Annual report and accounts 1999 Our objectives To provide shareholders with good financial returns by focusing on customers(cid:213) needs, adding value through our expertise and innovation, and investing for future growth. To provide unrivalled value to our customers in the quality of the goods we sell, in the competitiveness of our prices and in the range of choice we offer. To achieve efficiency of operation, convenience and customer service in our stores, thereby creating as attractive and friendly a shopping environment as possible. To provide a working environment where there is a concern for the welfare of each member of staff, where all have opportunities to develop their abilities and where each is well rewarded for their contribution to the success of the business. To fulfil our responsibilities by acting with integrity maintaining high environmental standards, and contributing to the quality of life of the community. Group profile 1 J Sainsbury plc at a glance 1999 2 Financial highlights 3 Chairman(cid:213)s statement 4 Group Chief Executive(cid:213)s review 6 Our core competencies 14 Operating review 19 Financial review 22 Board of Directors 24 Report of the Directors 27 Report of the Remuneration Committee 33 Statement of Directors(cid:213) responsibilities in respect of the accounts 33 Auditors(cid:213) report to the members of J Sainsbury plc 34 Accounting policies 36 Group profit and loss account 37 Balance sheets 38 Group cash flow statement 39 Group statement of total recognised gains and losses 39 Reconciliation of movements in equity shareholders(cid:213) funds 40 Notes to the accounts 58 Interim accounts for the 52 weeks ended 6 March 1999 59 Review report by the Auditors to the shareholders of J Sainsbury plc on the interim accounts 60 Ten year financial record 62 Investor information 64 Financial calendar, registered office and advisers J Sainsbury plc is one of the world(cid:213)s leading retailers, playing a part in the lives of 15 million customers a week. From the freshest food to the widest choice of products for the home to the best service and value in banking. Sainsbury(cid:213)s Supermarkets was established in 1869 by John James and Mary Ann Sainsbury and is Britain(cid:213)s longest standing major food retailing chain. The founders(cid:213) principles and values guide us as strongly today as they did at the outset — to be the customer(cid:213)s first choice for food shopping by providing high quality products, value for money, excellent service and attention to detail. Our people Sainsbury(cid:213)s Supermarkets employs over 129,600 people. Of these, 69 per cent are part-time and 31 per cent full-time. 65 per cent of employees are women. Our products A large Sainsbury(cid:213)s supermarket offers over 23,000 products — 40 per cent of these are Sainsbury(cid:213)s own brand. In addition to a wide range of quality food and grocery products, many stores offer bread baked on the premises, delicatessen, meat and fish counters, pharmacies, coffee shops, restaurants and petrol stations. Our stores We serve over nine million customers a week at 405 stores throughout the UK. Of these stores, 12 are in Scotland, eight in Wales and six in Northern Ireland. Nearly 60 per cent of our stores are in town-centre or edge-of-centre locations, many of these built on previously derelict sites. New store openings 1998/99 Armagh, NI; Arnold, Nottingham; Attleborough; Brighouse; Buchanan Galleries, Glasgow; Chesham; Chipping Ongar; Clitheroe; Darwen; Exeter; Fallowfield, Manchester; Headcorn; Leeds; Leven; Liphook; London: Finchley Road and Fulham Palace Road; Meadowbank, Edinburgh; Newry, NI; and Sherbourne. New stores(cid:213) sales area: 458,000 sq ft. Extensions 1998/99 We undertook 27 store extensions and refurbishments and added 239,000 sq ft of sales area. Planned store openings 1999/2000 include: Bourne; Braehead, Glasgow; Dartford; Huntingdon; Isle of Wight; Linlithgow; London: Greenwich, Holborn, Paddington Station, Tooting, Tottenham Court Road and Victoria; Londonderry, NI; Stirling; and Wallington. Planned stores(cid:213) sales area: 386,000 sq ft. Planned extensions 1999/2000 We have 22 extensions planned which will add 245,000 sq ft of sales area. Savacentre was founded in 1975 as a joint enterprise between Sainsbury(cid:213)s and BhS to sell food, clothing and electrical items. In 1989, Sainsbury(cid:213)s acquired BhS(cid:213) share and Savacentre became wholly-owned by Sainsbury(cid:213)s. There are 13 Savacentres. In 1998 the Calcot, Reading store was remodelled to offer a greater emphasis on food. This year the Board decided to integrate Savacentre within Sainsbury(cid:213)s Supermarkets, as Sainsbury(cid:213)s largest store format. The Savacentre head office in Wokingham will close to avoid duplication of activities. Homebase was founded in 1979 and opened its first store in 1981. In1995 the company bought Texas Homecare and the acquired stores have now all been converted to the Homebase format. Homebase serves over one million customers a week at 288 stores throughout the UK, employing 18,200 staff, of which 12,200 are part-time. A Homebase store has on average 25,000 DIY, home enhancement and gardening products available. There is a growing emphasis on lifestyle, design and decorative goods. The Homebase own brand represents over 22 per cent of the range and has a reputation for quality and value for money — it accounts for 32 per cent of sales. New store openings 1998/99 Cardiff; East Grinstead; Irvine; Leeds; London: Finchley Road, Seven Kings and North Finchley. New stores(cid:213) sales area: 291,000 sq ft. Planned store openings 1999/2000 Dundee; East Filton, Bristol; Frome; Hamilton; London: Greenwich; Sittingbourne; and Wrexham. Planned stores(cid:213) sales area: 450,000 sq ft. Shaw(cid:213)s Supermarkets Inc. has been fully- owned by Sainsbury(cid:213)s since 1987 and prior to that was part-owned from 1983. Shaw(cid:213)s serves over two million customers a week at 127 stores in the New England states of the USA. Sainsbury(cid:213)s Bank opened in February 1997, and was the first bank to be opened by a British supermarket company. It is owned 55 per cent by J Sainsbury plc and 45 per cent by Bank of Scotland, and offers telephone banking 24 hours a day. Like Sainsbury(cid:213)s Supermarkets, Shaw(cid:213)s places an emphasis on high quality food at value for money prices, and is constantly improving its range of fresh foods. The Company offers 50,000 different lines, up to 35,000 per store at any one time. Some 5,700 popular own label products account for 39 per cent of sales. Shaw(cid:213)s employs over 20,000 associates. New store openings 1998/99 Bridgeport CT; Hamden CT; New Haven CT; Orange CT; Shrewsbury MA; Tilton NH; Wallingford CT; Waterbury CT; and Webster MA. New stores(cid:213) sales area: 367,000 sq ft. Planned store openings 1999/2000 Barrington RI; Gorham NH; and North Conway NH. Planned stores(cid:213) sales area: 113,000 sq ft. The Bank attracts customers via Bank Information Points which have been established in most branches of Sainsbury(cid:213)s Supermarkets. Customers can also call for information free on 0500 405060. To date it has attracted over one million customers with deposits totalling £1.7 billion. Sainsbury(cid:213)s Bank continues to research and launch new products; its current product portfolio includes: instant access savings accounts; Christmas saver accounts; personal loans; flexible options mortgages; 100 per cent fixed rate mortgages; three Visa credit cards (Classic, Gold and Merit); home and contents insurance; and pet insurance. J Sainsbury plc at a glance 1999 Sales (incl. taxes) 52 weeks £m Operating profit 52 weeks £m* Number of stores** Sales area 000 sq ft** Employees 000** J Sainsbury plc 16,269 867.3 833 27,805 178 Sainsbury(cid:213)s Supermarkets 12,097 714.1 405 11,425 130 Savacentre 875 28.3 13 1,119 Homebase 1,270 66.6 288 10,851 Shaw(cid:213)s $3,047m $85.1m 127 4,410 10 18 20 * Before Year 2000 costs, exceptional costs and profit sharing. ** As at 3 April 1999. The figures for sales and operating profit have been extracted from the unaudited Interim Accounts for the 52 weeks ended 6 March 1999 (see page 29). These accounts have been subject to an interim review by our auditors, PricewaterhouseCoopers. The audited statutory accounts are for the 56 weeks ended 3 April 1999. For the purpose of comparability we have also prepared Interim Accounts for the 52 weeks ended 6 March 1999 which have been subject to an interim review by our auditors, PricewaterhouseCoopers. These 52 week results are the focus of our review unless otherwise stated. J Sainsbury plc Annual report and accounts 1999 1 Financial highlights (cid:13) Group sales £ billion (cid:13) Group profit £ million (cid:13) Dividend per share pence 99 98 97 96 95 16.3 99 15.5 14.3 13.5 12.1 98 97 96 95 756 728 651 764 808 99 98 97 96 95 14.32* 13.9 12.3 12.1 11.7 *(cid:9) Excludes a one-off 1p per share payment to cover(cid:13) the extra four weeks in this financial year. 1999 52 weeks £m 1998* 52 weeks £m % change Group sales (incl. taxes) 16,269 15,496 Group operating profit before Year 2000 costs, exceptional costs and profit sharing Year 2000 costs Associated Undertakings — share of profit Profit sharing Net interest payable Group profit before tax, exceptional costs, property and investments profits Exceptional integration costs — Texas Homecare Property profits Profit/(loss) on sale of associate/subsidiary Group profit before tax Tax Group profit after tax Earnings per share Earnings per share before exceptional costs, property and investments profits Diluted earnings per share before exceptional costs, property and investments profits Dividend per share for 52 week period Dividend per share to cover extra 4 week period Dividend per share for 56 week period of which final * Restated for new accounting standards. 867 (28) 12 (42) (53) 756 (21) 13 84 832 (273) 559 29.4p 27.2p 26.9p 14.32p 1.00p 15.32p 11.30p 854 (20) 16 (44) (78) 728 (28) 3 (12) 691 (226) 465 25.1p 26.6p 26.6p 13.9p 10.15p 5.0 1.6 3.8 20.4 17.1 2.3 1.1 3.0 The 52 week information for 1999 is extracted from the unaudited Interim Accounts which have been subject to an interim review by our auditors, PricewaterhouseCoopers. 2 J Sainsbury plc Annual report and accounts 1999 (cid:9) Chairman(cid:213)s statement This has been a challenging year in a challenging market. It has also been a year in which we have initiated the changes necessary to grow all the businesses within the Sainsbury(cid:213)s Group and deliver the value shareholders expect. A year of change Two years ago the Board indicated that recovery in each of our businesses would take three years to achieve. I am pleased to say that at Homebase and Shaw(cid:213)s we are ahead of schedule, and Sainsbury(cid:213)s Bank is outperforming all expectations. However, the financial results from Sainsbury(cid:213)s Supermarkets are not satisfactory. Naturally, in my first annual report as Chairman of the Group, I would like to announce better results. But retailing is a challenging market, especially for those companies committed to providing the highest quality products and service. We recognise that we cannot sustain a leadership position in this market without some real changes to the way our UK supermarkets business operates. The initiatives outlined in this year(cid:213)s review are therefore vital to our success. Group sales increased by 5 per cent to £16.3 billion and Group operating profit by 1.6 per cent to £867 million. Earnings per share before exceptional costs, property items and investments profits increased by 1.1 per cent. We propose to increase the total dividend per share for the year to 15.32p (including a one-off 1p per share payment to cover the extra four weeks in this financial year). My job is to create the climate in which management can deliver the changes needed to evolve the business. To this end I have spent much of my time visiting different parts of the Group — I have been to over 75 stores in the UK, 20 in the USA and 40 individual departments within head office functions. I have found a business full of excellent people eager to do a fine job, and I see it as my role to help create a culture in which people have the desire and the framework to generate outstanding value for shareholders and customers. I have become Chairman of a Board which has a superlative knowledge of retailing, especially within the UK. We will be adding to this wealth of expertise with knowledge and experience from other fields, shaping the Board not only to develop and grow our UK businesses, but to use its skills to look for future growth outside the UK. Driving this growth will be the need to create value for shareholders. Our decision not to buy Giant, and our firm intention to acquire Star Markets in the USA demonstrates how precise we are about where we focus our efforts. My predecessor as Chairman, David Sainsbury, has retired to pursue a career in politics. We all have immense respect for David(cid:213)s contribution over the last 35 years. He oversaw the change from Sainsbury(cid:213)s being a family business to a large, global plc. I am tremendously impressed by the strength of the heritage he has left. Two other Group Board Directors left Sainsbury(cid:213)s this year. Bob Cooper retired after 23 years, and David Clapham after 35 years, both long periods of valuable service. In July, Rosemary Thorne will also be leaving after seven years as Group Finance Director. I thank them all for their contribution. After 25 years on the Board, Sir Timothy Sainsbury will retire in July. He has made a unique and significant contribution to the success of the Company. His departure marks a historic moment for the Company because for the first time in 130 years there will not be a member of the Sainsbury family on the Board. Sainsbury(cid:213)s is a company acknowledged as the original leader; it is and remains the (cid:212)brand(cid:213) thought of as (cid:212)the best in the business(cid:213). An outstanding name that is associated with finding, creating and offering the best. I have joined the business at a time when we need to rediscover this heritage, execute and deliver our offer and ensure that the Sainsbury(cid:213)s Group recognises how customers(cid:213) needs and values continue to change. During my visits to stores and central departments, I have been genuinely impressed by the tremendous loyalty of all my colleagues to the Sainsbury(cid:213)s Group, and the strength of purpose and will to win in the market place. The changes we are making throughout the Group will release the true potential of these colleagues, providing a great source of energy to help us deliver the value shareholders and customers expect from Sainsbury(cid:213)s. Sir George Bull 1 June 1999 J Sainsbury plc Annual report and accounts 1999 3 Group Chief Executive(cid:213)s review We seek to generate superior value for shareholders and customers on a sustainable basis and we are now aligning our strategy, management processes and performance measures to this purpose. A common theme runs through our Group. The commitment to offering high quality, value for money products that meet our customers(cid:213) needs, in a way that is friendly, responsive and convenient. In keeping with this commitment, each business has a clear strategy and determination to broaden its appeal, increase efficiency and substantiate its offer. Strong profit growth at Homebase and Shaw(cid:213)s has contributed to an overall increase in Group profit. We recognise the key to future profitability is to increase sales and cost effectiveness in our UK food business. Our objective is to be a leading international food retailer, with a successful UK DIY, horticulture and home enhancement business. The initial success of the Bank demonstrates the potential that exists in applying the Sainsbury brand to other consumer product offers. The emergence of Homebase and Shaw(cid:213)s as formidable competitors within their markets is evidence of the Group(cid:213)s ability to transfer its considerable retail skills across both market and international boundaries. Their recent successes are a robust testament to the Group(cid:213)s ability to tackle and resolve problems. But undoubtedly, confidence in the Group is closely linked to the performance of its largest component. It is, therefore, vital that our UK food business has a solid platform for sustainable growth. I have been active this year in honing the economics of our businesses, investing in activities which add value, and positioning each of our businesses to compete successfully in tough markets. It is clear that in order to maximise the Group(cid:213)s profit potential we must take decisive action to cut costs out of our businesses permanently. We must create a leaner and fitter corporate structure, and sharpen our corporate culture and working practices. We have already taken significant steps to achieving this. We will also create value for shareholders by expanding our business outside the UK. Our proposed acquisition of Star Markets, New England(cid:213)s fifth largest food retailer, forms a natural addition to Shaw(cid:213)s in terms of geographical locations and core competencies. Taking control of Giant Food Inc. was not essential to our strategy and during the year we sold our holding for over $600 million, representing a profit of £84 million. Performance of the Group businesses Sales at Sainsbury(cid:213)s Supermarkets increased by 4.6 per cent to £12.1 billion with like-for-like growth a disappointing 2.2 per cent. Naturally this shortfall affects our performance against most key financial targets. Operating profit was adversely affected and was £714 million. This caused us to miss the net margin and return on net assets targets set at the start of the year. It is clear to me that we need to change customers(cid:213) perception of value, choice and service at Sainsbury(cid:213)s. Changing the value perception will take time and money — we will continue to invest gross margin in promotions and lower prices, while still strengthening our lead in quality. Our cultural change programme and the restructuring of our cost base will also help to improve the customer service elements of our value offer. Better management of space and a major five year investment plan for store extensions and refurbishments will further improve service for customers, and widen the choice of products available in our stores. Success in the USA is not the limit of our international ambitions and our firmly established world-class retailing skills will drive expansion into other regions. To date we have taken a 25 per cent share in Edge, a chain of 80 small stores in Egypt. Improving our operating efficiency and effectiveness is now a way of life at Sainsbury(cid:213)s and we have increased the scope and pace of our cost reduction programme, reorganising store, regional and London office management structure, as well as identifying many 4 J Sainsbury plc Annual report and accounts 1999 improvements we can make in our procurement processes. This improved efficiency will allow us greater flexibility to meet competitive pressures. This year(cid:213)s operating review describes Sainsbury(cid:213)s Supermarkets(cid:213) commitment to the quality of food we offer, our product innovation and our development of new store formats. Everything we do is about providing choice and access for our customers, enabling us to compete successfully. We will provide the best value for our customers by changing our offer to face up to the intense competition in our industry. We strongly believe that the Competition Commission will confirm the intensely competitive nature of UK food retailing. Indeed, we were somewhat surprised that a referral to the Commission was felt to be necessary. Savacentre experienced sales difficulties similar to Sainsbury(cid:213)s Supermarkets — growing 1.3 per cent to £875 million. The business is now being integrated into Sainsbury(cid:213)s Supermarkets. It is no longer necessary to run two separate head offices and the Savacentre head office at Wokingham will close. With this integration we are able to eliminate some duplication of roles, and realise economies of scale. Savacentre becomes Sainsbury(cid:213)s largest store format, and in time, some large Sainsbury(cid:213)s stores will be extended to this new format. At Homebase sales were up 2.8 per cent to £1.3 billion representing strong growth and an excellent performance and the business met all targets. Operating profit increased to £67 million and return on net assets increased from 12.3 per cent to 15.1 per cent. A powerful promotions programme, a strong value message in marketing communications, and a successful start to the process of broadening our appeal, have all contributed to this strong performance. Our strategy is to further differentiate Homebase from the rest of the DIY sector, adding more decorative and horticulture lines to expand our share of the £24 billion home enhancement market. We need larger stores to accommodate this expanded offer, which we intend to be the widest in the sector. As well as opening larger formats, we will undertake a programme of extensions to existing stores. We have recently agreed to pioneer two stores with Meyer International plc, which owns the Jewson brand, developing a store format of over 100,000 sq ft to combine the complementary strengths of both companies. A comprehensive range of product options and promotions reflects our priority of focusing on value for our customers. Having reduced the working capital by £20 million during the year, we are now targeting the