Greggs
Annual Report 2002

Plain-text annual report

a n n u a l r e p o r t a n d a c c o u n t s 2 0 0 2 The taste of the nation Fernwood House, Clayton Road, Jesmond, Newcastle upon Tyne NE2 1TL. www.greggs.co.uk G R E G G S p l c : a n n u a l r e p o r t a n d a c c o u n t s 2 0 0 2 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 NATIONWIDE COVERAGE MISSION, VISION AND VALUES C O N T E N T S Our Business. Greggs plc is the UK’s leading retailer specialising in sandwiches, savouries and other bakery-related products, with a particular focus on takeaway food and catering. We continue to show significant growth and now have over 1,200 retail outlets, trading under the Greggs and Bakers Oven brands. Our Vision and Purpose. Our vision is to be Europe’s finest bakery-related retailer. Our purpose is the growth and development of a thriving business, operating with integrity, for the benefit and enjoyment of our people, customers and shareholders alike. Our Strategy. Our people will be enabled, within overall guidance from the centre, 1 2 6 FINANCIAL REVIEW CHAIRMAN’S STATEMENT MANAGING DIRECTOR’S REPORT 12 DIRECTORS’ REPORT 14 STATEMENT OF DIRECTORS’ RESPONSIBILITIES 15 REPORT OF THE INDEPENDENT AUDITORS 16 GROUP PROFIT & LOSS ACCOUNT to work towards the successful attainment of world-class standards. To achieve this, the 17 GROUP BALANCE SHEET focus will be on: 18 PARENT COMPANY BALANCE SHEET A Great Place to Work: we will place major emphasis on promoting a culture 19 GROUP CASH FLOW STATEMENT that encourages personal development, leadership qualities and creativity. Enjoyable Experience: we will deliver customer satisfaction by offering great- tasting food at unbeatable value to the highest standards of food safety. 20 ACCOUNTING POLICIES 22 NOTES TO THE ACCOUNTS This will be achieved from shops that provide friendly and efficient service in 35 DIRECTORS’ REMUNERATION REPORT attractive surroundings. Business Excellence: our people will seek continuous improvement in their areas of responsibility, enabling them to make a real and lasting contribution to the objectives of the company. 40 CORPORATE GOVERNANCE 43 CORPORATE SOCIAL RESPONSIBILITY 44 TEN YEAR HISTORY Challenging Targets: we will strive to achieve a turnover of £1 billion by 2010 44 DIRECTORS & ADVISERS through continued core growth and the acquisition of new units, taking us to 45 SHOP ALLOCATION over 1,700 shops. Caring for the Community: our emphasis on social responsibility will encourage even greater involvement in local charity activities and social projects, and a strengthened focus on protecting the environment. Our Values. As a people-focused business, we aim to be enthusiastic and supportive in all that we do, open, honest and appreciative, and to treat everyone with fairness, consideration and respect. G R E G G S S H O P N U M B E R S Scotland Gosforth Cumbria Yorkshire North West Midlands Treforest South East TOTAL 2 0 0 2 125 112 51 112 125 129 91 228 973 2 0 0 1 118 112 50 102 120 119 81 203 905 B A K E R S OV E N S H O P N U M B E R S Scotland North Midlands South TOTAL TOTAL GROUP 2 0 0 2 32 49 85 63 229 2 0 0 2 1,202 2 0 0 1 33 51 88 67 239 2 0 0 1 1,144 45 F I N A N C I A L R E V I E W EPS DIVIDEND Pence 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 F I N A N C I A L C A L E N DA R Announcement of results and dividends Half year Full year Dividends Interim Final Annual report to shareholders Early August Early March Mid October Late May Early April Annual General Meeting 16 May 2003 F I N A N C I A L H I G H L I G H T S 2002 £’m 2001 £’m 422.6 377.6 36.7 24.7 32.7 22.8 Turnover Pre-tax profits Post-tax profits Shareholders’ funds 120.0 103.6 Capital expenditure 42.1 27.4 Pence Pence Earnings per share 205.5 190.2 Dividend per ordinary share 72.5 65.0 1 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 CHAIRMAN’S STATEMENT In my first report as Chairman, it is pleasing to note that continued satisfactory progress during 2002 has made this the Group’s eleventh consecutive year of profit, earnings and dividend growth. This success has been based above all on a culture of putting people first that goes right back to Greggs’ roots as a family bakery. Attentiveness to the needs of our employees and customers has been the key to almost 40 years of successful expansion which have taken Greggs from a single shop to a nationwide market leader with over 1,200. RESULTS BUSINESS HIGHLIGHTS Sales in 2002 increased by 11.9 per cent to £422.6 million. This included The Group traded satisfactorily throughout the year, with like-for-like sales growth like-for-like sales growth of 6.4 per cent, driven by continued strong demand for slowing as expected in the second half, as we encountered comparison with the takeaway food. exceptionally strong performance achieved in the latter part of 2001. The Greggs Operating profit increased by 11.8 per cent to £35.3 million, despite the substantial brand maintained its good progress, with particularly strong performances in the increase in insurance costs that was experienced across the food and retail sectors, South East, Midlands and Scotland. A year of record capital investment saw us and interest receivable rose by £0.2 million to £1.3 million. Pre-tax profit advanced increase the pace of new shop openings, adding a net 58 stores to give a total of by 12.0 per cent to £36.7 million. Basic earnings per share were 205.5 pence, 1,202 at the year end. We also made substantial investments in production facilities a rise of 8.0 per cent, reflecting an increase in the Group’s tax charge following the to support the growth of our retail operations. Mike Darrington provides a more exhaustion of credits relating to prior years. detailed commentary on these and other trading and business development issues DIVIDEND in his report on pages 6 - 10. The Board recommends a final dividend of 49.0 pence per share (2001: 44.0 pence), THE BOARD an increase of 11.4 per cent. Together with the interim dividend of 23.5 pence, paid I succeeded Ian Gregg as Chairman on 2 August 2002, having joined the Board in October 2002, this makes a total for the year of 72.5 pence (2001: 65.0 pence), on 1 March. I am delighted that Ian has agreed to remain on the Board as a a rise of 11.5 per cent. The Board remains committed to a progressive dividend non-executive director for the time being, providing us with continued access to policy which seeks to provide shareholders with increases in their income broadly his unequalled expertise. We are seeking to add to the number of independent in line with the underlying growth of earnings per share over the medium term. non-executive directors on the Board. Subject to the approval of the Annual General Meeting, the final dividend will be paid on 23 May 2003 to shareholders on the register at 22 April 2003. 2 “It’s really good coffee.” 3 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 “It’s great value and the kids love it.” PEOPLE PROSPECTS I have greatly enjoyed getting to know Greggs and its people, visiting bakeries and Trading since the start of the new year has been satisfactory, with like-for-like sales shops in many of the divisions since my appointment to the Board. One cannot fail in the first nine weeks up 5.2 per cent. Results to date are in line with our budgets, to be impressed by the hard work and commitment that is shown by all our staff, and ahead of the comparable period last year. and also by the fact that they take pleasure as well as pride in what they do. Since the year end we have opened our first two shops outside the UK, at Leuven The continued growth of the business directly reflects the efforts of all our 17,524 and Antwerp in Belgium, and plan a controlled trial of the Greggs format in that employees and I would like to thank them on behalf of the Board for their country which will involve a small number of additional openings in the months ahead. contribution to another successful year. The main thrust of our expansion will continue to be in the UK where we plan to add a further 45 new units, net of closures. We will also make significant further investments in UK manufacturing capacity, to keep pace with our retail expansion. Greggs is the market leader in a growing sector, with strong brands, proven formats and exceptional people. Despite further cost pressures we believe that the Group is well placed to achieve another year of satisfactory progress in 2003. Derek Netherton, Chairman 7 March 2003 4 5 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 MANAGING DIRECTOR’S REPORT This year we passed several important milestones, achieving turnover of over £400 million for the first time and opening our 1,200th shop. We also undertook the preparatory work that permitted the opening of our first shop outside the UK early in 2003. We further refined the strategic mission and vision through which we aim to achieve continued growth in the years ahead. Ian Gregg stepped down as Chairman of the Group in August after a remarkable 38 years of service. TRADING PERFORMANCE As the Chairman has noted, the Group made satisfactory progress during the year. Greggs of Cumbria, created during the year through the rebranding of our 50 We had anticipated from the outset that like-for-like sales growth would slow as the Birketts shops in the Lake District and adjoining counties, responded positively to the year progressed, given the exceptionally strong performance achieved in the second adoption of the new fascia. This was the final phase of our programme to create a half of 2001. Our expectations were duly met, with like-for-like sales growth averaging single and cohesive Greggs brand nationwide. We now have a strong platform for the 6.4 per cent over the year as a whole, comprising increases of 7.6 per cent in the more unified promotion of the Greggs proposition and brand across the UK, in which first half (24 weeks) and 5.4 per cent in the second half. The weather was more we will be assisted by the new advertising agency we appointed during the year. favourable in the first half than the second, but we would consider it fairly average for our business over the year as a whole. Lower levels of consumer traffic on the high street in the run-up to Christmas are also assumed to have contributed to slower like-for-like sales progress in the final weeks of the year, when we achieved growth of just over 4 per cent. Core volumes grew by 4.5 per cent in the first half and 2.9 per cent in the second, making an increase of 3.6 per cent over the year as a whole. Price increases averaging 2.8 per cent over the year were again driven primarily by product upgrades, though we also recovered cost increases in a number of areas including wages and insurance, where our premiums rose by some £1.7 million or 82.0 per cent. Including the benefit of new shop openings in the current and prior year, total sales BAKERS OVEN BRAND Like-for-like sales in the four Bakers Oven divisions grew by 3.8 per cent in the first half and 1.8 per cent in the second, making a 2.7 per cent increase over the year. Core volume performance remained disappointing, declining by 0.4 per cent in the first half and 1.3 per cent in the second, and so averaging 0.9 per cent for the year. There was a small reduction in Bakers Oven’s contribution to Group operating profit. Bakers Oven South continued to make satisfactory progress during the year, but the North and Scotland remained problematic. We have made a number of appointments to strengthen the management in these regions, including the transfer of proven, senior people from the Greggs divisions. rose by 13.2 per cent in the first half and 11.0 per cent in the second, making an RETAIL PROFILE overall increase of 11.9 per cent for the year. In the light of their relative performances, we have naturally concentrated our retail Operating profit grew by 11.8 per cent to £35.3 million, net interest receivable development programme on driving the successful Greggs brand, both by extending rose by £0.2 million to £1.3 million, and pre-tax profit increased by 12.0 per cent its geographic reach and by converting existing units to our new and more to £36.7 million. GREGGS BRAND The nine Greggs divisions remained the key drivers of Group sales and profits. Like-for-like sales grew by 8.8 per cent in the first half and 6.6 per cent in the second, including core volume uplifts of 6.1 and 4.3 per cent respectively. This produced a like-for-like sales increase of 7.6 per cent for the year, including core volume growth of 5.1 per cent. The Enfield and Twickenham divisions, now combined as Greggs South East, again made particularly pleasing progress, and Greggs of the Midlands also performed strongly. Greggs of Scotland, already our most profitable division, achieved another record result. takeaway-focused shop format. In total we opened 82 new shops during the year and closed 24, giving us a net increase of 58 to 1,202 outlets by 28 December 2002. This was slightly ahead of our target. There were 973 Greggs and 229 Bakers Oven shops at the year end, compared with 905 and 239 respectively twelve months earlier. We completed 58 comprehensive shop refurbishments and 17 minor refits during the year. The combination of new openings and refurbishments gave us a total of 295 new format Greggs stores at the year end, comprising 30 per cent of the chain, compared with 19 per cent in December 2001. 6 “It’s our favourite fast food. We love it! You cannot beat the chicken pasties.” Ant and Dec 7 “The staff are great. Very friendly.” 