VT Group Annual Report & Accounts 2007

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VT Group plc Annual Report & Accounts 2007 www.vtplc.com

w: www.vtplc.com F: +44 (0)23 8083 9002 E: [email protected] Southampton SO30 2DQ +44 (0)23 8083 T: 9001 VT House Grange Drive, Hedge End VT Group plc Valuing Trust People, Performance and Partnering are VT Group’s core values that underpin our vision to be recognised as the number one international government services group. Our vision and values clearly identify our aspirations and define how we want to operate as an organisation. Valuing Trust demonstrates our commitment to all our stakeholders. It is what we believe in, informs our actions and will shape our future. Valuing Trust Valuing commitment Valuing you

contents

Results Summary �� 01 Corporate Responsibility �� 30 Consolidated Income Statement �� 68

Chairman’s Statement �� 02 Chief Executive’s Statement �� 30 Consolidated Statement of Marketplace �� 32 Recognised Income and Expense �� 69 Business Review �� 04 Workplace �� 34 Consolidated Balance Sheet �� 70 Nature, Strategy and Prospects �� 04 Community �� 40 �� Health and Safety 42 Consolidated Cash Flow Statement �� 71 Financial Performance �� 08 Environment ��46 Governance �� 50 Notes to the Consolidated Business Division Operating Review �� 14 Financial Statements �� 72 Report of the Directors �� 52 VT Communications �� 14 Company Balance Sheet �� 112 VT Education and Skills �� 16 Corporate Governance Report �� 54 VT Services Inc. �� 18 Notes to the Company Remuneration Report �� 58 VT Support Services �� 20 Financial Statements �� 113 VT Shipbuilding �� 24 Statement of Directors’ Responsibilities Five Year Summary �� 117 in respect of the Annual Report and Resources, Risks and Relationships �� 26 Designed and produced by Barrett Howe, www.barretthowe.com Financial Statements �� 66 Principal Subsidiary and Board of Directors �� 28 Joint Venture Undertakings �� 118 This report is printed on Revive Special Silk which contains 30% de-inked post-consumer waste. The FSC logo identifies Independent Auditor’s Report products which contain wood from well managed forests certified in accordance with the rules of the Forest Stewardship Council. to the members of VT Group Plc �� 67 Principal Locations �� 119 Printed using vegetable based inks and a bio-degradable laminate. Our printer is registered to environmental management system ISO 14001 and EMAS, the Eco Management and Audit Scheme and is a CarbonNeutral® company. VT GROUP PLC IS A LEADING SUPPORT SERVICES AND V T G ROUP P LC ANN U AL REPOR SHIPBUILDING COMPANY, TRUSTED BY ITS CUSTOMERS TO PROVIDE WORLD CLASS SOLUTIONS THROUGH MOTIVATED AND COMMITTED STAFF WORLDWIDE. T & ACC OU NTS 2007 Results Summary – Continuing Operations financial highlights

2007 2006 Change Group Revenue* £1,004.6m £847.1m +19% Revenue Excluding Joint Ventures £852.5m £709.0m +20% Underlying Profit Before Taxation** £74.2m £61.5m +21% Profit Before Taxation £53.8m £55.5m -3% Adjusted Earnings Per Share (p)*** 30.9p 24.7p +25% Basic Earnings Per Share (p) 25.4p 24.0p +6% Final Dividend Per Share (p) 8.6p 7.75p +11%

* Includes share of revenue from equity accounted investments

** Excludes intangible amortisation arising from business combinations (£7.7m; 2006: £1.5m) share of joint venture taxation (£6.7m; 2006: £4.5m) and non-recurring charges (£6m; 2006: £nil)

*** Before intangible amortisation arising from business combinations and non-recurring charges

Adjusted Earnings per share (p) Basic Earnings per share (p) Final Dividend per share (p) 07 30.9 07 25.4 07 8.6 06 24.7 06 24.0 06 7.75 05 18.5 05 18.4 05 7.0

0 15.0 20.0 25.0 30.0 35.0 0 10.0 15.0 20.0 25.0 30.0 0 4.0 5.0 6.0 7.0 8.0 9.0

Underlying Profit Before Taxation (£m) Group Revenue (£m) Order Book (£m) 07 74.2 07 1,004.6 07 3,685 06 61.5 06 847.1 06 2,415 05 45.8 05 734.0 05 2,695

0 35.0 45.0 55.0 65.0 75.0 0 700.0 800.0 900.0 1000.0 1100.0 0 2000.0 2500.0 3000.0 3500.0 4000.0

For a full five year summary see page 117. CHAIRMAN’S STATEMENT

Chairman’s Statement

This has been another successful year for the group with solid growth underpinned by a number of large contract wins and a strong performance from key acquisitions.

Michael Jeffries Chairman

Group revenue including joint ventures increased by Our commitment to long-term partnering contracts is 19% to £1,005m (2006: £847m). Underlying profit before further strengthened by the announcement of the VT and taxation improved by 21% to £74.2m (2006: £61.5m) Lockheed Martin Joint Venture (Ascent) as the preferred with the corresponding adjusted earnings per share bidder on the UK Military Flying Training System (MFTS). also improving by 25% to 30.9p (2006: 24.7p). Further, in February, VT was selected as Preferred Bidder This performance has enabled the Board to to provide support services for the Search and Rescue recommend a final dividend of 8.6 pence, giving a Sea King helicopter fleet. These programmes, together total dividend for the year of 11.85 pence per share, with contract extensions in our Army training and naval an increase of 10% over last year. support businesses and involvement with the Future Strategic Tanker Aircraft (FSTA) programme, further the This has been my first full year as chairman and strategic objective of growing our market share as a I continue to be encouraged and impressed by the leading UK defence support services company. performance of the group, the professionalism and commitment of our employees and the positive culture In the US, VT Services has expanded our customer base fostered throughout the business. As we continue to and capabilities into new areas. We have strengthened grow, become a larger participant in our existing market the quality of our offering in sectors and move into new fields of expertise, it is the US market through the “The Group important that we retain this culture. acquisition of Milcom Systems continues to make Corporation. This acquisition The year has seen significant successes in both our also contributes significantly good progress support services and shipbuilding businesses. Within to our strategic objective of our VT Support Services division, the full integration of and has reached growing a sizeable service the former Lex businesses has extended our capability in business in the US. another milestone the provision of critical asset availability. Complementing our existing capability in ships and aircraft, the substantial VT Communications continues by achieving Group number of military vehicles now managed by VT to build on core contracts Revenue of more consolidates our position and directly reflects the with existing customers in requirements of the government’s Defence Industrial the Defence and Security than £1 billion for Strategy (DIS). sector and is now investing the first time” V T G ROUP P LC ANN U AL REPOR T & ACC OU NTS 2007 Chairman’s Statement VT Communications’ Jon Wright with the atomic clocks that now deliver the UK’s time signal (see p14)

significantly in new technology in the Broadcast sector Simon played a key role in the development of our to ensure that changing and increasingly sophisticated support services businesses, which now account for requirements can be met. over 80 per cent of turnover and we extend our best wishes for his retirement. We have achieved notable success on two Building Schools for the Future (BSF) programmes following Again, at the time of writing this report, we are in contract signature with the London Borough of the process of appointing a Finance Director. In the Greenwich and selection as Preferred Bidder in the meantime, Chris Cundy, Group Commercial Director London Borough of Lewisham. These are extremely is fulfilling the role of Finance and Commercial Director. important programmes for our Education and Skills Chris was previously Finance Director of the company business and strengthen our position in this sector. from November 1997 to 1 July 2006.

VT Shipbuilding has secured the UK’s first naval export During the year, John Davies, Managing Director orders for nearly ten years. In January we signed a VT Support Services, and Doug Umbers, Managing contract with the Government of Oman for three Ocean Director VT Communications, became members of Patrol Vessels and since the year end, in April 2007, the VT Group Executive Committee, reporting to the we secured a contract from the Government of Trinidad Chief Executive, further strengthening the top level of and Tobago for three Offshore Patrol Vessels (OPVs). management of our support services activities. These contracts, together with the ongoing work on the Continuing success can only be achieved through the Type 45 destroyer programme and anticipated people who work in our business. Earlier I mentioned the workshare on the Aircraft Carrier (CVF) project, strong VT culture and the importance of retaining this and will ensure that shipbuilding remains a strong and we can only do so by demonstrating our commitment growing business for VT. to our employees. This year we have made a significant We have also decided to exit from our low margin investment in initiatives such as Talent Management and commercial boat building activities; this has resulted in a Coaching, with the aim of ensuring that employees are £6m non-recurring charge, but also released 20 acres of given the development and support they need in their land for sale within the next 2 year period. roles, enabling them to continue to focus on performance and deliver quality services to our customers. During the year, we announced that we are in discussions with BAE Systems regarding the formation of a joint venture With the increasing breadth and depth of our support combining our respective shipbuilding and naval support services businesses, strong trading conditions in our businesses. At the time of writing this report, these talks shipbuilding business and a group order book standing at continue to make good progress. £3.7bn, providing excellent visibility of earnings, the board remains confident for the current year and beyond. In March, Simon Tarrant retired from the board after more than 30 years working for the group. Simon joined the board in September 1999 with responsibility for VT’s support services businesses and latterly took on a wider group strategy role with continuing responsibility for VT Defence and VT Communications. Michael Jeffries

BUSINESS REVIEW Nature, strategy and prospects Financial performance Business division operating review Resources, risks and relationships

Business Review

Our chosen strategy of focusing on key support services sectors, using our skills to deliver complex projects and related services is demonstrating success for the group. Paul Lester Chief Executive

The group’s businesses The group is organised into five business units:

VT Communications: VT Education and Skills:

Provision of critical communications services in the Provision of supporting services to schools, Local broadcast, defence, space, emergency services and Education Authorities and Central Government, security sectors worldwide. including careers guidance and provision of vocational work based training.

VT Services Inc.: VT Support Services:

Provision of base operations, facilities management Provision of technical services, logistics and training activities and IT and communications installation for commercial customers, all three Armed Services and integration services, primarily for the US in the UK and around the world. Activities Department of Defense. include facilities management, operation and maintenance of assets, provision of specialist manpower and supply chain management.

VT Shipbuilding:

Design and construction of advanced naval vessels for the Royal Navy and navies worldwide, including the design and manufacture of high quality smaller craft and equipment for the marine market.

V T G ROUP P LC ANN U AL REPOR T & ACC OU NTS 2007

From left to right Simon Withey, Paul Lester, Chris Cundy, Doug Umbers, Jo Robbins, Ken Smith, John Davies, Matthew Jowett

Strategy and prospects (Harmonisation) (SAR (H)) programme. We are also keen Through solid growth and a focused acquisition policy, to transfer our critical asset availability and management we have grown our support services businesses model, for example the support we provide to British significantly. Revenues have increased substantially and Airways and the Metropolitan Police, to other major the acquisitions made within the last year of the former customers in the UK and overseas. Lex businesses and Milcom Systems Corporation In VT Communications, following our success with provide a good strategic fit with our defence support Deutsche Welle, we expect to continue to take a lead services and strengthen our relationships with the in the development of the niche global short wave Ministry of Defence (MoD) and Department of Defense broadcasting market. The investment we have made in (DoD) respectively. Both acquisitions add further our new Media Management Centre, and our anticipated capabilities to offer existing customers and broaden involvement with digital infrastructure ensure we are well our customer base for future opportunities. placed to keep pace with the changing demands of Our focus going forward is to secure the major defence customers. VT Communications is providing information, projects for which we are Preferred Bidder, strengthen communications and technology services to the VT our position as a leading UK defence support services consortia for both FSTA and UK MFTS and there remains company, expand our involvement with other UK a good pipeline of smaller systems engineering projects. Government agencies and continue to develop our VT Education and Skills is well placed to capitalise on the US services business. success achieved on BSF and will continue to consider We are pursuing major opportunities within each further opportunities within this programme. We are also business, building on our substantial and developing analysing opportunities in the Further Education sector capability portfolio. Within VT Support Services we and we aim to expand our school support capability, expect to achieve financial close on both the FSTA and developed within VT Four S, to areas outside Surrey. UK MFTS programmes in the second half of 2007, in addition to the contract to deliver maintenance support to Search and Rescue Sea Kings. This positions us well for the longer-term opportunity of the Search and Rescue

BUSINESS REVIEW Nature, strategy and prospects Continued Financial performance Business division operating review Resources, risks and relationships

VT Services Inc. has a substantial pipeline of businesses, including Fleet Support Limited (FSL). opportunities in development. Specific targets include The proposed consolidation is in line with the Defence large programmes in base operations, facilities operation Industrial Strategy and would create a world-class and management, vehicle/equipment maintenance and provider and strategic partner for the UK Government. logistics. The primary customer base is NASA, US Navy, The transaction as a whole remains subject to final US Army and US Air Force and the targets include US agreement between the parties and the MoD and to VT domestic and overseas operating locations. VT Milcom is shareholder approval. Further details will be provided in pursuing large opportunities in the engineering services due course. sector, including further extension of the Space and The planned JV would give improved stability and Naval Warfare Command (SPAWAR) systems contract. visibility of workload in the Naval sector and allow greater This involves installing and servicing Command, Control, management focus on our developing support services Communications, Computers, Intelligence, Surveillance businesses. Much progress has been made on this and Reconnaissance (C4ISR) systems on US Navy consolidation but the transaction can only be concluded ships, submarines and shore-based systems. following the full go-ahead of the Aircraft Carrier We have made initial progress in the waste management (CVF) project. market, a new area to which VT’s capabilities are ideally suited. During the year we were shortlisted for a requirement to build, operate and maintain a facility for Wakefield District Council. We are also considering a number of other opportunities.

VT Shipbuilding has won two major export orders this year as well as continuing work on the Type 45 destroyers for the Royal Navy. The business remains solid with good visibility of the order book. Further medium-term prospects include follow-on ships for the Hellenic Navy and vessels for Libya, Kuwait and Saudi Arabia.

We announced in December 2006 that we had entered into discussions with BAE Systems to combine our respective surface shipbuilding and naval support

V T G ROUP P LC ANN U AL REPOR T & ACC OU NTS 2007

HMS Clyde – the first ship to be built in Portsmouth in nearly 40 years. In the background, the bow section of HMS Dauntless is being prepared for its journey to BAE Systems, Glasgow. BUSINESS REVIEW Nature, strategy and prospects Financial performance Business division operating review Resources, risks and relationships

Business Key Performance Indicators Group financial performance The board has assessed that the following KPIs are the most effective measures of progress towards achieving 2007 006 the group’s strategies and as such towards fulfilling the £m £m group’s objectives. Revenues (including group share • Profit before taxation, intangible amortisation and of joint ventures) 1,004.6 847.1 exceptional items Profit before taxation – excluding non-recurring charges 59.8 .5 • Order intake level Non-recurring charges (6.0) – Discontinued operations – 0.2 • Cash generation from operating activities Total profit before tax 53.8 .7 • Underlying earnings per share Order book 3,685 ,415 Performance against KPIs is discussed in the financial report. Business unit KPIs are reported in the Business Division Operating Review on pages 14 to 25. Revenue growth continued with group revenue up by Our markets 19% to £1,005m, revenue from wholly owned operations The group’s principal subsidiaries and countries of up by 20% and the group’s share of revenue from equity operation are listed on pages 118 to 119. While our accounted investments up by 10%. main business units are based either in the United Profit before taxation, excluding one-off charges, Kingdom or United States of America, our businesses increased by 8% to £59.8m (2006: £55.5m). The operate worldwide. group incurred one-off charges of £6m relating to the restructuring of the small boats business.

V T G ROUP P LC ANN U AL REPOR T & ACC OU NTS 2007

One of the 4500 vehicles that VT Critical Services provides to British Airways.

The group uses underlying profit before taxation (i.e. profit The order book increased to £3.7bn (2006: £2.4bn). before taxation, amortisation of intangibles arising from Order intake for the year was over £1bn, excluding business combinations, JV taxation and non-recurring potential contracts where we are already preferred bidder charges) as a key measure of performance. The increase including FSTA, UK MFTS and Trinidad and Tobago. year on year was 21%. The effective tax rate on reported profit before taxation from continuing activities was 14.3% (2006: 23.6%). 2007 006 Increase If the IFRS presentation relating to taxation on joint £m £m % venture profits was shown as taxation rather than share Profit before taxation of post tax earnings of joint ventures, the effective rate as reported 53.8 .5 would have been 23.7% (2006: 29.3%). The decrease was Amortisation of intangible caused by the finalisation of prior year tax computations assets arising from and the release of associated provisions. It is expected business combinations 7.7 .5 that the future effective tax rate, on the same basis, will JV taxation 6.7 .5 be around 25%. Non-recurring charges 6.0 – Underlying earnings per share before amortisation of intangibles arising from business combinations and Underlying profit 74.2 . non-recurring charges were 30.87p (2006: 24.66p) an increase of 25%.

Net finance costs have increased to £8.3m (2006: £7.0m) The proposed final dividend of 8.6p per share, which as a result of higher average levels of debt, largely due to coupled with the interim dividend of 3.25p per share the Lex business purchase in April 2006. paid in January 2007, gives a total dividend for 2007 of 11.85p (2006: 10.75p), an increase of 10% over the prior As a result of the acquisitions made in both this and the year. The total dividend is covered 2.7 times by earnings previous financial year, the charge for amortisation of before intangible amortisation and exceptional items intangible assets arising from business combinations (2006: 2.3 times). increased to £7.7m (2006: £1.5m). Net debt as at 31 March 2007 was £71.4m (2006: £15.2m). The increase was largely attributable to business combinations during the period.

BUSINESS REVIEW Nature, strategy and prospects Financial performance Continued Business division operating review Resources, risks and relationships

Cashflow Pensions Operating cashflow, before exceptional items, was VT Group has five pension schemes accounted for as £107.4m (2006: £64.1m) converting 173% (2006: 102%) defined benefit pension schemes with deficits, net of of group operating profit into cash. related deferred tax assets, of £26.3m (2006: £43.6m) included within the consolidated balance sheet. The net cash outflow from investing activities of £87.3m The decrease in the year is largely due to changes in (2006: inflow of £24.0m) reflected acquisitions during the actuarial assumptions applied, predominantly an increase year as well as capital expenditure. The prior year cash in the discount rate used to calculate scheme liabilities, flows included substantial receipts from the refinancing which is driven by general bond yields. A full actuarial of vessels. valuation as at 1 April 2007 is in progress. The £27.1m net change in cash flows from financing activities is due largely to repayment of assumed debt Critical accounting policies on acquisitions. The group’s main accounting policies affecting its results are set out on pages 72 to 77. Judgements and The overall result is a net decrease in cash and cash assumptions have been required by management in equivalents of £35.3m (2006: net increase of £71.4m). applying the group’s accounting policies in certain areas. Net debt at 31 March 2007 was £71.4m (2006: £15.2m) Actual results may differ from the estimates calculated and can be analysed as follows: using these judgements and assumptions.

The following policies are considered to be the group’s 2007 006 critical accounting policies as the judgements and £m £m assumptions made could have significant impact on its Cash 75.2 .0 results and financial condition. Bank loans and overdrafts (54.7) (18.7) Retirement benefits Asset finance (39.9) (48.7) Accounting for pensions and other post-retirement benefits involves judgement about certain events, Other loans (17.4) (23.8) including estimated retirement dates, salary levels at Loan notes (13.6) (14.0) retirement, mortality rates, rates of return on plan assets (50.4) .8 and determination of discount rates for measuring Non-recourse debt on PFI projects (21.0) (22.0) plan obligations. Determination of the projected benefit obligations for the group’s defined benefit pension plans (71.4) (15.2 ) impacts on the recorded amounts for such obligations on

Non-recourse debt is excluded from the group’s banking facility covenants but is presented as a liability in the group’s balance sheet.

10 V T G ROUP P LC ANN U AL REPOR T & ACC OU NTS 2007

VT Training’s Steve Reid and Craig Dear – an apprentice at Weland Ltd. VT Training is responsible for delivering both his NVQ and Key Skills training.

the balance sheet and to the amount of benefit expense Capital structure and Treasury in the income statement. The assumptions used may Treasury policies vary from year to year, which will affect future results. The group’s treasury function is responsible for Any differences between these assumptions and the managing the group’s exposure to finance risks actual outcome also affect future results. and operates in line with policies set by the board. The primary objectives are to: Pension benefit assumptions are discussed and agreed with independent actuaries in March each year. • Manage interest rate and foreign currency exposure These assumptions are used to determine the projected • Provide cash management benefit obligation at the year end and hence the deficits recorded on the group’s balance sheet, and pension • Ensure the availability of cost-effective facilities to finance expense for the following year. new investment, working capital and guarantees.

Taxation The board has a conservative policy towards the Provisions for tax contingencies require management investment of cash. Treasury instruments are used only to make judgements and estimates in relation to tax to reduce risk. Speculation is not permitted. issues and exposures. Amounts provided are based The group finances its activities with a combination on management’s interpretation of country specific law of bank loans, loan notes, finance leases and cash. and the likelihood of settlement. Tax benefits are not Other financial assets and liabilities, such as trade recognised unless the tax positions are probable of debtors and trade creditors, arise directly from the being sustained. group’s operating activities. The group also enters into Goodwill and other intangible assets derivative transactions, including principally interest rate The group has capitalised goodwill included on the swaps and foreign currency contracts. The purpose is balance sheet of £201m at 31 March 2007. Goodwill to manage the interest rate and currency risks arising is required to be tested for impairment at least annually from the group’s operations and its sources of finance. or more frequently if changes in circumstances or the The main risks associated with the group’s financial occurrence of events indicate potential impairment exists. assets and liabilities are set out below, together with The group uses the present value of future cash flows to the policies agreed by the board for their management. determine implied fair value. In calculating the implied fair value, significant management judgement is required in Foreign currency risk forecasting cash flows of the reporting unit, in estimating The group has invested in operations outside the UK and terminal growth values and in selecting an appropriate also buys and sells goods and services denominated discount rate. If alternative management judgements in currencies other than sterling. As a result the value of were adopted then different impairment outcomes the group’s non-sterling revenues, purchases, financial could result. No impairment resulted from the annual assets and liabilities and cash flows can be affected impairment test in 2007. significantly by movements in exchange rates, particularly in the US Dollar and Euro.

11 BUSINESS REVIEW Nature, strategy and prospects Financial performance Continued Business division operating review Resources, risks and relationships

VT Group policy is to finance, so far as practicable, VT Group has no absolute policy towards either fixed rate the costs of acquisition and new business opportunities finance or floating rate finance. The proportion of interest by matching borrowings in the local currency in order rate exposure that should be fixed and the proportion to eliminate foreign exchange transaction exposure, that should be floating, will be dictated by the nature provided that the benefits are not outweighed by the and terms of the underlying assets and contracts being overall cost of the borrowing. funded. The exact proportion will be determined by current economic conditions, the currency in which The group’s transactional currency exposure arises the debt is denominated and the purposes and from sales or purchases by certain operating units in duration of the debt. currencies other than its functional currency. It is the group’s policy not to enter into forward contracts for The group does use interest rate swaps agreed with other purchases until there is a high degree of certainty. parties to generate the desired interest profile, agreeing to In addition, the group treasury policy is to hedge if exchange, at specified intervals, the difference between and when a significant exposure is recognised, through fixed rate and variable interest amounts calculated by the use of foreign exchange instruments to manage the reference to an agreed-upon notional principal. At the currency exposures on any individual transactions for year end, 16% (2006: 19%) of the group’s borrowings were which payment is anticipated. at fixed rates after taking account of interest rate swaps.

Interest rate risk Credit risk The group’s policy is to manage its cost of borrowing The risk of financial loss due to a counterparty’s failure using a mix of fixed and variable rate debt. Whilst fixed to honour its obligations arises principally in relation rate interest bearing debt is not exposed to cash flow to transactions where the group provides goods and interest rate risk, there is no opportunity for the group to services on deferred terms, enters into derivative enjoy a reduction in borrowing costs in markets where contracts requiring settlement by the other party rates are falling. In addition, the fair value risk inherent in and invests or deposits surplus cash. fixed rate borrowing means that the group is exposed to Group policies are aimed at minimising such losses unplanned costs should debt be restructured or repaid and require that deferred terms are granted only to early. In contrast, whilst floating rate borrowings are not customers who demonstrate an appropriate payment exposed to changes in fair value, the group is exposed history and satisfy creditworthiness procedures. to cash flow risk as costs increase if market rates rise.

12 V T G ROUP P LC ANN U AL REPOR T & ACC OU NTS 2007

VT Critical Services handles 150,000 calls per year in support of its contract with the Metropolitan Police (see p20)

Individual exposures are monitored with customers funding facilities are available to cover authorised capital subject to credit limits to ensure that the group’s expenditure commitments and debt due for repayment exposure to bad debts is not significant. within one year.

Group policies also restrict the counterparties with which Surplus cash is only invested in high credit rated financial derivative transactions can be contracted and funds may institutions and in financial instruments exposed to be invested to those approved by the treasury team and insignificant risk of changes in market value, with not approved by the board, comprising banks and financial less than 50% of surplus funds available invested with institutions with a high credit rating. The treasury team maturities of three months or less. Funds may not be ensures that exposure is spread across a number of invested for periods of greater than one year. approved financial institutions. Excess cash used in managing liquidity is only invested Liquidity risk in financial instruments exposed to insignificant risk The group aims to mitigate liquidity risk by managing cash of changes in market value, being placed on interest- generation by its operations and applying cash collection bearing deposit with maturities fixed at no more than targets throughout the group. Investment is carefully six months. Short term flexibility is achieved by controlled, with authorisation limits operating up to overdraft facilities. group board level. Price risk In its funding strategy, the group’s objective is to maintain It is, and has been throughout the period under review, a balance between continuity of funding and flexibility the group’s policy that no trading in derivative financial through the use of overdrafts, bank loans, loan notes instruments shall be undertaken. and finance leases. To meet this objective, the group’s policy is to ensure that adequate unutilised committed

13 BUSINESS REVIEW Nature, strategy and prospects Financial performance Business division operating review Resources, risks and relationships

VT Communications

VT Communications has achieved good profit growth, underpinned by continued progress with the DHFCS programme and the start of the Deutsche Welle transmission contract. This is a strong performance against a backdrop of considerably increased energy costs. Doug Umbers Managing Director

During the year the business was antenna refurbishment project. We have been reorganised into two operational units; named Preferred Bidder to provide managed Broadcast and Defence & Security, putting ICT (Information Communication Technology) the right structure in place to meet expected solutions to the MFTS and FSTA consortia. VT Communications Highlights future growth and allowing us to strengthen This illustrates VT Communications’ ability the management teams and improve to support VT’s group-wide programmes. A Continued strong financial operational effectiveness. The DHFCS programme is entering the final performance year of its capability enhancement phase In Broadcast, our success in winning the A Key strategic contract secured with and we expect the target in-service date Deutsche Welle contract demonstrates Deutsche Welle to deliver analogue to be achieved. VT Communications also the strength of our value proposition for and digital transmission continues to pursue opportunities to international broadcasters. It has also deliver existing capabilities into overseas A enabled us to begin digitalisation through Defence High Frequency defence markets. Communications Service (DHFCS) a £7m investment in our broadcast programme is on-track infrastructure. Another £2m is also being From 1 April 2007 VT Communications has invested in our new Media Management been transmitting the time and frequency A Significant capital programme Centre which will position us well for the standard for NPL (National Physical investing in digital capability long-term security of our existing contracts Laboratory). This involved the building and and bring new media capabilities on-stream. operating of highly resilient transmission Financial Highlights These include content archiving, delivery to infrastructure. Many organisations in the UK mobile devices and internet streaming, all now rely on VT to synchronise their timing 2007 006 new services demanded by our customers. systems including the UK time “pips”. £m £m In Defence & Security we continue to build Group Revenue 99.2 .6 on our core contracts with the MoD and Underlying other government agencies, including a major operating profit 15.7 .6 Margin 15.8% .1%

14 V T G ROUP P LC ANN U AL REPOR T & ACC OU NTS 2007

CUSTOMER PERSPECTIVE: Name: Mike Cronk Job Role: Controller Future Media, Technology and Distribution BBC World Service “We are able to work closely and openly with VT Communcations to continually improve the service we offer our audience.” BUSINESS REVIEW Nature, strategy and prospects Financial performance Business division operating review Continued Resources, risks and relationships

VT Education and Skills

Education and Skills continues to grow with turnover up 18%, although high bid activity in the period on BSF and restructuring costs of £1m held back operating profit. Simon Withey Managing Director

Significant progress has been made on and supply chain which will deliver the VT Education & Skills Highlights the Building Schools for the Future (BSF) major refurbishment or renewal of 12 A Double success in Building programme, the Government initiative to secondary schools in the Borough. This Schools for the Future rebuild, refurbish and re-equip all secondary will involve construction and the provision schools across England over the next 15 of support services including ICT and A Integration of last year’s years. Following VT Education and Skills’ facilities management, both of which will acquisitions completed selection as Preferred Bidder by the London be the responsibility of VT Education and Borough of Greenwich in May 2006, we Skills. Initial capital expenditure on school A Established position on Train proceeded to contract signature in November refurbishment and rebuilding is expected to to Gain programme when we were appointed as Greenwich’s be in the region of £210 million. The project is A Developing position in the Further Strategic Partnering Organisation. The expected to reach financial close in 2007. Education sector Greenwich programme covers three waves The two vocational training businesses, of secondary school regeneration to include HCTC and Touchstone, acquired in early 13 secondary schools, with a capital value 2006, are now fully integrated into our Financial Highlights in excess of £290 million. VT Education existing training company, VT Training. and Skills support to the Local Education 2007 006 This process has proved to be more £m £m Authority includes project management, challenging than expected but we now have design management and procurement of Group Revenue 112.1 .3 a single administrative and management the schemes supply chain. We will also be system in place. VT Education and Skills is Underlying a major shareholder in the Special Purpose also addressing the Further Education sector, operating profit 3.8 .9 Companies established to construct and complementing our work based learning and Margin 3.4% .1% maintain the schools. educational consultancy activities. Also on BSF, Learning21, our joint venture VT Education and Skills has secured Train with Costain plc, was selected as Preferred to Gain contracts in seven regions across Bidder for the Lewisham schools programme. England. Train to Gain is the new government Learning21 will manage the procurement

16 V T G ROUP P LC ANN U AL REPOR T & ACC OU NTS 2007

CUSTOMER PERSPECTIVE: Name: John Cain Job Role: Headteacher, Reigate School, Surrey “Working in partnership with VT Education and Skills helped the school to be judged as Outstanding by Ofsted in 2007.”

initiative to provide training for older members of the have transferred from Connexions to local authorities as workforce. We are also looking to expand our activities part of the Children’s Services organisation. We into additional sectors and geographical areas with are liaising closely with current and prospective several large proposals under consideration. customer authorities to ascertain their procurement and delivery plans. We broadly welcome the findings of the Leitch Review of Skills published in December 2006, whose VT Four S (our alliance with Surrey County Council) recommendations include doubling the number continues to provide a high quality service to schools of apprenticeships to 500,000 a year, substantially across the County in this pathfinder public-private increasing adult skills at all levels. These proposals partnership. We have grown our external business to would provide significant opportunities for VT Training. nearly 25% of turnover this year, having supported several other local authorities and secured further national Our careers business has delivered well against all of our contracts from the Department for Education and Skills. Connexions and Learning and Skills Council contracts. In addition to our Higher Level Teaching Assistants and There will be a significant change to the structure of Excellent/Advanced Skills Teachers contracts, we now Young People’s Information, Advice and Guidance (IAG) deliver training and accreditation in Personal Health and services from April 2008, by which time responsibility will Social Education for teachers on a national basis.

