Final Results

SERCO GROUP PLC Preliminary results for the year ended 31 December 2003 2003 2002 Turnover £1,556m £1,326m up 17.3% Profit before tax - pre goodwill £67.0m £57.0m up 17.4% Earnings per share - pre goodwill 11.03p 9.58p up 15.1% Profit before tax £52.9m £48.9m up 8.0% Earnings per share 7.75p 7.66p up 1.2% Dividend per share 2.34p 2.08p up 12.5% Executive Chairman Kevin Beeston said: 'In another excellent year for Serco we have maintained our consistent record of strong growth in sales and profits. Total turnover was up 17% to £1.6bn. Profit before tax and goodwill amortisation was up 17% to £67m. Free cash flow increased significantly to £47m. Contracts awarded in the year totalled a record £4.6bn and we enter 2004 with our largest-ever forward order book of £ 10.3bn. The opportunities in our markets continue to grow, driven by unremitting pressure on governments to deliver value for taxpayers' money. Our proven track record of delivering both value and quality improvement in public services makes us confident that we can sustain continuing strong earnings growth.' - Strong sales and profits growth for 16th consecutive year - 57% of incremental sales from existing contract base, with success rate in rebids and extensions continuing above 90% - 26% of incremental sales from new contract wins, with new bid success rate continuing above 50% - 27% underlying profit growth (before goodwill, exceptional items and incremental pension cost of £9m) - Significantly enhanced cash generation - Free cash flow increased to £47m (2002 - £9.7m) - 81% of group EBITDA converted into operating cash (2002 - 45%) - £9.9m cash from Great Southern Railway sale and leaseback and Norfolk and Norwich University Hospital refinancing - Succession of sales records broken - Total contracts awarded in 2003 - £4.6bn - Largest new contract - 25-year Merseyrail Electrics contract - Serco share valued at £1.8bn - Significant rebids and extensions awarded - new 10-year National Physical Laboratory contract valued at £500m, 11-year contract at Goose Bay, Canada, valued at over C$440m and 15-year extension to the Atomic Weapons Establishment contract valued at over £1bn - Largest North American contract - 10-year Ontario driver examination services contract valued at C$600m - Largest Middle East contract and first PFI in the region - preferred bidder for 30-year Oman Joint Technical College valued at approximately US$1.4bn - Serco's share of the consortium is 50% - Continued high visibility of earnings - Forward order book stands at £10.3bn - 93% of 2004, 77% of 2005 and 70% of 2006 planned turnover already secured - Substantial range of future opportunities - Bids worth £5bn submitted and under evaluation - Over £14bn of further opportunities identified Note: Profit before tax - pre goodwill is stated before the impact of FRS10 Goodwill Amortisation, (£14.1m). Full detail is provided in section one of the Finance review. Free cash flow is reconciled in section four of the Finance review. EBITDA is defined in the Chairman's statement. - Ends - WEBCAST A webcast of the results presentation will be available on www.serco.com from 1800 hrs (GMT) on the 2 March 2004. To pre-register for viewing please visit www.axisto.com/webcast/media/serco/020304/ For further information please contact Serco Group plc: T: +44 (0)1256 745900 Kevin Beeston - Executive Chairman Andrew Jenner - Finance Director Kevin Johnson - Head of Media and Public Relations Chairman's statement The successful £500m rebid of our contract to run the UK's National Physical Laboratory completed an excellent year for Serco. We maintained our unbroken record of double-digit growth in sales and profits before goodwill, strengthened our free cash flow and balance sheet, and entered 2004 with our largest-ever forward order book of £10.3bn. During the year we were awarded contracts valued at a record total of £4.6bn. The key to Serco's sustained success is a high rate of organic growth from extending the scope and scale of existing contracts. Over 50% of the year's incremental sales were achieved in this way. We maintained our above 90% success rate on rebids and won a large number of extensions including our largest-ever. We were awarded a record £2.4bn of new contracts - including our biggest ever -- as we continued to win over half our bids. There is ample scope for further growth: we currently have bids with a potential value of £5bn under evaluation and are addressing further opportunities valued at over £14bn. Financial performance Double-digit sales and profit growth Turnover grew 17% to £1,556m. Pre-tax profit was up 17% to £67m before goodwill amortisation and 8% to £52.9m after goodwill amortisation. Gross margin was maintained at 13.7% of sales. Earnings per share rose 15% to 11.03p before goodwill and 1% to 7.75p after goodwill. Pre-tax profit before goodwill amortisation and exceptional items was up 11% to £63.4m. The exceptional items consisted of gains totalling £8.1m from the sale and leaseback of Great Southern Railway (GSR) rolling stock and the refinancing of Norfolk and Norwich University Hospital, partially offset by reorganisation costs of £4.5m. Strong cash performance Free cash flow increased to £47m, compared with £9.7m in 2002. Operating cash generation continued to strengthen: we converted 81% of group EBITDA (earnings before interest, tax, depreciation and goodwill amortisation) into cash, compared with 45% in 2002. This is a significant achievement as our strong growth brings an accompanying demand for working capital - typically equivalent to a month's incremental turnover each year. As part of our continuing focus on cash management we released significant cash value from capital assets. The sale and leaseback of the remaining GSR rolling stock in Australia generated £5.8m of cash and £4m of profit. This followed a similar arrangement completed in June 2001. A further £4.1m cash and profit came from the refinancing of the Norfolk and Norwich University Hospital. This was possible because of the success of the project's construction phase, which delivered a major teaching hospital within budget and 20 weeks ahead of schedule. Reorganisation As our businesses grow, we need to back them with efficient and consistent support processes. As part of a continuing review of our organisational model, we announced in our interim report that we had restructured our UK support operations, bringing them together on a single business campus in Hampshire. This new arrangement is working well: although redundancy and relocation costs resulted in an exceptional charge of £4.5m in 2003, it will generate ongoing savings of some £1.5m a year. Chairman's statement (continued) Dividend Continuing strong profit growth has enabled us to maintain double-digit dividend growth. The recommended final dividend of 1.62p per share gives a total for the year of 2.34p - an increase of 12.5% over 2002. It will be paid on 12 May 2004 to shareholders on the register on 12 March 2004. Balance sheet Maintaining a strong balance sheet is a priority for us, because of the continuing growth of the business and the scale of opportunities ahead. In August, we took advantage of historically low interest rates by issuing £117m of 8-12 year loan notes. This provides