8 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 PRODUCT PROFILE The well-established trend to takeaway food categories continued to drive our sales launched successfully across the Group in 2002, included a ham and cheese bake across the Group, led by savouries and sandwiches and supported by complementary and an egg and bacon breakfast savoury for Greggs, and a cheese and onion products such as drinks. Cakes and confectionery products again remained fairly crumble topped bake for Bakers Oven. In addition, the centre houses one of the stable as a proportion of our trade, while the traditional bakery staples such as world’s most advanced laboratories for microbiological testing of products and bread and rolls continued to decline. STRATEGIC PRINCIPLES Greggs plc has been built on simple principles: motivating and empowering people to deliver enjoyable, value-for-money products and provide great customer service. Our key strategic principles are outlined in our Mission Statement inside the front cover of this report, and I am pleased to report that we made progress in each of our key target areas during 2002. ingredients, equipped to provide exceptionally rapid results that ensure our attainment of the highest possible standards of food safety. During the year this laboratory became the first such facility in the UK to be audited to ensure compliance with the International Standard ISO 17025. As well as monitoring the sales performance of each and every product line, we also talk directly to our customers and listen to what they have to say. Increasing investment in customer surveys is providing valuable feedback which will ensure that the next generation of products and shops is even more enjoyable ‘A Great Place to Work’. We want our people to enjoy their work and to derive and attuned to our customers’ changing needs. real satisfaction from what they do. A major employee opinion survey was conducted in February 2002, the results of which were generally positive, and we are working hard on the areas for improvement that it highlighted. All our managers across the Group are committed to building a positive culture that is founded on simple values: being enthusiastic and supportive, open, honest and appreciative, and treating everyone with fairness, consideration and respect. 360° feedback is being undertaken to monitor the effectiveness of our approach, beginning with the executive directors and our most senior managers. We aim to create the best possible working conditions for our people, and our new shop formats are designed to improve standards for employees as well as customers. Similarly, we devise improvements in working practices, such as the making of sandwiches, which are designed to make these everyday tasks more enjoyable as ‘Business Excellence’. Listening to our employees and acting on their suggestions is central to our philosophy. Through effective two-way communication, we will ensure that all our people understand our corporate goals and can make a real contribution to their realisation. This is backed by our commitment to simplifying every area of the business as far as possible. Best practice in products and service standards is increasingly shared across the business, aided by the research and development work undertaken at the Group Technical Centre. In parallel, we are placing ever increasing focus on the development and promotion of our two distinct national brands. Systematic targeting, benchmarking and progress measurement are all being pursued with ever-increasing professionalism, to ensure the attainment of our long term strategic objectives. well as more efficient. ‘Challenging Targets’. We are striving to achieve a turnover of £1 billion by the Opportunities for personal development are provided as widely as possible, and all end of the current decade. This will require not only the further expansion of our our employees are encouraged to develop their leadership qualities and to use shop base, to over 1,700 shops, but also the achievement of continued like-for-like their individual initiative, while adhering to the strict company-wide policies that are sales growth through our established outlets. Everything we are doing in the necessary to ensure the safe preparation and handling of food. management of the business is designed to ensure that all our people are working During the year all of our most senior managers benefited from a visit to some together towards these goals. In the longer term, we see potential for at least 2,000 businesses in the USA which are considered world leaders in customer service shops under our existing brands in the UK, and have already begun to examine the and in the creation of an environment and culture in which people can truly potential for our products and retail concepts on the Continent. enjoy their work. Although we recognise that much remains to be done, we were pleased to achieve recognition of our efforts to make working at Greggs an enjoyable experience when we featured for the first time in the The Sunday Times ‘The 100 best companies to work for in the UK’ survey, published in February 2003. ‘Caring for the Community’. One of the founding principles of our business has been a care for the communities in which we operate. We have a long-standing commitment to contributing in areas of deprivation, notably through the Greggs Trust through which we channel the bulk of our charitable contributions, which totalled £379,000 this year. The Greggs Breakfast Clubs which featured in last year’s ‘Enjoyable Experience’. The continuous introduction of new and improved products annual report have continued to expand successfully, and now operate in over is an important driver of like-for-like sales growth. Development work is undertaken 40 primary schools. We are determined to remain at the forefront in exercising both by our divisional teams and by the new Group Technical Centre in Balliol Park, corporate responsibility not only in the social arena, but also in our care and Newcastle upon Tyne. Outstanding new products devised at Balliol Park, and consideration for the environment. 9 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 CAPITAL INVESTMENT IAN GREGG Capital expenditure during 2002 was a record £42.1 million, comprising £18.4 million Ian Gregg is a very special man, as all who know him inside and outside the business in new shops and refurbishments and £23.7 million in land, buildings and plant can testify. He joined the family firm on the unexpected death of his father in 1964 including a substantial investment in a freehold site in west London for the further and led it up to its flotation 20 years later. During that period he grew the company development of our business in the South East. We also invested £3.5 million in a from a single shop in Gosforth, Newcastle upon Tyne, to a multi-divisional chain new cold store adjacent to our central savouries unit at Balliol Park. This new facility with over 300 outlets. From the outset he endowed Greggs with the fundamental was completed on schedule and in line with our budget, and has worked successfully principles of putting people first, on which our success has undoubtedly been based. to plan since it opened in October 2002. Its provision has enabled us to improve Equally remarkably, given his founding role and his undoubted entrepreneurial skills, the utilisation of our existing savouries production capacity, increasing efficiency and Ian readily stepped back from day-to-day management of the business on my effecting substantial savings in external storage costs. We are continuing to develop appointment in 1984, and has given me exemplary support as a non-executive plans for the construction of a second savouries unit to ensure that we have the Chairman. On behalf of everyone in Greggs, I would like to thank him for his unique facilities to meet continuing strong demand for these products. and outstanding contribution over his 38 years in the chair and look forward to his During 2003 we expect to invest around £40.0 million in the business, opening continued contribution as a non-executive director. some 45 new shops net of closures, continuing our rolling refurbishment campaign, and adding to our production capacity in Enfield, Birmingham, Leeds, PEOPLE Manchester and Edinburgh. We have written at length in this year’s report about the importance we attach to putting people first, notably in my earlier comments on our strategic principles. CASH FLOW AND BALANCE SHEET To those words I would merely like to add that the continued success of the The strongly cash generative nature of the Group enabled us to fund our record business remains a reflection of the quality of all our people. Once again, I would capital expenditure programme from our own resources, with only a small net like to thank everyone for their individual contributions to meeting the expectations cash outflow during the year. At 28 December 2002 we had net cash on the of our customers and shareholders. balance sheet of £28.6 million, compared with £30.0 million at the end of 2001. CORPORATE GOVERNANCE CONTINENTAL EUROPE We are committed to continuous improvement and raising of standards. In that Although Greggs has the potential to expand successfully in the UK for many years context, we continue to strive for good standards of corporate governance. I feel, to come, we feel that it is important to examine the scope for future growth in however, that the ever-increasing bureaucracy and the proportion of Board time other countries. As previously outlined, we have therefore been researching associated with this area is beginning to impact adversely on the time that can actually Continental markets for a number of years. During 2002 we decided that our first be devoted to the running of businesses in the interests of shareholders. It is a matter overseas trial would take place in Belgium, and appointed a local manager who of sensible balance. spent some months in the UK familiarising himself with the Greggs culture and operational style. We have undertaken extensive consumer research and trials, and OUTLOOK our first two shops opened at Leuven and Antwerp early in 2003, offering a mixture of local specialities and standard Greggs product lines. We will refine and develop our range and concept in the light of continuing consumer feedback, and will open a further one or two shops in Belgium as the first stage of our trial. This is a very closely controlled and low-risk venture, in which we expect to invest some £500,000 of capital in the current year. If the trial proves successful, we will expand our shop base with the aim of developing local production capabilities once we have reached a critical mass of around 20 shops. We expect this business to be profitable in four to five years’ time. As the Chairman has noted, we have made a positive start to the current year. The outlook for ingredient costs is benign, though we anticipate a further £1.8 million increase in our insurance costs. Greggs has always focused on achieving long term growth by building a simple business that strives to be the best in its field. Application of these principles has enabled us to attain market leadership in the growing market for bakery-related takeaway food in the UK, with a potent national brand, and will help us towards our ambitious targets for further growth in the years ahead. Mike Darrington, Managing Director 7 March 2003 10 “The bread’s fantastic, I eat the fresh sandwiches every day.” 11 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 DIRECTORS’ REPORT The directors have pleasure in presenting their annual report and the audited DIRECTORS AND THEIR INTERESTS accounts for the 52 weeks ended 28 December 2002. The comparative period is The names of the directors in office during the year together with their relevant the 52 weeks ended 29 December 2001. interests in the share capital of the Company (as defined in the Companies Act PRINCIPAL ACTIVITIES The principal activity of the Group is the retailing of sandwiches, savouries and other bakery related products with a particular focus on takeaway food and catering. The majority of products sold are manufactured in house. RESULTS AND DIVIDENDS 1985) at 28 December 2002 and 29 December 2001 are set out in note 6 to the accounts. Details of directors’ share options are set out in the Directors’ Remuneration Report on pages 35 to 39. On 1 March 2002 Derek Netherton was appointed a non-executive director. Trustee holdings of ordinary shares with no beneficial interest include 214,567 shares held by the Greggs Employee Benefit Trust to which certain directors are trustees. Sales for the financial year excluding VAT were £422,600,000, an increase of In accordance with the Company’s Articles of Association, Malcolm Simpson, £45,044,000 or 11.9% over the previous financial year. Group profit before Ian Gregg, Sonia Elkin and Susan Johnson retire from the Board by rotation taxation amounted to £36,666,000, an increase of 12.0% over the previous and, being eligible, offer themselves for re-election. Malcolm Simpson has a service financial year. agreement determinable in normal circumstances by not less than one years’ notice An interim dividend of 23.5p per ordinary share was paid on 4 October 2002 and from the Company, or not less than six months’ notice from Malcolm Simpson, the directors propose a final dividend of 49.0p payable on 23 May 2003 leaving Ian Gregg, Sonia Elkin and Susan Johnson do not have service agreements (in common profit for the financial year to be retained of £16,116,000 (2001: £15,146,000). with the other non-executive directors). BUSINESS REVIEW CORPORATE GOVERNANCE A review of the business during the year and an outline of future developments are A separate report on corporate governance is set out on pages 40 to 43. given in the Chairman’s statement and Managing Director’s report on pages 2 to 10. FIXED ASSETS SUBSTANTIAL SHAREHOLDINGS At 7 March 2003 the only notified interests of substantial shareholdings in the In the opinion of the directors the market value of all of the Group’s properties is issued share capital of the Company were: not significantly different from their historical net book amount. Percentage of issued share capital, % A.J. Davison (as trustee of various settlements) Aviva plc J.A. Wardropper (as trustee jointly with A.J. Davison) FMR Corporation Prudential plc Mrs G.V. Richardson and family Legal and General Investment Management Limited 8.90 7.01 5.43 5.05 4.80 4.44 3.02 12 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 EMPLOYMENT POLICIES CHARITABLE CONTRIBUTIONS We are committed to promoting policies which ensure that employees and those The Group is a member of the ‘Per Cent’ Club. Charitable donations of £379,000 who seek to work for us are treated equally regardless of sex, marital status, creed, were made by the Group during the year, including £282,000 to Greggs Trust. colour, race or ethnic origin. Greggs Trust also received donations from employees under Give As You Earn It is our policy to give full and fair consideration to applications for employment by of £50,000, from major shareholders of £129,000 and income from investments people who are disabled, to continue wherever possible the employment of staff of £174,000. These funds were used by Greggs Trust in pursuance of its main who become disabled and to provide equal opportunities for the career development objective, to alleviate the effects of poverty and social deprivation in the areas of disabled employees. where the Company trades. The number and dispersion of the Group’s operating locations make it difficult, but essential, to communicate effectively with employees. Communication with our shop staff is principally through the operational structure of shop area and divisional management. We communicate with our bakery staff by regular briefings and letters. All staff receive a copy of divisional and Group gazettes. The Group operates Profit Sharing and Savings Related Share Option Schemes to encourage its employees to identify with its corporate objectives. PAYMENTS TO SUPPLIERS AUDITORS In accordance with Section 384 of the Companies Act 1985, a resolution for the re-appointment of KPMG Audit Plc as auditors of the Company will be proposed at the forthcoming Annual General Meeting. By order of the Board ANDREW DAVISON, Secretary Supplier credit is an extremely important factor in the success of the Group. Whilst Greggs plc (CRN 502851) the Group does not follow any code or standard on payment practice, payments to suppliers are made in accordance with the Group’s normal terms and conditions of business except where varied terms and conditions are agreed with individual suppliers in which case these prevail. Where disputes arise we attempt to resolve them promptly and amicably to ensure delays in payment are kept to a minimum. The average creditor payment period for the Company and the Group at Fernwood House Clayton Road Jesmond Newcastle upon Tyne NE2 1TL 28 December 2002 was 46 days (2001: 51 days). 