17 BUSINESS REVIEW Nature, strategy and prospects Financial performance Business division operating review Continued Resources, risks and relationships

VT Services Inc.

Turnover for the year was APPROACHING $370m, similar to last year. Operating profits were $11.3m, compared to $9.4m in 2006. Operating margin rose to 3.1% due to improved efficiencies. Currency movements had a £0.4m adverse effect in the year. Ken Smith Chief Executive Officer

In February 2007, VT Services Inc. completed VT Griffin’s continued success at Kings Bay its acquisition of Virginia based Milcom Naval Submarine Base was confirmed when Systems Corporation. VT Milcom provides the facility was announced as one of five IT and communications installation and winners for the 2007 “Commander in Chief’s integration services to the Department of Annual Award for Installation Excellence”. VT Services Inc. Highlights Defense, primarily the US Navy. In April 2006, VT Services Inc. will be pursuing a $2bn A Milcom was awarded a five-year $577 million Acquisition of Milcom pipeline of opportunities during 2007. contract to support the SPAWAR Systems Systems Corporation Over the next 12 months we expect to Center, Charleston, on its east-coast Sea approach our initial target of $500m A Customer expansion – US Enterprise contract. Following a successful turnover per annum. Coastguard at Kodiak, Alaska and active first ten months on the contract, SPAWAR exercised the first annual extension A Kings Bay Naval Submarine Base option two months ahead of schedule. – 2007 Winner of “The Commander in Chief’s Annual Award for VT Griffin expanded its customer base with Installation Excellence” the award of a Coastguard contract for base operations support services at Kodiak Island, A Continued operating margin growth Alaska. We also saw option years exercised on our US Army contracts at Fort Eustis, Fort Financial Highlights Stewart and Fort McCoy where we continue to see high levels of troop mobilization and 2007 006 de-mobilization logistics work. £m £m Group Revenue 193.2 08.1 Underlying operating profit 5.9 .3 Margin 3.1% .5%

18 V T G ROUP P LC ANN U AL REPOR T & ACC OU NTS 2007

CUSTOMER PERSPECTIVE: Job Role: P3-operations center Dept of Homeland Security “When we need a project done in a secure environment we know we can always count on VT Griffin.” BUSINESS REVIEW Nature, strategy and prospects Financial performance Business division operating review Continued Resources, risks and relationships

VT Support Services

Turnover grew by 55% helped by the acquisition of the Lex businesses, contributing £175m to turnover. Underlying operating profit increased by 37%, held back by the refinancing of the OPVs where £2.8m of interest costs in the previous year are now categorised as lease costs and deducted from operating profit. John Davies Managing Director

Following the Lex acquisition in April 2006 Gloucester, and the facilities received quality VT Support Services Highlights and its successful integration, VT Support approval for fire training from the Atomic A Enhancement in breadth and Services is now at the forefront of providing Weapons Establishment. VT Critical Services depth of capability contracting mission critical asset availability and has continued to ensure high availability following the successful capability – of aircraft, vehicles and of all British Airways vehicles at Heathrow, integration of Lex businesses ships – directly reflecting the MoD’s DIS. Gatwick, Birmingham and Manchester and VT Defence continues to support Air Force, is working in partnership to facilitate BA’s A Mobilisation of Metropolitan Navy and Army customers both in the UK smooth transition to Terminal 5. Police and Army ‘Construction’ and internationally whilst VT Critical Services During May 2006, VT Defence, as part of vehicles contracts supports the Emergency Services sector the Amey Lex Consortium (ALC) saw the and major commercial organisations. A Major contract renewals including successful mobilisation of its C-Vehicle River Class OPVs, Bordon, VT Critical Services has successfully contract providing a construction capability Arborfield and Tucano Support mobilised its contract for the Metropolitan to the British Army utilising over 3,000 Police, now managing the availability of over specialised vehicles. The project also won A Preferred Bidder on UK MFTS 3,500 police vehicles against demanding “Best Private Finance Initiative (PFI) Deal in and Sea King Integrated Key Performance Indicators. The contract the UK to achieve financial close in 2006” at Operational Support commencement also saw the successful The Public Private Finance Awards, where completion of two purpose built workshops industry recognises innovation in this field. Financial Highlights in London, representing a £10m investment Service also commenced in July 2006 by VT. Both Cardiff Gate and Severn on the £100m contract to provide vehicle 2007 006 Park continued their successful delivery management services for 10 years for the £m £m of fire training to a number of brigades Allenby Connaught Programme. Group Revenue 436.1 81.5 including South Wales, Somerset, Avon and Underlying operating profit 44.0 .0 Margin 10.1% .4%

20 V T G ROUP P LC ANN U AL REPOR T & ACC OU NTS 2007

CUSTOMER PERSPECTIVE: Name: Geoff Want Job Role: Director of Ground Operations, British Airways “The British Airways ground equipment fleet has continued to attain the improved serviceability levels gained in previous years. With the introduction of 550 items of new ground equipment in preparation for Terminal 5 we look forward to jointly taking serviceability and utilisation to the next level.” BUSINESS REVIEW Nature, strategy and prospects Financial performance Business division operating review Continued Resources, risks and relationships

VT Support Services continued

The Bordon and Arborfield contracts, which provide to the River Class vessels; and the award of a £40m training to the British Army, were both extended for a contract to provide a wide range of support services to further two years until March 2009. The Light Aircraft the Royal Navy of Oman for Ocean Patrol Vessels which Flying Training (LAFT) PFI programme, which makes will be built by VT Shipbuilding. available 99 aircraft to provide elementary flying training It has been another successful year for our joint venture to the RAF, successfully reached the delivery of a Flagship. The company now has a turnover in excess quarter of a million flying hours. The Tucano programme, of £120m and employs approximately 1,600 people. delivering basic fast jet training, was extended for a During the year Flagship agreed revisions to its Partnering further 2 years until 2009. Contract with the MoD which included £120m of new In December 2006, Ascent, the 50/50 joint venture business and an extension to the contract by up to with Lockheed Martin, was announced as the Preferred 2 years to 2013. Flagship also enhanced its training Bidder for the role of Training System Partner to work with capabilities by taking on more Royal Navy training the MoD to deliver the UK MFTS. This 25 year contract to delivery, including a further 300 Royal Navy and MoD design, implement and maintain a training system for all civilian positions. The company is well positioned for UK military aircrew is expected to be worth around £6bn. further growth as it looks to exploit its training and It will secure VT Support Services’ position as the major integrated support services capabilities in the UK provider of support for military flying training. and the rest of the world.

Early 2007 saw a number of further achievements in During the year, our other joint venture FSL delivered a the Defence business: selection as Preferred Bidder strong operational performance and the strengthening of by AgustaWestland to support the Sea King Integrated relationships with other dockyard companies has brought Operational Support (SKIOS) programme, providing more stability to the ship engineering programme. support to Search and Rescue Sea King helicopters The first two of three Type 23 Frigates for Chile were across 7 UK sites and the Falklands; the award of a 5 handed over and substantial reductions in the running year extension for the charter and support of the River costs of the Portsmouth Naval Base were achieved. Class OPVs; the acceptance of HMS Clyde into service The outcome of the Naval Base review, announced in under a charter and availability based contract similar September 2006, is expected during 2007.

22 V T G ROUP P LC ANN U AL REPOR T & ACC OU NTS 2007

CUSTOMER PERSPECTIVE:

Name: Air Cdre Brian Newby CBE AFC RAF Job Role: Director of Flying Training, No22 (Trg) Gp, Royal Air Force “Working with VT is always a pleasure. We regularly face difficult challenges together but always find a solution that delivers operational capability in a way that satisfies the needs of the Service and meets the aspirations of the company.” BUSINESS review Nature, strategy and prospects Financial performance Business division operating review Continued Resources, risks and relationships

VT Shipbuilding

Turnover was similar to the previous year, with the benefit of contract wins in Oman and Trinidad and Tobago not expected until 2008. Underlying operating profit, excluding non-recurring costs on the restructuring of VT Halmatic, improved due to progress on the Type 45 programme. Geoff Smith Managing Director

HMS Clyde was launched in late summer standard has been excellent and this project 2006 and entered service in January 2007. has exceeded all the planned productivity This ship represents an evolution from the improvements. three River Class vessels and the design, The contract award for Ocean Patrol Vessels which includes a helicopter deck, will be of for the Oman Navy was granted in January interest to other navies around the world. VT Shipbuilding 2007. This was a great achievement for Work on the SuperVita Fast Attack Craft VT Shipbuilding and the culmination of four A Contracts secured with Oman has progressed well during the year. years’ hard work. The teams are in place and Trinidad and Tobago Three vessels have been in service with and the programme is on target with steel A HMS Clyde now in service the Hellenic Navy with a further two in build. cutting planned for late Summer 2007. We are working with our partners, Elefsis A In April 2007, we announced that VT Aircraft Carrier (CVF) progressing Shipbuilding, to quote for ships six and had been contracted through the UK to manufacturing stage seven in the class. Government to build and manage three A Bow sections for Type 45 ships two The Aircraft Carrier (CVF) project has OPVs, including associated training and long- and three delivered, production of matured with all members of the Alliance term maintenance support, for Trinidad and ships four, five and six in progress working towards Main Gate Approval. Tobago. The programme, which was part of VT has produced plans for a Super block a proposal from the UK Government and VT and Upper block to be manufactured in the Group to the Government of Trinidad and Financial Highlights Portsmouth facility. Good progress continues Tobago, is valued at more than £150 million. to be made on the VT work allocation of the 2007 006 The cumulative effect of existing contracts £m £m design contract. and new awards has justified a further Group Revenue 164.0 .5 This has been a very busy year for the investment of £10m in the Portsmouth facility. Type 45 Project. We have now delivered An extension to our halls will be complete by Underlying operating profit 13.2 .6 the bow sections for ships two and three December 2007, providing capacity for future with sections of ships four, five and six all export orders as well as Aircraft Margin 8.0% 7.0% in progress. The progress on the delivery Carrier (CVF) blocks.

24 V T G ROUP P LC ANN U AL REPOR T & ACC OU NTS 2007

CUSTOMER PERSPECTIVE: Name: Khalifa Bin Hamed Al-Qasmi Job Role: Commander, Royal Navy of Oman “The new Ocean Patrol Vessels continue the long and successful relationship between VT and the Royal Navy of Oman. Through working together, these vessels will be amongst the most advanced of their type in the world.”

Within VT Halmatic we undertook a strategic review Contracts have recently been secured for the repair of which resulted in the decision to exit from low margin MoD small boats and a contract has been awarded by commercial boat building activities. the French Navy for a new range of Special Forces boats.

The remaining military business will be relocated to VT Halmatic enters the new financial year with a Portsmouth Naval Base, releasing some 20 acres of land refocused team and a significant number of overseas for sale within the next 2 years. This strategic review has military opportunities, some of which we expect to resulted in a non-recurring charge of £6m which includes translate into further orders in the current year. the cost of asset write-offs and associated redundancy costs. Of the total non-recurring cost, £3.5m was cash. A further charge of up to £1m is anticipated for the 2007/08 year.

25 BUSINESS review Nature, strategy and prospects Financial performance Business division operating review Resources, risks and relationships

Resources, risks and relationships

Resources Management throughout the group uses a common The group aims to safeguard the assets that give it framework to identify and assess the impact of risks competitive advantage, being its reputation for quality to their businesses. For each risk the likelihood and and reliability, its intellectual capital and its people. consequence are identified, management controls and frequency of monitoring are confirmed and results Reputation reported. The corporate governance report on pages 54 Codes of conduct operate across the group to provide to 57 describes more about the group’s risk management a framework for responsible innovative and ethical processes. The board considers that the principle risks yet commercial business practices. Structures for to achieving its objectives are set out below. accountability through operating units to managing directors and from them to the group board are Political risk clearly defined. Given that a large proportion of the group’s activities Employees are derived from government authorities, the group’s Information about our people is provided in the business is susceptible to changes in government Corporate Responsibility report on pages 34 to 39. policy, budget allocations and the changing political environment, both in the UK and worldwide. The group Environmental matters has sought to mitigate this risk in recent years by Environmental matters are discussed in the Corporate diversifying the service offering from a largely UK Responsibility Report on pages 46 to 49. based defence orientated business to provision of a broader range of services on an international basis. Principal risks and uncertainties The board is committed to ensuring that high quality risk management systems are in place across the group. The objective is to safeguard the interests of shareholders, customers and staff through effective management of corporate and operational risk.

26 V T G ROUP P LC ANN U AL REPOR T & ACC OU NTS 2007

Contract management Going concern The group’s largest operational risk remains the After making enquiries, the directors have a reasonable management of ongoing long-term contracts to expectation that the group has adequate resources to customer satisfaction. This is managed via regular continue in operational existence for the foreseeable project appraisals and continued dialogue with the future. For this reason they continue to adopt the going customers as programmes progress. concern basis in preparing the financial statements.

The business review and certain other sections of this Major bid pricing annual report contain forward looking statements that Given the long-term nature of contracts that the group are subject to risk factors associated with, amongst enters into, there is a risk that unfavourable terms could other things, the economic and business circumstances be negotiated at inception leading to less than expected occurring from time to time in the countries and returns. The group manages this risk via a rigorous bid sectors in which the group operates. It is believed acceptance process, ultimately involving main board that the expectations reflected in these statements are approval for major bids. reasonable but they may be affected by a wide range of variables which could cause actual results to differ Entering new markets materially from those currently anticipated. The group’s expansion encompasses organic growth, acquisitions and potentially entering into new market On behalf of the board opportunities. Both acquisitions and the entry into new markets bring with them an extra element of risk as these may involve activities not currently carried out by the group. All such activities require main board approval, Paul Lester after having carefully considered the group’s ability to manage and fund any new activities arising. Chief Executive 14 May 2007

27 board of directors at 31 March 2007

Baroness Blackstone Michael Jeffries Simon Tarrant Admiral the Lord Andrew Given Non-executive Chairman, age 62 Executive Director, Michael Boyce Non-executive Director, age 54 Non-executive Director, age 59 age 64 Director, age 64

Baroness Blackstone Previously Chief Joined the group as After a long and Retired as Deputy Chief joined the board of Executive Officer of a Graduate Trainee distinguished career Executive of Logica VT in January 2004. WS Atkins plc from in 1975 and has held in the Royal Navy, plc in December 2002 After an academic 1995 to 2001 and various positions culminating in his having previously been career culminating in Chairman from 2001 within the group. appointment as its Finance Director her appointment as to 2005. Currently He was appointed First Sea Lord in since 1990. Prior to Master of Birkbeck Chairman of Wembley to the board in 1999. 1998, Lord Boyce that he held roles in the College, London National Stadium He is a non-executive was subsequently telecommunications (1987–97), Baroness Limited and Wyless plc Director of the Business appointed Chief of industry. He is also a Blackstone served in and a non-executive Services Association. Defence Staff in 2001. non-executive director the Labour Government director of De La Rue Mr Tarrant retired He retired from the of Spectris plc. successively as Minister plc. Appointed as a from the board on latter role in May 2003 He was appointed to of State for Education non-executive director 31 March 2007. and was appointed the VT Group Board and Employment in May 2005 and Lord Warden and in September 2002. (1997–2001) and became chairman on Admiral of the Cinque Minister of State for the 5 July 2005. Ports in July 2004. Arts (2001–2003). She He is non-executive has now retired from chairman of Tricolom active politics and has Limited and g7 returned to the higher Limited and a non- education sector as executive director Vice Chancellor of the of W S Atkins plc. University of Greenwich. He is Vice Chairman She is a non-executive of the White Ensign director of Mott Association and the MacDonald and chairs RNLI, an Elder Brother the RIBA Trust. of Trinity House and a Trustee of the National Maritime Museum. He was appointed to the VT Group board in Chairman of July 2004. Audit Committee and member of Member of Member of Remuneration Remuneration Remuneration and Nomination Committee and Member of Nomination Committee and Committees. member of Nomination Committee. member of Nomination Senior independent Committee. Independent at Committee. director. Independent. appointment. Independent. Independent.

28 V T G ROUP P LC ANN U AL REPOR T & ACC OU NTS 2007

David Barclay David Thorpe Chris Cundy Chris Rickard, Paul Lester Non-executive Non-executive Commercial Director, Finance Director, Chief Executive, Director, age 53 Director, age 57 age 46 age 50 age 57

Vice-Chairman of In April 2003, Has worked for Joined the group on Became Chief Dresdner Kleinwort Mr Thorpe retired VT Group since 1993. 1 July 2006 as Finance Executive of VT Group Wasserstein until as President of EDS He became Group Director. Previously in July 2002 having March 2005 and a Europe having been Finance Director in 1997 Group Finance Director been a non-executive former corporate with that organisation following the successful of The Weir Group PLC board member since finance adviser to the since 1994 and prior to award of partnering and prior to that Group 1998. Previously he group since flotation that he held roles in the contracts between Finance Director of was Group Managing in 1988. He is non- IT sector and IT/BPO the Warship Support Meggitt PLC and Director of Balfour executive deputy outsourttcing sector. Agency and FSL and Director of Group Beatty plc. A graduate chairman of John Lewis He is a non-executive the Naval Recruiting Financial Planning with Mechanical Engineer, Partnership plc and a chairman of Tunstall and Training Agency the Morgan Crucible he has held a number non-executive director Ltd and CAS Services and Flagship . Company PLC. of board or senior of Wessex Water Ltd, a non-executive Graduated with first management positions Services Limited. He director of Isoft plc, In January 2006, class honours in in engineering and was appointed to the The Innovation Group Chris was appointed History from King’s support services board on 19 May 2003. plc and Morgan Group Commercial College London and companies in both Chambers plc. He is Director where he worked in New Zealand the UK and US. He is also Chairman of is responsible for for two years with also currently a non- the Racecourse steering the company PricewaterhouseCoopers. executive Director of Association Ltd through an intense He has no other Civica plc and High and a director of negotiating period on directorships. Integrity Solutions the British Horse major PFI opportunities. Mr Rickard resigned Limited. Racing Board and the He is filling the role from the board on Horseracing Betting of Finance Director 24 April 2007. and Levy Board. He during the search for a was appointed to the replacement . VT Group board in He has an Economics January 2003. and Accounting degree and is a qualified Chartered Accountant. Prior to working for VT, he was based at Chairman of KPMG’s Brussels office Remuneration with responsibility Committee and for their multinational Member of Member of Audit clients. Remuneration, Audit and Nomination and Nomination Committees. Committees. Independent.

29 CORPORATE RESPONSIBILITY Chief Executive’s statement Marketplace Workplace Community Health and safety Environment Governance Corporate Responsibility

WE CONTINUE TO DRIVE OUR CORPORATE RESPONSIBILITY PROGRAMME AND ITS INTEGRATION INTO OUR BUSINESS STRATEGY. In particular, we are pleased with our achievement in health and safety. Paul Lester Chief Executive

This year we have made sound progress developing our We are pleased with the achievements made this year Corporate Responsibility Programme. Led by a senior in our Health and Safety programme. Improved rigour level task force, and utilising business unit workshops, around our governance and assurance processes have we have improved understanding of our key issues and delivered confidence in the quality of management data opportunities and how these align with our business and will allow us to set stretching but realistic improvement vision and values. targets.

However, for corporate responsibility to be meaningful it The board strongly believes that the safety culture of an has to be an integral part of our day-to-day operations. organisation is shaped through the visible leadership of With this aim the task force will continue to provide its directors and managers. Next year we will begin to leadership in the key material environmental and social implement our Safety Leadership Programme. impact areas identified. This year it will work with the This year we refreshed the Group Environmental Policy. business units to develop our strategy further and ensure An external assessment of compliance, environmental business focused vision and action plans are delivered. impact and risk, coupled with the preliminary base-line Key to this will be the embedding of appropriate KPIs data collected for the first time will provide a springboard to enable future performance measuring and reporting for our environmental programme next year. as well as enhanced communication with, and understanding of, our stakeholders. Our data clearly demonstrates achievements in reducing both cost and environmental load within our businesses. We maintain our strong and open stance on ethical trading and will be increasing our training and monitoring We recognise the importance of sustainability to regimes next year. our customers. We are working towards integrating targets into our operations, and ensuring that the The board fully recognises that our strong financial results corporate responsibility dimension grows in our this year are the product of the efforts of our people. future service offering. VT’s People Strategy has now put in the framework and tools that will enable all of our people to develop their full potential. As well as building competences we will continue to ensure we share success appropriately.

30 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

HOCKNEY JOIN SHOT OF WELDERS TO GO HERE

Trading Ethically Export control compliance Working against corruption As described in last year’s CR report, the group continues Our policy states, in simple terms, what we all believe to to ensure that, as appropriate, it has policies, processes be right – that corruption will not be tolerated. No other and procedures in place and that the export controls of the policy or business target of the group takes precedence UK Government, European Community, US Government, over this rule. In May 2006 our Anti-Corruption Policy was and any other relevant national controls are fully respected. updated. Appointment of agents is subject to a rigorous documented procedure overseen by a compliance Whistle-blowing committee. The confidential whistleblowers’ line operated by Right CoreCare took 5 “whistle-blowing” calls during the year. The group does not make political donations. Our Of these, one issue was subjected to an internal investigation charitable donations are carried out as an integral part of reporting to the chief executive and appropriate action was our community relations policies. Donations are approved taken. The remainder were resolved via counselling services. by the group charity committee and a record kept of all monies disbursed. Ethics in our day-to-day business We recognise that ethical behaviour is not confined to We recognise that working to eliminate corruption will the field of corruption, but that proper conduct, allied with be successful only through industry-wide partnerships ensuring we know and meet our responsibilities, forms part with governments, international institutions and non‑governmental organisations. In 2006, the group joined of our day-to-day business. forces with the UK’s other leading defence companies and Our employees are recruited and trained in accordance defence sector Trade Associations forming the Society of with the law, and our clients’ requirements, including, for British Aerospace Companies “UK Defence Industry Anti- example, the safeguarding of vulnerable groups, such as Corruption Forum” to promote the prevention of bribery schoolchildren. Detailed reporting on corporate governance and corruption in the international defence market. The is on pages 54 to 57. group is also working with the defence industry on an international basis through the Aerospace and Defence Industries Association of Europe “International Defence Anti-Corruption Forum” – chaired by Lord Robertson, and facilitated by Transparency International.

31 CORPORATE RESPONSIBILITY Chief Executive’s statement Marketplace Workplace Community Health and safety Environment Governance Growing our relationships

THE GROUP CONTINUES TO GROW AND DEVELOP WITH ITS CUSTOMERS AND SUPPLIERS. A SUBSTANTIAL AMOUNT OF WORK HAS TAKEN PLACE OVER THE LAST YEAR TO DEEPEN AND STRENGTHEN OUR PARTNERSHIPS.

Partnering with our customers and suppliers We have decided to carry out a comprehensive review We are continuing to develop open and honest long term of our payment terms with our suppliers to ensure that partnerships with our customers. There is no doubt that we are reflecting best practice. As part of this exercise VT’s focus on partnering behaviours played an important we will be reviewing in depth our creditor days against part in Ascent’s selection as Preferred Bidder for the UK contracted terms. Military Flying Training System. (Ascent is a 50:50 joint venture between VT Group and Lockheed Martin.) Creditor days at year end During 2006 we began to work more closely with our key 2004 35 suppliers through partnering workshops and a supply chain conference aimed at our top 50 suppliers. 2005 44 2006 47 We are furthering our strategic relationships through a comprehensive vendor management system with 2007 45 corporate responsibility rating criteria and next year will see the introduction of a set of consolidated Terms and Conditions for use across the group.

We are developing our personnel through the introduction of a professional Chartered Institute of Purchasing and Supply corporate award scheme.

32 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

Air Marshal S Dalton taking receipt of his new Toyota Prius – the first hybrid car to join the MoD White Fleet

VT Land: Partnering to ensure customer satisfaction Through its White Fleet contract, VT Land provides non-combatant vehicles on a continuous basis and a vehicle rental service to the MoD. The White Fleet contract came under the umbrella of VT Group in 2006 with the acquisition of the Lex business and has already dealt with over a million vehicle rental bookings since the contract began in 2001.

VT Land and Lex (formerly Lex Vehicle Leasing) worked together to integrate the best aspects of customer service and partnering with the MoD. The customer satisfaction survey shows that the partnering ethos brings results with 97% of UK White Fleet customers rating their overall satisfaction with VT Land as Satisfactory, Good or Excellent.

“We have seen a step-change in approach since Lex Defence joined VT – the ethos of the VT Group has come through, taking our relationship to a higher level.”

Robert Hobbs Senior Contract Manager, MoD

VT Careers Management: Partners with the Prince’s Trust Since 2002 we have been working closely with the Prince’s Trust, first creating a unique long-term partnership to deliver career guidance services in five boroughs in East London, and more recently supporting a North Yorkshire team comprising the North Yorkshire Police, Fire & Rescue Service, the MoD and the Prince’s Trust.

Team 55 is a 12-week programme of personal development, training and basic skills qualifications that aims to re-engage disadvantaged young people aged 16-25 who are educational under achievers, offenders/ex-offenders, unemployed, in/or leaving care. The Team are proud of their track record – over 50% of participants move on to learning, or training in voluntary and paid employment, which increases to 70% within three months of finishing the programme. Recently the North Yorkshire Police, in addition to sponsoring the programme, have made two full time staff secondments.

“Both from an organisational perspective for North Yorkshire Police, and on a more personal basis, we have found that the partnership created to deliver the Prince’s Trust Team programme whilst being challenging to all involved, has delivered tangible outcomes for a significant number of young people. We are very happy with all the outcomes from Team 55.”

Peter Bagshaw Acting Chief Constable, North Yorkshire Police

33 CORPORATE RESPONSIBILITY Chief Executive’s statement Marketplace Workplace Community Health and safety Environment Governance Still passionate about people

SERVICES ARE PROVIDED BY PEOPLE, OUR EMPLOYEES ARE THE KEY DRIVERS OF PROFITABILITY AND GROWTH. Jo Robbins Group HR Director

This year we have published and communicated Delivering on last year’s employee survey, the Similarly our discussions with BAE Systems the VT People Strategy which provides the business unit Value Champions (appointed regarding formation of a shipbuilding joint framework for future action. In 2006 the HR employee representatives committed to venture is being taken forward in full and open conference brought together teams from across embedding the values within the organisation) consultation with our employees and their the business to facilitate implementation. met with the specialist company People in trades union representatives. Business to understand how we can develop VT Group requires that managers are trained the VT employer brand. Human rights and in the application of HR policies, and that decent labour conditions documentation is readily accessible to all, Communication and integration Overall VT Group has less than 300 local including provision in alternative formats. The growth of the group-wide intranet employees in non-OECD countries. Where We have begun an audit process (initially (Evolution) and an extranet will ensure access local legislation is weak or non-existent, UK of Equality & Diversity, Code of Ethics, to group and business unit information, legislation is followed. In general, staff have Disciplinary and Grievance policies) to ensure policies and guidelines by all employees and a mirror of the benefits given to UK staff, that all business unit policies are legally also facilitate the exchange of knowledge and with alternative compensation where this is compliant, follow best practice, and are development of best practices. not possible – such as in the case of share regularly reviewed. incentive plans. Pay reviews consider local Change management conditions but follow UK processes, including Responding to employees – VT Group recognises that the management bonus schemes. embedding the group values of change is a key competence in the delivery “Although it is sometimes We recognise that if our people can identify of our business strategy. In 2006 the group difficult to mirror all schemes strongly with the group’s values then we acquired a number of businesses from the exactly, we always identify will create a much stronger unified culture. Lex organisation. Integration was complex a scheme that will This concept, often referred to as employer and roadshows took place enabling work outside the UK”. brand, is being actively developed by a joint face‑to‑face briefing for all employees and Karen Hinnigan marketing and HR team, and we look forward business leaders. HR Director, VT Communications to reporting progress next year.