structural economics of the business by taking at least £30 million of cost out of the business over the next three years. Shaw(cid:213)s has also made excellent progress this year, with sales up 8.5 per cent to $3.0 billion. Like-for-like sales increased 4.1 per cent. Operating profit was $85.1 million, a 37.7 per cent increase. A key factor driving this success is our focus on managing our existing assets effectively with greater emphasis on capital investment, management development and management accountability. Next year we are targeting another 30 per cent profit increase by continuing both our programme of innovating promotions and our successful reversal of performance in Connecticut, as well as by reducing costs. We plan to reduce our cost base by at least $40 million over the next two years without affecting quality or service, principally through supply chain improvements and store operating procedures. In November we sought to acquire Star Markets for a consideration of $490 million. We expect Federal Trade Commission approval for our proposed acquisition in late June. On completion, this acquisition will position us as the clear number two in New England with a combined sales base of approximately $4 billion. After just two years, Sainsbury(cid:213)s Bank continues to represent a major success, with over one million customers enjoying some of the most competitive rates in the market. The cost of acquiring these customer accounts contributed to a loss of £5.6 million, but we anticipate moving into profitability this year. This year we have continued our commitment to the community and the environment, increasing our support for educational projects, volunteer schemes, waste recycling and use of environmentally responsible products. Our latest Environmental Report is available on our Group internet site: www.j-sainsbury.co.uk Our people I would like to thank and congratulate all colleagues for their hard work and loyalty this year — theirs has been an outstanding contribution. However, great culture changes are running through our Group. We must all raise our game to compete. I know the people of the Sainsbury(cid:213)s Group will respond positively to these changes, and I can guarantee they will be encouraged to use their many talents and initiatives in the workplace to try and forge shareholder value. Our objective Our objective remains the same — to be a leading international retailer producing sustainable growth in shareholder value by providing the best possible quality, value and choice for our customers. We are confident we have the strategies, the organisation and the people to achieve this goal. We know we have the enthusiasm. We recognise the issues that are facing us, and those we will face in the future, and we are dealing with them. This is the key to our long-term success. Dino Adriano 1 June 1999 J Sainsbury plc Annual report and accounts 1999 5 Right: As customer tastes become more adventurous Sainsbury(cid:213)s has searched the world to introduce a wide range of Special Selection products, including Normandy Cider Vinegar. Above right: As part of our commitment to animal welfare and food safety, Farm Assured Milk is available in all stores. Our Dairy Welfare Policy is one of Europe(cid:213)s most stringent codes on good farm practice. And thanks to our award-winning design, customers now enjoy easier, drip-free pouring from the four and six pint milk bottles. Above: Responding to more exotic tastes, we launched a range of cooking sauces which draw inspiration from Thailand. All 12 sauces and pastes are made to traditional recipes and packed with authentic ingredients such as lemon grass and galangal, tamarind and kaffir lime. Responding to customers(cid:213) needs Having doubled our range of organic foods to over 400 lines, we now have the best selection available from any British supermarket. Additions to the range include ice-cream, sausages and ready-to-eat salads all clearly identified in store. Above: We enhanced Spend & Save this year with a range of even higher points rewards for regular Homebase customers. 10 million card holders can now earn up to 10 per cent savings, and research shows this is a strong incentive to visit. Above: With everyone already looking towards Millennium celebrations, we are offering our own cuv(cid:142)es of Champagne and Cava chosen especially for the big occasion. Above: Our unique easy-grip squash bottle is more comfortable to use for adults and children, yet no more expensive. Pouring is now far easier from both one litre and two litre sizes. Left: Sainsbury(cid:213)s has introduced four premium condiments to complement the traditional range. The Tomato, Basil and Mustard Sauce, for instance, is not only delicious on the side of a plate, but can also be used for topping bruschetta or flavouring a dip. Above: Our Prawn Laksa, a spicy coconut dish of noodles and prawns, won the top award at this year(cid:213)s SuperMarketing Quality Food & Drink Awards. It was selected for its fresh ingredients and flavour, and simple and effective packaging. Above: Eat and Keep Bananas are a specially developed mix of ripe and unripe fruit, with ripening instructions. They are for customers who would like a banana for today, and other bananas that will keep at home to be in perfect condition when required. Above: Our milk bath range adds a touch of luxury and indulgence to any bath. In stylish packaging, they use natural extracts to soothe the skin. The four cream varieties in the range are scented with honey, almond, aloe and juniper. A passion for quality Above: With Sainsbury(cid:213)s Lifestyle coffees, customers can enjoy a choice of different blends of freshly ground coffee to suit different tastes. Wakey Wakey, All Day Long, After Dinner and Espresso are each designed for different times of the day. Above: Customers can enjoy the subtle varieties of taste in Sainsbury(cid:213)s three oak-matured, malt whiskies. These are made exclusively for Sainsbury(cid:213)s by traditional producers from three of Scotland(cid:213)s famous malt producing regions: Highland, Speyside and Islay. Sainsbury(cid:213)s reputation for excellent cheeses continues to improve with the introduction of 17 distinctive, new choices to complement the 106 previously available at the delicatessen. Whether a continental favourite or a slice of Stilton, there is something to tempt everyone(cid:213)s taste buds. Customer research has repeatedly told us that there is demand for increased variety in our pepper range. The Ramiro pepper is a new, exceptionally sweet member of the capsicum family. By virtue of its distinctive shape and taste, the Ramiro offers a talking point for the pepper connoisseur or simply a departure from the norm for culinary fans. Greater choice, greater value Left: Sainsbury(cid:213)s buyers search the world to find new vegetable varieties and recipe ideas that can be passed on to customers. Examples of sweet potatoes include the red-fleshed variety from North America and a yellow variety from the West Indies. Below: Sainsbury(cid:213)s World of Honey is a celebration of this versatile ingredient. We offer a range of natural flavours from all over the world. Flavours are graded according to strength, so customers can choose to suit their own taste. We also offer accompanying recipe cards to encourage customers to cook with honey. Above: Our Economy range offers good value and a greater choice across 140 different everyday essentials. Above: Shaw(cid:213)s four new 100 per cent juices blend cranberry with apple, grape, raspberry and strawberry. These offer not only more cranberry juice than the national brands but have been developed in response to the sharper palate of New Englanders. The juices are available in all Shaw(cid:213)s stores. Below: Homebase(cid:213)s Value Basics range of everyday DIY and garden essentials — tools, accessories, plants and materials — cuts the cost of home improvement. Practical and functional, Value Basicsis at extremely low prices. Above: In keeping with pasta(cid:213)s ever-growing popularity, Sainsbury(cid:213)s has introduced a new range of four regional varieties. Pastas of all shapes and sizes from different Italian regions are produced in the age-old way using traditional durum wheat flour. Recipes on the packs enable customers to create the authentic accompanying sauce of each region. Below: Sainsbury(cid:213)s is Britain(cid:213)s largest fishmonger, now offering amongst its range, fresh red snapper from Western Australia and line-caught swordfish from the Maldives. Seven tonnes of fresh mackerel finds its way onto our customers(cid:213) plates each week. Below: Sainsbury(cid:213)s range of five canned lagers offers strengths from Green label at 3 per cent, through Blue label at standard strength to super strength at 8.5 per cent. Independent research placed Premier Gold as tastier than the brand leader. Above: Sainsbury(cid:213)s Hydro Source is a refreshing new idea for relaxing in the bathroom — a moisturising hydrotherapy spa range of four natural, fragrant bath oils, crystals and shower gels. Above: Britons now buy more coloured paint than white, and Homebase has responded with a range of 16 bold, new fashion colours aimed at the younger generation. Colour Zones will transform any teenager(cid:213)s bedroom with just one coat. Above: This winter we introduced the first ever microwaveable salad. Exclusive to Sainsbury(cid:213)s, Fresh (cid:213)n(cid:213) Ready Warm Eating Salad combines a fresh dressing and onion pieces with four types of crunchy leaves. It is available in more than 200 stores. Above: Our Fresh Creations range offers busy customers 12 restaurant-quality meals, each costing less than £5. The gourmet meals, which include meat, fish and vegetarian dishes, contain the finest ingredients. All of them can be created at home in under 10 minutes. Left: Customers can now buy fresh sauces to enhance their choice of fish from Sainsbury(cid:213)s increasing selection. Launched in six authentic, international recipes, all can be heated in seconds or served cold, saving time without ever compromising taste and quality. New products, new ideas Last autumn Homebase undertook a major review of its tiles offer. As a result, the range is being expanded and enhanced to better reflect market trends. New ranges will include an extensive choice of ceramic floor tiles and exclusive premium collections to order. Current best sellers are smaller, contemporary coloured tiles in green, blue, terracotta and yellow. Operating review Sainsbury(cid:213)s Supermarkets analysis Sales (incl. taxes) £12,096.9m £11,563.8m 1999 1998 Operating profit Number of stores Sales area (000 sq ft) Full-time employees Part-time employees £714.1m £734.6m 405 11,425 39,890 89,798 391 10,860 38,416 88,155 (cid:212)estate(cid:213) trolley Below: This year we trialled a new model to add to our range of 15 trolleys. Designed to comfortably seat two children aged up to eight at the back, the (cid:212)estate(cid:213) trolley can also seat a baby at the front. Sainsbury(cid:213)s Local Above: Our Fulham Palace Road, London, and Headcorn Sainsbury(cid:213)s Local stores are each about the size of a tennis court and fill a gap in the convenience market for fresh, value-for-money food. The stores recruit from, and are very much part of, the local communities they serve. new style uniform Left: Sainsbury(cid:213)s new uniforms are smart, modern and comfortable. They were designed by Paul Costelloe based on feedback from over 6,000 colleagues in 300 stores. Among the options available are polo and rugby shirts that feature colourful motifs such as chillies, leeks, strawberries and oranges. SAINSBURY(cid:213)S SUPERMARKETS — making life taste better This year Sainsbury(cid:213)s Supermarkets confronted the key issues facing the business and began to deal with them positively and decisively. We embarked upon a huge programme of customer research, the largest we have ever undertaken, and have learnt considerably more about what customers value and how we measure up against their expectations. With this we set ourselves a fresh objective without, of course, losing sight of what we are here to do — sell high quality, good value products profitably to as many people as possible. We recognise that food is at the heart of people(cid:213)s lives, however basic any individual item may be, and this led us to establish Sainsbury(cid:213)s Supermarkets(cid:213) purpose — Making Life Taste Better. Making Life Taste Better is more than a campaign or a slogan. It is about real culture change. It runs through everything we do. We launched it in February at a convention for senior managers from all parts of the business. We have high ambitions. They cannot be achieved in a matter of weeks, naturally, so what follows is an account of how we will achieve them. 14 J Sainsbury plc Annual report and accounts 1999 Putting people first Last year we discovered that while we have tens of thousands of talented, enthusiastic colleagues, their principal focus is on their duties rather than on customers. We decided to change the way we work and have developed a set of principles to help us work together more effectively, and release the talents and energies of our staff. The programme for culture change started with the Board members, who helped trial initiatives at five stores. Sales increased on average three per cent above the rest of the business and the response from colleagues was and continues to be extremely positive. Our Way We Work principles are being adopted throughout Sainsbury(cid:213)s Supermarkets. They embody a set of standards and values that will provide the framework for a culture of continuous improvement. Cutting costs As detailed in the Group Chief Executive(cid:213)s review, we have made it a priority this year to find ways to reduce costs, based on the simple principle that if it does not add value for our customers, we will not do it. We have identified many activities which can be removed or simplified without affecting quality, choice or customer service. We are restructuring our store and regional management, reviewing the supply chain, and streamlining our head office operations to make our organisation leaner, yet more responsive to stores and customers. Market-leading innovation Our heritage is a passion for quality food and we intend to be the best. Last year we introduced over 1,300 new own brand lines, such as Fresh Creations,a range of12 gourmet meals (illustrated on page13). We also reviewed a further 3,000 products and as a result, some1,500 are being improved to reflect changes in customer tastes and needs. We launched Food to Go, offering hot chicken and a curry bar, and will include the service in more stores, adding pies and roast meats. Building on our experience in the US, we increased the number of our new style salad bars and now have them at 41 of our larger stores, where they have proved very popular with customers. Our constant innovation applies also to packaging — a simple move to see- through salad pots helped contribute to a 70 per cent sales increase. In response to customer concern about fat intake, we developed the Be Good To Yourself range; 200 products which prove that lower fat does not mean inferior flavour. We expanded our ranges of fresh produce and meat, as well as increasing the types of fish we sell to become Britain(cid:213)s biggest fishmonger. During the last year we have piloted and enhanced our category management process, developing plans with suppliers for over 50 per cent of our business. We recognise that this process alone will not contribute to a step change in our business and have taken steps to redesign our organisation to bring more customer focus to our activities, streamline our work processes and further develop the skills of our people. We have already announced the first phase of this work with the formation of the new commercial division. This is made up of four cross-functional business units and a strategy group which provides clear direction, best practice and support to the re-focused category teams. Offering customers real choice The desire to provide quality and choice drives our innovation, but equally we recognise the importance to our customers of the sources and safety of the food we sell, and the information we provide. supporting initiatives, including the transition to organic status. Demand for organic foods is greater than ever and sales are over £1.5 million every week — from soft fruits and fresh soups to garlic baguettes and frozen chips. Our guarantee of a market for organic milk for at least five years gives farmers the confidence they need to invest in and expand their businesses. It is just one example of our continuing support for Britain(cid:213)s organic producers. We are always keen to ensure that our offer reflects the wishes of our customers. We support the responsible use of genetic modification (GM) providing it is legal, safe, environmentally responsible and has clear consumer benefit. However, in response to overwhelming customer concern, we have introduced a policy of eliminating GM ingredients from all our own brand products. To enable us to do this, we set up a unique international consortium of food retailers to establish and validate crop sources of non-GM food. Of foodstuffs that can be grown in this country, we source 90 per cent from Britain — customers can choose British meat at all times — and we continue to provide strong support to British farmers. To help the farming community plan ahead and invest in commercially viable production, we work alongside over 16,000 farmers and growers, sharing data and We have worked with other businesses and development agencies to help form the Ethical Trading Initiative which works to secure specified labour standards worldwide. Our code of practice for Socially Responsible Trading has been commended by Christian Aid, and we are now working with our own label suppliers to gain their commitment to this code. Making Sainsbury(cid:213)s available to more customers Our simple aim is to make the Sainsbury(cid:213)s brand accessible to as many customers as possible, and so maximise its value and achieve a competitive advantage. Our approach to store development is driven by a combination of the desire to improve our geographical spread, respond to changing lifestyles, and abide by Government restrictions, so we have introduced a variety of formats to meet different customer needs. We have three larger formats — Savacentres, our largest store format, Superstoresand Supermarkets. Extending and refurbishing these stores is an increasingly successful and important way of expanding our business. This year we improved 27 stores, adding 239,000 sq ft of profitable new selling space. We also opened nine larger format stores. In addition we have three smaller formats. This year we opened eight Country Townstores, typically in smaller towns like Attleborough and Chipping Ongar. The successful opening of the Buchanan Galleries in Glasgow saw the arrival of our first Sainsbury(cid:213)s Centralstore. We plan to open 30 Centrals over the next few years in major cities throughout the country — this year in London in Tottenham Court Road and Holborn. Sainsbury(cid:213)s Supermarkets Directors Dino Adriano Chairman John Adshead Hamish Elvidge Robin Whitbread Bill Williams Ian Coull Kevin McCarten Martin White bakery Below: Sainsbury(cid:213)s bakery training has won a prestigious National Training Award and could become the blueprint for the bakery industry. Our programme is designed to keep bakery skills alive and to maintain the quality of the 2.4 million loaves our customers enjoy weekly. city petrol Below: Sainsbury(cid:213)s customers can choose more environmentally friendly fuel which helps reduce emissions and keeps catalytic converters clean. We are one of the UK(cid:213)s leading retailers of cleaner fuels, and this year added ultra low sulphur City Petrol to complement our City Diesel. radio headsets Above: This year we have trialled a whole range of initiatives to speed things up for customers including mobile checkouts and radio headsets. Also on trial are team checkouts where teams of staff work together. This allows role swapping plus the flexibility to go and check an item or take a short break easily. J Sainsbury plc Annual report and accounts 1999 15 Operating review Sainsbury(cid:213)s Central Below: Sainsbury(cid:213)sCentral stores are designed to help city centre customers shop quickly. The design and product range have been matched to customer needs through intensive research. Savacentre analysis Sales (incl. taxes) Operating profit Number of stores Sales area (000 sq ft) Full-time employees Part-time employees 1999 £874.8m £28.3m 13 1,119 2,993 6,529 1998 £863.5m £30.5m 13 1,119 3,006 7,119 wine tasting Below: Savacentre customers enjoy the opportunity to taste as many as four different wines each week. Qualified staff offer information and samples of wines featured in the week(cid:213)s promotions. books for babies Above: As one of our Millennium projects and in partnership with the educational charity Book Trust, we are investing £6 million in developing an on-going national (cid:212)Bookstart(cid:213) programme, to give every baby a bag of high quality books at their eight month healthcheck. Research shows early contact with books can radically improve literacy in later life. The World Cup and Red Nose Day promotions were both successful in bringing millions of people into our stores — and we raised a record £4.5 million for Red Nose Day. Our Reward Card, with 14 million customer accounts, is regarded by shoppers as the best in the market, and