which no credit has been
taken:
Overseas timing differences (2,767) (3,224) - -
(2,767) (3,224) - -
20 Reconciliation of movements in shareholders' funds
Restated
2002 2001
�'000 �'000
Profit on ordinary activities after taxation 32,302 27,027
Dividends (9,441) (7,265)
22,861 19,762
Currency translation differences on foreign currency net (1,911) (1,917)
investments
New capital subscribed 117,929 3,561
Exercise of share scheme options (93) (1,260)
Net increase in shareholders' funds 138,786 20,146
Opening shareholders' funds as previously stated 129,877 108,925
Prior year adjustment (806) -
Opening shareholders' funds as restated 129,071 108,925
Closing shareholders' funds as restated 267,857 129,071
Notes to the Preliminary Announcement
For the year ended 31 December 2002
21 Called up share capital
2002 2001
�'000 �'000
a) Authorised 550,000,000 (2001 - 550,000,000) Ordinary 11,000 11,000
Shares of 2p each
2002 2001
�'000 �'000
b) Called up, allotted and fully paid:
434,862,837 (2001 - 395,170,815) Ordinary Shares of 2p each 8,697 7,903
c) Ordinary Shares of 2p each allotted in the year:
During the year 289,581 Ordinary Shares of 2p each were allotted to the holders
of options or their personal representatives.
Of these, 147,178 were allotted using newly issued shares, 2,628 were allotted
at �2.0208*, 104,796 at �2.175, 38,706 at �2.45*, and 1,048 at �3.81.
The remaining 142,403 were allotted at nil value using shares purchased in the
market and held in trust.
In addition to the above, 39,500,000 Ordinary Shares of 2p each were allotted
under a share placement on 12 March 2002 at �3.05. 44,844 Ordinary Shares of 2p
each were also allotted on 19 December 2002 as deferred consideration relating
to the acquisition of Serco QAA (formerly Quality Assurance Associates Limited)
made in December 2000.
*Restated to reflect the capitalisation issue on 5 April 2000.
d) Options in respect of Ordinary Shares of 2p each:
i. In January 1996, 1,210,392 options in respect of Ordinary Shares of 2p each
were granted in accordance with the rules of the `Serco Group plc 1996 Long
Term Incentive Scheme'. At 31 December 2002 no options remain.
ii. In January 1997, 1,439,622 options in respect of Ordinary Shares of 2p each
were granted in accordance with the rules of the `Serco Group plc 1996 Long
Term Incentive Scheme'. At 31 December 2002 there remained 54,000 options
which are exercisable at nil value in accordance with the rules of the
Scheme.
iii. 3,341,346 options in respect of Ordinary Shares of 2p each were granted in
May and September 1998 in accordance with the rules of the `Serco Group plc
1998 Executive Option Plan'. At 31 December 2002 there remained 1,606,259
options which are exercisable at a price of �2.175 each and 10,830 at �
2.0208* each in accordance with the rules of the Scheme.
iv. On 1 April 1999, 3,461,664 options in respect of Ordinary Shares of 2p each
were granted in accordance with the rules of the `Serco Group plc 1998
Executive Option Plan'. At 31 December 2002 there remained 2,385,474
options which are exercisable at a price of �2.45 each in accordance with
the rules of the Scheme.
v. On 31 March 2000, 4,511,988 options in respect of Ordinary Shares of 2p
each were granted as part of the 1996 Sharesave Scheme. 2,577,092 options
were held by employees on 31 December 2002. The options are exercisable at
any time between 1 May 2003 and 31 October 2003 at a price of �3.81 each in
accordance with the rules of the Scheme.
vi. On 5 April 2000, 2,524,836 options in respect of Ordinary Shares of 2p each
were granted in accordance with the rules of the `Serco Group plc 1998
Executive Option Plan'. At 31 December 2002 there remained 2,368,224
options which are exercisable at a price of �4.2542* each in accordance
with the rules of the Scheme.