assured funding for the future and allows a mixed portfolio of debt. It has also enabled us to repay the short term facilities we used to acquire the remaining 50% of Premier Custodial Group. Following this restructuring of debt we now have a very strong balance sheet with increased long term debt capacity. During the year we acquired full control of two PFI projects by buying-out joint venture partners' interests, together with a further five PFI projects through the acquisition of Premier. This has put us in a better position to manage the long term operating contracts and develop the potential for future organic growth. It is also the principal reason why the non recourse project debt shown on the group balance sheet rose over the year from £29.7m to £357m. Although shown as a liability on the balance sheet, non recourse debt is ringfenced and secured on assets and income streams of individual projects with future revenues of over £3bn. They do not affect the groups' credit agreement covenants, our risk profile or our ability to fund the group going forward. Pensions As previously announced, in February 2003 we merged our two UK defined benefit pension schemes to achieve cost and investment efficiencies. The merged scheme continues to show a net deficit, now reduced to £70m. As announced in last year's report, we have raised our long term contribution rates to reduce the deficit. An additional payment of £9m was made in 2003. Our underlying growth in pre-tax profit before goodwill, exceptional items and this incremental pension charge was 27% in 2003. Growing the business Contract wins Sales grew by £230m compared with 2002. As usual, the majority of this increase (57%) came from extending the duration or scope of existing contracts. A further 26% came from our record level of new business wins, and 17% from acquisitions. It was a good year for rebids and extensions. These are a crucial test of customer confidence because we can be judged on the performance and value that we have actually delivered. Our largest-ever contract extension, valued at £ 1bn, added 15 years to the 10-year contract under which we and our partners are managing the Atomic Weapons Establishment. It extends the contract until 2025. We were awarded preferred bidder status in our rebid for a further 10-year contract to run the UK's National Physical Laboratory, valued at £500m. This is a vote of confidence in our ability to run the most managerially and technically demanding contracts. We successfully rebid and broadened our contract with the Canadian Department of National Defence to provide site support services at Goose Bay. The new 11-year contract is valued at over C$440m. Chairman's statement (continued) Our largest-ever new contract, to run Merseyrail Electrics in partnership with the Dutch rail operator Ned Railways, began in July. Serco's share of the £ 3.6bn contract is valued at £1.8bn over 25 years. Merseyrail Electrics is a self-contained network in and around Liverpool, with 66 stations and over 1,000 staff. When we took it over, it was already achieving Britain's best PPM - the Public Performance Measure by which train services are judged; in the first six months we raised its score even higher, to hit a record level in December. Another strategically significant win was the public private partnership under which we are providing driver examination services to 12m residents throughout Ontario, Canada. This is the first contract of its kind in the North American market: the model can readily be applied to other activities where governments collect a fee for service, and other provinces are watching our progress with interest. We secured the 10-year franchise for C$114m, funded mainly with non recourse debt raised in the Canadian market, and expect to generate revenues totalling some C$600m. In continental Europe, we have taken over operational management of Gefechtsübungszentrum (GÜZ), Germany's flagship army combat training centre. Valued at €50m, this is our most important German contract win to date and greatly strengthens our position in the country's developing defence outsourcing market. While remaining very satisfied with our success rate of over 50% in new contract awards, it is nonetheless disappointing when we are not successful, notably with our consortium not winning the very large Future Strategic Tanker Aircraft PFI contract announced in January. Market development We are passionate about improving the quality and productivity of public services. In the UK, we have played a leading role in establishing and supporting the CBI's Public Services Strategy Board. The Board works with the government and other stakeholders to stimulate debate, publish research and promote public private partnerships as a means of delivering better value for the taxpaying public. We also promote these ideas internationally through direct contact with governments and opinion leader audiences. During the year, Serco executives addressed public services conferences in Australia, Hong Kong, Italy, Japan and the US. The Serco Institute will continue to keep Serco businesses and public sector stakeholders alert to market developments and thought leadership, and help us to position Serco appropriately. We have redefined the aims of the Institute to put greater emphasis on understanding private sector delivery of public services around the world and promoting best practice to governments, unions and other stakeholders. In 2003, Institute staff initiated a major research project on contractual performance regimes, using a number of Serco's contracts as the information base. During the year we recruited management consultants from market leading firms to create Serco Government Consulting. This team is helping to shape the way our markets evolve by demonstrating the benefits of competition within public private partnerships and advising senior civil servants on ways to improve public service delivery through innovative public private partnerships and appropriate procurement strategies. Its strength as a consultancy is that it can deliver practice as well as principles - bringing in people from our operating companies to advise on practical issues and implement solutions. International strategy We have a well diversified risk profile. Our business spread -- across a range of sectors and countries - enables us to take advantage of areas of opportunity as they arise and offset periods of slower growth in other regions. Chairman's statement (continued) We allocate resources in favour of the areas of greatest opportunity at any time. In the past year, the UK has contributed a growing percentage of our business because of a series of exceptionally large contract wins - not least the Merseyrail contract which began in July. But our commitment to international growth and diversity is undiminished: we remain convinced that this strategy is in the best long term interests of our shareholders. Portfolio management We regularly review our portfolio of contracts and make adjustments to focus the business on areas with greatest potential and reduce underperforming activities. During the year we disposed of several facilities management, leisure and IT contracts in the Swedish market and reached agreement with Network Rail in