continues to provide a powerful incentive to visit. We have enhanced its value by extending the many ways in which customers can redeem their vouchers. Things are changing at Sainsbury(cid:213)s and it shows. The culture of change running through our business has been captured in a new identity, elements of which you will see in this review. This look represents our progress and supports our promise — that we are Making Life Taste Better. SAVACENTRE — the best foodstore in Britain This year the Group Board decided to integrate Savacentre within the main supermarket business as Sainsbury(cid:213)s largest store format. We also redesigned the Savacentre at Calcot, Reading, to create the best refurbished food store in Britain. After 20 weeks of improvements, during which the store continued trading, Calcot relaunched in August 1998 to enthusiastic customer response. We presented more prominent fresh food sections and more convenience foods, a more open store design and, importantly, many new customer service concepts. The ratio of food to non-food changed from 60:40 to 80:20, with the non-food offer focused in four sections: Celebration— for party ideas; Indulgence— for beauty products; Baby and Toddler; and Cookshop. The integration of Savacentre complements our store format development programme. It is a planned move away from a hypermarket style outlet, to a very large Sainsbury(cid:213)s — with its welcoming promise of friendly service and a focus on food, but with other selected offers to enhance the weekly shop. The initial pilots of Sainsbury(cid:213)s Local, our convenience store format, have exceeded all expectations. The pilot continues this year with up to seven new sites including Paddington Station in London. If this is successful, the ultimate aim is for more Locals and a significant share of the country(cid:213)s £15 billion convenience store market. We have two other schemes to complement our six formats. SAVE(Sainsbury(cid:213)s Assisting Village Enterprises)is a trial aiming to support the village shop, and Orderlineis our home shopping trial. Following an extensive pilot of Orderlinelast year, we are now focusing on home shopping inside the M25. Early in the new year we will open the largest food retail picking centre in the UK to support this. Promoting value Last year, an AC Neilsen shoppers(cid:213) survey rated us number one for choice, quality, service and well-stocked shelves, but not price. People believed there must be a premium on quality, even though our prices were competitive. We designed our Agenda for Valuecampaign to address this issue. Much reporting of the campaign was based on criticism of the television advertising. It is true it did not achieve its overall sales targets, but it did bring many more people into our stores, and evidence shows that it achieved its main objective of closing the value perception gap. 16 J Sainsbury plc Annual report and accounts 1999 HOMEBASE — major improvements in the home enhancement market We had a successful year in which we met our targets and completed the conversion of the remaining 60 Texas stores. We grew our share in the DIY market and established ourselves as a leading name in the much larger (cid:212)home enhancement(cid:213) market, which covers DIY goods through to soft furnishings and gardening. This market is growing fast — the profusion of magazines and TV shows bears witness to people(cid:213)s burgeoning interest in their living environment. Our new store at Finchley Road, London, one of seven opened last year, is an example of our approach to this market, with a design studio to assist with colour scheming, and our largest textile department to date. The broader range on offer requires larger stores, hence our plans to extend many. Our new stores in Dundee and Greenwich will be our largest yet averaging over 100,000 sq ft each. Maintaining quality and choice In common with all Group businesses, Homebase has a reputation for quality which is a vital factor in the home enhancement market. The quality of our offer has been reflected in our marketing campaigns throughout the year. World of Colourfocused on spring colours, Outdoor Livingon summer gardens and outdoor furniture, and in autumn we launched Editors(cid:213) Choice(illustrated below). We also looked closely at all our ranges of products, particularly in DIY, to make sure we offer something to suit all budgets and all needs. Focusing on value We have been working hard to get across a simple message — quality and choice need not mean expensive. Our new Value Basicsrange offers functional products at competitive prices and complements our standard own brand range which offers premium products at affordable prices. We have introduced Price Trackon hundreds of key lines — if a customer finds them cheaper elsewhere we will refund the difference. Thousands of prices are checked regularly against competitors(cid:213) and our new slogan You(cid:213)re Better Off At Homebase relates to quality, service, choice and value. Promotions, such as an offer on paintbrushes if you buy paint, add to both the value proposition and sales, as does our loyalty card Spend & Save. This loyalty scheme, unique within the DIY market, offers regular customers the opportunity to save up to10 per cent and is a strong incentive to shop frequently. We have further supported instore promotions with our Christmas, January Sale and Easter 1999 TV campaigns which have proved how well TV advertising works for us. The successful Easter TV campaign focused on value-for-money. It featured Neil Morrissey and Leslie Ash to appeal equally to men and women, based on the fact that nearly half of all couples shop for DIY and home enhancement products together. As a TV first, we also sponsored Better Homes which attracted over10 million viewers a week. Moving employee communications forward Building on Touchbase, our staff magazine, we have been working to improve our internal communications and our understanding of what motivates and drives our staff and makes them want to work for Homebase. We launched HBTV, a TV network showing training videos, business news reports and features on new products and promotions. The first meetings of News and Views— Homebase(cid:213)s staff council — took place in December and in February staff took part in Hometruths, a staff feedback questionnaire. We are linking the results of these initiatives with customer research so that changes implemented enhance staff satisfaction levels whilst improving the business. In a challenging operating environment, Homebase has met all its targets. We are now concentrating on differentiating our offer to take advantage of the large and growing home enhancement market, and on making sure customers see us as the ideal choice for both quality and value. Homebase Directors David Bremner Chairman Ian Baldwin Ian Coull* Peter Guildford Kathryn Swann * Non-Executive Steve Bradbury Judith Evans Mike Powell value Below: Value Basicsis an own brand range of 400 essential everyday DIY and garden products which will not be beaten on price. It is key to getting across the simple message that quality and choice need not mean expensive. editors(cid:213) choice Above: Editors from seven major home and garden magazines endorsed selected Homebase products on the basis of value, style and innovation featuring them in their magazines. Homebase provided accompanying information leaflets to enable customers to get the most from the products. Homebase analysis Sales (incl. taxes) £1,269.7m £1,234.8m 1999 1998 Operating profit Number of stores Sales area (000 sq ft) Full-time employees Part-time employees £66.6m 288 10,851 6,006 12,219 £55.5m 298 11,201 5,809 11,162 design centre Below: The new Finchley Road, London, store offers an innovative design studio where customers can receive advice on colours, mix and match paints and coverings, and view their selection as a computer generated image before buying the products. The design studio is now also available at the refurbished Bath store. J Sainsbury plc Annual report and accounts 1999 17 Operating review Shaw(cid:213)s Directors David Bremner Chairman Ross McLaren President and Chief Executive Officer Harry Beckner* Steve DuBrul* Peter Gunderson Verne Powell Robin Whitbread* Ruth Bramson Paul Gannon Brian Pijanowski Scott Ramsay * Non-Executive worldwide apples Below: As well as offering domestically grown produce, Shaw(cid:213)s looks all over the world to satisfy customers(cid:213) tastes. Some of the 23 varieties of apple come from as far away as New Zealand, Chile and South Africa. SHAW(cid:213)S — making the best use of skills and locations We have delivered profits up 38 per cent on the previous year, exceeding challenging targets. We are aiming for the same success this year. Last year a stronger management team focused on maintaining growth in existing locations rather than increasing our geographical spread. Substantial improvements to turnover can still be made by extending existing stores and opening (cid:212)in-fill(cid:213) stores in our established trading areas. This will be the continuing focus of our expansion programme. The proposed acquisition of Star Markets will enhance this geographical consolidation as well as delivering economies in central procedures. Changes for success The first three of 20 planned extensions re- balanced our offer in favour of fresh products, and all showed strong fourth quarter sales increases. The remodelling of our Dover, NH, store, combined with a promotional campaign and the emphasis on fresh food, gave increased sales of 23 per cent. We also ran a summer (cid:212)fresh produce(cid:213) campaign throughout all stores. Following favourable customer response, this campaign will be renewed this summer. 18 J Sainsbury plc Annual report and accounts 1999 Sainsbury(cid:213)s Bank Directors Dino Adriano Chairman*(cid:160) Rodger McArthur Chief Executive Richard Chadwick Deputy Chief Executive(cid:160) David Bremner*(cid:160) Peter Burt* Leslie Knox* Kevin McCarten*(cid:160) Sir David Scholey*(cid:160) Gavin Masterton* George Mitchell* training schemes Above: Shaw(cid:213)s associates receive computer-based training to improve their specialist knowledge and help them respond better to customer requests for information. Shaw(cid:213)s analysis Sales (incl. taxes) Operating profit Number of supermarkets Sales area (000 sq ft) Full-time associates 1999 $3.05bn $85.1m 127 4,410 7,675 Part-time associates 12,796 1998 $2.81bn $61.8m 121 4,119 7,077 13,031 Other keys to success have been aggressive promotional activity throughout the year, and the continued development of our highly regarded own brand range. This currently stands at 5,700 lines and accounts for 39 per cent of sales. Notable additions to the range include new cereal flavours, healthy snack items, juice blends, nutritional drinks, health supplements, reduced fat and free range chicken, and high quality kitchen equipment. Progress in Connecticut The improvement at the stores in Connecticut was central to the year(cid:213)s success and due in part to a clearer understanding of customers(cid:213) needs. Even allowing for the closure of three stores, overall sales were up 18 per cent and market share in the state rose from 7.2 per cent to 8.5 per cent. Two of the closed stores have now been replaced, and the third replacement store will open this year. This year(cid:213)s focus on our core competencies of own label management and remodelling to proven formats, has enabled us to progress towards our objective — which is to stand in the top quartile of US food retailers. * Non-Executive (cid:160) Directors appointed on behalf of J Sainsbury plc fixed rate mortgage Below: Our fixed rate mortgage is proving particularly popular with first-time buyers as it provides finance for up to 100 per cent of the property value, as well as for valuation and legal fees. SAINSBURY(cid:213)S BANK — proof of the demand for easy access to high quality, branded financial services The first two years represent an excellent start. We have attracted over one million customers and have £1.7 billion on deposit and £1 billion of lending and commitments. Selling through the supermarket network affords us a distinct competitive advantage. Bank Information Points, with literature on all products and a free phone service to our call centres, are in most supermarkets. We continue to research and launch new products in response to demand: ¥ A 100 per cent fixed rate mortgage — one of the most competitive for first-time buyers; ¥ The Merit Visa card, offering low cost borrowing; and ¥ PetCare“ insurance. We also revised our flexible options mortgage, introducing a free remortgage service, making it even more attractive for customers to switch to us. We also cut our personal loan rates to market-leading levels. People are daunted by traditional financial services. But people trust Sainsbury(cid:213)s — our name and our reputation for delivering what they want. We recognise this as a huge opportunity to extend our brand proposition. Financial review (cid:13) Group operating profit £ million 99 98 97 96 95 867 854 745 854 899 Accounting periods To avoid operational difficulties from progressive shortening of the time between the Christmas trading period and the new financial year, the Directors have restored the financial year-end to a position in early April. Accordingly the 1999 financial year covers a period of 56 weeks to 3 April 1999. To facilitate annual comparisons, much of the commentary set out below relates to the 52 weeks to 6 March 1999. Unless otherwise stated references to profit and loss items including earnings per share information relate to the 52 week accounting period ended 6 March whereas references to balance sheet and cash flow items relate to the 56 week accounting period ended 3 April 1999. Analysis of operating results Group operating profit before Year 2000 costs, exceptional costs and profit sharing increased by 1.6 per cent to £867 million on sales up by 5.0 per cent to £16.3 billion. Reduced profitability in Sainsbury(cid:213)s Supermarkets and Savacentre was more than offset by higher profits at Homebase and Shaw(cid:213)s along with reduced losses at Sainsbury(cid:213)s Bank. The Group(cid:213)s return on average net assets declined from 15..9 per cent in the previous year to 15.1 per cent. Sales in Sainsbury(cid:213)s Supermarkets increased by 4.6 per cent to £12.1 billion including growth in like-for-like stores of 2.2 per cent. After a promising first half, like-for-like sales growth slowed during the second half due to softening market conditions and a tough competitive environment. Operating margin before Year 2000 costs reduced to 5.90 per cent of sales from 6.35 per cent the previous year due partly to an aggressive promotional campaign which achieved its objective of improving customers(cid:213) perceptions of value but which failed to meet sales targets. Operating profit declined by 2.8 per cent to £714 million. Savacentre(cid:213)s sales increased by 1.3 per cent to £875 million. Savacentre was affected by similar trends as Sainsbury(cid:213)s Supermarkets and operating profit declined by 7.2 per cent to £28 million. The return on average net assets in the UK food retailing sector was 16.1 per cent. Homebase(cid:213)s sales increased by 2.8 per cent to £1,270 million with like-for-like sales growing strongly by 4.2 per cent. Operating profit before Year 2000 costs increased by 20.0 per cent to £67 million. The return on net assets increased to 15.1 per cent from 12.3 per cent in the previous year. Shaw(cid:213)s sales increased by 8.5 per cent to $3.0 billion (£1.8 billion) including solid growth of 4.1 per cent in existing stores. Operating profit increased by 37.7 per cent to $85.1 million (£51 million). This impressive increase was due to a reduction in losses from stores in the Connecticut trading area, a strong sales performance across the entire chain, and the depressing impact of strike costs on last year(cid:213)s comparative profit performance. Sainsbury(cid:213)s Bank incurred a loss of £5.6 million. Losses reduced from a first half loss of £4.4 million to £1.2 million in the second half. The Bank performed well against the aggressive entry of major new players into the direct banking market. Analysis of operating results (52 weeks) Sainsbury(cid:213)s Supermarkets Savacentre Homebase Shaw(cid:213)s Sainsbury(cid:213)s Bank Other Group total Sales Operating profit* Return on average net £m % change £m % change assets %*** 12,097 875 1,270 1,838 146 43 16,269 4.6 1.3 2.8 8.5** — — 5.0 714 28 67 51 (6) 13 867 (2.8) (7.2) } 20.0 37.7** — — 16.1 15.1 9.8** — — 1.6 15.1 Operating profit before Year 2000 costs, profit sharing and exceptional costs. In dollar terms. * ** *** Return on net assets based on average net operating assets excluding interest bearing assets and liabilities, taxation and dividends. Group profit before tax The major elements of Group profit before tax are summarised below: 52 weeks Group operating profit Year 2000 costs Associated Undertakings — share of profit Profit sharing Net interest payable Group profit before tax, exceptional costs, property and investments profits Property profits Profit/(loss) on sale of associate/subsidiary Exceptional integration costs — Texas Homecare 1999 £m 1998 % £m change 867 (28) 854 (20) 1.6 12 (42) (53) 16 (44) (78) 756 728 3.8 13 3 84 (12) (21) (28) Group profit before tax 832 691 20.4 Group profit before tax increased by 20.4 per cent mainly due to the profit of £84 million on the disposal of the Group(cid:213)s interest in Giant. Net interest payable reduced significantly from £78 million to £53 million due mainly to the cash inflow of £345 million from the disposal of the stake in Giant on 28 October 1998. However, the disposal reduced the contribution from associates from £16 million to £12 million. Profit sharing reduced marginally as a result of lower UK profitability. Taxation The Group tax charge of £273 million for the year results in an effective underlying tax rate of 31.7 per cent (1998: 32.4 per cent). The effective rate for the Group exceeds the nominal rate of UK corporation tax due to the higher rate of tax incurred on US profits and the lack of tax relief on depreciation of UK retail properties. J Sainsbury plc Annual report and accounts 1999 19 Financial review (cid:13) Group capital expenditure £ million 1999 (56 weeks) 299 296 23 62 77 15 1998 (52 weeks) 329 219 10 83 85 2 772 728 Sainsbury(cid:213)s — New stores Sainsbury(cid:213)s — Existing stores and infrastructure Savacentre Shaw(cid:213)s Homebase Other Earnings per share, dividends and shareholder returns Earnings per share before exceptional costs, property and investments profits increased by 2.3 per cent to 27.2 pence. Diluted earnings per share before exceptional costs, property and investments profits increased by 1.1 per cent to 26.9 pence. Our policy is to increase dividends as a function of underlying earnings and the cash requirements of the business. A final dividend of 11.30 pence per share is proposed which results in a total dividend for the year of 15.32 pence per share. This includes a one-off 1 pence per share payment to cover the extra four weeks in this financial year which will not be included in the base for determining future dividends. The full year dividend is covered 1.9 times by earnings over the 56 week period. Managing for value The Group is adopting value based management principles to provide a rigorous framework for managing the business. The governing objective is to maximise shareholder value on a sustainable basis. The soon to be installed (cid:212)Managing For Value(cid:213) programme will seek to align key management processes and performance measures with the governing objective. The programme will have a significant impact on key processes such as strategic planning, resource allocation, performance management and prioritising management activity. Share price The share price declined from 467.5 pence at the start of the financial year to 384.75 pence at 3 April 1999 and the range was 344.25 pence to 580.0 pence. The Company(cid:213)s market capitalisation on 3 April 1999 was £7.38 billion. Cash flow Free cash flow increased substantially due to £348 million proceeds from the disposal of the stake in Giant Food Inc. and other businesses. The main elements of the Group(cid:213)s cash flow before financing are shown below. The figures for 1999 relate to 56 weeks. 