34 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

PEOPLE IN VT COUNTRIES OF OPERATION

VT Services Inc. 28% UK 66%

VT Support Services 24% USA 28%

VT Education and Skills 19% Australasia 1.5%

VT Shipbuilding 11% Europe 0.5%

VT Communications 6% Middle East 3%

VT Group Services 1% Asia-Pacific 0.5%

FSL 5% Other 1%

Flagship 6%

4000 People In The VT Group Male Female Male Female Total 3000 2005 8,360 average 2000 2006 9,098 3,937 11,538* Headcount (at 31 Mar including 50% of JVs) 1000 2007 9,201 3,699 12,900** (at 31 Mar including 50% of JVs)

0 VT VT VT VT VT VT Fl FS a We have built on the introduction of our HR information Gri Suppo Ed Shipbuilding Co Gr gshi L ou software, yielding more robust group-wide data this year. ff ucatio m p in municationp Se rt Se We will further improve our central monitoring and reporting Se n rv rv ices rv an ices during the next period. ices d In Skills s c Training in the VT Group

In the last 12 months the group invested in over thirty thousand days of training – about 2.5 days per employee.

* Figure restated from last year’s report. ** Headcount figures include our acquisitions – Milcom and Lex, and half of the headcount of our 50:50 JVs, Flagship and FSL.

35 CORPORATE RESPONSIBILITY Chief Executive’s statement Marketplace Workplace Continued Community Health and safety Environment Governance Building skills and nurturing talent

YOUR POTENTIAL FOR OUR FUTURE … ...DURING THE PAST YEAR WE HAVE FOCUSED ON PUTTING IN PLACE THE SKILLS AND TOOLS NEEDED TO ALLOW ALL OF OUR PEOPLE TO DEVELOP THEIR FULL POTENTIAL IN THE VT GROUP.

Establishing a coaching culture within the organisation, we recognise that the Over the next year a uniform executive This year has marked the start of a major challenge is transferring the learning appraisal system will be introduced step–change in the way VT managers into the day-to-day workplace. across the group, facilitating performance lead and develop their people to achieve management by objective and behaviours Michael Staunton, Executive Development and both company goals and their full personal linked to our values. These will be linked to Succession Planning Director, will continue to potential. In support of our core values of bonus payments. drive the key programmes: People, Performance and Partnering we are establishing a coaching culture throughout • Coaching for Performance Project management the group. 30 senior managers and directors Project management is a key organisational • Talent Management have already completed the Henley Senior competence. A group project management Accredited Coach Programme, and over • Project Management conference in September 2006 brought the next 12 months some 120 managers will together 80 project managers from the complete a coaching programme at Roffey Talent management businesses. A project management steering Park, building over time a rich and productive The transfer of knowledge and capability is group continues to drive improvement coaching culture in the group. accelerated by employees moving around and work towards defining a VT project the group, and while it is not always easy in management process. “Coaching will enable VT to enhance a diverse workplace such as VT the benefits personal responsibility and autonomy, The Project Management Training Initiative has to both the company and the employee driving the achievement of business goals delivered skills training to 212 employees of are clear. through the development of our people”. which 50 went on to qualify as Association of Michael Staunton, We have built, piloted and rolled out the Project Management practitioners. Executive Development Director VT Talent Management Process for senior managers across most business units with High-level cross-business project teams have all others (including our US operations) now defined our required competences for scheduled to be completed by the autumn. future growth. Whilst traditional training and This process informs the VT executive team development will continue to embed these on succession planning opportunities.

36 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

Graduate Paul Bates, who drove through the achievement of ISO14001 by VT Four S

A sustainable achievement – Paul Bates Since joining the VT Group Graduate Scheme in September 2006, I have been able to embrace a wealth of opportunities in my first of four placements. I have been actively encouraged to pursue Continuing Professional Development and gained a qualification in Project Management.

With responsibilities such as designing and implementing a new customer service system, my project management and inter-personal skills have improved significantly. I am particularly grateful to VT Four S for allowing me to pursue my interest in the environmental impacts of the business by being challenged to research, plan, and project manage the achievement of certification to ISO14001, the international standard for Environmental Management. For VT Four S the certification strengthens their bid submissions and has resulted in a significant reduction in the environmental load from the business as well as delivering cost savings.

Graduate Training Scheme through basic training for National Tests at Levels 1 Over the next five years we will seek to improve both the and 2 in numeracy and literacy, including Level 2 ICT, quality and quantity of our graduate intake into VT and gaining the Business in the Community Big Tick Award are working on the development of an attractive and for the second successive year. compelling “Employer Brand”. Every graduate joining VT • VT Education and Skills have apprentice training as a benefits from a full support network including dedicated core business offering. Last year, three young chefs graduate manager, mentor and buddy. Sarah Herrick, Joanna Thompson and Jeanette The success of the graduate scheme is starting to prove Jowsey received Apprentice Awards. itself with all graduates that joined since the new scheme launch in 2004 successfully achieving management roles Welders wanted within the group. Faced with a skills shortage in a critical area, VT Shipbuilding joined with the GMB union and headed Addressing a skills shortage for Poland. Over 50 applicants were interviewed yielding VT continues to support the modern apprenticeship 11 successful candidates to join the Portsmouth route for developing skills and employability, with many workforce – at pay rates equivalent to those offered to excellent examples of achievement this year. British recruits. A full support package, including advice on settling into the UK was provided, together with • At the Institute of the Motor Industry awards, language training. VT Emergency Services apprentice Ben Betterton received the National Apprentice of the Year Award VT Shipbuilding has to ensure that it has a skill base in Body Repair. for the future and a Welding School is now being established on the Portsmouth site. The training is • This year, at the Portsmouth Learning Centre, being delivered by VT Shipbuilding and VT Training in VT Shipbuilding have guided more than 100 people conjunction with the “Train to Gain” programme.

37 CORPORATE RESPONSIBILITY Chief Executive’s statement Marketplace Workplace Continued Community Health and safety Environment Governance Sharing and celebrating success

HIGH PERFORMANCE SHOULD BE REWARDED AND WE AIM TO ENSURE THAT FAIR, OPEN AND APPROPRIATE REWARD MECHANISMS ARE IN PLACE TO MOTIVATE EMPLOYEES.

We are continually reviewing our reward packages to Share Incentive Plan ensure we share success fairly and appropriately across The Share Incentive Plan is now entering its third year and the group. The Flexible Benefits Scheme for 2007 has we are pleased that so many employees have decided been refreshed following feedback from employees and to take a personal stake in the group. Over 4,500 UK resulted in improved uptake. The range of benefits on employees have signed up to the plan. offer addresses lifestyle and wellness and includes the buying/selling of leave, childcare vouchers, health/dental/ Employee Assistance Programme travel insurance and gym membership. Our Employee Assistance Programme benefits all employees and their families. Right Corecare managed Pensions 261 calls to the confidential free-phone helpline on behalf The group continues to support pension schemes of VT employees and their dependants. We receive for its employees full details of which are given in the regular information on the numbers and types of calls financial statements. received, which allows us to understand if there are areas where we can improve our working environment and support to employees.

38 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

Celebrating Success – The Winners These awards recognise those people who embody the group’s vision and values and who go the extra mile for our stakeholders. The awards were presented at a gala dinner on 3 May 2007.

Partnering With Exceptional Commitment Customers And Suppliers Performance To People The Chairman’s Award The George Cameron Award The Peter Usher Award

WINNER: Len Reed WINNER: Nick Earl WINNER: John Birchmore

VT Communications VT Support Services VT Shipbuilding Head of Programmes Business Development Manager Health, Safety and Environment Manager Living the VT Values in terms of Delivering measurable commercial ‘Partnering with our Customers and success through dedication Engaging the whole establishment Suppliers’, and delivering success to the organisation and to the and the Trades Unions to combat by partnering with a key supplier to achievement of objectives at great the serious risks from hand-arm deliver new transmission equipment personal expense, demonstrating vibration and noise, winning support vital to the newly won Deutsche drive, initiative and respect for and praise from the Health & Safety Welle contract. people. A true professional and an Executive for this initiative. inspirational leader.

39 CORPORATE RESPONSIBILITY Chief Executive’s statement Marketplace Workplace Community Health and safety Environment Governance Being a part of the local community

VT GROUP COMMITS TO BEING A RESPONSIBLE CONTRIBUTOR TO ITS LOCAL COMMUNITIES THROUGH THE INVESTMENT OF TIME, MONEY AND RESOURCES IN A WAY WHICH BOTH PROMOTES THE GROUP’S VISION AND VALUES, AND WHICH MAKES A DIFFERENCE TO THOSE COMMUNITIES.

Communities Charitable giving We continue to contribute to the development In response to employee nominations, of the communities in which we operate. some 38 charities received support from Sponsoring career choice As part of VTs membership of Business in the VT Group Services’ charities committee. VT Training is a lead the Community Paul Lester, chief executive, The largest donation was to Southampton sponsor for the Springboard currently chairs the Solent Leadership Team Hospital for the refurbishment of the family Charitable Trust’s UK which is developing a strategy to tackle low room in the Special Care Baby Unit, which Futurechef competition. skills and aspiration levels in disadvantaged offers families some home comforts while Futurechef attracts over 7,000 communities. being able to stay near their baby at an entrants aged 12-16 from anxious time. The group also became a founder member of around six hundred schools. the Safer London Foundation which aims to Total charitable donations for the group Our sponsorship means reduce crime, promote community cohesion amounted to £93,000 (2006: £112,000). that we are able to interact and develop safer neighbourhoods. directly with the schools and We are reviewing our approach to community with those young people interaction and charitable giving. At group who have shown an interest level, our aim is to move towards more long in cooking, helping them to term partnering with fewer charities, while turn hobbies into rewarding still maintaining autonomy at local level in the careers. VT has enjoyed many business units. In this way we hope to ensure years of partnership activities maximum benefit to our partners, and to the with Springboard enabling us communities in which we operate. to extend our geographical reach to school leavers and excluded groups.

40 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

VT Shipbuilding – growing Britain’s skills in SSAFA Forces Help partnership with the trades unions, education VT Group has become a Corporate Friend of the and the community Soldiers, Sailors, Airmen and Families Association During the last 12 months our schools liaison Forces Help. SSAFA was established in 1885 programme delivered master classes in graphic to help and support serving and ex-Service design, materials, mathematics, procurement and personnel and their families who are in need, design processes to 169 pupils, and we further suffering or distress. The breadth of service encourage interest in engineering with the VT Young provided by SSAFA fits well with our business Graduate Scheme, run in partnership with The values and directly supports our customer base. Sholing Technology College. The charity is also important to our employees as many are either spouses of serving military In partnership with the Confederated Shipbuilding personnel or are ex-military themselves. and Engineering Union, VT Shipbuilding has offered training and work experience to 12 jobseekers Donation matching is used to encourage as part of the Interwork Programme. Those employees who fund-raise for SSAFA as well as an completing the course successfully will be offered initiative to make a donation for each completed the opportunity to move onto the VT adult training Customer Satisfaction survey form returned. programme, leading to recognised qualifications An outstanding example of fundraising is and a possible first step on the employment ladder. demonstrated by Steve Tyers of VT Land, who has An Adult Training Programme, in partnership with raised tens of thousands of pounds over many the Trades Unions, leads to NVQ Level 3 craft years for SSAFA, with £2,200 added recently qualifications. Those completing the course become from a sponsored cycle ride. Previous fund-raising recognised tradespersons, without the necessity to efforts range from running marathons to a gruelling complete an apprenticeship and may immediately Himalayan trek with Chris Ryan of SAS fame. apply for skilled positions with any employer.

41 CORPORATE RESPONSIBILITY Chief Executive’s statement Marketplace Workplace Community Health and safety Environment Governance Measuring, managing, leading, improving

WITH IMPROVED UNDERSTANDING AND CONFIDENCE AROUND OUR PERFORMANCE WE MOVE FORWARD TO ALIGN OUR OPERATIONS BEHIND A UNIFIED LONG TERM STRATEGY TO DELIVER INDUSTRY LEADING PERFORMANCE. Barbara Harrison HS&E Director

A clear improvement strategy reporting that will accommodate emerging and more Building on the sound work to date, we move forward with predictive (leading) key performance indicators. the continued ambition to deliver industry leading health Our US operations are included in our data capture for the & safety performance. This vision has been consolidated first time, so performance is shown separately. into a group Health & Safety Strategy which was launched in May 2007 and will align our operations behind four We recognise that improvements are required to the core objectives; engagement and management of contractors and last year we recorded 2 RIDDOR major and 6 over 3 day reportable • Strong leadership of a shared culture through accidents to UK contractors. Next year we will work with supervision, coaching and stakeholder engagement procurement and local management teams to improve the • Robust governance and assurance with clear vision, management of safety through our supply chain. policy and standards All business units have health & safety policies in place • A learning organisation with HS&E functional excellence that are geared to their individual operations. Last year we added improved rigour to our H&S assurance and • Measurement & benchmarking with feedback, governance, initiated by re-affirmation of the group H&S recognition and reward. policy and management processes and based on the UK Last year we set out to improve the capture and reporting Health & Safety Management standard BS 18001. of our H&S data. As a result we are able to report our In 2007 VT Emergency Services won the International figures this year with confidence, and with the knowledge Safety Award from the British Safety Council. that they include our operations worldwide and UK A revitalised Health & Safety Forum provides strategic contractor activities. We believe that the increased focus to the board, and is supported by a new accident rate seen this year is the result of previous Best Practice Working Group that will fast-track the under-reporting and while we continue to out perform the interpretation of emerging legislation, lessons learnt and respective sector performance published by the UK Health sharing of best practice. Audit plays a key role in providing & Safety Executive, our future strategy aims to deliver “Best assurance on our safety management and we will develop in Class” performance. We aim to implement electronic a safety audit programme that will deliver improved internal and external assurance.

42 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

John Birchmoor, HS&E Manager at VT Shipbuilding

Partnering to reduce risk In July 2006 the Health & Safety Executive launched the ‘Worker Involvement (managing noise and hand-arm vibration risks) Project’, in collaboration with the EEF, the Construction Federation, FMB and Unions UCATT and GMB. VT Shipbuilding became one of a small group of companies to participate in a pilot project. A key part of the project was to develop worker involvement in the manufacturing and construction sectors and working with suppliers on specification, maintenance and management of hand tools.

“I believe it is essential that Health & Safety Executive works closely with industry to develop new ideas and strategies for effectively tackling health and safety risks in the workplace. An excellent example of such co- operation is the worker involvement project that VT Shipbuilding is piloting on behalf of HSE. If, as we expect, worker involvement is successful in improving management of these risks, we intend to promote it widely across industry. What will help us to achieve this is the energy, imagination and enthusiasm that the company has brought to the project and the example it has set for others to follow. I would like to thank the VT Group for its support, particularly the team leading this project.”

Geoffrey Podger Chief Executive HSE

43 CORPORATE RESPONSIBILITY Chief Executive’s statement Marketplace Workplace Community Health and safety Continued Environment Governance

Reportable Accident Rate per 100,000 Employees 3000 06/07 05/06 Performance Data 2500

Compared with UK Health & Safety Executive Sector (SIC) Rates Fatal Accidents 0 te 2000

Ra Prosecutions 0 t

en 1500 Prohibition Notices 0 Improvement Notices 0

Accid 1000 Fines 0 1 1 500 23

11 89 64 RIDDOR Dangerous Occurences 4 0 ShipbuildingCons Ot Al VT VT Ed l he Industries Gr Se u r ca tr Se ou rv uction tion rv p ices ices (e & xc In Occupational Health Ship l. c. US Whilst we have made solid progress in gaining ) Repair understanding of sickness absence within the group, next year we will further improve the collection of data on work- related ill health especially stress and musculoskeletal The introduction of six monthly business unit reviews injuries. We will also review our return to work processes. chaired by the chief executive has yielded a much In 2006/2007 2,213 UK employees received occupational improved understanding of our health & safety risks and health screening. As with many manufacturing companies, lent renewed vigour to the senior level review of policy, as Hand Arm Vibration Syndrome (HAVs) continues to be well as delivery of performance improvements. a potential exposure issue in our Shipbuilding and FSL We carried out internal benchmarking in the area of businesses. Last year 66 cases of HAVs were diagnosed. employee engagement and are pleased to report over These are identified as long-standing cases and we expect 90% compliance with VT minimum standards across the figure to drop as our HAVs management plans deliver the businesses. improvements.

We recognise that achieving our performance aspirations Referrals to our occupational health provider and calls to will only be attained through a positive safety culture. our employee assistance line have suggested that work We have taken the first steps to strengthen and develop related pressure may be an issue for parts of our business. the visible leadership of our directors and managers Next year we will set out to understand these risks further including the introduction of group senior executive safety and consider the best arrangements for managing stress objectives and safety tours. Next year we will progress the related issues. development of a Group Safety Leadership Programme.

44 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

Refuelling operations at Fort Huachuca, Arizona

VT Griffin: working to raise safety performance Continuous improvement is the theme in Safety and Environmental performance throughout all VT Griffin locations in the United States. Fort Huachuca, Fort McCoy and Kings Bay are all actively pursuing the distinguished US Occupational Safety & Health Administration’s Voluntary Protection Program Star designation.

Fort Huachuca has recently received the 2006 Army’s Distinguished Refuelling Operations Award which encompasses excellence in Environmental and Safety performance. Fort McCoy has seen a dramatic improvement in their accident frequency rates over the last two years by getting employees actively engaged in the accident prevention process. At all three sites employees have embraced the concept that their effective pro-action results in best in class safety performance.

Reducing workforce injuries Musculoskeletal injuries due to poor manual handling are a common hazard within many of our businesses. Fleet Support Limited, operating within the Portsmouth Naval Base, worked with an innovative training provider resulting in a reduction by some 42% in the number of manual handling incidents in the last year.

A new approach moving away from the traditional styles was employed. Trainers, led by a former Olympic weightlifter and world record holder delivered a very serious message in a fun and memorable style. So if the work takes place in the bilge of the ship – then that’s where the training takes place! This unique and realistic approach delivered achievable principles out of the classroom pitched at a level that everyone can both understand and enjoy.

45 CORPORATE RESPONSIBILITY Chief Executive’s statement Marketplace Workplace Community Health and safety Environment Governance Quantifying and reducing our impacts

GROUP-WIDE REPORTING AND AUDIT IN 2006 HAS DELIVERED IMPROVED UNDERSTANDING OF ENVIRONMENTAL RISK AND PERFORMANCE.

Our primary objective in 2006 was to advance our A number are in the process of implementing external environmental data capture and reporting. The introduction verification of their environmental management of KPIs aligned with DEFRA and GRI guidelines has systems. In 2006 FSL was successful in achieving enabled baseline data to be reported for the first time. level 5 of BS 8555 and both VT Four S and Flagship at the Fire Fighting Training Unit in Portsmouth achieved The reporting processes are not yet robust and we are ISO 14001 certification. particularly challenged by the definition of our boundaries. The structure and diversity of the group in itself makes the In 2006 Environmental Resources Management Ltd (ERM) collection of data a challenge. As a service company we were engaged to undertake an environmental assurance do not always have access to information, and in some audit across the group. The programme, scoped in areas of operation we may not have direct management conjunction with the business units, has been delivered influence on sustainability performance. This is particularly on a prioritised basis and the first phase is due for true of our US and public sector operations. completion shortly. The audit results will not only provide a compliance status of our operations but will also deliver Our future focus will be on the areas of energy and global recommendations on the associated options to better warming contribution, waste and recycling, as well as manage environmental risk as well as highlighting good the impact of our activities on environmentally sensitive practices. The individual reports also set out to deliver areas. We will also work with the supply chain to address practical prioritised corrective actions to the sites and resource usage, including the sourcing of materials. opportunities for the further reduction of environmental risk. The group environmental policy was refreshed in 2006 and We measure the robustness of our environmental now provides the overarching framework for the business management systems, and in 2006 undertook 1,276 internal units. The range and nature of environmental impacts and 390 external audit days. Environmental budgeting is an and risks varies widely within the group and each of our integral part of our operational management. businesses will apply local environmental polices and management systems appropriate to their needs.

46 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

report data only for environmental impacts under the direct Environmental Management control of the group and excluding the US businesses. Serious environmental incidents/spills, prosecutions/convictions, 0 Waste enforcement notices/warning letters VT environmental teams have already significantly reduced Complaints about our operations 2 waste on managed sites such as HMS Sultan and we expect to report further progress next year. In 2006 we recycled 56% of our general waste. As a group we delivered 307 training days exclusively on environmental issues, in addition to the training carried Waste Tonnes per £m out during operational induction, site management Net Sales Value (NSV) procedures etc. Hazardous 180 0.3 Environmentally sensitive sites General 2,178 3.6 The group is increasingly aware of the impact that our operations can have on local ecology and biodiversity. Recycling 1,212 We know that maintaining a rich diversity of species and habitats is important to local communities and other Recycled Waste stakeholders. In 2006 11 UK VT operations reported working close to environmentally sensitive areas. These Plastics & Other included the Portsmouth Harbour, Crimond and Bowness Metals Common SSSIs, National Trust and RSPB reserves, a Marsh Fritillary butterfly colony, fen environments and local Paper County Wildlife Trust Sites of Nature Conservation Interest WEEE, batteries, etc (SNCI). Our environmental management systems are locally geared to ensure the long-term protection of these sensitive areas. Water We are working to understand better the patterns Awards of our site water use, and opportunities for recycling VT Group business units received a total of nine and reduction. environmental awards & commendations. Of note was the VT Griffin Navy site at Kings Bay which was awarded the m3 per Water prestigious State of Georgia 2006 Plant of the Year Award £m NSV by the Georgia Association of Water Professionals. Total usage, thousand m3 58 96 Environmental Data Licensed abstraction, m3 500 We anticipate that further sharpening of our data collection Operational & Site Use 87% systems and redefining the boundaries of reporting will 13% result in some rebasing of the data next year. This year we Official Use

47 CORPORATE RESPONSIBILITY Chief Executive’s statement Marketplace Workplace Community Health and safety Environment Continued Governance

Energy VT recognises the pressing issues of climate change Tonnes CO2 Emitted 2005/06 2006/07 and the need for sustainable consumption and Baseline 2003 33,919 33,919 production. Last year we took the first steps to improve our understanding of energy use and began the collation Allocation 28,351 28,829 of global data of our energy consumption in buildings, Actual Emissions 20,110 17,350

industrial usage, and some initial assessment of the Team Portsmouth impact of transport fleet activities. Our operations are also making significant efforts locally Next year we have set out to improve the accuracy of to reduce energy consumption. Evaluation is in progress the measurement of our carbon footprint, and improve for the use of alternative energy sources in a number quantitative disclosure both in our annual reporting and of projects, including micro-generation options such as through the Carbon Disclosure Project. We will pay wind turbines and solar panels. specific attention to energy attributable to business travel VT Communications are using approved CHP sources and those locations where we manage or share sites. with Climate Change Levy exemption. A transmitter replacement programme at Woofferton will successfully Energy Use GWh MWh per reduce the site’s carbon footprint by over 25% and the £m NSV business has scheduled transmitter replacements over several years as part of an energy reduction programme. Electricity 126 210 VT Education and Skills have completed a feasibility Gas 4.5 7 study on converting the company fleet entirely to the use Fuel/Oil 68 113 of hybrid vehicles. Total Energy Consumption 199 331 VT businesses are passionate about supporting our customers in achieving their objectives to reduce carbon Total Absolute Tonnes Equivalent CO2 intensity. Flagship have shown excellent results for the MoD training facilities and VT Land White Fleet have Kilotonnes Equivalent CO2 72 established a sustainable development team to ensure

Tonnes CO2 Equivalent per £m NSV 120 that the MoD achieves its target to reduce carbon emissions by 15%.

As well as being a part of the overall VT Group In 2006, VT Communications purchased 56 kg of SF6 reporting above, VT Shipbuilding are included in the gas, a DEFRA defined sustainability indicator. The use of Team Portsmouth registration with the EU Emissions the gas as a dielectric in HV switchgear is currently under Trading Scheme. In this second year of operation, Team review to ensure future compliance and minimisation of

Portsmouth has succeeded in beating its CO2 emission both losses and deployment. allocation by almost one third (8,241 tonnes, 29%), and reducing emissions by 41% over the baseline set in 2003.

48 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

Through working together at HMS Sultan, the Royal Navy and Flagship have reduced energy consumption by 22%

Partnering with the Royal Navy to reduce energy use Flagship has been the Royal Navy’s partner in training since 1996. At HMS Sultan (one of the four locations of the Defence College of Electro-Mechanical Engineering), and just nine months into the RN/Flagship Sustainable Energy Partnership, the Commodore’s team has achieved a annualised reduction of 22% in energy consumption – some 8 million kWh.

“The work and dedication of the combined military and Flagship ‘Tiger Team’ has paid enormous dividends – reducing our energy consumption has benefited both the environment and saved hundreds of thousands of pounds”.

Commodore G J Thwaites ADC Royal Navy, Commandant of the Defence College of Electro-Mechanical Engineering and Commanding Officer HMS SULTAN

This knowledge and competence building initiative has now been spread across all four locations of DCEME by the Commodore’s ‘Tiger Team’ resulting in energy conservation benefits across the whole college. The team is now using the same approach to understand and reduce water usage.

Gaining BS8555 and driving down environmental impacts

FSL has achieved level 5 of BS 8555 as part of the DEFRA “Project Acorn” initiative, and are now one short step from certification to ISO14001. As part of Team Portsmouth,F SL have played a full part in driving environmental gains at the Base. In addition to helping to cut carbon emissions by nearly 20 per cent, a total of £1.9 million savings were made this

year. Taken over the past three years, the improvements have been impressive, with local CO2 emissions having almost halved. Building on this success, the base is targeting further reductions in energy consumption with the aim of cutting emissions by at least another five per cent next year. Recycling has shown a dramatic increase with some 25% of waste now being recycled with improvements in waste reduction plus re-use being the next targets.

49 CORPORATE RESPONSIBILITY Chief Executive’s statement Marketplace Workplace Community Health and safety Environment Governance About this corporate responsibility report

The report this year has been expanded to include our its major institutional shareholders, both current and US operations and our joint ventures Flagship and FSL. prospective. Regular visits are made to institutions’ offices We have recently strengthened our US business with the and there are reciprocal visits to the group’s premises. acquisition of Milcom Systems Corporation. Milcom is not Comment and opinion from shareholders and their included in this CR report. representatives is regularly provided to directors. The chairman is available to visit major shareholders during The period covered by this report is the 12 months the year and the senior independent director is available to March 2007. Further development of stakeholder to attend meetings as required. engagement processes is an integral part of the new Corporate Responsibility Task Group and the needs of The chief executive and finance director communicate our stakeholders will continue to inform our reporting. with institutional investors through analysts’ briefings Our internal engagement programmes have informed us and investor meetings as well as making timely stock that our employees should remain a focus of particular exchange announcements. consideration in CR reporting. The framework of the most recently published Guidelines of the Global Reporting Private shareholders Initiative (GRI3) has guided the scope and content, and the The annual general meeting will again be held in the report will be self-declared to the GRI. Southampton area as this is convenient for a significant number of employee and retired employee shareholders, The VT Group Corporate Responsibility report is who are actively encouraged to attend the AGM. The published as part of the annual report and accounts and company recognises the importance of communicating the auditors’ scrutinise it to ensure it is not inconsistent with its shareholders including those with and without with the audited sections of the annual report. The report internet access. is also published on our website at www.vtplc.com/cr.

Understanding the wishes of our stakeholders The AGM All directors normally attend the AGM and shareholders In the Marketplace and Workplace sections of this report, are invited to ask questions during the meeting and to we describe our approach to listening to, and partnering meet the directors informally afterwards. with, our customers, suppliers, and our employees. The results of votes on all resolutions put to the AGM will Institutional Shareholders be available on the company’s website, together with The company is required to have a dialogue with details of proxy votes cast for each resolution, whether or shareholders and it adopts a pro-active approach to not a poll is demanded.

50 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

Investment in new transmitters at VT Communications’ facility at Wooferton, Shropshire will reduce the site’s carbon footprint by 25%

Now you tell us • How did we do this year? • What was good? • What could we improve? • What do you wish to see in our future Corporate Responsibility reporting?

Write to us: Barbara Harrison, CR Feedback, VT House, Grange Drive, Hedge End, Southampton, SO30 2DQ Call us: +44 (0) 23 8083 9001 e-mail us: [email protected]

51 REPORT OF THE DIRECTORS For the year ended 31 March 2007

The directors present their annual report and the audited Directors financial statements for the year ended 31 March 2007. The names of the current directors together with brief biographical details are shown on pages 28 and 29. Principal activities Mr C J Rickard was appointed to the board on 1 July The principal activities of the company and its 2006. In accordance with the articles of association subsidiaries are: he was re-appointed at the annual general meeting on • provision of critical communications services in the 26 July 2006. Mr Rickard resigned from the board and broadcast, defence, space, emergency services and the group on 24 April 2007. security sectors worldwide. On 31 March 2007 Mr S E Tarrant retired from the board • provision of technical services, logistics and training for and from the group. commercial customers and for all three armed services Mr Lester, Baroness Blackstone and Lord Boyce retire in the UK and around the world. Activities include by rotation and, being eligible, offer themselves for facilities management, operation and maintenance of re‑appointment. assets, provision of specialist manpower and supply chain management. Each of Baroness Blackstone, Lord Boyce, Mr Barclay, Mr Given, Mr Jeffries and Mr Thorpe has a service • provision of support services to schools, LEAs and contract for a three year period but which may be central government, including careers guidance and terminated by either party on one month’s notice. provision of vocational work based training. Directors’ interests in the shares of the company are • provision of base operations, facilities management disclosed in the remuneration report on page 64. activities, and IT and communications installation and integration services, primarily for the US Department of Acquisitions and disposals Defense, operating across the US. During the year the group strengthened its portfolio of • design and construction of advanced naval vessels support services with the acquisition of four vehicle for the Royal Navy and navies worldwide, including the support businesses from RAC plc on 27 April 2006. design and manufacture of high quality smaller craft The businesses comprise Lex Transfleet Limited, Lex and equipment for the marine market. Defence Limited, Lex Defence Management Limited and RAC Software Solutions. The activities of these Developments affecting the group during the year and businesses include fleet management and logistics, its prospects for the future, including principal risks and vehicle provision and disposal, software and support uncertainties, are evaluated in the Chairman’s Statement and asset finance. and in the Business Review on pages 4 to 7. In February 2007, VT Services completed its acquisition Results and Dividends of Virginia based Milcom Systems Corporation. The group profit for the year available to ordinary VT Milcom provides IT and communications installation shareholders after tax amounted to £44,430,000 and integration services to the Department of Defense, (2006: £41,750,000). primarily the US Navy.