7 March 2003 13 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE PREPARATION OF ACCOUNTS The directors are required by company law to prepare accounts for each financial The directors have responsibility for ensuring that the Company keeps accounting year which give a true and fair view of the state of affairs of the Company and the records which disclose with reasonable accuracy at any time the financial position Group at the end of the financial year and of the results for that period. of the Company and which enable them to ensure that the accounts comply with The directors consider that in preparing the accounts on pages 16 to 34, the Companies Act 1985. the Company has used appropriate accounting policies, consistently applied and The directors have general responsibility for taking such steps as are reasonably supported by reasonable and prudent judgements and estimates, and that all open to them to safeguard the assets of the Group and to prevent and detect accounting standards which they consider to be applicable have been followed. fraud and other irregularities. The accounts have been prepared on a going concern basis on the presumption that the Group will continue in business. 14 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 REPORT OF THE INDEPENDENT AUDITORS TO THE MEMBERS OF GREGGS PLC We have audited the accounts on pages 16 to 34. We have also examined the amounts BASIS OF AUDIT OPINION disclosed relating to emoluments, share options and directors’ pension entitlements We conducted our audit in accordance with Auditing Standards issued by the which form part of the directors’ remuneration report on pages 35 to 39. Auditing Practices Board. An audit includes examination, on a test basis, of evidence This report is made solely to the Company’s members, as a body, in accordance relevant to the amounts and disclosures in the accounts. It also includes an with section 235 of the Companies Act 1985. Our audit work has been assessment of the significant estimates and judgements made by the directors in the undertaken so that we might state to the Company’s members those matters we preparation of the accounts, and of whether the accounting policies are appropriate are required to state to them in an auditor’s report and for no other purpose. to the Group’s circumstances, consistently applied and adequately disclosed. To the fullest extent permitted by law, we do not accept or assume responsibility to We planned and performed our audit so as to obtain all the information and anyone other than the Company and the Company’s members as a body, for our explanations which we considered necessary in order to provide us with sufficient audit work, for this report, or for the opinions we have formed. evidence to give reasonable assurance that the accounts are free from material RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of The directors are responsible for preparing the Annual Report and the directors’ information in the accounts. remuneration report. As described on page 14 this includes responsibility for OPINION preparing the accounts in accordance with applicable United Kingdom law and In our opinion the accounts give a true and fair view of the state of affairs of the accounting standards. Our responsibilities, as independent auditors, are established Company and the Group as at 28 December 2002 and of the profit of the Group in the United Kingdom by statute, the Auditing Practices Board, the Listing Rules of for the 52 weeks then ended and have been properly prepared in accordance with the Financial Services Authority and by our profession’s ethical guidance. the Companies Act 1985. KPMG Audit Plc Chartered Accountants Registered Auditor Newcastle upon Tyne 7 March 2003 We report to you our opinion as to whether the accounts give a true and fair view and whether the accounts have been properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the directors’ report is not consistent with the accounts, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors’ remuneration and transactions with the Group is not disclosed. We review whether the statement on page 40 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules and we report if it does not. We are not required to consider whether the board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Report, including the corporate governance statement, and consider whether it is consistent with the audited accounts. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the accounts. 15 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 GROUP PROFIT AND LOSS ACCOUNT for the 52 weeks ended 28 December 2002 Turnover Cost of sales Gross profit Distribution and selling costs Administrative expenses Operating profit Net interest receivable and other income Profit on ordinary activities before taxation Taxation on profit on ordinary activities Profit on ordinary activities after taxation Dividends paid and proposed Retained profit for the financial year Basic earnings per share Diluted earnings per share Note 1 2 2 2 3 4 9 10 11 24 12 12 2002 £’000 422,600 (163,406) 259,194 (192,790) (31,070) 35,334 1,332 36,666 (11,980) 24,686 (8,570) 16,116 205.5p 202.0p 2001 £’000 377,556 (147,468) 230,088 (172,711) (25,780) 31,597 1,145 32,742 (9,933) 22,809 (7,663) 15,146 190.2p 187.7p The Group’s operating profit for both the current and preceding financial year derives from continuing operations. There are no recognised gains or losses during the current and previous year other than the profit for the year. RECONCILIATION OF MOVEMENT IN CONSOLIDATED SHAREHOLDERS’ FUNDS 2002 £’000 24,686 (8,570) 16,116 4 291 16,411 103,554 119,965 2001 £’000 22,809 (7,663) 15,146 3 236 15,385 88,169 103,554 Profit for the financial year Dividends Retained profit for the financial year New share capital - nominal value - share premium Net addition to shareholders’ funds Opening shareholders’ funds Closing shareholders’ funds 16 GROUP BALANCE SHEET at 28 December 2002 Fixed assets Tangible assets Investments Current assets Stocks Debtors Cash at bank and in hand Note £’000 13 15 16 17 6,330 11,740 28,635 46,705 Creditors: amounts falling due within one year 18 (64,943) Net current liabilities Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges Deferred tax Capital and reserves Called up share capital Share premium account Profit and loss account Equity shareholders’ funds 19 21 22 23 24 28 December 2002 £’000 148,184 3,561 151,745 (18,238) 133,507 (119) (13,423) 119,965 2,404 10,085 107,476 119,965 The accounts on pages 16 to 34 were approved by the Board of directors on 7 March 2003 and were signed on its behalf by M.J. Darrington}Directors M. Simpson GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 29 December 2001 £’000 £’000 124,123 3,563 127,686 6,275 12,406 30,027 48,708 (60,762) (12,054) 115,632 (109) (11,969) 103,554 2,400 9,794 91,360 103,554 17 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 PARENT COMPANY BALANCE SHEET at 28 December 2002 Fixed assets Tangible assets Investments Current assets Stocks Debtors Cash at bank and in hand Creditors: amounts falling due within one year Net current (liabilities) / assets Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges Deferred tax Capital and reserves Called up share capital Share premium account Profit and loss account Equity shareholders’ funds Note £’000 28 December 29 December 2002 £’000 £’000 2001 £’000 14 15 16 17 6,330 28,270 28,553 63,153 18 (64,884) 19 21 22 23 24 127,358 8,751 136,109 102,739 8,753 111,492 6,275 30,737 29,872 66,884 (60,556) (1,731) 134,378 (119) (10,704) 123,555 2,404 10,085 111,066 123,555 6,328 117,820 (109) (9,250) 108,461 2,400 9,794 96,267 108,461 The accounts on pages 16 to 34 were approved by the Board of directors on 7 March 2003 and were signed on its behalf by M.J. Darrington} Directors M. Simpson 18 GROUP CASH FLOW STATEMENT for the 52 weeks ended 28 December 2002 Reconciliation of operating profit to net cash inflow from operating activities Operating profit Depreciation charges Loss / (profit) on disposal of fixed assets Release of government grants Increase in stocks Decrease / (increase) in debtors Increase in creditors Net increase in working capital Net cash inflow from continuing operating activities CASH FLOW STATEMENT Net cash inflow from continuing operating activities Returns on investments and servicing of finance Interest received Interest paid Net cash inflow from returns on investments and servicing of finance Taxation paid Capital expenditure and financial investments Purchase of tangible fixed assets Disposal of tangible fixed assets Disposal of investments Net cash outflow from capital expenditure and financial investments Equity dividends paid Financing Issue of ordinary share capital Redemption of loan notes Loan repayments Net cash inflow / (outflow) from financing Net (decrease) / increase in cash in the period Further details regarding cash flows are given in note 26 to the accounts GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 £’000 2002 £’000 £’000 2001 £’000 31,597 14,907 (248) (24) 4,186 50,418 50,418 1,145 (6,005) 35,334 16,813 260 (7) 3,155 55,555 55,555 1,332 (9,474) (639) (513) 5,338 1,354 (209) (27,385) 1,888 - (41,132) (7,968) (25,497) (7,067) 239 (42) (2,039) 295 (1,392) (1,842) 11,152 (55) 666 2,544 1,361 (29) (42,143) 1,009 2 295 - - 19 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 ACCOUNTING POLICIES The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group’s accounts. (a) BASIS OF ACCOUNTING The accounts are prepared under the historical cost accounting rules and in accordance with applicable accounting standards. The requirements of all new accounting standards and pronouncements adopted during the past year have been implemented where relevant. (b) CONSOLIDATION The consolidated accounts include the results of Greggs plc and its subsidiary undertakings for the period of 52 weeks ended 28 December 2002. The comparative period is the 52 weeks ended 29 December 2001. (c) DEPRECIATION Depreciation is provided on the cost of tangible fixed assets before deducting government capital grants and after taking the estimated residual value into consideration. Freehold and long leasehold properties are depreciated by equal instalments over a period of 40 years. No depreciation is provided on freehold land. Depreciation of other tangible fixed assets is provided on a straight line basis as follows: Short leasehold properties Plant: General Computers Motor vehicles Delivery trays Shop fixtures and fittings: General Electronic equipment 10% 10% 20% - 331/3% 20% - 25% 331/3% 10% 20% (d) GOVERNMENT GRANTS Grants received in respect of specific capital items are credited to deferred income and transferred to the profit and loss account in equal instalments over the estimated average life of the relevant fixed assets. Grants which are related to the fulfilment of certain conditions or to the expiry of a period of time are also credited to deferred income and are transferred to the profit and loss account in equal instalments over a period from the commencement of the project until these conditions are met. (e) STOCKS Stocks are stated at the lower of cost and net realisable value. (f) TAXATION The charge for taxation is based on the profit for the year and takes into account taxation deferred or accelerated because of timing differences between the treatment of certain items for taxation and accounting purposes. Deferred tax is recognised, without discounting, in respect of all timing differences between the treatment of certain items for taxation purposes and accounting purposes which have arisen but not reversed by the balance sheet date, except as otherwise required by FRS 19. 