JJ DD WWeetthheerrssppoooonn ppllcc ANNUAL REPORT AND ACCOUNTS 2013 Contents SECTION 1 1 2 Financial highlights Chairman’s statement, operating and finance review Lessons in the property market, by Tim Martin Income statement Statement of comprehensive income 7 9 9 10 Cash flow statement 11 Balance sheet 12 Statement of changes in shareholders’ equity 13 Notes to the financial statements 34 Financial record SECTION 2 35 Authorisation of financial statements and statement of compliance with IFRSs 36 Accounting policies 40 Principal risks and uncertainties facing the company 42 Independent auditors’ report 43 Directors, officers and advisers 44 Directors’ report 46 Directors’ remuneration report 51 Corporate governance 56 Information for shareholders 57 Pubs opened during the financial year Financial calendar Annual general meeting 14 November 2013 Interim report for 2014 March 2014 Year end 27 July 2014 Preliminary announcement for 2014 September 2014 Report and accounts for 2014 October 2014 Wetherspoon owns and operates pubs throughout the UK. The company aims to provide customers with good-quality food and drinks, served by well-trained and friendly staff, at reasonable prices. The pubs are individually designed, and the company aims to maintain them in excellent condition. View this report online: www.jdwetherspoon.co.uk/investors FINANCIAL HIGHLIGHTS SECTION 1 Revenue up 7.0% to £1,280.9m (excluding week 53 in previous year: +9.3%) Like-for-like sales up 5.8% and profit up 4.4% Operating profit before exceptional items* up 3.7% to £111.3m (excluding week 53 in previous year: +6.0%) Operating profit down 2.5% to £91.5m Operating margin before exceptional items* 8.7% (last year: 9.0%) Operating margin 7.1% (last year: 7.8%) Profit before tax and exceptional items* up 6.3% to £76.9m (excluding week 53 in previous year: +8.8%) Profit before tax down 3.0% to £57.1m Earnings per share before exceptional items* up 13.3% to 46.8p (excluding shares held in trust) Basic earnings per share up 7.6% to 38.3p Earnings per share before exceptional items* up 12.6% to 44.8p (including shares held in trust) Free cash flow per share 51.8p (last year: 70.4p) 29 pubs opened, 3 closed, creating a total of 886 *Exceptional items as disclosed in account note 3. ANNUAL REPORT AND ACCOUNTS 2013 1 CHAIRMAN’S STATEMENT, OPERATING AND FINANCE REVIEW Background As in recent years, we have tried to make our report and accounts more readable by dividing them into two sections. Section 1 contains the main financial statements, while section 2 contains mainly corporate governance reports. We have also tried to reduce jargon and repetition, wherever possible, although this is a major task, especially in respect of corporate governance reports and any area which concerns accounting. I am pleased to report a year of further progress for the company, with record sales, profit and earnings per share before exceptional items. The company was founded in 1979 – and this is the 30th year since incorporation in 1983. The table below outlines some key indicators of our performance during that period. Since our flotation in 1992, earnings per share before exceptional items and free cash flow have grown by an average of 16.4 per cent per annum. Summary accounts for the years ended July 1984 to 2013 Financial year Total sales £000 818 1,890 2,197 3,357 3,709 5,584 7,047 13,192 21,380 30,800 46,600 68,536 100,480 139,444 188,515 269,699 369,628 483,968 601,295 730,913 787,126 809,861 847,516 888,473 907,500 955,119 996,327 1,072,014 1,197,129 1,280,929 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Profit before tax and exceptional items £000 Earnings per share before exceptional items pence Free cash flow Free cash flow per share £000 pence (7) 185 219 382 248 789 603 1,098 2,020 4,171 6,477 9,713 15,200 17,566 20,165 26,214 36,052 44,317 53,568 56,139 54,074 47,177 58,388 62,024 58,228 66,155 71,015 66,781 72,363 76,943 0.0 0.2 0.2 0.3 0.3 0.6 0.4 0.8 1.9 3.3 3.6 4.9 7.8 8.7 9.9 12.9 11.8 14.2 16.6 17.0 17.7 16.9 24.1 28.1 27.6 32.6 36.0 34.1 39.8 44.8 915 732 1,236 3,563 5,079 5,837 13,495 20,968 28,027 28,448 40,088 49,296 61,197 71,370 83,097 73,477 68,774 69,712 52,379 71,411 99,494 71,344 78,818 91,542 65,349 0.4 0.4 0.6 2.1 3.9 3.6 7.4 11.2 14.4 14.5 20.3 24.2 29.1 33.5 38.8 36.7 37.1 42.1 35.6 50.6 71.7 52.9 57.7 70.4 51.8 Notes Adjustments to statutory numbers 1. Where appropriate, the EPS, as disclosed in the statutory accounts, has been recalculated to take account of share splits, the issue of new shares and capitalisation issues. 2. Free cash flow per share excludes dividends paid which were included in the free cash flow calculations in the annual report and accounts for the years 1995–2000. 2 J D WETHERSPOON PLC 3. The weighted average number of shares, EPS and free cash flow per share include those shares held in trust for employee share schemes. 4. Before 2005, the accounts were prepared under UKGAAP. All accounts from 2005 to date have been prepared under IFRS. The year under review comprised 52 weeks, whereas the previous year was 53 weeks. Unless stated, the comparisons below reflect the fact that there was one week fewer in the year under review than in the previous year. Like-for-like sales, on a 52-week basis, increased by 5.8%, with total sales of £1,280.9 million for the 52 weeks, increasing by 7.0%, compared with the 53-week period in the previous year (2012: 11.7%). Like-for-like bar sales increased by 3.8% (2012: 2.8%), food sales by 10.9% (2012: 4.8%) and machine sales by 0.4% (2012: decreased by 2.8%). Operating profit before exceptional items increased by 3.7% to £111.3 million (2012: £107.3 million) and, after exceptional items, decreased by 2.5% to £91.5 million (2012: £93.8 million). The operating margin, before exceptional items, decreased to 8.7% (2012: 9.0%), mainly as a result of increases in taxation, utilities and bar and food costs. The operating margin after exceptional items was 7.1% (2012: 7.8%). Profit before tax and exceptional items increased by 6.3% to £76.9 million (2012: £72.4 million) and, after exceptional items, decreased by 3.0% to £57.1 million (2012: £58.9 million). Earnings per share (which exclude shares held in trust by the employee share scheme) before exceptional items increased by 13.3% to 46.8p (2012: 41.3p). Basic earnings on the same basis after exceptional items increased by 7.6% to 38.3p (2012: 35.6p). If the weighted average number of shares held in trust by the employee share scheme is included in the calculation, earnings per share before exceptional items increased by 12.6% to 44.8p (2012: 39.8p). Net interest was covered 3.2 times by operating profit before exceptional items (2012: 3.1 times) and 2.7 times by operating profit after exceptional items (2012: 2.7 times). Total capital investment was £101.8 million in the period (2012: £120.6 million), with £60.9 million on new pub openings (2012: £75.4 million) and £40.9 million on existing pubs and IT infrastructure (2012: £45.2 million). Exceptional items before tax totalled £19.8 million (2012: £13.5 million), £0.2 million of which resulted in the expenditure of cash. The exceptional items relate to the impairment of trading pub assets of £15.6 million (2012: £7.8 million), a provision for onerous leases of £3.3 million (2012: £2.2 million) and a loss on the disposal of property, plant and equipment of £1.0 million (2012: £1.1 million). The total provision for impairment and onerous leases is now £47.6 million, compared with the original cost of our assets of £1.58 billion. Free cash flow, after capital investment of £40.9 million on existing pubs (2012: £45.2 million), £8.8 million in respect of share purchases for employees under the company’s share-based payment schemes CHAIRMAN’S STATEMENT, OPERATING AND FINANCE REVIEW (2012: £5.8 million) and payments of tax and interest, decreased by £26.2 million to £65.3 million (2012: £91.5 million), owing to a working capital outflow of £6.0 million in the year under review, compared with an inflow of £35.5 million in the previous year. Free cash flow per share was 51.8p (2012: 70.4p). Property The company opened 29 pubs during the year, with three pubs sold, resulting in a total estate of 886 pubs at the financial year end. The average development cost for a new pub (excluding the cost of freeholds) was £1.55 million, compared with £1.42 million a year ago, as we continue to increase expenditure on kitchens, customer areas and beer gardens. The full-year depreciation charge was £53.1 million (2012: £49.2 million). We currently intend to open around 30 pubs in the year ending July 2014. Property litigation As reported in our interim accounts, Wetherspoon agreed on an out-of-court settlement with developer Anthony Lyons, formerly of property leisure agent Davis Coffer Lyons. Wetherspoon has received approximately £1.25 million from Mr Lyons. The payment relates to litigation in which Wetherspoon claimed that Mr Lyons had been an accessory to frauds committed by Wetherspoon’s former retained agent Van de Berg and its directors Christian Braun, George Aldridge and Richard Harvey. Mr Lyons denied the claim – and the litigation was contested. The claim related to properties in Portsmouth, Leytonstone and Newbury. The Portsmouth property was involved in the 2008/9 Van de Berg case itself. In that case, Mr Justice Peter Smith found that Van de Berg, but not Mr Lyons, who was not a party to the case, fraudulently diverted the freehold from Wetherspoon to Moorstown Properties Limited, a company owned by Simon Conway. Moorstown leased the premises to Wetherspoon. Wetherspoon is still a leaseholder of this property – a pub called The Isambard Kingdom Brunel. The properties in Leytonstone and Newbury (the other properties in the case against Mr Lyons) were not pleaded in the 2008/9 Van de Berg case. Leytonstone was leased to Wetherspoon and trades today as The Walnut Tree public house. Newbury was leased to Pelican plc and became Café Rouge. Before the year end, the company also agreed to settle its final claim in this series of cases and accepted £400,000 from property investor Jason Harris, formerly of First London and now of First Urban Group. Wetherspoon alleged that Harris was an accessory to frauds committed by Van de Berg. Harris contested the claim and has not admitted liability. ANNUAL REPORT AND ACCOUNTS 2013 3 CHAIRMAN’S STATEMENT, OPERATING AND FINANCE REVIEW In the previous year, Wetherspoon also agreed on a settlement with Paul Ferrari, of London estate agent Ferrari Dewe & Co, in respect of properties referred to as the ‘Ferrari Five’ by Mr Justice Peter Smith. Further shareholder information about these cases is available in a short article which I wrote for the trade publication Propel; this is reproduced on page 7 of this report. Corporation tax The overall tax charge (including deferred tax) on pre-exceptional items, before taking into account the effect of the tax-rate change on deferred tax is 26.6% (2012: 28.6%). The UK standard average tax rate for the period is 23.7% (2012: 25.3%). The difference between the effective tax rate of 26.6% and the standard average rate of UK corporation tax of 23.7% is 2.9% (2012: 3.2%) which is due primarily to the level of non-qualifying depreciation (depreciation which does not qualify for tax relief). The pre-exceptional current tax rate which excludes deferred tax has fallen by 0.5% to 25.1% (2012: 25.6%). This is largely due to the standard average rate of UK corporation tax falling from 25.3% to 23.7%, offset by reduced capital allowances being available. Financing As at 28 July 2013, the company’s total net debt, including bank borrowings and finance leases, but excluding derivatives, was £474.2 million (2012: £462.6 million), an increase of £11.6 million. Factors which have led to the increase in debt are 29 new pub openings costing £60.9 million, investment in existing pubs of £40.9 million and dividend payments of £15.1 million. Year-end net-debt-to-EBITDA was 2.88 times (2012: 2.96 times). As at 28 July 2013, the company had £111.0 million (2012: £128.5 million) of unutilised banking facilities and cash balances, with total facilities of £575.0 million (2012: £575.0 million). The company’s existing interest-rate swap arrangements remain in place. Following the period end, the company agreed on a new bank facility with a syndicate of nine banks which increased the funds available to £690.0 million and extended the term to March 2018. Dividends and return of capital The board proposes, subject to shareholders’ approval, to pay a final dividend of 8.0p per share (2012: 8.0p per share), on 28 November 2013, to those shareholders on the register on 25 October 2013, giving a total dividend for the year of 12.0p per share (2012: 12.0p per share). The dividend is covered 3.2 times (2012: 3.0 times) by earnings. In view of high levels of capital expenditure in recent years and the potential for advantageous investments in the future, the board has decided to maintain the dividend at its current level for the time being. Further progress As in the past, the company has tried to improve many areas of the business. During the year, our catering team upgraded many items on our menu and introduced several new items which, together, helped to produce strong like- for-like sales growth. As regards bar sales, in the face of fierce competition from supermarkets, we achieved record volumes of traditional ales and ciders and continued to promote a wide range of attractive bottled beers, wines and spirits from the UK and the rest of the world. We continue to recognise that attracting and retaining the best employees are the keys to future success; in this context, bonuses and free shares totalling £28.6 million, which amounts to 37% of our profits before tax, were paid to employees. About 83% of this sum was paid to employees working in our pubs, with just over half being paid to the pub management team and the remainder being paid to our hourly paid staff. As in previous years, we have continued our efforts in respect of training, including both government-sponsored apprenticeship schemes and our own schemes, enabling many thousands of employees, over the years, to start as bar staff and progress through various stages of promotion to become duty managers and, eventually, for successful candidates, pub managers. Most of our area managers, each of whom is responsible for approximately a dozen pubs, started as a pub manager. A large percentage of the senior management positions in the company generally are occupied by those who have previously run pubs. We continue our efforts to improve our IT systems. Our ‘myJDW’ website, which enables close communication between employees and the company, continues to be upgraded. We have also invested in other areas, including faster credit-card approval at the bar in our pubs, so increasing the speed of service for customers and also general efficiency. We have continued our efforts in raising money for CLIC Sargent, which supports young cancer patients and their families. In the year, we raised over £1.6 million for the charity, bringing the total raised to £7.6 million, making Wetherspoon the biggest corporate partner for CLIC Sargent. General tax matters As we have pointed out in previous years, we believe that pubs are taxed excessively and that the government would create more jobs and receive higher levels of overall revenue, if it were to create tax parity among supermarkets, pubs and restaurants. Supermarkets pay virtually no VAT in respect of food sales, whereas pubs 4 J D WETHERSPOON PLC pay 20% – and this disparity enables supermarkets to subsidise their alcoholic drinks sales to the detriment of pubs and, indeed, restaurants. This serious economic disadvantage has contributed to the closure of many thousands of pubs, and the pub industry has lost approximately 50% of its beer sales to supermarkets since VAT was increased from 8% over 30 years ago. This does not make economic sense for the government, since pubs create far more jobs per meal or per pint than supermarkets, for reasons which are self-evident. They also pay far more taxes per pint or per meal than supermarkets, and this would remain the case, even if VAT levels were reduced in pubs. It cannot make sense for any government to perpetuate a tax advantage for supermarkets in this context. A main consequence of the tax disparity between supermarkets and pubs is that pubs in the less-well-off areas of the country suffer most, as do the residents and local authorities in those areas, who are deprived of the facilities and, to an extent, the income from taxes they would otherwise receive. This is because customers in less-well-off areas are more sensitive, as a matter of common sense, to the price differential which is created by the current tax régime. As a result, they inevitably end up using supermarkets more and pubs less. The results are evident to see, with large numbers of pubs closing in less-affluent areas, with undesirable social and economic consequences in the majority of the country. In affluent areas, the price differential between pubs and supermarkets is less acutely felt, although still important for a considerable percentage of those living in these areas. Wetherspoon is happy to pay its share of tax and, in this respect, is a major contributor to the economy. In the year under review, we paid total taxes of £551.5 million, an increase of £32.2 million compared with the previous year, which equates to approximately 43% of our sales. 