The directors recommend the payment of a final In line with the group’s policy of disposing of non-core dividend of 8.6p (2006: 7.75p) per ordinary share, activities, VT Software Solutions Limited (formerly RAC amounting to £15,092,000 (2006: £13,524,000) which Software Solutions Limited) was sold to Civica plc on together with the interim dividend of 3.25p (2006: 3.00p) 8 January 2007. makes a total of 11.85p or £20,786,000 (2006: 10.75p or £18,757,000) for the year. Research and development The group continued to maintain its levels of research and If approved, the final dividend will be paid on 8 August development relating to composite materials, shipbuilding, 2007 to ordinary shareholders on the register at the close broadcasting and electronic control systems. of business on 22 June 2007. Fixed assets In the opinion of the directors, the market value of the group’s properties at 31 March 2007 exceeds the book value of assets by approximately £10m.

52 REPORT OF THE DIRECTORS VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007 For the year ended 31 March 2007

Substantial interests in shares Details of substantial holdings in the issued ordinary share capital of the company notified as at 14 May 2007 were:

Number of Shares % of total

Newton Investment Management 11,248,973 6.41

Morley Fund Management 7,179,658 4.09

Fidelity International (UK) 6,648,277 3.79

Legal and General 6,540,418 3.73

Standard Life Investments 5,749,882 3.27

Co-operative Insurance Society 5,623,280 3.20

Corporate responsibility Auditors The corporate responsibility report, which includes KPMG Audit Plc have indicated their willingness to matters relating to the employment of our people, continue in office and a resolution for their re-appointment donations made by the group in the year and our policy as auditors of the company will be proposed at the on creditors payment, is on pages 30 to 51. forthcoming annual general meeting.

Corporate governance Disclosure of information to auditors The corporate governance statement is set out on pages The directors who held office at the date of approval of 54 to 57. this directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which Annual General Meeting the company’s auditors are unaware; and each director The Annual General Meeting of the company will be held has taken all the steps that he ought to have taken as on Wednesday 25 July 2007. Details of the resolutions a director to make himself aware of any relevant audit to be proposed, together with appropriate explanations, information and to establish that the company’s auditors are set out in the separate Notice of Annual General are aware of that information. Meeting enclosed with this report. Special business By order of the board includes authority to allot shares and the disapplication of pre-emption rights under section 89 of the Companies Act 1985. It is also proposed to amend the company’s articles of association to permit electronic communication with shareholders and to introduce a new share based reward scheme for senior employees. All proxy votes cast will be counted and the results shown on the company’s M P Jowett website after the AGM. Secretary 14 May 2007

53 Corporate Governance Report 2007

Compliance with the Combined Code As at 14 May 2007 the board comprises Mike Jeffries, Throughout the period of this report the board has been chairman, Paul Lester, chief executive, five independent in compliance with the Combined Code on Corporate non-executive directors and one executive director. Governance as issued in July 2003 as applicable under Andrew Given is the senior independent director. the Listing Rules of the UK Listing Authority. Biographies of the directors, giving details of their experience and main commitments are set on out pages The Code requires listed companies to report how the 28 to 29. main and supporting principles of the Code have been applied, giving sufficient detail to enable shareholders to The board holds full meetings at least seven times a year, evaluate the report, and to state whether there has been spread across the full calendar year. In addition there is a compliance with the provisions of the Code and providing separate meeting each year to discuss the strategic plan. an explanation for any points of non-compliance. The directors believe that these meetings enable the board to exercise control over the group and remain fully Directors conversant with its activities. There is a formal schedule The board of matters reserved for the board which only the board The Code requires the company to have an effective itself can change; these matters include the acquisition board whose role is to provide leadership within a and disposal of businesses and significant contractual framework of controls which allow risk to be assessed commitments. The chairman and non-executives meet at and managed. The board sets strategic aims and the least annually without the executive directors. company’s values and ensures that obligations to Directors and officers of the group have the benefit of a shareholders are met. The role of non-executive directors directors’ and officers’ liability insurance policy. During includes the development of strategy, the scrutiny of the year the company agreed to indemnify each director management and ensuring the integrity of financial through a Deed of Indemnity in respect of certain information and risk management systems. The board liabilities to third parties which may be incurred as a result believes it has met these requirements. of discharging his or her duties as a director. A copy of The composition of the board during the year has the Deed of Indemnity is available for inspection from the changed as follows: Chris Rickard was appointed as registered office and at the annual general meeting. finance director on 1 July 2006 and resigned from the The number of full scheduled board and committee board on 24 April 2007. Simon Tarrant retired from the meetings attended by each director was as follows: board on 31 March 2007. Chris Cundy has taken on the role of Commercial and Finance Director until a replacement for Mr Rickard has been appointed.

Director Board Audit Remuneration Nomination

Mr M M E Jeffries 7 (7) 1 (1)

Mr D M Barclay 7 (7) 3 (3) 4 (4) 1 (1)

Baroness Blackstone 6 (7) 4 (4) 1 (1)

Lord Boyce 7 (7) 4 (4) 1 (1)

Mr C J Cundy 7 (7)

Mr A F Given 7 (7) 3 (3) 4 (4) 1 (1)

Mr P J Lester 7 (7)

Mr C J Rickard 5 (6)

Mr S E Tarrant 7 (7)

Mr D A Thorpe 7 (7) 3 (3) 4 (4) 1 (1)

54 Corporate Governance Report 2007 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

Chairman and Chief Executive Information and professional development The Code requires that there should be a clear division A main principle of the Code is that information of of responsibilities between the running of the board and sufficient quality is supplied to the board in a timely executive responsibility for the running of the business so manner. The board is supplied with detailed information that no one person has unrestricted power. several days prior to the board meeting. The agenda for each board meeting includes substantial reports on The board has met this requirement by establishing all aspects of the group’s business and ad-hoc reports clearly defined roles for the chairman and chief executive. are circulated if decisions are required between formally This division of responsibilities is set down in writing and arranged meetings. Non-executive directors have ready agreed by the board. The chairman is responsible for access to executive directors. Board meetings are held the leadership of the board, ensuring its effectiveness at different company locations during the year as well and setting its agenda. Once the strategic and financial as at the head office, enabling directors to make site objectives have been agreed by the board as a whole, visits. Non-executive directors make site visits during the it is the chief executive’s responsibility to ensure their year and executive directors carry out regular business delivery. The chief executive is obliged to comply with a reviews at different locations throughout the year. practical schedule of matters requiring board approval before implementation; this schedule is reviewed at All newly appointed directors are provided with a least annually. structured induction programme which includes meetings both internally and externally with those principally The current commitments of Mr Jeffries outside the VT involved with the business. Group are as chairman of Wembley National Stadium Limited and of Wyless Plc and as a non-executive Ongoing training for directors is provided for all directors director of De la Rue Plc. to ensure that directors are aware of their responsibilities. The board is currently reviewing its training needs. Board balance and independence The company complies with the requirements of the All directors have access to the advice and services of Code that there should be a balance of executive and the company secretary and are able to take independent non-executive directors so that no individual or small professional advice at the company’s expense. group can dominate decision taking. The board has met Independent advice was taken by the directors during the the Code requirement that at least 50% of the board year in relation to the Deed of Indemnity referred to above. should be independent throughout the year. Performance evaluation The board intends to appoint a new executive finance The Code requires the board to undertake a formal and director once a suitable replacement for Mr Rickard has rigorous evaluation of its own performance annually and been identified. that of its committees and of the directors.

In deciding the chairmanship and membership of board A formal evaluation was conducted by means of detailed committees both the need to refresh membership and questionnaires which were completed by each director. the skills of the individuals are taken into account. The answers formed the basis of a review by the whole board led by the chairman. Comments were invited on a All non-executive directors are considered by the board wide range of issues including board and board committee to be independent. skill and balance, frequency of meetings, access to At the time of his appointment as chairman, and in management other than executive directors, sufficiency compliance with the Code, Mr Jeffries was considered to of information, achievement of objectives, operational be independent. issues and monitoring, dialogue with shareholders, rigour of meetings and working relationships. The chairman has Processes are in place to ensure that, in the event of a discussed the results with each member of the board. The conflict of interest, this is reported to the board and the performance of the chairman has been subject to appraisal director involved takes no part in the relevant discussion. by the board, led by the senior independent director. Non executive directors are not eligible to participate in Re-election the company’s share, bonus or pension schemes. Under the Code directors should offer themselves for Appointments to the board re-election at regular intervals and all the directors submit There is a rigorous and transparent procedure for the themselves for re-election at least every three years. appointment of new directors, which are made on merit Directors stand for reappointment by the shareholders and against objective criteria. Heidrick and Struggles were at the first annual general meeting following their retained as consultants for the appointment of Mr Rickard and appointment and subsequently at least every three years. the Miles Partnership in the search for his successor. During Non-executive directors are appointed for a term of three the year the company has introduced a talent management years and may be reappointed for a further term of three process with the intent of identifying and managing talent years by agreement of the board. On appointment each and planning for succession across the group. non-executive director receives a letter setting out the 55 Corporate Governance Report 2007

terms of their appointment. The terms and conditions HR director attend the committee, by invitation, when of their appointment are available for inspection at the appropriate. No executive is present when the committee registered office on request and at the AGM. Non- considers matters relating to himself. Mr Jeffries is absent executive directors are not employees and do not when his remuneration as chairman is under consideration. participate in the daily business of the group. The committee’s responsibilities are described in the Remuneration remuneration report on page 58. Information regarding the remuneration committee is set The committee meets periodically when required but not out on page 58 and the Directors’ Remuneration report is less than twice a year. on pages 58 to 65. It has access to information and advice both from within Board committees the group and externally, at the cost of the company, as The board has the following standing committees, each it deems necessary. It is responsible for appointing any has its own terms of reference which are available on consultants in respect of executive remuneration. request and on the company’s website. Nomination committee The company secretary is secretary to each committee. Members during the year were: Mr M Jeffries, Baroness Audit committee Blackstone, Lord Boyce, Mr D Barclay, Mr A Given and Members during the year were: Mr A F Given (chairman), Mr D Thorpe. Mr D Barclay and Mr D A Thorpe. The finance director Directors’ appointments are considered before formal and a representative of the external auditors attend by approval by the board and the committee aims to maintain invitation. The committee meets at least twice a year and a proper balance between executive and non-executive at least once a year there is an opportunity for the external directors in accordance with the Code. auditors to discuss matters with the committee without the executive directors being present. The committee leads the process for identifying, and recommending, candidates for appointment as directors, The board has determined that the committee members giving full consideration to succession planning and have sufficient skills and experience to contribute the needs of the group, including qualifications and meaningfully to the committee’s discussions. The expertise to guide the strategy of the group. Before chairman of the committee has the required experience concluding arrangements with any preferred candidate for in accounting and financial management. The committee appointment to the board, the committee satisfies itself takes regard of the guidance in the Combined Code on that their other commitments are not such that would Audit Commitees. adversely affect their ability to devote adequate time to the The committee has set parameters so that the position. The committee reviews the structure, size and independence of the external auditors is not prejudiced composition of the board. It also makes recommendations when undertaking non-audit work. Depending on the to the board on the composition of the board committees. nature of the work it is either prohibited or requires prior No-one other than members of the committee is entitled to approval from the finance director or committee, as be present at its meetings but non-executive directors are appropriate. Non-audit work includes tax advice and invited to attend. The committee meets when required. mergers and acquisitions due diligence. The company has The committee has access to such information and advice appointed a different firm of accountants from its auditors as it may require both from within the group and externally, as its principal tax advisor. The cost effectiveness and and at the cost of the company. This may include the impact on any corporate relationship with the auditors are appointment of external search consultants. considered when awarding non-audit work. In turn, the external auditors have in place processes to ensure that Group Executive Committee their independence is maintained. For details of fees paid The group executive committee (GEC) is the chief to the auditors, see note 7 to the financial statements. executive’s committee and is responsible for managing the business. Its members are the executive directors together Remuneration committee with the managing directors of the business units, the Members during the year were: Mr D A Thorpe (Chairman), group HR director and the company secretary. It meets Baroness Blackstone, Lord Boyce, Mr A F Given and fortnightly throughout the year. Members who are not Mr D Barclay. board directors are invited to make presentations to the The committee is comprised exclusively of non-executive board during the year. The GEC focuses on operational directors. The chairman, chief executive and group performance and decision making.

56 Corporate Governance Report 2007 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

Accountability and audit The processes used by the board to review the Financial reporting effectiveness of the system of internal controls include The board is required to present a balanced and the following: comprehensive assessment of the group’s position • annual budgets are prepared for each operating and prospects and is satisfied it has met this obligation. business and compared with monthly management A summary of the directors’ responsibilities for the reporting, which focuses on actual performance financial statements is set out on page 66. against these budgets; Organisation • management reports, internal and external audit The group has a defined structure in which operational reports on the system of internal controls and any management have detailed responsibilities and levels of material control weaknesses that are identified; authorisation. The group has a code of business ethics setting out principles to be followed by all employees • discussions with management including discussions on in the course of business. A confidential telephone line the actions taken on problem areas identified by board is available for staff to report concerns with regard to members or in the internal and external audit reports; conduct and all calls are investigated. • policies and procedures for such matters as delegation Ethical trading of authorities, capital expenditure and treasury Further information on the group’s ethical trading policies management as well as regular updates; is given in the corporate responsibility report on page 31. • review of the adequacy of the level of experienced Internal controls and professional staff throughout the business and Following the publication of guidance for directors the expertise of individual staff members so that they “Internal Control: Guidance for Directors on the are capable of carrying out their individual delegated Combined Code” (the Turnbull guidance), the board responsibilities; confirms that the group has established processes and • review of major tenders which are specifically approved procedures for identifying, evaluating and managing by the board and contract performance which is the significant risks faced by the group. The processes regularly reviewed and compared against estimates have been embedded into the fabric of the group and drawn up at the time of original tender; have been in place for the year under review and up to the date of approval of the annual report and financial • review of the external and internal audit work plans; and statements. The processes and procedures are regularly • all directors receive a copy of the monthly reviewed by the board. management accounts. The board is ultimately responsible for the group’s system The group’s management operates a risk management of internal controls and for reviewing its effectiveness. The process, which identifies the key risks facing each role of management is to implement board policies on risk business. The process is based on each business unit and control. The system of internal controls is designed producing a risk register which identifies the potential key to manage rather than eliminate the risk of failure of risks to the individual business unit, the impact should the achievement of business objectives. In pursuing they occur and the action being taken to manage those these objectives, internal controls can only provide risks sufficiently. Internal audit independently review reasonable and not absolute assurance against material the risk identification procedures and control process misstatement or loss. implemented by management and report to the audit A process of control self-assessment and hierarchical committee twice per annum. The audit committee review reporting has been established which provides for a the assurance procedures, ensuring that an appropriate documented and auditable trail of accountability. These mix of techniques is used to obtain the level of procedures are relevant across all group operations: assurances required by the board. The audit committee they provide for successive assurances to be given at chairman presents their findings to the board on a six increasingly higher levels of management and, finally, to monthly basis or more frequently as appropriate. the board. This process is facilitated by internal audit, Going concern which also provides a degree of assurance as to the After making enquiries, the directors have a reasonable operation and validity of the system of internal controls. expectation that the group has adequate resources to Internal audit ensure that corrective action is taken to continue in operational existence for the foreseeable rectify any weaknesses. During the year, the internal audit future. For this reason they continue to adopt the going function was outsourced to Grant Thornton. concern basis in preparing the financial statements.

57 REMUNERATION REPORT For the year ended 31 March 2007

This report has been prepared in accordance with The following comprise the principal elements of executive Schedule 7A to the Companies Act 1985 (as amended directors’ remuneration: by the Directors’ Remuneration Report Regulations • base salary 2002). It also describes the group’s compliance with the Combined Code on Corporate Governance in relation • benefits, including pension, company car and fuel, to remuneration for the current and forthcoming financial healthcare and private telephone costs years. The report has been approved by the board for • participation in the annual short-term performance submission to shareholders at the forthcoming AGM. related bonus plan The company’s auditors have audited the report to the extent required by the relevant legislation. The chairman of • participation in the company’s long-term incentive plans, the committee will attend the AGM and will be available to as described below under which awards vest subject answer shareholders’ questions regarding the contents of to the satisfaction of performance conditions set by this report. the remuneration committee with the primary aim of encouraging the generation of returns to shareholders. Remuneration Committee Base Salary In accordance with the Combined Code, the Base salaries for executive directors are reviewed annually, remuneration of the executive directors is determined usually in April. When conducting the most recent review by the remuneration committee on behalf of the board. of base salaries, the remuneration committee considered The committee also reviews and monitors remuneration (as it has done in previous years) salary levels for executive for other senior executives below the board and oversees directors in companies of a similar size and within similar the operation of the company’s share schemes. industries to the company, as well as the director’s The committee’s terms of reference are available on the personal experience and performance. company’s website. The revised salaries of the executive directors employed Details of the composition of the committee during the year at time of publication (effective for the year beginning on are contained in the Corporate Governance Report on 1 April 2007) are: page 56. • P J Lester £435,000 (7% increase since 2006/7) By invitation, remuneration committee meetings are also attended by the chairman, the chief executive and • C J Cundy £231,500 (6% increase since 2006/7) the group HR director. No person is present during any Annual Bonus discussion relating to their own remuneration. Executive directors, in common with other executives in The remuneration committee has appointed New Bridge the company, are eligible to participate in the annual bonus Street Consultants LLP (“NBSC”) as independent advisers plan. During the year, the maximum bonus potential for to the committee. NBSC does not provide any other executive directors was 75% of salary, of which 40% of services to the company. A description of the relationship any payment must be compulsorily deferred under the between the company and NBSC is available on the Deferred Annual Bonus Scheme (“DABS”) (see below). company’s website. The committee also received advice The level of bonus paid is determined annually by the during the year from Hymans Robertson (for UK pensions) remuneration committee dependent on the achievement of and Advaita Consulting (for US pensions). a combination of challenging profit, cash flow and strategic targets set by the committee (on a split of 60%:25%:15% Remuneration Policy bonus opportunity respectively). The company’s policy continues to be to provide for each From 2007/8 onwards, executive directors have the of its executive directors a remuneration package which opportunity to earn up to 100% of salary in annual bonus. is adequate to attract, retain and motivate individuals of The payment of any bonus in excess of the previous 75% the appropriate calibre, whilst at the same time not paying of salary maximum will be payable only in cash – and is more than is necessary for this purpose. The company’s not eligible to be deferred under the DABS. In addition, policy is regularly reviewed so as to ensure it remains the payment of any bonus in excess of 75% of salary appropriate to the company’s current circumstances will require performance targets to be met that are more and prospects. The remuneration package for executive stretching than those which have had to be met for the directors and other senior executives is structured to existing maximum bonus to be paid. In 2006/7, the level of ensure that a significant proportion of total remuneration bonus payable for target performance was 50% of salary. is only payable subject to the achievement of challenging This will remain unchanged in the forthcoming year. targets, designed to improve shareholder value. For the forthcoming financial year, the balance of the When setting remuneration for executive directors, regard performance targets will be amended so that 70% of the is paid to the pay policy throughout the group. bonus is based on group profits, 10% based on cash flow and 20% on strategic targets.

58 REMUNERATION REPORT VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007 For the year ended 31 March 2007

Deferred Annual Bonus Scheme Under the DABS, approved by shareholders at the 2005 AGM, executive directors and other members of the Group Executive Committee are required to defer 40% of any bonus payment up to 75% of salary into VT Group shares for a period of three years. Individual executive directors may also elect to defer a further 35% of bonus up to 75% of salary under the same arrangement. At the end of the three year period, matching shares will be awarded dependent upon the extent to which Earnings per Share (“EPS”) targets have been achieved over the three year period.

In the current year, the remuneration committee reviewed the EPS targets applying to the DABS in line with the company’s current strategy for growth over the next three years. Accordingly, the range of EPS growth hurdles applying to the release of the matching shares to be awarded in 2007 (linked to the out-turn of the 2006/7 annual bonus) has been increased since last year. The schedule for release of 2007 matching shares will be as follows:

EPS growth over 3 years Number of matching shares awarded

Less than RPI + 5% p.a. (previously 3%) Nil

RPI + 5% p.a. (previously 3%) 1:1

RPI + 7% p.a. (previously 5%) 2:1

RPI + 12% p.a. (previously 10%) 3:1

Between the above points Straight line

Given these more challenging EPS targets, the remuneration committee also determined that the requirement for the company’s EPS growth in each of the three years of the performance period to be at least 3% higher than in the previous year should be removed for the awards to be made in 2007 and thereafter.

Other Long-Term Incentive Plans Until 2006/7, the company’s policy was to make awards to executive directors under the Long-Term Incentive Plan and two share option plans (approved and unapproved). These plans are summarised in greater detail below.

Long-Term Incentive Plan The Long-Term Incentive Plan (“LTIP”), approved by shareholders in 2003, provides for annual conditional awards to be made over VT Group shares worth up to 50% of basic salary. The shares are held in trust and are released after three years subject to the extent to which a Total Shareholder Return (“TSR”) performance target is met over the vesting period, with TSR chosen to encourage the delivery of above market returns to shareholders. For awards made to date, the comparator group for measuring performance has been the FTSE 250 (but excluding Investment Trusts). If the company is ranked at the median at the end of the performance period, 50% of shares will be released, with full vesting for upper quartile performance or above. No shares will vest if the company is ranked below the median.

Share Option Plans Until 2006/7, the company has operated two share option plans (a UK Inland Revenue approved plan and an unapproved plan) approved by shareholders in 1999 and 1996 respectively and under which directors and other executives are eligible to participate at the discretion of the remuneration committee. Options are granted at market value determined immediately before the grant. Annual awards do not normally exceed one times base salary.

Options under the company’s schemes can normally be exercised only on the achievement of an EPS performance condition. For the most recent awards, the performance condition applying is real growth in adjusted EPS of at least RPI plus 3% per annum over three consecutive years. If this target is not met at the end of the three year period, the options lapse (there is no “re-testing” facility).

In 2006, Mr P J Lester was granted an award of options worth 200% of salary. Whilst this was higher than the usual maximum annual grant of 100% of salary, Mr Lester had not received any option awards since 2003, so on an annualised basis, this grant was below the normal 100% maximum. In making this award, the remuneration committee was mindful of the need to ensure that Mr Lester continues to be strongly aligned with the business over the long term.

59 REMUNERATION REPORT For the year ended 31 March 2007

New VT Group 2007 Performance Share Plan Following a wholesale review of long-term incentive provision conducted by the remuneration committee, from 2007 onwards, it is proposed that these two plans are replaced by a single new plan, the VT Group 2007 Performance Share Plan (“PSP”), for which shareholder approval will be sought at the forthcoming AGM. The main features of this plan are set out in detail in the Notice of Annual General Meeting. In summary, it is intended that annual awards of conditional shares will be made to executive directors and other eligible executives worth up to a maximum of 100% of salary. These awards will vest after three years subject to the satisfaction of performance targets based on EPS growth (50% of awards) and relative TSR performance (50% of awards), thereby providing a balanced incentive to senior executives to deliver both outstanding returns to shareholders and strong earnings growth. More precisely the vesting schedule that will apply to initial awards in 2007 is as follows:

TSR Element EPS Element TSR performance relative to the FTSE 250 (excluding Number of PSP shares vesting investment trusts) EPS growth over 3 years under each element

Below median Less than RPI + 5% p.a Nil

Median RPI + 5% p.a. 30%

Upper quartile RPI + 12% p.a. 100%

Between the above points. Between the above points Straight line

Following the adoption of the PSP, it is intended that no further awards will be made under either the LTIP or the option schemes.

Assessing performance under Long Term Incentive Plans Performance under the TSR targets in the LTIP is independently calculated by NBSC on behalf of the remuneration committee and this will continue to be the case under the TSR element of the PSP.

Under the DABS and share option plans, the remuneration committee will obtain external guidance as regards the extent to which the EPS targets are satisfied. Where outstanding awards straddle the transition from UK GAAP to International Accounting Standards, the committee will continue to ensure that EPS is calculated on a consistent basis.

Share ownership guidelines Executive directors are encouraged to build a shareholding in VT Group worth 100% of salary.

Directors’ service agreements All executive directors’ service contracts are of no fixed term and are subject to 12 months’ notice of termination from the company.

Non-executive directors are normally appointed for a three year term which is extendible at the board’s discretion. All appointees are subject to regular re-appointment by shareholders.

Directors’ contracts

Executive directors Date of contract Notice period

P J Lester 14 May 2002 12 months

C J Cundy 5 January 2004 12 months

C J Rickard (1) 9 August 2006 12 months

S E Tarrant (2) 19 May 2003 12 months

Notes (1) Appointed 1 July 2006 and resigned 24 April 2007 (2) Retired 31 March 2007

60 REMUNERATION REPORT VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007 For the year ended 31 March 2007

Non-executive Date of letter Period of Notice directors of appointment appointment period

M Jeffries 16 May 2005 To AGM 2008

D M Barclay 26 July 2006 To AGM 2009 1 month

Baroness Blackstone 23 Jan 2004 To AGM 2007 1 month

Lord Boyce 23 July 2004 To AGM 2007 1 month

A F Given 26 July 2006 To AGM 2008 1 month

D A Thorpe 26 July 2006 To AGM 2009

Non-executive directors’ fees The fees of the non-executive directors (other than the chairman whose fees are set by the remuneration committee) are set by the full board on the recommendation of the executive directors and they are reviewed annually. Non-executive directors are not eligible to participate in any of the company’s bonus or share option schemes, nor do they receive a pension.

All the non-executive directors receive an annual base fee of £36,000 with additional fees of £6,000 for chairing the audit and remuneration committees. The senior independent non-executive director also receives an additional fee of £5,000 from November 2006.

The chairman’s fees are £150,000 per year with effect from November 2006.

Policy on external appointments for executive directors Executive directors may hold one non-executive directorship of a listed company.

Mr P J Lester is a non-executive director of Civica plc. Mr Lester takes holiday when meetings occur and retains the fees of £24,000. He receives no fees from his non-executive directorship of High Integrity Solutions Limited.

Performance graph As the company is a constituent of the FTSE 250, the FTSE 250 index provides an appropriate indication of market movements against which to benchmark the company’s performance for these purposes. The chart below shows the company’s TSR performance against the FTSE 250 index less investment trusts over the five years ended 31 March 2007.

250 Total shareholder return Source: Thomson Financial

200 This graph shows the value, by 31 March 2007, of £100 invested in VT Group on 31 March 2002 compared with £100 invested in the FTSE 205 Index. The This graph shows the other points plotted are the values at intervening financial year-ends. value, at 31 March 2007, 150 of £100 invested in VT Group on 31 March 2002 compared 100 with £100 invested in the FTSE 250 Index. The other points plotted are the values 50 at intervening financial year-ends. 0 31 Mar 2002 31 Mar 2003 31 Mar 2004 31 Mar 2005 31 Mar 2006 31 Mar 2007

VT Group FTSE 250

61 REMUNERATION REPORT For the year ended 31 March 2007

The auditors are required to report on the information contained in the following section of this report.

Directors’ emoluments

Remuneration table The various elements of remuneration (excluding employer pension contributions) received by each director were as follows: Salary & fees Benefits Annual Bonus Total 2007 2006 2007 2006 2007 2006 2007 2006 £000 £000 £000 £000 £000 £000 £000 £000

Executive P J Lester 406 395 26 23 289 277 721 695 C J Cundy 218 218 12 19 156 154 386 391 C J Rickard (1) 188 - 9 - - - 197 - S E Tarrant (2) 208 206 15 20 148 144 371 370 Sub total 1,020 819 62 62 593 575 1,675 1,456

Non-executive M Jay (3) - 35 - - - - - 35 M M E Jeffries (4) 141 104 - - - - 141 104 D Barclay 33 30 - - - - 33 30 Baroness Blackstone 33 30 - - - - 33 30 Lord Boyce 33 30 - - - - 33 30 A F Given 43 40 - - - - 43 40 D A Thorpe 38 35 - - - - 38 35 Sub total 321 304 - - - - 321 304

Former directors Executive P J McIntosh (5) - 159 - 14 - 112 - 285 Sub total - 159 - 14 - 112 - 285

TOTAL 1,341 1,282 62 76 593 687 1,996 2,045

Notes

(1) From 1 July 2006; (2) To 31 March 2007; (3) To 5 July 2005; (4) From 16 May 2005; (5) To 31 January 2006

Benefits include provision of company car and fuel, healthcare and personal telephone costs, all of which are taxable.

The annual bonus is payable under the Deferred Annual Bonus Scheme approved at the annual general meeting in July 2005 and is split between cash and shares. 40% of any bonus paid up to 75% of salary bonus must be deferred under the scheme into shares with each participant having the option to defer a further 35% of salary if he so wishes.

No director received any compensation for loss of office during the year.

The highest paid director was Mr P J Lester.

62 REMUNERATION REPORT VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007 For the year ended 31 March 2007

Pension benefits With the exception of Mr C J Rickard, the executive directors are members of the group’s contributory pension scheme which entitles them to a pension on retirement of two-thirds of pensionable salary after twenty years’ service: details of accrued benefits are set out below. No elements of remuneration apart from salary are pensionable. The normal retirement age for directors is 60.