the UK to terminate our maintenance contract for the East Midlands zone in January 2004. In July we acquired our partner's share of Premier Custodial Group, our custodial support services business. This £48.6m deal followed the acquisition of our partner's parent by a competitor. The move has strengthened our position in a market with high growth potential in the UK and overseas. It secures greater synergy with the rest of our justice business and enables us to react to the market more flexibly. During the year we also bought-out our partners in the Metro Service joint venture, which runs the Copenhagen Metro, and the joint ventures set up to deliver the National Physical Laboratory and Manchester Metrolink PFIs. This has increased our control and ability to deliver change where capital assets have been constructed and projects have moved into the operating phase. As in the past we will continue to review our portfolio on an ongoing basis. Private Finance Initiatives We are enthusiastic but selective participants in PFIs. Our PFI portfolio consists of 12 projects: we have operating contracts in all 12 and equity stakes in all but one. Together, these contracts account for some 9% of our turnover and are now delivering positive cash returns on both equity investment and operating contracts. PFIs deliver proven benefits to governments and taxpayers. Recent analyses by HM Treasury and the National Audit Office have compared PFIs very favourably with conventional public sector procurement. The Treasury found that 89% of PFIs deliver on time or early, with no construction cost overruns borne by the taxpayer. It contrasted these figures with previous research into conventionally procured projects, which found only 30% delivered on time and 27% within budget. PFIs are extremely good business for Serco. Our interest in them is primarily for the long term operating contracts that follow the construction or asset procurement phase: we have built a forward order book of operating contracts worth some £3bn. To the end of 2003 we have made capital investments of £15.3m, from which we have already realised cash inflows of £22.6m. The emergence of a secondary market in PFI equity and debt confirms that the value of PFI stakes is now well recognised and realisable. However, our strategy is generally to retain our stakes as we expect to generate further long term value from the operating contracts. Chairman's statement (continued) Corporate social responsibility Social responsibility has always been part of our culture; now it is an increasingly formalised part. We have a structured approach which delegates accountability for corporate social responsibility (CSR) performance to every contract manager. This ensures that the majority of initiatives are managed at a local level, where they have most impact. Social responsibility is integrated into the Serco Management System. The first Business in the Community Corporate Responsibility Index, announced in March 2003, indicates that this approach is delivering encouraging results: Serco was ranked in the second quintile, and our overall score of 79% fell just short of the top quintile. This year for the first time we are publishing a separate Corporate Responsibility Report, which covers our policies, processes and performance. We have also greatly enlarged the corporate responsibility area of our website, www.serco.com which was recently relaunched. In 2003 we launched the Serco Foundation to provide additional financial support to community projects. Board We reviewed the composition and balance of the board and appointed two new non-executive directors during 2003. In 2004 we see the retirement from the board of one executive and one non-executive director. Mindful of the new Combined Code on Corporate Governance published in July 2003, we believe these changes leave the board appropriately composed and balanced for the future. In June we appointed David Richardson to the board as a non-executive director. David is finance director of Whitbread Plc, the FTSE 100 leisure group. His previous roles there have included eight years as strategy director. In October we appointed Margaret Ford as a non-executive director. A successful entrepreneur and specialist in public sector management, she chairs English Partnerships, the national urban regeneration agency, and is a non-executive director of Thus plc. In March 2004 Iestyn Williams retires as an executive director and in April, Rhidian Jones retires as a non-executive director. Both became directors of Serco in 1987 after the buyout of RCA's UK business, where Iestyn had been Director of Personnel. Each has played a vital role in making Serco what it is today, and we thank them for their commitment, enthusiasm and guidance since Serco's establishment as a plc. Iestyn will remain involved with the company as non-executive chairman of our education business, Serco Learning. On Rhidian's retirement, DeAnne Julius becomes senior non-executive director and David Richardson takes over as chairman of the Audit Committee. People Our continued growth is made possible by the individual commitment of everyone in Serco. We thank them all for their contribution, and this year we will be able to acknowledge exceptional achievements through the new Chairman's Recognition Awards. These cover individual and team contributions to environmental, safety and community initiatives - and other exceptional contributions to Serco's business success. The award winners are listed in our separate Corporate Responsibility Report. Chairman's statement (continued) To ensure that our management capabilities keep pace with our growth we continue to enhance leadership training and management development. We supplemented our very successful Institute of Directors and Chartered Management Institute accredited courses with a new Directing our Business programme for almost 240 directors and senior managers. To accelerate the development of managers with high potential we launched the Serco Leadership Programme, which provides fast-track training in a range of skills. Senior managers globally are now beginning to go through a profiling process to generate focused personal development plans. Outlook We have made an encouraging start to the new year - notably with our first PFI in the Middle East: to build, manage and deliver education at a new joint technical college in Oman. The consortium, of which we have a 50% share, has been named as preferred bidder for the 30-year contract, with an estimated value of US$1.4bn. In February we were nominated as preferred supplier to deliver prison escort and custody services for London and South East England. It is pleasing to announce preferred bidder status to our longest-standing contract, now over 40 years old -- the solid state phased array radar support contract at RAF Fylingdales - and also the broadening of our multi-activity support role with the Naval Air Command under a new contract valued at about £ 39m. At the start of 2004 our forward order book stood at £10.3bn, equivalent to about seven times last year's turnover, with contracts running until 2031. Our consistent success in winning rebids and extensions provides a solid platform for growth. Assuming a continuing 90% renewal rate on rebids, we