vii. On 5 April 2000, 219,900 options in respect of Ordinary Shares of 2p each
were granted in accordance with the rules of the `1996 Serco Group plc Long
Term Incentive Scheme as amended by the Company on 5 April 2000'. At 31
December 2002 there remained 148,236 options which are exercisable at a nil
value in accordance with the rules of the Scheme.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
21 Called up share capital (continued)
viii. 37,677 options in respect of Ordinary Shares of 2p each were granted in
August and November 2000, in accordance with the rules of the `Serco Group
plc 1998 Executive Option Plan'. As at 31 December 2002 there remained
26,268 options which are exercisable at a price of �5.825 and 8,878 options
which are exercisable at a price of �4.90 each in accordance with the rules
of the scheme.
ix. On 24 November 2000, 259,351 options in respect of Ordinary Shares of 2p
each were granted in accordance with the rules of the `1996 Serco Group plc
Long Term Incentive Scheme as amended by the Company on 5 April 2000'. At
31 December 2002 there remained 188,169 options which are exercisable at
nil value in accordance with the rules of the Scheme.
x. On 20 March 2001, 2,851,962 options in respect of Ordinary Shares of 2p
each were granted in accordance with the rules of the `Serco Group plc 1998
Executive Option Plan'. As at 31 December 2002 there remained 2,700,200
options which are exercisable at a price of �4.07 each in accordance with
the rules of the Scheme.
xi. On 27 March 2001, 603,144 options in respect of Ordinary Shares of 2p each
were granted in accordance with the rules of the `Serco Group plc 1998
Executive Option Plan'. As at 31 December 2002 there remained 600,838
options which are exercisable at a price of �4.35 each in accordance with
the rules of the Scheme.
xii. On 16 November 2001, 248,374 options in respect of Ordinary Shares of 2p
each were granted in accordance with the rules of the `1996 Serco Group plc
Long Term Incentive Scheme as amended by the Company on 5 April 2000'. At
31 December 2002 there remained 200,202 options which are exercisable at
nil value in accordance with the rules of the Scheme.
xiii. On 3 May 2002, 5,986,743 options in respect of Ordinary Shares of 2p each
were granted in accordance with the rules of the `Serco Group plc 1998
Executive Option Plan'. As at 31 December 2002 there remained 5,914,886
options which are exercisable at a price of �2.64 each in accordance with
the rules of the Scheme.
xiv. On 3 May 2002, 55,600 options in respect of Ordinary Shares of 2p each
were granted in accordance with the rules of the `1996 Serco Group plc Long
Term Incentive Scheme as amended by the Company on 5 April 2000'. At 31
December 2002 no options had been exercised or lapsed. These options have
been granted in respect of a three-year performance period starting 1
January 2002 and are exercisable at a nil value in accordance with the
rules of the Scheme.
xv. On 6 September 2002, 5,428,691 options in respect of Ordinary Shares of 2p
each were granted in accordance with the rules of the `Serco Group plc 1998
Executive Option Plan'. As at 31 December 2002 there remained 5,327,309
options which are exercisable at a price of �1.645 each in accordance with
the rules of the Scheme.
*Restated to reflect the capitalisation issue on 5 April 2000.
e) The market price of Serco Group plc Ordinary Shares of 2p each as at 31
December 2002 was �1.53. The market price of these shares ranged from �4.00 to
�1.325 during the year.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
22 Share premium account
Group and Company �'000
Balance at 1 January 2002 73,656
Deferred consideration relating to the acquisition of Serco QAA 69
Limited
Share premium on issue of shares upon exercise of options 422
Share placement (Net of �3,041,000 expenses) 116,644
Balance at 31 December 2002 190,791
23 Profit and loss account
�'000
Group
At 31 December as previously stated 48,175
Prior year adjustment (806)
Balance at 1 January 2002 as restated 47,369
Retained profit transferred to reserves 22,861
Currency translation differences on foreign currency net investments (1,911)
Exercise of share option schemes (93)
Balance at 31 December 2002 68,226
The Profit and Loss Account includes a goodwill charge of �41,578,000 under the
accounting policy applicable prior to the implementation of FRS 10.
Company
As permitted by Section 230 of the Companies Act 1985, the Profit and Loss
Account of the Parent Company is not presented as part of this preliminary
announcement. The consolidated profit for the financial year includes the
Parent Company profit of �14,219,000, which includes dividends of �24,874,000
received from subsidiary companies.