Mr P J Lester and Mr C J Cundy’s pensionable salaries within the group’s contributory pension scheme are capped by a notional earnings cap of £108,600. Mr P J Lester and Mr C J Cundy received a pension supplement of 55% and 65% respectively of salary above the cap.

Mr C J Rickard did not participate in the defined benefit scheme as this is now closed to new members. Instead, he received a cash supplement in lieu of pension valued at 20% of salary, in addition to that disclosed on page 62.

Director Total Total Transfer Transfer Increase accrued accrued Change value of value of Member in transfer pension pension in accrued accrued contributions value less at 1 April at 1 April accrued pension as pension as over member 2006 2007 benefits 1 April 2006 1 April 2007 the year contributions £ £ £ £ £ £ £

P J Lester 13,200 17,195 3,995 220,691 344,672 9,231 114,750 C J Cundy 32,177 47,606 15,429 326,071 604,542 16,290 262,181 S E Tarrant 107,387 89,929 (17,458) 1,563,009 2,195,973 17,680 615,284

i) The total accrued pension shown is that which would iv) Mr Cundy’s accrued pension at 31 March 2007 be paid annually on retirement based on service to the includes £11,850 pa in respect of an augmentation end of the year. made by the company.

ii) The transfer value has been calculated on the basis of v) Mr Tarrant retired as at 31 March 2007. The accrued actuarial advice in accordance with Actuarial Guidance pension at 31 March 2007 is the full pension (no cash Note GN11. sum was taken) and reflects a reduction in benefits for early payment. The unreduced accrued pension at the iii) Members of the scheme have the option to pay date of retirement was £116,280 pa. Additional Voluntary Contributions; neither the contributions nor the resulting benefits are included vi) The remuneration committee has determined that no in the above table. special arrangements will be made for executives who are affected by the lifetime allowance.

Remuneration arrangements for Mr S E Tarrant Mr S E Tarrant retired from the board on 31 March 2007. He will continue to work for the company as an employee on a part time basis, committing at least four days per month to the company. Mr Tarrant will be engaged in assisting with specific strategic projects for the group. In respect of these services, Mr Tarrant will receive fees based on the time he spends on VT Group matters and may also be eligible to receive a performance-related bonus based on the completion of these projects. Future emoluments payable to Mr Tarrant in this capacity will be fully disclosed in subsequent remuneration reports.

63 REMUNERATION REPORT For the year ended 31 March 2007

Directors’ interests in shares

At 1 April 2006 At 31 March 2007

Ordinary shares Beneficial Non-Beneficial Beneficial Non-Beneficial

D M Barclay 10,000 - 10,000 - Baroness Blackstone - - 4,297 - Lord Boyce 1,200 - 1,200 - C J Cundy 32,491 - 46,000 - A F Given 3,000 - 3,000 - M Jeffries 50,000 - 50,000 - P J Lester 83,170 - 120,193 - P J McIntosh* 6,012 - - - C J Rickard* - - - - S E Tarrant 18,456 - 18,456 - D A Thorpe 5,000 - 5,000 -

*At date of appointment, resignation or retirement, as appropriate

During the year none of the directors had an interest in the share capital of any of the company’s subsidiaries. There have been no changes in the above holdings between 31 March 2007 and 14 May 2007.

Share options The following figures relate to participation in the group’s executive share option schemes. The middle market value of the company’s ordinary shares on 31 March 2007 was 491.5p and the range during the year was 431p to 511.5p.

No of options At 31.3.2007 At 1.4. 2006 Granted Exercised or date of Gain on Date or date during and sold resignation/ Exercise exercise from which Expiry of appointment the year during year retirement price p price p exercisable date

P J Lester 250,000* - - 250,000 260 - 05.07.05 04.07.12 12,195+ - - 12,195 246 - 08.07.06 07.07.13 264,227* - - 264,227 246 - 08.07.06 07.07.13 - 178,462* 178,462 455 - 25.05.09 24.05.16

C J Cundy 15,000* - 15,000 - 171.6 323.65 28.05.01 27.05.08 15,000* - 15,000 - 160.2 335.05 23.11.01 22.11.08 90,277* - 30,000 60,277 216 279.25 18.12.05 17.12.12 9,259+ - - 9,259 324 - 19.12.08 18.12.15 58,148* - - 58,148 324 - 19.12.08 18.12.15

C J Rickard** - 6,097+ - 6,097 492 - 07.08.09 06.08.16 - 44,716* - 44,716 492 - 07.08.09 06.08.16

S E Tarrant 12,500* - - 12,500 160.2 - 23.11.01 22.11.08 74,074* - - 74,074 216 - 18.12.05 17.12.12 9,259+ - - 9,259 324 - 19.12.08 18.12.15 52,469* - - 52,469 324 - 19.12.08 18.12.15

* The Vosper Thornycroft Executive Share Option Plan 1996 + The Vosper Thornycroft Approved Share Option Plan 1999 ** Participation lapsed on resignation

No executive directors have interests in either the company’s sharesave schemes or the share incentive plan.

64 REMUNERATION REPORT VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007 For the year ended 31 March 2007

Long Term Incentive Plan This table sets out the shares provisionally allocated under the long term incentive plan

Retained & Share Value Allocated matching price on Earliest of shares Date of Retained Matching shares shares date of date for on date of allocation Allocated# shares* shares released released release release allocation+

P J Lester 22.07.03 71,729 - - 55,016 - 482.75p 22.07.06 237.0p 16.06.04 69,288 - - - - - 16.06.07 267.0p 27.07.05 58,418 - - - - - 27.07.08 334.1p 14.07.06 41,916 - - - - - 14.07.09 484.3p

C J Cundy 22.07.03 41,139 - - 31,553 - 482.75p 22.07.06 237.0p 16.06.04 39,325 3,893 3,893 - - - 16.06.07 267.0p 27.07.05 32,684 3,237 3,237 - - - 27.07.08 334.1p 14.07.06 22,548 - - - - - 14.07.09 484.3p

C J Rickard** 14.07.06 25,810 ------484.3p

S E Tarrant 22.07.03 33,755 - - 25,890 - 482.75p 22.07.06 237.0p 16.06.04 32,771 - - - - - 16.06.07 267.0p 27.07.05 29,931 - - - - - 27.07.08 334.1p

# This represents the maximum allocation, subject to the achievement of the performance target * The purchase of the retained shares has been funded by subscription from the individual directors and the share numbers are included in the table on page 64 + This figure is used to calculate the number of shares originally allocated ** Participation lapsed on resignation

The vesting of all awards made under the LTIP are as described above on page 59.

Deferred Annual Bonus Scheme This table sets out the shares granted under the Deferred Annual Bonus Scheme

Number of Number of deferred matching shares Share price Earliest Date of shares conditionally on grant release Grant awarded (1) awarded (2) date date

P J Lester 16.05.06 24,145 72,435 460.75 16.05.09

C J Cundy 16.05.06 13,509 40,527 460.75 16.05.09

(1) Deferred shares are awarded in respect of bonus deferred under the terms of the DABS outlined in detail above. The shares vest three years after grant subject to continued employment.

(2) Matching shares will vest three years after grant subject to the satisfaction of EPS performance targets as outlined on page 59 and continued employment.

Dilution Limits The company’s share incentive schemes, including the sharesave scheme, operate within the ABI’s dilution limit of 5% in 10 years for executive schemes and all its plans operate within the 10% in 10 years limit for all schemes.

By order of the board

D A Thorpe Chairman of the Remuneration Committee 14 May 2007

65 Statement of directors’ responsibilities In respect of the annual report and the financial statements

The directors are responsible for preparing the Annual The directors are responsible for keeping proper Report and the group and parent company financial accounting records that disclose with reasonable statements, in accordance with applicable law accuracy at any time the financial position of the parent and regulations. company and enable them to ensure that its financial statements comply with the Companies Act 1985. Company law requires the directors to prepare group and They have general responsibility for taking such steps parent company financial statements for each financial as are reasonably open to them to safeguard the assets year. Under that law they are required to prepare the of the group and to prevent and detect fraud and group financial statements in accordance with IFRSs as other irregularities. adopted by the EU and applicable law and have elected to prepare the parent company financial statements in Under applicable law and regulations, the directors accordance with UK Accounting Standards and applicable are also responsible for preparing a Directors’ Report, law (UK General Accepted Accounting Practice). Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and The group financial statements are required by law and those regulations. IFRSs as adopted by the EU to present fairly the financial position and performance of the group; the Companies The directors are responsible for the maintenance Act 1985 provides in relation to such financial statements and integrity of the corporate and financial information that references in the relevant part of that Act to financial included on the company’s website. Legislation in statements giving a true and fair view are references to the UK governing the preparation and dissemination their achieving a fair presentation. of financial statements may differ from legislation in other jurisdictions. The parent company financial statements are required by law to give a true and fair view of the state of affairs of the parent company.

In preparing each of the group and parent company financial statements, the directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgments and estimates that are reasonable and prudent;

• for the group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU;

• for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business.

66 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF VT GROUP PLC VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007 For the year ended 31 March 2007

We have audited the group and parent company financial statements We read the other information contained in the Annual Report and (the “financial statements”) of VT Group plc for the year ended consider whether it is consistent with the audited financial statements. 31 March 2007 which comprise the Consolidated Income Statement, We consider the implications for our report if we become aware the Consolidated and Parent Company Balance Sheets, the of any apparent misstatements or material inconsistencies with Consolidated Cash Flow Statement, the Consolidated Statement the financial statements. Our responsibilities do not extend to any of Recognised Income and Expense, and the related notes. These other information. financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Directors’ Basis of audit opinion Remuneration Report that is described as having been audited. We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. This report is made solely to the company’s members, as a body, An audit includes examination, on a test basis, of evidence relevant in accordance with section 235 of the Companies Act 1985. to the amounts and disclosures in the financial statements and the Our audit work has been undertaken so that we might state to the part of the Directors’ Remuneration Report to be audited. It also company’s members those matters we are required to state to includes an assessment of the significant estimates and judgments them in an auditor’s report and for no other purpose. To the fullest made by the directors in the preparation of the financial statements, extent permitted by law, we do not accept or assume responsibility and of whether the accounting policies are appropriate to the to anyone other than the company and the company’s members group’s and company’s circumstances, consistently applied and as a body, for our audit work, for this report, or for the opinions we adequately disclosed. have formed. We planned and performed our audit so as to obtain all the Respective responsibilities of directors and auditors information and explanations which we considered necessary The directors’ responsibilities for preparing the Annual Report and in order to provide us with sufficient evidence to give reasonable the group financial statements in accordance with applicable law and assurance that the financial statements and the part of the International Financial Reporting Standards (IFRSs) as adopted by the Directors’ Remuneration Report to be audited are free from material EU, and for preparing the parent company financial statements and misstatement, whether caused by fraud or other irregularity or error. the Directors’ Remuneration Report in accordance with applicable law In forming our opinion we also evaluated the overall adequacy of the and UK Accounting Standards (UK Generally Accepted Accounting presentation of information in the financial statements and the part of Practice) are set out in the Statement of Directors’ Responsibilities the Directors’ Remuneration Report to be audited. on page 66. Opinion Our responsibility is to audit the financial statements and the part of In our opinion: the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards • the group financial statements give a true and fair view, in on Auditing (UK and Ireland). accordance with IFRSs as adopted by the EU, of the state of the group’s affairs as at 31 March 2007 and of its profit for the year We report to you our opinion as to whether the financial statements then ended; give a true and fair view and whether the financial statements and the part of the Directors’ Remuneration Report to be audited have • the group financial statements have been properly prepared in been properly prepared in accordance with the Companies Act accordance with the Companies Act 1985 and Article 4 of the 1985 and, as regards the group financial statements, Article 4 of IAS Regulation; the IAS Regulation. We also report to you whether in our opinion • the parent company financial statements give a true and fair view, the information given in the Directors’ Report is consistent with in accordance with UK Generally Accepted Accounting Practice, the financial statements. The information given in the Directors’ of the state of the parent company’s affairs as at 31 March 2007; Report includes that specific information presented in the Business Review section and Corporate Responsibility Report that is • the parent company financial statements and the part of the cross‑referred from the Directors’ report. Directors’ Remuneration Report to be audited have been properly prepared in accordance with the Companies Act 1985; and In addition we report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all the • the information given in the Directors’ Report is consistent with the information and explanations we require for our audit, or if information financial statements. specified by law regarding directors’ remuneration and other transactions is not disclosed.

We review whether the Corporate Governance Statement reflects the company’s compliance with the nine provisions of the 2003 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are KPMG Audit Plc not required to consider whether the board’s statements on internal Chartered Accountants control cover all risks and controls, or form an opinion on the Registered Auditor effectiveness of the group’s corporate governance procedures or its 8 Salisbury Square risk and control procedures. London EC4Y 8BB 14 May 2007

67 Consolidated Income Statement For the year ended 31 March 2007

Non- recurring costs of exiting business Total Notes 2007 2007 2007 2006 £000 £000 £000 £000

Combined sales of group and share of equity accounted investments 3,4 1,004,597 - 1,004,597 847,085 Less: adjustment for share of equity accounted investments 18 (152,069) - (152,069) (138,086)

Revenue – continuing operations 852,528 - 852,528 708,999 Cost of sales (706,053) (4,996) (711,049) (577,134)

Gross profit – continuing operations 146,475 (4,996) 141,479 131,865 Administrative expenses (93,806) (1,041) (94,847) (79,838)

Group operating profit – continuing operations 4,6 52,669 (6,037) 46,632 52,027

Share of results of equity accounted investments 18 15,454 - 15,454 10,421

Operating profit before amortisation of intangible assets arising from business combinations and taxation expense of equity accounted investments 82,495 (6,037) 76,458 68,412 Amortisation of intangible assets arising from business combinations (7,688) - (7,688) (1,510) Taxation expense of equity accounted investments (6,684) - (6,684) (4,454)

Operating profit – continuing operations 4,5 68,123 (6,037) 62,086 62,448

Finance income 9 4,767 - 4,767 1,035 Finance expenses 10 (13,072) - (13,072) (8,019)

Net financing costs (8,305) - (8,305) (6,984)

Profit from continuing operations before taxation 59,818 (6,037) 53,781 55,464 Income tax expense 11 (9,481) 1,810 (7,671) (13,092)

Profit for the year from continuing operations 50,337 (4,227) 46,110 42,372

Profit from discontinued operations - - - 103

Profit for the year 50,337 (4,227) 46,110 42,475

Attributable to: Equity holders of the parent 48,657 (4,227) 44,430 41,750 Minority interest 1,680 - 1,680 725

50,337 (4,227) 46,110 42,475

Basic earnings per share from continuing operations 12 25.40p 23.97p Diluted earnings per share from continuing operations 12 24.81p 23.53p Basic earnings per share from discontinued operations 12 - 0.06p Diluted earnings per share from discontinued operations 12 - 0.06p Total basic earnings per share 12 25.40p 24.03p Total diluted earnings per share 12 24.81p 23.59p

68 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

670 2006 (390) (998) (527) £000 1,703 1,332 1,510 1,300 2,420 42,475 44,895 44,225 44,895

554 £000 2007 (814)

2,712 3,112 (6,091) (4,339)

23,221 58,241 61,353 61,353 15,243 46,110 13,345

37 18 18 Notes

ense nd Exp ome a Inc gnised f Reco nt o teme a St ted

Equity holders of the parent on retranslation of foreign operations Exchange differences on items taken directly to equity Tax – effective cash flow hedges Derivative financial instruments arising on Group pension obligations Actuarial gains /(losses) Minority interest of joint venture and associates pension obligations Actuarial gain on share associates pension obligations on gain on share of joint venture and Tax income and expense for the year recognised Total Net income recognised directly in equity the year for Profit income and expense for the year: Other recognised

2007 March ended 31 year For the solida Con income and expense for the year recognised Total Attributable to:

Consolidated Balance Sheet For the year ended 31 March 2007

Notes 2007 2006 £000 £000 (restated)

ASSETS Non-current assets Property, plant and equipment 14 155,831 122,506 Investment property 15 765 786 Goodwill 16 200,895 170,287 Other intangible assets 17 51,234 20,626 Equity accounted investments 18 27,093 12,912 Financial assets 19 217 1,119 Other receivables 23 4,162 4,279 Deferred tax assets 11 24,360 30,238 Total non-current assets 464,557 362,753

Current assets Inventories 21 28,413 23,142 Trade and other receivables 23 162,913 134,768 Income tax receivable 8,604 7,547 Financial assets 19 254 203 Assets classified as held for sale 14 4,275 5,250 Cash and cash equivalents 24 75,161 111,999 Total current assets 279,620 282,909 TOTAL ASSETS 744,177 645,662

LIABILITIES Current liabilities Interest-bearing loans and borrowings 26 39,689 49,778 Trade and other payables 25 284,459 222,396 Income tax payable 4,970 12,070 Other financial liabilities 26 387 779 Provisions 28 9,562 10,918 Total current liabilities 339,067 295,941

Non-current liabilities Interest-bearing loans and borrowings 26 106,883 77,478 Other payables 924 1,514 Employee benefits 37 37,640 62,303 Provisions 28 13,762 20,951 Deferred tax liabilities 11 43,575 31,622 Total non-current liabilities 202,784 193,868 TOTAL LIABILITIES 541,851 489,809 NET ASSETS 202,326 155,853

EQUITY Issued share capital 32 8,774 8,717 Share premium 32 33,995 30,650 Hedging reserve 32 (20) (404) Translation reserve 32 (2,399) 966 Retained earnings 32 159,323 116,016 Equity attributable to equity holders of the parent 199,673 155,945 Minority interest 32 2,653 (92) TOTAL EQUITY 202,326 155,853

These financial statements were approved by the board of directors on 14 May 2007 and were signed on its behalf by: C J Cundy Director 70 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

- - - 944 680 741 2006 (119) (998) 1,144 2,706 (1,342) (8,194) (2,501) 62,715 49,645 24,039 68,191 71,391 39,867 (59,060) (15,363) (10,976) (13,683) (17,366) (2,598) 111,999 64,057 £000 - 861 - -

892 £000 2007 (107) (367)

2,086 1,000 3,402 4,804 (2,110) (1,614) (1,517)

75,161 94,534 37,280

(32,518) (35,321) (17,394) (76,502) (19,218) (42,524) (87,331) (16,687) (12,802) (12,862)

111,999 107,396

33 33 14 17 20 20 13 33 Notes 33

19 19 32 32 33

nt teme a

St Flow Cash ted Purchase of minority interest Repayment of loans arising on acquisition Repayment of loans Net (decrease)/increase in cash and cash equivalents plant and equipment Disposal of property, property Disposal of investment Purchase of investment Sale of investment plant and equipment Purchase of property, Payments to acquire intangible fixed assets parent Dividends paid to equity shareholders of the Dividends paid to minority interests New minority interest New borrowings Purchase of treasury shares Cash and cash equivalents at the beginning of the year Net foreign exchange movements Sale of subsidiaryof cash disposed of) undertaking (net Purchase of subsidiary (net of cash acquired) undertakings Net cash outflow from financing activities Net cash outflow from Cash and cash equivalents at the end of the year Interest paid Net cash (outflow)/inflow from investing activities Net cash (outflow)/inflow financing activities Cash flows from Interest received Net cash inflow from operating activities Net cash inflow from investing activities Cash flows from operating activities Cash flow from

2007 March ended 31 year For the solida Con paid Tax

Proceeds from issue of share capital Notes to the Consolidated Financial Statements

1 authorisation of financial statements and statement of compliance with IFRSs The group financial statements for the year ended 31 March 2007 have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (‘Adopted IFRSs’). The company has elected to prepare its parent company financial statements in accordance with UK GAAP; these are presented on pages 112 to 116. VT Group plc is a public limited company incorporated and domiciled in the UK. The company’s ordinary shares are traded on the London Stock Exchange. The accounting policies as set out below have, unless otherwise stated, been applied consistently to all periods presented in these financial statements and have been applied consistently by group companies. There were no new accounting standards issued during the year that have a material impact on the group’s results.

2 summary of significant accounting policies

i Basis of preparation The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments that have been measured at fair value. The carrying values of recognised assets and liabilities that are hedged are adjusted to record changes in the fair values attributable to the risks that are being hedged. The group financial statements are presented in Sterling and all values are rounded to the nearest thousand pounds (£000) except when otherwise indicated.

ii Basis of consolidation The consolidated financial statements comprise the financial statements of VT Group plc and its subsidiaries at each balance sheet date and include its share of its joint ventures’ and associates’ results on the equity method. A subsidiary is an entity controlled by the group. Control is the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities. All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated. The results of subsidiaries sold or acquired during the year are consolidated up to, or from, the date control passes.

iii Investments in associates and joint ventures Joint ventures are those businesses in which the group has a long-term interest and is able to exercise joint control with its partners under a contractual agreement. Associates are those businesses in which the group has a long-term interest and is able to exercise significant influence, but not control, over the financial and operating policies. The group’s share of post tax results of joint ventures and associates are included in the consolidated income statement as an element of profit before tax. In the consolidated balance sheet the net investment is carried as a non-current asset at the share of the joint venture’s or associate’s equity including any goodwill arising on the group’s acquisition of its interest.

iv Revenue Revenue is recognised to the extent that it is probable that the economic benefits will flow to the group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Sale of goods Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and can be reliably measured and recovery of consideration is considered probable. Rendering of services Revenue from services rendered is recognised by reference to the stage of completion of the transaction. Revenue from services provided on a short-term or one-off basis is recognised when the service is complete. The provision of services over a long-term period are treated as construction contracts and the revenue recognised as set out below. Construction contracts Revenue from construction contracts, including long-term service provision contracts, is recognised by reference to the stage of completion of the contract. The stage of completion is determined according to the nature of the specific contract concerned. A prudent level of profit attributable to the contract activity is recognised if the final outcome of such contracts can be reliably assessed. An expected loss on a contract is recognised immediately in the income statement. Variations and claims are included where it is probable that the amount will be settled. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred where it is probable that those costs will be recoverable. Rental and lease income Rental and lease income arising is accounted for on a straight-line basis over the lease term on ongoing leases.

72 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007 NTS TEME A 73 up to 50 years, or the lease term if shorter 3 to 5 years 5 years 4 years 5 to 10 years 20 to 33 years IAL ST IAL FINANC TED goodwill not deductible for tax purposes, neither accounting or taxable profit, and initial recognition of assets or liabilities that affect associates and interests in joint ventures, to the extent that they will probably not differences relating to investments in subsidiaries, reverse in the foreseeable future.

of a qualifying asset are capitalised as part of Borrowing costs that are directly attributable to the acquisition, construction or production and can be measured reliably. the cost of that asset when it is probable that they will result in future economic benefits Other borrowing costs are recognised as an expense in the period in which they are incurred. follows: Buildings Computer equipment Fixtures and fittings Motor vehicles Plant and machinery Heavy equipment Impairment reviews are undertaken if there are indications that the carrying values may not be recoverable. applicable, are plant and equipment are reassessed annually and adjustments, where The residual value and useful lives of property, made on a prospective basis. cost of property, plant and equipment are stated as cost less accumulated depreciation and impairment losses. The Items of property, plant and equipment comprises purchase price and directly attributable costs. useful lives of each part of an item of Depreciation is charged to the income statement on a straight-line basis over the estimated lives are as plant and equipment. Land and assets in the course of construction are not depreciated. The estimated useful property, realised. • • • on the expected manner of realisation or settlement of the carryingThe amount of deferred tax provided is based amount of assets and enacted at the balance sheet date. liabilities, using tax rates enacted or substantively extent that it is probable that future taxable profits will be available against which the A deferred tax asset is recognised only to the reduced to the extent that it is no longer probable that the related tax benefit will be asset can be utilised. Deferred tax assets are Income tax comprises current and deferred tax. in which except to the extent that it relates to items recognised directly in equity, Income tax is recognised in the income statement case it is recognised in equity. using tax rates enacted or substantively enacted at the taxable income for the year, Current tax is the expected tax payable on the payable in respect of previous years. balance sheet date, and any adjustment to tax liability method, providing for temporaryDeferred tax is provided using the balance sheet the carrying differences between amounts of and the amounts used for taxation purposes. The following temporaryassets and liabilities for financial reporting purposes differences are not recognised: capitalised on the of ownership of the assets concerned, are transfer substantially all the risks and rewards Finance leases, which at the inception net present value of the minimum lease payments of the fair value of the leased asset and balance sheet at the lower when they are due. or current liabilities depending on the period liabilities are recorded as non-current of the lease. The corresponding as a finance cost. statement over the periods of the leases of the rental obligations are charged to the income The interest elements a constant rate of reduction in the lease liability so as to achieve between the finance cost and the Lease payments are apportioned balance of the liability. interest on the remaining the lease term. Lease statement on a straight-line basis over are recognised as an expense in the income Operating lease payments integral part of the total lease expense. recognised in the income statement as an incentives received are and investment property at cost less plant and equipment property, out under operating leases are included in Assets held for leasing basis. income is recognised in revenue on a straight-line and accumulated impairment losses. Rental accumulated depreciation Borrowing costs Borrowing Property, plant and equipment plant Property, Income tax Leases viii vii vi v 2 policies (continued) of significant accounting summary ONSOLIDA THE C ES TO NOT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 summary of significant accounting policies (continued)

ix Goodwill Goodwill arising on consolidation consists of the excess of the fair value of the consideration over the fair value of the identifiable intangible and tangible assets net of the fair value of the liabilities including contingencies of businesses acquired at the date of acquisition. Goodwill in respect of business combinations of subsidiaries is recognised as an intangible asset. Goodwill arising on the acquisition of a joint venture or associated undertaking is included in the carrying value of the investment. Goodwill is carried at cost less any recognised impairment losses that arise from annual assessment of its carrying value. To the extent that the carrying value exceeds its recoverable amount, goodwill is written down and an impairment charge is recognised in the income statement. The recoverable amount is the higher of fair value less costs to sell and the estimated value in use. Value in use is determined from estimated discounted future net cash flows. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal.

x Research costs Research costs are expensed as incurred.

xi Other intangible assets Intangible assets acquired separately are capitalised at cost and from a business combination are capitalised at fair value as at the date of acquisition. Intangible assets, excluding development costs, created within the business are not capitalised and expenditure is charged against profits in the year in which the expenditure is incurred. Acquired computer software licences are capitalised as an intangible asset on the basis of the costs incurred to acquire and bring to use the specific software. Amortisation is charged to the income statement on a straight line basis over the estimated useful lives of the intangible asset. The estimated useful lives are as follows: Acquired software licences 2–5 years Brands 3–5 years Trademarks and licences up to 20 years Customer contracts and relationships up to 30 years Intangible assets are tested for impairment annually either individually or at the cash generating unit level. Useful lives are also examined on an annual basis and adjustments, where applicable, are made on a prospective basis.

xii Investment properties Land and buildings that are leased to non-group entities are classified as investment properties. The group applies the cost model to measure investment properties at their cost less accumulated depreciation and accumulated impairment losses. Depreciation is provided on a straight-line basis to write off the cost of investment properties over their estimated useful lives of up to 50 years. The residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

xiii Impairment The carrying amount of the group’s assets are tested for impairment when events occur or circumstances indicate that their carrying values may be impaired. Goodwill is subject to annual impairment tests. Impairments arising are charged to the income statement. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units and then to reduce the carrying amount of the other assets in the unit on a pro-rata basis. An asset’s recoverable amount is the higher of its fair value less costs to sell and its value in use and is determined for an individual asset. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

74 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007 NTS TEME A 75 IAL ST IAL FINANC TED risks associated with interest rate and foreign The group primarily uses foreign currency contracts and interest rate swaps to hedge its issue derivative financial statements for the group does not hold or currency fluctuations. In accordance with its treasury policy, trading purposes. value of forward exchange contracts and Derivative financial instruments are recognised at fair value in the balance sheet. The fair with similar maturity profiles. interest rate swaps are calculated by reference to current forward exchange rates for contracts they hedge the exposure to changes For the purpose of hedge accounting, hedges are classified as either fair value hedges when to variability in cash flows that is either in fair value of a recognised asset or liability; or cash flow hedges where they hedge exposure transaction. The group currently has only attributable to a particular risk associated with a recognised asset or liability or a forecasted certain designated cash flow hedges. in foreign currencies are translated to the respective functional currency of group entities at the foreign exchange rate Transactions ruling at the date of the transaction. Monetary liabilities denominated in foreign currencies at the balance sheet date are assets and exchange differences arising on translation translated to the functional currency at the foreign exchange rate ruling at that date. Foreign are recognised in the income statement. Non-monetary exchange rate at the date of the assets and liabilities are translated using the initial transaction. arising on consolidation, are translated to The assets and liabilities of foreign operations, including goodwill and fair value adjustments of foreign operations are translated to Sterling at foreign exchange rates ruling at the balance sheet date. The revenues and expenses directly in Foreign exchange differences arising on retranslation are recognised Sterling at average rates of exchange during the year. the deferred cumulative amount recognised in equity relating to that On disposal of a foreign entity, a separate component of equity. differences that arose before the transition date to particular foreign operation shall be recognised in the income statement. Translation IFRSs are deemed to be nil. comprise cash at bank and in hand and short-term deposits with an original maturity Cash and cash equivalents in the balance sheet of three months or less. statement, cash and cash equivalents consist of cash and cash equivalents as defined For the purpose of the consolidated cash flow on demand. above, net of outstanding bank overdrafts repayable amounts. An estimate are recognised and carried at original invoice amount less an allowance for any uncollectible receivables Trade the full amount is no longer probable. Bad debts are written off when identified. for doubtful debts is made when collection of less provision for any anticipated losses. Appropriate provisions for any losses are Long-term contract balances are stated at cost payments are amounts received from customers in accordance with the terms of the made in the year they are first foreseen. Progress of deliverycontracts which specify payments in advance any expenditure incurred and are credited, as progress payments, against balance in respect of progress payments is held in trade and other payables as customer for the particular contract. Any unexpended stage payments. cost less impairment losses. Other receivables are stated at their amortised price in the ordinary Net realisable value is the estimated selling at the lower of cost and net realisable value. Inventories are stated expenses. estimated costs of completion and selling course of business, less principle and includes expenditure incurred in acquiring the inventories and The cost of inventories is based on the first-in-first-out In the case of manufactured inventories and work in progress, cost includes an bringing them to their existing location and condition. operating capacity. appropriate share of overheads based on normal upon the purpose for initial recognition. The classification depends the classification of its other investments at The group determines were acquired. which the investments or sell the the date on which the group commits to purchase investments are recognised on trade-date, Purchases and sales of fair value through profit costs for all financial assets not carried at initially recognised at fair value plus transaction asset. Investments are and loss. been transferred and from the investments have expired or have when the rights to receive cash flows Investments are derecognised substantially all risk and reward of ownership. the group has transferred Derivative financial instruments Foreign currency Foreign Cash and cash equivalents Trade and other receivables and other Trade Inventories Other investments xix xviii xvii xvi xv xiv 2 policies (continued) of significant accounting summary ONSOLIDA THE C ES TO NOT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 summary of significant accounting policies (continued) In relation to cash flow hedges to hedge firm commitments which meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be effective is recognised directly in equity and the ineffective portion is recognised in profit or loss. When the hedged firm commitment results in the recognition of a non-financial asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses that had previously been recognised in equity are included in the initial measurement of the acquisition cost or other carrying amount of the asset or liability. For all other cash flow hedges, the gains or losses that are recognised in equity are transferred to the income statement in the same year in which the hedged firm commitment affects the profit or loss. For derivatives that do not qualify for hedge accounting, any gains or losses arising in fair value are taken directly to profit or loss for the year. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity remains in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to profit or loss for the year.

xx Interest-bearing loans and borrowings All loans and borrowings are initially recognised at fair value, being the amount of the consideration received net of issue costs associated with the borrowing. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any issue costs and any discount or premium on settlement.

xxi Retirement benefit plans Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred. The group’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value and any unrecognised past service costs, and the fair value of any plan assets is deducted. The discount rate is the yield at the balance sheet date on AA credit rated bonds that have maturity dates approximating to the terms of the group’s obligations. The calculations, together with the cost of providing benefits under the plans, are performed by a qualified actuary using the projected unit credit method. Actuarial gains and losses are recognised in full in the period in which they occur and are recognised in the statement of recognised income and expense.

xxii Long-term service benefits The group’s net obligation in respect of long-term service benefits, other than pension plans, is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using the projected unit credit method and is discounted to its present value and the fair value of any related assets is deducted. The discount rate is the yield at the balance sheet date on AA credit rated bonds that have maturity dates approximating to the terms of the group’s obligations.

xxiii Share-based payment transactions Share based incentive arrangements are provided to employees under the group’s share option, incentive and other award schemes. Share options granted to employees and share based arrangements put in place since 7 November 2002 are valued at the date of grant or award using an appropriate option pricing model and are charged to operating profit over the vesting period of the scheme, with a corresponding entry recorded within equity. The annual charge is modified to take account of shares forfeited by employees who leave during the vesting period and, in the case of non-market related performance conditions, where it becomes unlikely the option will vest. The group has an employee share incentive plan and an employee share trust for the granting of non-transferable options to executives and senior employees. Shares in the group held by the employee share trust are treated as treasury shares and presented in the balance sheet as a deduction from equity.

xxiv Provisions Provisions are recognised when the group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at an appropriate pre-tax discount rate.