20 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 (g) GOODWILL Purchased goodwill arising in respect of acquisitions before 1 January 1998, when FRS 10: "Goodwill and Intangible Assets" was adopted was written off to reserves in the year of acquisition. When a subsequent disposal occurs any related goodwill previously written off to reserves is written back through the profit and loss account as part of the profit or loss on disposal. Purchased goodwill (representing the excess of the fair value of the consideration given over the fair value of the separable net assets acquired) arising in respect of acquisitions since 1 January 1998 is capitalised. Positive goodwill is amortised to nil by equal annual instalments over its estimated useful life. Negative goodwill arising in respect of acquisitions since 1 January 1998 is included within fixed assets and released to the profit and loss account in the periods in which the fair values of the non-monetary assets purchased on the same acquisition are recovered whether through depreciation or sale. (h) LEASED ASSETS The rental costs of properties and other assets acquired under operating leases are charged to the profit and loss account on a straight line basis over the term of the lease. (i) PENSION COSTS The Group operates defined benefit and defined contribution schemes for its employees. The assets of these funds are held by the Trustees of the schemes and are entirely separate from those of the Group. The amount charged to the profit and loss account in respect of the defined benefit scheme is based on actuarial estimates and is calculated to spread the cost of pensions over employees’ working lives with the Group. The amount charged to the profit and loss account in respect of the defined contribution schemes represents the contributions payable in respect of the accounting period. (j) FINANCIAL ASSETS AND LIABILITIES Changes in the value of financial instruments are disclosed in the notes to the accounts but are not reflected in the profit and loss account or the balance sheet. (k) CASH AND LIQUID RESOURCES Cash, for the purposes of the cash flow statement, comprises cash in hand and deposits repayable on demand, less overdrafts repayable on demand. Liquid resources are current asset investments which are disposable without curtailing or disrupting the business and are either readily convertible into known amounts of cash at or close to their carrying values or traded in an active market. Liquid resources comprise term deposits of less than one year (other than cash), government securities and investments in money market managed funds. (l) FOREIGN CURRENCY Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction or, if hedged, at the forward contract rate. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date or, if appropriate, at the forward contract rate. All exchange rate differences are included in the profit and loss account. 21 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 NOTES TO THE ACCOUNTS 1. Turnover Turnover represents sales to customers less value added tax. The turnover arises from the Group’s principal activity and relates wholly to sales within the United Kingdom. 2. Employee profit sharing scheme The total amount paid out under the Group’s employee profit sharing scheme is contained within the main cost categories as follows: Cost of sales Distribution and selling costs Administrative expenses 3. Net interest receivable / (payable) and other income / (similar charges) Interest receivable and similar income Interest payable on bank loans Interest receivable and similar income includes net exchange gains on foreign currency deposits of £165,000 (2001: £nil). 4. Profit on ordinary activities before taxation This is stated after charging / (crediting): Depreciation on tangible fixed assets: owned Loss / (profit) on disposal of fixed assets Release of government grants Auditors’ remuneration (group and parent company): audit services (2002: including £7,000 in respect of internal audit advice) non-audit fees paid to the auditor and its associates: - corporation tax compliance - current year - prior years - other taxation services - pension schemes audit - IT consultancy 2002 £’000 1,326 2,744 619 4,689 2002 £’000 1,361 (29) 1,332 2001 £’000 1,212 2,362 504 4,078 2001 £’000 1,354 (209) 1,145 2002 £’000 2001 £’000 16,813 14,907 260 (7) (248) (24) 94 25 21 4 12 - 84 25 42 26 10 25 Payments under operating leases – property rents 27,713 25,226 22 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 5. Share options Contingent rights to the allotment of Ordinary Shares in the Company at future dates exist under the terms of the Company’s Savings Related Share Option Scheme and its Executive Share Option Schemes. Details of these options at 28 December 2002 are as follows: Options outstanding at the end of the year Date of grant Price September 1993 700p 2002 4,400 2001 11,900 September 1996 1355p 28,734 36,812 March 1999 26871/2p 89,846 93,350 April 1999 2098p 170,647 185,128 March 2000 17011/2p 143,200 145,000 April 2002 2821p 121,276 April 2002 3526p 8,800 - - Dates exercisable Three to ten years after September 1993 Three to ten years after September 1996 Three to seven years after March 1999 June 2004 to December 2004 Three to seven years after March 2000 June 2005 to December 2005 Three to seven years after April 2002 Executive Share Option Scheme 4 Executive Share Option Scheme 5 Executive Share Option Scheme 6 Savings Related Share Option Scheme 4 Executive Share Option Scheme 7 Savings Related Share Option Scheme 5 Executive Share Option Scheme 8 6. Directors’ share interests The directors who served during the year and who were still in office at the end of the year and their interests in the share capital of the Company according to the register of directors’ interests are as follows: Mike Darrington Malcolm Simpson Ian Gregg (non-executive) Stephen Curran (non-executive) Sonia Elkin (non-executive) Susan Johnson (non-executive) Derek Netherton (non-executive) - appointed 1 March 2002 Ordinary shares of 20p (Beneficial interest) 2002 70,440 79,323 2001 70,640 80,723 231,300 240,500 3,700 900 - - 3,700 900 - - Ordinary shares of 20p (Trustee holding with no beneficial interest) 2002 2001 214,567 243,168 214,567 214,655 243,256 214,655 - - - - - - - - The executive directors have a potential beneficial interest in the Greggs Employee Benefit Trust (note 15). Details of directors’ share options and emoluments can be found in the Directors’ Remuneration Report on pages 35 to 39. There have been no changes since 28 December 2002 in the directors’ interests noted above. 23 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 NOTES TO THE ACCOUNTS continued 7. Pensions a). Defined benefit scheme The Company operates a defined benefit pension scheme, the Greggs plc 1978 Retirement and Death Benefit Scheme. The scheme funds are administered by trustees and are independent of the Company’s finances. Contributions are paid to the scheme in accordance with the recommendations of an independent actuarial adviser. The pension cost relating to the scheme is assessed in accordance with the advice of an independent qualified actuary using the attained age method. Actuarial valuations are carried out triennially and the latest actuarial assessment of this scheme was at 6 April 2002. The assumptions which have the most significant effect on the results of the valuation are those relating to the rate of return on investments and the rate of increase in salaries. It was assumed that the investment return would exceed salary increases by 2.0% per annum. At the date of the latest actuarial valuation, the market value of the scheme’s assets was £33,334,400. The actuarial value of the scheme’s assets represented 87% of the benefits that had accrued to members, after allowing for expected future increases in earnings. In view of this situation the Company has already made a one off contribution to the scheme and has agreed to increase the funding rate, including employees contribution, to a total of 16.5% (previously 13.3%) of annual pensionable salary. In addition the Company has undertaken regularly to review the funding position and intends to ensure that the scheme is adequately funded to meet its liabilities. The total pension cost to the Group of this scheme, including the group life premium, was £2,400,000 for the year (2001: £1,798,000). Whilst the Group continues to account for pension costs in accordance with Statement of Standard Accounting Practice 24 ‘Accounting for Pension Costs’ under FRS 17 ‘Retirement Benefits’ the following transitional disclosures are required: The actuarial valuation was updated to 28 December 2002, by an independent qualified actuary in accordance with the transitional arrangements of FRS 17. As required by FRS 17, the defined benefit liabilities have been measured using the projected unit method and both the assets and liabilities include the value of those pensions in payment which are secured with insured annuities. The major assumptions used in this valuation were: Inflation Pension increases (LPI) Salary growth Discount rate 28 December 29 December 2002 2.4% pa 2.4% pa 3.9% pa 5.6% pa 2001 2.5% pa 2.5% pa 4.0% pa 5.8% pa The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions, which, due to the timescale covered, may not necessarily be borne out in practice. 24 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 7. Pensions (continued) Scheme assets The fair value of the scheme’s assets, which are not intended to be realised in the short term and may be subject to significant change before they are realised, and the present value of the scheme’s liabilities, which are derived from cash flow projections over long periods and thus inherently uncertain, were: 28 December 2002 Expected return £’000 £’000 Expected return £’000 Equities Bonds Other 7.4% pa 4.5% pa 4.5% pa 18,188 6,229 7,952 8.0% pa 4.8% pa 5.3% pa 20,908 7,125 6,034 32,369 (41,699) (9,330) 2,799 (6,531) 29 December 2001 (restated) £’000 34,067 (34,373) (306) 92 (214) Fair value of assets Composed of : Total fair value of assets Present value of liabilities Gross pension liability Related deferred tax asset Net pension liability The present value of liabilities at 29 December 2001 has been restated from the value presented in the 2001 annual report following clarification of the treatment of benefits accrued before 6 April 1997. An allowance has been made for the pensions payable for pre-April 1997 service to increase overall at rates lower than 3% pa. This has resulted in a reduction of £1,219,000 in the net pension liability at 29 December 2001. Over the year to 28 December 2002, contributions by the Company of £2,171,000 (2001: £1,852,000) were made to the scheme. It has been agreed with the trustees that employer’s contributions from 6 April 2003 will be at the level of 9.9% of annual pensionable salary plus the cost of insuring death in service benefits and the cost of administration expenses. The post retirement deficit under FRS 17 would have moved as follows during the year to 28 December 2002: Post retirement deficit at 29 December 2001 Current service cost (employee and employer) Contributions (employee and employer) Other net finance income Actuarial loss Post retirement deficit at 28 December 2002 Year ended 28 December 2002 £’000 (306) (2,513) 3,011 367 (9,889) (9,330) 25 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 NOTES TO THE ACCOUNTS continued 7. Pensions (continued) The following amounts would have been included within operating profit under FRS17: Current service cost (employer’s part only) Past service cost The following amounts would have been included as net finance income under FRS 17: Expected return on pension scheme assets Interest on post retirement liabilities The following amounts would have been recognised within the statement of recognised gains and losses ("STRGL") under FRS 17: Annual return less expected return on scheme assets Experience losses arising on liabilities Loss due to changes in assumptions underlying the present value of scheme liabilities Actuarial loss recognised in the STRGL Year ended 28 December 2002 £’000 1,673 - 1,673 Year ended 28 December 2002 £’000 2,419 (2,052) 367 Year ended 28 December 2002 £’000 (6,663) (2,206) (1,020) (9,889) (21%) (5%) (2%) The above percentages show the STRGL components as a percentage of the end of year value of the scheme’s assets or liabilities as appropriate. The scheme is now closed to new entrants and, under the method used to calculate pension costs in accordance with FRS 17, the cost as a percentage of covered pensionable payroll will tend to increase as the average age of the membership increases. The Group’s net assets, including the disclosed FRS 17 balance sheet item above, would be £113,434,000 at 28 December 2002. b). Defined contribution schemes The Company also operates defined contribution schemes for other eligible employees. The assets of the schemes are held separately from those of the Group. The pension cost represents contributions payable by the Group and amounted to £942,000 in the year (2001: £893,000). There were no material amounts outstanding to any of the schemes at the year end. 26 8. Employees The average number of persons employed by the Group (including directors) during the year was as follows: Management Administration Production Shop The aggregate payroll costs of these persons were as follows: Wages and salaries Social security costs Other pension costs 9. Taxation on profit on ordinary activities a). Analysis of charge in period at 30% (2001: 30%) Current tax: Corporation tax at 30.0% (2001: 30.0%) - current year Total current tax Deferred tax Origination and reversal of timing differences - current year - previous years Total deferred tax Tax on profit on ordinary activities GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 2002 No’s 643 306 2,610 13,498 17,057 2001 No’s 585 290 2,529 12,237 15,641 2002 £’000 2001 £‘000 156,568 142,530 10,171 3,477 9,135 2,691 170,216 154,356 2002 £’000 2001 £’000 10,526 8,827 10,526 8,827 1,454 - 1,316 (210) 1,454 11,980 1,106 9,933 27 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 NOTES TO THE ACCOUNTS continued 9. Taxation on profit on ordinary activities (continued) b). Factors affecting current tax charge for period The tax assessed for the period is lower than the standard rate of corporation tax in the UK (30%). The differences are explained below: Profit on ordinary activities before tax Tax on profit on ordinary activities at UK standard rate of tax of 30% (2001:30%) Effects of: Capital allowances for period in excess of depreciation Expenses not deductible for tax purposes Lease rentals Chargeable gains rolled over Non-qualifying depreciation Other Current tax charge for period 10. Profit attributable to Greggs plc 2002 £’000 2001 £’000 36,666 32,742 11,000 9,823 (1,454) (1,316) 147 - (65) 758 140 208 (660) (273) 789 256 10,526 8,827 Of the profit attributable to shareholders, £23,369,000 (2001: £22,534,000) is dealt with in the accounts of the parent company. The Company has taken advantage of the exemption permitted by section 230 of the Companies Act 1985 from presenting its own profit and loss account. 