A final ordinary dividend of �6,184,000 is proposed, which together with the
interim dividend of �2,747,000 and the payment in relation to the 2001 final
dividend caused by the movement in the number of shares in issue of �510,000,
leaves a profit of �4,778,000 which has been added to reserves brought forward
of �34,958,000. This, along with a foreign exchange charge of �1,947,000,
results in reserves carried forward of �37,789,000.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
24 Reconciliation of operating profit to net cash inflow from operating
activities
2002 Restated
2001
�'000 �'000
Operating profit before cost of unsuccessful NATS 29,103 21,254
acquisition
Exceptional item: Cost of unsuccessful NATS acquisition - (10,187)
Operating profit 29,103 11,067
Depreciation 15,534 13,160
Amortisation of goodwill and intangible fixed assets 8,098 5,123
Profit on sale of tangible fixed assets (1,948) (1,236)
Increase in stocks (2,906) (8,932)
Increase in debtors (41,870) (56,223)
Increase in creditors 30,795 53,578
Increase/(decrease) in provisions 2,805 (1,053)
One off pension fund contribution (15,500) -
Net cash inflow from operating activities before PFI asset 24,111 15,484
expenditure
Expenditure on PFI asset in the course of construction (14,950) (13,733)
Net cash inflow from operating activities after PFI asset 9,161 1,751
expenditure
25 Analysis of net debt
Balance Other Balance
31
1 January Cash non-cash December
2002 flow changes 2002
�'000 �'000 �'000 �'000
Cash at bank and in hand 34,812 36,962 - 71,774
Overdrafts (70,647) 68,261 - (2,386)
Cash net of overdrafts (35,835) 105,223 - 69,388
Non-recourse debt to fund PFI asset (14,100) (15,600) - (29,700)
Other loans due after more than one (45,642) (24) (1,767) (47,433)
year
Other loans due within one year (629) 300 (43) (372)
Finance leases (11,385) 3,594 (7,500) (15,291)
Net debt (107,591) 93,493 (9,310) (23,408)
26 Reconciliation of increase/(decrease) in cash to movement in net debt
2002 2001
�'000 �'000
Increase/(decrease) in cash 105,223 (81,332)
Cash inflow from non-recourse debt financing PFI asset (15,600) (14,100)
Cash outflow from debt and lease financing 3,870 1,935
Change in net debt resulting from cash flows 93,493 (93,497)
Non cash changes from other debt and lease financing (9,310) (10,089)
Movement in net debt in the year 84,183 (103,586)
Net debt at 1 January (107,591) (4,005)
Net debt at 31 December (23,408) (107,591)
Notes to the Preliminary Announcement
For the year ended 31 December 2002
27 Major non cash transactions
During the year the Group entered into finance lease arrangements in respect of
assets with a total capital value at the inception of the leases of �7,610,000
(2001 - �10,089,000).
During the year �93,000 (2001 - �1,260,000) has been charged to the profit and
loss reserve in respect of shares issued under employee share incentive
schemes.
Other non-cash movements with respect to other loans relate to foreign
exchange.
28 Contingent liabilities
The Group has given indemnities in respect of overseas credit facilities and
lease payments amounting to �7,426,000 (2001 - �7,590,000).
In addition to this, the Group has given indemnities in respect of performance
guarantees, letters of credit and import duty guarantees issued on its behalf
in the ordinary course of business, which are not expected to result in any
material financial loss.
29 Capital and other commitments
Group Group Company Company
2002 2001 2002 2001
�'000 �'000 �'000 �'000
Capital expenditure contracted but not 8,595 1,244 - -
provided
There is a commitment of �30 million in relation to the Traffic Control Centre
PFI asset under construction, which will be funded by non-recourse bank debt.
During the year ending 31 December 2003 the Group is to make the following
payments in respect of operating leases:
Land and buildings Other
�'000 �'000
Leases which expire:
Within one year 1,965 4,199
Between one and five years 7,015 16,690
After five years 4,464 4,264
13,444 25,153
Notes to the Preliminary Announcement
For the year ended 31 December 2002
30 Related parties
Directors
The Directors of Serco Group plc had no material transactions with the Group
during the year other than service contracts and Directors' liability
insurance.