76 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

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ES ummary T xxviii xxvii xxvi xxv O s 2 N NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3 Revenue Revenue disclosed in the income statement is analysed as follows:

2007 2006 Share of Share of joint joint Group venture Total Group venture Total £000 £000 £000 £000 £000 £000

Sale of goods 56,061 2,492 58,553 81,415 - 81,415 Revenue from construction contracts 127,980 8,214 136,194 87,925 - 87,925 Rendering of services 600,721 141,363 742,084 529,814 138,086 667,900 Equipment leasing income 67,119 - 67,119 9,296 - 9,296 Property rental income 647 - 647 549 - 549

Revenue 852,528 152,069 1,004,597 708,999 138,086 847,085

No revenue was derived from exchanges of goods or services (2006: £nil).

4 segment reporting Segment information is presented in respect of the group’s business and geographical segments. The primary segment reporting format is determined to be business segments as the group’s risks and rates of return are affected predominantly by differences in the products and services provided. Secondary segment information is reported geographically. The group’s geographical segments are based on the location of the group’s assets. Sales to external customers disclosed in geographical segments are based on the geographical location of its customers. Inter-segment pricing is determined on an arm’s length basis. Segment revenue, segment expense and segment result include transfers between business segments. Those transfers are eliminated in consolidation. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period. The group comprises the following main business segments: Communications – provides critical communications services in the broadcast, defence, space, emergency services and security sectors worldwide. Education and Skills – provides a wide range of supporting services to schools, LEAs and central government, including careers guidance and provision of vocational work based training. VT Services Inc. – provides a range of support service activities, including base operations, facilities management and the installation and support of communication systems. This activity is primarily for the US Department of Defense, operating across the US. Support Services – provides technical services, logistics and training for commercial customers and all three armed services in the UK and around the World. Activities include facilities management, operation and maintenance of assets, provision of specialist manpower and supply chain management. Shipbuilding – designs and constructs advanced naval vessels for the Royal Navy and navies worldwide. The segment’s activities also include the design and manufacture of smaller craft and equipment for the marine, offshore and aerospace markets.

78 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

- (7,688) (7,671) (8,305) (6,684) (6,037) 53,781 46,110 46,632 59,813 22,682 82,495 852,528 852,528 (152,069) 1,004,597

- - 62,086 ------(16,175) (16,175)

- Inc Elimination Total 31 303 (899) (118) 4,872 4,687 5,586 5,889 (5,787) 187,473 187,442 193,229

- 1,828 (4,366) (6,448) 33,199 18,204 22,026 21,987 44,013 293,818 291,990 436,109 (144,119) Support VT Services

- - - 7,113 7,113 (6,037) 13,150 12,300 13,150 176,312 164,012 164,012 NTS TEME

A - 83 967 392 (118) 79 1,241 3,390 3,782 (2,163) - (2,423) 109,984 109,901 112,064

Education

- - - - -

1,933

15,661 99,183 99,183 15,661 15,661 15,661

101,116

£000 £000 £000 £000 £000 £000 £000

Communications and Skills Shipbuilding Services

IAL ST IAL FINANC TED

continuing operations – operating profit Group for year Net profit taxation before Profit Operating profit Segment revenue Results Segment result before non-recurring Revenue Sales from external segments for the business liability information regarding the group’s revenue and profit and certain asset and The following tables present 2007 and 31 March 2006. year ended 31 March 2007 – Continuing operations ended 31 March Year Primary – Business segments reporting format customers accounted investments taxation and amortisation arising from charges and amortisation of intangible assets arising from business combinations arising from business combinations business combinations Income tax expense Net finance costs Included in the above: revenue Inter-segment Less: share of equity Share of joint venture profit before profits of joint venture Taxation

Non-recurring charges Amortisation of intangible assets

4 (continued) reporting segment ONSOLIDA THE C ES TO NOT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4 segment reporting (continued)

Primary reporting format – Business segments (continued)

Education Support VT Services Communications and Skills Shipbuilding Services Inc Elimination Total £000 £000 £000 £000 £000 £000 £000

Assets and liabilities Segment assets 130,274 86,452 126,165 252,260 111,296 - 706,447 Investment in joint ventures - 547 - 25,600 946 - 27,093 Unallocated assets 10,637

Total assets 744,177

Segment liabilities (71,418) (45,572) (118,528) (136,545) (40,666) - (412,729) Unallocated liabilities (129,122)

Total liabilities (541,851)

Other segment information Capital expenditure: Tangible fixed assets 1,717 783 4,096 10,539 259 - 17,394 Intangible fixed assets 296 695 266 853 - - 2,110

Depreciation and impairment 1,558 1,068 7,048 11,821 480 - 21,975 Amortisation 365 2,585 404 4,483 1,101 - 8,938

Unallocated assets and liabilities primarily comprise centrally held properties, group-wide bank funding and group-wide pension scheme balances.

80 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

(4,454) (1,510) (6,984) 62,448 55,464 14,875 (13,092) 42,372

35,817

645,662 (102,430) (489,809) - - - 19,124 2,616 - 847,085 - 68,412 - - 13,683 2,598 - 53,537 - - - 596,933 12,912 - 708,999 - 52,027 - - - (387,379)

- (31,945) - Inc Elimination Total 362 (676) 4,905

- (4,289) (145) 17,544 Support VT Services

- 11,922 954 - - 14,448 11,585 NTS TEME

A 65 81

Education

- 36 - (573) - (131,029) (6,484) - (138,086) - (834) - - (20) -

98,627 95,181 190,369 155,138 201,629 (31,945) 708,999

14,645 4,069 11,585 27,703 4,446

1,665 346 903 937 5,401 10,571 96 584 375 862 138,788 69,365 176,085 131,090 81,605 96,636 95,337 165,487 281,512 208,113 14,645 4,923 11,585 31,992 5,267 96,636 1,991 94,764 165,487 417 150,483 201,629 24,882 4,655 £000 £000 £000 £000 £000 £000 £000 14,645 4,024 11,585 17,544 4,229 14,645 4,858

Communications and Skills Shipbuilding Services 269 165 1,158 769 237 1,647 550 3,947 7,095 444

(91,310) (50,837) (113,710) (98,153) (33,369)

IAL ST IAL FINANC TED

investments

accounted

equity

Intangible fixed assets fixed assets Tangible continuing operations Net finance costs Depreciation Amortisation Other segment information Capital expenditure: Segment assets Investment in joint ventures Unallocated assets Assets and liabilities for year Net profit – operating profit Group taxation before Profit Operating profit

Results Less: Segment revenue Amortisation of intangible assets arising Revenue Sales from external customers Year ended 31 March 2006 – Continuing operations 2006 – Continuing 31 March ended Year revenue Inter-segment Segment result before amortisation business combinations of intangible assets arising from from business combinations Share of joint venture profit before taxation profits of joint venture Taxation Income tax expense Included in the above: assets Total Segment liabilities Unallocated liabilities liabilities Total

4 (continued) reporting segment ONSOLIDA THE C ES TO NOT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4 segment reporting (continued)

Secondary reporting format – Geographical segments The following tables present revenue, expenditure and certain asset information regarding the group’s geographical segments for the years ended 31 March 2007 and 31 March 2006.

Year ended 31 March 2007 United North Africa and Kingdom Europe America Asia Other Elimination Total £000 £000 £000 £000 £000 £000 £000

Sales to external customers 684,758 38,176 201,646 68,011 12,006 - 1,004,597 Less share of joint ventures (145,733) - (6,062) (135) (139) - (152,069)

Revenue 539,025 38,176 195,584 67,876 11,867 - 852,528 Inter-segment revenue 16,144 - 31 - - (16,175) -

Segment revenue 555,169 38,176 195,615 67,876 11,867 (16,175) 852,528

Other segment information Segment assets 584,285 7,747 120,922 1,421 2,709 - 717,084 Investment in joint ventures 26,147 - 946 - - - 27,093

Total assets 744,177

Capital expenditure: Tangible fixed assets 16,807 35 312 40 200 - 17,394 Intangible fixed assets 2,103 - - 7 - - 2,110

Depreciation 21,227 46 573 16 113 - 21,975 Amortisation 7,837 - 1,101 - - - 8,938

Year ended 31 March 2006 United North Africa and Kingdom Europe America Asia Other Elimination Total £000 £000 £000 £000 £000 £000 £000

Sales to external customers 488,772 68,674 216,729 61,238 13,274 - 848,687 Less share of joint ventures (130,500) - (6,484) (1,102) - - (138,086)

Revenue 358,272 68,674 210,245 60,136 13,274 - 710,601 Less sales attributable to discontinued operations (1,602) - - - - - (1,602)

Revenue from continuing operations 356,670 68,674 210,245 60,136 13,274 - 708,999 Inter-segment revenue 31,882 63 - - - (31,945) -

Segment revenue 388,552 68,737 210,245 60,136 13,274 (31,945) 708,999

Other segment information Segment assets 532,750 8,934 87,095 961 3,010 - 632,750 Investment in joint ventures 11,958 - 954 - - - 12,912

Total assets 645,662

Capital expenditure: Tangible fixed assets 13,010 25 560 26 62 - 13,683 Intangible fixed assets 2,359 1 238 - - - 2,598

Depreciation 18,297 40 667 37 83 - 19,124 Amortisation 1,747 6 863 - - - 2,616

82 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

------21 58 158 (137) (875) (293) 2,616 1,060 8,585 (1,012) 19,103 21,740 12,361 2006 £000 2006 £000

21 (60)

244 686 306 321 2007 £000 2007 £000

(208) (169) (208)

6,037 1,041 4,996 1,949 8,938 1,949 2,040

30,913 20,005 11,873 53,769

NTS TEME

A 83

IAL ST IAL FINANC TED

– write-down of inventories to net realisable value Other costs charges non-recurring Total Included within administrative expenses Included within cost of sales Redundancy costs Shipbuilding division review of the small boat activities carried out within the group’s During the year the board undertook a strategic the commercial boat building activities. This decision has resulted in one-off charges during which resulted in the decision to exit from the the the current contracts in place. The analysis of the costs, which were incurred after year for both the costs of restructuring and exiting statement are as follows: announcement of this decision, within the income Research expenditure after charging/(crediting): This is stated Other costs assets Amortisation of intangible depreciation and amortisation expense Total Impairment of plant and equipment Onerous contract terminations on business restructuring Impairment charge arising plant and equipment Depreciation of property, Foreign currency differences properties Depreciation of investment plant and equipment Profit on disposal of property, Cost of inventories recognised as an expense Including: Profit on disposal of investment properties of non-current assets profit on disposal Total – reversals of impairments in inventories payments Operating lease payments – minimum lease charges Non-recurring operating profit Group

5 ONSOLIDA THE C ES TO NOT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

7 auditors’ remuneration 2007 2006 £000 £000

Fees payable to the Company’s auditor for the audit of the company and consolidated financial statements 215 200

Fees payable to the Company’s auditor for other services: Audit of company’s subsidiaries pursuant to legislation 410 430 Taxation services 142 119 Transaction services 777 - Other services 91 85

1,635 834

8 staff costs and directors’ emoluments

(a) Staff costs 2007 2006 £000 £000

Wages and salaries 248,046 220,720 Social security costs 21,066 17,392 Other pension costs 18,409 14,654

287,521 252,766

Included in wages and salaries is a total expense of share-based payments of £3,494,000 (2006: £2,333,000) of which £2,658,000 (2006: £1,313,000) arises from transactions accounted for as equity-settled share-based payment transactions. The pension costs represent £13,977,000 (2006: £12,223,000) in respect of defined benefit schemes and £4,432,000 (2006: £2,431,000) in respect of defined contribution schemes. The average monthly number of employees during the year was made up as follows:

2007 2006 £000 £000

Shipbuilding 1,337 1,286 VT Services Inc. 3,686 3,189 Education and Skills 2,460 2,474 Communications 720 708 Support Services 3,067 2,088 Corporate central functions 188 179

11,458 9,924

(b) Directors’ emoluments Details of directors’ emoluments are included in the Remuneration Report on pages 58 to 65.

9 Finance income 2007 2006 £000 £000

Bank interest receivable 4,747 1,001 Income from investments 20 34

Total finance income 4,767 1,035

84 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

- 89 89 400 426 527 974 335 (299) (310) 3,114 4,241 8,019 1,403 1,301 13,092 13,181 10,053 10,142 11,545 11,880 13,181 2006 £000 2006 £000 2006 £000 2006 £000

- -

521 166 191 2007 £000 2007 £000 2007 £000 2007 £000 (974)

7,806 6,091 7,671 6,899 7,671 7,806 2,367 2,316 7,671 7,480 8,850 1,334 (2,642)

10,122 13,072

NTS TEME

A 85

IAL ST IAL FINANC TED

– discontinued operations Other loans Bank loans – non recourse Finance lease – recourse Bank loans and overdrafts Actuarial gains and losses on pension schemes

Tax relating to items charged or credited to equity: Tax Income tax expense on continuing operations The tax charge in the income statement is disclosed as follows: tax expense Deferred tax expense Current UK Corporation tax – continuing operations Tax charged in the income statement charged Tax (a) Tax on profit on ordinary on profit activities (a) Tax Interest payable:

UK Corporation tax Income tax expense on discontinued operations Current income tax charge income statement charge in the Tax Net gain on revaluation of cash flow hedges Exchange differences on retranslation charge in the statement of recognised income and expense Tax Foreign tax Amounts (over)/under provided in previous years Interest capitalised finance expenses Total tax current income Total Taxation Finance expenses Origination and reversal of temporary differences

11 10 ONSOLIDA THE C ES TO NOT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

11 Taxation (continued)

(b) Reconciliation of the total tax charge The tax expense in the income statement for the year is lower than the standard rate of corporation tax in the UK of 30% (2006: 30%). The differences are reconciled below: 2007 2006 £000 £000

Profit from continuing operations before taxation 53,781 55,464 Profit before taxation from discontinued operations - 192

Accounting profit before income tax 53,781 55,656

Accounting profit multiplied by the UK standard rate of corporation tax of 30% (2006: 30%) 16,134 16,697 Tax effect of share of results of joint ventures (4,636) (3,126) Over provided in prior years (3,784) (243) Other (43) (147)

Total tax expense reported in the income statement 7,671 13,181

Deferred tax asset Accelerated capital allowances 4,040 5,775 Other long term benefits 1,450 774 Pension benefits 11,264 18,691 Acquisition fair value adjustments 1,447 460 Share based payments 3,253 2,840 Revaluation of cash flow hedges 83 234 Lease rental deduction 802 895 Temporary timing differences 1,831 515 Other 190 54

Deferred tax asset 24,360 30,238

Deferred tax liability Accelerated capital allowances 26,045 25,842 Revaluation in respect of foreign currency cash flow hedges 76 61 Capitalised interest 99 1,050 Acquisition fair value adjustments 1,304 - Intangible assets arising from business combinations 13,428 4,441 Temporary timing differences 2,413 - Other 210 228

Deferred tax liability 43,575 31,622

86 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

No. (27) 473 450 103 2006 £000 2006 2006 £000 2006 (404) (578) (302) 1,689 1,301 41,647 41,750 23.97p 24.03p 23.53p 23.59p 3,285,409 173,761,014 177,046,423

70 No.

561 191 2007 2007 £000 2007 2007 £000 (762) (141) (333)

1,938 (1,142)

44,430 44,430 25.40p 25.40p 24.81p 24.81p

4,182,458

174,922,425 179,104,883

NTS TEME

A 87

IAL ST IAL FINANC TED

Basic earnings per share – continuing operations Basic weighted average number of shares (excluding treasury shares)

parent – continuing operations Net profit attributable to equity holders of the by dividing net profit for the year attributable to ordinaryBasic earnings per share amounts are calculated equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. by dividing the net profit attributable to ordinaryDiluted earnings per share amounts are calculated holders of the parent by the equity weighted average number of ordinary of ordinary shares outstanding during the year plus the weighted average number shares that would ordinarybe issued on the conversion of all dilutive potential shares into ordinary shares. date used in the basic and diluted earnings per share computations: The following reflects the income and share Accelerated capital allowances tax in the income statement Deferred is as follows: group income statement tax included in the The deferred Diluted weighted average number of shares Acquisition fair value adjustments Dilutive potential ordinary shares – employee share options hedges Revaluation of cash flow – discontinued operations Profit attributable to equity holders of the parent Share based payments Pension benefits of prior years Adjustments in respect Other Deferred income tax expense parent Net profit attributable to equity holders of the Basic earnings per share – total operations Diluted earnings per share – total operations There have been no other transactions involving ordinaryshares or potential ordinary shares between the reporting date and the date of completion of these financial statements. (continued) Taxation Diluted earnings per share – continuing operations

12 earnings per share

11 ONSOLIDA THE C ES TO NOT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

12 earnings per share

Adjusted basic earnings per share Earnings per share before amortisation of intangible assets acquired from business combinations and non-recurring charges, which the directors consider gives a useful additional indicator of performance, is calculated on earnings for the period as follows:

2007 2006 £000 £000

Net profit attributable to equity holders of the parent 44,430 41,750 Charges included in profit: Amortisation of intangible assets arising from business combinations 7,688 1,510 Non-recurring charges 6,037 - Tax on charges included in profit (4,153) (406)

Adjusted earnings attributable to equity holders of the parent 54,002 42,854

Weighted average number of shares 174,922,425 173,761,014

Adjusted basic earnings per share (pence) 30.87p 24.66p

13 dividends paid and proposed

Declared and paid during the year: 2007 2006 £000 £000

Equity dividends on ordinary shares: Final dividend for 2006 of 7.75p (2005: 7p) per ordinary share 13,524 12,133 Interim dividend for 2007 of 3.25p (2006: 3p) per ordinary share 5,694 5,233

19,218 17,366

Proposed for approval at AGM (not recognised as a liability at 31 March) 2007 2006 £000 £000

Equity dividends on ordinary shares: Final dividend for 2007 of 8.6p (2006: 7.75p) per ordinary share 15,092 13,507

88 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

- - (718) (396) (573) (250) 1,949 (2,553) (1,869) 57,572 17,394 20,005 39,214 77,011 155,831 180,078 232,842

(17,557)

- 57,841 - 248 - 1,248 - 19,103 ------(7) 378 2,937 1,915 3,284 2,937 (2,633) 28 (31) (550) (369) (573) (250) 1,949 (2,486) (1,810) 79,758 44,981 14,653 16,460 29,234 60,930 100,382 140,688 - (2,063) - (2,063) - (7,313) - (7,313) - - -

31 (27) (67) (59)

826

(161)

3,545 6,696 2,605

73,136 12,591 79,318 89,217 16,081

Land and buildings Plant and equipment £000 construction Under £000 Total £000 £000

75,026 164,446 4,059 113 9,340 (543) 239,585 (66,973) 284 13,683 (20) (67,536) 9,819 48,022 (528) (17,029) 16 232 80 696 330 552 1 411 3,284 15,819 66,727 55,401 378 122,506

65,207 116,424 113 181,744

NTS TEME

A 89

IAL ST IAL FINANC TED Under the provisions of IFRS 5, assets with a carrying of £4,275,000 (2006: £5,250,000) have been classified as assets held for sale. value These vessels have a carrying equal to the value of the expected net sale proceeds less costs of sale expected value in the balance sheet to be incurred. Assets held for resale Security At 31 March 2007, assets with a carrying (2006: £22,607,000) are subject to charges to secure two of the Group’s amount of £18,632,000 finance lease arrangements. bank loans. Assets with a net book value of £3,149,000 (2006: £3,617,000) are held under Net book value At 31 March 2007 Disposals and impairment Depreciation Balance at 1 April 2005

Disposals Additions Cost Balance at 1 April 2005 and equipment plant Property, Foreign currency adjustment held for resale to assets Transfer Foreign currency adjustment combinations Acquired through business to assets held for resale Transferred At 31 March 2006 Depreciation charge for year Balance at 31 March 2006 Balance at 31 March 2006 At 1 April 2005 Foreign currency adjustment Foreign currency adjustment Additions Depreciation charge for year Acquired through business combinations Restructuring impairment charge Disposals Disposals Disposal of subsidiary Disposal of subsidiary Transfers Transfers Balance at 31 March 2007 Balance at 31 March 2007 14 ONSOLIDA THE C ES TO NOT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

15 investment property £000

Cost Balance at 1 April 2005 1,133 Disposals (98)

Balance at 31 March 2006 and 31 March 2007 1,035

Depreciation and impairment Balance at 1 April 2005 257 Depreciation charge for year 21 Disposals (29)

Balance at 31 March 2006 249 Depreciation charge for year 21

Balance at 31 March 2007 270

Net book value At 31 March 2007 765

At 31 March 2006 786

At 1 April 2005 876

Investment property comprises a number of commercial and residential properties that are leased to third parties. The estimated fair value of investment property at 31 March 2007 amounted to £2,425,000 (2006: £2,252,000). Fair values were determined having regard to recent market transactions for similar properties in the same location as the group’s investment property.

16 Goodwill £000

Cost Balance at 1 April 2005 155,882 Foreign currency adjustment 678 Acquisition of subsidiaries 13,422 Acquisition of minority interest 793 Disposal of subsidiary (800)

Balance at 31 March 2006 169,975 Fair value adjustments to prior acquisitions 312

Balance at 31 March 2006 restated 170,287 Foreign currency adjustment (1,078) Acquisition of subsidiaries (note 20) 33,387 Disposal of subsidiary (1,701)

Balance at 31 March 2007 200,895

Impairment Balance at 1 April 2005, 31 March 2006 and 31 March 2007 -

Net book value At 31 March 2007 200,895

At 31 March 2006 170,287

At 1 April 2005 155,882

90 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

(80) (80) (181) (719) (908) (695) 5,444 8,938 2,110 51,234 26,070 13,426 38,187 64,660

- 12,486 (74) (80) (80) (183) (908) (695) 6,248 3,770 7,914 2,316 2,110 5,237 2,632 11,485

- (17) (17) - - 2,598 2,598 (17) (17) - - - - (105) (520) 1,577 5,981 7,453 40,975 17,119 31,829 48,428 Customer contracts & Computer

- 144 - 2,641 2,785 - - - 20 40 60 - 5,309 5,209 10,518 - 5,165 2,568 7,733 - 361 124 485 - - -

(2)

(16)

641 736

4,011 1,037 3,726 4,747

Brands relationships £000 software £000 Total £000 £000

1,037 11,449 940 15,542 4,144 20,626 97 1,413 1,106 2,616

NTS TEME

A 91

IAL ST IAL FINANC TED

Gross margin Discount rates cash flows beyond the budget period Growth rate used to extrapolate Net book value At 31 March 2007 Disposals Amortisation and impairment Balance at 1 April 2005 Disposal Additions Cost • • • Goodwill of £13.4m was training businesses. Limited, two vocational and Touchstone HCTC Limited year the group acquired During the prior with March 2006 and in accordance been finalised since The fair values have on provisional fair values. at March 2006 based recognised goodwill of £312,000 has been made retrospectively. IFRS 3, an increase to projections based on financial a value in use calculation using cash flow of goodwill has been determined based on The recoverable amount beyond the three year flow projections is 11% and cash flow projections the board. The discount rate applied to cash budgets approved by UK. as the long-term average growth rate in the using a 2.5% growth rate that is the same budget are extrapolated assumptions: in use is most sensitive to the following key The calculation of value on the current values being achieved. Gross margins are based weighted average cost of capital. Discount rates reflect the company’s information in respect of long-term growth rates. Growth rate estimates are based on published change in any of the above key assumptions would cause the carryingManagement believes that no reasonably possible value of any unit to exceed its recoverable amount. Goodwill (continued) Foreign currency adjustment Balance at 31 March 2006 Acquired through business combinations Balance at 31 March 2006 At 31 March 2006 Amortisation for the year Balance at 1 April 2005 Foreign currency adjustment At 31 March 2005 Foreign currency adjustment Foreign currency adjustment Amortisation for the year Additions Disposals Disposal of subsidiary Disposal of subsidiary Disposals Balance at 31 March 2007 Acquired through business combinations Balance at 31 March 2007

17 other intangible assets 16 ONSOLIDA THE C ES TO NOT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

17 other intangible assets (continued) Customer contracts and relationships and brands are intangible assets acquired through business combinations and are measured using the cost model. Intangible assets relating to customer contracts and relationships are amortised over the remaining period of the relevant contract or relationship at the date of acquisition. This currently is a period of between 1 and 30 years. Brands are amortised over their estimated economic useful life, being between 3 and 5 years.

18 investment in joint ventures and associates 2007 2006 £000 £000

Investments in associates 547 36 Investments in joint ventures 26,546 12,876

Investments accounted for using the equity method 27,093 12,912

The group has the following interests in joint ventures and associates:

Shareholding Principal activity Country 2007 2006

Flagship Training Limited Provision of training England 50% 50% Fleet Support Limited Provision of support services England 50% 50% ALC (Superholdco) Limited Provision of support services England 50% - CH2M Hill/VT Griffin Joint Venture Provision of support services USA 50% 50% Whitefleet Limited Provision of support services England 50% - Careers Enterprise (Futures) Limited Provision of careers advice England 26% 26%

Joint Ventures Associates Total

2007 2006 2007 2006 2007 2006 £000 £000 £000 £000 £000 £000

At 1 April 12,876 10,809 36 - 12,912 10,809 Adoption of IAS 32 and IAS 39 - (25) - - - (25)

12,876 10,784 36 - 12,912 10,784 Share of profits retained 15,179 10,377 275 44 15,454 10,421 Dividends (13,780) (9,286) (169) - (13,949) (9,286) Arising on business combinations 10,890 - - - 10,890 - Exchange adjustment (112) 83 - - (112) 83 Actuarial gain/(loss) on pension obligations (net of deferred tax) 1,493 918 405 (8) 1,898 910

At 31 March 26,546 12,876 547 36 27,093 12,912

92 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

- - 6,359 2,550 1,226 (4,454) follows: 61,784 68,143 52,681 55,231 12,912 14,875 10,421

(14,636)

138,086 (109,801) as

Total are 2006 £000

- 217 - - 107 - 5 2007 £000 (544) 1,646 ended (6,684)

55,256 33,938 27,093 34,750 81,537 89,194 22,138 15,454 (16,088) 116,287 152,069 (114,945) then

- - - - (1,000) (1,000) 2 year 36 66 44

(22) 604 439 102 977 573 (509) 107 the 1,079 1,043

for

and

£000 2006 Reimbursement Preference rights £000 shares £000 Total £000

119 1,000 1,119

119 1,000 1,119 217 (14) - (14)

5 - Associates 4 65 219 804 411 476 547 392 274 2007 £000 (402) (118) March 2,163 1,023

(1,373) 31

- 6,257 2,111 1,224 (4,432) 60,807 67,064 52,077 54,188 12,876 14,809 10,377 (14,127) associates 137,513

(109,801) Joint NTS TEME and

Ventures £000 2006

A 2007 £000 (544) 93

1,642 (6,566)

34,531 80,733 54,845 33,873 88,718 26,546 21,746 15,180 ventures

(15,686)

149,906 115,264

(113,572)

joint

the

expenses

IAL ST IAL FINANC TED and

income

liabilities,

assets,

the

Income statement Revenue Disposals Balance at 1 April 2005 Additions Non-current assets balance sheet of Share The Current assets Share of gross liabilities Cost of sales Administrative expenses Amortisation of intangible assets Finance income Share of gross assets Current liabilities Non-current liabilities Share of net assets Profit before income taxes Net profit Income tax expense arising from business combinations Financial assets – non-current Financial assets Balance at 31 March 2006 Balance at 31 March 2007 Foreign currency adjustment Additions Fair value movement

18 (continued) and associates in joint ventures investment ONSOLIDA THE C ES TO NOT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

19 Financial assets (continued) The preference shares were unlisted and classified as available for sale investments. They were redeemed in full during the current year. Interest was earned at a rate of 4% per annum. The reimbursement rights represent life insurance policy held to fund the future liabilities arising in the US defined benefit pension scheme. Under the provisions of IAS 19 this policy is defined as a non-qualifying insurance policy and as such is not deemed to be an asset of the pension scheme. It is therefore deemed to be a corporate asset and is held at fair value on the balance sheet.