20 J Sainsbury plc Annual report and accounts 1999 Summary of cash flows Operating cash flows Tax paid Payments for fixed assets Sale of fixed assets Sale of businesses Other items Free cash flow Dividends paid Net interest paid 1999 56 weeks £m 1998 52 weeks £m 1,322 (287) (803) 107 348 2 689 (249) (83) 1,149 (177) (672) 96 13 37 446 (221) (75) Net cash flow before financing 357 150 On an annualised basis, operating cash flow remained well in excess of £1 billion despite an increase in stocks which largely related to purchases of land held for development. Tax paid of £287 million included £40 million payable on the disposal of our stake in Giant Food Inc.. Payments for fixed assets increased from £672 million to £803 million due in part to capital expenditure on extensions of Sainsbury(cid:213)s Supermarkets(cid:213) stores rising from £68 million to £160 million. Capital structure and finance Total Group shareholders(cid:213) funds as at 3 April 1999 amounted to £4,644 million (1998: £4,127 million). The principal movements for the year were retained profits of £304 million and the adding back of goodwill of £148 million previously written-off to reserves and now charged to the profit and loss account in association with the disposal of our stake in Giant Food Inc.. Group net debt at the year-end amounted to £704 million (1998: £1,077 million) giving a balance sheet gearing (net debt to equity) of 15 per cent (1998: 26 per cent). Group policy is for a target maximum for gearing of 50 per cent. Year 2000 compliance The Group has been taking action since 1995 to address the Year 2000 issue with a cumulative expensed revenue cost of £50 million to 3 April 1999 and a capital cost of £6 million. In each of the Group(cid:213)s businesses, project teams have been set up to look at the three elements of the millennium problem; IT systems, infrastructure (embedded chips) and the supply chain. The project teams report monthly to a steering group chaired by the Group Board sponsor for Year 2000, Ian Coull. Each element of the programme is overseen by an external expert and is regularly subject to review by Group Internal Audit. Most of the Group programmes are nearing completion and the project teams are now concentrating on event planning and business continuity initiatives. These initiatives will ensure that predefined management procedures are available to respond to any Year 2000 related failures leading up to and over the millennium weekend. The majority of our systems are now compliant and roll-out into stores will be completed by the end of June 1999. All equipment containing (cid:212)embedded chips(cid:213) such as weighing scales, refrigeration systems and fire alarms have been tested and all business critical non-compliant items will be replaced, or will have in place a programme to be replaced, by July 1999. In common with all companies, the Group cannot fully address the risks involved in suppliers(cid:213) systems and their infrastructure. Every supplier of goods, consumables, equipment and services has been required to provide evidence that they are addressing the Year 2000 problem with subsequent follow-up if the Group is not reassured by their response. The Board has agreed trading hours over the millennium and all areas of the business will have created staffing and contingency plans by September 1999. Euro The Group continues its work in making preparations for the possibility of the UK joining EMU. Following the impact analysis carried out last year a number of working groups have been established in different parts of the business to progress the issues identified. Treasury management Treasury policy and significant treasury transactions are reviewed and approved by the Board and the Finance Management Sub-committee of the Board is responsible (cid:13) (cid:13) Net debt fixed/Floating interest £ million Net debt currency composition £ million April 1999 April 1999 (cid:9) Floating rate(cid:9) Fixed rate(cid:9) £m 149 555 (cid:9) Sterling(cid:9) US dollars(cid:9) £m 358 346 for monitoring treasury activity and performance. The Group(cid:213)s major treasury activities, with the exception of the operations of Sainsbury(cid:213)s Bank, are centralised in the Group Treasury function. Group Treasury operates as a cost centre with Group wide responsibilities for cash management, funding and interest rate and currency risk management. In this context Group policy permits the use of derivative instruments but they may only be used to reduce exposures arising from underlying business activities and not for speculative purposes. Financial instruments The Group holds or issues financial instruments to finance its operations and to manage the interest rate and currency risks arising from its sources of finance. In addition, various financial instruments eg. trade debtors, trade creditors, accruals and prepayments arise directly from the Group(cid:213)s operations. The Group finances its operations by a combination of cash generated by operating companies, bank loans, commercial paper, capital market debt issues, leases and issued share capital. The Group(cid:213)s long-term borrowings are raised centrally by the parent company and on-lent to operating companies on commercial terms. The Group borrows in a range of currencies at both fixed and floating rates of interest, using derivatives where appropriate to generate the desired currency and interest rate profile. The derivatives used for this purpose are principally interest rate swaps and options, cross currency swaps and forward foreign currency contracts. The main risks arising from the Group(cid:213)s financial instruments are interest rate risk, liquidity risk, exchange rate risk and credit risk. The Board reviews and agrees policies for managing each of these risks and they have remained unchanged since 7 March 1998. Interest rate risk The Group(cid:213)s exposure to interest rate fluctuations is managed by using interest rate swaps and options. The Group(cid:213)s objective is to provide a degree of protection against interest rate volatility by holding a proportion of the Group(cid:213)s net debt portfolio at fixed rates of interest. Depending on market conditions and the scale of underlying interest rate exposures, Group policy allows the proportion of net debt subject to fixed rates of interest to vary between 20 per cent and 80 per cent. As at the year-end and after taking account of interest rate swaps, the proportion of the Group(cid:213)s net debt at fixed rates was 79 per cent. The average period for which the fixed rate financial liabilities, including finance leases, are fixed as at 3 April 1999 was 6.3 years. Liquidity risk The Group(cid:213)s exposure to liquidity risk is managed by promoting a diversity of funding sources and a spread of debt maturities. The Group(cid:213)s principal debt raising operations are arranged through the Group(cid:213)s £500 million Euro Commercial Paper programme and £1 billion Euro Medium Term Note programme. In addition the Group maintains a portfolio of undrawn committed bank facilities which amounted to £815 million as at 3 April 1999. Of this total facility, £595 million expire within one year, £45 million in more than one year but under two years and £175 million in more than two years. The facilities act as a store of liquidity as well as providing support for the Group(cid:213)s commercial paper programme and other short term borrowing activity. The Group aims to structure debt issues so that not more than 25 per cent of borrowings mature in any one financial year. The weighted average maturity of the Group(cid:213)s borrowings was 3.1 years as at 3 April 1999. Currency risk The Group has one significant overseas subsidiary, Shaw(cid:213)s Supermarkets Inc., which operates in the USA and whose revenues and expenses are denominated exclusively in US dollars. The Group(cid:213)s policy is to limit the effects of exchange rate translation on Group shareholder funds by matching overseas investments with liabilities of the same currency. Exchange movements on foreign currency liabilities created for this purpose are taken directly to reserves. The Group does not actively hedge exchange rate movements on the translation of overseas profits except where those profits are matched by foreign currency interest costs. The Group incurs transactional foreign currency exposures arising from overseas purchases made predominantly in currencies other than the operating companies(cid:213) functional currency. Forward contracts and currency options are used to hedge selected future overseas purchases, which may be either contracted or uncontracted. Gains and losses on these contracts are deferred until recognition of the purchase, which is normally within one year. Credit risk Group policy requires that credit exposures may only be taken on a limited basis with banks or financial institutions that maintain a first class credit rating. Counterparty positions are monitored on a regular basis. The Group controls its dealing activity by providing dealing mandates to, and operating standard settlement instructions with, its banking counterparties. Sainsbury(cid:213)s Bank The Bank has a conservative approach to Treasury Management. It does not undertake any trading activities and only uses derivative instruments to hedge risk. Credit limits have been established for all counterparties and these are reviewed and approved by the Bank(cid:213)s Board and the Risk Management Committee, a sub-committee of the Board. Rosemary Thorne 1 June 1999 J Sainsbury plc Annual report and accounts 1999 21 Board of Directors Sir George Bull Dino Adriano David Bremner Non-Executive Chairman Group Chief Executive Deputy Group Chief Executive Appointed to the Board April 1998, Chairman and Chief Executive, Chairman and Chief Executive, succeeded David Sainsbury as Sainsbury(cid:213)s Supermarkets Ltd and Homebase Group Ltd, Executive Chairman in July 1998. Chairman Non-Executive Chairman, Sainsbury(cid:213)s Chairman, Shaw(cid:213)s Supermarkets Inc. of the Nomination Committee and Bank plc. Member of the Nomination and Non-Executive Director, member of the Audit and Committee. Joined Sainsbury(cid:213)s 1964. Sainsbury(cid:213)s Bank plc. Was with Remuneration Committees. Non- Moved to Homebase in 1981 where Sainsbury(cid:213)s between 1978 and 1989 Executive Director of Diageo plc. he became Managing Director in various posts, latterly as Logistics Previously Group Chief Executive and in 1989 and was Chairman from Director, Homebase. Rejoined then Chairman of Grand Metropolitan 1991—96. Appointed to the Board Sainsbury(cid:213)s and appointed to the PLC. President of the Advertising of J Sainsbury plc 1990. Trustee Board 1996 with responsibility for Association and Director of the of Oxfam. Age 56. Marketing Council. Age 62. Sir Clive Thompson Non-Executive Director Sir Terence Heiser GCB Non-Executive Director Homebase and US businesses and more recently, International Business Development. Logistics Director of B&Q in 1989. Joined Watson and Appointed to the Board 1992. Philip plc as Chief Executive in 1992. Appointed to the Board 1995. Chairman of the Audit Committee Age 41. Member of the Audit and Nomination and member of the Remuneration Committees and Chairman of the and Nomination Committees. Robin Whitbread Remuneration Committee. President Director, J Sainsbury Pension Director of the CBI. Chief Executive of Rentokil Trustees. Non-Executive Director, Group Commercial and International Initial plc. Director of Farepak PLC. Abbey National plc. Board member, Buying Director. Director, Sainsbury(cid:213)s Vice President of the Chartered PIA. Trustee of the Victoria and Supermarkets Ltd, responsible for Institute of Marketing. Deputy Albert Museum. Trustee of the Prince commercial strategy. Non-Executive Chairman of the Financial Reporting of Wales Phoenix Trust. Member of Director, Shaw(cid:213)s Supermarkets Inc.. Council. Age 56. the Executive Council of the National Joined Sainsbury(cid:213)s 1969. Appointed Trust. Governor of Birkbeck College, to the Board 1990. Age 48. University of London. Freeman of the City of London. Permanent Secretary, Department of the Environment 1985—92. Age 67. 22 J Sainsbury plc Annual report and accounts 1999 The Rt Hon Sir Timothy Sainsbury Kevin McCarten Non-Executive Director Director Rosemary Thorne Director Joint Presidents Sir Robert Sainsbury Appointed to the Board 1995. Group Marketing and Brand Group Finance Director. Director, Lord Sainsbury of Preston Candover KG Member of the Audit and Nomination Development Director. Director, J Sainsbury Pension Trustees. Joined Committees. Chairman, Somerset Sainsbury(cid:213)s Supermarkets Ltd Sainsbury(cid:213)s and appointed to the House Trust. Was Director, J Sainsbury, responsible for marketing. Board 1992. Fellow of the Chartered 1962—83. Member of Parliament for Non-Executive Director, Sainsbury(cid:213)s Institute of Management Accountants Hove 1973—97. Minister of State for Bank plc. Joined Sainsbury(cid:213)s and and the Association of Corporate Trade 1990—92 and Minister of State appointed to the Board 1995. Treasurers. Non-Executive Director for Industry 1992—94. Appointed Privy Previously worked in various of The Post Office. Member of the Counsellor 1992. Will be retiring from marketing roles for Procter & Gamble Financial Reporting Council and the Board in July 1999. Age 66. before joining Kingfisher plc where Financial Reporting Review Panel. Ian Coull Director Group Property, Corporate John Adshead CBE Communications and Environmental Director and Chairman of the Technical Committee. Board member of The Prince(cid:213)s Youth Business Trust. he was Director of Superdrug and Member of The Hundred Group of Woolworths. Age 41. Finance Directors Main Committee Affairs Director. Director, Sainsbury(cid:213)s Group Human Resources and Will be leaving the Company at the Supermarkets Ltd with responsibility Information Systems Director. end of July 1999. Age 47. for property. Chairman, Savacentre Director, Sainsbury(cid:213)s Supermarkets Ltd and Non-Executive Director, Ltd responsible for information Sir David Scholey CBE Homebase Group Ltd. Director, systems and human resources. Non-Executive Director J Sainsbury Pension Trustees. Joined Chairman, J Sainsbury Pension Appointed to the Board 1996. Sainsbury(cid:213)s and appointed to the Trustees. Joined Sainsbury(cid:213)s and Member of the Audit, Remuneration Board 1988. Fellow of the Royal appointed to the Board 1989. and Nomination Committees. Non- Institution of Chartered Surveyors. Member of the Training and Executive Director, Sainsbury(cid:213)s Bank Member of the Scottish Valuation Enterprise Councils(cid:213) Assessors plc. Senior Adviser to Warburg Dillon and Rating Council. Member of the Committee. Non-Executive Director Read and the International Finance Government(cid:213)s Property Industry of the Tablet Publishing Company. Corporation. Director, The Chubb Forum. Chairman, the South Bank Age 54. Employers(cid:213) Group. Age 48. Corporation and Vodafone Group plc. Governor of the BBC. Age 63. J Sainsbury plc Annual report and accounts 1999 23 Report of the Directors for the 56 weeks to 3 April 1999 J Sainsbury plc An outline of the Group(cid:213)s principal activities and the performance of the main operating companies during the period is contained in the Chairman(cid:213)s statement, the Group Chief Executive(cid:213)s Review and the Operating and Financial Reviews on pages 3 to 21. The financial year is for 56 weeks to 3 April 1999 compared to 52 weeks to 7 March 1998. The accounting reference date has been changed accordingly. The profit on the ordinary activities of the Group before tax amounted to £888 million (1998: £691 million restated). The Directors are proposing the payment of a final dividend of 11.30p per share on 18 August 1999 to shareholders on the Register at the close of business on 18 June 1999; together with the interim dividend paid of 4.02p per share, this makes a total dividend for the year of 15.32p (1998: 13.9p) per share. This includes a one off 1.00p per share payment to cover the extra four weeks in the financial year which will not be included in the base for determining future dividends. The following developments took place in the Group(cid:213)s investments in the USA during the year. Giant Food Inc. The Company(cid:213)s 20 per cent stake in Giant Food Inc. was sold to Koninklijke Ahold N.V. in October 1998 and resulted in a profit on disposal of £84 million (see note 3 page 41). Star Markets Inc. In November 1998 the Company agreed to acquire Star Markets Inc., the fifth largest food retailer in New England with 53 supermarkets. Federal Trade Commission approval of this agreement is expected in late June. The total consideration offered was $490 million. Corporate governance and internal structure The Company has complied throughout the period under review with all the provisions of the Combined Code of good practice in corporate governance as laid down in the Listing Rules of the London Stock Exchange except in relation to the issuing of Annual General Meeting (AGM) papers as explained on page 25. This section of the Report together with the Report of the Remuneration Committee explains how the Company has applied the governance principles set out in Section 1 of the Combined Code. In addition there are matters relating to the AGM which are covered in the Notice of the Meeting and the Chairman(cid:213)s letter to shareholders which accompany this Report. There is a well established framework for dealing with matters of a corporate governance nature. There are clear structures and accountabilities supported by well understood policies and procedures to guide the activities of the Directors within the Group, and its operating companies, both in their day-to-day business and in the areas associated with internal control. The Company and its subsidiaries have clear terms of reference to guide the operations of the various boards in their decision making processes and in maintaining appropriate corporate governance standards. The Board The Board is responsible to the shareholders for the strategic development of the Company, the management of the Company(cid:213)s assets in a way that maximises performance, and the control of the operation of the business. The regular meetings of the Board, together with the list of matters reserved exclusively for their consideration, concentrate on these specific aspects of the management of the Company. The Board approves the strategic plans and annual budgets that the operating companies and their management utilise, within their defined structure and delegated authority, for the day-to-day effective and efficient operation of the businesses. The Group Board reviews performance of the operating companies against budgets on a monthly basis. On 30 July 1998, following his appointment as a Government Minister, Lord Sainsbury of Turville retired as a Director and Chairman of the Company and was succeeded as Chairman by Sir George Bull. Bob Cooper and David Clapham retired from the Group Board on 20 November 1998 and 14 May 1999 respectively. Details of the Board of Directors, together with short biographies of the individuals and their membership of Board Committees, are set out on pages 22 and 23. Sir George Bull, Sir Terence Heiser, Sir David Scholey and Sir Clive Thompson are considered to be independent, within the definition contained in the Combined Code, and constitute a majority of the Non-Executives appointed to the Board. Sir Terence Heiser is the nominated senior Non-Executive Director on the Board. Board committees The Remuneration, Audit and Nomination Committees have written terms of reference which define their authorities and duties, as well as detailing composition and membership of each committee. The Remuneration Committee is comprised solely of independent Non-Executive Directors and is responsible for making recommendations on the framework of executive remuneration policy within a total cost determined by the Board. The Committee also determines the remuneration packages for individual Executive Directors. The report of the Committee is set out on pages 27 to 32. The Nomination Committee, whose membership includes a majority of Non-Executive Directors, advises the Board on the appointment of Directors. The Audit Committee is comprised solely of Non-Executive Directors. It is responsible inter aliafor making recommendations on the 24 J Sainsbury plc Annual report and accounts 1999 accounting and reporting policies of the Company and on defining and monitoring internal financial control. The Committee receives regular reports from the operating companies(cid:213) internal audit departments and the external auditors. It also reviews the interim and annual financial statements before they are considered by the Board. In addition, each half year the Audit Committee reviews the results of a risk self-assessment process which has been established for several years within the Group, and in each of the operating companies. This process defines the significant business risks and the controls in place to manage them. New areas are introduced for assessment as the business risk profile changes. The controls are monitored by each business via the risk self-assessment process, internal audit coverage and routine management review. Action is taken to address areas of non-compliance or to improve the effectiveness of controls. Substantial interests The substantial interests in shares notified to the Company, all of which include duplications, are as follows: Judith Portrait is a trustee of various settlements, including charitable trusts and a Blind Trust for Lord Sainsbury of Turville. As at 29 May 1999 the total holding of these trusts amounted to 29 per cent. Christopher Stone, Andrew Cahn and John Rosenheim are trustees of various settlements, including charitable settlements. As at 29 May1999 the total holdings of the trusts of which the above are trustees amounted to 5 per cent, 5 per cent and 3 per cent respectively. As at 29 May1999 the interests, beneficially and as trustees of charitable and other trusts, of Lord Sainsbury of Preston Candover KG, the Hon Simon Sainsbury and the Rt Hon Sir Timothy Sainsbury were 4 per cent, 3 per cent and 3 per cent respectively. Internal financial control There is a well established control framework comprising clear structures and accountabilities, well understood policies and procedures and budgeting and review processes. Directors(cid:213) interests No Director had, during or at the end of the financial period, any material interest in any contract of significance to the Group(cid:213)s business. The Board has reviewed the systems of internal financial control using the risk self-assessment process. The Directors believe that proper accounting records are maintained