Joint ventures
The following material transactions took place between the Group and its joint
ventures during 2002:
2002 2001
�'000 �'000
Net loans during the year 1,797 2,131
Net trading 1,800 2,671
Royalties and management fees receivable 2,302 2,448
Dividends receivable 11,095 9,645
16,994 16,895
The following receivable balances relating to joint ventures were included in
the Group Balance Sheet:
2002 2001
�'000 �'000
Amounts due within one year:
Loans 2,140 -
Trading balance 287 342
Royalties and management fees 239 3,915
2,666 4,257
Amounts due after more than one year:
Loans 12,033 9,567
12,033 9,567
The following payable balances relating to joint ventures were included in the
Group Balance Sheet:
2002 2001
�'000 �'000
Amounts payable within one year:
Loans 16,974 14,165
Trading balance - 699
16,974 14,864
Details of Group investments in joint ventures and other principal undertakings
are given in Note 32.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
31 Pension schemes
The Group has continued to account for pensions in accordance with SSAP 24.
Full adoption of the requirements of FRS 17 `Retirement Benefits' will not be
mandatory for the Group until the year ended 31 December 2005. The transitional
disclosures required by FRS 17 are set out in Part (B) of this note which shows
the Group's pension deficit in accordance with FRS 17 at 31 December 2002 was �
73.6 million (2001 - �3.6 million) on an asset base of �294.4 million (2001 - �
298.4 million).
(A) SSAP 24 Disclosure
The net pension charge in accordance with SSAP 24 for the year ended 31
December 2002 was �29,096,000 (2001 - �19,544,000). The Group operates or is a
member of a number of pension schemes as follows:
a) Serco Pension and Life Assurance Scheme ("SPLAS")
This is a pre-funded defined benefit scheme.
The funding policy is to contribute such variable amounts, on the advice of the
actuary, as will achieve 100% funding on a projected salary basis.
The latest formal valuation of the scheme was carried out as at 6 April 1999.
The figures included in the accounts are based on a formal valuation, which is
currently being carried out as at 6 April 2002. During 2002 there has been a
fall in general stock market values and a bulk transfer was received from the
AEA Technology Pension Scheme. The figures in the Profit and Loss Account and
the Balance Sheet prepayment have been determined in accordance with the
requirements of SSAP 24. The average contribution rate is currently 18% for the
scheme.
The projected unit method was adopted for the actuarial valuation of the Scheme
for accounting purposes. The main actuarial assumptions used to value
liabilities are:
Investment yield 7.0% p.a. (5.5% post retirement)
Salary growth 3.75% p.a.
Price inflation 2.5% p.a.
Pension increases 2.5% p.a.
The Scheme is assessed to be fully funded on a current funding level basis
based on a market value of assets of �145,881,000 at 6 April 1999. Liabilities
for this purpose are calculated using the basis for determining individual cash
equivalents for active members and deferred pensioners and by estimating the
cost of purchasing annuity policies for pensioners.
The actuarial value of the assets represented 81% of the ongoing liabilities of
the Scheme. Variations from the normal costs are amortised for accounting
purposes over a fifteen year period as a constant monetary amount.
Employer pension contributions paid into the Scheme during the year were �
12,300,000 (2001 - �9,760,000), of which �500,000 related to special
contributions in respect of a discretionary increase to pensions in payment
awarded during the year (2001 - �652,000) and �600,000 of contributions in
respect of augmentations (2001 - �810,000). A �15,000,000 contribution which
was included in accruals and prepayments at 31 December 2001 was paid in
February 2002.
At 31 December 2002 a prepayment of �17,450,000 (2001 - �17,360,000) in respect
of the Scheme was included in the Balance Sheet. �12,210,000 was charged to the
Profit and Loss Account in respect of the Scheme (2001 - �8,950,000).
b) The Serco-IAL Pension Scheme
This is a pre-funded defined benefit scheme.
The funding policy is to contribute such variable amounts, on the advice of the
actuary, as will achieve 100% funding on a projected salary basis.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
31 Pension schemes (continued)
Actuarial assessments covering expenses and contributions are carried out by
independent qualified actuaries, with the last such review being carried out as
at 31 March 2001. On the assumptions adopted for accounting purposes and based
on a market value of assets of �104,037,000 at 31 March 2001, the actuarial
value of the assets represented 110% of the ongoing past service liabilities of
the Scheme as at that date. The current contribution rate is 17.8% for the
Scheme.
For accounting purposes, the projected unit method has been adopted and the
main actuarial assumptions used to value liabilities are:
Investment return 6.0% p.a.
Salary growth (excluding salary scale) 4.5% p.a.