already have contracts in place to provide 93% of planned revenue this year, 77% in 2005 and 70% in 2006. The opportunities in our markets continue to grow, driven by unremitting pressure on governments to deliver value for taxpayers' money. Our proven track record of delivering both value and quality improvement in public services makes us confident that we can sustain continuing strong earnings growth. Finance review 1. Financial performance 2003 has been a year of strong performance. The group has continued to deliver strong growth in both revenue and profit, combined with an improved free cash flow. Further analysis is provided below: Year to 31 December 2003 2002 Increase % £m £m Total turnover 1,555.5 1,325.9 17.3% Group turnover 1,324.3 1,097.3 20.7% Joint venture turnover 231.2 228.6 1.1% Gross profit 180.8 150.0 20.6% Administration expenses (138.5) (112.8) Exceptional items (net) 3.6 - Joint venture profit 24.0 23.9 Net group interest (2.9) (4.1) Profit before goodwill and tax 67.0 57.0 17.4% Goodwill amortisation (14.1) (8.1) Profit before tax 52.9 48.9 8.0% Tax (19.1) (16.6) Profit after tax 33.8 32.3 Effective tax rate 36.1% 34.0% Average number of shares 429.9m 421.8m Earnings per share before goodwill 11.03p 9.58p 15.1% Earnings per share after goodwill 7.75p 7.66p 1.2% Dividend per share 2.34p 2.08p 12.5% 1.1 Turnover Total turnover for the year to 31 December 2003 increased by 17.3% to £ 1,555.5m. Gross margin on group turnover, representing the average contract margin across the portfolio, was maintained at 13.7% for 2003. Joint venture turnover increased by 1.1% to £231.2m. Joint venture turnover and profit in the second half of the year was reduced by the acquisition of the remaining 50% share in Premier Custodial Group (Premier) in July 2003, which was fully consolidated from that date. 1.2 Administration expenses Administration expenses for the year increased by 22.8% to £138.5m. This includes a £9m increase in contribution to our UK defined benefit pension scheme (see 3. Pensions). Excluding this, underlying administration expenses increased by 14.8%. 1.3 Exceptional items There were three exceptional items during 2003 resulting in a net profit of £ 3.6m. These items are explained below: £m Reorganisation costs (4.5) GSR sale and leaseback 4.0 Norfolk and Norwich refinancing 4.1 Net exceptional profit 3.6 Finance review (continued) 1.3.1 Reorganisation costs As the group grows, to ensure we have efficient and consistent support processes, we have restructured our UK support operations, bringing them together on a single campus site in Hook, Hampshire. In addition, we have rationalised our Australian support offices to a single centre in Sydney. The resulting redundancy and relocation cost resulted in an exceptional charge of £ 4.5m in the first half year of 2003, and will generate savings of approximately £1.5m a year going forward. 1.3.2 GSR sale and leaseback As part of the focus on cash generation we arranged the sale and leaseback of the remaining rolling stock belonging to our Great Southern Railway (GSR) business in Australia. This generated cash of £5.8m and profit of £4.0m, and followed a similar arrangement completed in June 2001. 1.3.3 Norfolk and Norwich University Hospital refinancing The refinancing of the Norfolk and Norwich University Hospital (Octagon), in which we are a 5% investor, was completed in December 2003. The refinancing released cash from a PFI asset whilst simultaneously providing additional funding to the NHS in Norfolk. This generated cash and profit of £4.1m (see 5. PFIs). 1.4 Profit before tax Profit before tax and goodwill amortisation increased 17.4% to £67.0m, representing a net margin on turnover of 4.3% (2002 - 4.3%). Profit before tax, goodwill amortisation and exceptional items increased by 11.2%. Profit before tax and after goodwill amortisation increased by 8.0%. 1.5 Goodwill Amortisation of goodwill was £14.1m (2002 - £8.1m). The increase results largely from the acquisitions of the Ontario Driver Examination Services (DES) franchise and the remainder of Premier. 1.6 Tax The tax charge of £19.1m (2002 - £16.6m) represents an effective rate of 36.1% (2002 - 34.0%). The increase in tax rate is largely due to the increased non-deductible goodwill charge discussed above. 1.7 Earnings per share As a result of the above, earnings per share before goodwill amortisation grew by 15.1% to 11.03p. Earnings per share post goodwill amortisation grew by 1.2% to 7.75p. 2. Dividends The proposed final dividend of 1.62p per share gives a cumulative dividend for 2003 of 2.34p, a 12.5% increase on 2002. 3. Pensions The total 2003 pension charge for Serco was £36.8m (2002 - £29.1m), of which the UK defined benefit scheme had a charge of £20.0m (2002 - £12.5m). In February 2003 we merged our two UK defined benefit pension schemes for cost and investment efficiency reasons. A one-off £15.5m cash contribution was made in 2002 to align the funding levels of the two schemes to facilitate the merger. Finance review (continued) For 2003 we have continued to apply the transitional rules and disclosures for the implementation of FRS17 Retirement Benefits. This requires the market values of the assets and liabilities for defined benefit schemes to be calculated and disclosed in a note, discussed in more detail in note 33 to the Accounts. In summary, at 31 December 2003 there was a net deficit in relation to the defined benefit scheme of £69.7m (2002 - £73.6m), and an asset base of approximately £350.4m (2002 - £294.4m). Long term employer contributions into the scheme were increased by £9m in 2003 to address the level of deficit on the scheme. 4. Cash flow Free cash flow for 2003 was £47m (2002 - £9.7m). At 31 December 2003 net recourse debt was £22.3m (2002 - £6.3m cash). Further analysis is shown below: Year to 31 December 2003 2002 £m £m Operating profit before exceptional item 28.2 29.1 Exceptional Item: Reorganisation costs (4.5) - Operating profit 23.7 29.1 Non-cash items 33.8 24.4 Group EBITDA 57.5 53.5 Pension fund equalisation payment - (15.5) Working capital movement (11.1) (13.9) Operating cash flow 46.4 24.1 Dividends from joint ventures 12.6 11.1 Interest and taxation (7.8) (11.9) Exceptional item: GSR sale and leaseback 5.8 - Capital expenditure (21.8) (23.6) Disposal of assets 8.9 8.1 Other items 2.9 1.9 Free cash flow 47.0 9.7 Exceptional item: Norfolk and Norwich refinancing 4.1 - Acquisitions/disposals (96.6) (10.3) Financing - Long term loans 117.5 - - Net increase in non recourse debt 47.0 - - Share issues / other financing (8.0) 114.1 Dividends paid (9.5) (8.3) Net cash flow 101.5 105.2 4.1 Operating cash flow There was an operating cash inflow for the year of £46.4m (2002 - £24.1m), an increase of 93%. This represents a conversion of 196% of operating profit into cash (2002 - 83%). As operating profit is calculated after deduction of goodwill amortisation and depreciation, we believe that a more appropriate measure for operating cash flow is the conversion of group EBITDA into operating cash flow. For 2003 this was 81% (2002 - 45%). The improvement in conversion rates is particularly notable given that our strong level of organic growth brings an accompanying demand for working capital, typically equivalent to a month's incremental turnover each year. Finance review (continued) 4.2 Joint venture dividends Dividends received from joint ventures during 2003 of £12.6m (2002 - £11.1m) represent a 78% (2002 - 67%) conversion of profit after tax into cash. 4.3 Capital expenditure Capital expenditure, excluding investment in PFI Special Purpose Companies (SPC), for the year was £21.8m (2002 - £23.6m). This expenditure represented 1.6% of group turnover, and is broadly similar to prior years. 