11. Dividends On ordinary shares of 20p Interim paid: 23.5p (2001:21.0p) Final proposed: 49.0p (2001:44.0p) Total dividends: 72.5p (2001: 65.0p) 12. Earnings per share 2002 £’000 2001 £’000 2,782 5,788 8,570 2,477 5,186 7,663 Basic earnings per share are calculated on earnings after taxation of £24,686,000 (2001: £22,809,000) divided by the weighted average number of shares in issue for which consideration is receivable during the year of 12,015,526 (2001: 11,993,371). Diluted earnings per share are calculated using the same earnings as those used for basic earnings per share, and a weighted average number of shares of 12,220,091 (2001: 12,153,399). This number includes 204,565 (2001: 160,028) shares being the dilutive effect of the share options in place at the year end. 28 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 Land and buildings £’000 Plant and Shop fixtures machinery and fittings £’000 £’000 Total £’000 52,070 13,250 (755) (721) 57,879 10,581 82,501 18,312 192,450 42,143 (4,202) (7,271) (12,228) 721 - - 63,844 64,979 93,542 222,365 10,674 1,267 31,031 6,731 26,622 8,815 68,327 16,813 (311) (3,457) (7,191) (10,959) - 242 (242) - 11,630 34,547 28,004 74,181 52,214 41,396 30,432 26,848 65,538 55,879 148,184 124,123 13. Group statement of tangible fixed assets Cost At 29 December 2001 Additions Disposals Reclassification At 28 December 2002 Depreciation At 29 December 2001 Charged in year Disposals Reclassification At 28 December 2002 Net book amount At 28 December 2002 At 29 December 2001 Included in land and buildings is an amount of £8,511,000 (2001: £1,218,000) in respect of freehold land which is not depreciated. The net book amount of land and buildings comprises: Freehold property Shops Bakeries Other Long leasehold property Bakeries Short leasehold property Shops 2002 2001 £’000 £’000 £’000 £’000 14,396 31,087 6,115 15,242 20,578 4,965 51,598 264 352 52,214 40,785 149 462 41,396 29 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 NOTES TO THE ACCOUNTS continued 14. Parent company statement of tangible fixed assets Cost At 29 December 2001 Additions Disposals Reclassification At 28 December 2002 Depreciation At 29 December 2001 Charged in year Disposals Reclassification At 28 December 2002 Net book amount At 28 December 2002 At 29 December 2001 Land and buildings £’000 Plant and Shop fixtures machinery and fittings £’000 £’000 Total £’000 24,021 13,136 (705) (721) 58,412 10,581 82,989 18,312 165,422 42,029 (4,202) (7,271) (12,178) 721 - - 35,731 65,512 94,030 195,273 4,368 611 (276) - 31,302 6,731 27,013 8,815 62,683 16,157 (3,458) (7,191) (10,925) 242 (242) - 4,703 34,817 28,395 67,915 31,028 19,653 30,695 27,110 65,635 55,976 127,358 102,739 Included in land and buildings is an amount of £7,293,000 (2001: £nil) in respect of freehold land which is not depreciated. The net book amount of land and buildings comprises: 2002 2001 £’000 £’000 £’000 £’000 7,397 16,922 6,208 7,838 6,146 5,058 30,527 149 352 31,028 19,042 149 462 19,653 Freehold property Shops Bakeries Other Long leasehold property Bakeries Short leasehold property Shops 30 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 15. Investments Group Investments relate to shares in Greggs plc held by the trustees of the Greggs Employee Benefit Trust. This trust was established during 1988 to act as a repository of issued Company shares which can be purchased either on the exercise of an option by employees under the Greggs Executive Share Option Schemes or by the trustees of the Greggs Employee Share Scheme. The trust holds 214,567 shares in Greggs plc (2001: 214,655). These are shown in the accounts at cost of £3,561,000 (2001: £3,563,000) and have a market value at 28 December 2002 of £6,947,000 (2001: £6,574,000). The trust has registered a waiver in respect of dividends on these shares. Parent Company Interest in subsidiary undertakings Shares at cost Less: Amounts written off Employee Benefit Trust The Company’s subsidiary undertakings, which are all wholly owned, are as follows: Charles Bragg (Bakers) Limited Non-trading Greggs (Leasing) Limited Non-trading Thurston Parfitt Limited Dormant Greggs Properties Limited Property holding Olivers (UK) Limited Dormant Olivers (UK) Development Limited * Dormant Birketts Holdings Limited Non-trading J R Birkett & Sons Limited * Non-trading Greggs Trustees Limited Trustee * held indirectly 16. Stocks Raw materials and consumables Work in progress 2002 £’000 2001 £’000 5,828 (638) 5,190 3,561 8,751 5,828 (638) 5,190 3,563 8,753 Group Parent company 2002 £’000 4,685 1,645 6,330 2001 £’000 4,865 1,410 6,275 2002 £’000 4,685 1,645 6,330 2001 £’000 4,865 1,410 6,275 31 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 NOTES TO THE ACCOUNTS continued 17. Debtors Trade debtors Amounts owed by subsidiary undertakings Other debtors, including value added tax Prepayments and accrued income 18. Creditors: amounts falling due within one year Trade creditors Corporation tax Other taxes and social security costs Other creditors Accruals Proposed final dividend Deferred government grants 19. Creditors: amounts falling due after more than one year Deferred government grants 20. Financial assets and liabilities Group Parent company 2001 £’000 484 - 5,383 6,539 2002 £’000 525 2001 £’000 484 16,530 18,331 3,910 7,305 5,383 6,539 2002 £’000 525 - 3,910 7,305 11,740 12,406 28,270 30,737 Group Parent company 2002 £’000 2001 £’000 2002 £’000 2001 £’000 24,721 24,097 24,721 24,097 5,838 4,299 4,786 3,531 5,779 4,299 4,580 3,531 16,120 14,914 16,120 14,914 8,170 5,788 7 8,224 5,186 24 8,170 5,788 7 8,224 5,186 24 64,943 60,762 64,884 60,556 Group Parent company 2002 £’000 119 2001 £’000 109 2002 £’000 119 2001 £’000 109 The Group’s activities are financed by cash at bank and short term investments which comprise cash placed on deposit. During the year the Group has placed funds in a deposit account denominated in Euros in preparation for its anticipated expansion into Europe. The Group’s treasury policy has as its principal objective the achievement of the maximum rate of return on cash balances whilst maintaining an acceptable level of risk. Other than mentioned above there are no financial instruments, derivatives or commodity contracts used. The Group considers that the interest rate and currency risks are not significant. For the purposes of the following disclosures, short-term debtors and creditors have been excluded, as permitted by FRS13. The Group’s financial assets comprise cash at bank. At 28 December 2002 the average interest rate earned on the closing cash balance was 3.5% (2001: 3.5%). At 28 December 2002 the Group had no financial liabilities (2001: £nil). The Group has an overdraft facility of £10,000,000 of which £10,000,000 was undrawn at 28 December 2002 (2001: £10,000,000 undrawn). The fair value of the Group’s other financial assets and liabilities is not materially different from their book values. 32 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 Group Parent company 2002 £’000 2001 £’000 2002 £’000 2001 £’000 13,423 11,969 10,704 9,250 Group and Parent company 2002 £’000 2001 £’000 5,000 5,000 2,400 2,397 4 3 2,404 2,400 Group and Parent company £’000 9,794 291 10,085 2002 £’000 91,360 16,116 107,476 Group Parent company 2001 £’000 76,214 15,146 91,360 2002 £’000 96,267 14,799 111,066 2001 £’000 81,396 14,871 96,267 21. Provisions for liabilities and charges - deferred tax The provision is in respect of: Accelerated capital allowances The movement in deferred tax is represented by the charge for the year. 22. Share capital Authorised: 25,000,000 ordinary shares of 20p Issued and fully paid: Number of shares: 12,000,632 21,767 12,022,399 At 29 December 2001 Issued in respect of share options At 28 December 2002 Details of outstanding share options are given in note 5. 23. Share premium account At 29 December 2001 Premium arising on issue of shares in respect of share options At 28 December 2002 24. Profit and loss account At start of year Retained profit for the year At end of year Cumulative goodwill written off resulting from acquisitions made prior to 1 January 1998 amounts to £3,275,000 (1999: £3,275,000). 33 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 NOTES TO THE ACCOUNTS continued 25. Commitments a). Capital commitments Outstanding commitments for capital expenditure at 28 December 2002 not provided for in the accounts are as follows: Contracted for b). Operating lease commitments Group Parent company 2002 £’000 2001 £’000 2002 £’000 2001 £’000 2,689 2,161 2,689 2,161 At 28 December 2002 the Group and Company had annual commitments under operating leases on land and buildings as set out below: Operating leases which expire: Within one year In the second to fifth years inclusive After more than five years 2002 £’000 2001 £’000 1,195 6,749 18,954 26,898 1,213 5,882 16,690 23,785 The Group’s business is carried on through retail outlets which are subject to operating leases which include clauses for periodic rent reviews. The property commitments above are stated at current rents. 26. Notes to the group cash flow statement a). Reconciliation of net cash flow to movement in net funds (Decrease) / increase in cash in the period Cash outflow from decrease in debt Movement in net funds in the period Net funds at 29 December 2001 Net funds at 28 December 2002 b). Analysis of net funds 2002 £’000 2001 £’000 (1,392) 11,152 - (1,392) 30,027 28,635 2,039 13,191 16,836 30,027 At 29 December 2001 £’000 Cash flow Other changes £’000 £’000 At 28 December 2002 £’000 Cash in hand and at bank 30,027 (1,392) - 28,635 34 DIRECTORS’ REMUNERATION REPORT Remuneration Committee The names of the directors who have served on the Remuneration Committee of the Board during the year are Ian Gregg (Chairman), Sonia Elkin, Stephen Curran and Derek Netherton (with effect from August 2002). Mike Darrington and Andrew Davison have assisted the Committee in their deliberations on directors’ remuneration. The Remuneration Committee also received advice from Monks Partnership that materially assisted the Committee in their consideration of matters relating to directors’ remuneration, benefits and incentives. Monks Partnership were selected and appointed by the Committee. General Policy on Directors’ Remuneration The Company’s policy is to establish competitive remuneration packages for its directors that will attract, retain and motivate individuals with appropriate skills and experience and will best serve the interests of the Company, its shareholders and its employees. Remuneration packages for executive directors are designed so as to reward them fairly for their contributions within the range of benefits offered by other UK companies of equivalent size and to recognise the unusually complex nature of the combined retail, manufacturing and distribution operations of the Greggs business. The Remuneration Committee aims to set basic salaries for executive directors at a level broadly equivalent to median salaries for individuals holding similar positions in comparable companies, with adjustment to reflect individual performance. Basic salaries are normally re-set every three years unless a material change in the business warrants earlier review. Basic salaries were last re-set in 2002, to take effect from 1 January 2003, on the basis of advice and information as to levels of remuneration in comparable companies provided by Monks Partnership. Between major reviews, basic salaries will normally rise in line with rates of increase adopted elsewhere in the Greggs business. The Remuneration Committee seeks to structure total benefits packages in a manner which will align the interests of the executive directors with those of shareholders. The performance-related elements of the executive directors’ remuneration packages, under which executive directors can receive payments in total of up to 50% of their basic salaries, consist of annual performance based cash bonuses and participation in the Company’s Profit-Sharing Scheme (which distributes 10% of profits half-yearly to all employees on the basis of a formula related to service and salary levels). Such bonus payments are not pensionable. In addition, there will be occasional grants of options over shares in the Company, pursuant to one or more of the share option schemes operated through the Remuneration Committee. These include both Inland Revenue approved and unapproved long-term share incentive schemes, designed to encourage the executive directors and other employees to hold shares in the Company and to enhance share values. In accordance with the Joint Statement from the Investment Committees of the Association of British Insurers and the National Association of Pension Funds, the total number of new shares over which the Company may grant options is limited and the Company has chosen to allocate most of the number available to the Company’s Savings Related Share Option Scheme open to all employees, including executive directors. This has restricted the number of new shares available to be allocated under the discretionary Senior Executive Share Option Scheme under which the last grant of options (in which no executive director participated) was made in 2002. The policy adopted by the Remuneration Committee is that further grants of options will be awarded to executive directors under the Senior Executive Share Option Scheme, only when it is necessary to ensure that the value of options held is broadly in line with the median value of options held by directors holding similar positions in comparable companies. Unless granted pursuant to the all-employee Savings Related Share Option Scheme (under which options may be offered at a discount to market price), all options granted to executive directors will be at exercise prices at least equal to the market price of a share as at the date of grant. GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 The above policies enable the executive directors to receive potentially significant benefits in addition to their basic salaries, but only if value has been created for shareholders. The Remuneration Committee considers that, although the non-performance-related elements of the executive directors’ remuneration packages are, rightly, substantial, the performance-related elements are significant