Pension increases 2.5% p.a.
The past service surplus in excess of the prepayment as at 31 March 2001 is
being amortised for accounting purposes over a nine year period at a constant
monetary amount.
Employer pension contributions paid into the Scheme during the year were �
2,125,000 (2001 - �1,738,000).
An amount of �325,000 (2001 - �300,000) has been charged to the 2002 Profit and
Loss Account in respect of the Scheme and a prepayment of �10,900,000 (2001 - �
9,100,000) has been included in the Balance Sheet as at 31 December 2002.
c) Serco GmbH & Co.KG Pension arrangement
The German pension arrangement comprises two elements; an unfunded defined
benefit arrangement and an unfunded hybrid scheme.
Actuarial assessments covering liabilities are carried out by independent
qualified actuaries, with the last such review being carried out as at 23
December 1999 and updated as at 31 December 2002 by a qualified independent
actuary.
The projected unit method was adopted for the actuarial valuation of the
arrangement. The main actuarial assumptions used in the valuation for
accounting purposes were:
Discount rate 6.0% p.a.
Salary growth 3.0% p.a.
Price inflation 1.0% p.a.
The Profit and Loss charge for the year was �1,663,000 (2001 - �130,000) and a
provision of �25,808,000 (2001 - �23,003,000) has been included in the Balance
Sheet as at 31 December 2002 of which �20,271,000 (2001 - �17,466,000) relates
to the hybrid element of the Scheme and �5,537,000 to the defined benefit
element of the Scheme.
d) Serco Superannuation Fund
The defined benefit element of the Scheme was established in Australia on 1
April 1993 to provide equivalent benefits for members transferring from the AWA
Defence Industries Superannuation Fund, a defined benefit scheme.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
31 Pension schemes (continued)
Actuarial assessments covering expenses and contributions relating to the
defined benefit element of the Scheme are carried out by independent qualified
actuaries, with the last such valuation being carried out as at 31 December
2000. The attained age method was used for the actuarial valuation of the
Scheme as at 31 December 2000. This method was chosen to produce a level
employer contribution rate as a proportion of members' salaries over the
expected future working lives of the existing members, as the defined benefit
element of the Scheme was closed to new members with effect from 1 April 1993.
The main actuarial assumptions used in the actuarial valuation for accounting
purposes were:
Average long-term interest rate (net of investments
and administration expenses and investment tax) 8.0% p.a.
Average long term allowance for salaries increases 5.5% p.a.
The defined benefit element of the Scheme was assessed to be fully funded on a
current funding level based on a market value of assets of �1,385,000
(A$3,938,000) at 31 December 2000 with a ratio of market value of assets to
current funding level liabilities of 107%.
The actuarial value of assets of the defined benefit element of the Scheme
represented 115% of its ongoing liabilities at 31 December 2000. The pension
cost calculated under the attained age method will amortise the above surplus
over the expected future working lives of the existing members which have an
average value of 11 years.
Employer pension contributions paid into the Scheme and charged to the 2002
Profit and Loss Account relating to the defined benefit element of the scheme
were �257,000 (2001 - �104,000).
e) The NPL Management Limited Pension Scheme
This is a pre-funded defined benefit scheme. The Company accounts for this
scheme as a defined contribution scheme since at re-bid any surplus or deficit
would transfer to the next contractor. Cash contributions are recognised as
pension costs and no asset or liability is shown on the Balance Sheet.
Actuarial assessments covering expenses and contributions are carried out by
independent qualified actuaries, with the last such review being carried out as
at 5 April 2001. The funding policy is to contribute such variable amounts as
will achieve 100% funding on a projected unit basis.
The average contribution rate is currently 20.8% for the scheme.
The main actuarial assumptions proposed in the valuation were:
Investment return 6.50% p.a. (5.0% for current pensioners)
Salary growth 4.25% p.a. (plus promotional scale)
Price inflation 2.25% p.a.
Pension increases 2.25% p.a.
The market value of assets represented 93% of the ongoing liabilities of the
Scheme.
Employer pension contributions charged to the 2002 Profit and Loss Account were
�1,903,000 (2001 - �1,634,000).