and that financial information used within the business and for external publication is reliable. Nevertheless the system of internal financial control can only provide reasonable and not absolute assurance against material misstatement and loss. Going concern The Directors confirm that they are satisfied that the Company has sufficient resources to continue in operation for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Group Accounts. Share capital matters Principal changes in share capital The principal changes in share capital were: ¥ 11.4 million shares were allotted under the Company(cid:213)s share schemes for employees; and ¥ 4.3 million shares were allotted under the terms of the share dividend alternative to shareholders in respect of the final dividend paid in July 1998. The Share Dividend Alternative Scheme expired following the dividend payment made in July 1998 and a new scheme is being introduced to enable shareholders to reinvest their dividends in shares of the Company. This Dividend Reinvestment Plan will operate for the first time in conjunction with the final dividend to be paid on 18 August 1999. For those shareholders who participate their cash dividends will be used to purchase shares on the stock market. No new shares will be allotted under this scheme. Details of Directors(cid:213) interests in the ordinary shares of the Company are set out in the Report of the Remuneration Committee on pages 31 and 32. Market value of properties The Directors believe that the aggregate open market value of Group properties exceeds the net book value of £5 billion by a considerable margin. Annual General Meeting The 1999 Annual General Meeting of shareholders will take place at 12 noon on Wednesday 21 July 1999 at the Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE. The Notice of the Meeting and proxy card accompany these Annual Accounts. As the venue arrangements for this year(cid:213)s AGM had been made before the publication of the Combined Code it has not been possible to observe provision C.2.4 in the Combined Code requiring documents to be issued to shareholders 20 working days ahead of the Meeting. This situation is not expected to arise in the future. At the AGM resolutions will be proposed to renew the general authority of the Directors to issue shares together with the authority to issue shares without applying the statutory pre-emption rights, to enable the Company to make market purchases of its own shares up to a maximum of 191 million shares, to approve the revised incentive arrangements and to appoint PricewaterhouseCoopers as Auditors. In accordance with the Articles of Association, Dino Adriano, John Adshead, Kevin McCarten and Robin Whitbread will retire J Sainsbury plc Annual report and accounts 1999 25 Report of the Directors Annual General Meeting continued by rotation and will seek re-appointment. The Directors seeking re-appointment all have service contracts on a rolling 12 month basis. Sir Timothy Sainsbury and Rosemary Thorne will also retire at the AGM and are not seeking re-appointment. The Company continues to place great emphasis on the value of open communication both through an ever more effective network of local and central staff councils and through the annual attitude surveys which are demonstrating increasing levels of satisfaction and commitment. Auditors Following the merger of Coopers & Lybrand and Price Waterhouse on 1 July 1998, Coopers & Lybrand resigned as Auditors in favour of the new firm, PricewaterhouseCoopers, and the Directors appointed PricewaterhouseCoopers to fill the casual vacancy created by the resignation. A resolution to appoint PricewaterhouseCoopers as Auditors of the Company and to authorise the Directors to agree their remuneration will be put to the Annual General Meeting. Staff, social responsibility and the environment Employment policies The Company remains committed to achieving its business objectives through the motivation and development of its people. In the belief that (cid:212)how we manage is how we serve(cid:213), there is continued commitment to provide all colleagues with: ¥ ¥ ¥ the information they need in order to perform effectively; a regular opportunity to review performance with their manager; and a personal training and development plan. As a direct result, 48 supermarkets and parts of the head office complex have now achieved the Investors in People standard. It is planned that Sainsbury(cid:213)s Supermarkets Ltd will achieve this standard for the whole of its operation by the end of the year 2000. This year Sainsbury(cid:213)s Supermarkets Ltd won the National Training Award in conjunction with Campden & Chorleywood Food Research Association, Tameside College (Manchester) and Brooklands College (Weybridge) for the Bakery Manager Focus Programme. Full roll-out has begun of the Sainsbury(cid:213)s GUILD programme which will progressively equip store colleagues with the skills to offer outstanding customer service through improved product knowledge and other skills. The Company is committed to providing fair and equal treatment for all employees and recognises the importance of diversity within the organisation. As part of that commitment to equality and diversity, the Company believes that, given the chance, people with a disability have at least as much to offer as anyone else. During 1998, Sainsbury(cid:213)s Supermarkets won two (cid:212)Ease(cid:213) awards from the Queen Elizabeth(cid:213)s Foundation for Disabled People as the Best Employer of People with Disabilities and the Best Supermarket for Customers with Disabilities. These awards reflect our continuing work to ensure the social inclusion of people with disabilities. 26 J Sainsbury plc Annual report and accounts 1999 Staff are offered a full range of employee share schemes and about one third of all shareholders are employees or former employees. Policy on payment of suppliers The policy of the Company and its principal operating companies is to agree terms of payment prior to commencing trade with a supplier and to abide by those terms based on the timely submission of satisfactory invoices. The Company subscribes to the CBI Code of Good Practice (which can be obtained from the CBI, Centrepoint, 103 New Oxford Street, London, WC1A 1DU) on the prompt payment of suppliers. The performance of the operating companies in respect of payment to suppliers is contained in their accounts. Donations Donations to charitable organisations and local community projects amounted to £3.8 million, which included contributions of money and time to enterprise agencies, job creation, educational schemes, town centre management initiatives, community projects and the arts. There were no political donations. Research and development The Technical Division employs 200 people and has an annual expenditure of £8.5 million. It works in close co-operation with suppliers to achieve the highest standards of product quality, integrity, hygiene and safety and to maintain these throughout the Group(cid:213)s distribution chains and stores. The Division also develops and co-ordinates policies to address issues of concern and interest to our customers, for example environmental management and healthy eating. The Company Environment Report is produced by the Division. This document sets out the primary environmental policies adhered to by the Company as well as detailing the objectives set to improve our care for the environment. By order of the Board Nigel Matthews Secretary 1 June 1999 Report of the Remuneration Committee The following is a report by the Remuneration Committee which has been approved by the Board for submission to shareholders. Composition and terms of reference The Remuneration Committee(cid:213)s composition and terms of reference are in line with the Combined Code of the London Stock Exchange(cid:213)s Listing Rules. The Company complies fully with Section B of the Combined Code provisions on Directors(cid:213) remuneration and Schedule B to the code in respect of the Remuneration Report content. The Committee is chaired by Sir Clive Thompson and other members are Sir George Bull, Sir Terence Heiser and Sir David Scholey. Policy on remuneration of Executive Directors Total level of remuneration The Remuneration Committee recommends to the Board a remuneration framework for Executive Directors and determines the remuneration arrangements for individual Directors. The Committee aims to maintain a remuneration policy consistent with the Company(cid:213)s business objectives which: ¥ ¥ ¥ ¥ attracts, retains and motivates high calibre Directors; is responsive to both personal and Company performance; aligns the interests of Directors with those of the shareholders by linking share and cash incentive payments to performance; and is based on information from independent remuneration sources and from within the retail sector as well as other large companies of a comparable size and complexity. The main components of Executive Directors(cid:213) remuneration are: i) Basic salary Basic salary for each Director is determined taking into account assessments of the Director(cid:213)s performance, experience and responsibility, together with market factors. ii) Incentive arrangements In addition to basic salary, the Company maintains incentive arrangements which combine an annual bonus plan with a long-term incentive plan. Payments under this scheme were made in respect of 1997/98. No bonus was paid in respect of 1998/99. Directors and senior employees also receive share options under the Company(cid:213)s executive share option schemes. The Remuneration Committee has reviewed the incentive arrangements and has recommended proposals to be put to shareholders at the Annual General Meeting. If approved, the new incentive arrangements will apply in respect of the financial year which commenced on 4 April 1999. The new arrangements are designed to place greater emphasis on rewarding the personal performance of Directors and senior employees and to separate more clearly the annual and long-term elements of the incentive arrangements. The Committee believes that these changes more clearly reflect the need to align the rewards of Directors and other senior staff with the Company(cid:213)s immediate business priorities, shareholder interests and the long-term performance of the Company. Share ownership by Directors strengthens the link between their personal interests and those of all shareholders whilst motivating personal performance. Full particulars of the proposals for a long-term incentive plan (the Performance Share Plan) and changes in the executive share option schemes are contained in the letter from the Chairman to shareholders which accompanies the Notice of Meeting. The proposals may be summarised as follows: Annual Bonus Scheme — a cash bonus will be payable subject to the achievement of both business and individual targets which are key to the businesses(cid:213) performance. The bonus will be a percentage of salary (up to a maximum of 50 per cent for Executive Directors with lower maxima for other senior staff) calculated according to performance against achievement of profit before tax targets and individual business targets. J Sainsbury plc Annual report and accounts 1999 27 Report of the Remuneration Committee Policy on remuneration of Executive Directors continued Performance Share Plan — this long-term incentive plan will allow shares to be allocated to individuals but not released to them unless future performance criteria are met. The number of shares allocated will depend on the Company(cid:213)s long-term performance compared with a sample of comparator companies. The measure that will be used to compare the Company(cid:213)s relative performance is Total Shareholder Return, being the increase in the value of a share, including reinvested dividends, over a three year period. Initial share allocation will be based on a percentage of salary (up to 50 per cent for Executive Directors). After three years has elapsed and subject to the Company(cid:213)s position in the comparator group, some or all of the initial allocation may be released to the individual. No shares will be allocated if the Company(cid:213)s performance is below the median of the comparator group. Executive Share Option Scheme — it is proposed that, subject to shareholder approval of amendments to the Unapproved Executive Share Option Scheme, grants will be made annually. Grants have previously only been made every 18 months. However, more rigorous performance conditions will be attached to the exercise of options. This will mean Directors will only be able to exercise options if an average of three per cent per annum real growth in earnings per share (EPS) is achieved over three years. If the criterion is not achieved on the first measurement, a further measure will be carried out by adding the fourth year to the first three years. If three per cent average real EPS growth per annum is not achieved over the four year period, the option will lapse. The cap, limiting the maximum number of outstanding share options that can be held at any one time to four times the value of remuneration, will be removed. Where the four times remuneration limit is exceeded, additional and more stringent performance criteria will be determined by the Remuneration Committee. iii) Other share options Directors may hold options under the Savings-Related Share Option Scheme. iv) Employee profit sharing Directors participate in the Company(cid:213)s Employee Profit Sharing Scheme in the same way as all other employees. Although profit sharing is accounted for on an accruals basis, payments are not finally calculated and paid until after the Annual General Meeting. Accordingly, Directors(cid:213) profit sharing is included on a paid basis in the table of Directors(cid:213) Emoluments on page 29, based on the profitability of the Group in the previous year. Profit sharing in respect of the 56 week period ended 3 April 1999 will be paid in August 1999 and is expected to amount to approximately 4.4 per cent of 56 week qualifying pay (1998: 5.2 per cent of 52 week qualifying pay). v) Benefits Benefits include the provision of a company car and medical insurance premia. Contracts of service for Directors Non-Executive Directors including the Chairman, do not have service contracts. The Company last year agreed that, in future, all new contracts would be on a 12 month rolling basis. It has now been agreed that once the new proposals are in place all existing contracts will change from 2 4 month to 12 month rolling contracts. In the event of early termination by the Company without cause, the agreements will provide for predetermined compensation to be paid, equivalent to 12 months(cid:213) basic salary for the notice period and nine months(cid:213) in respect of all benefits. Company pension policy regarding Executive Directors The Group(cid:213)s policy is to offer its most senior employees membership of the J Sainsbury Executive Pension Scheme. The scheme is a funded, Inland Revenue approved, final salary, occupational pension scheme. Under the Group(cid:213)s pension arrangements, Directors are entitled after a minimum of 20 years of pensionable service to a pension on retirement at age 60 (or earlier in the event of 40 years(cid:213) service, or ill health) of up to two thirds of their pensionable earnings (defined as salary in the last 12 months of service) subject to Inland Revenue limits. Pensions are also payable to dependants on death and a lump sum is payable if death occurs in service. In the case of four Directors who joined the Company on or after 17 March 1987, the Company has agreed to make up that portion of the standard pension entitlement which is in excess of Inland Revenue limits. This last obligation is unfunded, although full provision of £404,000 has been made in respect of the 56 week period ended 3 April 1999 (1998: £328,000). 28 J Sainsbury plc Annual report and accounts 1999 Directors(cid:213) emoluments The aggregate emoluments of the Directors of the Company were as follows: 1999 £000 1998 £000 Executive Directors Basic salary Long-term incentive scheme/performance related bonus Profit sharing Benefits Compensation for loss of office Non-Executive Directors Fees 2,882 — 138 147 231 3,398 293 3,691 The emoluments set out above cover a 56 week period in 1999 compared to a 52 week period in 1998. The basic salary received by Executive Directors in the 52 weeks ended 6 March 1999 amounted to £2,703,000 and total Directors(cid:213) emoluments in the 52 weeks ended 6 March 1999 amounted to £3,478,000. The emoluments of each of the Executive Directors are set out below: Dino Adriano David Bremner Ian Coull John Adshead CBE Robin Whitbread Kevin McCarten Rosemary Thorne David Clapham David Sainsbury Bob Cooper Tom Vyner CBE Colin Harvey Note Basic salary £000 Profit sharing £000 Benefits £000 Compensation for loss of office £000 538 386 307 291 264 264 248 215 156 213 — — 1 2 3 21 16 14 13 11 11 12 10 16 14 — — 20 22 12 17 11 19 16 9 10 11 — — 2,882 138 147 — — — — — — — — — 231 — — 231 Total 1999 £000 579 424 333 321 286 294 276 234 182 469 — — 3,134 2,213 109 167 — 5,623 100 5,723 Total 1998 £000 728 548 484 455 410 409 426 340 471 493 832 27 3,398 5,623 As noted above the figures for 1999 are for a 56 week period. The 1998 figures are for a 52 week period. No amounts were receivable by the Directors in respect of the Company(cid:213)s Long Term Incentive Scheme for the 56 week period ended 3 April 1999. Notes 1. Retired as a Director in May 1999. 2. Highest paid Director. In addition to the emoluments above, gains on options exercised in the year amounted to £431,000. Retired as a Director on 30 July 1998. 3. Chairman until date of retirement. Following his retirement as a Director on 20 November 1998, Bob Cooper continued to be employed by the Company until 5 March 1999 during which time he received a salary of £87,000. J Sainsbury plc Annual report and accounts 1999 29 Report of the Remuneration Committee Directors(cid:213) emoluments continued The emoluments of each of the Non-Executive Directors are set out below: Sir George Bull Sir Terence Heiser GCB Rt Hon Sir Timothy Sainsbury Sir Clive Thompson Sir David Scholey CBE Dr John Ashworth Note 1 2 Fees 1999 £000 185 30 24 24 30 — 293 1998 £000 - 24 22 22 25 7 100 Notes 1. Appointed as a Director on 20 April 1998. Appointed Chairman on 30 July 1998. 2. The fees of Sir Clive Thompson are remitted to Rentokil Initial plc. Directors(cid:213) pension entitlements The pension entitlements of the Directors who served during the 56 week period ended 3 April 1999 were as follows: Dino Adriano David Bremner Ian Coull John Adshead CBE Robin Whitbread Kevin McCarten Rosemary Thorne David Clapham David Sainsbury* Bob Cooper* * At date of retirement. Age at 3 April 1999 Length of service Additional pension earned in the year £000 Transfer value of increase £000 Accrued entitlements at year-end £000 56 41 48 53 48 41 47 52 58 50 35 3 12 10 30 4 7 35 35 23 60 12 11 18 12 10 7 9 — 29 950 86 129 260 131 74 68 118 — 356 297 27 95 114 118 26 54 114 173 87 The transfer value represents the capital sum that would be necessary to acquire the incremental annual pension earned in the year which would be payable each year from normal retirement age and therefore cannot be meaningfully added to annual remuneration. The accrued pension entitlement shown is the amount that would be paid each year following retirement based on retirement at age 60 (or at the date of retirement for Directors who have retired during the year). The increase in the additional pension earned during the year excludes any increase for inflation. Members of the scheme have the option of paying Additional Voluntary Contributions. Neither these contributions nor the resulting benefits are shown in the above table. 