4.4 Acquisitions / disposals There were two principal acquisitions during 2003: In February 2003, we acquired the franchise for the operation of the DES, a Canadian contract for C$114m, funded by C$99m of non recourse debt and C$15m of equity and subordinated debt. We acquired our joint venture partner's share of Premier, our custodial support services business, for £48.6m in July 2003. Also during 2003, we bought out our partners in three businesses, to increase our direct control over the long term operating contracts. These were Laser (the National Physical Laboratory PFI SPC), Altram (the Manchester Metrolink PFI SPC) and Metro Service (the Copenhagen Metro joint venture). As part of the review to focus the business on areas of greatest potential and to reduce under-performing activities in October 2003 we disposed of a number of our Swedish contracts for £5.6m. 4.5 Financing The movement in long term loans arises as a result of the Private Placement (see 6. Treasury) taken out in August 2003. The net increase in non recourse loans of £47m primarily represents the loan taken out to fund the acquisition of the DES franchise. 4.6 Net debt 31 Dec 31 Dec 2003 2002 £m £m Closing cash 170.9 69.4 Long term loans (165.3) (47.4) Other loans and finance leases (27.9) (15.7) Recourse net (debt)/cash (22.3) 6.3 Non recourse debt (357.0) (29.7) Total net debt (379.3) (23.4) Non recourse debt (see 5. PFIs) represents long term loans secured on the contracts of PFI and other concessions, and not any other assets of the group. The loans are excluded from all of our credit agreement and other covenants calculations, therefore having no impact on the group's ability to borrow. 5. PFIs 5.1 Profile At the end of 2003 the group had 12 PFI projects, with 11 equity investments and 12 operating contracts. These contracts contribute £3.0bn to the group's order book of £10.3bn. During 2003 PFIs contributed £133.4m to turnover and £ 11.9m to gross profit for the year. Finance review (continued) At the end of 2003 we had invested £15.3m of equity and subordinated debt into our SPCs. As a result of refinancings and one sale, we have received back £ 22.6m cash from these investments, representing a net inflow to the group of £ 7.3m. 5.2 Disclosure The 100% ownership of eight of our PFI SPCs at the end of 2003 has raised the transparency and visibility of their assets and liabilities on the group's balance sheet. We continue to expand our disclosure of PFIs in this year's Annual Review and Accounts. 5.3 SPC funding SPC funding is via long term loans which are non recourse to Serco. At the start of 2003, the Traffic Control Centre (TCC) was the only fully owned PFI, with full balance sheet consolidation of non recourse debt and offsetting PFI asset. All remaining PFIs in which we had an interest were owned 50% or less, and so non recourse debt and PFI assets were included in the share of gross assets and share of gross liabilities of joint ventures, which offset within the fixed asset area of the consolidated balance sheet. During 2003 as described, we acquired all remaining share capital in Premier, Laser and Altram, and bought the franchise for the operation of DES. The impact of these changes is to consolidate on our balance sheet a non recourse debt of £357m as at the end of 2003, as shown below: As at 31 December 2003 2002 Non recourse debt £m £m Traffic Control Centre (TiS) 54.3 29.7 National Physical Laboratory (Laser) 82.4 - Premier Custodial Group 170.6 - Ontario Driver Examination Services 49.7 - Non recourse debt in consolidated balance sheet 357.0 29.7 In addition to the above, non recourse debt of £55.2m (2002 - £205.2m) is included in joint venture gross liabilities. 5.4 SPC refinancing We are a 5% investor in the Norfolk and Norwich University Hospital. The refinancing of this SPC was completed in December 2003. This generated cash and profit of £4.1m. This is consistent with our philosophy of holding equity stakes in SPCs to increase our direct control over the operating contracts, whilst accelerating our future cash flows on those equity stakes through refinancing. 6. Treasury 6.1 Treasury management The group's treasury function is responsible for managing the group's exposure to treasury risk, and operates within a defined set of policies and procedures approved and reviewed by the board. 6.2 Liquidity management The group is funded by a £140m revolving credit facility, and two private placements. Revolving credit facility The credit facility of £140m is provided by a syndicate of seven banks and expires in 2007. The facility is floating rate, has unsecured obligations with covenants and obligations typical of these types of arrangement. Finance review (continued) Private Placements The group has taken out two Private Placements. The first Private Placement of £43.2m was taken out in the US in 1997 and matures in 2007. During 2003 a new Private Placement was raised to extend the maturity profile of the group's debt and to take advantage of historically low interest rates. This second Private Placement raised £117m and has a maturity profile of 8-12 years, with an average fixed coupon of 5.8%. 6.3 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 largely 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 assets value of the group. An element of the Private Placements was issued in US Dollars and was swapped into sterling consistent with the risk profile set out above. 6.4 Interest rate risk The group's exposure to interest rate fluctuations on its borrowing and deposits is selectively managed, using interest rate swaps. All short term debt is maintained at floating rates of interest. 7. UITF 38 - accounting for ESOP shares Urgent Issues Task Force (UITF) Abstract 38 `Accounting for ESOP Trusts' was issued in December 2003 for accounting periods ending on or after 22 June 2004, early adoption is however encouraged. UITF Abstract 38 requires any investment in own shares to be deducted from shareholder funds as opposed to being held as an asset on the balance sheet. This also requires a restatement of the cash flow statement to include the movement on the ESOP shares balance in the non-cash movement section. We have adopted UITF 38 for 2003 and have restated the 2002 balance sheet and cash flow statement accordingly. 