2013 £m VAT Alcohol duty PAYE and NIC Business rates Corporation tax Machine duty Climate change levy Fuel duty Carbon tax Stamp duty Landfill tax Premise licences and TV licences Total tax Tax per pub (£000) Tax as % of sales Pre-exceptional profit after tax Profit after tax as % of sales 253.0 144.4 70.2 46.4 18.4 7.2 4.3 2.0 2.6 1.0 1.3 0.7 551.5 632 43.1% 65.2 5.1% 2012 £m 241.2 136.8 67.1 43.9 18.2 3.3 1.9 1.9 2.4 0.8 1.3 0.5 519.3 617 43.4% 57.3 4.8% CHAIRMAN’S STATEMENT, OPERATING AND FINANCE REVIEW Tax parity day In order to draw attention to the current unfair tax régime, Wetherspoon is supporting ‘Tax Parity Day’ (Wednesday, 25 September 2013) in association with Jacques Borel’s VAT Club – also supported by many others, including Punch, Fuller’s, Pizza Hut and thousands of individual publicans. At Wetherspoon, we are reducing our prices by about 7.5%, to reflect the likely reduction in prices which consumers would see, if VAT in pubs were reduced. We are sure that this offer will be extremely popular with customers and will, undoubtedly, increase the amount of revenue for the government as well, if it succeeds in reversing the increase in off-sales through supermarkets, even for one day. Corporate governance In my opinion, it is a strange paradox that companies in the pub business which have complied least with governance guidelines seem to have fared the best. Family brewers like Fuller’s, Young’s and Shepherd Neame, which have often had a chairman who had previously been chief executive, a majority of executives on the board and non-executive directors who are either not ‘independent’ or have been on the board for more than the recommended time, have tended to do well, whereas the compliant boards of the large pub companies have struggled greatly, in many cases, in the last decade. One reason may be that the non-compliant boards have been more resistant to the sometimes foolish ideas which take hold of financial markets. The main misconceived fashion of the last decade and a half has been in relation to so-called ‘efficient balance sheets’. This fashion encouraged excessively high levels of debt and arrangements such as ‘opco/propco’, which also increased financial gearing. However, a sensible system of corporate governance, in which non-executive directors play an important role, is clearly necessary, to provide guidance and rules in areas such as levels of pay, appropriate ethical behaviour and to try to restrain egotism and excess in the boardroom. As Warren Buffet has pointed out, it is easier to criticise corporate governance regulations than to suggest alternatives. My own view is that companies should carefully question whether compliance with the existing guidelines is beneficial in the following areas: i) Non-executive tenure The discouragement of non-executives who remain at a company longer than nine years may often be counterproductive, since it usually means that directors have not seen the effects of a recession, for example, on the company which they serve. It may be desirable, in principle, for companies to have non-executive directors who have been there longer than nine years, but it is important for the board and the chairman to take a commonsense view, to reduce the dangers of ‘cronyism’ ANNUAL REPORT AND ACCOUNTS 2013 5 CHAIRMAN’S STATEMENT, OPERATING AND FINANCE REVIEW or excessive familiarity which might reduce a director’s good judgement. ii) Remuneration guidelines The corporate governance guidelines have a strong presumption in favour of bonuses and awards which are based on specific targets. In my opinion, this setting of targets has been a key factor in the demise of the banks and many other businesses, since it has encouraged excessive debt. Targets can also create distortions in the behaviour of executives, since they can often be achieved by, for example, reducing costs to a level which adversely affects customer service or by other types of behaviour which prejudice long-term success for the benefit of relatively short-term gains. A considerable percentage of Wetherspoon share awards is not based on targets, other than the requirement of working for the company at the time at which the shares are issued. Naturally, the future value of the shares will depend on the success of the company. iii) Chief executive becomes chairman Several of the family brewers, for example, have decided that a chief executive should become chairman – and this can add ballast and gravitas to the board and increase resistance to some of the more harmful ideas which have beset the financial community. This seems to have worked well where the chairman represents family interests, as well as his own shareholding, in the company. iv) Majority of non-executives on the board Wetherspoon complies with this advice at the current time, but I believe that it may often be disadvantageous for a board to have a majority of non-executives. This is because it encourages an unrealistically low number of executives on the board, which risks unduly increasing the power of the chief executive. Alternatively, this practice encourages excessively large boards. In the pub industry, at least, I believe that companies which have had a majority of executives have fared better than those which have had a majority of non-executives. v) Board evaluation A recent requirement of corporate governance is a recommendation for a third party to evaluate the functioning of the board. Delegation of a key task of the chairman and of the directors of the board itself to a third party, often with little or no connection with the company’s business and with a very limited knowledge of the directors, may be a dangerous step for a board to take. It is the function of the board itself to evaluate its own performance – and the performance is most evident from the performance of the underlying business. For this reason, I believe it to be best for Wetherspoon to continue with its current system of ‘self-evaluation’. vi) General point A related matter concerns the huge increase in the size and incomprehensibility of annual reports and accounts; this has been exacerbated by corporate governance reports. As has been well documented, remuneration committee reports, for example, are often extremely difficult to understand. Many corporate governance reports are full of business jargon and repetition. The financial reports themselves are often the worst offenders, frequently using obscure language and definitions. The net effect of this is that annual reports, which should be read by shareholders, have become extremely difficult to digest – and many people have given up. Wetherspoon has attempted, no doubt imperfectly, to reduce jargon and repetition in this report and accounts which are now considerably briefer than most similar documents. Summary In my opinion, it is undoubtedly desirable for there to be a set of corporate governance guidelines, similar to those which exist today, by which shareholders and non-executives can create pressure for poorly performing executives to change their behaviour. However, for the reasons set out above, I believe that there are potential dangers in strict compliance with existing corporate governance guidelines – and the qualifications which are suggested above may, in the round, be beneficial to companies like Wetherspoon. Current trading and outlook The biggest danger to the pub industry, as indicated above, is the VAT disparity between supermarkets and pubs. Wetherspoon, along with many pub and restaurant companies, is supporting Jacques Borel’s VAT Club on Tax Parity Day (Wednesday, 25 September 2013), to publicise this inequality. In the six weeks to 8 September 2013, like-for-like sales increased by 3.6%, with total sales increasing by 7.8%. In the last fortnight, like-for-like sales were 2.5% – and this may be a reasonable indicator of future sales trends, in the light of strong sales in the last financial year. Overall, therefore, the company is aiming for a reasonable outcome in the current financial year. Tim Martin Chairman 13 September 2013 6 J D WETHERSPOON PLC LESSONS IN THE PROPERTY MARKET, BY TIM MARTIN J D Wetherspoon has always been a buyer of freeholds. Our second, third and fourth pubs were freehold and, by the time of our 1992 flotation, 20 of our 44 pubs were freehold. I negotiated our first 20 or so pubs myself, dealing directly with the owners’ agents, before employing Christian Braun, of Van de Berg & Co (VDB), in about 1990. Little did I realise that Braun was a double agent or ‘mole’, who was to burrow deep into our organisation, undermining the very property foundations which underpin any retailer. Following a tip-off, in 2005, we terminated VDB’s contract and undertook a review of all of our 600 or so property transactions, using a team of up to a dozen legal and paralegal staff. We discovered about 50 ‘back-to-back’ transactions, in which freeholds, which were available to buy, had been diverted by VDB to third parties, which had acquired them at the same time as JDW had taken a lease – the rent being set at a level which created an immediate uplift in the value of the reversion. Proceedings were issued against VDB and its directors, Braun, George Aldridge and Richard Harvey, in respect of about a dozen of these transactions. In a 136-page judgment, Mr Justice Peter Smith found that VDB had fraudulently diverted properties to several third parties, but he made no findings against the third parties themselves. Following Mr Justice Smith’s judgment, JDW issued proceedings against several third parties: Paul Ferrari of Braun’s former employer Ferrari Dewe & Co; Anthony Lyons, formerly of Davis Coffer Lyons; Jason Harris, formerly of First London. Liability was denied by all. The cases were contested and settled out of court. JDW received substantial payments in all three cases. Some of the pleaded properties in the VDB case, referred to by the judge as the ‘Ferrari Five’, involved Jersey companies with nominee owners who were connected to Ferrari. Each of the Jersey companies had a different name – and care was taken to use different lawyers and nominees. Profits from the purchasing companies were usually channelled to a Jersey holding company called Gecko, with money then transferred as loans or fees to companies controlled by VDB’s directors. In my opinion, the Lyons case is the most interesting for the property market and for prospective tenants and purchasers. Lyons stated, in his defence, that he was acting in his capacity as an employee and in accordance with his duties to Davis and Coffer (now Davis Coffer Lyons). The Lyons case concerned properties in Portsmouth, Leytonstone and Newbury, two of which became JDW pubs, with the third becoming a Café Rouge. The Portsmouth property belonged to British Gas – and Mr Justice Smith found that VDB had bid for the freehold, unbeknown to JDW, and, once the bid was accepted, agreed with Lyons for JDW to take a lease and for the freehold to be acquired by Moorstown Properties, owned by a friend, and subsequently a colleague, of Lyons – Simon Conway. No findings were made against Lyons, or indeed Conway, in the VDB case, and neither person was a party to the case. Portsmouth was subsequently sold by Moorstown to Scottish American Investment Company, a few months later, with the benefit of a lease to JDW for a substantial profit. Illustrating the Byzantine complexity of the transactions, Lyons’ defence stated that shares in Moorstown were “transferred”, before the sale was completed, to Northcreek which, Companies House shows, was owned by Roger Myers, then chairman of Café Rouge owner Pelican, and his family. The Newbury property was acquired by Riverside Stores, a company connected to Conway, and was leased at around the same time to Café Rouge. Newbury was sold shortly after completion for a substantial profit. JDW did not allege, and is not alleging, that the Portsmouth and Newbury transactions are connected and is not alleging that Davis Coffer Lyons, Myers or Conway are dishonest, but it is a matter of public importance, as well as of importance to JDW and its shareholders, for there to be an explanation about the circumstances in which Moorstown, a company which clearly benefited from the Portsmouth fraud by VDB, ended up belonging to the family of Myers. ANNUAL REPORT AND ACCOUNTS 2013 7 LESSONS IN THE PROPERTY MARKET, BY TIM MARTIN A key legal and ethical question for the property market which emerges from these cases concerns the obligations of estate agents and investors, in circumstances in which a freehold property is first offered to a friend or colleague of an agent, who agrees to acquire it, and the property is then offered by the agent to a company like Wetherspoon on a ‘back-to-back’ basis. What are the obligations of the introducing agent? In broad terms, the third parties in the Wetherspoon litigation argued that they owed no duties or obligations to Wetherspoon and were not, therefore, liable to us. The great risk which all agents and investors run, in these circumstances, is that the retained agent, VDB in this instance, may itself be dishonest. If so, this may open up the possibility of a claim by an aggrieved ‘end user’, such as Wetherspoon, that the introducing agent participated in the dishonesty of the retained agent. JDW has lost many tens of millions of pounds as a result of the VDB frauds. Rent reviews and ‘yield compression’ have exacerbated the damage over the years. Our experience teaches several lessons. First, buyers and tenants should ask their agents to confirm in writing that they have no direct or indirect interest in any property which they are acquiring and should ask their lawyers to take particular interest, if a freehold is changing hands at the same time as they are acquiring a lease or, indeed, the freehold. Professionals and investors should also obtain confirmation in writing from the ‘end user’ in back-to- back deals that they have consented to the transaction. Take the retained agent’s word for it at your peril. 8 J D WETHERSPOON PLC INCOME STATEMENT for the 52 weeks ended 28 July 2013 J D Wetherspoon plc, company number: 1709784 Notes 52 weeks ended 28 July 2013 Before exceptional items Total £000 52 weeks ended 28 July 2013 Exceptional items (note 3) Total £000 52 weeks ended 28 July 2013 After exceptional items Total £000 53 weeks ended 29 July 2012 Before exceptional items Total £000 53 weeks ended 29 July 2012 Exceptional items (note 3) Total £000 53 weeks ended 29 July 2012 After exceptional items Total £000 Revenue Operating costs Operating profit Finance income Finance costs Profit before taxation Income tax expense Profit for the year Basic earnings per share 1 2 5 5 6 7 1,280,929 (1,169,619) – (19,800) 1,280,929 (1,189,419) 1,197,129 (1,089,811) – (13,481) 1,197,129 (1,103,292) 111,310 118 (34,485) 76,943 (11,731) (19,800) – – (19,800) 776 91,510 118 (34,485) 57,143 (10,955) 107,318 55 (35,010) 72,363 (15,038) (13,481) – – (13,481) 723 93,837 55 (35,010) 58,882 (14,315) 65,212 (19,024) 46,188 57,325 (12,758) 44,567 Adjusted earnings per share 7 46.8 Diluted adjusted earnings per share 7 44.8 29.7 39.8 38.3 31.0 41.3 35.6 31.1 30.0 STATEMENT OF COMPREHENSIVE INCOME for the 52 weeks ended 28 July 2013 Notes 52 weeks ended 28 July 2013 £000 53 weeks ended 29 July 2012 £000 Items which will not be subsequently reclassified to profit or loss Interest-rate swaps: gain/(loss) taken to other comprehensive income Tax on items taken directly to other comprehensive income 20 6 Net gain/(loss) recognised directly in other comprehensive income Profit for the year Total comprehensive income for the year 21,984 (6,378) 15,606 46,188 (8,149) 717 (7,432) 44,567 61,794 37,135 ANNUAL REPORT AND ACCOUNTS 2013 9 CASH FLOW STATEMENT for the 52 weeks ended 28 July 2013 J D Wetherspoon plc, company number: 1709784 Cash flows from operating activities Cash generated from operations Interest received Interest paid Corporation tax paid Purchase of own shares for share-based payments Notes 8 52 weeks ended 28 July 2013 £000 Free cash flow 52 weeks ended 28 July 2013 £000 53 weeks ended 29 July 2012 £000 Free cash flow 53 weeks ended 29 July 2012 £000 164,922 122 (31,569) (18,370) (8,825) 164,922 122 (31,569) (18,370) (8,825) 196,733 49 (36,091) (18,168) (5,756) 196,733 49 (36,091) (18,168) (5,756) Net cash inflow from operating activities 106,280 106,280 136,767 136,767 Cash flows from investing activities Purchase of property, plant and equipment Purchase of intangible assets Proceeds on sale of property, plant and equipment Investment in new pubs and pub extensions Lease premiums paid (35,051) (5,880) (35,051) (5,880) 645 (60,795) (93) (36,578) (8,647) 887 (74,859) (489) (36,578) (8,647) Net cash outflow from investing activities (101,174) (40,931) (119,686) (45,225) Cash flows from financing activities Equity dividends paid Proceeds from issue of ordinary shares Purchase of own shares Advances under bank loans Advances under finance leases Finance costs on new loan Finance lease principal payments Net cash outflow from financing activities Net increase in cash and cash equivalents Opening cash and cash equivalents Closing cash and cash equivalents Free cash flow Free cash flow per ordinary share (15,053) – – 17,585 – – (5,841) (3,309) 1,797 28,040 29,837 10 25 9 9 9 9 9 17 17 7 7 (15,544) 96 (22,711) 18,059 10,473 (2,731) (4,373) (16,731) 350 27,690 28,040 65,349 51.8p 91,542 70.4p 10 J D WETHERSPOON PLC BALANCE SHEET for the 52 weeks ended 28 July 2013 J D Wetherspoon plc, company number: 1709784 Assets Non-current assets Property, plant and equipment Intangible assets Deferred tax assets Other non-current assets Total non-current assets Current assets Inventories Receivables Assets held for sale Cash and cash equivalents Total current assets Total assets Liabilities Current liabilities Trade and other payables Borrowings Current income tax liabilities Total current liabilities Non-current liabilities Borrowings Derivative financial instruments Deferred tax liabilities Other liabilities Total non-current liabilities Net assets Shareholders’ equity Share capital Share premium account Capital redemption reserve Hedging reserve Retained earnings Total shareholders’ equity Notes 28 July 2013 £000 29 July 2012 £000 11 12 6 13 14 15 16 17 18 19 19 20 6 21 25 956,928 20,166 11,531 9,897 924,341 16,936 16,198 10,682 998,522 968,157 19,857 23,940 422 29,837 20,975 18,685 2,055 28,040 74,056 69,755 1,072,578 1,037,912 (207,947) (5,552) (9,313) (207,114) (5,880) (9,103) (222,812) (222,097) (498,498) (44,045) (61,131) (31,177) (484,771) (66,029) (67,860) (27,511) (634,851) (646,171) 214,915 169,644 2,521 143,294 1,910 (35,236) 102,426 2,521 143,294 1,910 (50,842) 72,761 214,915 169,644 The financial statements, on pages 9 to 33 and 36 to 41, approved by the board of directors and authorised for issue on 13 September 2013, are signed on its behalf by: John Hutson Director Kirk Davis Director ANNUAL REPORT AND ACCOUNTS 2013 11 STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY J D Wetherspoon plc, company number: 1709784 Notes Share capital £000 Share premium Capital redemption reserve £000 account £000 Hedging reserve £000 Retained earnings £000 Total £000 At 24 July 2011 2,632 143,199 1,798 (43,410) 66,826 171,045 Profit for the year Interest-rate swaps: loss taken to equity Tax on items taken directly to equity Total comprehensive income Exercise of options Repurchase of shares Tax on repurchase of shares Share-based payments Purchase of shares held in trust Tax on purchase of shares held in trust Dividends At 29 July 2012 Profit for the year Interest-rate swaps: gain taken to equity Tax on items taken directly to equity 20 6 25 10 20 6 1 (112) 95 112 44,567 44,567 (8,149) 717 (8,149) 717 (7,432) 44,567 37,135 (22,598) (113) 5,379 96 (22,598) (113) 5,379 (5,727) (5,727) (29) (15,544) (29) (15,544) 2,521 143,294 1,910 (50,842) 72,761 169,644 46,188 46,188 21,984 (6,378) 21,984 (6,378) Total comprehensive income 15,606 46,188 61,794 Share-based payments Deferred tax on share-based payments Purchase of shares held in trust Tax on purchase of shares held in trust Dividends 10 6,539 6,539 816 816 (8,787) (8,787) (38) (15,053) (38) (15,053) At 28 July 2013 2,521 143,294 1,910 (35,236) 102,426 214,915 The balance classified as share capital includes those proceeds arising on issue of the company’s equity share capital, comprising 2p ordinary shares and the cancellation of shares repurchased by the company. The capital redemption reserve arose from the purchase of the company’s share capital. Shares acquired in relation to the employee Share Incentive Plan and the 2005 Deferred Bonus Scheme are held in trust, until such time as the awards vest. At 28 July 2013, the number of shares held in trust was 5,748,048 (2012: 5,503,428), with a nominal value of £114,961 (2012: £110,100) and a market value of £43,800,126 (2012: £25,706,512). Hedging gain/loss arises from the movement of fair value in the company’s financial derivative instruments, in line with the accounting policy disclosed in section 2. As at 28 July 2013, the company had distributable reserves of £67.2 million (2012: £21.9 million). 