30 J Sainsbury plc Annual report and accounts 1999 Directors(cid:213) interests Details of Directors(cid:213) interests in the shares of the Company are as follows: Dino Adriano David Bremner Ian Coull John Adshead CBE Robin Whitbread Kevin McCarten Rosemary Thorne David Clapham Sir George Bull Sir Terence Heiser GCB Rt Hon Sir Timothy Sainsbury Sir Clive Thompson Sir David Scholey CBE Long Term Incentive Plan shares(cid:160) 28,957 21,718 19,184 17,736 15,926 15,926 16,650 13,392 Ordinary shares** 3 April 1999 7 March 1998 44,966 4,085 25,218 45,914 43,163 4,177 17,209 51,871 10,000 1,000 13,184,850 881 15,000 41,786 2,534 23,674 42,533 39,883 2,604 12,519 27,001 —* 1,000 13,181,900 881 15,000 As at date of appointment. * ** These ordinary shares above are beneficial holdings which include the Directors(cid:213) personal holdings and those of their spouses and minor children, as well as holdings in family trusts of which a Director or his minor children are beneficiaries or potential beneficiaries. They include also the beneficial interest in shares which are held in trust under the J Sainsbury Profit Sharing Scheme. Shares held in Trust represent shares awarded to Directors under the Long Term Incentive Plan. Half of the bonus award made to Directors under the Plan in respect of the year ended 7 March 1998 was used to purchase shares at a price of 518 pence on 29 May 1998. Subject to the rules of the Plan these shares will vest with the Director on the third anniversary of the award. (cid:160) In addition the Rt Hon Sir Timothy Sainsbury has a non-beneficial interest in holdings of 61,052,537 shares (1998: 62,366,069 shares). There were no changes to the Directors(cid:213) interests in ordinary shares shown above between 3 April 1999 and 29 May 1999. J Sainsbury plc Annual report and accounts 1999 31 Report of the Remuneration Committee Options over Ordinary Shares Directors(cid:213) options under the Company(cid:213)s Executive Share Option Scheme (a) and Savings-Related Share Option Scheme (b) are set out below: Dino Adriano David Bremner Ian Coull John Adshead CBE Robin Whitbread Kevin McCarten Rosemary Thorne David Clapham Total 8 March 1998 304,201 156,743 241,540 242,695 227,991 136,206 185,591 193,259 Number granted 92,732 63,968 52,293 49,950 45,586 45,781 43,197 39,359 David Sainsbury* 312,247 — Bob Cooper* 276,627 55,045 Number exercised Date exercised 1,558(b) 3.2.99 — — 779(b) 779(b) — 2,842(b) 58,495(a) 1,329(b) 112,813(a) 62,085(a) 47,666(a) 89,683** 20,207(a) 81,648(a) 69,351(a) 3.2.99 3.2.99 3.2.99 15.9.98 3.2.99 29.7.98 29.7.98 29.7.98 7.9.98 7.9.98 17.9.98 Option price pence 301.0 301.0 301.0 301.0 359.0 301.0 359.0 322.1 272.7 322.1 359.0 447.0 Market price on exercise pence Gains on options exercised £ 428.5 428.5 428.5 428.5 567.0 428.5 524.0 524.0 524.0 542.5 542.5 525.5 1,986 — — 993 993 — 3,624 121,670 1,694 186,141 125,357 119,790 44,538 149,824 54,441 811,051 Total 3 April 1999 395,375 220,711 293,833 291,866 272,798 181,987 225,946 172,794 — 160,466** From 8 March 1998 to date of retirement. * ** Options held by David Sainsbury at retirement have lapsed. No other options for Executive Directors lapsed during the period. Bob Cooper will be permitted to exercise his options outstanding until May 2002. Gains on options exercised have been calculated using the differences between the share option price and the market price on the date of the exercise. Where shares have been retained by the individual, rather than sold, the gain shown is the notional gain at the date of exercise. The Company(cid:213)s Register of Directors(cid:213) Interests contains full details of Directors(cid:213) shareholdings and options to subscribe. Options outstanding above and below the market price of 384.75p on 3 April 1999 are set out in the table below: Dino Adriano David Bremner Ian Coull John Adshead CBE Robin Whitbread Kevin McCarten Rosemary Thorne David Clapham Options outstanding below market price Options outstanding above market price Number of options outstanding 395,375 220,711 293,833 291,866 272,798 181,987 225,946 172,794 Number 184,821 156,743 71,525 108,812 171,641 59,945 32,240 53,026 Weighted average price pence 363.2 367.0 362.0 360.5 348.8 367.0 365.1 364.9 Number 210,554 63,968 222,308 183,054 101,157 122,042 193,706 119,768 Weighted average price pence 497.8 541.8 483.5 488.7 505.3 498.8 482.1 489.3 The options outstanding are exercisable at prices between 272.7p and 545.0p. In the period from 8 March 1998 to 3 April 1999 the highest middle market price was 580.0p and the lowest middle market price was 344.25p. Approved by the Board on 1 June 1999 Sir Clive Thompson Chairman of the Remuneration Committee 32 J Sainsbury plc Annual report and accounts 1999 Statement of Directors(cid:213) responsibilities in respect of the accounts Company law requires the Directors to prepare accounts for each financial year which give a true and fair view of the state of affairs of the Company and the Group at the end of the period, and of the profit or loss of the Group for that period. In preparing accounts, the Directors are required to: select suitable accounting policies and then apply them consistently; ¥ ¥ make judgements and estimates that are reasonable and prudent; ¥ state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts; and prepare the accounts on the going concern basis unless it is inappropriate to assume that the Company will continue in business. ¥ The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the accounts comply with the Companies Act 1985. They are also responsible for the safeguarding of the assets of the Company and for taking reasonable steps for the prevention of fraud and other irregularities. Auditors(cid:213) report to the members of J Sainsbury plc We have audited the accounts on pages 34 to 57. Respective responsibilities of Directors and Auditors The Directors are responsible for preparing the Annual Report, including as described above. Our responsibilities, as independent auditors, are established by statute, the Auditing Practices Board, the Listing Rules of the London Stock Exchange and our profession(cid:213)s ethical guidance. We report to you our opinion as to whether the accounts give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors(cid:213) Report is not consistent with the accounts, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding Directors(cid:213) remuneration and transactions is not disclosed. We read the other information contained in the Annual Report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the accounts. We review whether the statement on page 24 reflects the Company(cid:213)s compliance with those provisions of the Combined Code specified for our review by the London Stock Exchange, and we report if it does not. We are not required to form an opinion on the effectiveness of the Group(cid:213)s corporate governance procedures or its internal controls. Basis of audit opinion We conducted our audit in accordance with auditing standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the accounts, and of whether the accounting policies are appropriate to the Company(cid:213)s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the accounts are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the accounts. Opinion In our opinion the accounts give a true and fair view of the state of affairs of the Company and the Group at 3 April 1999 and of the profit and cash flows of the Group for the 56 weeks then ended and have been properly prepared in accordance with the Companies Act 1985. PricewaterhouseCoopers Chartered Accountants and Registered Auditors London 1 June 1999 J Sainsbury plc Annual report and accounts 1999 33 Accounting policies Basis of accounts These accounts have been prepared under the historical cost convention as modified by the revaluation of certain properties. They comply with all applicable accounting and financial reporting standards. No Profit and Loss Account is presented for the Company as provided by section 230(3) of the Companies Act 1985. All the key activities of the Group are continuing businesses. The Group disposed of its investment in Giant Food Inc. on 28 October 1998. The Group(cid:213)s share of operating profit from Giant Food Inc. in the 56 week period ended 3 April 1999 is not sufficiently material to warrant separate disclosure of those amounts as discontinued operations on the face of the Group(cid:213)s Profit and Loss Account. A number of new accounting standards have been issued which have been adopted for the accounts for the 56 week period ended 3 April 1999. These new standards have required the Group to change its accounting policies and in certain circumstances to provide a greater level of disclosure in the accounts. Consolidation The results of subsidiaries and Associated Undertakings are included in the Group Profit and Loss Account from the date of acquisition, or in the case of disposals, up to the effective date at which the investment is sold. In accordance with FRS 12, Provisions, Contingent Liabilities and Contingent Assets, the Group has changed its accounting policy for provisions. Specifically, the exceptional provisions relating to Texas Homecare integration costs which were provided in the year ended 9 March 1996 (£48 million) and in the year ended 8 March 1997 (£50 million) have been reversed as these amounts cannot be treated as provisions under the new standard. Having reversed these provisions, the current period and prior year Profit and Loss Accounts include the actual costs incurred in the respective periods for the integration of Texas Homecare. These costs are separately identified on the face of the Profit and Loss Account. An analysis of the effect of this change in accounting policy is set out in note 23. FRS 10, Goodwill and Intangible Assets, has been adopted resulting in a change to the Group(cid:213)s accounting policy for goodwill as detailed further below. FRS 13, Derivatives and Other Financial Instruments: Disclosures, has been adopted and requires a greater level of disclosure in relation to the Group(cid:213)s financial instruments. This disclosure is set out in note 21 of the accounts and also on page 21 in the Financial Review. FRS 14, Earnings Per Share, has been adopted in the period. This standard requires a change in the basis of the calculation of diluted earnings per share, as set out further in note 10. FRS 15, Tangible Fixed Assets, has been adopted during the year. Under this accounting standard interest capitalised on borrowings for financing property developments is required to be capitalised gross of tax relief. In previous years the Group has capitalised interest net of tax relief. Prior year amounts capitalised net of tax relief have not been restated due to immateriality. Goodwill arising in connection with the acquisition of shares in subsidiaries and Associated Undertakings is calculated as the excess of the purchase price over the fair value of the net tangible assets acquired. In prior years goodwill has been deducted from reserves in the period of acquisition. FRS 10 is applicable in the current financial year, and in accordance with the standard acquired goodwill is now shown as an asset on the Group(cid:213)s Balance Sheet. As permitted by FRS 10, goodwill written off to reserves in prior periods has not been restated as an asset. Goodwill is treated as having an indefinite economic life where it is considered that the acquired business has strong customer loyalty built up over a long period of time, based on advantageous store locations and a commitment to maintain the marketing advantage of the retail brand. The carrying value of the goodwill will be reviewed annually for impairment and adjusted to its recoverable amount if required. Where goodwill is considered to have a finite life, amortisation will be applied over that period. The Companies Act 1985 requires companies to amortise capitalised goodwill over a finite period. However, the Act allows companies to depart from these requirements to the extent necessary to provide a true and fair view. In respect of goodwill which is treated as having an indefinite economic life, the Directors consider that the policy adopted is appropriate in order to provide a true and fair view of the final position of the Group, for the reasons given above. For amounts stated as goodwill which are considered to have an indefinite life, no amortisation is charged to the Profit and Loss Account. Sales Sales consist of sales through retail outlets, sales of development properties and, in the case of Sainsbury(cid:213)s Bank plc, interest receivable, fees and commissions. Rental and other income is included in cost of sales. 34 J Sainsbury plc Annual report and accounts 1999 Cost of sales Cost of sales consists of all costs to the point of sale including warehouse and transportation costs, all the costs of operating retail outlets and, in the case of Sainsbury(cid:213)s Bank plc, interest payable. Deferred tax Deferred tax is accounted for, at anticipated tax rates, in respect of all timing differences between accounting and tax treatment, except to the extent that it is thought reasonably probable that the tax effects of such deferrals will continue for the foreseeable future. No provision has been made for additional tax which would arise if profits of overseas subsidiaries or Associated Undertakings were distributed. Depreciation Freehold land is not depreciated. Freehold buildings, and leasehold buildings with more than 50 years unexpired, are depreciated in equal annual instalments at the rate of 2 per cent per annum. Leasehold properties with less than 50 years unexpired are depreciated to write off their book value in equal annual instalments over the unexpired period of the lease. Fixtures, equipment and vehicles are depreciated in equal annual instalments to write off their cost over their estimated useful lives, which range from 3 to 15 years, commencing when they are brought into use. A permanent diminution in value of any fixed asset is charged to the Profit and Loss Account. Capitalisation of interest Following the implementation of FRS 15, interest incurred on borrowings financing specific property developments is capitalised gross of tax relief. In prior years, interest has been capitalised net of tax relief. Prior year figures have not been adjusted to reflect this accounting policy change as the amounts are not material. Capitalisation of software Software is written off as incurred unless it forms an integral part of a purchased tangible asset. Leased assets Assets used by the Group which have been funded through finance leases are capitalised and the resulting lease obligations are included in creditors net of finance charges. Interest costs on finance leases and all payments in respect of operating leases are charged direct to the Profit and Loss Account. Research and development Research and development expenditure is written off as incurred. Pension costs The costs of providing pensions for employees are charged in the Profit and Loss Account in accordance with the recommendations of independent qualified actuaries. Any funding surpluses or deficits that may arise from time to time are amortised over the average service life of members of the relevant scheme. Stocks Stocks are valued at the lower of cost and net realisable value. Stocks at warehouses are valued at cost, and at retail outlets at calculated average cost prices. Foreign currencies On consolidation, assets and liabilities of foreign undertakings are translated into sterling at year-end exchange rates. The results of foreign undertakings are translated into sterling at average rates of exchange for the year. Exchange differences arising from the retranslation at year-end exchange rates of the net investment in foreign undertakings, less exchange differences on foreign currency borrowings or forward contracts which finance or hedge those undertakings, are taken to reserves and are reported in the statement of total recognised gains and losses. Financial instruments The derivative financial instruments used by the Group to manage its interest rate and currency risks are interest rate swaps and swap options, cross currency swaps, forward rate contracts and currency options. Interest payments or receipts arising from derivative instruments are recognised within net interest payable. Any premia or discounts arising are amortised over the life of the instrument. Termination payments made or received in respect of derivatives are spread over the life of the underlying exposure in cases where the underlying exposure continues to exist and taken to the Profit and Loss Account where the underlying exposure ceases to exist. J Sainsbury plc Annual report and accounts 1999 35 Group profit and loss account for the 56 weeks to 3 April 1999 Group sales including VAT and sales taxes VAT and sales taxes Group sales excluding VAT and sales taxes Cost of sales Exceptional cost of sales — Texas Homecare integration costs Gross profit Administrative expenses Year 2000 costs Group operating profit before profit sharing Profit sharing Group operating profit Associated Undertakings — share of profit Profit on sale of properties Profit/(loss) on disposal of an associate/subsidiary Profit on ordinary activities before interest Net interest payable Profit on ordinary activities before tax Tax on profit on ordinary activities Profit on ordinary activities after tax Minority equity interest Profit for the financial year Equity dividends Retained profit Earnings per share Exceptional cost of sales (Profit)/loss on sale of properties and disposal of an associate/subsidiary Earnings per share before exceptional cost of sales, profit/loss on sale of properties and disposal of an associate/subsidiary Diluted earnings per share Diluted earnings per share before exceptional cost of sales, profit/loss on sale of properties and disposal of an associate/subsidiary * Restated for new accounting standards (see notes 10 and 23). 36 J Sainsbury plc Annual report and accounts 1999 1999 56 weeks £m 17,587 1,154 16,433 15,095 21 1,317 406 30 881 45 836 12 11 84 943 55 888 292 596 2 598 294 304 1998* 52 weeks £m 15,496 996 14,500 13,289 28 1,183 357 20 806 44 762 16 3 (12) 769 78 691 226 465 4 469 264 205 31.4p 0.7p (2.9p) 25.1p 1.0p 0.5p 29.2p 26.6p 31.1p 25.1p 29.0p 26.6p Note 1 1 23 1 1 1 2 3 4 5 8 9 26 10 10 10 10 Balance sheets 3 April 1999 and 7 March 1998 Fixed assets Tangible assets Investments Current assets Stocks Debtors Investments Sainsbury(cid:213)s Bank Cash at bank and in hand Creditors: due within one year Sainsbury(cid:213)s Bank Other Net current liabilities Total assets less current liabilities Creditors: due after one year Provisions for liabilities and charges Total net assets Capital and reserves Called up share capital Share premium account Revaluation reserve Profit and loss account Equity shareholders(cid:213) funds Minority equity interest Total capital employed Group Company Note 1999 £m 1998* £m 1999 £m 1998 £m 11 12 15 16 17 18 18 19 19 23 24 24 25 26 6,409 41 6,450 843 249 17 1,766 725 3,600 (1,669) (2,880) (4,549) (949) 6,133 151 6,284 743 229 14 1,584 270 2,840 (1,502) (2,499) (4,001) (1,161) 226 5,726 5,952 228 5,023 5,251 — 72 — — 1 73 — (835) (835) (762) — 67 — — — 67 — (518) (518) (451) 5,501 5,123 5,190 4,800 (804) (8) (949) (9) (767) — (926) — 4,689 4,165 4,423 3,874 480 1,359 38 2,767 4,644 45 4,689 476 1,295 38 2,318 4,127 38 4,165 480 1,359 — 2,584 4,423 — 4,423 476 1,295 — 2,103 3,874 — 3,874 * Restated for new accounting standard (see note 23). Notes to the accounts are on pages 40 to 57. The Accounts on pages 34 to 57 were approved by the Board of Directors on 1 June 1999, and are signed on its behalf by Sir George Bull Chairman Dino Adriano Group Chief Executive J Sainsbury plc Annual report and accounts 1999 37 Group cash flow statement for the 56 weeks to 3 April 1999 Net cash inflow from operating activities Dividends received from Associated Undertakings Returns on investments and servicing of finance Interest received Interest paid Interest element of finance lease rental payments Net cash outflow from returns on investments and servicing of finance Tax paid Capital expenditure and financial investment Payments for tangible fixed assets Receipts from sale of tangible fixed assets Purchase of investments Net cash outflow from capital expenditure and financial investment Acquisitions and disposals Investment in Sainsbury(cid:213)s Bank by minority shareholder Investment in Egyptian Distribution Group SAE Proceeds from disposal of Giant Food Inc. Proceeds from disposal of other fixed asset investments Net cash inflow from acquisitions and disposals Equity dividends paid Management of liquid resources Financing Issue of ordinary share capital Debt due within a year Increase/(decrease) in short-term borrowings Debts due beyond a year (Decrease)/increase in long-term borrowing Capital element of finance lease rental payments Net cash inflow/(outflow) from financing Increase/(decrease) in cash in the period Reconciliation of net cash flow to movement in net debt Increase/(decrease) in cash in the period Cash (inflow)/outflow from (increase)/decrease in debt and lease financing New finance leases Currency translation difference 8.5% Capital Bonds conversion Movement in net debt in the period Net debt at the beginning of the period Prior year reclassification Net debt at the end of the period 38 J Sainsbury plc Annual report and accounts 1999 Note 27 1999 56 weeks £m 1,322 3 1998 52 weeks £m 1,149 6 46 (113) (16) (83) (287) (803) 107 (2) (698) 9 (11) 345 3 346 22 (83) (14) (75) (177) (672) 96 (7) (583) 38 — — 13 51 (249) (221) 3 38 188 (9) (6) 211 568 568 (173) (17) (5) — 373 (1,077) — — 41 (629) 343 (7) (252) (102) (102) 293 (13) 11 156 345 (1,436) 14 (704) (1,077) 22 22 22 22 Group statement of total recognised gains and losses for the 56 weeks to 3 April 1999 Profit for the financial year Currency translation differences on foreign currency net investments Total recognised gains and losses relating to the financial year * Restated for new accounting standard. There is no material difference between the above profit for the period and the historical cost equivalent. 