8. International Financial Reporting Standards (IFRS) The group is in the process of preparing to convert to IFRS in time for application to the 2005 Serco Accounts. It is a complex task to assess the differences between current accounting policies and IFRS, not least since many of the IFRS are themselves in the course of revision. A project team, which is working in conjunction with Deloitte & Touche, has been working for more than a year to identify the major areas of impact with respect to known and anticipated changes to financial statements. Consolidated Profit and Loss Account For the year ended 31 December 2003 2003 2002 2003 Joint 2003 2002 Joint 2002 Ventures Total Ventures Total Group Group Note £'000 £'000 £'000 £'000 £'000 £'000 Turnover: Group and 2 1,324,271 231,255 1,555,526 1,097,278 228,670 1,325,948 share of joint ventures - continuing operations Less: Share of joint 2 - (231,255) (231,255) - (228,670) (228,670) ventures Group turnover 2 1,324,271 - 1,324,271 1,097,278 - 1,097,278 Cost of sales (1,143,418) - (1,143,418) (947,313) - (947,313) Gross profit 180,853 - 180,853 149,965 - 149,965 Administrative expenses (157,144) - (157,144) (120,862) - (120,862) Amortisation of (14,131) - (14,131) (8,098) - (8,098) intangible assets Other administrative (138,516) - (138,516) (112,764) - (112,764) expenses Exceptional item: (4,497) - (4,497) - - - reorganisation costs Operating 23,709 - 23,709 29,103 - 29,103 profit-continuing operations Exceptional item: GSR 3,977 - 3,977 - - - sale and leaseback Share of operating - 22,700 22,700 - 21,883 21,883 profit in joint ventures Interest receivable and 16,760 11,397 28,157 1,422 16,894 18,316 similar income Group 12,691 - 12,691 1,422 - 1,422 Exceptional item: 4,069 - 4,069 - - - Norfolk and Norwich refinancing Share of joint ventures - 11,397 11,397 - 16,894 16,894 Interest payable and (15,609) (10,080) (25,689) (5,486) (14,875) (20,361) similar charges Group (15,609) - (15,609) (5,486) - (5,486) Share of joint ventures - (10,080) (10,080) - (14,875) (14,875) Profit on ordinary 28,837 24,017 52,854 25,039 23,902 48,941 activities before taxation Taxation on profit on (19,103) (16,639) ordinary activities Profit on ordinary 33,751 32,302 activities after taxation Share of joint venture (198) - minority interest Minority interest (255) - Profit for the financial 33,298 32,302 year Equity dividends (10,050) (9,441) Retained profit for the 23,248 22,861 financial year Earnings per share (EPS) 3 per ordinary share of 2p each Basic EPS, after 7.75p 7.66p amortisation of goodwill Basic EPS, before 11.03p 9.58p amortisation of goodwill Diluted EPS, after 7.74p 7.63p amortisation of goodwill Diluted EPS, before 11.02p 9.54p amortisation of goodwill Consolidated Balance Sheet As at 31 December 2003 Restated 2003 2002 Note £'000 £'000 Fixed assets Intangible assets 222,950 147,473 Tangible assets 77,398 62,479 Investments in joint ventures 4 24,886 35,883 Share of gross assets 151,460 317,831 Share of gross liabilities (126,574) (281,948) 325,234 245,835 Current assets Stocks 39,543 38,744 Debtors: amounts due within one year 5 278,931 220,042 Debtors: amounts due after more than one year 5 419,589 108,932 Cash at bank and in hand 170,888 71,774 908,951 439,492 Creditors: amounts falling due within one year Bank loans and overdrafts - 2,386 Trade creditors 81,335 74,377 Other creditors including taxation and social 90,892 93,843 security Accruals and deferred income 177,866 136,766 Proposed dividend 6,958 6,184 357,051 313,556 Net current assets 551,900 125,936 Total assets less current liabilities 877,134 371,771 Creditors: amounts falling due after more 539,798 87,588 than one year Provisions for liabilities and charges 56,526 34,533 Net assets 280,810 249,650 Capital and reserves Called up share capital 8,697 8,697 Share premium account 190,791 190,791 Capital redemption reserve 143 143 ESOP reserve (16,949) (18,207) Profit and loss account 98,128 68,226 Equity shareholders' funds 6 280,810 249,650 This preliminary announcement was approved by the Board of Directors on 2 March 2004 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 2003 2003 Restated 2002 £'000 £'000 Operating profit before exceptional item 28,206 29,103 Exceptional item: reorganisation cost (4,497) - Operating profit 23,709 29,103 Depreciation and amortisation of goodwill 32,532 23,632 Movement in ESOP investment 1,258 776 Net increase in working capital (11,111) (13,900) One-off pension fund contribution - (15,500) Net cash inflow from operating activities 46,388 24,111 before PFI asset expenditure Movement in PFI debtor * 3,680 - Expenditure on PFI assets under construction * (33,001) (14,950) Net cash inflow from operating activities 17,067 9,161 after PFI asset expenditure Dividends received from joint ventures 12,630 11,095 Returns on investments and servicing of finance Interest received 5,652 1,223 Interest paid (6,054) (7,362) Exceptional item: Norfolk and Norwich 4,069 - refinancing Net cash inflow/(outflow) from returns on 3,667 (6,139) investments and servicing of finance Taxation Tax paid (7,354) (5,738) Capital expenditure and financial investment Purchase of tangible and intangible fixed (21,835) (23,596) assets Sale of tangible fixed assets 8,878 8,125 Exceptional item: GSR sale and leaseback 5,761 - Net cash flows with joint ventures 2,969 1,235 Net cash outflow from capital expenditure and (4,227) (14,236) financial investment Acquisitions and disposals Acquisitions † (107,463) (11,353) Net cash acquired with acquisitions 12,843 397 Net cash redeemed upon disposal (3,141) - Subscription for shares in joint ventures (3,354) (370) Proceeds on disposal of subsidiary 4,471 - undertakings Proceeds on disposal of joint ventures - 1,030 Net cash outflow from acquisitions and (96,644) (10,296) disposals Equity dividends paid Dividends paid (9,529) (8,283) Net cash outflow from equity dividends paid (9,529) (8,283) Net cash outflow before financing (84,390) (24,436) Financing Issue of ordinary share capital - 117,929 Debt due within one year: (Decrease) in other (1,709) (300) loans Debt due beyond one year: Increase in: 193,787 15,624 Other loans 117,502 24 Non recourse debt financing - DES † 49,774 - Non recourse debt financing PFI assets * 26,511 15,600 Capital element of finance lease repayments (6,188) (3,594) Net cash inflow from financing 185,890 129,659 Increase in cash in the year 101,500 105,223 Balance at 1 January 69,388 (35,835) Balance at 31 December 170,888 69,388 * PFI assets and debtor financed by non recourse loans † Acquisitions include DES that is partly funded by non recourse debt Consolidated Statement of Total Recognised Gains and Losses For the year ended 31 December 2003 2003 2002 £'000 £'000 Profit for the financial year 33,298 32,302 Currency translation differences on foreign currency net 6,654 (1,911) investments Total recognised gains and losses for the year 39,952 30,391 Prior year adjustment - (806) Total gains and losses recognised since last annual 39,952 29,585 report and accounts Notes to the Preliminary Announcement For the year ended 31 December 2003 Basis of preparation - preliminary announcement 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 in this announcement, which was approved by the board of directors on 2 March 2004, does not constitute the company's statutory accounts for the years ended 31 December 2003 or 2002, but is derived from these accounts. Statutory accounts for 2002 have been delivered to the Registrar of Companies and those for 2003 will be delivered following the company's annual general meeting. The auditors have reported on these accounts; their reports were unqualified and did not contain statements under S237 (2) or (3) Companies Act 1985. 