12 J D WETHERSPOON PLC NOTES TO THE FINANCIAL STATEMENTS at 28 July 2013 1 Revenue Revenue disclosed in the income statement is analysed as follows: 52 weeks ended 28 July 2013 £000 53 weeks ended 29 July 2012 £000 Sales of food, beverages, hotel rooms and machine income 1,280,929 1,197,129 2 Operating profit before exceptional items – analysis of costs by nature This is stated after charging/(crediting): Concession rental payments Operating lease payments Repairs and maintenance Rent receivable Depreciation of property, plant and equipment (note 11) Amortisation of intangible assets (note 12) Amortisation of non-current assets (note 13) Share-based payments (note 4) Auditors’ remuneration Fees payable for the audit of the financial statements Fees payable for other services: – assurance services – services Total auditors’ fees Analysis of continuing operations Revenue Cost of sales Gross profit Administration costs Operating profit before exceptional items Exceptional items (note 3) Operating profit after exceptional items Exceptional items in the year and the previous year are included under cost of sales. 52 weeks ended 28 July 2013 £000 53 weeks ended 29 July 2012 £000 15,054 53,707 48,030 (623) 50,084 2,650 363 6,539 165 29 20 214 14,831 53,230 44,575 (540) 47,416 1,423 327 5,379 156 29 64 249 52 weeks ended 28 July 2013 £000 53 weeks ended 29 July 2012 £000 1,280,929 (1,121,787) 1,197,129 (1,045,404) 159,142 (47,832) 151,725 (44,407) 111,310 107,318 (19,800) (13,481) 91,510 93,837 ANNUAL REPORT AND ACCOUNTS 2013 13 NOTES TO THE FINANCIAL STATEMENTS 3 Exceptional items In the table below, property impairment relates to situations in which, owing to a poor trading performance, pubs are unlikely to generate sufficient cash in the future to justify their book value. In the year, an exceptional charge of £15,551,000 (2012: £7,823,000) was incurred in respect of the impairment of property, plant and equipment, other non-current assets and assets held for sale following a review of the company’s assets, as required under IAS 36. This comprises an impairment charge of £16,317,000 (2012: £9,613,000), offset by impairment reversals of £766,000 (2012: £1,790,000). The onerous lease provision relates to pubs for which future trading profits, or income from subleases, are not expected to cover the rent. The provision takes several factors into account, including the expected future profitability of the pub, but also the amount estimated as payable on surrender of the lease, where this is a possible outcome. In the year, £3,278,000 (2012: £2,229,000) was incurred in respect of onerous leases. The loss on disposal of property, plant and equipment in the year relates to the sale of three pubs, and in the previous year related to the sale of three pubs. Also, in the previous year, exceptional costs were incurred for the write-off of redundant IT assets and restructuring costs. Property impairment Onerous lease provision Loss on disposal of property, plant and equipment Write-off of IT-related assets Restructuring costs Operating exceptional items 52 weeks ended 28 July 2013 £000 53 weeks ended 29 July 2012 £000 15,551 3,278 971 – – 7,823 2,229 1,062 1,742 625 19,800 13,481 14 J D WETHERSPOON PLC 4 Employee benefits expense Wages and salaries Social Security costs Pension costs Share-based payments The totals below relate to the average number of employees during the year, not the total number of employees at the end of the year. Full-time equivalents Managerial/administration Hourly paid staff Total employees Managerial/administration Hourly paid staff NOTES TO THE FINANCIAL STATEMENTS 52 weeks ended 28 July 2013 £000 53 weeks ended 29 July 2012 £000 326,479 21,778 2,187 6,539 305,156 19,544 1,668 5,379 356,983 331,747 2013 Number 2012 Number 3,675 11,727 3,584 10,819 15,402 14,403 2013 Number 2012 Number 4,065 25,406 3,953 22,912 29,471 26,865 For details of the Share Incentive Plan and the 2005 Deferred Bonus Scheme, refer to the remuneration report on pages 46 to 50. The shares awarded as part of the above schemes are based on the cash value of the bonuses at the date of the awards. These awards vest over three years – with their cost spread equally over their three-year life. The share-based payment charge above represents the annual cost of bonuses awarded over the past three years. ANNUAL REPORT AND ACCOUNTS 2013 15 NOTES TO THE FINANCIAL STATEMENTS 5 Finance income and costs Finance costs Interest payable on bank loans and overdrafts Amortisation of bank loan issue costs Interest payable on obligations under finance leases Total finance costs Bank interest receivable Total finance income Total net finance costs Further details are provided in account note 20. Analysis of finance income and costs in categories in accordance with IAS 39 Loans and receivables Financial liabilities carried at amortised cost Financial derivatives Other financial expenses Total net finance costs 52 weeks ended 28 July 2013 £000 53 weeks ended 29 July 2012 £000 32,208 1,655 622 32,826 1,709 475 34,485 35,010 (118) (118) (55) (55) 34,367 34,955 52 weeks ended 28 July 2013 £000 53 weeks ended 29 July 2012 £000 (118) 14,611 19,233 641 (55) 15,996 18,475 539 34,367 34,955 The net finance costs during the year decreased from £35.0 million to £34.4 million. The finance costs in the income statement were covered 3.2 times (2012: 3.1 times), on a pre-exceptional basis. 16 J D WETHERSPOON PLC NOTES TO THE FINANCIAL STATEMENTS 6 Income tax expense (a) Tax on profit on ordinary activities Tax charged in the income statement The standard rate of corporation tax in the UK changed from 24% to 23%, with effect from 1 April 2013. Accordingly, the company’s profits for this accounting period are taxed at an effective rate of 23.7% (2012: 25.3%). 52 weeks ended 28 July 2013 Before exceptional items £000 52 weeks ended 28 July 2013 After exceptional items £000 53 weeks ended 29 July 2012 Before exceptional items £000 53 weeks ended 29 July 2012 After exceptional items £000 Current income tax: Current income tax charge 19,356 18,580 18,538 17,815 Total current income tax 19,356 18,580 18,538 17,815 Deferred tax: Origination and reversal of temporary differences Impact of change in UK tax rate 1,095 (8,720) 1,095 (8,720) 2,127 (5,627) 2,127 (5,627) Total deferred tax (7,625) (7,625) (3,500) (3,500) Tax charge in the income statement 11,731 10,955 15,038 14,315 Tax relating to items charged or credited to other comprehensive income Deferred tax: Tax charge/(credit) on interest-rate swaps 6,378 6,378 Tax charge/(credit) in the statement of comprehensive income 6,378 6,378 (717) (717) (717) (717) ANNUAL REPORT AND ACCOUNTS 2013 17 NOTES TO THE FINANCIAL STATEMENTS 6 Income tax expense continued (b) Reconciliation of the total tax charge The tax expense after exceptional items in the income statement for the year is lower (2012: lower) than the standard rate of corporation tax in the UK of 23.7% (2012: 25.3%), owing largely to the adjustment in respect of the change in the tax rate. The differences are reconciled below: 52 weeks ended 28 July 2013 Before exceptional items £000 52 weeks ended 28 July 2013 After exceptional items £000 53 weeks ended 29 July 2012 Before exceptional items £000 53 weeks ended 29 July 2012 After exceptional items £000 Profit before income tax 76,943 57,143 72,363 58,882 Profit multiplied by the UK standard rate of corporation tax of 23.7% (2012: 25.3%) Abortive acquisition costs and disposals Other disallowables Other allowable deductions Non-qualifying depreciation Deduction for share options and SIPs Deferred tax on balance-sheet-only items Adjustment to deferred tax in respect of change in tax rate 18,210 88 116 (151) 2,995 (402) (204) (8,921) 13,524 88 116 (151) 6,905 (402) (204) (8,921) 18,332 39 192 (55) 2,502 (7) (121) (5,844) 14,917 39 192 (55) 5,194 (7) (121) (5,844) Total tax expense reported in the income statement 11,731 10,955 15,038 14,315 On 1 April 2014, the UK standard rate of corporation tax is set to fall to 21% and is due to reduce a further 1%, to 20%, by 1 April 2015. 18 J D WETHERSPOON PLC NOTES TO THE FINANCIAL STATEMENTS 6 Income tax expense continued (c) Deferred tax The deferred tax in the balance sheet is as follows: Deferred tax liabilities At 24 July 2011 Credited to the income statement At 29 July 2012 Transfer to deferred tax assets Impact of change in tax rate on opening balance Movement during year charged/(credited) to income statement Accelerated tax depreciation £000 Revaluation of land and buildings £000 Other temporary differences £000 62,830 (2,934) 59,896 – (7,812) 1,285 2,629 (337) 2,292 – (299) (104) 5,989 (317) 5,672 891 (856) 166 Total £000 71,448 (3,588) 67,860 891 (8,967) 1,347 At 28 July 2013 53,369 1,889 5,873 61,131 Deferred tax assets At 24 July 2011 Debited to the income statement Credited to other comprehensive income At 29 July 2012 Transfer from deferred tax liabilities Impact of change in tax rate on opening balance Movement during year credited to the income statement Movement during year credited to equity Movement during year debited to other comprehensive income Share- based payments £000 Capital losses carried forward £000 Interest-rate swaps Total £000 £000 – – – – 891 (116) – 816 – 1,099 (88) – 1,011 – (131) 251 – – 14,470 (1,158) 1,875 15,187 – (1,320) – – (5,058) 15,569 (1,246) 1,875 16,198 891 (1,567) 251 816 (5,058) At 28 July 2013 1,591 1,131 8,809 11,531 The Finance Bill 2013 was substantively enacted before the balance sheet date of 28 July 2013. It included legislation to reduce the main rate of corporation tax to 21% (with effect from 1 April 2014) and 20% from 1 April 2015. The lower rate of 20% has been used to determine the overall net deferred tax liability, as the temporary differences are expected to reverse at the lower rate. The reversal of the deferred tax asset, in relation to capital losses, is dependent on the availability of capital gains on future disposals. This asset is likely to be reversed after more than 12 months. The deferred tax liabilities are expected to unwind after more than 12 months. ANNUAL REPORT AND ACCOUNTS 2013 19 NOTES TO THE FINANCIAL STATEMENTS 7 Earnings and cash flow per share Basic earnings per share have not been calculated by dividing the profit attributable to equity holders of £46,188,000 (2012: £44,567,000) by the weighted average number of shares in issue of 126,036,296 (2012: 129,998,234). International reporting standards require that the weighted average number of shares be adjusted to exclude shares held in trust in respect of the employee Share Incentive Plan and the 2005 Deferred Bonus Scheme. This has resulted in the number of shares used in the calculation of 120,684,262 (2012: 125,085,248). On this basis, earnings per share before exceptional items have been calculated before items detailed in note 3. The weighted average number of shares held in trust of 5,352,034 (2012: 4,919,213), which have a dilutive effect, has been excluded in the calculation of undiluted earnings per share in the table below. Therefore, the weighted average number of ordinary shares used in this calculation is 120,684,262 (2012: 125,085,248). The calculation of diluted earnings per share (in the table below) is based on the weighted average number of shares in issue of 126,036,296 (2012: 129,988,234), including those held in trust in respect of employee share schemes. Adjusted earnings exclude an adjustment in respect of the corporation tax-rate change of £8,720,000 (2012: £5,627,000) and exceptional items. Earnings per share Earnings (profit after tax) Exclude one-off tax benefit (rate change) Adjusted earnings after exceptional items Exclude effect of exceptional items net of tax Adjusted earnings before exceptional items Undiluted earnings per share (excluding shares held in trust) Basic earnings per share Adjusted earnings per share before exceptional items Adjusted earnings per share after exceptional items Diluted earnings per share (including shares held in trust) If the shares held in trust in respect of the employee share schemes are included for the purpose of the earnings per share calculation, the following diluted measures would hold true, based on a weighted average of 126,036,296 (2012: 129,998,234) shares in issue. 52 weeks ended 28 July 2013 £000 53 weeks ended 29 July 2012 £000 46,188 (8,720) 37,468 19,024 44,567 (5,627) 38,940 12,758 56,492 51,698 38.3p 46.8p 31.0p 35.6p 41.3p 31.1p Diluted earnings per share Diluted adjusted earnings per share before exceptional items Diluted adjusted earnings per share after exceptional items 36.6p 44.8p 29.7p 34.3p 39.8p 30.0p Free cash flow per share The calculation of free cash flow per share is based on the net cash generated by business activities and available for investment in new pub developments and extensions to current pubs, after funding interest, corporation tax, all other reinvestment in pubs open at the start of the period and the purchase of own shares under the employee Share Incentive Plan (‘free cash flow’). It is calculated before taking account of proceeds from property disposals, inflows and outflows of financing from outside sources and dividend payments and is based on the weighted average number of shares in issue, including those held in trust in respect of the employee share schemes. Free cash flow per share Free cash flow (£000) Free cash flow per share (p) 20 J D WETHERSPOON PLC 52 weeks ended 28 July 2013 53 weeks ended 29 July 2012 65,349 51.8 91,542 70.4 8 Cash generated from operations Profit for the year Adjusted for: Tax Impairment charge Onerous lease provision Loss on disposal of property, plant and equipment Amortisation of intangible assets Depreciation of property, plant and equipment Lease premium amortisation Share-based charges Interest receivable Amortisation of bank loan issue costs Interest payable Change in inventories Change in receivables Change in payables Net cash inflow from operating activities 9 Analysis of changes in net debt Cash in hand Debt due after one year (notes 19 and 20) Bank borrowing Finance lease creditor – due less than one year Finance lease creditor – due after one year Net borrowings Derivative: interest-rate swaps (note 20) NOTES TO THE FINANCIAL STATEMENTS 52 weeks ended 28 July 2013 £000 53 weeks ended 29 July 2012 £000 46,188 44,567 10,955 15,551 3,278 971 2,650 50,084 363 6,539 (118) 1,655 32,830 14,315 7,823 2,229 2,804 1,423 47,416 327 5,379 (55) 1,709 33,301 170,946 1,118 (5,255) (1,887) 161,238 514 2,598 32,383 164,922 196,733 At 29 July 2012 £000 Cash flows £000 Non-cash movement £000 At 28 July 2013 £000 28,040 (474,559) (446,519) (5,880) (10,212) (462,611) (66,029) 1,797 (17,585) (15,788) 5,841 – (9,947) – – (1,655) (1,655) (5,513) 5,513 29,837 (493,799) (463,962) (5,552) (4,699) (1,655) 21,984 (474,213) (44,045) Net debt (528,640) (9,947) 20,329 (518,258) Non-cash movements The non-cash movement in debt due after one year relates to the amortisation of bank loan issue costs. The movement in interest-rate swaps of £22.0 million relates to the change in the ‘mark to market’ valuations for the year. ANNUAL REPORT AND ACCOUNTS 2013 21 NOTES TO THE FINANCIAL STATEMENTS 10 Dividends paid and proposed Declared and paid during the year: Dividends on ordinary shares: – final for 2011/12: 8.0p (2010/11: 8.0p) – interim for 2012/13: 4.0p (2011/12: 4.0p) Dividends paid Proposed for approval by shareholders at the AGM: – final dividend for 2012/13: 8.0p (2011/12: 8.0p) 52 weeks ended 28 July 2013 £000 53 weeks ended 29 July 2012 £000 10,021 5,032 10,475 5,069 15,053 15,544 9,623 10,006 As detailed in the interim accounts, the board declared and paid an interim dividend of 4.0p for the financial year ended 28 July 2013. 