1999 56 weeks £m 1998* 52 weeks £m 598 5 603 469 (1) 468 Reconciliation of movements in equity shareholders(cid:213) funds Profit for the financial year Equity dividends Currency translation differences Goodwill on disposals charged to profit for the financial year New share capital subscribed for less expenses of capital issues Amounts deducted from the profit and loss account for shares issued to the QUEST Other Net movement in equity shareholders(cid:213) funds Prior year adjustment (note 23) Opening equity shareholders(cid:213) funds Closing equity shareholders(cid:213) funds * Restated for new accounting standard. Group Company 1999 56 weeks £m 1998* 52 weeks £m 1999 56 weeks £m 1998 52 weeks £m 598 (294) 304 5 148 68 (6) (2) 517 — 4,127 4,644 469 (264) 205 (1) 3 214 — 2 423 33 3,671 4,127 779 (294) 485 2 — 68 (6) — 549 — 3,874 4,423 52 (264) (212) — — 214 — 3 5 — 3,869 3,874 J Sainsbury plc Annual report and accounts 1999 39 Notes to the accounts at 3 April 1999 1 Segmental analysis of turnover, profit and net assets 1999 56 weeks 1998 52 weeks Food retailing — UK Food retailing — US DIY retailing — UK Banking — UK Property development — UK Other — UK Turnover excluding taxes £m 13,074 1,970 1,187 158 32 12 16,433 Exceptional cost of sales — Texas Homecare integration costs Year 2000 costs Profit sharing Group operating profit Associated Undertakings Profit on sale of properties Profit/(loss) on disposal of associate/subsidiary Net interest payable Group profit before tax Non - operating assets and liabilities*** Net borrowings**** Total net assets Turnover excluding taxes £m 11,629 1,697 1,053 66 36 19 14,500 Profit £m 793 56 76 (5) 9 3 932 (21) (30) (45) 836 12 11 84 (55) 888 Net assets £m 4,595 505 452 100 130 10 5,792 38 (437) (704) 4,689 Profit* £m 765 38 56 (15) 6 4 854 (28) (20) (44) 762 16 3 (12) (78) 691 Net** assets £m 4,413 505 426 83 32 33 5,492 151 (401) (1,077) 4,165 Restated for new accounting standard. Restated for new accounting standard and separate disclosure of non-operating assets and liabilities. Non-operating assets and liabilities principally represents accruals for tax, dividends and profit sharing. * ** *** **** Net borrowings include cash and current asset investments, excluding those of Banking. Intra-group sales between the Group(cid:213)s business segments are not material. Total administrative expenses amounted to £481 million (1998: £421 million) including Year 2000 costs and profit sharing. Total cost of sales amounted to £15,116 million (1998 — restated: £13,317 million) including exceptional cost of sales. Turnover is disclosed by origin. There is no material difference in turnover by destination. Net margin on tax exclusive sales:* UK US Group * Based on operating profit before profit sharing, Year 2000 costs and exceptional cost of sales. 40 J Sainsbury plc Annual report and accounts 1999 Group 1999 1998 6.06% 2.84% 5.67% 6.37% 2.24% 5.89% Profit sharing 2 The amount provided for profit sharing for the UK retail companies is calculated on the operating profits and net interest reflected in the accounts of the participating companies. The figure on which the profit fund is based is £806 million (1998: £755 million). £42 million (1998: £41 million) has been provided for the profit fund and £3 million (1998: £3 million) for Employers(cid:213) National Insurance payable thereon. Employees participate in the Profit Sharing Scheme after completing one financial year(cid:213)s service and obtain full benefits after the third year. In respect of the 56 week period ended 3 April 1999, 120,700 employees are eligible. A distribution rate is calculated according to the size of the profit fund and the total qualifying pay of eligible employees and is finalised following the Annual General Meeting. The distribution rate in 1999 is expected to be approximately 4.4 per cent of 56 week qualifying pay (1998: 5.2 per cent of 52 week qualifying pay). Profit sharing may be taken in cash under the Cash Trust or, subject to the statutory maximum, in shares under the Share Trust. The number of shares allotted to Profit Sharing Scheme participants in July 1998 is set out in note 24. At 3 April 1999, the Trustees of the J Sainsbury Profit Sharing Scheme Share Trust held 9.9 million shares (1998: 11.1 million) on behalf of 52,105 participants (1998: 45,396) in the Scheme. Profit on disposal of an associate 3 The Company(cid:213)s investment in Giant Food Inc. was sold to Koninklijke Ahold N.V. on 28 October 1998. The profit on disposal of £84 million is after deducting £148 million of goodwill which was written off to reserves at the time of acquisition and after deducting £16 million in relation to the unwinding of debt instruments which were funding the Group(cid:213)s investments in Giant (see note 21). Taxation arising on the disposal of Giant Food Inc. of £40 million is disclosed in note 8. The Company also disposed of its investment in Breckland Farms Ltd on 24 April 1998. 4 Net interest payable Interest receivable Interest payable: Bank loans and overdrafts Other loans Finance leases Interest capitalised Net interest payable Group 1999 56 weeks £m 1998 52 weeks £m 45 17 82 16 115 (15) 100 55 26 20 84 14 118 (14) 104 78 Including interest receivable attributable to Sainsbury(cid:213)s Bank plc of £139 million (1998: £61 million), included in sales, and interest payable attributable to Sainsbury(cid:213)s Bank plc of £108 million (1998: £49 million), included in cost of sales, total interest receivable for the 56 weeks ended 3 April 1999 amounted to £184 million and total interest payable amounted to £223 million. Of the interest capitalised figure, £12 million (1998: £12 million) has been capitalised into fixed assets (see note 11) and £3 million (1998: £2 million) has been capitalised into stocks during the financial year. J Sainsbury plc Annual report and accounts 1999 41 Notes to the accounts 5 Profit on ordinary activities before tax This has been arrived at after charging/(crediting): Depreciation — owned assets — finance leases Pension costs Auditors(cid:213) remuneration — audit fee (Company £0.1 million (1998: £0.1 million)) — other services (see below) Operating lease rentals — plant and equipment — other — receivable Group 1999 56 weeks £m 1998 52 weeks £m 380 8 70 0.6 2.9 12 249 (19) 337 8 52 0.6 2.4 12 222 (21) Non-audit fees paid to PricewaterhouseCoopers and its associates (being the predecessor partnerships of Price Waterhouse and Coopers & Lybrand) during the period were £2.9 million of which £0.6 million related to work by Coopers & Lybrand, the previous auditors, and its associates. (Non-audit fees in 1998 comprise solely amounts paid to Coopers & Lybrand). These fees were charged to the Company and its UK subsidiaries for services which include taxation advice, advice on business effectiveness and information system programme implementation. 6 Employees Employees(cid:213) remuneration and related costs during the period amounted to: Wages and salaries Social security costs Other pension costs Profit sharing The average number of employees during the period was: Full-time Part-time Full-time equivalent 42 J Sainsbury plc Annual report and accounts 1999 Group 1999 56 weeks £m 1998 52 weeks £m 1,696 108 70 1,874 45 1,919 1,479 92 52 1,623 44 1,667 Group 1999 Number 1998 Number 55,956 123,002 55,332 120,219 178,958 175,551 109,245 107,266 Advances to directors and connected persons 7 As at 3 April 1999, authorisations, arrangements and agreements entered into by Directors, Officers and Connected Persons in the normal course of business with Sainsbury(cid:213)s Bank plc amounted to £52,132 (number of persons — 10). The details of Directors(cid:213) emoluments and interests are set out in the Report of the Remuneration Committee on pages 27 to 32. 8 Tax on profit on ordinary activities The tax charge based on the profit for the period is: UK Corporation tax at 31% (1998: 31%) Over provision in prior periods Deferred tax* Overseas tax — current Overseas tax — deferred Taxation on the disposal of associate/subsidiary Share of Associated Undertakings(cid:213) tax * 9 Restated for new accounting standard (see note 23). Equity dividends Interim Proposed final Group 1999 56 weeks £m 1998* 52 weeks £m 232 (8) 9 19 (4) 40 4 292 Company 1999 £m 77 217 294 215 — — 7 (2) — 6 226 1998 £m 71 193 264 10 Earnings per share The calculation of earnings per share is based on profit after tax and minority interest, divided by the weighted average number of ordinary shares in issue during the period of 1,909.4 million (1998: 1,869.3 million). For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Group has only one category of dilutive potential ordinary shares: those share options granted to employees where the exercise price is less than the average market price of the Company(cid:213)s ordinary shares during the year. Weighted average number of shares in issue Weighted average number of dilutive share options Total number of shares for calculating diluted earnings per share 1999 Number million 1,909.4 17.0 1998 Number million 1,869.3 16.8 1,926.4 1,886.1 The alternative measures of earnings per share provided reflect the Group(cid:213)s underlying trading performance by excluding the effect of the exceptional cost of sales, the profit or loss on the sale of properties and any profits or losses on the disposal of Associated Undertakings or subsidiaries and take account of the anticipated future dilution of earnings per share. J Sainsbury plc Annual report and accounts 1999 43 Notes to the accounts 11 Tangible fixed assets Cost or valuation At 8 March 1998 Additions (see below) Disposals Exchange adjustments At 3 April 1999 Depreciation At 8 March 1998 Provided in the period Disposals Exchange adjustments At 3 April 1999 Net book value At 3 April 1999 At 7 March 1998 Capital work-in-progress included above At 3 April 1999 At 7 March 1998 Company Total £m Properties £m Group Fixtures, equipment & vehicles £m 2,974 381 (53) 4 Properties £m 5,552 391 (124) 12 8,526 772 (177) 16 5,831 3,306 9,137 752 90 (16) 4 1,641 298 (44) 3 2,393 388 (60) 7 830 1,898 2,728 5,001 4,800 76 103 1,408 1,333 61 44 6,409 6,133 137 147 Total £m 229 — — — 229 1 2 — — 3 226 228 — — 229 — — — 229 1 2 — — 3 226 228 — — The new accounting standard FRS15, Tangible Fixed Assets, has been adopted for the accounts for the 56 weeks ended 3 April 1999. Interest has been capitalised during the period on a gross basis. In previous years, interest has been capitalised after deducting tax relief. Prior year amounts capitalised have not been restated. The amount included in the additions of £772 million in respect of interest capitalised during the period ended 3 April 1999 amounted to £12 million. Accumulated interest capitalised included in the cost or valuation total above amounts to £242 million (1998: £230 million) for the Group and £nil (1998: £nil) for the Company. Analysis of finance leases — Group Cost Depreciation Net book value 1999 Fixtures, equipment & vehicles £m 25 23 2 Properties £m 116 31 85 Total £m 141 54 87 Properties £m 117 32 85 1998 Fixtures, equipment & vehicles £m 25 22 3 Total £m 142 54 88 44 J Sainsbury plc Annual report and accounts 1999 11 Tangible fixed assets continued Analysis of properties Group Company At 3 April 1999 Freehold Cost 1973 valuation 1992 valuation Long leasehold Cost 1973 valuation 1992 valuation Short leasehold Cost Cost £m Valuation £m Cost £m — 229 3 63 3 22 91 229 Valuation £m — — — — — 4,357 763 620 5,740 If the properties included at valuation had been included at cost, the cost and accumulated depreciation figures at 3 April 1999 would have been: Freehold Long leasehold Short leasehold 12 Fixed asset investments Subsidiaries (note 13) Associated Undertakings (note 14) Listed on a UK stock exchange Listed on a US stock exchange Other Purchase of own shares (at cost)* Other investments Group Company Cost £m Depreciation £m Cost £m Depreciation £m 4,385 779 620 5,784 510 147 164 821 229 229 3 3 Group Company 1999 £m 1998 £m 1999 £m 5,698 1998 £m 5,003 3 — 35 38 2 1 41 3 120 27 150 — 1 151 — — 28 28 — — — — 20 20 — — 5,726 5,023 * The Group owned 398,783 ordinary 25p J Sainsbury plc shares at 3 April 1999. The shares are held in an Employee Share Ownership Trust (ESOT) on behalf of certain Directors and senior employees under the Group(cid:213)s Long Term Incentive Scheme in respect of an award dated 29 May 1998. It is a condition of the Scheme that the shares are held by the Trust for a period of three years from the date of the award. On the third anniversary of the award, beneficial ownership of the shares will transfer to those Directors and senior employees who remain in the Company(cid:213)s employment or, who have left for certain permitted reasons. Any administrative costs in relation to the ESOT are charged to the Group Profit and Loss Account. The shares had a market value of £1.5 million at 3 April 1999. J Sainsbury plc Annual report and accounts 1999 45 Notes to the accounts 13 Investment in subsidiaries The Company(cid:213)s principal subsidiaries are: Sainsbury(cid:213)s Supermarkets Ltd (Food retailing) Savacentre Limited* (Food retailing) Homebase Limited* (DIY retailing) Shaw(cid:213)s Supermarkets, Inc.* (Food retailing) Sainsbury(cid:213)s Bank plc (Banking) * Shares are held by other subsidiaries. Share of ordinary allotted capital and voting rights Country of registration or incorporation 100% 100% 100% 100% 55% England England England USA England All subsidiaries operate in the countries of their registration or incorporation. Sainsbury(cid:213)s Bank plc(cid:213)s audited accounts are drawn up to 28 February 1999 to conform with the Bank of Scotland (the 45 per cent shareholder). Management accounts have been used to include Sainsbury(cid:213)s Bank plc(cid:213)s results up to 31 March 1999. All other principal subsidiaries have been included up to 3 April 1999. Summary of movements — Company At 8 March 1998 Net movement At 3 April 1999 Shares £m 3,734 579 Long-term capital advances £m 1,269 116 Total net investment £m 5,003 695 4,313 1,385 5,698 On 22 February 1999 the Company transferred all the shares in its subsidiary J Sainsbury (USA) Inc. to a wholly -owned subsidiary, JS USA Holdings Inc., for a consideration of £745 million satisfied by the issue of shares by JS USA Holdings Inc.. 14 Investment in Associated Undertakings The Company(cid:213)s principal Associated Undertakings are: Associates Hampden Group PLC (DIY retailing — UK and Eire) Ordinary shares Egyptian Distribution Group SAE (Food retailing — Egypt) Ordinary shares Joint venture Hedge End Park Limited (Property investment — UK) Ordinary shares (other shareholder Marks & Spencer p.l.c.) Share of ordinary Year-end allotted capital Country of registration or incorporation 2 January 29.2% England 31 December 25.1% Egypt 3 April 50% England The Company(cid:213)s share of the gross assets of its joint venture amounted to £25 million at 3 April 1999 (1998: £27 million) and its share of the gross liabilities of its joint venture amounted to £11 million at 3 April 1999 (1998: £14 million). The investments in Hedge End Park Limited and Egyptian Distribution Group SAE are held directly by the Company. The investment in Hampden Group PLC is held by a subsidiary. 46 J Sainsbury plc Annual report and accounts 1999 14 Investment in Associated Undertakings continued Summary of movements Group As at 8 March 1998 Share of retained profit Additions Disposals Exchange adjustments As at 3 April 1999 Company As at 8 March 1998 Additions Disposals As at 3 April 1999 Group share of post acquisition reserves £m Long-term capital advances £m 27 8 — (27) — 8 — — — — 13 — — (2) — 11 13 — (2) 11 Shares £m 110 — 11 (107) 5 19 7 11 (1) 17 Total £m 150 8 11 (136) 5 38 20 11 (3) 28 On 28 October 1998, the Company sold its investment in Giant Food Inc. to Koninklijke Ahold N.V. and the Company disposed of its investment in Breckland Farms Limited on 24 April 1998 (see note 3). On 11 March 1999, the Company acquired 25.1 per cent of the ordinary share capital of Egyptian Distribution Group SAE for £11 million of which £8 million relates to goodwill arising on the acquisition. The goodwill is assumed to have an indefinite life. At 3 April 1999 the market value of shares listed on a recognised UK stock exchange was £2 million (1998: £4 million). 15 Stocks Goods for resale Land held for development 16 Debtors Trade debtors Amounts owed by subsidiaries Other debtors due in less than one year Advance Corporation Tax recoverable in more than one year Other debtors due in more than one year Prepayments Group 1999 £m 702 141 843 Group Company 1999 £m 54 96 — 17 82 1998 £m 50 68 49 23 39 249 229 1999 £m — 62 10 — — — 72 1998 £m 675 68 743 1998 £m — 4 10 49 2 2 67 J Sainsbury plc Annual report and accounts 1999 47 Notes to the accounts 17 Current asset investments Investments listed on a recognised stock exchange at cost (equivalent to market value) Other unlisted investments 18 Current assets and creditors of Sainsbury(cid:213)s Bank Group 1999 £m 2 15 17 1998 £m 1 13 14 Group 1999 £m 1998 £m Current assets Treasury bills and other eligible bills Loans and advances to banks Loans and advances to customers* Debt securities Prepayments and accrued income Creditors: due within one year Customer accounts Accruals and deferred income 83 1,212 398 48 25 1,766 1,653 16 1,669 * Loans and advances to customers include £100 million (1998: £63 million) of loans and advances repayable in more than one year (see note 21). In addition to the above assets, Sainsbury(cid:213)s Bank plc had other assets of £4 million at 3 April 1999. 19 Creditors Group Company Due within one year: Borrowings: Bank loans and overdrafts Short-term notes Current portion of long-term indebtedness including obligations under finance leases Total short-term borrowings Trade creditors Amounts due to subsidiaries Corporation tax Social security and other taxes Other creditors Accruals Proposed dividend 48 J Sainsbury plc Annual report and accounts 1999 1999 £m 293 368 4 665 1,084 185 89 469 171 217 1998 £m 268 162 6 436 902 239 64 504 161 193 2,880 2,499 1999 £m 174 368 — 542 — 33 8 — 13 22 217 835 111 1,302 164 — 7 1,584 1,492 10 1,502 1998 £m 57 162 — 219 — 33 19 — 17 37 193 518 19 Creditors continued Due after one year: Bank loans Secured loans Medium-term notes US$ 200 million 6.25% Notes March 2002 US$ 200 million 6.625% Notes Dec 1999 7.25% Bond — June 2002 8.25% Bond — Dec 2000 8% Irredeemable Unsecured Loan Stock Obligations under finance leases Amounts due to subsidiaries Other creditors 20 Summary of borrowings Due within one year: Bank and other loans Obligations under finance leases Due after one and within two years: Bank and other loans Obligations under finance leases Due after two and within five years: Bank and other loans Obligations under finance leases Due after five years: Bank and other loans Obligations under finance leases Group Company 1998 £m 55 1 159 122 122 200 150 3 113 24 949 1999 £m — — 132 125 — 200 150 3 — 127 30 767 Group Company 1998 £m 430 6 123 5 583 12 106 96 1999 £m 542 — 187 — 353 — 70 — 1999 £m 43 — 132 125 — 200 150 3 128 23 804 1999 £m 661 4 199 3 384 13 70 112 1998 £m — — 159 122 122 200 150 3 — 127 43 926 1998 £m 219 — 122 — 656 — 106 — Obligations under finance leases due after five years at 3 April 1999 are repayable by instalment. Bank and other loans due after five years are not repayable by instalment. 1,446 1,361 1,152 1,103 J Sainsbury plc Annual report and accounts 1999 49 Notes to the accounts 21 Financial instruments This note contains disclosures as required under FRS 13, Derivatives and Other Financial Instruments: Disclosures. The financial assets and financial liabilities analysed below include fixed rate financial assets of £7 million, financial assets on which no interest is paid (ie. debtors receivable in more than one year) of £10 million and financial liabilities on which no interest is paid of £35 million which are not included in Group net debt, as analysed in note 22. Debtors receivable and creditors payable in less than one year, and the current assets and current liabilities of Sainsbury(cid:213)s Bank are excluded from the analysis. The Group(cid:213)s policies and procedures in relation to its treasury management, including management of interest rate and currency risk, are set out on pages 20 and 21 of the Financial Review. Analysis of interest rate profile and currency of financial assets and financial liabilities Financial assets After taking into account various interest rate swaps and forward currency contracts the interest rate profile of the Group(cid:213)s financial assets at 3 April 1999 was: Currency Sterling US dollar Euro Floating rate financial assets £m Fixed rate financial assets £m Financial assets on which no interest is paid £m 437 443 2 882 7 — — 7 9 1 — 10 Total £m 453 444 2 899 The US dollar financial assets were held at 3 April 1999, in part in anticipation of the acquisition of Star Markets Inc. (see note 32). Floating rate financial assets comprise bank balances linked to bank Base Rate, and Money Market fund balances and commercial paper investments bearing interest rates linked to LIBOR. The fixed rate financial asset has an interest rate of 7.75 per cent fixed for 6.2 years. The financial assets on which no interest is paid have a weighted average period until maturity of 3.0 years. 