1. Accounting policies This preliminary announcement been prepared in accordance with applicable UK accounting standards. These have all been applied consistently with prior years with the exception of investment in own shares which is explained in the restatement below. ESOP reserve The ESOP reserve represents shares in Serco Group plc held by the Serco Group plc 1998 Employee Share Ownership Trust (the Trust). 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. In accordance with UITF 38, the difference between the market value of the shares at the date of award and any consideration to be paid for the shares in respect of these schemes is charged to the profit and loss account over the performance period during which the benefits are earned by employees. Restatement The 2002 Accounts have been restated to reflect the early adoption of the Urgent Issues Task Force Abstract 38 (UITF 38) - Accounting for ESOP trusts. Investment in own shares which was previously disclosed in Fixed Assets is now classified as an ESOP reserve and is shown as a reduction in the shareholders' funds. Notes to the Preliminary Announcement (continued) For the year ended 31 December 2003 2. Segmental report Classes of business Joint Group Ventures Total 2003 £'000 £'000 £'000 Turnover Civil government 444,875 42,897 487,772 Defence 252,469 151,496 403,965 Transport 385,793 36,862 422,655 Science 111,004 - 111,004 Private sector 130,130 - 130,130 Total 1,324,271 231,255 1,555,526 Profit before taxation and other costs/income Civil government 17,025 4,195 21,220 Defence 17,878 15,968 33,846 Transport 18,976 2,537 21,513 Science 11,619 - 11,619 Private sector 8,697 - 8,697 Total 74,195 22,700 96,895 Other (costs)/income Common costs (31,858) Exceptional items - reorganisation costs and (520) GSR sale and leaseback Amortisation of intangible assets (14,131) Net interest - group (2,918) Exceptional item - Norfolk and Norwich 4,069 refinancing Net interest - joint ventures 1,317 Profit on ordinary activities before taxation 52,854 Net assets Civil government 43,749 Defence 53,127 Transport 59,173 Science 64,508 Private sector 32,436 Total 252,993 Unallocated assets 27,817 Total 280,810 Notes to the Preliminary Announcement (continued) For the year ended 31 December 2003 2. Segmental report (continued) 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/income 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)/income 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 Restated Civil government 43,269 Defence 53,400 Transport 45,716 Science 69,771 Private sector 31,679 Total 243,835 Unallocated assets 5,815 Total 249,650 Notes to the Preliminary Announcement (continued) For the year ended 31 December 2003 2. Segmental report (continued) Geographical segments Joint Group Ventures Total 2003 £'000 £'000 £'000 Turnover United Kingdom 950,098 174,723 1,124,821 Rest of Europe and Middle East 185,936 8,355 194,291 Asia Pacific 109,627 43,251 152,878 North America 78,610 4,926 83,536 Total 1,324,271 231,255 1,555,526 Profit before taxation and other costs/income United Kingdom 43,017 19,274 62,291 Rest of Europe and Middle East 14,414 227 14,641 Asia Pacific 6,982 2,831 9,813 North America 9,782 368 10,150 Total 74,195 22,700 96,895 Other (costs)/income Common costs (31,858) Exceptional items - reorganisation costs and (520) GSR sale and leaseback Amortisation of intangible assets (14,131) Net interest - group (2,918) Exceptional item - Norfolk and Norwich 4,069 refinancing Net interest - joint ventures 1,317 Profit on ordinary activities before taxation 52,854 Net assets United Kingdom 142,166 Rest of Europe and Middle East 41,670 Asia Pacific 42,553 North America 26,604 Total 252,993 Unallocated assets 27,817 Total 280,810 Note: Turnover is shown by geographical origin. Turnover analysed by geographical destination is not materially different. Notes to the Preliminary Announcement (continued) For the year ended 31 December 2003 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/income 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)/income 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 Restated 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 5,815 Total 249,650 Note: Turnover is shown by geographical origin. Turnover analysed by geographical destination is not materially different. Notes to the Preliminary Announcement (continued) For the year ended 31 December 2003 3. 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 FRS10 on the group Accounts. The calculation of basic earnings per Ordinary Share after goodwill is based on profits of £33,298,000 for the year ended 31 December 2003 (2002 - £32,302,000) and the weighted average number of 429,878,711 (2002 - 421,813,107) 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 £47,429,000 (adjusted for the effect of goodwill amortisation of £14,131,000) for the year ended 31 December 2003 (2002 - £40,400,000 adjusted for the effect of goodwill amortisation of £8,098,000) and the weighted average number of 429,878,711 (2002 - 421,813,107) 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 £33,298,000 for the year ended 31 December 2003 (2002 - £ 32,302,000) and the weighted average number of 430,291,041 (2002 - 423,288,423) 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 £47,429,000 (adjusted for the effect of goodwill amortisation of £14,131,000) for the year ended 31 December 2003 (2002 - £40,400,000 adjusted for the effect of goodwill amortisation of £8,098,000) and the weighted average number of 430,291,041 (2002 - 423,288,423) Ordinary Shares of 2p each assuming that the options are all exercised. Notes to the Preliminary Announcement (continued) For the year ended 31 December 2003 4. Investments held as fixed assets Group £'000 a) Group investments in joint ventures: At 1 January 2003 35,883 Acquisitions 4,077 Disposals (19,460) Foreign exchange translation difference 976 Share of profits after tax 16,040 Dividends received (12,630) At 31 December 2003 24,886 Disposals are further explained in c (i) and c (ii) below. b) Joint ventures: The group's share of its joint venture assets is summarised as follows: 2003 2003 2003 2002 2002 2002 2002 AWE* Other Total AWE* PCG Other Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 Turnover 101,493 129,762 231,255 91,386 52,504 84,780 228,670 Profit before tax 8,984 15,033 24,017 7,801 4,993 11,108 23,902 Tax (1,584) (6,195) (7,779) (1,832) (2,070) (3,425) (7,327) Minority Interest - (198) (198) - - - - Profit after tax 7,400 8,640 16,040 5,969 2,923 7,683 16,575 Fixed assets - 19,236 19,236 - 2,288 31,278 33,566 Current assets 28,875 103,349 132,224 21,861 124,266 138,138 284,265 28,875 122,585 151,460 21,861 126,554 169,416 317,831 Liabilities due within one 17,207 32,740 49,947 17,660 17,518 27,313 62,491 year Liabilities due after more 7,356 69,271 76,627 1,066 94,446 123,945 219,457 than one year 24,563 102,011 126,574 18,726 111,964 151,258 281,948 Share of net assets 4,312 20,574 24,886 3,135 14,590 18,158 35,883 * Atomic Weapons Establishment Management Limited Notes to the Preliminary Announcement (continued) For the year ended 31 December 2003 4. Investments held as fixed assets c) 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 the economic useful life of the asset or a period of 20 years, whichever is