Notes to the Preliminary Announcement
For the year ended 31 December 2002
31 Pension schemes (continued)
f) The Serco Shared Cost Section of the Railways Pension Scheme
This is a pre-funded defined benefit scheme. The Company accounts for this
scheme as a defined contribution scheme since at re-bid any surplus or deficit
would transfer to the next contractor. Cash contributions are recognised as
pension costs and no asset or liability is shown on the Balance Sheet.
Actuarial assessments covering expenses and contributions are carried out by
independent qualified actuaries, the last such review being carried out as at
31 December 2001. The funding policy is to contribute such variable amounts as
will achieve 100% funding on a projected unit basis.
The main actuarial assumptions used in the valuation were:
Investment return 6.3% p.a.
Salary growth 4.0% p.a. (plus promotional scale)
Price Inflation 2.5% p.a.
Pension increases 2.5% p.a.
The actuarial value of assets represented 117% of the ongoing liabilities of
the Scheme. The current contribution rate is 7.5% of Section Pay.
Employer pension contributions charged to the 2002 Profit and Loss Account
during the year were �715,000 (2001 - �634,000).
g) Serco Metrolink Pension Scheme
This is a pre-funded defined benefit scheme. The Company accounts for this
scheme as a defined contribution scheme as at re-bid any surplus or deficit
would transfer to the next contractor. Cash contributions are recognised as
pension costs and no asset or liability is shown on the Balance Sheet.
Actuarial assessments covering expenses and contributions are carried out by
independent qualified actuaries, the last such review being carried out as at
31 August 2001. The funding policy is to contribute such variable amounts as
will achieve 100% funding on a projected unit basis.
The main actuarial assumptions used in the valuation were:
Investment return 6.5% p.a.
Salary growth 4.4% p.a.
Price Inflation 2.4% p.a.
Pension increases 2.4% p.a.
The actuarial value of assets represented 82% of the ongoing liabilities of the
scheme. The current contribution rate is 8.2%.
Employer pension contributions charged to the 2002 Profit and Loss Account were
�244,000 (2001 - �225,000).
h) Docklands Light Railway Pension Scheme
This is a pre-funded defined benefit scheme with Docklands Light Railway
Limited being the principal employer. Serco accounts for this scheme as a
defined contribution scheme, since at re-bid any surplus or deficit would
transfer to the next contractor. Cash contributions are recognised as pension
costs and no asset or liability is shown on the Balance Sheet.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
31 Pension schemes (continued)
Actuarial assessments covering expenses and contributions are carried out by
independent qualified actuaries, with the last such review being carried out at
1 April 2001. The funding policy is to contribute such variable amounts as will
achieve 100% funding on a projected unit basis. The main actuarial assumptions
used in the valuation this year were:
Investment return 7.0% p.a.
Salary growth 5.0% p.a. (including promotional scale)
Pension increases 3.0% p.a.
Dividend yield 2.75% p.a.
The actuarial value of assets represented 96% of the ongoing liabilities of the
Scheme. The current contribution rate is 15.2%.
Employer pension contributions charged to the 2002 Profit and Loss Account were
�1,378,000 (2001 - �1,181,000).
i) Other defined contribution schemes
The Group paid employer contributions of �10,401,000 (2001 - �6,386,000) into
UK and Australian defined contribution schemes and foreign state pension
schemes.
(B) FRS 17 Disclosure
The disclosures required under the transitional arrangements within FRS 17 have
been based on the most recent full actuarial valuations of the Serco Pension
and Life Assurance Scheme as at 6 April 1999 and the Serco-IAL Scheme as at 31
March 2001, updated to 31 December 2002 by independent qualified actuaries.
If the amounts had been recognised in the preliminary announcement the net
assets and the Profit and Loss Account would be as follows:
Restated
2002 2001
�'000 �'000
Net assets excluding net, SSAP 24, pension assets 248,012 110,549
Net pension liability under FRS 17 (73,602) (3,614)
Net assets including pension liabilities under FRS 17 174,410 106,935
2002 Restated
2001
�'000 �'000
Profit and loss reserve 68,226 47,369
Reversal of SSAP24 prepayments, net of deferred taxation (19,845) (18,522)
48,381 28,847
(Deficit) in relation to SPLAS scheme, net of deferred (62,427) (5,740)
taxation
(Deficit) / surplus in relation to Serco-IAL scheme, net (11,174) 2,126
of deferred taxation
Total pension deficit (73,601) (3,614)
Profit and loss reserve adjusted (25,220) 25,233
Notes to the Preliminary Announcement
For the year ended 31 December 2002
31 Pension schemes (continued)
a) Serco Pension and Life Assurance Scheme ("SPLAS")
The financial assumptions used were:
2002 2001
% p.a. % p.a.