in terms of providing motivation to the executive directors to improve shareholder value. Fees payable to non-executive directors are set by a committee of the Board consisting only of executive directors (Mike Darrington and Malcolm Simpson) who periodically seek advice from external consultants as to the appropriate market rates applicable. Such advice was last obtained in 2002 from Monks Partnership and formed the basis upon which the fees payable in 2003 were set. Policy on Performance Conditions The performance conditions attaching to share options granted to the executive directors under the Company’s Senior Executive Share Option Schemes have varied according to the date of grant. Such conditions are set by the Remuneration Committee following receipt of advice from external consultants as to prevailing market practice and in order to set challenging performance objectives linked to shareholder return. The Remuneration Committee intends that performance conditions will continue to be settled on this basis and applied to any future grants of options to the executive directors under the discretionary Senior Executive Share Option Schemes. Details of the performance conditions for options currently outstanding are set out in the section headed ‘Share Options’ below. Whether performance conditions attached to share options have been met is tested by the Remuneration Committee, which compares the actual performance of the Company with relevant published statistics and, if necessary, obtains advice from external consultants in order to reach its conclusion. This ensures that no director is in a position to rule on whether any performance condition applicable to his own options has been satisfied. No performance conditions have been attached to options granted pursuant to the Company’s Savings Related Share Option Scheme, which is available for all employees, as the principal purpose of this scheme is to encourage employees at all levels within the Company to participate in, and to understand better, the growth in value of the Company and the rules of that scheme require that all options granted must be on the same terms. Performance criteria in relation to the performance based annual cash bonuses payable to the executive directors are set by the Remuneration Committee each year in accordance with the general remuneration policy set out above. Policy on Service Contract Notice Periods and Payments on Early Termination The Company’s policy on the duration of directors’ contracts is that: • existing executive directors should have service contracts terminable on one year’s notice served by the Company or by six months notice served by the director. Future executive directors would be engaged on terms necessary to secure individuals of appropriate calibre, having regard to prevailing market conditions at that time; • non-executive directors are appointed subject to the Company’s Articles of Association, which require them to retire and to seek re-election at the first AGM after appointment. Thereafter, one half of the Board (other than those appointed since the last AGM), being those who have been longest in office since last re- election, and any other director who has not been elected or re-elected at either of the two preceding AGMs, must retire and seek re-election. The Nominations Committee advises the Board as to whether a particular director, whose turn it is to retire by rotation, should be nominated for re-election. 35 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 DIRECTORS’ REMUNERATION REPORT continued The policy on termination payments for executive directors is that the Company does not normally make payments beyond its contractual obligations, including any payment in respect of notice to which a director is entitled. In exceptional circumstances, an additional ex-gratia payment may be considered, based on factors including the director’s past contribution and the circumstances of the director’s departure. The Company’s policy on notice periods changed at the end of 2002 when the executive directors agreed (without receiving any compensation) to reduce their entitlement to notice in all circumstances other than within 12 months following a change of control of the Company from two years to one year. Should either of the existing executive directors’ employment by the Company be terminated within 12 months following a change of control of the Company, it has been agreed that he would be entitled to a payment by way of liquidated damages calculated on the basis of a two year, rather than one year, notice period. This provision was approved by the Remuneration Committee in recognition of the special circumstances applicable to these executives, both of whom have served the Company well for many years and who intend to continue to do so for the rest of their working lives. Non-executive directors would not normally be entitled to compensation for early termination of their appointments prior to the date on which they would next be due to retire by rotation, or if not re-appointed at such time. In addition to the above arrangements, for 2003, the executive directors have been awarded a performance based cash bonus such that the combined bonus to be received by each of them under this arrangement and the Company’s Profit-Sharing Scheme will be set according to a straight line graph, subject to confirmation by the Remuneration Committee. By way of example as to how this graph would operate, if net profit per share before tax (excluding any property profit) adjusted for the issue of any shares during the period (other than those issued on the exercise of share options) for 2003 is greater than that for 2002 by 10%, the total bonus will be 20% of basic salary. If such net profit per share growth is greater than that for 2002 by 25%, the total bonus will be 50% of basic salary. Total bonus payments are capped at 50% of basic salary. Non-executive Directors The non-executive directors do not have service contracts with the Company. However, all of them do have letters of appointment. The terms of appointment of each non-executive director require that they seek re-election on a regular basis in accordance with the Articles of Association of the Company (see above). The fees payable to the non-executive directors cover all normal duties. In exceptional circumstances, where significant additional time commitment is required, the Board (or a duly authorised committee) may award additional fees. No right of compensation exists where the office is terminated, for whatever reason. DIRECTORS’ SERVICE CONTRACTS PERFORMANCE GRAPH The graph below shows a comparison of the total shareholder return for the Company’s shares for each of the last 5 financial years against the total shareholder return for the companies comprised in the FTSE Mid 250 Index (excluding investment Trusts). This index was chosen for this comparison because it includes companies of broadly similar size to the Company. Total Shareholder Return 400 350 300 250 200 150 100 50 0 0 0 1 o t d e s a b e R 7 9 - n a J 7 9 - y a M 7 9 - p e S 8 9 - n a J 8 9 - y a M 8 9 - p e S 9 9 - n a J 9 9 - y a M 9 9 - p e S 0 0 - n a J 0 0 - y a M 0 0 - p e S 1 0 - n a J 1 0 - y a M 1 0 - p e S 2 0 - n a J 2 0 - y a M 2 0 - p e S FTSE 250 (ex-Invst Trusts) Greggs Produced from information supplied by Thomson Financial, Datastream Details of the directors’ service contracts or letters of appointment are as follows: Executive Directors Mike Darrington has a service contract with the Company. His continuous period of service with the Company commenced on 15 July 1983. Malcolm Simpson has a service contract with the Company. His continuous period of service with the Company commenced on 24 April 1973. Both Mike Darrington and Malcolm Simpson have provisions in their contracts which enable them to be terminated by the Company on 12 months notice (in normal circumstances) or by the executive on 6 months notice. In addition to their basic salaries, each is entitled to participate in the Company’s profit sharing scheme available to all employees and to a performance based cash bonus. They are also entitled to additional benefits including the use of a motor car, private medical insurance, life assurance, permanent health insurance and a contribution towards telephone expenses. The service contracts contain a special provision which operates only in circumstances where the executive director’s employment with the Company is terminated within 12 months following a change of control of the Company. In those circumstances only they would be entitled to a payment calculated on the basis of a two year notice period. They will be entitled to a payment equal to their salary and the value of their other benefits (including bonus) for the full two year notice period and are obliged to accept this in full settlement of any claim they may have against the Company in respect of the termination of their contract. Their entitlement to this payment will not be affected if they in fact are able to reduce their loss by obtaining alternative employment during the normal notice period. This provision was introduced when the executives’ notice periods in other circumstances were reduced from two years to twelve months and are considered by the Remuneration Committee to be appropriate in the case of executive directors who have served the Company for 20 years and 30 years respectively and who intend to devote the remainder of their working lives to the service of the Company. 36 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 DIRECTORS’ EMOLUMENTS AND COMPENSATION The following table sets out details of the emoluments and compensation received in 2002 by each director (excluding pension contributions, details of which are set out below). Executive Mike Darrington Malcolm Simpson Non-executive Derek Netherton Stephen Curran Sonia Elkin Colin Gregg Ian Gregg Susan Johnson TOTAL Salary/fees Estimated value of benefits £ 19,494 15,299 - - - - - - £ 279,000 186,000 66,667 21,250 22,250 - 74,750 21,250 Annual bonus and profit share £ Total 2002 Total 2001 £ £ 71,815 47,876 370,309 249,175 359,847 244,202 - - - - - - 66,667 21,250 22,250 - 74,750 21,250 - 20,250 21,250 7,180 71,500 20,250 671,167 34,793 119,691 825,651 744,479 The fees for Stephen Curran were paid to a third party. The fees for Sonia Elkin reflect the fact that she is the Chairman of the Audit Committee and the Senior Independent Non-executive Director. No part of the remuneration, other than the basic salaries of the executive directors, is taken into account when calculating pension benefits. SHARE OPTIONS The following table sets out details of the share options (all of which were granted at a nominal or nil cost to the executive director concerned) held by, or granted to, each director during the year, according to the register of directors’ interests: Mike Darrington Malcolm Simpson Number of options during year At At 29/12/01 Granted Exercised 28/12/02 Exercise price £ Market price at date of exercise Gain on exercise 5,000 18,000 199 27,900 3,500 12,000 199 18,600 - - - - - - - - - - - - - - - - 5,000 13.55 18,000 26.875 199 20.98 27,900 17.015 3,500 13.55 12,000 26.875 199 20.98 18,600 17.015 - - - - - - - - - - - - - - - - Date of grant Sep 96 Mar 99 Jun 99 Mar 00 Sep 96 Mar 99 Jun 99 Mar 00 Date from which exercisable Sep 99 Mar 02 Jun 04 Mar 03 Sep 99 Mar 02 Jun 04 Mar 03 Expiry date Aug 03 Mar 06 Scheme Executive Executive Dec 04 SAYE Mar 07 Aug 03 Mar 06 Executive Executive Executive Dec 04 SAYE Mar 07 Executive The executive directors also have a potential beneficial interest in the Greggs Employee Benefit Trust (see note 15 to the Accounts). The grants awarded in 1996 under the Senior Executive Share Option Scheme were conditional upon the Company’s earnings per share increasing annually on an average over a three year period by inflation plus 4%. On each of the grants awarded in 1999 and 2000 under the Senior Executive Share Option Scheme, the exercise of one half of the options granted was made conditional upon the growth in the Company’s earnings per share over the three years from grant being greater than the median earnings per share growth of the companies comprised in the FTSE Mid 250 index (excluding Investment Trusts). The other half of the options granted was conditional upon growth in the earnings per share of the Company being at least 10% above the median earnings per share growth of such comparator companies within the same period. No non-executive director has any options to acquire shares in the Company. The mid-market price of ordinary shares in the Company as at 28 December 2002 was £32.375. The highest and lowest mid-market prices of ordinary shares during the financial year were £40.025 and £28.625 respectively. 