shorter. i) Premier Custodial Group Limited In July 2003 the group acquired the remaining 50% of the issued share capital of Premier Custodial Group Limited (Premier) for a total cash consideration of £48,600,000. Acquisition costs of £3,481,000 were incurred. The provisional fair value of the net assets acquired was £16,671,000 representing 50% of the book values of the assets and liabilities. The following table sets out the book values of the identifiable assets and liabilities acquired and their provisional fair value to the group: Provisional fair value to group £'000 Fixed assets Tangible 3,266 Current assets PFI debtor 194,878 Stocks 1,994 Debtors 37,751 Cash 15,878 Total assets 253,767 Liabilities Trade creditors 17,583 Senior debt financing 169,965 Subordinated debt financing 16,817 Accruals and deferred income 9,149 Provisions 6,911 Total liabilities 220,425 Net assets 33,342 Net assets acquired (50 per cent) 16,671 Goodwill 35,410 Cash consideration 52,081 The following table sets out the summary profit and loss account for Premier for the period 1 January 2003 to 3 July 2003: Six months to 3 July 2003 £'000 Turnover 60,660 Operating profit 520 Profit before taxation 3,924 Taxation on profit on ordinary (2,062) activities Profit for the period 1,862 The corresponding profit after tax for the full year to 31 December 2002 was £ 5,857,000. Notes to the Preliminary Announcement (continued) For the year ended 31 December 2003 4. Investments held as fixed assets (continued) ii) Buy-out of other investment partners During the year the group bought out its partners in the following businesses, two of which are PFI projects. In March 2003 the group acquired the remaining 50% of Laser (Teddington II) Limited , a joint venture with Laing Investments Limited formed to build the new science building for the National Physical Laboratory in Teddington. Also in March 2003 the group acquired the remaining 74% of the Altram consortium company, which had built Phase 2 of the Metrolink system in Manchester and operates and maintains Phases 1 and 2. In June 2003 the group acquired the remaining 33% of Metro Service AS. The total cash consideration amounted to £2,389,000. The fair value of the net liabilities acquired was £51,000. The total adjustment, required to the book values of the assets and liabilities of the companies acquired in order to present the net assets of those companies at fair values in accordance with group accounting policies, was £2,300,000. The aggregate goodwill arising on consolidation is £140,000. iii) Other acquisitions In February 2003, the group acquired a renewable 10-year franchise (renewable to a maximum 20 year term) from the province of Ontario, Canada, relating to Ontario Driving Examination Services (DES). Consideration of £47,707,000 was incurred along with £5,248,000 of related acquisition costs. The fair value of the net assets acquired are considered to be the same as their book value and amounted to £1,952,000. Goodwill arising is £51,003,000. Prior to acquisition the financial results of the DES business were not separately reported by the Ministry of Transportation, Ontario, and as such, it has not been possible to provide a summarised profit and loss account for the pre-acquisition period in accordance with FRS 6. The acquisition of Teknical in December 2003 gave rise to goodwill of £746,000. d) Disposals: In October 2003 the group sold its 100% interest in the ordinary share capital of Serco Sverige AB. The total sales proceeds of £5,601,000 comprised cash of £ 4,471,000 and a loan note of SKr 15,200,000 (£1,130,000) payable in two equal annual instalments commencing 31 December 2004. The loan carries interest at 150bp over 3-month LIBOR which is payable semi-annually in arrears commencing 31 December 2003. The net assets disposed of were £4,753,000 and disposal costs amounted to £581,000, resulting in a profit on disposal of £267,000. The profit of Serco Sverige AB up to the date of disposal was £749,000, and for its last financial year was £897,000. Notes to the Preliminary Announcement (continued) For the year ended 31 December 2003 5. Debtors Group Group 2003 2002 £'000 £'000 a) Amounts due within one year: Amounts recoverable on contracts 198,687 168,820 Other debtors 32,572 18,425 Corporation tax recoverable 1,670 - Prepayments and accrued income 35,924 30,131 Amounts owed by joint ventures 2,600 2,666 PFI debtor * 7,478 - 278,931 220,042 Group Group 2003 2002 £'000 £'000 b) Amounts due after more than one year: Amounts recoverable on contracts 22,043 18,412 Other debtors 21,780 16,297 Pensions prepayment 30,580 28,350 Amounts owed by joint ventures 8,869 12,033 PFI debtor * 260,780 - PFI assets in the course of 75,537 33,840 construction* 419,589 108,932 Total debtors 698,520 328,974 Included in amounts recoverable on contracts is £12,448,000 (2002 - £7,978,000) in respect of items procured on behalf of customers. This is offset by an amount of £9,933,000 (2002 - £8,792,000) in trade creditors and an amount of £ 7,659,000 (2002 - £945,000) in accruals. *PFI contract balances in debtors The impact of the PFI contract balances in debtors on the group accounts in relation to the Traffic Control Centre, Laser and Premier contracts is summarised as follows: Balance Acquired Movement Balance at 1 during during at 31 January the year the year December 2003 2003 £'000 £'000 £'000 £'000 Balances in relation to PFI contracts: PFI assets excluding capitalised 32,088 275,498 27,777 335,363 interest Interest included in PFI debtor 1,752 5,136 1,544 8,432 Total PFI debtor and assets in the 33,840 280,634 29,321 343,795 course of construction The PFI assets analysed above are funded by non recourse loans of £307,205,000 (2002 - £29,700,000). Notes to the Preliminary Announcement (continued) For the year ended 31 December 2003 6. Reconciliation of movements in shareholders' funds Restated 2003 2002 £'000 £'000 Profit on ordinary activities after taxation 33,751 32,302 Share of joint venture minority Interest (198) - Minority interest (255) - Dividends (10,050) (9,441) 23,248 22,861 Currency translation differences on foreign 6,654 (1,911) currency net investments New capital subscribed - 117,929 Exercise of share scheme options - (93) Change in ESOP reserve 1,258 - Net increase in shareholders' funds 31,160 138,786 Opening shareholders' funds as previously stated 249,650 129,071 Restatement - (18,207) Opening shareholders' funds as restated 249,650 110,864 Closing shareholders' funds as restated 280,810 249,650 7. Analysis of net debt Cash flow Other Acquired Movement non-cash Balance during during changes Balance the the 31 1 January year year December 2003 2003 2003 2003 2003 £'000 £'000 £'000 £'000 £'000 Cash at bank and in hand 71,774 12,843 86,271 - 170,888 Overdrafts (2,386) - 2,386 - - Cash net of overdrafts 69,388 12,843 88,657 - 170,888 Other loans due after more (47,433) - (117,502) (321) (165,256) than one year Other loans due within one (372) - 1,709 (5,810) (4,473) year Finance leases (15,291) (234) 6,422 (14,358) (23,461) Recourse net cash / debt 6,292 12,609 (20,714) (20,489) (22,302) Non recourse debt (29,700) (250,994) (76,285) - (356,979) Net debt (23,408) (238,385) (96,999) (20,489) (379,281)

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