11 Property, plant and equipment Cost: At 24 July 2011 Additions Transfers Transfer to/from assets held for sale Disposals Reclassification At 29 July 2012 Additions Transfers Transfer from assets held for sale Disposals Reclassification Freehold and long-leasehold property £000 Short- leasehold property £000 Equipment, fixtures and fittings £000 Expenditure on unopened properties £000 Total £000 624,746 8,102 34,903 (4,001) – 4,309 668,059 2,852 26,470 1,693 (1,693) 6,090 391,451 6,302 19,395 (895) (2,355) (3,809) 410,089 11,645 11,302 1,135 (1,952) (6,090) 355,963 26,083 14,881 (952) (6,245) – 389,730 27,791 13,090 – (2,536) – 23,105 61,652 (69,179) 611 (633) – 15,556 55,650 (50,862) – – – 1,395,265 102,139 – (5,237) (9,233) 500 1,483,434 97,938 – 2,828 (6,181) – At 28 July 2013 703,471 426,129 428,075 20,344 1,578,019 Accumulated depreciation and impairment: At 24 July 2011 Provided during the period Impairment loss Disposals Transfer to/from assets held for sale Reclassification At 29 July 2012 Provided during the period Impairment loss Disposals Transfer from assets held for sale Reclassification 103,306 11,201 7,317 – (2,748) 906 119,982 11,107 6,458 (1,320) 1,328 1,899 156,516 12,582 715 (1,725) (315) (479) 167,294 13,127 6,809 (797) 424 (1,899) 253,772 23,633 (209) (5,660) (660) – 270,876 25,850 1,191 (2,179) – – At 28 July 2013 139,454 184,958 295,738 400 – – – 541 – 941 – – – – – 941 513,994 47,416 7,823 (7,385) (3,182) 427 559,093 50,084 14,458 (4,296) 1,752 – 621,091 Net book amount at 28 July 2013 564,017 241,171 132,337 19,403 956,928 Net book amount at 29 July 2012 548,077 242,795 118,854 14,615 924,341 Net book amount at 24 July 2011 521,440 234,935 102,191 22,705 881,271 22 J D WETHERSPOON PLC NOTES TO THE FINANCIAL STATEMENTS 11 Property, plant and equipment continued Impairment of property, plant and equipment In assessing whether a pub has been impaired, the book value of the pub is compared with its anticipated future cash flows. Assumptions are used about sales, costs and profit, using a pre-tax discount rate for future years of 10% (2012: 10%). If the value, based on future anticipated cash flows, is lower than the book value, the difference is written off as property impairment. As a result of this exercise, a net impairment loss of £14,458,000 (2012: £7,823,000) was charged to operating costs in the income statement, as described in note 3. Management believes that a reasonable change in any of the key assumptions, for example the discount rate applied to each pub, could cause the carrying value of the pub to exceed its recoverable amount, but that the change would be immaterial. Finance leases Certain items of furniture, kitchen and IT equipment are subject to finance leases. The carrying value of these assets, held under finance leases at 28 July 2013, included in equipment, fixtures and fittings, was as follows: Net book value 2013 £000 2012 £000 10,554 12,794 ANNUAL REPORT AND ACCOUNTS 2013 23 NOTES TO THE FINANCIAL STATEMENTS 12 Intangible assets Cost: At 24 July 2011 Additions Disposals At 29 July 2012 Additions At 28 July 2013 Accumulated amortisation: At 24 July 2011 Amortisation during the period Disposals At 29 July 2012 Amortisation during the period At 28 July 2013 Net book amount at 28 July 2013 Net book amount at 29 July 2012 Net book amount at 24 July 2011 £000 22,987 8,647 (2,021) 29,613 5,880 35,493 11,462 1,423 (208) 12,677 2,650 15,327 20,166 16,936 11,525 Amortisation of £2,650,000 (2012: £1,423,000) is included in operating costs in the income statement. The majority of intangible assets relates to computer software and development. Included in the intangible assets is £4,258,000 of assets in the course of development (2012: £10,575,000). Finance leases The carrying value of fixed assets held under finance leases at 28 July 2013, included in intangible assets, was as follows: Net book value 2013 £000 2012 £000 4,626 5,170 24 J D WETHERSPOON PLC NOTES TO THE FINANCIAL STATEMENTS 13 Other non-current assets These assets relate to lease premiums whereby the company has paid a landlord a sum of money to take over the benefit of a lease. Cost: At 24 July 2011 Additions Reclassification At 29 July 2012 Additions At 28 July 2013 Accumulated amortisation: At 24 July 2011 Amortisation during the period Transfer to/from assets held for sale Reclassification At 29 July 2012 Amortisation during the period Impairment At 28 July 2013 Net book amount at 28 July 2013 Net book amount at 29 July 2012 Net book amount at 24 July 2011 14 Inventories Lease premiums £000 13,988 489 (500) 13,977 93 14,070 3,468 327 (73) (427) 3,295 363 515 4,173 9,897 10,682 10,520 Bar, food and non-consumable stock held at the pubs and our national distribution centre. Goods for resale at cost 2013 £000 2012 £000 19,857 20,975 ANNUAL REPORT AND ACCOUNTS 2013 25 NOTES TO THE FINANCIAL STATEMENTS 15 Receivables Receivables relate to situations where third parties owe the company money. Examples include rebates from suppliers and overpayments of certain taxes. Prepayments relate to payments which have been made in respect of liabilities after the period end. Receivables Prepayments and accrued income 2013 £000 5,457 18,483 2012 £000 5,159 13,526 23,940 18,685 At the balance sheet date, the company was exposed to a maximum credit risk of £5.5 million, of which £210,000 was overdue. The company holds no collateral for these receivables. An impairment of £105,000 was charged to the income statement in the year. No further impairment to receivables was deemed necessary at the balance sheet date. 16 Assets held for resale This relates to situations in which the company has decided to sell a property, but the transaction is not yet under contract. As at 28 July 2013, one site was classified as held for sale (2012: three sites). The major classes of assets held, comprising the sites classified as held for sale, were as follows: Property, plant and equipment 2013 £000 422 2012 £000 2,055 A total loss of £578,000, in writing these assets down to fair value less costs to sell, has been included in the impairment charge in exceptional items (note 3). It is expected that this site will be disposed of in the new financial year. 17 Cash and cash equivalents Cash at bank and in hand 2013 £000 2012 £000 29,837 28,040 Cash at bank earns interest at floating rates, based on daily bank deposit rates. 26 J D WETHERSPOON PLC NOTES TO THE FINANCIAL STATEMENTS 18 Trade and other payables This category relates to money owed by the company to suppliers and the government. Accruals refer to allowances made by the company for future anticipated payments to suppliers and other creditors. Trade payables Other payables Other tax and Social Security Accruals and deferred income 19 Borrowings Current (due within one year) Finance lease obligations Non-current (due after one year) Bank loans Variable-rate facility Unamortised bank loan issue costs Other Finance lease obligations Total non-current financial liabilities 2013 £000 99,540 11,303 37,289 59,815 2012 £000 106,681 7,922 39,180 53,331 207,947 207,114 2013 £000 2012 £000 5,552 5,880 498,195 (4,396) 480,590 (6,031) 4,699 10,212 498,498 484,771 ANNUAL REPORT AND ACCOUNTS 2013 27 NOTES TO THE FINANCIAL STATEMENTS 20 Financial instruments For a discussion on capital risk management, please refer to section 2 on page 40. Also discussed in section 2 on pages 40 and 41 are the financial risks associated with financial instruments, including credit risk and liquidity risk. The table below analyses the company’s financial liabilities which will be settled on a net basis into relevant maturity groupings, based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Maturity profile of financial liabilities Within 1 year £000 1–2 years £000 2–3 years £000 3–4 years £000 4–5 years £000 At 28 July 2013 12,450 Bank loans Finance lease obligations 5,949 Trade and other payables 170,659 19,341 Derivatives 12,450 2,801 – 13,892 518,425 2,101 – 12,137 – – – 6,873 – – – 6,795 Within 1 year £000 1–2 years £000 2–3 years £000 3–4 years £000 4–5 years £000 At 29 July 2012 12,163 Bank loans Finance lease obligations 6,496 Trade and other payables 167,934 19,428 Derivatives 12,163 5,949 – 19,428 12,163 2,801 – 13,722 493,198 2,101 – 11,862 – – – 4,761 More than 5 years £000 – – – 2,007 More than 5 years £000 – – – 4,683 Total £000 543,325 10,851 170,659 61,045 Total £000 529,687 17,347 167,934 73,884 At the balance sheet date, the company had loan facilities of £575 million (2012: £575 million) as detailed below: (cid:2) Unsecured revolving-loan facility of £555 million (cid:2)(cid:2) Matures March 2016 (cid:2)(cid:2) 11 participating lenders (cid:2) Overdraft facility of £20 million The company has hedged its interest-rate liabilities to its banks by swapping the floating-rate debt into fixed-rate debt which fixed £400 million of these borrowings at rates of between 5.25% and 5.52%. The effective weighted average interest rate of the swap agreements is 5.33% (2012: 5.33%), fixed for a weighted average period of 1.9 years (2012: 2.9 years). The company also holds forward-starting interest-rate swap agreements totalling £400 million to July 2018, to replace the existing swaps, when they expire. The effective average interest rate is 3.5% from 12 November 2014 to 31 July 2016. From 31 July 2016 to 31 July 2018, the weighted average interest rate falls to 2.2%. At the balance sheet date, £510 million (2012: £485 million) was drawn down under the £555-million unsecured-term revolving-loan facility, with interest rates set for periods of between one and six months, at which point monies are repaid and, if appropriate, redrawn. 28 J D WETHERSPOON PLC NOTES TO THE FINANCIAL STATEMENTS 20 Financial instruments continued Interest-rate and currency risks of financial liabilities An analysis of the interest-rate profile of the financial liabilities, after taking account of all interest-rate swaps, is set out in the following table. Analysis of interest-rate profile of the financial liabilities Floating-rate borrowings Fixed-rate borrowings: – bank loans – finance lease obligations 2013 £000 2012 £000 93,799 74,559 400,000 10,251 400,000 16,092 504,050 490,651 The floating-rate borrowings are interest-bearing borrowings at rates based on LIBOR, fixed for periods of up to one month. Obligations under finance leases The minimum lease payments under finance leases fall due as follows: Within one year In the second to fifth year, inclusive Less future finance charges Present value of lease obligations Less amount due for settlement within one year 2013 £000 5,949 4,902 2012 £000 6,496 10,852 10,851 17,348 (600) (1,256) 10,251 16,092 (5,949) (6,496) Amount due for settlement during the second to fifth year, inclusive 4,302 9,596 All finance lease obligations are in respect of various equipment and software used in the business. No escalation clauses are included in the agreements. ANNUAL REPORT AND ACCOUNTS 2013 29 NOTES TO THE FINANCIAL STATEMENTS 20 Financial instruments continued Fair values In some cases, payments which are due to be made in the future by the company or due to be received by the company have to be given a fair value. The table below highlights any differences between book value and fair value of financial instruments. Financial assets Cash and cash equivalents Receivables Financial liabilities at amortised cost Trade and other payables Finance lease obligations Long-term borrowings 2013 Book value £000 2013 Fair value £000 2012 Book value £000 2012 Fair value £000 29,837 5,456 29,837 5,456 28,040 5,159 28,040 5,159 (170,659) (10,251) (493,799) (170,659) (10,366) (523,011) (167,934) (16,092) (474,559) (167,934) (16,236) (513,831) Financial liabilities at fair value through profit or loss Interest-rate swaps (44,045) (44,045) (66,029) (66,029) The fair value of finance leases has been calculated by discounting the expected cash flows at the year end’s prevailing interest rates. The fair value of derivatives has been calculated by discounting all future cash flows by the market yield curve at the balance sheet date. The fair value of borrowings has been calculated by discounting the expected future cash flows at the year end’s prevailing interest rates. Interest-rate swaps At 28 July 2013, the company had fixed-rate swaps designated as hedges of floating-rate borrowings. The floating-rate borrowings are interest-bearing borrowings at rates based on LIBOR, fixed for periods of up to one month. The interest-rate swaps of the floating-rate borrowings were assessed to be effective; a cumulative loss of £44,045,000 (2012: a loss of £66,029,000), with a deferred tax credit of £8,809,000 (2012: a credit of £15,187,000), relating to the hedging instrument, is included in equity. A credit of £21,984,000 for the year (2012: loss of £8,149,000) is reflected in equity. Fair value of financial assets and liabilities Effective from 27 July 2009, the company adopted the amendment to IFRS 7 for financial instruments which are measured in the balance sheet at fair value. This requires disclosure of fair value measurements by level, using the following fair value measurement hierarchy: – Quoted prices in active markets for identical assets or liabilities (level 1) – Inputs other than quoted prices included in level 1 which are observable for the asset or liability, either directly or indirectly (level 2) Inputs for the asset or liability which are not based on observable market data (level 3) – The fair value of the interest-rate swaps of £44.0 million is considered to be level 2. All other financial assets and liabilities are measured in the balance sheet at amortised cost. 30 J D WETHERSPOON PLC 21 Other liabilities Operating lease incentives Onerous lease provision Amount held in respect of gaming machine settlement under appeal by HMRC Other liabilities NOTES TO THE FINANCIAL STATEMENTS 2013 £000 12,710 3,520 14,947 2012 £000 10,817 1,747 14,947 31,177 27,511 Included in other liabilities are lease incentives on leases where the lessor retains substantially all of the risks and benefits of ownership of the asset. The lease incentives are recognised as a reduction in rent over the lease term and shown as a liability on the balance sheet. The weighted average period to maturity of operating lease incentives is 14.6 years (2012: 15.9 years). Also included is an amount held in respect of the company’s gaming machine VAT claim. HMRC made a repayment of the existing claim, subject to the company providing a guarantee to HMRC that, in the event that the existing decision is overturned in a higher court, the amount will be repayable in full. The company is holding the repayment amount of £14,947,000 as a liability, until the Rank plc case has reached its final conclusion. The Rank plc case was heard in the Court of Appeal in May 2013 – with a decision not yet released at the balance sheet date. 22 Financial commitments About 55% of the company’s pubs are leasehold. New leases are normally for 30 years, with a break clause after 15 years. Most leases have upwards-only rent reviews, based on open-market rental at the time of review, but the majority of new pub leases have an uplift in rent which is fixed at the start of the lease. The minimum contractual operating lease commitments fall due as follows: Land and buildings Within one year Between one and five years After five years 2013 £000 2012 £000 62,760 240,285 855,247 62,379 241,646 894,242 1,158,292 1,198,267 The company has some lease commitments, with rentals determined in relation to sales. An estimate of the future minimum rental payments under such leases of £63 million (2012: £62 million) is included above. 23 Capital commitments The company had £nil capital commitments for which no provision had been made, in respect of property, plant and equipment, at 28 July 2013 (2012: £nil). The company has some sites in the property pipeline; however, any legal commitment is contingent on planning and licensing. Therefore, there are no commitments at the balance sheet date. ANNUAL REPORT AND ACCOUNTS 2013 31 NOTES TO THE FINANCIAL STATEMENTS 24 Related-party disclosures No transactions have been entered into with related parties during the year. J D Wetherspoon is the owner of the share capital of the following companies: J D Wetherspoon (Scot) Limited J D Wetherspoon Property Holdings Limited Moon and Spoon Limited Moon and Stars Limited Moon on the Hill Limited Moorsom & Co Limited Sylvan Moon Limited All of these companies are dormant and contain no assets or liabilities and are, therefore, immaterial. As a result, consolidated accounts have not been produced. As required by IAS 24, the following information is disclosed about key management compensation. Key management compensation: Salaries and short-term employee benefits Post-employment pension benefits Termination benefits Share-based charges 2013 £000 2,824 179 – 1,636 2012 £000 2,699 164 132 366 4,639 3,361 Key management comprises the executive directors and management board, as described in the section detailing directors, officers and advisers. For additional information about directors’ emoluments, please refer to the directors’ remuneration report. Directors’ interests in employee share plans Details of the shares held by executive members of the board of directors are included in the remuneration report on pages 46 to 50 which forms part of these financial statements. 32 J D WETHERSPOON PLC 25 Share capital At 24 July 2011 Allotments Repurchase of shares At 29 July 2012 Allotments Repurchase of shares At 28 July 2013 NOTES TO THE FINANCIAL STATEMENTS Number of shares 000s 131,608 30 (5,602) 126,036 – – Share capital £000 2,632 1 (112) 2,521 – – 126,036 2,521 The total authorised number of 2p ordinary shares is 500 million (2012: 500 million). All issued shares are fully paid. In the year, there were no proceeds from the issue of shares (2012: £96,000). During the year, no shares were repurchased by the company for cancellation. In the previous year, 5,602,174 shares (representing approximately 4.3% of the issued share capital) were repurchased by the company for cancellation, at a cost of £22.7 million, including stamp duty, representing an average cost per share of 405p. While the memorandum and articles of association allow for preferred, deferred or special rights to attach to ordinary shares, no shares carried such rights at the balance sheet date. 26 Share-based payments Movements in the year The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, each category of share options during the year. The significance of options granted before 7 November 2002 is that they have been excluded from the IFRS 2 share-based payment charge, on the basis of their date of grant. No options were granted after 7 November 2002. (a) New Discretionary Share Option Scheme (NDSO) Outstanding at the beginning of the year Lapsed in the year Exercised in the year Outstanding at the end of the year (b) 2001 Executive Scheme (2001 scheme) Outstanding at the beginning of the year Lapsed in the year Exercised in the year Outstanding at the end of the year 2013 Number 2013 WAEP – – – – – – – – 2012 Number 13,490 (5,130) (8,360) – 2013 Number 2013 WAEP 2012 Number – – – – – – – – 37,455 (15,483) (21,972) – 2012 WAEP 339.0 339.0 339.0 339.0 2012 WAEP 301.5 301.5 301.5 301.5 At 28 July 2013, there were no members and no shares held in the NDSO scheme or the 2001 scheme. 