37 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 PENSIONS Both of the executive directors earned pension benefits under the Greggs 1978 Retirement and Death Benefit Scheme, the Company’s defined benefit scheme, during the period under review. This scheme, which currently requires a contribution of 5.7% of pensionable salary from members, provides for up to two-thirds of final pensionable salary, dependant on length of service. Both of the executive directors also received contributions into the Company’s money purchase defined contributions pension schemes during the period under review. No pension benefits were earned or accrued in respect of any non-executive director. Defined benefit scheme The following table sets out the change in each director’s accrued pension in the Company’s defined benefit scheme during the year and his accrued benefits in the scheme at the year end: Accrued annual Accrued annual pension pension Increase in entitlement at entitlement at age 65 as at age 65 as at accrued pension Increase in accrued pension entitlement for 28 December 29 December entitlement the year net of 2002 £ 92,410 91,152 2001 £ 82,379 82,766 for the year inflation of 1.7% £ 10,031 8,386 £ 8,631 6,979 Date of birth 8/3/42 15/10/41 Date service commenced 15/8/83 24/4/73 Executive Director Mike Darrington Malcolm Simpson Note 1: The pension entitlement shown is that which would be paid annually on retirement based on service to the end of the year, but excluding any statutory increases which would be due after the year end. Note 2: The inflation rate of 1.7% shown in the table above is that published by the Secretary of State for Social Security in accordance with Schedule 3 of the Pensions Schemes Act 1993. Executive Director Mike Darrington Malcolm Simpson Cash equivalent Contributions transfer value as at made by the director Increase in the cash equivalent Cash equivalent transfer value as at 29 December 2001 29 December 2001 transfer value since 28 December 2002 £ 1,084,581 1,058,847 £ 15,942 10,413 £ 97,424 79,615 £ 1,183,648 1,153,803 Note: cash equivalent transfer values have been calculated in accordance with Actuaries Guidance Note GN11. The transfer values disclosed above do not represent a sum paid or payable to the individual director. Instead they represent a potential liability of the pension scheme. Money purchase schemes The Company has paid the following contributions to two of the Company’s money purchase schemes (the Greggs Bakeries (MJD) Retirement Benefit Scheme and the Greggs Senior Executive Pension Scheme) for the benefit of executive directors during this financial year: Contribution Contributions in respect in respect of any other financial year of 2002 £ 67,800 9,267 but made in 2002 £ - - Total contributions made during 2001 £ 67,800 8,900 Director Mike Darrington Malcolm Simpson 38 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 APPROVAL BY SHAREHOLDERS At the Annual General Meeting of the Company to be held on 16 May 2003, a resolution approving this report is to be proposed as an ordinary resolution. This report was approved by the Board on 7 March 2003. Signed on behalf of the Board Ian Gregg, Director Chairman of Remuneration Committee 7 March 2003 39 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 CORPORATE GOVERNANCE The Combined Code The Board recognises the importance of, and is committed to, high standards of corporate governance and to integrity and high ethical standards in all of its business dealings. The Board considers that it has complied throughout the period under review with the principles of governance set out in Section 1 of the combined code on corporate governance appended to the Listing Rules published by the UK Listing Authority (“the Combined Code”), apart from the provisions relating to the length of executive directors’ notice periods. During the period under review, the service contracts for both of the executive directors contained a requirement that the Company give two years notice of termination. With effect from 1 January 2003 the executive directors have agreed (without compensation) to a reduction in their notice periods to one year, save that they will be entitled to a payment by way of liquidated damages calculated by reference to a two year notice period if termination takes place within 12 months following a change of control of the Company. The Remuneration Committee considers that such protection is reasonable for individuals who have given over 20 and 30 years service respectively to the Company and who intend to continue to do so for the remainder of their working lives. The following statements describe how the relevant provisions of the Combined Code are applied to the Company. The Board The Board, under the non-executive chairmanship of Derek Netherton, meets regularly to discharge its duties. At these meetings, it reviews Group strategy, performance and matters reserved for the Board. Whilst the executive responsibility for running the Company’s business rests ultimately with the Managing Director, Mike Darrington, the non-executive directors fulfil an essential role in that they ensure that the strategies proposed by the executive directors are fully discussed and critically examined. The Board is supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties and considers that it effectively leads and controls the Company. The Board currently comprises 2 executive and 5 non-executive directors as follows:- Derek Netherton (Non-Executive Chairman), 58, spent his career in investment banking and retired in 1996 from his position as joint head of corporate finance at J Henry Schroder & Co. He is a non-executive director of Next plc, Hiscox plc, St James’s Place Capital plc, Plantation & General Investments plc and Life Assurance Holding & Corporation Limited. He was appointed to the Board on 1 March 2002 and was appointed Chairman in August of the same year. Mike Darrington (Managing Director), 61, qualified as a Chartered Accountant and then spent 17 years with United Biscuits, latterly in General Management. During this time he attended the PMD course at Harvard Business School. He joined Greggs in 1983 and was appointed Managing Director in January 1984. Malcolm Simpson (Finance Director), 61, qualified as a Chartered Accountant with what is now KPMG and then worked for eight years within the finance department of Procter and Gamble Limited. He joined the Company in 1973 and was appointed Financial Director in 1975. 40 Stephen Curran, 59, joined the Board in 1981. He was appointed Chairman of Candover Investments plc in May 1999, having previously been Chief Executive of Candover since January 1991. Prior to joining Candover in May 1981, he was a managing consultant with Coopers & Lybrand Associates and then an investment manager with what is now Cinven. He is a non-executive director of Jarvis Hotels plc and a number of unquoted companies. Sonia Elkin OBE, 70, is a former CBI Director, responsible for its Regional organisation and policy in relation to Smaller Firms. She was a Commissioner of the Manpower Services Commission and served on a DTI committee on deregulation. She is a member of the Review Committee of the Institute of Chartered Accountants. She joined the Board in 1992, is Chairman of the Audit Committee and has been appointed as the Senior Independent Non-Executive Director. Ian Gregg OBE, 63, qualified as a solicitor before joining the Company as Executive Chairman and Managing Director on the death of his father in 1964. He built the business up from a single-shop operation to a multi-divisional specialist retailer with almost 300 shops by the time of its successful flotation in 1984. Following the appointment of Mike Darrington as Managing Director in January 1984, Ian continued in the role of Executive Chairman until July 1993. He was then invited to become non- executive Chairman in order that the Board could avail itself of his unequalled experience of both the industry and the Company. Ian stepped down from the Chairman’s role in August 2002. Susan Johnson OBE, 45, was appointed to the Board in March 2000. She obtained an MBA in 1993 after which she pursued a career in sales and marketing before being appointed as Chief Executive of the Northern Business Forum. She is now an Executive Director of Yorkshire Forward. After carefully reviewing the guidance in the Combined Code, all of the non-executive directors are considered by the Board to be independent of management and free from any business or other relationship which would materially interfere with the exercise of their independent judgement. As stated in the interim announcement issued on 2 August 2002, the Board is taking steps to add to the number of independent non-executive directors on the Board. The Company’s Articles of Association require that all directors must retire and seek re-election at the first AGM following appointment. Thereafter, one half of the directors (other than those appointed since the last AGM) being those who have been in office longest since last re-election and any other director who has not been elected or re-elected at either of the two preceding AGMs must seek re-election at each AGM. All directors are able to receive training and to take independent professional advice at the expense of the Company. They also have direct access to the Company Secretary. All directors are appraised annually. GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 Board Committees Accountability, Audit and Going Concern. The Board delegates some of its activities to the following committees, each of which has written terms of reference: The Audit Committee consists of three independent non-executive directors (Sonia Elkin – Chairman, Susan Johnson and Stephen Curran). It meets at least twice a year. Its main functions are to endeavour to ensure (i) that the accounting and financial policies of the Company are proper and effective; (ii) the integrity of the financial statements and information published by the Company; and (iii) that the financial controls of the Company are proper and effective. The Committee, in performing these functions, reviews the annual and interim financial statements issued to shareholders, compliance with financial reporting standards and the size and remit of the internal audit function. The Committee also considers and makes recommendations to the Board in relation to the independence and objectivity of the external auditors (including the impact of any non-audit work undertaken by them) and their suitability for re-appointment. The Committee determines the scope of the external audit in discussion with the external auditors and agrees their fees in respect of the audit. The Committee normally meets with the Finance Director and the external auditors in attendance, although time is set aside annually for discussion between the Committee and the external auditors in the absence of all executive directors. The Remuneration Committee consists entirely of independent non-executive directors (Ian Gregg – Chairman, Stephen Curran, Sonia Elkin and Derek Netherton). Its main duties are to determine the basic salary, benefits in kind, terms and conditions of employment, performance-related bonuses, share options and pension benefits of the executive directors. In order to assist with these duties the Committee has, during 2002, used the services of external consultants, Monks Partnership. The Committee is also responsible for the operation of the Company’s share option schemes. The Directors’ Remuneration Report is set out on pages 35 to 39 of this Annual Report. The Nominations Committee comprises Derek Netherton - Chairman, Mike Darrington and Sonia Elkin. Its main functions are to review the balance and constitution of the Board; to advise the Board as to whether directors retiring by rotation should be nominated for re-election by the members; and to approve and manage the process for setting the specification for all Board appointments, identifying candidates who meet that specification and making recommendations to the Board in respect of all new Board appointments. Relations with shareholders. There is regular dialogue with individual and institutional shareholders as well as general presentations after announcement of the interim and preliminary results. The AGM provides a forum for communication with investors, with the chairmen of the Board and its committees available to answer any issues raised. At the AGM, the balance of proxy votes cast for and against each resolution is indicated after it has been dealt with on a show of hands. All substantial issues, including the adoption of the annual report and accounts, are proposed at the AGM as separate resolutions. The Board acknowledges its responsibility to present a balanced and understandable assessment of the Company’s position and prospects. This is fulfilled by the statements contained in the Chairman’s statement and Managing Director’s report, which supplement the statutory accounts themselves. A statement of directors’ responsibilities in respect of the preparation of accounts is given on page 14. The Audit Committee has reviewed and is satisfied that the Company’s auditors, KPMG Audit Plc, continue to be objective and independent of the Company. KPMG Audit Plc does perform non-audit services for the Group but the Audit Committee is satisfied that its objectivity is not impaired by such work (non-audit fees amounted to £62,000 during 2002 and related mainly to taxation compliance advice). The Company has an internal audit function. This assists in its monitoring of systems of control and augments the examination carried out by the external auditors. After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. Risk Management. The Board is ultimately responsible for the Group’s system of internal control, which covers all aspects of the business, and for reviewing its effectiveness. However, any such system can only be designed to manage, rather than eliminate, the risk of failure to achieve the Company’s objectives and, therefore, is only able to provide reasonable, and not absolute, assurance against material misstatement or loss. The Directors regularly review the risks to which the Company is exposed, as well as the operation and effectiveness of the system of internal controls. This is an ongoing process, involving the identification, evaluation and management of the significant risks faced by the Company. Key systems of the internal control system, which have been in place during the whole of the period under review, are:- • Board of Directors The Board takes a proactive approach to the management of all forms of risk, and views risk management as a vital constituent of its role. The Board holds five scheduled meetings a year. At each of these meetings the effectiveness of the controls relating to the most significant risks (i.e. those which may restrict the Company’s ability to meet its objectives) are monitored and reviewed. Remedial action is determined where appropriate. For some key risks, where it is felt necessary, specialist advice is sought from external agencies and professional advisers. The Board also reviews, at least annually, the level and scope of insurance cover maintained within the business. The Board receives regular reports from Management on significant changes in the business and external environment which might affect the risk profile. It has also set in place a system of regular hierarchical reporting which provides for relevant details and assurances on the assessment and control of risks to be given to it. • Management Board The Management Board, answerable directly to the Managing Director, is responsible for implementing decisions of the Main Board and providing protection against the major risks by various techniques, including sharing best practice, monitoring, supervision and training. 