Other financial assets – current 2007 2006 £000 £000

Forward currency contracts - 203 Interest rate swaps 254 -

254 203

20 Business combinations and disposals

Acquisition of Lex Vehicle Solutions On 27 April 2006 the group acquired a number of businesses collectively referred to as Lex Vehicle Solutions for a consideration of £55.9m satisfied wholly by cash. In addition a loan assumed upon acquisition of £32.5m was repaid at this date. Lex Vehicle Solutions carries out vehicle supply and maintenance operations and ancillary fleet services. Book and fair values of the net assets at the date of acquisition were as follows:

Book Fair value Fair value values adjustments to group £000 £000 £000

Property, plant and equipment 59,332 (23,931) 35,401 Intangible assets 1,324 31,236 32,560 Equity accounted investments 32 10,858 10,890 Deferred tax assets 125 8,987 9,112 Inventories 96 - 96 Trade and other receivables 24,711 715 25,426 Cash and cash equivalents 1,548 - 1,548 Trade and other payables (33,234) (3,709) (36,943) Deferred tax liabilities (2,882) (9,989) (12,871) Interest-bearing loans and borrowings (32,518) - (32,518)

Net identifiable assets and liabilities 18,534 14,167 32,701 Goodwill on acquisition 23,005

55,706

Discharged by: Cash consideration 54,055 Costs associated with the acquisition 1,651

55,706

The goodwill recognised on acquisition represents the value of those assets not requiring valuation under IFRS 3 and the synergies expected to be achieved from integrating the companies into the group’s existing business. From the date of acquisition, Lex Vehicle Solutions has contributed a profit after tax and amortisation of £6,843,000 to the results of the group. If the combination had taken place at the beginning of the year, the profit of the group would have been increased by £320,000 and revenue from continuing operations would have been increased by £12,680,000.

94 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

- 549 £000

3,813 5,627 9,256 9,344 1,323 (5,782) 323 £000

13,285 10,382 23,667 23,118 23,667 disposed

(10,296)

Net assets

1,701

213 1,782 713 (1,933) 2,799 2,799

- £000

Book Fair value Fair value values adjustments £000 to group

2,927 886 281 9,264 9,496 5,346 1,323 (10,296) (8) (152) 9,984 - 3,301 (3,011) (2,771)

NTS TEME

A 95

IAL ST IAL FINANC TED

the group. VT Software Solutions Limited was not deemed to be core to the strategy and activities of The following information is provided in respect of this disposal: Goodwill plant and equipment Property,

Disposal of VT Software Solutions Disposal of VT Software VT Software Solutions Limited, for a cash consideration of £2.8m. On 8 January 2007 the group disposed of a subsidiary company, plant and equipment Property,

On 11 February for a incorporated in the United States of America, Milcom Systems Corporation, a company 2007 the group acquired and support of electronic Corporation carries out the design, installation satisfied wholly by cash. Milcom Systems consideration of $46.2m primarily for the US Government. and communication systems, were as follows: values of the net assets at the date of acquisition Book and provisional fair Acquisition of Milcom Systems Corporation of Milcom Systems Acquisition Intangible assets Inventories receivables and other Trade Cash and cash equivalents payables and other Trade Net identifiable assets and liabilities Goodwill on acquisition Discharged by: Costs associated with the acquisition and attributable to the skills and technical talent of the acquired businesses’ workforce The goodwill recognised on acquisition is principally existing business. from integrating the companies into the group’s from the synergies expected to be achieved a profit after tax and amortisation of £189,000 to the results of the group. If the combination From the date of acquisition, Milcom contributed have been increased by £661,000 and revenue from continuing the profit of the group would had taken place at the beginning of the year, operations would have been increased by £70.2m. Deferred tax liabilities (continued) and disposals Business combinations Cash consideration Other intangible assets and other receivables Trade Cash and cash equivalents and other payables Trade Net identifiable assets and liabilities Cash consideration Profit arising on disposal Solutions acquisition. From 27 April 2006 until the date of disposal, the VT Software Solutions was acquired as part of the Lex Vehicle company contributed a profit after tax and amortisation of £85,000 to the results of the group.

20 ONSOLIDA THE C ES TO NOT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

21 inventories 2007 2006 £000 £000

Raw materials and consumables 8,329 4,896 Work in progress 18,533 15,283 Finished goods and goods for resale 1,551 2,963

28,413 23,142

22 Construction contracts 2007 2006 £000 £000

Contracts in progress at balance sheet date: Amounts due from contract customers included in trade receivables 9,992 26,010

Amounts due to contract customers included in trade and other payables 66,817 53,378

Aggregate costs incurred on contracts to date 413,624 313,075

Reported profit on contracts to date 50,660 36,703

23 Trade and other receivables

Non-current assets 2007 2006 £000 £000

Trade receivables - 30 Other receivables and prepayments 4,162 4,249

4,162 4,279

Current assets 2007 2006 £000 £000

Trade receivables 114,675 101,158 Amounts due from joint ventures and associates 730 2,399 Prepayments and other receivables 47,508 31,211

162,913 134,768

24 Cash and cash equivalents 2007 2006 £000 £000

Cash at bank and in hand 33,804 106,695 Short-term deposits 41,357 5,304

Cash and cash equivalents 75,161 111,999

Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the group and earn interest at the respective short-term deposit rates. Included in the above amounts are restricted funds of £2,845,000 (2006: £5,786,000). At 31 March 2007 the group had available £170.1m (2006: £70.8m) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. None (2006: £24.6m) of these facilities fall for review within one year and the remainder is available until November 2011.

96 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

- 779 779 1,896 1,810 3,000 7,926 8,890 15,543 41,774 47,941 19,574 84,915 32,833 39,835 77,478 10,962 22,000 49,778 105,258 116,011 222,396 2006 £000 2006 £000 2006 £000 -

387 181 377 2007 £000 2007 £000 2007 £000

1,163 9,111 1,810 9,305

74,521 57,346 41,632 30,552 13,621 15,600 39,689

154,929 197,317 296,295 120,238 284,459 106,883

NTS TEME

A 97

IAL ST IAL FINANC TED Other financial liabilities – current Interest rate swap contracts liabilities Non-current Non-current instalments due on bank loans Interest-bearing loans and borrowings Interest-bearing Within one year Group as lessee Group as follows: Future minimum rentals payable under non-cancellable operating leases at 31 March are Current portion of bank loans liabilities Current payables Trade

run for terms of between 1 and 21 years. Lease The group leases a number of commercial properties under operating leases. The leases payments are reviewed at regular intervals rentals. None of these leases include contingent rentals. to reflect market After one year but not more than five years More than five years ventures and associates Amounts owed to joint security costs Other taxes and social Guaranteed loan notes Current portion of guaranteed loan notes Loans from joint ventures deferred income Accrued expenses and Finance lease creditors Other loans Current portion of finance lease creditors between certain material subsidiaryThe bank overdrafts are secured by cross-guarantees undertakings. Foreign exchange contracts Operating leases Financial liabilities and other payables Trade

27 obligations under leases

26 25 ONSOLIDA THE C ES TO NOT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

27 obligations under leases (continued) The group has also entered into commercial leases on certain motor vehicles and items of machinery. These leases have an average life of between 1 and 11 years with renewal terms included in the contracts. There are no restrictions placed upon the lessee by entering into these leases. Group as lessor The group leases out its investment property under operating leases. In addition the group leases out certain items of plant and machinery. The future minimum rentals receivable under non-cancellable leases at 31 March are as follows: 2007 2006 £000 £000

Within one year 73,157 8,910 After one year but not more than five years 256,251 11,385 More than five years 29,825 -

359,233 20,295

Finance leases Future minimum lease payments under finance leases are as follows: 2007 2006 £000 £000

Within one year 11,158 11,131 After one year but not more than five years 33,475 44,526 More than five years - -

44,633 55,657 Less finance charges allocated to future periods (4,776) (6,932)

39,857 48,725

28 Provisions Contract and Reorganisation warranty Chester Street and provisions provision redundancy Total £000 £000 £000 £000

At 1 April 2006: Current 8,408 900 1,610 10,918 Non-current 10,713 10,238 - 20,951

19,121 11,138 1,610 31,869 Exchange differences (73) - (2) (75) Created during the year 1,525 - 3,284 4,809 Utilised (5,493) (1,570) (2,321) (9,384) Unused amounts reversed (3,777) - (118) (3,895)

At 31 March 2007 11,303 9,568 2,453 23,324

Analysed as: Current 6,162 947 2,453 9,562

Non-current 5,141 8,621 - 13,762

Contract and warranty provisions Provisions are made when contracts are put to sales to cover expected warranty claims. Provisions are based on an assessment of future claims with reference to past experience. Such costs are generally incurred within one to five years post delivery. Reorganisation and redundancy Provisions are made to cover costs to be incurred in respect of committed programmes. Chester Street provision Provision has been made for potential liabilities following a previous group insurance carrier entering a Scheme of Arrangement. 98 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

217 244 (377) (206) (1,810) the 75,161 above

(21,036) (13,621) (39,857) (54,442) (15,600) (23,185) (48,142)

the

111,999

- 203 - (13,962) - (318) - (779) - (6,852) - (11,561) - (22,000) ------than 217 217

years Total

instruments

(1,810) discussion

(15,274) (17,084) included

the

not

in More

- - 119 119 - - (1,810) (1,810) - - financial ------

are (36) of out

years 5

(1,217) (1,253) set that

(54,442) (54,442)

are Interest

group ------

year. (51)

the years 4–5

(1,223) of (1,274)

one strategies (10,642) (10,642)

follows:

S and as than

- 200 250 550 1,000 ------is ------

NT (52) (43) less

years 3–4

instruments

of policies

(1,114) (1,209)

March (10,174) (10,174)

risk. EME

at financial A rate

- - - -

------

intervals

T (55) (84) at

objectives, years 2–3 99

other group

(1,123) (9,736) (1,262) (9,736)

interest

IAL S IAL the The to

repriced of

- - - - (11,561) - - - - is 1 NC

(84) (89) (95) (50) - (79) A 203 244 management

(183)

subject

rate Review.

(1,085) (9,305) (1,103) I 75,161 36,635

liabilities (13,621) (15,600) instrument. risk

not

the and

Within floating (1,606) (1,172) (1,217) (962) (972) (17,758) (23,687)

ED of

Business as

rate year 1–2

£000 £000 £000 £000 £000 £000 £000 £000 therefore

the instrument assets 63,251 (24,520) (9,959) (9,959) (9,959) 119 8,973

Effective - - 4.0% 3.6% (10,962) (3,000) - 5.5% 6.0% 4.34% 6.5% 4.7% 5.05% (8,934) (6,852) (9,959) (9,959) - (9,959) (9,959) - (48,770) 5.15% (779) - 5.76% 6.5% 5.78% 5.8% 5.15% 4.45% (22,000) - 5.31% 6.0% 5.55% (946) (1,083) (1,122) (1,112) (1,222) (16,498) (21,983) in are

maturity interest

classified

and

to until financial financial

SOLIDA 11 N

the

fixed

O of bearing

group’s C

pages instruments

£ £ $

rate the

contract - contracts -

– – on profile

rights rights facility facilty

equivalents - 111,999 equivalents - HE

venture venture of

US$ US

T fixed – – rate swap swaps £ US$

financial

joint joint instruments

non-interest cash cash O – – credit credit

rate rate

policies leases T currency currency

on rate rate

rate rate are loans loans

and and loans: loans: loans: notes notes from from

interest

explanation ES

Non-recourse Non-recourse Recourse Recourse T classified tables Interest Floating Cash

Preference 2006 31 March Fixed Floating Cash 31 March 2007 31 March Fixed Foreign Interest rates and maturity analysis rates Interest The An treasury Financial Foreign Reimbursement Reimbursement Bank Loan Bank Bank Loan Other Recourse Interest Recourse Other Finance Revolving Revolving Interest Loan Loan

29 N

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

29 Financial instruments (continued)

Fair values The fair values of financial instruments, together with the carrying amounts shown in the balance sheet are as follows: Carrying Carrying amount Fair value amount Fair value 2007 2007 2006 2006 £000 £000 £000 £000

Financial assets Cash 75,161 75,161 111,999 111,999 Available-for-sale investments 217 217 1,119 1,119 Interest rate swaps 254 254 - - Forward currency contracts - - 203 203

Financial liabilities Interest bearing loans and borrowings: Floating rate borrowings (94,299) (94,299) (67,188) (67,188) Fixed rate borrowings (23,052) (22,808) (24,113) (23,334) Loan notes (13,621) (13,621) (13,956) (13,956) Loan from joint venture (15,600) (15,600) (22,000) (22,000) Forward currency contracts (377) (377) - - Interest rate swaps (10) (10) (779) (779)

(71,327) (71,083) (14,715) (13,936)

Unrecognised gains 244 779

Forward exchange contracts are either marked to market using listed market prices or by discounting the contractual forward price and deducting the current spot rate. For interest rate swaps broker quotes are used. Those quotes are back tested using pricing models or discounted cash flow techniques. Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate is a market related rate for a similar instrument at the balance sheet date. Where other pricing models are used, inputs are based on market related data at the balance sheet date. The fair value of interest-bearing loans and borrowings is calculated based on discounted expected future principal and interest cash flows.

Cash flow hedges The group uses forward contracts to hedge anticipated foreign currency cash flows. Certain of these contracts qualify for hedge accounting and are designated as cash flow hedges. Gains and losses are held in the cash flow hedge reserve and are recycled to the income statement when the related purchases are recorded and recognised in the income statement. There is an immaterial amount of hedge ineffectiveness related to these hedges. Gains and losses on cash flow hedges are ultimately recorded in the income statement consistently with the underlying hedged item. Any gains or losses on cash flow hedges arising due to hedge ineffectiveness would be shown in the income statement within net financing costs. At 31 March 2007, the group held foreign exchange contracts designated as hedges of expected future receipts in respect of overseas operations for which the group had firm commitments. The terms of the contracts are as follows:

Quantity Maturity Exchange rate

Sell Euro 31,259,794 EUR April 2007- October 2011 EUR/£ 1.42 -1.51

At 31 March 2007 a net unrealised loss of £267,000 with deferred income tax of £80,000 is included in equity in respect of these contracts. In addition at 31 March 2007 the company held a forward currency contract to sell EUR 69.5m in April 2007 at an exchange rate of £/EUR 1.468 which has not been designated for hedge accounting. This contract had a fair value liability amounting to £110,000 at 31 March 2007.

100 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

2006 2006 1,140 173,138 174,278 CYP/£ 0.84 Exchange rate 200,000,000 SGD/£ 2.9-2.94 EUR/£ 1.45-1.47 THB/£ 71.86-72.0

2007 2007 1,211

174,278 175,489

200,000,000

Maturity

April 2006-March 2007 April 2006-March 2007 April 2006-March 2007 April 2006-March 2007 NTS TEME

A 101

Quantity

IAL ST IAL FINANC TED 6,033,000 EUR 1,904,700 CYP 4,270,000 SGD 28,500,000 THB Euro Singapore Dollar Thai Baht in respect of these contracts. income tax of £61,000 is included in equity unrealised gain of £202,000 with deferred At 31 March 2006 a net rate a forward currency contract to purchase US$12m in November 2006 at an exchange In addition at 31 March 2006 the company held for hedge accounting. This contract had a fair value of £1,000 at 31 March 2006. of £/$ 1.75 which had not been designated with its exposure to interest rate movements on certain of its bank borrowings. Contracts The group uses interest rate swaps to manage up fixed interest payments at a weighted average rate of 5.57% (2006: 5.57%) for periods nominal values of £22.1m (2006: £24.7m) have at 5.2% (2006: 5.2% plus LIBOR). until 2029 and have floating rate interest receipts on 31 March 2007 is estimated at £244,000 (2006: £779,000). These amounts are based The fair value liability of swaps entered into at balance sheet date. All of these interest rate swaps are designated and effective as cash market values of equivalent instruments at the of £39,000 (2006: £28,000) has been offset against hedged An amount deferred in equity. flow hedges and the fair value thereof has been interest payments made in the period. In thousands of shares On issue at 1 April Allotted, called up and fully paid Ordinary of 5p each shares Authorised Buy Cyprus Pounds in respect purchases and expenses hedges of expected future designated as foreign exchange contracts 2006 the group held At 31 March follows: of the contracts are as The terms the group had firm commitments. operations for which of overseas Issued for cash On issue at 31 March – fully paid During the year 1,211,020 (2006: 1,140,201) ordinary were issued for cash consideration of £3,402,000 (2006: £2,640,000) under shares share option schemes. the company’s (continued) Financial instruments

30 capital share

29 ONSOLIDA THE C ES TO NOT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 share-based payments Employee and management share participation plans exist as follows. All plans are equity-settled except where stated.

Long-term Incentive Plan (LTIP) The long-term incentive plan was established as an incentive scheme for executive directors and other selected senior executives. Under the terms of the scheme, employees may be awarded shares equal in value up to 50% of basic salary. The grant of awards is at the discretion of the Remuneration Committee. The shares are held in trust and released after three years pro rata to achievement of the performance target. The performance criteria is the Total Shareholder Return (‘TSR’) of the comparator group which currently comprises the members of the FTSE250 (but excluding Investment Trusts) but for future years the remuneration committee has the discretion in addition to relate the TSR to the Defence sector or the Support services sector. Shares vest fully if the company’s performance equals or exceeds the upper quartile of the comparator group but there is no vesting if performance is below the median. For LTIP awards made prior to July 2005, each time share awards were made under the LTIP employees were entitled to invest, subject to certain conditions, up to 5% of basic salary to purchase additional shares in the company (‘Retained Shares’). These shares are held in the trust for at least three years and they are then matched on a 1:1 basis with further shares (‘Matching Shares’). This element of the scheme has now ceased for all future awards. The last potential matching share award will vest in July 2008.

Deferred annual bonus scheme (DABS) The group operates a deferred annual bonus scheme for senior executives. Under the provisions of the scheme members are required to defer 40% of their annual bonus which is used to acquire shares to that value. In addition, employees have the option to defer a further portion of annual bonus to acquire additional shares, up to a maximum of 35% of annual bonus. The deferred shares are held in trust for a period of three years. At the end of the three year period employees will received these shares together with a matching element from the company. The quantum of the matching element is dependant upon earnings per share growth targets. The maximum matching element obtainable is three times the deferred shares originally held for an employee.

Share option plans The group operates two share option plans under which directors and other executives are eligible to participate at the discretion of the remuneration committee. Options are granted at market value, determined immediately before the grant. Share options vest in equal tranches on the 3rd, 4th and 5th anniversaries of the date of the grant subject to achievement of a performance condition. The performance condition currently applying is real growth in earnings per share of at least 2% per annum over three consecutive years. These share options have a maximum life of 10 years.

Share incentive plan (SIP) The group operates a share incentive plan open to all employees. Under this plan employees are granted share options subject to the group meeting certain financial profit targets. Options are granted at the market value on date of the award and vest unconditionally if the employee remains in service for a period of 3 years from the date of the award. The contractual life of the options is five years and there are no cash settlement alternatives.

Employee Share Option Savings Plans (ESOP) The group operates Share Option Savings Plans for all eligible employees, whereby employees can save towards the exercise price payable for an award of share options. The exercise price of these options is set at 90% of the market value of the share price at the date of grant. Under awards granted by the group, the savings period is ether 3 or 5 years for UK based employees and 2 years for US based employees. At the end of the savings period the options vest and the option holders have a 6 month window in which to exercise their options. The following tables sets out share option activity under these plans illustrating the number and weighted average exercise prices (WAEP) of, and movements in share options during the year.

Long term incentive plan

2007 2007 2006 2006 No. waeP (£) No. WAEP (£)

Outstanding at 1 April 861,505 2.83 765,169 2.56 Granted during the year 209,794 4.84 328,235 3.34 Forfeited during the year (42,257) 4.26 (119,109) 2.46 Exercised (220,511) 2.35 (36,022) 2.87 Expired during the year (46,238) 2.37 (76,768) 2.62

Outstanding at 31 March 762,293 3.47 861,505 2.83

102 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

------dependent ------No. (£) WAEP No. (£) WAEP No. (£) WAEP shares 2006 2006 2006 2006 2006 2006 (149,035) (413,105) 2.79 2.37 3,886,937 1,119,751 2.51 3.25 4,444,548 2.72 receive

- - - - 2007 2007 2007 2.72 4.64 4.64 4.61 4.61 3.00 4.64 4.64 4.65 3.57 2.59 1.67 P (£) WAE P (£) WAE P (£) WAE employees

- - - -

No. No. No.

2007 2007 2007 scheme,

(3,081) (8,262)

226,386 226,386 166,721 155,378 617,246 the (151,799) (732,445) (100,314)

4,444,548 4,077,236 of

rules the NTS TEME

A Under 103 2005. June

1 from effect

IAL ST IAL FINANC TED with introduced was plan incentive share Outstanding at 1 April Share incentive plan Share Outstanding at 1 April Share option schemes Share Outstanding at 1 April Deferred annual bonus plan Deferred £3.44). was £4.84 (2006: for the options exercised at the date of exercise average share price The weighted years). 1.2 years (2006: 1.4 contractual life is average remaining 31 March 2007 the weighted outstanding as at For the options prices for options was £2.80 (2006: £1.81). The range of exercise fair value of options granted during the year The weighted average end was £2.26 – £4.84 (2006: £2.26 – £3.84). outstanding at the year Granted during the year Forfeited during the year Exercised Outstanding at 31 March is open to senior executives. In accordance with the provisions of IFRS 2 a cost of As noted above the deferred annual bonus plan within the financial statements representing services£2,003,000 (2006: £1,298,000) has been included provided by the employees under the terms of this plan. Outstanding at 31 March Granted during the year Forfeited during the year Exercised Outstanding at 31 March The Granted during the year Forfeited during the year IFRS 2 (2006: 2,693,705) shares that have not been recognised in accordance with Included within the outstanding options are 1,882,810 to 2002. These options have not been subsequently modified and therefore do not need as the options were granted before 7 November be accounted for in accordance with IFRS 2. of exercise for the options exercised is £4.81 (2006: £3.71). The weighted average share price at the date life is 6.1 years (2006: 6.3 years). For the options outstanding as at 31 March 2007 the weighted average remaining contractual The range of exercise prices for options The weighted average fair value of options granted during the year was £1.02 (2006: £0.65). outstanding at the year end was £1.71 – £4.89 (2006: £1.61 – £3.84). Exercised Expired during the year during the year ended 31 March 2007. upon the group achieving certain profit targets. The first awards were made under this scheme with employees. Shares may vest at earlier The shares will be held in trust for a minimum period of three years before vesting unconditionally dates only in certain limited circumstances, such as early retirement or redundancy.

31 payments (continued) share-based ONSOLIDA THE C ES TO NOT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 share-based payments (continued)

Share option savings plan 2007 2007 2006 2006 No. waeP (£) No. WAEP (£)

Outstanding at 1 April 2,489,794 2.45 3,399,191 2.47 Granted during the year 1,193,148 4.10 - - Forfeited during the year (183,296) 2.92 (318,665) 2.58 Exercised (306,839) 2.26 (590,732) 2.58

Outstanding at 31 March 3,192,807 3.06 2,489,794 2.45

Included within the outstanding options are 670,887 (2006: 713,570) shares that have not been recognised in accordance with IFRS 2 as the options were granted before 7 November 2002. These options have not been subsequently modified and therefore do not need to be accounted for in accordance with IFRS 2. The weighted average share price at the date of exercise for the options exercised is £4.62 (2006: £3.71). For the options outstanding as at 31 March 2007 the weighted average remaining contractual life is 2.6 years (2006: 4.2 years). The weighted average fair value of options granted during the year was £1.04 (2006: £nil). The range of exercise prices for options outstanding at the year end was £2.20 – £4.10 (2006: £2.20 – £2.61).

Share option valuation assumptions The fair value of options granted were measured using the Black-Scholes method for the share option plans and Employee Share Options Savings Plans, the Monte-Carlo method for the grants under the Long-Term Incentive Plan, and a simplified Black-Scholes method for the matching shares granted within the Long-Term Incentive Plan. The weighted average assumptions used in determining fair value of options granted were as follows: Share options Long-term incentive plan share options plans savings plans

2007 2006 2007 2006 2007 2006

Dividend yield 2.2% 2.9% 2.3% 3.0% 2.4% - Expected volatility 21.0% 23.9% 22.6% 21.8% 21.2% - Risk-free interest rate 4.7% 4.1% 4.7% 4.3% 4.7% - Expected life 3 years 3 years 5 years 5 years 4 years - Exercise price 484p 334p 465p 324p 415p -

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share options), adjusted for any expected changes to future volatility due to publicly available information. The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The Long-Term Incentive Plan includes a market vesting condition linked to the Total Shareholder Return (‘TSR’) of a comparator group which requires the volatility of comparator companies’ share prices and the average correlation between the share prices of the company and the comparator companies to be considered in assessing the fair value of options granted. The following approach has been adopted for these items: Comparator company volatility – Annualised, daily historic volatility assessed over a period prior to the date of grant that corresponds to the period over which the TSR is being projected; Company correlation – Taken as the average correlation of TSR between all of the companies over the same historic period.