27 Events after the balance sheet date Following the year end, the company concluded an amendment and restatement of its existing banking facility. The new non-amortising £670-million four-year-and-eight-month facility, expiring in March 2018, was put in place, with a syndicate of eight existing lenders and one new lender. Total facilities now available, including the overdraft, are £690 million. ANNUAL REPORT AND ACCOUNTS 2013 33 FINANCIAL RECORD for the five years ended 28 July 2013 Sales and results Revenue from continuing operations Operating profit before exceptional items Exceptional items Finance income Finance costs Fair value loss on financial derivatives Profit on ordinary activities before taxation Taxation 2009 £000 2010 £000 2011 £000 2012 £000 2013 £000 955,119 996,327 1,072,014 1,197,129 1,280,929 97,001 (21,920) 336 (31,182) 794 45,029 (19,730) 100,013 (10,557) 16 (29,014) – 102,309 (5,389) 36 (35,564) – 107,318 (13,481) 55 (35,010) – 111,310 (19,800) 118 (34,485) – 60,458 (19,680) 61,392 (14,600) 58,882 (14,315) 57,143 (10,955) Profit for the year 25,299 40,778 46,792 44,567 46,188 Net assets employed Non-current assets Net current liabilities Non-current liabilities Deferred tax and other liabilities 797,496 (199,468) (346,259) (84,076) 845,012 (111,164) (473,034) (98,673) 918,885 (131,492) (520,134) (96,214) 968,157 (152,342) (550,800) (95,371) 998,522 (148,756) (542,543) (92,308) Shareholders’ funds 167,693 162,141 171,045 169,644 214,915 Ratios Operating margin (excluding exceptional items) Earnings per share (excluding exceptional items) Free cash flow per share Dividends per share (interim and final) 10.2% 32.6p 71.7p 0p 10.0% 36.0p 52.9p 19.0p 9.5% 35.3p 57.7p 12.0p 9.0% 41.3p 70.4p 12.0p 8.7% 46.8p 51.8p 12.0p Notes to the financial record (a) The summary of accounts has been extracted from the annual audited financial statements of the company for the five years shown. 34 J D WETHERSPOON PLC AUTHORISATION OF FINANCIAL STATEMENTS AND STATEMENT OF COMPLIANCE WITH IFRSs SECTION 2 The financial statements of J D Wetherspoon plc (the ‘Company’) for the year ended 28 July 2013 were authorised for issue by the board of directors on 13 September 2013, and the balance sheet was signed on the board’s behalf by J Hutson and K Davis. J D Wetherspoon plc is a public limited company, incorporated and domiciled in England and Wales. The Company’s ordinary shares are traded on the London Stock Exchange. The Company’s financial statements have been prepared in accordance with the EU-endorsed IFRSs and IFRIC interpretations as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006 as applicable to companies reporting under IFRS. The principal accounting policies adopted by the Company are set out on pages 36 to 39. ANNUAL REPORT AND ACCOUNTS 2013 35 ACCOUNTING POLICIES Basis of preparation The financial statements of the Company have been prepared in accordance with IFRSs as adopted by the EU, IFRIC interpretations and the Companies Act 2006, applicable to companies reporting under IFRS. The financial statements have been prepared on the going-concern basis, using historical cost convention, except for the revaluation of financial instruments. The accounting policies which follow set out those policies which apply in preparing the financial statements for the year ended 28 July 2013. Important estimates and judgements Estimates and judgements are based on historical experience and other factors, including expectations of future events which are believed to be reasonable and constitute management’s best judgement at the date of the financial statements. Actual experience may differ from these estimates. Complex areas on judgement or estimates involving sums which are significant to the accounts are disclosed below. Impairment of property, plant and equipment The Company determines whether a trading pub should be impaired by comparing its net book value with future cash flows (‘value in use’), having made certain assumptions about sales, costs and profit and applying a pre-tax discount rate for future years of 10%. Pubs and pub sites which the Company intends to sell, or might sell, are impaired if the expected net sale proceeds (‘fair value’) are less than the book value. Fair value (less the costs of selling the assets) is determined using external and internal estimates of the value of the Company’s pubs. The value in use is calculated using the estimated earnings and cash flows derived by management estimates and applying a suitable pre-tax discount rate to these cash flows. At each reporting date, the Company assesses whether an asset may be impaired. Any changes in the level of forecast earnings or cash flows, the discount rate applied to those or the estimate in sale proceeds/fair value could give rise to an additional or reduced impairment provision. If a previously recognised impairment loss is reversed, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount which would have been determined, net of depreciation, had no impairment loss 36 J D WETHERSPOON PLC been recognised for the asset in previous years. After such a reversal, the depreciation charge is adjusted in future periods, to allocate the asset’s revised carrying amount, less any residual value, over its remaining useful life. Hedging The Company adopts hedge accounting which means that the effective portion of the changes in the fair value of the derivatives is dealt with in other comprehensive income. Any gain or loss relating to the ineffective portion would be recognised immediately in the income statement. Taxation Significant judgement is required to determine the provision for taxes, as the tax treatment for some transactions cannot be fully determined until a formal resolution has been reached with the tax authorities. Tax benefits are not recognised until it is probable that the benefit will be obtained. Deferred tax Deferred tax assets and liabilities require management’s judgement in determining the amounts to be recognised. In particular, significant consideration is given to the timing and level of future taxable income and any future tax-planning strategies. Segmental reporting The Company operates one type of business (pubs) in the United Kingdom. Given the immaterial size of the Company’s hotel business, this has not been separately disclosed as a business segment. Exceptional items The Company presents, on the face of the income statement, those material items of income and expense which, because of the nature and magnitude of the event giving rise to them, merit separate presentation to allow shareholders to better understand the elements of financial performance in the year. This helps to facilitate comparison with previous years and to better assess trends in financial performance. Property, plant and equipment Property, plant and equipment is stated at cost or deemed cost, less accumulated depreciation and any impairment in value. Cost of assets includes acquisition costs, as well as other directly attributable costs in bringing the asset into use. Depreciation is charged on a straight-line basis, over the estimated useful life of the asset as follows: Freehold land is not depreciated. Freehold and long-leasehold buildings are depreciated to their estimated residual values over 50 years. Short-leasehold buildings are depreciated over the lease period. Equipment, fixtures and fittings are depreciated over three to 10 years. Unopened properties are not depreciated until such time as economic benefits are derived. Profits and losses on disposal of property, plant and equipment reflect the difference between the net selling price and the carrying amount at the date of disposal and are recognised in the income statement. Impairment losses are recognised in the income statement in those expense categories consistent with the function of the impaired asset. Intangible assets Intangible assets are carried at cost, less accumulated amortisation and accumulated impairment losses. Intangible assets with a finite life are amortised on a straight-line basis over their expected useful life, as follows: Computer software – three to 10 years The carrying value of intangible assets is reviewed annually for impairment, in case there has been an event or change in circumstances indicating that the carrying value may not be recoverable. Lease premiums Payments made on entering into or acquiring leaseholds which are accounted for as operating leases represent prepaid lease payments. These are amortised on a straight-line basis, over the lease term to the break clause. Lease premiums are disclosed as other non-current assets. Assets held for sale Where the value of an asset will be recovered through a sale transaction, rather than continuing use, the asset is classified as held for sale. Assets held for sale are valued at the lower of book value and fair value, less any costs of disposal, and are no longer depreciated. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is calculated on the basis of ‘first in, first out’, with net realisable value being the estimated ACCOUNTING POLICIES selling price, less any costs of disposal. Provision is made for obsolete, slow-moving or damaged inventory, where appropriate. Provisions Provisions are recognised when the Company has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the obligation’s amount. Revenue recognition Revenue recognised at the time of sale is the value of bar, food, slot machine and hotel room sales, after deducting discounts and sales-based taxes. Leases Leases where the Company assumes substantially all of the risks and rewards of ownership are classified as finance leases. Assets acquired under finance leases are capitalised at the lower of their fair value and the present value of future lease payments. The corresponding liability is included in the balance sheet as a finance lease payable. Finance charges included in lease payments are charged as an expense to the income statement, and the asset depreciation is charged in line with the accounting policy for property, plant and equipment. Leases where the lessor retains substantially all of the risks and benefits of ownership of the asset are classified as operating leases. If the operating lease is subject to fixed uplifts over the term of the lease, rental payments are charged to the income statement on a straight-line basis, over the period of the lease, in line with adopted accounting standards. If the operating lease is subject to open-market rents, rental payments are charged at the prevailing rates. The Company also has contingent rentals payable, based on turnover. These are charged to operating profit at the higher of minimum contractual obligations under the agreements or based as a percentage of turnover. Lease incentives Lease incentives are recognised as a reduction of rental expense to the break clause. These are amortised on a straight-line basis. Borrowing costs Borrowing costs are recognised as an expense in the period in which they are incurred, unless the requirements by the adopted accounting standards for the capitalisation of borrowing costs relating to assets are met. Income taxes Current tax assets and liabilities are measured at the ANNUAL REPORT AND ACCOUNTS 2013 37 ACCOUNTING POLICIES amount expected to be recovered from, or paid to, the taxation authorities, based on tax rates and laws which are enacted or substantively enacted by the balance sheet date. Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, with the following exceptions: (cid:2) Where the temporary difference arises from an asset or liability in a transaction which, at the time of the transaction, affects neither accounting nor taxable profit or loss. (cid:2) Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carried-forward tax credits or tax losses can be utilised. Deferred income tax assets and liabilities are measured at the tax rates which are expected to apply when the related asset is realised or liability settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date. Income tax is charged or credited directly to equity, if it relates to items which are credited or charged to equity. Otherwise, income tax is recognised in the income statement. Free cash flow The calculation of free cash flow is based on the net cash generated by business activities after funding interest, corporation tax, all reinvestment in information technology, head office and pubs trading at the start of the period and the purchase of own shares under the employee share-based plan. Financial instruments Financial assets and liabilities are recognised on the date on which the Company becomes party to the contractual provisions of the instrument giving rise to the asset or liability. ‘other receivables’ and ‘cash and cash equivalents’ on the balance sheet. Receivables Other receivables are initially recognised at fair value and carried at amortised cost less an allowance for any uncollectible amounts. An estimate for doubtful debts is made, when collection of the full amount is no longer probable. Bad debts are written off, when identified. Cash and cash equivalents Cash and short-term deposits in the balance sheet comprise cash at bank and in hand and short-term deposits. For the purpose of the cash flow statement, cash and cash equivalents comprise cash and short-term deposits as defined above. Bank overdrafts are shown within current financial liabilities on the balance sheet. Financial liabilities The Company classifies its financial liabilities as other financial liabilities. The Company currently has no liabilities which would fall outside of this category, with the exception of interest-rate swaps which are described below in the section dealing with hedging and are classified as fair value through profit and loss. Other financial liabilities are measured at fair value on initial recognition and subsequently measured at amortised cost, using the effective-interest method. Trade and other payables Trade and other payables are initially recognised at fair value and subsequently at amortised cost, using the effective-interest method. Bank loans and borrowings Interest-bearing bank loans and other borrowings are recorded initially at fair value of consideration received net of direct issue costs. Borrowings are subsequently recorded at amortised cost, with any difference between the amount initially recorded and the redemption value recognised in the income statement over the period of the bank loans, using the effective-interest method. Financial assets The Company classifies its financial assets as loans and receivables. The Company has no assets which would fall into a category outside of loans and receivables. Bank loans and loan notes are classified as current liabilities, unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments which are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables comprise Derivative financial instruments and hedging activities Derivative financial instruments used by the Company are stated at fair value on initial recognition and at subsequent balance sheet dates. Hedge accounting is used only where, at the inception of 38 J D WETHERSPOON PLC the hedge, there is formal designation and documentation of the hedging relationship, it meets the Company’s risk-management objective for undertaking the hedge and it is expected to be highly effective. Interest-rate swaps Interest-rate swaps are classified as hedges where they hedge exposure to cash flow variability in interest rates. For interest-rate swaps, the effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective portion is recognised in the income statement within ‘fair value gain/loss on financial derivatives’. Amounts taken to equity are transferred to the income statement only when the hedged transaction is assessed to be ineffective when considering the Company’s forecast debt levels for the period of time for which the swaps are in place. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Foreign currencies Transactions denominated in foreign currencies are recorded at the rates of exchange prevailing at the date of transaction. Monetary assets and liabilities are translated at the year-end exchange rates, with the resulting exchange differences taken to the income statement. Retirement benefits Contributions to personal pension schemes are recognised in the income statement in the period in which they fall due. All contributions are in respect of a defined contribution scheme. Dividends Dividends recommended by the board, but unpaid at each period end, are not recognised in the financial statements until they are paid (in the case of the interim dividend) or approved by shareholders at the annual general meeting (in the case of the final dividend). Changes in net debt Changes in net debt are both the cash and non-cash movements of the year, including movements in derivative financial instruments, of finance leases, borrowings, cash and cash equivalents. Share-based charges The Company has an employee share incentive plan which awards shares to qualifying employees; there is also a deferred bonus scheme which awards shares to directors and senior managers, subject to specific performance criteria. ACCOUNTING POLICIES The cost of the awards in respect of these plans is measured by reference to the fair value at the date at which they are granted and is amortised as an expense over the vesting period. In valuing these transactions, no account is taken of any vesting conditions, other than market conditions linked to the price of the shares of the Company. The Company currently has no other share-based transactions. Standards, amendments and interpretations effective in the current year, but not relevant to the Company: (cid:2) Amendment to IAS 12 ‘Income taxes’ on deferred tax (cid:2) Amendment to IAS 1 ‘Presentation of financial statements on other comprehensive income’ Standards and interpretations which are not yet effective and have not been early adopted by the Company: (cid:2) Amendment to IAS 19 ‘Employee benefits’ (cid:2) Amendment to IFRS 1 ‘First time adoption’, on government loans (cid:2) Amendment to IFRS 7 ‘Financial instruments: Disclosures’, on asset- and liability-offsetting (cid:2) Annual improvements 2011 (cid:2) IFRS 10 ‘Consolidated financial statements’ (cid:2) IFRS 11 ‘Joint arrangements’ (cid:2) IFRS 12 ‘Disclosures of interest in other entities’ (cid:2) IFRS 13 ‘Fair value measurement’ (cid:2) IAS 27 ‘Separate financial statements’ (cid:2) IAS 28 ‘Associates and joint ventures’ (cid:2) IFRIC 20 ‘Stripping costs in the production phase of a surface mine’ The above standards and interpretations are not expected to have a significant impact on the Company’s results or financial position. ANNUAL REPORT AND ACCOUNTS 2013 39 PRINCIPAL RISKS AND UNCERTAINTIES FACING THE COMPANY In the course of normal business, the Company continually assesses significant risks faced and takes action to mitigate the potential impact. The following risks, while not intended to be a comprehensive analysis, constitute (in the opinion of the board) the principal risks and uncertainties currently facing the Company: Strategic risks Economic outlook The Company aims to improve its customer offering continually, so that it remains competitively placed in the market in which it operates. Adverse economic conditions can theoretically have an effect on the Company’s performance, although, historically, these effects have been muted. Regulation of the sale of alcohol The pub business is highly regulated, with increases in alcohol duty, as well as increased regulation, a constant feature of the industry for many years. Commercial risks Cost increases Inflationary pressures on the Company’s costs pose a risk to margins, although the Company has been able to achieve satisfactory arrangements with its suppliers, up until now, in both good and difficult economic conditions. Operational risks Health and safety The Company endeavours to ensure that all reasonable standards of health and safety are met, including a process by which risks are identified in a timely manner and remedied accordingly. Supply chain risks It is fundamental to our operations that we should be able to supply our pubs with the required goods and services. We work closely with our suppliers and central distribution partners, in order to maintain availability of products, at all times. Head office and national distribution centre Any disasters at the Company’s head office (in Watford) or its national distribution centre (in Daventry) could seriously disrupt its daily operations. Various measures have been undertaken by the Company, including a comprehensive disaster-recovery plan, seeking to minimise the impact of any such incidents. Information technology The Company’s daily operations are increasingly reliant on its information technology systems. Any prolonged or significant failure of these systems could pose a risk to trading. The Company seeks to minimise this risk by ensuring that there are policies and procedures to ensure protection of hardware, software and information, by various means, including a disaster- recovery plan, a system of backups and external hardware and software. Reputational risk The Company is aware that, in operating in a consumer- facing business, its business reputation, built over many years, can be damaged in a significantly shorter timeframe. The Company, therefore, in its daily business, maintains substantial efforts in this area to improve operational controls. Financial risks Capital risk management The Company aims to increase sales, earnings and distributions to shareholders, while maintaining reasonable levels of capital and debt. Financial conditions since 2007/8 demonstrate that banking facilities may not be available for some companies in extraordinary circumstances – and this is a risk to the Company. However, in spite of extreme financial conditions, the Company was able to refinance its debt in March 2010, August 2011 and July 2013. Interest-rate risk The Company has dealt with the risks of an increase in interest rates by swapping the majority of its floating-rate borrowings into fixed rates which expire in 2018 (see note 20). During the 52 weeks ended 28 July 2013, if the interest rates on UK-denominated borrowings had been 1% higher, with all other variables constant, pre-tax profit for the year would have been reduced by £1,088,000 and equity increased by £19,525,000. The movement in equity arises from a change in the ‘mark to market’ valuation of the interest-rate swaps into which the Company has entered, calculated by a 1% shift of the market yield curve. The Company considers that a 1% movement in interest rates represents a reasonable sensitivity to potential changes. However, this analysis is for illustrative purposes only. Credit risk The Company does not have a significant concentration of credit risk, as the majority of its revenue is in cash. 40 J D WETHERSPOON PLC PRINCIPAL RISKS AND UNCERTAINTIES FACING THE COMPANY At the balance sheet date, the Company was exposed to a maximum credit risk of £5.5 million, of which £210,000 was overdue – and an impairment charge of £105,000 was taken to the income statement in the year. Cash deposits with financial institutions and derivative transactions are permitted with investment-grade financial institutions only. The Company receives a small amount of income from properties which it has sublet to third parties, but the sums involved from any one letting are immaterial. Liquidity risk The Company regularly monitors cash flow forecasts and endeavours to ensure that there are enough funds, including committed bank and finance lease facilities, to meet its business requirements and comply with banking covenants. The risks in this area relate to miscalculating cash flow requirements, being unable to renew credit facilities or a substantial fall in sales and profits. ANNUAL REPORT AND ACCOUNTS 2013 41 INDEPENDENT AUDITORS’ REPORT to the members of J D Wetherspoon plc We have audited the financial statements of J D Wetherspoon plc for the 52-week period ended 28 July 2013 which comprise the income statement, the statement of comprehensive income, the cash flow statement, the balance sheet, the statement of changes in shareholders’ equity, the accounting policies and the related notes. The financial reporting framework which has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. Respective responsibilities of directors and auditors As explained more fully in the directors’ responsibilities statement, set out on pages 44 and 45, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements, in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for, and only for, the Company’s members as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come, save where expressly agreed on by our prior consent in writing. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; the overall presentation of the financial statements. In addition, we read all of the financial and non-financial information in the annual report, to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies, we consider the implications for our report. Opinion on financial statements In our opinion, the financial statements: (cid:2) have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: (cid:2) the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. (cid:2) the information given in the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements. (cid:2) the information given in the corporate governance statement, set out on pages 51 to 55, with respect to internal control and risk-management systems and about share capital structures, is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006, we are required to report to you if, in our opinion: (cid:2) adequate accounting records have not been kept or returns adequate for our audit have not been received from branches not visited by us; or (cid:2) the financial statements and the part of the directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or (cid:2) certain disclosures of directors’ remuneration specified by law are not made; or (cid:2) we have not received all of the information and explanations which we require for our audit; or (cid:2) a corporate governance statement has not been prepared by the Company. Under the Listing Rules, we are required to review: (cid:2) the directors’ statement, set out on pages 44 and 45, in relation to going concern. (cid:2) the parts of the corporate governance statement relating to the Company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review. (cid:2) certain elements of the report to shareholders by the board on directors’ remuneration. (cid:2) give a true and fair view of the state of the Company’s affairs as at 28 July 2013 and of its profit and cash flows for the year then ended. (cid:2) have been properly prepared, in accordance with IFRSs as adopted by the European Union. Andrew Paynter (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 13 September 2013 42 J D WETHERSPOON PLC DIRECTORS, OFFICERS AND ADVISERS Registered office Wetherspoon House Central Park Reeds Crescent Watford WD24 4QL Company number 1709784 Registrars Computershare Investor Services plc PO Box 82 The Pavilions Bridgwater Road Bristol BS99 6ZY Independent auditors PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors 1 Embankment Place London WC2N 6RH Solicitors Macfarlanes LLP 20 Cursitor Street London EC4A 1LT Bankers Abbey National Treasury Services plc Bank of Tokyo-Mitsubishi UFJ Barclays Bank plc BNP Paribas Crédit Industriel et Commercial HSBC Bank plc Lloyds TSB Bank plc Mediobanca International (Luxembourg) SA The Royal Bank of Scotland plc Financial advisers Investec Bank plc Stockbrokers Investec Bank plc Tim Martin Chairman, aged 58 Founded the business in 1979, having previously studied law at Nottingham University and qualified as a barrister. He became chairman in 1983. John Hutson Chief Executive Officer, aged 48 Joined in 1991 and was appointed to the board in 1996. He is a graduate of Exeter University and previously worked with Allied Domecq. Kirk Davis Finance Director and Company Secretary, aged 42 Joined in 2008 as deputy finance director, was appointed as company secretary in October 2010 and became finance director in March 2011. He previously worked for Tesco plc and qualified as a chartered management accountant in 2004. Su Cacioppo Personnel and Legal Director, aged 46 Joined in 1991 and was appointed to the board in 2008. She is a graduate of South Bank University and London Guildhall University and previously worked for Courage Ltd and Allied Leisure. She worked in several operational roles in the Company, before being appointed as personnel director in 1999 and personnel and legal director in 2006. Elizabeth McMeikan Senior Independent Director, aged 51 Appointed to the board in 2005 and is a member of the audit, remuneration and nomination committees. She is a graduate of Cambridge University. She is a non-executive director of several privately owned companies and chairs the Membership Selection Panel for Network Rail. She also holds several independent positions in government and Whitehall. Elizabeth previously worked for Tesco plc for 12 years, in a wide variety of commercial and operational roles, both in the UK and overseas. Debra van Gene Non-Executive Director, aged 58 Appointed to the board in 2006 and is the remuneration committee chair and a member of the audit and nomination committees. She is a graduate of Oxford University. She spent 17 years in the advertising industry, ending as deputy managing director of Butterfield Day Devito Hockney. Since then, she has worked in the executive search industry. She was a partner at Heidrick and Struggles and now runs her own company, Debra van Gene Associates Ltd, of which she is managing director. Sir Richard Beckett Non-Executive Director, aged 69 Appointed to the board in 2009 and is the nomination committee’s chair and a member of the audit and remuneration committees. He was called to the bar in 1965 and took silk in 1987. He was one of the pre-eminent practitioners in regulatory and licensing matters. He is also a non-executive director of Mercantile Investment Trust plc. Mark Reckitt Non-Executive Director, aged 55 Appointed to the board in May 2012 and is the audit committee’s chair and a member of the remuneration and nomination committees. He has been group strategy director at Smiths Group plc since February 2011. Before joining Smiths, he was chief strategy officer at Cadbury plc, from 2004 to 2010, and held a range of strategy and finance roles at Cadbury since joining in 1989, including UK finance director. Before joining Cadbury, he spent six years in investment banking and retailing, after qualifying as a chartered accountant in 1983. Management board The management board comprises John Hutson, Kirk Davis, Su Cacioppo and the following: David Capstick IT and Property Director, aged 52 Joined in 1998 and is a graduate of the University of Surrey. He previously worked for Allied Domecq, as well as working in other areas of the hospitality industry, such as hotels and outside catering companies. He was appointed to the management board in 2003. Martin Geoghegan Operations Director, aged 44 Joined in May 1994, having previously worked for Safeway plc. He worked in several operational roles, before being appointed as operations director in 2004. Paul Hine Director of Purchasing and Logistics, aged 41 Joined in August 2001, having previously worked for Jungheinrich AG. He worked in several roles in purchasing, before being appointed as director of purchasing and logistics in January 2012. Miles Slade Deputy Operations Director, aged 32 Joined in December 2000, as a bar associate. He worked in several pub and operational roles, before being appointed as deputy operations director in January 2012. ANNUAL REPORT AND ACCOUNTS 2013 43 DIRECTORS’ REPORT for the 52 weeks ended 28 July 2013 Principal activities, business review and future developments The principal activities of the Company are the development and management of public houses. Details of progress and future developments are given in the chairman’s statement, operating and finance review, which includes various key performance indicators. While of utmost importance to the Company, the business review does not contain information about environmental, employee or community issues; these are covered in the corporate social responsibility report, available on the Company’s website. Dividends The board proposes, subject to shareholders’ consent, to pay a final dividend of 8.0p (2012: 8.0p) per share, on 28 November 2013, to those shareholders on the register on 25 October 2013, giving a total dividend for the year of 12.0p per share. Principal risks and uncertainties A discussion of the risks and uncertainties facing the Company is included in section 2 on pages 40 and 41 and incorporated by reference. Directors The directors who served during the year are listed on pages 43. Directors’ interest in contracts No director has any material interest in any contractual agreement, other than an employment contract, subsisting during or at the end of the year, which is or may be significant to the Company. Takeover directive disclosures The Company has an authorised share capital comprising 500 million ordinary shares of 2p each. As at 28 July 2013, the total issued share capital comprised 126,036,296 fully paid-up shares of 2p each. The rights to these shares are set out in the Company’s articles of association. There are no restrictions on the transfer of these shares or their attached voting rights. Details of significant shareholdings are given on page 56. No person holds shares with specific rights regarding control of the Company. The Company operates an employee share incentive plan. However, no specific rights with respect to the control of the Company are attached to these shares. In addition, the Company operates a deferred bonus scheme, whereby, should a takeover occur, all shares held in trust would be transferred to the employee immediately. The Company is not aware of any agreements among holders of securities known to the Company which may result in restrictions on the transfer of securities or voting rights. The Company has the power to issue and buy back shares as a result of resolutions passed at the annual general meeting in 2012. It is the Company’s intention to renew these powers; the resolutions approving them are found in the notice of the annual general meeting for 2013. In the event of a change of control, the Company is obliged to notify its main bank lenders. The lenders shall not be obliged to fund any new borrowing requests; facilities will lapse 10 days after the change of control, if the terms on which they can continue have not been agreed on. Any borrowings, including accrued interest, will become immediately repayable on such lapse. There are no other significant agreements to which the Company is party which may be subject to change-of-control provisions. There are no agreements with the Company’s directors or employees which provide for compensation for loss of office or employment which occurs because of a takeover bid. Statement of directors’ responsibilities The directors are responsible for preparing the annual report, the directors’ remuneration report and the financial statements, in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law, the directors have prepared the Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law, the directors must not approve the financial statements, unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the directors are required to: (cid:2) select suitable accounting policies and then apply them consistently. (cid:2) make judgements and accounting estimates which are reasonable and prudent. (cid:2) state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements. (cid:2) prepare the financial statements on the going-concern basis, unless it is inappropriate to presume that the Company will continue in business. 