Rate of increase in salaries 3.85 4.00
Rate of increase in deferred pensions 2.25 2.25
Rate of increase in pensions in payment 2.25 2.25
Discount rate 5.47 5.83
Inflation assumption 2.35 2.50
The Scheme's assets and the expected rates of return as at 31 December 2002
were:
2002 2002 2001 2001
% p.a. �'000 % p.a. �'000
Equities 7.00 134,319 7.25 119,600
AA corporate bonds 5.47 17,252 5.83 15,500
Gilts 4.50 28,264 5.00 21,000
Cash and other 4.00 - 4.00 15,800
Total market value of assets 179,835 171,900
Present value of scheme liabilities (269,017) (180,100)
Deficit in the Scheme (89,182) (8,200)
Related deferred tax asset 26,755 2,460
Net pension liability (62,427) (5,740)
The amount chargeable under FRS17 to operating profit for the year ended 31
December 2002 would have been:
�'000
Service cost 11,391
Past service cost 1,100
Total operating charge 12,491
Analysis of the net return on the pension scheme for the year ended 31 December
2002:
�'000
Expected return on pension scheme assets 12,872
Interest on pension liabilities (12,664)
Net return 208
Analysis of amount recognisable in Statement of Total Recognised Gains and
Losses (STRGL) for the year ended 31 December 2002:
�'000
Actual return less expected return on assets (56,996)
Experience gains and losses on liabilities (20,013)
Changes in assumptions (3,990)
Actuarial loss recognised in STRGL (80,999)
Notes to the Preliminary Announcement
For the year ended 31 December 2002
31 Pension schemes (continued)
Movement in deficit during the year:
�'000
Deficit in scheme at 31 December 2001 (8,200)
Movement in year:
Current service cost (11,391)
Contributions 12,300
Past service costs (1,100)
Net return on assets 208
Actuarial loss (80,999)
Deficit in scheme at 31 December 2002 (89,182)
History of experience gains and losses:
2002
�'000
Difference between expected and actual return on scheme assets (56,996)
Percentage of scheme assets 31.7%
Experience gains and losses on scheme liabilities (20,013)
Percentage of scheme liabilities 7.4%
Total amount recognised in STRGL (80,999)
Percentage of scheme liabilities 30.1%
b. The Serco-IAL Pension Scheme
The financial assumptions used were:
2002 2001
% p.a. % p.a.
Rate of increase in salaries 3.85 4.00
Rate of increase in pensions
- RPI 2.35 2.50
- LPI 2.25 2.25
- discretionary 2.25 2.25
Discount rate 5.47 5.83
Inflation assumption 2.35 2.50
The Scheme's assets and the expected rates of return as at 31 December 2002
were:
2002 2002 2001 2001
% p.a. �'000 % p.a. �'000
Equities 7.00 49,483 7.25 59,694
UK bonds 4.82 28,758 5.18 31,336
Property 6.24 7,690 6.54 7,329
Cash and other assets 4.50 908 4.00 78
Annuity policies 5.47 27,798 5.83 28,100
Total market value of assets 114,637 126,537
Present value of scheme liabilities (130,600) (123,500)
(Deficit) / surplus in the Scheme (15,963) 3,037
Related deferred tax asset / 4,789 (911)
(liability)
Net pension (liability) / asset (11,174) 2,126
Notes to the Preliminary Announcement
For the year ended 31 December 2002
31 Pension schemes (continued)
The amount chargeable under FRS17 to operating profit for the year ended 31
December 2002 would have been:
�'000
Service cost 2,300
Past service cost -
Total operating charge 2,300
Analysis of the net return on the pension scheme for the year ended 31 December
2002:
�'000
Expected return on pension scheme assets 7,900
Interest on pension liabilities (7,000)
Net return 900
Analysis of amount recognisable in Statement of Total Recognised Gains and
Losses (STRGL) for the year ended 31 December 2002:
�'000
Actual return less expected return on assets (16,100)
Experience gains and losses on liabilities 700
Changes in assumptions (4,300)
Actuarial loss recognised in STRGL (19,700)
Movement in surplus during the year:
�'000
Surplus in scheme at 31 December 2001 3,037
Movement in year:
Current service cost (2,300)
Contributions 2,100
Past service costs -
Net return on assets 900
Actuarial loss (19,700)
Deficit in scheme at 31 December 2002 (15,963)
History of experience gains and losses:
2002
�'000
Difference between expected and actual return on scheme assets (16,100)
Percentage of scheme assets 14.0%
Experience gains and losses on scheme liabilities 700
Percentage of scheme liabilities 0.5%
Total amount recognised in STRGL (19,700)
Percentage of scheme liabilities 15.1%
c. The Balance Sheet position for all of the other Group Pension Schemes is
materially the same in accordance with FRS17 as for SSAP 24.