Compensation expense 2007 2006 £000 £000

Long-term incentive plan 528 317 Deferred annual bonus scheme 2,003 1,298 Share option plans 335 238 Share incentive plan 274 215 Employee share option savings plans 354 265

3,494 2,333

104 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

(92) (367) 3,112 2,653 2,917 3,402 (1,614) 58,241 (1,778) (19,218) 199,673

£000 1,084

670 655 (2,501)

- 2,917 (1,614) 61,222 (19,218) (442) (17,366) (17,366) 89,109 125,442 159,323 41,933 44,225

- 2,716 2,716 - - 66 2,706 - - - - (20) 384

- - (1,336) ------(2,399) (3,365) 1,360 932

------3,345 NTS TEME

A ------

105 8,774 33,995

Share capital £000 premium Share Translation £000 Reserve Hedging reserve £000 Retained earnings £000 Total £000 £000

8,657 28,070 (394) -

60 2,580 8,717 30,650 966 (404) 116,016 155,945

IAL ST IAL FINANC TED

Balance at 1 April 2005 Minority interest Treasury shares Treasury the group held 172,175 (2006: 64,123) of the Own shares held are recognised as a deduction from retained earnings. At 31 March 2007, shares. company’s Hedging reserve The hedging reserve flow hedging instruments relating comprises the effective portion of the cumulative net change in the fair value of cash to hedged transactions that have not yet occurred. Translation reserve Translation The translation reserve statements of foreign operations comprises all foreign exchange differences arising from the translation of the financial that are not integral to the operations of the company. Balance at 1 April 2005 Attributable to equity holders of the parent Attributable to equity (2006: £1,313,000). transactions is £2,658,000 share-based payment arising from equity settled of the above expense The portion The carrying (2006: £1,020,000). 31 March 2007 is £836,000 settled options at liability relating to cash amount of the

recognised income and expense Total Dividends received Balance at 31 March 2007 including deferred tax including deferred tax in equity Reconciliation of movements IAS 39 Adoption of IAS 32 and Dividends to shareholders recognised income and expense Total recognised income and expense Total Dividends to shareholders Equity-settled share-based transactions, Share option exercised by employees Balance at 31 March 2006 income and expense recognised Total Minority purchase Balance at 31 March 2007 Share option exercised by employees Dividends received Purchase of treasury shares Balance at 31 March 2006 Equity-settled share-based transactions,

32 31 payments (continued) share-based ONSOLIDA THE C ES TO NOT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

33 additional cash flow information

Cash flow from operating activities 2007 2006 £000 £000

Operating profit – continuing operations 62,086 62,448 Adjustments to reconcile operating profit to net cash inflows from operating activities: Profit before tax from discontinued operations - 192 Share of post tax earnings of equity accounted investments (15,454) (10,421) Depreciation of property, plant and equipment 20,005 19,103 Depreciation of investment property 21 21 Restructuring impairment charge 1,949 - Amortisation of intangible assets 8,938 2,616 Profit on sale of property, plant and equipment (208) (1,012) Dividends received from joint ventures and associates 13,949 9,286 Changes in fair value of financial instruments 202 (598) Equity settled share-based payment expenses 2,658 1,313 Difference between pension contributions paid and amounts recognised in the income statement (1,446) (897) Decrease/(increase) in inventories 2,785 (2,934) Decrease/(increase) in trade and other receivables 660 (8,570) Increase/(decrease) in trade and other payables 19,727 (626) Decrease in provisions (8,476) (5,864)

Cash from operating activities 107,396 64,057

Analysis of net debt as defined by the group 1 April Arising on Exchange Non-cash 31 March 2006 acquisition Cash flow differences movements 2007 £000 £000 £000 £000 £000 £000

Cash and cash equivalents 111,999 - (35,321) (1,517) - 75,161 Interest bearing loans – non-current (77,478) - (43,704) 839 13,460 (106,883) Interest bearing loans – current (49,778) (32,518) 55,629 438 (13,460) (39,689)

(15,257) (32,518) (23,396) (240) - (71,411)

Analysed as: Recourse net funds/(debt) 6,726 (50,374) Non-recourse net debt (21,983) (21,037)

(15,257) (71,411)

1 April Exchange Non-cash 31 March 2005 Cash flow differences movements 2006 £000 £000 £000 £000 £000

Cash and cash equivalents 39,867 71,391 741 - 111,999 Interest bearing loans – non-current (84,783) 3,601 (980) 4,684 (77,478) Interest bearing loans – current (21,162) (12,732) - (15,884) (49,778)

(66,078) 62,260 (239) (11,200) (15,257)

Analysed as: Recourse net funds 5,714 6,726 Non-recourse net debt (71,792) (21,983)

(66,078) (15,257)

The non-cash movement represents the issue of loan notes upon the acquisition of Touchstone Limited during the year ended 31 March 2006. 106 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007 NTS TEME A 107 IAL ST IAL FINANC TED In the ordinary part of the contracts which can account for a substantial companies from time to time enter into course of business group consolidated revenue. with overseas customers, group companies are required to undertake significant obligations In connection with these contracts, particularly the contracts. in relation to the performance and financing of required in respect of these obligations. In the opinion of the directors, no provision is plant and equipment financial statements for the acquisition of property, contracted for but not provided in the At 31 March 2007 amounts (2006: £43,000). amounted to £9,296,000 balance sheet date announced after the rates either enacted or of changes in tax requires the disclosure the balance sheet date Events after tax rate from in the UK corporation of a change liabilities. The announcement deferred tax assets and effect current and that significantly This change is a non- balances set out in these financial statements. from 1 April 2008, will impact the deferred tax 30% to 28%, effective adjusting event. Contingent liabilities Capital commitments sheet events Post balance 36 35 34 ONSOLIDA THE C ES TO NOT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

37 Retirement benefits The group participates in five defined benefit pension schemes; the Shipbuilding Industries Scheme (SIPS), LAWDC, the Guidance Enterprise Group Scheme, the Local Government Pension Scheme (LGPS) and a US scheme. The UK schemes are funded by the payment of contributions to separately administered funds. The US scheme is an unfunded scheme. The group hold a life assurance policy which is to be used to fund retirement benefits arising. Under IAS 19 this insurance policy is deemed to be a non-qualifying insurance policy and as such is not an asset of the pension scheme. The asset is instead a corporate-owned asset and is included within the balance sheet (note 19). Pension contributions are determined with the advice of independent qualified actuaries on the basis of triennial valuations using the projected unit credit method. Scheme assets are stated at their market values at the respective balance sheet dates and overall expected rates of return are established by applying published forecasts to each category of scheme assets. The assets and liabilities of the schemes at 31 March are: SIPS LAWDC Guidance LGPS US Total £000 £000 £000 £000 £000 £000

Year ended 31 March 2007 Scheme assets at fair value Equities 268,322 16,527 8,621 18,794 - 312,264 Bonds 37,421 2,383 158 4,521 - 44,483

Fair value of scheme assets 305,743 18,910 8,779 23,315 - 356,747 Present value of scheme obligations (338,808) (20,184) (10,644) (24,612) (139) (394,387)

Net pension liability (33,065) (1,274) (1,865) (1,297) (139) (37,640)

Year ended 31 March 2006 Scheme assets at fair value Equities 253,668 15,447 7,993 15,717 - 292,825 Bonds 25,518 1,273 56 5,233 - 32,080

Fair value of scheme assets 279,186 16,720 8,049 20,950 - 324,905 Present value of scheme obligations (330,656) (21,741) (10,514) (24,235) (62) (387,208)

Net pension liability (51,470) (5,021) (2,465) (3,285) (62) (62,303)

The pension plans have not directly invested in any of the group’s own financial instruments nor in properties or other assets used by the group. The amounts recognised in the group income statement and in the group statement of recognised income and expense for the year are analysed as follows:

Year ended 31 March 2007 Recognised in income statement SIPS LAWDC Guidance LGPS US Total £000 £000 £000 £000 £000 £000

Current service cost 15,425 1,008 1,073 1,519 77 19,102 Past service cost 200 - - 44 - 244 Expected return on scheme assets (21,509) (1,309) (661) (1,446) - (24,925) Interest cost on scheme liabilities 16,679 1,101 548 1,225 3 19,556

Recognised in arriving at operating profit 10,795 800 960 1,342 80 13,977

Taken to the statement of recognised income and expense Actual return on scheme assets 23,481 1,139 739 1,416 - 26,775 Expected return on scheme assets (21,509) (1,309) (661) (1,446) - (24,925)

1,972 (170) 78 (30) - 1,850 Other actuarial gains and losses 14,362 3,922 660 2,420 7 21,371

Actuarial gains recognised in the statement of recognised income and expense 16,334 3,752 738 2,390 7 23,221 108 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

- - - 6.0% 4.0% 2.7% 4.9% 7.4% 4.6% 4.6% 3.1% 3.1%

longevity

calculation. US

actuarial LGPS

and

2006 2006

the - (998) - 69,153 - 448 - 50,106 - - -

US Total improved 2007 2007

actuarial

5.3% 8.0% 4.5% 4.5% 3.0% 3.0% 4.0% 2.7% 5.75% members the

scheme

reflecting

within SIPS

deferred

5.0% 8.0% 4.3% 4.1% 2.8% 2.9% 5.0% 8.0% 4.3% 4.1% 2.8% 2.9% effect

main for

the

cohort

assumption C LAWD

2006 2006

For Guidance

- 448 adjusted

2007 2007 5.3% 8.0% 4.5% 3.0% 2.9% 3.0% 5.3% 4.5% 4.1% 3.0% 2.9% 8.0%

medium been

mortality

schemes.

the has

- table

includes

specific

5.0% 8.0% 4.3% 4.1% 2.8% 2.9% The

the

strengthens

SIPS NTS TEME 2006

A - assumption effect

longevity.

2007 relevant in 109 5.3%

4.5% 2.9% 4.1% 3.0% 8.0%

cohort

mortality

tables

this

SIPS £000 LAWDC £000 Guidance £000 LGPS £000 £000 £000

60,145 3,506 1,867 3,635 10,779 732 733 1,154 61 43,680 13,459 2,546 1,392 2,488

(16,465) (960) (475) (1,147) - (19,047) (16,465) 14,900 (960) 9,214 934 (475) 706 (1,147) 477 1,051 735 - (44,447) 1,506 (19,047) (3,265) 1 (1,074) 17,363 62 (2,318) 12,223 - (51,104)

the

of increases

actuarial

addition

inclusion In

expected

upon

for The

IAL ST IAL FINANC TED based

allows 1945.

are experience.

and

which

92, scheme longevity 1925

PFA

actual

92/

between

pensioner

reflect for

PMA

born

to is

used

members Bonds Bonds Equities Equities

life expectancy to age 87 and a female would have The mortality assumption adopted predicts that a current 60 year old male would have a year is predicted to increase the deficit in the a life expectancy to age 90. The effect of increasing this assumed life expectancy by one schemes by approximately £10m. discount rate were to change by 0.1% then it is The assumption considered to be the most significant is the discount rate adopted. If the predicted that the deficit in the scheme would change by £7m. of table pensioners Discount rate Discount rate

income and expense to the statement of recognised Taken Actual return on scheme assets Current service cost statement Recognised in income Year ended 31 March 2006 31 March ended Year Curtailments and settlements Future salary increases Inflation rate Expected rate of return on assets: Rate of increase in pensions in payment Assumptions Expected rate of return on assets: Future salaryincreases Rate of increase in pensions in payment Inflation rate plans are: pension benefit obligations for the group’s The principal assumptions used in determining statement of recognised income and expense (767) (719) 318 170 (continued) benefits Retirement Expected return on scheme assets assets Expected return on scheme liabilities Interest cost on scheme at operating profit Recognised in arriving Other actuarial gains and losses Actuarial gains and losses recognised in the

37 ONSOLIDA THE C ES TO NOT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

37 Retirement benefits (continued)

Movement in the present value of the defined benefit pension obligations SIPS LAWDC Guidance LGPS US Total £000 £000 £000 £000 £000 £000

At 1 April 2005 270,594 16,847 8,188 18,890 - 314,519 Current service cost 10,779 732 733 1,154 61 13,459 Curtailments and settlements - - - 448 - 448 Interest cost 14,900 934 477 1,051 1 17,363 Benefits paid (10,090) (245) (245) (11) - (10,591) Contributions paid by employees 26 208 287 385 - 906 Actuarial gains and losses 44,447 3,265 1,074 2,318 - 51,104

At 31 March 2006 330,656 21,741 10,514 24,235 62 387,208 Exchange adjustment - - - - 4 4 Current service cost 15,425 1,008 1,073 1,519 77 19,102 Past service cost 200 - - 44 - 244 Transfer - 697 (697) - - - Interest cost 16,679 1,101 548 1,225 3 19,556 Benefits paid (10,625) (446) (224) (395) - (11,690) Contributions paid by employees 835 5 90 404 - 1,334 Actuarial gains and losses (14,362) (3,922) (660) (2,420) (7) (21,371)

At 31 March 2007 338,808 20,184 10,644 24,612 139 394,387

Changes in the fair value of plan assets

At 1 April 2005 218,701 12,398 5,733 16,002 - 252,834 Expected return on plan assets 16,465 960 475 1,147 - 19,047 Employer contributions 10,404 853 407 939 - 12,603 Contributions by employees 26 208 287 385 - 906 Benefits paid (10,090) (245) (245) (11) - (10,591) Actuarial gains and losses 43,680 2,546 1,392 2,488 - 50,106

At 31 March 2006 279,186 16,720 8,049 20,950 - 324,905 Expected return on plan assets 21,509 1,309 661 1,446 - 24,925 Transfer - 498 (498) - - - Employer contributions 12,866 994 623 940 - 15,423 Contributions by employees 835 5 90 404 - 1,334 Benefits paid (10,625) (446) (224) (395) - (11,690) Actuarial gains and losses 1,972 (170) 78 (30) - 1,850

At 31 March 2007 305,743 18,910 8,779 23,315 - 356,747

History of experience gains and losses Total Total Total 2007 2006 2005 £000 £000 £000

Fair value of scheme assets 356,747 324,905 252,834 Present value of defined benefit obligations (394,387) (387,208) (314,519)

Deficit in the schemes (37,640) (62,303) (61,685)

Experience adjustments arising on plan liabilities 21,371 (51,104) 17,099

Experience adjustments arising on plan assets 1,850 50,106 7,353

The cumulative amount of actuarial gains and losses recognised since 1 April 2004 in the group statement of recognised income and expense is £46,675,000 (2006: £23,454,000). 110 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

- - - - - to

of 154 781 party

has 2,756

entered has

turnover charged.

Bangor

post- - - - £6,400,000

by owed the a

51 62

officers.

was of 870 818 393 party related

Training

of to

Wales,

Transactions

2007.

majority executive

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- 56 795 - - - £118,000)

50 26 contributes parties. Repayments The

and

930

March related owed University

3,574

65. above, 39,162 2007. and

(2006:

the to

Limited.

62 directors Purchases Amounts Amounts

March - - - shown

to from

ended

officers, its above

other year.

388 607 960 party party related 31

£22,000,000). £118,000

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with

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on shown

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ended

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(2006: executive

during £000 £000 £000 £000 related Sales

7,305 5,021 2,403 1,355 3,930 23,108 588 1,017 1,721 637 12 375

the

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2007 the

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March VT in

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T All this provided University of Wales, Bangor University of Wales, The ALC (Superholdco) Limited The Careers Enterprise (Futures) Limited Enterprise (Futures) Careers The Whitefleet Limited The provided were Fleet Support Limited The Flagship Training Limited Flagship Training The Related Flagship employment The Total During into, Other related party transactions Other related The personnel with key management Transactions In Identity of related parties related Identity of Executive Related Careers ALC Fleet University Whitefleet

38 N

Company Balance Sheet at 31 March 2007

Notes 2007 2006 £000 £000

Fixed assets Tangible assets 4 342 405 Investments in subsidiary undertakings 5 51,376 43,718

51,718 44,123 Current assets Debtors – due within one year 6 435,356 81,314 Cash at bank and in hand - 15,003

435,356 96,317 Creditors: amounts falling due within one year 7 (101,954) (74,508)

Net current assets 333,402 21,809

Total assets less current liabilities 385,120 65,932

Creditors: amounts falling due after more than one year 7 (54,442) - Provisions for liabilities and charges 8 (25) (25)

Net assets 330,653 65,907

Capital and reserves Called up share capital 9 8,774 8,717 Share premium account 10 33,995 30,650 Revaluation reserve 10 10,257 10,257 Capital reserve 10 4,626 1,968 Profit and loss account 10 273,001 14,315

Shareholder’s funds 330,653 65,907

These financial statements were approved by the board of directors on 14 May 2007 and were signed on its behalf by:

CJ Cundy Director

112 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

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ccounting T The Details The 230 The results allocated Dividend The Computer based payments Share Although company’s Fixed assets and depreciation Depreciation straight financial Investments Investments Dividends and timing balance of funds within shareholders’ presented Dividends on shares The the the Taxation The The within Advantage Basis of preparation The The company’s VT Description of business Description Profit Presentation O

3 2 1 N NOTES TO THE COMPANY FINANCIAL STATEMENTS

4 Tangible fixed assets Computer Software £000

Cost At beginning of year 405 Additions 20

At end of year 425

Depreciation Charge in year 83

At end of year 83

Net book value At 31 March 2007 342

At 31 March 2006 405

5 Fixed assets investments

2007 2006 £000 £000

Shares in group undertakings 46,750 41,750 Capital contribution relating to share based payments 4,626 1,968

51,376 43,718

The cost of investment in subsidiary undertakings according to historical cost accounting rules is £29,350,000 (2006: £24,350,000), with the revaluation relating to Vosper Thornycroft (UK) Limited at the date of flotation 17 March 1988. Details of principal subsidiary undertakings are as follows: Percentage of Subsidiary Principal activity ordinary shares held

Vosper Thornycroft (UK) Limited Shipbuilding and design and manufacture of engineering products. 100% VT Group International Limited Holding company 100% VT Insurance Services Limited Provision of group insurance 100% VT Investments Limited Group investment holding company 100% VT Shipbuilding Holdings Limited Holding company 100%

6 debtors 2007 2006 £000 £000

Amounts owed by subsidiary undertakings 435,112 81,119 Other debtors 223 195 Recoverable taxation 21 -

435,356 81,314

114 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

- - - 25 80 109 2006 2006 2006 8,717 1,928 1,413 10,000 70,978 74,508 £000 £000 £000 Deferred taxation £000 25

25 25 71

425 £000 £000 £000 2007 2007 2007

8,774 1,720 1,938

54,442 10,000 40,620 57,180

101,954

115 NTS TEME A

IAL ST IAL FINANC ANY

175,489,289 ordinary ordinary shares of 5p each (2006: 174,278,269 shares of 5p each) Allotted, called up and fully paid Authorised Accelerated capital allowance At beginning of year than one year amounts falling due after more Creditors: Bank loans Guaranteed loan notes 200,000,000 ordinary shares of 5p each Amounts owed to subsidiary undertakings cross-guarantee arrangements between certain material subsidiaryThe bank loan and overdraft are secured by undertakings. under which is available to the company until November 2011. The total amount available The bank loan represents a revolving credit facility bears interest at LIBOR plus 0.45%. the facility is £225m and the facility currently Bank overdraft Other creditors Corporation tax income Accruals and deferred capital Called up share Provisions year falling due within one amounts Creditors: Created during the year At end of year set out below: The amounts provided for deferred taxation are

8 7 OM P THE C ES TO NOT NOTES TO THE COMPANY FINANCIAL STATEMENTS

10 share premium and reserves

Share Profit premium Revaluation Capital and loss account reserve reserve account Total £000 £000 £000 £000 £000

As beginning of year 30,650 10,257 1,968 14,315 57,190

Retained profit for the year - - - 260,300 260,300 Purchase of treasury shares - - - (1,614) (1,614) Premium on issue of shares 3,345 - - - 3,345 Capital contribution relating to share based payments - - 2,658 - 2,658

At end of year 33,995 10,257 4,626 273,001 321,879

Treasury shares Own shares held are recognised as a deduction from retained earnings. At 31 March 2007, the group held 172,175 (2006: 64,123) of the company’s shares.

11 Reconciliation of movements in shareholder’s funds 2007 2006 £000 £000

Profit on ordinary activities after taxation 279,518 15,381 Dividends (19,218) (17,366)

Retained profit/(loss) for the year 260,300 (1,985) New share capital subscribed 3,402 2,636 Capital contribution relating to share based payments 2,658 1,313 Treasury shares (purchase)/disposal (1,614) 66

Net addition to shareholder’s funds 264,746 2,030 Opening shareholder’s funds 65,907 63,877

Closing shareholder’s funds 330,653 65,907

12 events after the balance sheet date Events after the balance sheet date requires the disclosure of changes in tax rates either enacted or announced after the balance sheet date that significantly effect current and deferred tax assets and liabilities. The announcement of a change in tax rate from 30% to 28%, effective from 1 April 2008, will impact the deferred tax balances set out in these accounts. This change is a non adjusting event.

13 Contingent liabilities Where the company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its group, the company considers these to be insurance arrangements, and accounts for them as such. In this respect, the company treats the guarantee contract as a contingent liability until such time as it becomes probable that the company will be required to make a payment under the guarantee.

116 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

- - - - - UK GAAP

- - - - - (65,338) (35,338)

- - (15,000) (14,424) 4,935 - 4,000 (9,774) (19,475) - - - 18.1p 14.8p 16.6p 13.0p IFRS UK GAAP

------92 (1,084) (3,886) (3,722) IFRS 786 876 103 781 2006 2005 2004 2003 (725) (1,215) (1,439) (797) 5,398 12,410 (6,984) (5,265) (3,056) (1,518) 41,750 31,779 15,586 2,742 20,626 12,912 30,238 7,733 10,809 22,127 9,419 8,823 52,027 10,421 36,951 9,899 37,079 12,142 55,464 34,940 41,585 8,125 46,165 55,464 41,547 41,585 55,464 36,100 41,585 31,123 42,372 26,326 32,213 11,648 17,025 3,539 (13,092) (9,372) (9,301) (8,109) 169,975 122,506 155,882 181,744 158,834 192,185 159,381 157,699 111,999 170,972 39,867 147,521 43,508 149,551 143,412 29,455 155,945 125,442 142,501 142,760 847,085 734,068 670,679 564,639 (295,691) (258,045) (255,744) (193,868) (228,325) (194,398) (86,028) (88,625) £000 £000 £000 £000

------

765 IFRS 2007 £000

4,379 (8,305) (6,037) (7,671) (1,680) (2,653)

44,430 25.40p 24.81p 24.03p 11.85p 23.59p 18.43p 10.75p 18.27p 9.75p 9.1p 9.0p 9.0p 1.6p 1.6p 8.4p 27,093 23,381 15,454 53,781 46,110 51,234 75,161 52,669 53,781 59,818

199,673 155,831 211,965 200,895 (201,805) (346,573)

1,004,597

117

Equity accounted investments Other non-current assets holders of the parent Profit for the financial year attributable to equity Fixed assets Deferred tax assets Non-current liabilities Provisions for liabilities and charges accounted investments Share of results of equity Net interest (payable)/receivable Profit on ordinary items activities before exceptional Exceptional costs Property services and sale of businesses Profit on ordinary activities before tax Goodwill amortisation Profit on ordinary activities before tax Taxation Profit on ordinary activities after tax Discontinued operations Turnover Other intangible assets Cash and cash equivalents Equity shareholders’ funds Minority interest Property plant and equipment Investment property Other current assets Current liabilities Earnings per share – pre goodwill – continuing operations Group operating profit amortisation and exceptional items Earnings per share – pre goodwill amortisation Earnings per share – post goodwill amortisation Earnings per share – diluted post goodwill amortisation Dividend per share and goodwill amortisation Minority interest and goodwill amortisation Goodwill

ry mma Yea r Su Five Principal subsidiary and joint venture undertakings

The following is a list of the group’s principal subsidiary and joint venture undertakings. All holdings are of ordinary shares or common stock and are 100% unless otherwise stated. A full list of the group companies will be included in the company’s annual return. Name Activity Country of incorporation Country of operation

ALC (FMC) Limited*† (50%) Provision of Services to HM Armed Forces England UK Airwork Limited* Support Services for overseas airforces England Oman Ascent Flight Training Limited* Provision of initial flying training England UK Careers Enterprise Limited* (50%) Provision of careers services in the counties of Buckinghamshire, Kent and the City of London England UK Flagship Training Limited*† (50%) Worldwide provision of naval training services to HM Armed Forces and other establishments England UK and worldwide Fleet Support Limited*† (50%) Support services for the Royal Navy’s Fleet at Portsmouth England UK Guidance Enterprise Group Limited* (50%) Provision of careers services England UK HCTC Limited* Provision of training services England UK Learning21 Limited* Provision of services for Building Schools for the Future England UK Maritime Dynamics, Inc.* Design and supply of electronic maritime ride control systems USA USA and worldwide Naiad Marine BV* Design and supply of stabilisers and bow thrusters for yachts Netherlands Worldwide Surrey Careers Services Limited* Provision of careers services in the county of Surrey England UK The Cube Corporation, Inc.* Support services for the US government USA USA Touchstone Learning and Skills Limited* Provision of training services England UK Vosper Thornycroft (UK) Limited Shipbuilding and holding company England UK VT Aerospace Limited* Support services for the Royal Air Force England UK VT Career Progressions Limited* Provision of software for careers services England UK VT Careers Management Limited* Holding company England UK VT Communications Limited* Provision of worldwide communications England UK and worldwide VT Critical Services Limited* Provision of vehicle services Scotland UK VT Education and Skills Limited* Provision of education services England UK VT Fire Services Limited* Special projects operating company England UK VT Fire Training (Avonmouth) Limited* Special projects operating company England UK VT Fitzroy Limited*†(70%) Support services for the Royal New Zealand Navy New Zealand New Zealand VT Four S Limited* (80.1%) Provision of school support services in the county of Surrey England UK VT Griffin Services, Inc.* Support services for the US government USA USA VT Group International Limited Holding company England UK VT Group Services Limited* Support services for VT Group England UK VT Halmatic Limited* Design and manufacture of small boats England UK VT Hellas Marine Consultants SA* Provision of shipbuilding management services Greece Greece VT Insurance Services Limited Captive insurance company Guernsey Guernsey VT Integrated Services Limited* Provision of manpower, training and support services England UK and worldwide VT Investments Limited Group investment holding company England UK VT Land Limited* Provision of vehicle services England UK VT Leaseco Limited* Special projects company England UK VT Maritime Affairs Limited* Special projects operating company England UK VT Maritime Dynamics, Inc.* Design and supply of electronic maritime ride control systems USA USA and worldwide VT Milcom, Inc*. Support services for the US government USA USA VT Naiad, Inc.* Design and supply of stabilisers and bow ride control systems USA USA and worldwide VT Ocean Sciences Limited* (50%) Special projects operating company England UK VT Plus Training Plc* Provision of training services England UK VT Property Services Limited* Special projects operating company England UK VT Services, Inc* Group investment holding company USA USA VT Shipbuilding Limited* Shipbuilding England UK VT Shipbuilding Holdings Limited Holding company England UK VT Shipbuilding International Limited* Shipbuilding England UK VT Southern Careers Limited* Provision of careers services England UK VT Support Services Limited* Holding company England UK VT US Inc.* Holding company USA USA VT West Sussex Careers Limited* (80%) Provision of careers services in the county of West Sussex England UK Whitefleet Limited*† (50%) Provision of vehicle services England UK

* Investment held by a subsidiary company † Joint venture undertaking 118 VT GROUP PLC ANNUAL REPORT & ACCOUNTS 2007

e k

www.flagshiptraining.co.u www.vtplc.com/aerospac www.fleet-support.co.u www.vtplc.com/supportservice www.fours.co.u Leatherhead KT22 4UE Park Weyside Sutton House, F: 01491 615379 F: (01483) 413201 Bournemouth International Airport F: (01202) 573692 F: (023) 9272 0723 F: (023) 9233 9001 F: (01202) 573692 F: (01372) 834000 01491 615370 T: Lane, Godalming Cattershall VT Training VT Training E:[email protected] VT Support Services VT Aerospace Fleet Support Limited VT Critical Services Limited Flagship Training VT Four S W: W: E: [email protected] E: [email protected] Shore House, Compass Road E: [email protected] 413200 (01483) T: Head office & Development centre (01372) 834444 T: 41 Couching Street Oxfordshire OX49 5PX Watlington, W: Surrey GU7 1XJ www.vtplc.com/plustraining W: (01202) 365200 T: HM Naval Base, Portsmouth PO1 3NJ 365200 (01202) T: W: Portsmouth, PO6 4PR North Harbour, Airport Bournemouth International W: Kingston Road Avenue, Bay Tree (023) 9233 9000 T: Christchurch, Dorset BH23 6BS 6BS Christchurch, Dorset BH23 Postal Point 100, Building 2/166 Couching House (023) 9272 1669 T:

119

m m m/educationandskills

www.vtplc.c www.naiad.co [email protected] [email protected] [email protected] [email protected] F: (01483) 413201 F: (01483) 413201 F: 00 1 (203) 929 3594 F: +31 (0) 45 574 2345 F: +1 (954) 791 0827 F: + 1 (301) 863 0254 F: +1 (757) 463 3052 Catteshall Lane, Godalming Cattershall Lane, Godalming E:[email protected] Management VT Careers E:[email protected] VT Naiad Marine VT Education and Skills VT Naiad Marine VT Milcom 532 Viking Drive VT Naiad Marine Head Office VT Maritime Dynamics VT Maritime Park Sutton House, Weyside 463 2800 x 79212 (757) T:+1 E: 50 Parrott Drive, Shelton E: E: E: www.vtmilcom.com W: Virginia 23452 (01483) 413200 T: (01483) 413200 T: Virginia Beach +31 (0) 45 544 7100 T: The Netherlands Fort Lauderdale, Florida 33314 USA W: 00 1 (203) 929 6355 T: + 1 (954) 797 7566 T: Surrey GU7 1XJ Surrey GU7 1XJ 3700 Hacienda Bvd. Suite I www.vtplc.com/careersmanagement W: W: Connecticut 06484 USA www.maritimedynamics.com W: Broward Business Park Dudoklaan 3a, 6411 RP Heerlen Park Mills Road, Lexington 21001 Great Maryland 20653 USA Park Sutton House, Weyside 863 5499 + 1 (301) T:

m NS TIO

CA AL LO

www.vtgriffin.co www.vtplc.com/halmati www.vtplc.com/lan [email protected] [email protected] [email protected] Fax: + 1 (770) 859 0410 Portsmouth PO1 3AQ 153 42 Aghia Paraskevi F: (020) 7396 6221 F: (023) 9253 9601 F: (023) 9285 7400 F: (023) 9285 7400 F: (01202) 573692 F: (023) 8083 9002 F: + 30 210 55 35 177 (023) 9285 7200 T: Suite 220 5755 Dupree Drive, NW, VT Services, Inc. VT Hellas VT Communications E: [email protected] VT Halmatic Portchester Shipyard, Hamilton Road VT Naval Support E: Fleet Way VT Shipbuilding Airport Bournemouth International VT Land VT Group plc VT Group VT House NCIP PRI London WC2A 3ED E: W: E: [email protected] Atlanta, Georgia 30327-4352 USA E: Hedge End Grange Drive, + 30 210 55 35 127 T: W: (020) 7969 0000 T: Athens Greece 3 Stratigou Tombra Portsmouth Naval Base Southampton SO30 2DQ + 1 (770) 952 1479 Telephone: 9001 (023) 8083 T: W: (023) 9253 9600 T: www.vtplc.com/shipbuilding W: (023) 9285 7200 T: Inn Fields 20 Lincoln’s White House Bld 2/103 www.vtplc.com W: 365200 (01202) T: PO1 3AQ Portsmouth Fleet Way, Portsmouth PO6 4QB 6BS Christchurch, Dorset BH23 www.vtplc.com/communications W: NOTES

120 Valuing Trust People, Performance and Partnering are VT Group’s core values that underpin our vision to be recognised as the number one international government services group. Our vision and values clearly identify our aspirations and define how we want to operate as an organisation. Valuing Trust demonstrates our commitment to all our stakeholders. It is what we believe in, informs our actions and will shape our future. Valuing Trust Valuing commitment Valuing you

contents

Results Summary �� 01 Corporate Responsibility �� 30 Consolidated Income Statement �� 68

Partnering www.vtplc.com Performance Annual ReportAnnual & Accounts 2007 People

VT Group plc Annual Report & Accounts 2007 www.vtplc.com

w: www.vtplc.com F: +44 (0)23 8083 9002 E: [email protected] Southampton SO30 2DQ +44 (0)23 8083 T: 9001 VT House Grange Drive, Hedge End VT Group plc