44 J D WETHERSPOON PLC The directors are responsible for keeping adequate accounting records which are sufficient to show and explain the Company’s transactions and which disclose, with reasonable accuracy, the financial position of the Company, at any time. The accounting records enable the directors to ensure that the financial statements and the directors’ remuneration report comply with the Companies Act 2006 and that the Company’s financial statements comply with Article 4 of the IAS regulation. The directors are also responsible for safeguarding the assets of the Company and for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Each of the directors, whose names and functions are listed in the section headed ‘directors, officers and advisers’, confirms, to the best of his or her knowledge, that: (cid:2) the Company’s financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Company. (cid:2) the directors’ report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties which it faces. (cid:2) so far as each of the directors is aware, there is no relevant audit information of which the Company’s auditors are unaware. (cid:2) he or she has taken all steps which he or she ought to have taken as a director, in order to make himself or herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Directors’ indemnities The Company-maintained directors and officers’ liability insurance throughout the year and at the date of approval of the financial statements which gave appropriate cover for any legal action brought against its directors. Going concern The directors have made enquiries into the adequacy of the Company’s financial resources, through a review of the Company’s budget and medium-term financial plan, including capital expenditure plans and cash flow forecasts; they have satisfied themselves that the Company will continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going-concern basis, in preparing the Company’s financial statements. DIRECTORS’ REPORT Employment policies Staff are encouraged to make a commitment to the Company’s success and to progress to more senior roles as they develop. In selecting, training and promoting staff, the Company has to take account of the physically demanding nature of much of its work. The Company is committed to equality of opportunity and to the elimination of discrimination in employment. The Company aims to create and maintain a working environment, terms and conditions of employment and personnel and management practices which ensure that no individual receives less favourable treatment on the grounds of his or her race, religion, nationality, ethnic origin, age, disability, gender, sexual orientation or marital status. Employees who become disabled will be retained, where possible, and retrained, where necessary. The Company has established a range of policies, covering issues such as diversity, employees’ well-being and equal opportunities, aimed at ensuring that all employees are treated fairly and consistently. Internal communications seek to ensure that staff are well informed about the Company’s progress, through the use of regular newsletters and briefings at staff meetings, at which employees’ views are discussed and taken into account. All pub staff participate in incentive bonus schemes related to sales, profits and/or service standards. Policy on payment of suppliers The Company agrees on terms and conditions with all suppliers before business takes place and has a policy of paying agreed invoices in accordance with the terms of payment. Trade creditors at the year end represented 55 (2012: 58) days’ purchases. Political and charitable contributions The Company supports CLIC Sargent (caring for children with cancer and their families) and has helped to raise £1.6 million in the current year. It also provides advice and marketing support to the charity, at no cost. The Company also made a contribution of £96,000 to ‘Drinkaware’, a charitable trust which promotes responsible drinks retailing. The Company has not made any political donations in the year. Events after the reporting period The details of events after the reporting period can be found in note 27 on page 33. By order of the board Kirk Davis Company Secretary 13 September 2013 ANNUAL REPORT AND ACCOUNTS 2013 45 DIRECTORS’ REMUNERATION REPORT for the 52 weeks ended 28 July 2013 This report has been drawn up after taking account of the UK Corporate Governance Code 2010. Shareholders will be asked to approve this at the annual general meeting on 14 November 2013. Remuneration committee The remuneration committee comprises the following independent directors: Debra van Gene (chair), Elizabeth McMeikan, Sir Richard Beckett and Mark Reckitt. The committee meets regularly and considers executive directors’ remuneration annually. It approves all contractual and compensation arrangements for the executive directors, including performance-related payments. Remuneration policy The aim of this policy is to: (cid:2) provide attractive and fair remuneration for directors. (cid:2) align directors’ long-term interests with those of shareholders, employees and the wider community. (cid:2) incentivise directors to perform to a high level. In agreeing on remuneration, account is taken of the pay levels throughout Wetherspoon, as well as those in the leisure industry in general, along with other comparisons and reports. The committee aims to take a fair and commonsense approach. The Company measures the performance of the executive directors in respect of several areas, including: (cid:2) growth in profits before tax. (cid:2) growth in owners’ earnings (cash profits). (cid:2) standards of service and pub amenities. (cid:2) the number and quality of pub calls carried out by each executive director. The following comprises the components of the remuneration of all executive directors: Salaries and cash bonuses Salaries and other benefits are determined annually. A cash bonus, based on profit growth, which is multiplied by a factor of 1.5, is paid to a maximum of 45% of salary. In addition, a further 5% is awarded for carrying out a set number of calls on our pubs per month, in order to monitor service and other standards. The executive directors also receive bonuses in shares under the Share Incentive Plan and 2005 Deferred Bonus Scheme, as described below. Pension provision The Company makes contributions to personal pension schemes, on behalf of directors, equivalent to 12% of their annual pay. The Company does not operate any defined benefit pension schemes. Share schemes Share Incentive Plan All employees with at least 18 months’ service are entitled to receive shares under the Share Incentive Plan (an HMRC- approved scheme). This scheme allocates shares equivalent to 5% of an employee’s salary. Shares do not vest for at least three years under this plan – and tax-free returns are possible, if the shares are held for five years or more. The Company offers extra SIPs under this scheme to some employees: pub managers receive an extra 5% annual award; head-office staff 10–15%; senior managers and directors, including executive board directors, 20%. Awards under this scheme are not based on financial or other targets. As discussed in the chairman’s statement, the Company believes that excessive use of financial targets can lead to distortions in companies’ behaviour and that it is important for there to be some share awards which can be gradually accumulated, the value of which depends on the overall success of the Company. 2005 Deferred Bonus Scheme In addition to the current Share Incentive Plan, the Company introduced a deferred bonus scheme, for senior managers, including executive directors, following shareholders’ approval in 2005. Bonus awards are made under the scheme, annually, at the discretion of the remuneration committee, to executive directors, general managers and certain other senior employees. Under the scheme, bonus awards are based on the increase in owners’ earnings (cash profits) per share, over the previous financial year. Participants are entitled to an amount up to 3% of their annual base salary for every 1% increase in owners’ earnings per share. The maximum bonus to be earned under this scheme is 100% of annual salary. Owners’ earnings are calculated as follows: Profit before tax (excluding unrealised exceptional items) Add: Depreciation and amortisation Less: Cash reinvestment in current properties Cash tax Less: Equals: Owners’ earnings 46 J D WETHERSPOON PLC DIRECTORS’ REMUNERATION REPORT Bonus awards are satisfied in shares. One-third of a participant’s shares will vest to the participant on calculation of the amount of the award, one-third will vest after one year and the remaining third will vest to the participant after two years (in each case subject to the participant being employed at the release date). The shares required under the scheme are purchased in the market by an employee benefit trust, funded by the Company. Benefits in kind A range of taxable benefits is available to executive directors. These benefits comprise principally the provision of a Company car allowance, life assurance, private medical insurance and fuel expenses. Service contracts Chairman and directors’ service contracts The executive directors are employed on rolling contracts, requiring the Company to give up to one year’s notice of termination, while the director may give six months’ notice. In the event of termination of employment with the Company, without the requisite period of notice, executive directors’ service contracts provide for the payment of a sum equivalent to the net value of salary and benefits to which the executive would have been entitled during the notice period. The executive is required to mitigate his or her loss and such mitigation may be taken into account in any payment made. The Company’s policies on the duration of directors’ service contracts, notice periods and termination payments are all in accordance with best industry practice. The commencement dates for the executive directors’ service contracts were as follows: Tim Martin John Hutson Su Cacioppo Kirk Davis – – – – 20 October 1992 2 February 1998 10 March 2008 11 March 2011 Non-executive directors The non-executive directors hold their positions, pursuant to letters of appointment dated 1 November 2012, with a term of 12 months. If their appointment is terminated early, the non-executive directors are entitled to the fees to which they would have been entitled up to the end of their term. They do not participate in the Company’s bonus or share schemes. Their fees are determined by the executive directors, following consultation with professional advisers, as appropriate. External appointments The Company has not released any executive directors to serve as a non-executive director elsewhere. ANNUAL REPORT AND ACCOUNTS 2013 47 DIRECTORS’ REMUNERATION REPORT Directors’ remuneration – audited information: The table below shows a breakdown of the various elements of directors’ remuneration for the year ended 28 July 2013. Performance bonus – cash (2) Salary/fees (1) Taxable benefits (3) Taxable allowances (4) Pension Sub- contributions (5) total Performance bonus – 2005 Deferred Bonus Scheme – shares (7) Share Incentive Plan – shares (6) Total 2013 £000 Total 2012 £000 324 – 14 – 338 – – – 338 351 Chairman T R Martin Executive directors J Hutson K Davis S Cacioppo Non-executive directors E McMeikan D van Gene R Beckett M Reckitt Total 2012 1,380 191 1,328 145 Notes to the remuneration table: 444 218 230 41 41 41 41 95 47 49 – – – – 7 3 7 – – – – 31 30 15 13 13 – – – – 561 281 299 41 41 41 41 51 26 28 – – – – 109 52 57 358 176 186 1,079 535 570 847 400 444 – – – – – – – – 41 41 41 41 38 40 38 10 – 41 1,643 105 218 720 2,686 41 1,544 101 206 335 – 2,186 1) Executive directors’ salaries were reviewed in September 2012. Executive directors were awarded 2.5%, in line with general pay rises across the Company, with the exception of Kirk Davis. Kirk Davis was awarded a 10% pay rise, in recognition of his performance and with consideration to overall market rates. 2) Executive directors received 16.5% of their salary as a cash bonus, based on profit growth. In addition, a cash bonus equivalent to 5% of salary was paid for carrying out a set number of calls on our pubs per month. 3) Taxable benefits relate to the provision of rail travel for Tim Martin, as well as private health cover and fuel expenses for the executive directors. 4) Taxable allowances relate to car allowances received in lieu of a Company car. 5) Executive directors receive either pension contributions equivalent to 12% of salary or salary in lieu of pension contributions, where appropriate. 6) In April 2013, executive directors were awarded shares to the value of 25% of the salary they had earned between February 2012 and January 2013. Shares will vest in April 2016. 7) Owners’ earnings per share increased by 27%; therefore, executive directors will receive bonus shares with a value equal to 81% of salary. The Company’s Share Incentive Plan and 2005 Deferred Bonus Scheme (described on pages 46 and 47) include the full-year value of bonuses paid in shares, subject to forfeiture on cessation of employment, in certain circumstances. These shares are also included in each relevant director’s interest, shown in the table. 48 J D WETHERSPOON PLC DIRECTORS’ REMUNERATION REPORT Directors and connected persons’ interests in shares – non-audited information: The interests of the directors in the shares of the Company, as at 28 July 2013, were as follows: Ordinary shares of 2p each, held beneficially 2013 2012 T R Martin J Hutson J Hutson – Share Incentive Plan J Hutson – 2005 Deferred Bonus Scheme K Davis K Davis – Share Incentive Plan K Davis – 2005 Deferred Bonus Scheme S Cacioppo S Cacioppo – Share Incentive Plan S Cacioppo – 2005 Deferred Bonus Scheme E McMeikan D van Gene R Beckett M Reckitt 33,466,934 43,106 70,511 23,831 1,869 29,528 11,063 50,383 35,000 12,383 1,000 1,000 2,000 2,000 33,472,473 38,556 74,904 – 1,654 26,340 – 44,532 38,713 – 1,000 1,000 2,000 2,000 There have been no changes to these interests since 28 July 2013. Share Incentive Plan – audited information As highlighted above, the following share awards have been made under the Share Incentive Plan: Name John Hutson Kirk Davis Su Cacioppo Award date Shares held in trust at 29 July 2012 Granted in the year Vested in the year Shares remaining in trust at 28 July 2013 24/09/09 31/03/10 23/09/10 31/03/11 30/03/12 03/04/13 Partnership shares 24/09/09 31/03/10 23/09/10 31/03/11 30/03/12 03/04/13 24/09/09 31/03/10 23/09/10 31/03/11 30/03/12 03/04/13 Partnership shares 9,480 9,557 11,658 11,764 25,729 – 713 3,277 2,652 3,934 3,970 11,934 – 4,185 4,539 5,537 5,588 12,713 – 300 20,370 277 9,690 10,584 278 9,480 9,557 3,277 2,652 4,185 4,539 – – 11,658 11,764 25,729 20,370 990 – – 3,934 3,970 11,934 9,690 – – 5,537 5,588 12,713 10,584 578 The market price of the shares awarded on 3 April 2013 was 535.8p. The market price of shares which vested on 24 September 2012 was 474.0p. The market price of shares which vested on 2 April 2013 was 532.0p. ANNUAL REPORT AND ACCOUNTS 2013 49 DIRECTORS’ REMUNERATION REPORT Share Incentive Plan – audited information continued Partnership shares John Hutson is a participant in the Partnership Share scheme and acquired 277 shares between August 2012 and July 2013. Su Cacioppo is a participant in the Partnership Share scheme and acquired 278 shares between August 2012 and July 2013. The market price of the shares purchased ranged from 473.2p to 665.7p. 2005 Deferred Bonus Scheme The first award of shares under the 2005 Deferred Bonus Scheme was made in September 2006. As set out on pages 46 and 47, one-third of the total award vests immediately, which can be taken as either a cash or share award, with the other two-thirds vesting over the following two years. In September 2012, all executive directors elected to take the award in cash. The overall position is as follows: September 2012 award Total awarded Previously vested Vested Sold Shares retained Remaining in trust Date sold Market price at sale date J Hutson 23,831 K Davis 11,063 S Cacioppo 12,383 – – – – – – – – – 23,831 23,831 11,063 11,063 12,383 12,383 – – – – – – Performance graph – non-audited information: This graph shows the total shareholder return (with dividends reinvested) of a holding of the Company’s shares against a hypothetical holding of shares in the FTSE All-Share Travel & Leisure sector index for each of the last five financial years. The directors selected this index, as it contains most of the Company’s competitors and is considered to be the most appropriate index for the Company. Growth in the value of a hypothetical £100 holding since July 2006, based on 30-trading-day average values ) £ ( 180.0 i g n d o h l 0 0 1 £ l a c i t e h t o p y h f o l e u a V 160.0 140.0 120.0 100.0 80.0 60.0 40.0 Jul 06 Jul 07 Jul 08 Jul 09 Jul 10 Jul 11 Jul 12 Jul 13 J D Wetherspoon plc FTSE All-Share Travel & Leisure On behalf of the board: Debra van Gene Chair of the remuneration committee 13 September 2013 50 J D WETHERSPOON PLC Directors’ conflicts of interest The board expects the directors to declare any conflicts of interest and does not believe that any material conflicts of interest exist. The board of directors The board comprises the following members: (cid:2) Tim Martin, chairman (cid:2) John Hutson, chief executive officer (cid:2) Kirk Davis, finance director and company secretary (cid:2) Su Cacioppo, personnel and legal director (cid:2) Elizabeth McMeikan, non-executive director (cid:2) Debra van Gene, non-executive director (cid:2) Sir Richard Beckett, non-executive director (cid:2) Mark Reckitt, non-executive director The board considers each of Elizabeth McMeikan, Debra van Gene, Sir Richard Beckett and Mark Reckitt to be independent. Biographies of all non-executive and executive directors are provided on page 43 and can be viewed on the Company’s website: www.jdwetherspoon.co.uk The chairman regularly meets the non-executive directors and evaluates the performance of the board, its committees and its individual directors. It is not advantageous, in a company like Wetherspoon, for there to be high barriers or exaggerated distinctions between the role of chairman and that of chief executive officer. However, some general distinctions are outlined overleaf. CORPORATE GOVERNANCE Statement of compliance The Company is committed to high standards of corporate governance. Although, as indicated in the chairman’s statement, the chairman has reservations with regard to some aspects of the code. The board believes that the Company has been compliant with the code throughout the 52 weeks ended 28 July 2013, except as described below. B.4.2 – Development (cid:2) The chairman does not formally sit down with individual directors and identify specific training and development needs for them. The chairman and executive directors hold a series of weekly meetings, with head- office and pub managers, to try to identify areas of improvement for the business. Minutes are taken of these meetings and action points identified for a range of participants. In the opinion of the board, this process is effective in identifying problems and solutions and assists in the training and development of directors on an informal, yet effective, basis. B.6.2 – External board evaluation (cid:2) No externally facilitated evaluation of the board has taken place over the last three years. The non-executive directors and chairman evaluate the performance of the board on a quarterly basis and address any issues which arise. E.1.1 – Dialogue with shareholders (cid:2) The Code indicates that the chairman should discuss governance and strategy with major shareholders. The chairman has discussed governance and strategy with major shareholders on many occasions since the flotation in 1992. However, the majority of discussions with major shareholders takes place among the CEO, finance director and shareholders. The chairman is available for discussion with major shareholders, when requested. A full version of the Code is available on the official website of the Financial Reporting Council: www.frc.org.uk ANNUAL REPORT AND ACCOUNTS 2013 51 CORPORATE GOVERNANCE Chairman’s responsibility Chief executive officer’s responsibility The chairman is responsible for the smooth running of the board and ensuring that all directors are fully informed of matters relevant to their roles Delegated responsibility of authority from the Company to exchange contracts for new pubs and to sign all contracts with suppliers The chief executive officer is responsible for the smooth daily running of the business Developing and maintaining effective management controls, planning and performance measurements Providing support, advice and feedback to the chief executive officer Maintaining and developing an effective organisational structure Supporting the Company’s strategy and encouraging the chief executive officer with development of that strategy External and internal communications, in conjunction with the chairman, on any issues facing the Company Chairing general meetings, board meetings, operational meetings and agreeing on board agendas and ensuring that adequate time is available for discussion of agenda items Management of the chief executive officer’s contract, appraisal and remuneration, by way of making recommendations to the remuneration committee Implementing and monitoring compliance with board policies Timely and accurate reporting of the above to the board Providing support to executive directors and senior managers of the Company Recruiting and managing senior managers in the business Helping to provide the ‘ethos’ and ‘vision’ of the Company, after discussions and debates with employees of all levels, customers, shareholders and including organisations such as CAMRA Developing and maintaining effective risk-management and regulatory controls Helping to provide information on customers and employees’ views by calling on pubs Maintaining primary relationships with shareholders and investors Helping to make directors aware of shareholders’ concerns Chairing the management board responsible for implementing the Company’s strategy Helping to ensure that a culture of openness and debate exists in the Company Ensuring compliance with the London Stock Exchange and legal and regulatory requirements, in consultation with the board and the Company’s external advisers The board has several established committees as set out below. The board met nine times during the year ended 28 July 2013; attendance of the directors and non-executives, where appropriate, is shown below. Number of meetings held in the year Board 9 Audit 4 Remuneration Nomination 4 2 Tim Martin John Hutson Kirk Davis* Su Cacioppo* Elizabeth McMeikan Debra van Gene Sir Richard Beckett Mark Reckitt 7 8 9 9 8 8 9 8 N/A N/A 4 4 4 4 4 4 N/A N/A N/A N/A 4 4 3 4 N/A N/A N/A N/A 2 2 2 2 * Kirk Davis (in his role as finance director) and Su Cacioppo (in her role as personnel and legal director) attended audit committee meetings by invitation, to provide additional detail on any relevant matters. 52 J D WETHERSPOON PLC CORPORATE GOVERNANCE Matters reserved for the board The following matters are reserved for the board: PricewaterhouseCoopers LLP, attend audit committee meetings. (cid:2) Board and management (cid:2)(cid:2) Structure and senior management responsibilities (cid:2)(cid:2) Nomination of directors (cid:2)(cid:2) Appointment and removal of chairman and company secretary (cid:2) Strategic matters (cid:2)(cid:2) Strategic, financing or adoption of new business plans, in respect of any material aspect of the Company (cid:2) Business control (cid:2)(cid:2) Agreement of code of ethics and business practice (cid:2)(cid:2) Internal audit (cid:2)(cid:2) Authority limits for heads of department (cid:2) Operating budgets (cid:2)(cid:2) The entry into finance leases (cid:2)(cid:2) Approval of a budget for investments and capital projects (cid:2)(cid:2) Changes in major supply contracts (cid:2) Finance (cid:2)(cid:2) Raising new capital and confirmation of major facilities (cid:2)(cid:2) Specific risk-management policies, including insurance, hedging and borrowing limits (cid:2)(cid:2) Final approval of annual and interim accounts and accounting policies (cid:2)(cid:2) Appointment of external auditors (cid:2) Legal matters (cid:2)(cid:2) Consideration of regular reports on material issues relating to any litigation affecting the Company (cid:2)(cid:2) Institution of legal proceedings, where costs exceed certain values (cid:2) Secretarial (cid:2)(cid:2) Call of all shareholder meetings (cid:2)(cid:2) Delegation of board powers (cid:2)(cid:2) Disclosure of directors’ interests (cid:2) General (cid:2)(cid:2) Board framework of executive remuneration and costs (cid:2)(cid:2) Any other matters not within the terms of reference of any committee of the board (cid:2)(cid:2) Any other matter as determined from time to time by the board Board committees Audit committee The committee is chaired by Mark Reckitt and comprises Elizabeth McMeikan, Debra van Gene and Sir Richard Beckett. Representatives of the Company’s external auditors, In respect of the role of the audit committee, it effectively performs the following: (cid:2) Assumes direct responsibility for the appointment, compensation, resignation, dismissal and overseeing of the independent external auditors, including review of the external audit, its cost and effectiveness (cid:2) Reviews the scope and nature of the work to be performed by the external auditors, before audit commences (cid:2) Reviews the half-year and annual financial statements (cid:2) Ensures compliance with accounting standards (cid:2) Monitors the integrity of the financial statements and formal announcements relating to the financial performance of the Company (cid:2) Considers the findings of the internal audit report and management responses at the half year and year end (cid:2) Reviews the effectiveness of internal control systems (cid:2) Final review of the Company’s statement on internal control systems, before endorsement by the board (cid:2) Reviews any aspect of the accounts or the Company’s control and audit procedures, the interim and final audits and any other matters which the auditors may consider (cid:2) Ensures that all matters, if appropriate, are raised and brought to the attention of the board (cid:2) Reviews all risk-management systems adopted and implemented by the Company During the year, the Company made limited use of specialist teams from PricewaterhouseCoopers LLP, relating to accounting and tax services. The fees paid to PricewaterhouseCoopers LLP for non-audit services were £19,500 (2012: £64,000). The use of PricewaterhouseCoopers LLP for non-audit work is monitored regularly, to achieve the necessary independence and objectivity of the auditors. Where the auditors provide non-audit services, their objectivity and independence are safeguarded by the use of different teams. See note 2 on page 13 for a breakdown of auditors’ remuneration for audit and non-audit services. Following a review by the audit committee, the board agreed, in September 2013, to recommend to shareholders, at the annual general meeting, the reappointment of the external auditors for a period of one year. The audit committee assesses the ongoing effectiveness of the external auditors and audit process, on the basis of meetings and internal reviews with finance and other senior executives. In reviewing the independence of the external auditors, the audit committee considers several factors. These include the standing, experience and ANNUAL REPORT AND ACCOUNTS 2013 53 CORPORATE GOVERNANCE tenure of the external auditors, the nature and level of services provided and confirmation from the external auditors that they have complied with relevant UK independence standards. The terms of reference of the audit committee are available on the Company’s website. Remuneration committee The committee is chaired by Debra van Gene and comprises Elizabeth McMeikan, Sir Richard Beckett and Mark Reckitt. The directors’ report on remuneration is set out on pages 46 to 50. The terms of reference of the remuneration committee are available on the Company’s website. Nomination committee The committee is chaired by Sir Richard Beckett and comprises Elizabeth McMeikan, Debra van Gene and Mark Reckitt. The committee meets regularly and considers, among other matters, board appointments and the re-election of directors. No director is involved in any decision about his or her own re-appointment. In carrying out these activities, the non-executive directors follow the guidelines of the Institute of Chartered Secretaries and Administrators (ICSA) and comply with the Code. The terms of reference of the nomination committee are available on the Company’s website. Relations with shareholders The board takes measures to ensure that all board members are kept aware of both the views of major shareholders and changes in the major shareholdings of the Company. Efforts made to accomplish effective communication include: (cid:2) Annual general meeting, considered to be an important forum for shareholders to raise questions with the board (cid:2) Regular feedback from the Company’s stockbrokers (cid:2) Interim, full and ongoing announcements circulated to shareholders (cid:2) Any significant changes in shareholder movement being notified to the board by the company secretary, when necessary (cid:2) The company secretary maintaining procedures and agreements for all announcements to the Stock Market (cid:2) A programme of regular meetings between investors and directors of the Company Risk management The board is responsible for the Company’s risk-management process. 54 J D WETHERSPOON PLC The internal audit department, in conjunction with the management of the business functions, produces a risk register annually. This register has been compiled by the business, following feedback from senior management from the key business functions. The identified risks are assessed, based on the likelihood of a risk becoming a reality and the potential impact to the business, should the risk become realised. The head of internal audit determines and reviews the risk-assessment process and will communicate the timetable annually. The risk register is presented to the audit committee every six months, with a schedule of audit work agreed on, on a rolling basis. The purpose of this work is to review, on behalf of the Company and the board, those key risks and the systems of control necessary to manage such risks. The results of this work are reported to relevant senior management and the audit committee. Where recommendations are made for changes in systems or processes to reduce risk, internal audit will follow up regularly to ensure that the recommendations are implemented. A summary of the financial risks and treasury policies can be found on pages 40 and 41, together with other risks and uncertainties. Internal control During the year, the Company provided an internal audit and risk-management function. The attempt to create a system of internal control and risk mitigation is a key part of the Company’s operations and culture. The board is responsible for maintaining a sound system of internal control and reviewing its effectiveness. The function can only manage, rather than entirely eliminate, the risk of failure to achieve business objectives. It can provide only reasonable, and not absolute, assurance against material misstatement or loss. Ongoing reviews, assessments and management of significant risks took place throughout the year under review and up to the date of the approval of the annual report and accord with the Turnbull Guidance (Guidance on Internal Control). The Company has an internal audit function which is discharged as follows: (cid:2) Regular audits of the Company stock (cid:2) Unannounced visits to pub sites (cid:2) Monitoring systems which control the Company’s cash (cid:2) Health & safety visits, ensuring compliance with Company procedures (cid:2) Reviewing and assessing the impact of legislative and regulatory change (cid:2) Risk-management process, identifying key risks facing the business The Company has key controls, as follows: (cid:2) Authority limits and controls over cash-handling, purchasing commitments and capital expenditure (cid:2) A budgeting process, with a detailed 12-month operating plan and a mid-term financial plan, both approved by the board (cid:2) Business results reported weekly, with a report compared with budget and the previous year (cid:2) Forecasts prepared regularly throughout the year, for review by the board (cid:2) Complex treasury instruments are not used. The Company, from time to time, as revealed in our report and accounts, enters into swap arrangements which fix interest rates at certain levels for a number of years and enters into supply arrangements with fixed prices for electricity and gas, for example, which run for between one and three years (cid:2) An annual review of the amount of external insurance which it obtains, bearing in mind the availability of such cover, its costs and the likelihood of the risks involved (cid:2) Regular evaluation of processes and controls, in relation to the Company’s financial reporting requirements The directors confirm that they have reviewed the effectiveness of the system of internal control. Kirk Davis Company Secretary 13 September 2013 CORPORATE GOVERNANCE ANNUAL REPORT AND ACCOUNTS 2013 55 INFORMATION FOR SHAREHOLDERS Ordinary shareholdings at 28 July 2013 Shares of 2p each Up to 2,500 2,501–10,000 10,001–250,000 250,001–500,000 500,001–1,000,000 Over 1,000,000 Number of shareholders % of total shareholders Number % of total shares held 4,533 295 181 18 13 18 89.62 5.83 3.57 0.36 0.26 0.36 2,176,477 1,356,863 9,562,507 6,260,611 8,653,538 98,026,300 1.73 1.08 7.59 4.97 6.86 77.77 5,058 100.00 126,036,296 100.00 Substantial shareholdings The Company has been notified of the following substantial holdings in its share capital at 13 August 2013: Tim Martin Sanderson Asset Management Threadneedle Investments OppenheimerFunds Inc J D Wetherspoon plc Company Share Plan* Rothschild Wealth Management Invesco Perpetual Norges Bank Investment Management Investec Asset Management Legal & General Investment Management BlackRock Investment Management Number of ordinary shares % of share capital 33,466,934 19,404,121 13,612,019 5,500,000 5,178,164 4,779,441 4,406,319 3,399,657 3,381,349 3,155,427 2,748,655 26.55 15.40 10.80 4.36 4.11 3.79 3.50 2.70 2.68 2.50 2.18 * This represents shares which have been purchased by the Company for the benefit of employees under the SIP. Please see page 46. Share prices 29 July 2012 Low High 28 July 2013 467.1p 447.0p 775.3p 762.0p Shareholders’ enquiries If you have a query about your shareholding, please contact the Company’s registrars directly – Computershare Investor Services plc: www.uk.computershare.com/investor 0870 707 1091 Annual report Paper copies of this annual report are available from the company secretary, at the registered office. E-mail: investorqueries@jdwetherspoon.co.uk This annual report is available on the Company’s website: www.jdwetherspoon.co.uk/investors 56 J D WETHERSPOON PLC PUBS OPENED DURING THE FINANCIAL YEAR The Avion 19 Anchor Road The Kings Head Hotel 4–6 New Market The Rose Salterne 9–10 Bridgeland Street The Butter Cross Market Place Aldridge Beccles Bideford Bingham The Fair O’Blair 25–29 Allan Street Blairgowrie The Pillar of Rock 15 Castle Street The W. G. Grace 71–73 Whiteladies Road The Mount Stuart Landsea House, Stuart Place Bolsover Bristol Cardiff John The Clerk of Cramlington 2 Village Road Cramlington The Horse Shoe Inn 4 Church Street The Sir Norman Wisdom 18–20 Queens Street The Limes The Great Glen 30 Bridge Street 104 High Street The Smithy Fold Victoria Street The Mardy Inn 117 High Street The Percy Shaw Broad Street The Green Dragon 2 St Edward Street The Joseph Conrad 18–32 Station Square The Six Bells 47–48 St Thomas Street Crook Deal Fakenham Fort William Glossop Gorseinon Halifax Leek Lowestoft Lymington WS9 8PT NR34 9HA EX39 2PZ NG13 8AP PH10 6AB S44 6PP BS8 2NT CF10 5BU NE23 1DN DL15 9BG CT14 6ET NR21 9AZ PH33 6AD SK13 8HS SA4 4BR HX1 1YA ST13 5DS NR32 1BA SO41 9ND The Master Mariner 3–5 Union Terrace New Brighton CH45 2JT The Cribbar 11–19 Gover Lane The Kingfisher London Road South An Ruadh Ghleann 40–44 Main Street The Hat and Feathers 57–59 Church Street The Giant Bellflower 47a Gowthorpe Newquay Poynton Rutherglen Seaham Selby The Grand Electric Hall 2 Cheapside Spennymoor TR7 1ER SK12 1NJ G73 2HY SR7 7HF YO8 4HF DL16 6DJ The Regent 19 Church Street Walton-on-Thames KT12 2QP The Angel Hotel 1 New Quay Road The Clothier’s Arms 56 High Street Whitby Yeadon YO21 1DH LS19 7PP ANNUAL REPORT AND ACCOUNTS 2013 57 J D Wetherspoon plc Wetherspoon House, Central Park Reeds Crescent, Watford, WD24 4QL 01923 477777 www.jdwetherspoon.co.uk Designed by WLG Design Limited Printed by Banner Managed Communication English language advice by www.future-perfect.co.uk