Notes to the Preliminary Announcement
For the year ended 31 December 2002
32 List of principal undertakings
The companies listed below are, in the opinion of the Directors, the principal
undertakings of Serco Group plc. The percentage of equity capital directly or
indirectly held by Serco Group plc is shown. The voting rights are the same as
the percentage holding. The companies are incorporated and principally operate
in the countries stated below.
Principal subsidiaries
United Kingdom Serco Limited 100%
Serco-Denholm Limited 90%
Serco Europe Limited 100%
Serco-IAL Limited 100%
Serco Railtest Limited 100%
Serco Systems Limited 100%
NPL Management Limited 100%
Serco Docklands Limited 100%
Rakmulti Technology Limited 100%
Serco QAA Limited 100%
Traffic Information Services (TIS) Limited 100%
Rest of Europe
Belgium Serco Belgium S.A. 100%
Denmark Metro Service A/S 67%
France Serco France Sarl 100%
Germany Serco International GmbH 100%
Serco Services GmbH 100%
Ireland Serco Services Ireland Limited 100%
CCM Software Services Ltd 100%
Italy Serco s.r.l 100%
Guernsey Serco Insurance Company Limited 100%
Luxembourg Serco Facilities Management S.A. 100%
The Netherlands Serco Facilities Management BV 100%
Spain Serco Gestion de Negocias SL 100%
Sweden Serco Sverige AB 100%
Switzerland Serco Facilities Management S.A. 100%
Asia Pacific
Australia Serco Group Pty Limited 100%
Serco Australia Pty Limited 100%
Great Southern Railway Limited 100%
New Zealand Serco Group NZ Limited 100%
Hong Kong Serco Group (Hong Kong) Limited 100%
Other
Canada Serco Facilities Management, Inc. 100%
USA Serco Group, Inc. 100%
Serco, Inc. 100%
Serco Management Services, Inc. (Delaware) 100%
Barton ATC, Inc. 100%
Serco Management Services, Inc. 100%
(Tennessee)
JL Associates, Inc. 100%
Notes to the Preliminary Announcement
For the year ended 31 December 2002
32 List of principal undertakings
Joint
venture
undertakings
United Kingdom Premier Custodial Group Limited 50%
Kilmarnock Prison Services 50%
Limited
Lowdham Grange Prison Services 50%
Limited
Medomsley Holdings Limited 50%
Pucklechurch Custodial Services 50%
Limited
Moreton Prison Services Limited 50%
Serco Gulf Engineering Limited 50%
Defence Management Watchfield 50%
Limited
Laser (Teddington) II Limited 50%
Altram (Manchester) Limited 26%
Serco-Denholm Shipping Company 50%
Limited
AWE Management Limited 33%
Asia Pacific
Australia Defence Maritime Services Pty 50%
Limited
Serco Sodexho Defence Services 50%
Pty Limited
New Zealand Serco Sodexho Defence Services 50%
Limited
Other
USA Serco - SKE 50%
Bahrain Aeradio Technical Services WLL 49%
Bermuda BAS-Serco Limited 40%
Cyprus Serco Kalisperas 50%
Dubai International Aeradio (Emirates) 49%
LLC
Saudi Arabia Key Communications Development 49%
Co Limited
Singapore Serco Guthrie Pte Ltd 50%
Turkey Elektronik 51%
Sistemier Destek
Sanavi ve Ticaret
AS
Full details of related undertakings will be attached to the Company's Annual
Return to be filed with the Registrar of Companies.
END