41 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 CORPORATE GOVERNANCE continued • Risk Committee • Financial Reporting A Risk Committee, consisting of the heads of each management function within the business (including Health and Safety, Food Safety, Personnel, Production and Purchasing), has responsibility for analysing, assessing, measuring and understanding the Company’s risk environment, as well as devising a sound risk management strategy for review and approval by the Board. The Risk Committee reports it findings and important changes to the Board on a regular basis through personal presentation, narrative reports and key performance indicators (internal and external to the organisation). The Risk Committee also feeds the results of its assessments back into the business planning for each division at least annually. The risks are assessed on a regular basis across all functional areas but, in particular, the areas of Food Safety, Health and Safety, information flow, asset protection and Regulatory Requirements. • Policies and Procedures Policies and procedures, covering control issues across all aspects of the business, are defined and communicated to the respective managers and staff at all levels. Adherence is monitored and reported upon on an ongoing basis. • Health and Safety The Company is committed to improving continuously the working environment with the objective that accidents and work related ill health should be substantially reduced. An occupational health strategy has been produced with Health and Safety Officers and Occupational Nurses appointed in every Division. Targets are set and programmes are devised to implement them. This approach involves a rigorous health assessment, during which hazards are identified, risks assessed, control measures applied and improvement actions agreed to manage residual risks to an acceptable level. The Company operates a comprehensive financial control system that incorporates Divisional Financial Controllers who have responsibility for financial management within each Division. Each Divisional Financial Controller works closely with their respective Divisional Managing Director to monitor performance at Divisional Board level as against planned and prior year comparatives. In addition, assets and liabilities are scrutinised at several levels on a regular basis and remedial action taken where required. A comprehensive annual planning process is carried out which determines expected levels of performance for all aspects of the business. Each Divisional Financial Controller also reports directly to the Finance Director. • Internal Audit The internal audit function visits every Division at least once in every financial year and reviews performance of the Division across a range of financial and non-financial requirements, reporting findings to the relevant senior managers and direct to the Audit Committee. The Board confirms that it has reviewed the effectiveness of the system of internal control (covering all controls, including financial, operational, compliance and risk management), during the period under review. 42 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 CORPORATE SOCIAL RESPONSIBILITY The Company has established an aspirational statement of values which clearly sets out behaviours that are embraced by the Board and expected of all colleagues. “We will be enthusiastic and supportive in all that we do, open, honest and appreciative, treating everyone with fairness, consideration and respect.” This has been communicated to all who work in the business and is becoming embedded in the Company’s culture. Our culture and values are built upon a foundation of awareness of our social responsibility. Greggs is committed to making a positive difference for our customers, our people, our suppliers and for the wider communities in which it operates. Customers, people and suppliers This positive difference will result from the increasing adoption of our values as a basis for all of our activities. Our people are expected to use them as a reference point in their relationships with each other and, in turn, with customers and suppliers. • A group of dedicated staff work together for the benefit of the community by organising the major annual fun run sponsored by Greggs of Gosforth in aid of children’s cancer research. This has raised well over £2 million since its inception in 1983. A similar run is due to take place for the first time in Manchester in 2003. • The Company’s investment of £500,000 in 2000 in the Newcastle Employment Bond for a five year period, which is secured as to repayment by Northern Rock plc. This investment is at zero rate of interest. The purpose of the investment is for all the interest foregone to be used to help tackle long term unemployment in the Newcastle area. Although Greggs provides funding and makes time available for its staff to become engaged in these community activities, the real credit is due to the staff themselves, at all levels, for their voluntary commitment and for the inestimable benefit of what they achieve in Greggs’ name. The Environment Our values act as a framework within which the business seeks to manage its activities and are carefully considered in the setting of policies by which we operate and which, in turn, affect the way in which we operate. The Company recognises the importance of protecting our environment for future generations and is committed to carrying out its activities with due consideration for the adverse environmental impacts of its operations and in line with "Our Values". In particular, this affects the areas of food safety and health and safety which are key areas of focus for Greggs’ customers and people. Wider Communities Greggs also seeks to use these values in its relationships with the wider community and, by doing so, have a beneficial effect on the lives of people generally, for example: Charities • On a nationwide basis, Greggs is a member of the "Per Cent" Club and made charitable donations of £379,000 in 2002, the bulk of which was directed through Greggs Trust. • Greggs Trust is a registered charity, founded by Ian Gregg in 1987. Its main objective is the alleviation of the effects of poverty and social deprivation in the areas where the Company trades. Its income in 2002 was £635,000, derived partly from the Greggs plc donation, staff fund-raising initiatives, (many staff fund raising activities, such as Bakery open days, direct the proceeds to Greggs Trust), and donations received from employees under Give As You Earn (the Company’s Payroll Giving Scheme). The balance was received in the form of donations from major shareholders and income from investments (including shares in Greggs plc) held by the Trust. Funds are distributed by the Trustees and via the 13 staff Charity Committees operating across the country, offering support to good causes within our trading areas. • The Greggs Breakfast Club scheme is designed to get children in selected primary schools off to a better start by providing them with free breakfasts. Greggs funds all of the food, including providing fresh bread from the local Greggs shop, together with the necessary equipment. Under the now well established model, Greggs staff work with school teachers to encourage parents, grandparents and others to run the clubs, including serving the breakfasts, thereby helping them to help others in their own communities. There are already over 40 Greggs Breakfast Clubs and it is intended that this will increase over time. The concept has been validated by external independent research, which has shown that breakfast club attendance encourages children to get to school on time and increases attentiveness in class. Statement of Intent Greggs plc has identified the key environmental impacts of its activities. We are committed to an ongoing programme of continual reduction of any adverse impacts and prevention of pollution consistent with our long term business objectives. In support of this policy the Company intends that it will: • Develop and implement a recognised Environmental Management System (EMS). • Comply with all relevant environmental legislation, regulation and other requirements applicable to the Company or to which the Company subscribes. • Endeavour to reduce waste at source via the efficient use of resources and encourage re-use and recycling of wastes. • Work towards increasing energy efficiency at all its sites. • Monitor and aim to improve the performance of vehicles owned by Greggs plc. • Work towards ensuring that policies and procedures are in place so that accidents and incidents with potential adverse environmental impact are controlled as far as is reasonably practicable. • Progressively make employees aware of the environmental issues relevant to their role within Greggs plc. • Take into account the adverse impact on the environment of any capital expenditure project. In order to manage these commitments the Company intends to set appropriate objectives and targets, which will be monitored and reviewed regularly. 43 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 10 YEAR HISTORY Turnover (£'000) Profit on ordinary activities before taxation (£’000) Shareholders’ funds (£'000) Earnings per share (pence) Adjusted earnings per share (pence) Dividend per share (pence) Cash generated by operations (£'000) (before dividends, tax and capital expenditure) Capital expenditure (£'000) Acquisition of Baker's Oven (£'000) Number of shops in operation at year end 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 110,426 167,851 219,514 238,465 265,941 291,420 308,678 339,008 377,556 422,600 9,019 12,017 13,056 15,673 18,035 20,214 21,520 26,356 32,742 36,666 30,475 36,591 41,219 48,107 58,384 69,585 80,896 88,169 103,554 119,965 53.0 71.0 79.0 95.8 121.1 122.8 135.1 162.3 190.2 205.5 53.0 71.0 79.0 95.8 111.2 122.8 135.1 162.3 190.2 205.5 18.0 23.0 26.0 32.0 37.0 41.0 45.0 55.0 65.0 72.5 14,670 25,251 20,838 24,955 30,408 34,902 34,526 43,431 50,418 55,555 5,643 15,008 11,931 15,669 24,364 26,204 22,403 21,397 27,385 42,143 - 19,547 - - - - - - - - 499 930 967 1,032 1,057 1,072 1,084 1,105 1,144 1,202 DIRECTORS Derek Netherton (Non-executive chairman)†ø Mike Darrington FCA (Managing)ø Malcolm Simpson FCA (Financial) Ian Gregg OBE (Non-executive)† Steven Curran FCCA (Non-executive)*† Sonia Elkin OBE (Non-executive)*†ø Susan Johnson OBE (Non-executive)* *Member of Audit Committee †Member of Remuneration Committee øMember of Nominations Committee SECRETARY AND REGISTERED OFFICE Andrew John Davison, Solicitor Fernwood House Clayton Road Jesmond Newcastle upon Tyne NE2 1TL 44 Bankers National Westminster Bank Plc 149 High Street Gosforth Newcastle upon Tyne NE3 1HA Merchant Bankers SG Hambros Corporate Finance Advisory 41 Tower Hill London EC3N 4SG Auditors KPMG Audit Plc Quayside House 110 Quayside Stockbrokers UBS Warburg 1 Finsbury Avenue London EC2M 2PA Brewin Dolphin Securities Ltd Commercial Union House 39 Pilgrim Street Newcastle upon Tyne NE1 6RQ Solicitors Eversheds Central Square South Orchard Street Newcastle upon Tyne NE1 3XX Registrars Capita Registrars The Registry Newcastle upon Tyne 34 Beckenham Road NE1 3DX Beckenham Kent BR3 4TU GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 GREGGS PLC ANNUAL REPORT AND ACCOUNTS 2002 NATIONWIDE COVERAGE MISSION, VISION AND VALUES C O N T E N T S Our Business. Greggs plc is the UK’s leading retailer specialising in sandwiches, savouries and other bakery-related products, with a particular focus on takeaway food and catering. We continue to show significant growth and now have over 1,200 retail outlets, trading under the Greggs and Bakers Oven brands. Our Vision and Purpose. Our vision is to be Europe’s finest bakery-related retailer. Our purpose is the growth and development of a thriving business, operating with integrity, for the benefit and enjoyment of our people, customers and shareholders alike. Our Strategy. Our people will be enabled, within overall guidance from the centre, 1 2 6 FINANCIAL REVIEW CHAIRMAN’S STATEMENT MANAGING DIRECTOR’S REPORT 12 DIRECTORS’ REPORT 14 STATEMENT OF DIRECTORS’ RESPONSIBILITIES 15 REPORT OF THE INDEPENDENT AUDITORS 16 GROUP PROFIT & LOSS ACCOUNT to work towards the successful attainment of world-class standards. To achieve this, the 17 GROUP BALANCE SHEET focus will be on: 18 PARENT COMPANY BALANCE SHEET A Great Place to Work: we will place major emphasis on promoting a culture 19 GROUP CASH FLOW STATEMENT that encourages personal development, leadership qualities and creativity. Enjoyable Experience: we will deliver customer satisfaction by offering great- tasting food at unbeatable value to the highest standards of food safety. 20 ACCOUNTING POLICIES 22 NOTES TO THE ACCOUNTS This will be achieved from shops that provide friendly and efficient service in 35 DIRECTORS’ REMUNERATION REPORT attractive surroundings. Business Excellence: our people will seek continuous improvement in their areas of responsibility, enabling them to make a real and lasting contribution to the objectives of the company. 40 CORPORATE GOVERNANCE 43 CORPORATE SOCIAL RESPONSIBILITY 44 TEN YEAR HISTORY Challenging Targets: we will strive to achieve a turnover of £1 billion by 2010 44 DIRECTORS & ADVISERS through continued core growth and the acquisition of new units, taking us to 45 SHOP ALLOCATION over 1,700 shops. Caring for the Community: our emphasis on social responsibility will encourage even greater involvement in local charity activities and social projects, and a strengthened focus on protecting the environment. Our Values. As a people-focused business, we aim to be enthusiastic and supportive in all that we do, open, honest and appreciative, and to treat everyone with fairness, consideration and respect. G R E G G S S H O P N U M B E R S Scotland Gosforth Cumbria Yorkshire North West Midlands Treforest South East TOTAL 2 0 0 2 125 112 51 112 125 129 91 228 973 2 0 0 1 118 112 50 102 120 119 81 203 905 B A K E R S OV E N S H O P N U M B E R S Scotland North Midlands South TOTAL TOTAL GROUP 2 0 0 2 32 49 85 63 229 2 0 0 2 1,202 2 0 0 1 33 51 88 67 239 2 0 0 1 1,144 45 a n n u a l r e p o r t a n d a c c o u n t s 2 0 0 2 The taste of the nation Fernwood House, Clayton Road, Jesmond, Newcastle upon Tyne NE2 1TL. www.greggs.co.uk G R E G G S p l c : a n n u a l r e p o r t a n d a c c o u n t s 2 0 0 2 

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