50 J Sainsbury plc Annual report and accounts 1999 21 Financial instruments continued Financial liabilities After taking into account various interest rate swaps and forward foreign currency contracts, the interest rate profile of the Group(cid:213)s financial liabilities as at 3 April 1999 was: Currency Sterling US dollar Fixed rate debt Financial liabilities on which no interest is paid £m Floating rate financial liabilities £m Fixed rate financial liabilities £m Weighted average interest rate % Average time for which rate is fixed years 25 10 35 591 440 1,031 205 349 554 7.3 8.7 8.2 3.8 7.8 6.3 Total £m 821 799 1,620 Floating rate financial liabilities comprise bank borrowings, linked to bank Base Rate and LIBOR, and commercial paper, floating rate notes and fixed rate long-term debt issues swapped into floating rates, all bearing interest rates linked to LIBOR. Financial liabilities on which no interest is paid do not have predetermined dates of payment and therefore a weighted average period of maturity cannot be calculated. The above analysis includes three interest rate swaps which convert nominal fixed rate financial liabilities of $150 million at 6.625 per cent, £200 million at 8.25 per cent and £40 million at 7.36 per cent into floating rates based on US dollar and sterling LIBOR, respectively, and one interest rate swap which converts nominal floating rate LIBOR linked debt of $150 million into fixed rate financial liabilities at 6.95 per cent. The above analysis excludes two swap options with an aggregate amount of $200 million which if exercised by the bank, would require the Group to enter into a swap under which it would receive fixed rate interest at 6.40 per cent and pay floating rate LIBOR on a nominal amount of $200 million for a period to November 2002. The options may be exercised by the bank on quarterly dates through to August 2002. The above analysis of financial liabilities includes finance leases with a capitalised value of £132 million. These leases primarily finance stores in the Group(cid:213)s US operations and it is not practicable to estimate the fair value of these loans as no appropriate external benchmark is available. Excluding these leases, the fair value of the Group(cid:213)s financial liabilities exceeds book value by £20 million. Interest rate swaps and forward foreign currency contracts had a book value of £nil and a fair value of £6 million favourable and £2 million unfavourable, respectively, at 3 April 1999. Market values have been used to determine the fair value of public debt issues and the fair values of all other items have been calculated by discounting expected future cash flows at LIBOR equivalent interest rates prevailing at 3 April 1999. During the year the Group recognised costs of £16 million in crystallising interest rate swap instruments which had been used to hedge borrowings financing the Group(cid:213)s investment in Giant Food Inc. (see note 3). There were no other material recognised or unrecognised gains or losses on interest rate hedging instruments or forward foreign currency contracts at the beginning, end or during the 56 week period ended 3 April 1999 other than the interest rate swap and forward foreign currency contracts disclosed above. Financial instruments — Sainsbury(cid:213)s Bank The financial assets and financial liabilities of Sainsbury(cid:213)s Bank are shown separately as current assets and current liabilities in the Group accounts (see note 18). The management of the Bank(cid:213)s treasury operations is separate from that of the Group, as described on page 21 of the Financial Review. The Bank(cid:213)s exposure to movements in interest rates is shown in the following table which discloses the interest rate repricing profile of assets and liabilities as at 3 April 1999. Any asset (or positive) gap position reflects the fact that the Bank(cid:213)s financial assets reprice more quickly, or in greater proportion than liabilities in a given time period, and will tend to benefit interest rate income in a rising interest rate environment. A liability (or negative) gap exists when liabilities reprice more quickly or in greater proportion than assets during a given period and tends to benefit net interest income in a declining rate environment. Items are allocated to time bands by reference to the earlier of the next contractual interest rate repricing date and maturity date. J Sainsbury plc Annual report and accounts 1999 51 Notes to the accounts 21 Financial instruments continued Interest rate sensitivity table of Sainsbury(cid:213)s Bank as at 3 April 1999 Assets: Treasury bills and other eligible bills Loans and advances to banks Loans and advances to customers Debt securities Other assets Total assets Liabilities: Customer accounts Other liabilities Shareholders(cid:213) funds Total liabilities Interest rate sensitivity gap Cumulative gap 22 Analysis of net debt Cash and liquid funds Overdrafts Debt due within 1 year Debt due after 1 year Finance leases Total Not more Over 3 months but Over 6 months but not over 1 year £m than 3 months not over 6 months £m £m Over 1 year but Over 3 years but not over 5 years not over 3 years £m £m Non-interest bearing £m 83 1,033 294 48 6 1,464 1,653 — — 1,653 (189) (189) — 179 1 — 1 181 — — — — 181 (8) — — 3 — — 3 — — — — 3 (5) — — 47 — — 47 — — — — 47 42 — — 53 — — 53 — — — — 53 95 — — — — 22 22 — 16 101 117 (95) — Total £m 83 1,212 398 48 29 1,770 1,653 16 101 1,770 — — At 8 March 1998* £m Cash flow £m Other non-cash movements £m Exchange movements £m At 3 April 1999 £m 284 (249) (181) (812) (119) (1,077) 448 120 568 (188) 9 6 (173) 395 (155) 155 (17) (17) 10 1 (8) (5) (3) (5) 742 (128) (532) (653) (133) (704) * Current asset investments (see note 17) have been treated as cash. Consequently, brought forward net debt has been restated and reduced by £14 million. 52 J Sainsbury plc Annual report and accounts 1999 23 Provisions for liabilities and charges At 8 March 1998 Prior year adjustment (see below) Profit and loss account Deferred tax — UK Deferred tax — US New provisions Utilised Released At 3 April 1999 Total £m 24 (15) 9 9 (4) 3 (5) (4) 8 Group Other £m 39 (21) 18 3 (5) (4) 12 Deferred tax £m (15) 6 (9) 9 (4) (4) The total of other provisions of £12 million consists of a new provision of £2 million relating to provisions for onerous leases on properties, £3 million relating to unutilised provisions made in 1994 for losses on realisation of surplus land and stores due for closure, £5 million representing the balance of the provision for store closure costs of Texas Homecare and £2 million relating to unfunded pension liabilities. In accordance with FRS 12, Provisions, Contingent Liabilities and Contingent Assets, the Group(cid:213)s accounting policy for provisions has been changed. FRS 12 prohibits certain provisions including those made on the acquisition of a business that relate to the estimated cost of integrating the business with a company(cid:213)s existing operations. The Texas Homecare provision, which was established in the year ended 9 March 1996 (£48 million) and in the year ended 8 March 1997 (£50 million), is such a provision. Under the new accounting standard the current and prior year accounts have been adjusted by reversing the original provision and instead charging the Profit and Loss Account with the actual costs incurred in the respective periods. The adjustments following adoption of the new accounting standard are set out below: Year ended: 9 March 1996 8 March 1997 7 March 1998 56 weeks ended 3 April 1999 Total Reversal of original provision £m Amount to be charged under FRS 12 £m 48 50 — — 98 (5) (44) (28) (21) (98) Accordingly, profit before tax in the year ended 7 March 1998 has been restated and is reduced by £28 million (profit after tax — £18 million). Retained profit reserves brought forward at 8 March 1998 have increased by £15 million, being a reduction of brought forward provisions of £21 million less the related deferred tax asset of £6 million. Retained profit reserves brought forward at 9 March 1997 have increased by £33 million. The provided and unprovided liabilities for deferred tax are as follows: Timing differences between depreciation and capital allowances Other timing differences Group Provided 1999 £m Unprovided 1999 £m Provided* 1998 £m Unprovided 1998 £m 12 (16) (4) 172 4 176 11 (20) (9) 169 5 174 * Restated for FRS 12 The potential liability for tax which might arise on disposal of the Group(cid:213)s properties has not been quantified. In the opinion of the Directors the likelihood of any such liability arising is remote. J Sainsbury plc Annual report and accounts 1999 53 Notes to the accounts 24 Called up share capital and share premium account Ordinary Shares of 25p each authorised — 2,000 million shares At 8 March 1998 Shares allotted: Profit Sharing Scheme Savings-Related Share Option Scheme Executive Share Option Scheme Share dividend alternative At 3 April 1999 Allotted fully paid shares Number million 1,902.5 0.6 5.8 5.0 4.3 Aggregate nominal value £m 500 476 — 2 1 1 Share premium £m Consideration £m 1,295 3 23 18 20 3 25 19 21 1,918.2 480 1,359 The Company operates a Savings-Related Share Option Scheme for all employees with more than one year(cid:213)s service. This is an approved Inland Revenue Scheme and was established in 1980. The Scheme is renewable every 10 years and was last renewed in 1996. At 3 April 1999 employees held 80,325 five-year savings contracts in respect of options over 32.7 million shares and 37,688 three-year savings contracts in respect of options over 9.0 million shares. The Company also operates an Inland Revenue Approved Discretionary Share Option Scheme and an Unapproved Discretionary Share Option Scheme for Executive Directors and senior employees. Under the Discretionary Share Option Scheme, options are normally exercisable between three and ten years of the date of the grant of an option. Options remain exercisable under the 1984 Executive Share Option Scheme until September 2005. At 3 April 1999, 1,955 employees had options outstanding over 30.6 million shares. Details of these options at 3 April 1999 are set out below: (a) Savings-Related Share Option Scheme Price pence 393.0 301.0 331.0 313.0 292.0 292.0 398.0 398.0 416.0 416.0 Options outstanding at the end of the period 1999 million 1998 million — 1.0 6.3 7.3 2.4 5.8 2.8 6.1 3.8 6.2 1.4 6.2 6.8 8.0 2.7 6.3 3.1 6.6 — — 41.7 41.1 Date of grant 4 December 1992 6 December 1993 16 December 1994 20 December 1995 11 December 1996 (3 year period) 11 December 1996 (5 year period) 10 December 1997 (3 year period) 10 December 1997 (5 year period) 10 December 1998 (3 year period) 10 December 1998 (5 year period) 54 J Sainsbury plc Annual report and accounts 1999 24 Called up share capital and share premium account continued (b) Executive Share Option Scheme Date of grant 31 July 1989 28 February 1991 28 August 1992 12 March 1994 8 September 1995 1 December 1995 20 May 1997 11 November 1997 10 November 1998 Price pence 272.7 322.1 447.0 359.0 475.0 386.0 367.0 489.0 545.0 Options outstanding at the end of the period 1999 million 1998 million 0.2 0.9 3.6 3.3 5.6 0.1 8.1 0.5 8.3 0.5 1.6 4.7 5.4 6.7 0.1 8.3 0.5 — 30.6 27.8 Figures for all prices and options outstanding are adjusted as necessary for the rights issue in July 1991. During the period, the J Sainsbury plc Qualifying Employee Share Ownership Trust (the QUEST) was established under a deed of trust dated 11 December 1998. The purpose of the QUEST is to acquire shares for employees, including Directors, in satisfaction of their options under the Savings-Related Share Option Scheme. Of the 5.8 million ordinary shares allotted in relation to the Savings-Related Share Option Scheme, 5.0 million ordinary shares were subscribed for by the QUEST at a market value of £21 million. These shares were allocated to employees, including Directors, in satisfaction of options exercised under the Scheme. The Company provided £6 million to the QUEST for this purpose. The cost of this contribution has been transferred by the Company directly to the Profit and Loss Account reserve (see note 26). 25 Revaluation reserve At 3 April and 8 March 1998 26 Profit and loss account At 8 March 1998 Adjustment for Texas Homecare provision (note 23) Profit retained for the period Goodwill on disposals charged to profit for the financial year Currency movements Amounts deducted in respect of shares issued to the QUEST Other Group £m 38 Company £m 2,103 — 2,103 485 — 2 (6) — Group £m 2,303 15 2,318 304 148 5 (6) (2) At 3 April 1999 2,767 2,584 The cumulative goodwill deducted from the reserves of the Group at 3 April 1999 amounted to £290 million (1998: £438 million). The profit for the financial year dealt with by the Company is £779 million (1998: £52 million). J Sainsbury plc Annual report and accounts 1999 55 Notes to the accounts 27 Reconciliation of operating profit to net cash inflow from operating activities Operating profit before profit sharing Profit sharing Depreciation Loss on sale of equipment, fixtures and vehicles Increase in stocks (Increase)/decrease in debtors Increase in creditors Increase in Sainsbury(cid:213)s Bank current assets Increase in Sainsbury(cid:213)s Bank creditors Payment against provisions Group 1999 56 weeks £m 881 (45) 388 6 (75) (73) 261 (182) 166 1,327 (5) 1,322 1998 52 weeks £m 806 (44) 345 11 (4) 13 101 (1,567) 1,495 1,156 (7) 1,149 The payment against provisions relates to the provision raised in 1996 for store closure costs of Texas Homecare (£4 million) and to the provision raised in 1994 for losses on realisation of surplus land and stores due for closure (£1 million). 28 Future capital expenditure Contracted for but not provided for in the accounts 29 Contingent liabilities and financial commitments The Company had no guarantees for the borrowings of subsidiaries at 3 April 1999 (1998: £1 million). Commitments to make operating lease payments during the next financial year are as follows: Land and buildings: Leases which expire within 1 year Leases which expire between 1 and 5 years Leases which expire after 5 years Other leases: Leases which expire within 1 year Leases which expire between 1 and 5 years Leases which expire after 5 years 56 J Sainsbury plc Annual report and accounts 1999 Group 1999 £m 184 1998 £m 192 Group £m 2 5 259 1 12 13 Company £m — — — — — 13 30 Pension costs The pension costs for the UK relate to two funded defined benefit pension schemes, the J Sainsbury Pension and Death Benefit Scheme (JSPDBS) and the J Sainsbury Executive Pension Scheme (JSEPS). The assets of these schemes are held by trustee companies which are separate from the Company. The Group revised its pension arrangements during the year and introduced a defined contribution Group Personal Pension Plan to meet the requirements of a modern work force and in order to manage pension costs for the Group in the future. The cost of the new plan was minimal in the year. New employees will be eligible to join only the Group Personal Pension Plan but may join the JSPDBS after five years(cid:213) service. New Directors and senior employees will continue to join the JSEPS. The 1998/99 pension cost is based on the results of a triennial valuation carried out by Watson Wyatt, the Group(cid:213)s independent actuaries as of 8 March 1997, on the projected unit basis. The principal actuarial assumptions used in the actuarial valuations are: Long-term rate of return on investments Annual increase in dividends Average annual increase in total pensionable salary (excluding promotional increments) Average annual increase in present and future payments Average rate of inflation % 8.5 4.75 5.5 4.0 4.0 The only change on the assumptions above is that it is now assumed that the average rate of dividend growth will be 4.75 per cent per annum compared to 4.5 per cent assumed in 1994. As at March 1997, the market value of the UK schemes was £1,999 million (1994: £1,435 million). The actuarial value was sufficient to cover 109 per cent (1994: 122 per cent) of the liabilities of the JSPDBS, a surplus of £111 million (1994: £181 million) and 115 per cent (1994: 120 per cent) of the JSEPS, a surplus of £44 million (1994: £44 million). Total pension contribution costs for the Group were £70 million for the 56 week period ended 3 April 1999 (1998: £52 million) of which the pension contribution costs of the UK Schemes amounted to £61 million (1998: £44 million). There is a variation from the regular cost because of scheme surpluses. These surpluses are being amortised over a period using a method which reduces the amount of variation from the regular cost until 2005 for the JSPDBS and 2011 for the JSEPS. Total costs for 1999 are after taking account of an amortisation of scheme surpluses of £26 million in the 56 week period (1998: £32 million). The Group(cid:213)s UK pension cost is expected to increase by £4 million per annum until the results of the next triennial valuation (in April 2000) are known. The Group also operates a final salary pension scheme in the US. The pension cost relating to the US benefit scheme has been determined with the advice of independent actuaries. The charge to the Profit and Loss Account of £9 million (1998: £8 million) has been calculated in accordance with US accounting principles but would not have been materially different had UK accounting principles been applied. 31 Related party transactions There were no material transactions by the Company and Group with related parties. 32 Post balance sheet events On 25 November 1998, the Group conditionally agreed to purchase Star Markets Inc. from Investcorp for a total consideration of $490 million. The transaction is expected to be completed in late June 1999. Any goodwill arising on the acquisition will be assumed to have an indefinite life. On12 April 1999, the Group announced that certain of the operations of Savacentre Limited would be integrated with those of Sainsbury(cid:213)s Supermarkets Ltd; resulting in the closure of the Savacentre head office at Wokingham. Also, on 16 April1999, the Group announced plans to reduce the number of positions at its head office in Stamford Street, London as well as reorganising the store management structure of Sainsbury(cid:213)s Supermarkets Ltd. The costs of these actions will be incurred in the current financial year, and are estimated to be in the region of £30 million. J Sainsbury plc Annual report and accounts 1999 57 Interim accounts 52 weeks ended 6 March 1999 Set out below are the unaudited Interim Accounts for the 52 weeks ended 6 March 1999. The accounts have been subject to an interim review by our auditors, PricewaterhouseCoopers (see page 59). The financial information presented herein does not amount to full accounts under the meaning of section 240 of the Companies Act 1985 (as amended). Group profit and loss account Group sales including VAT and sales taxes VAT and sales taxes Group sales excluding VAT and sales taxes Cost of sales and administrative expenses Group operating profit before exceptional cost of sales, Year 2000 costs and profit sharing Exceptional cost of sales — Texas Homecare integration costs (see note 1) Year 2000 costs Profit sharing Group operating profit Associated Undertakings — share of profit Profit on sale of properties Profit/(loss) on disposal of associate/subsidiary Profit on ordinary activities before interest Net interest payable Profit on ordinary activities before tax Tax on profit on ordinary activities Profit on ordinary activities after tax Minority equity interest Profit for the period Equity dividends Retained profit Earnings per share Earnings per share before exceptional cost of sales, profit/loss on sale of properties and disposal of an associate/subsidiary Diluted earnings per share Diluted earnings per share before exceptional cost of sales, profit/loss on sale of properties and disposal of an associate/subsidiary Note 1 Restated for new accounting standards (see note 23 on page 53). 58 J Sainsbury plc Annual report and accounts 1999 1999 £m 16,269 1,073 15,196 14,329 19981 £m 15,496 996 14,500 13,646 867 21 28 42 776 12 13 84 885 53 832 273 559 2 561 275 286 854 28 20 44 762 16 3 (12) 769 78 691 226 465 4 469 264 205 29.4p 25.1p 27.2p 29.2p 26.6p 25.1p 26.9p 26.6p Group balance sheets at 6 March 1999 and 7 March 1998 Fixed assets Current assets Creditors due within one year Net current liabilities Total assets less current liabilities Creditors due after one year Provisions for liabilities and charges Total net assets Minority equity interest Equity shareholders(cid:213) funds Note 1 Restated for new accounting standards (see note 23 on page 53). Segmental financial information 1999 £m 6,439 3,478 (4,411) (933) 5,506 (835) (8) 4,663 (45) 4,618 Food retailing — UK Food retailing — US DIY retailing — UK Banking — UK Property development — UK Other Turnover excluding taxes Operating profit before exceptional costs, Year 2000 costs and profit sharing Net assets* 1999 £m 12,103 1,822 1,082 146 32 11 15,196 1998 £m 11,629 1,697 1,053 66 36 19 14,500 1999 £m 742 51 67 (6) 9 4 867 1998 £m 765 38 56 (15) 6 4 854 1999 £m 4,807 551 455 99 79 12 6,003 19981 £m 6,284 2,840 (4,001) (1,161) 5,123 (949) (9) 4,165 (38) 4,127 1998 £m 4,413 505 426 83 32 33 5,492 * Net assets exclude net borrowings of £833 million (1998: £1,077 million), non-operating assets and liabilities of £529 million (1998: £401 million) and assets of Associated Undertakings of £22 million (1998: £151 million). Net assets have been restated for a new accounting standard (see note 23 on page 53) and separate disclosure of non-operating assets and liabilities. Review report by the Auditors to the shareholders of J Sainsbury plc on the interim accounts We have reviewed the Interim Accounts for the 52 weeks ended 6 March 1999 set out on pages 58 to 59 which are the responsibility of and have been approved by the Directors. Our responsibility is to report on the results of our review. Our review was carried out having regard to the Bulletin (cid:212)Review of interim financial information(cid:213), issued by the Auditing Practices Board. This review consisted principally of applying analytical procedures to the underlying financial data, assessing whether accounting policies have been consistently applied, and making enquiries of management responsible for financial and accounting matters. The review excluded audit procedures such as tests of controls and verification of assets and liabilities and was therefore substantially less in scope than an audit performed in accordance with Auditing Standards. Accordingly we do not express an audit opinion on the Interim Accounts. On the basis of our review: ¥ In our opinion the Interim Accounts have been prepared using accounting policies consistent with those adopted by J Sainsbury plc in its financial statements for the 52 week period ended 7 March 1998 except for the change in accounting policy referred to in note1 on page 58; and ¥ We are not aware of any material modifications that should be made to the Interim Accounts as presented. PricewaterhouseCoopers Chartered Accountants and Registered Auditors London 1 June 1999 J Sainsbury plc Annual report and accounts 1999 59 Ten year financial record 1990 1991 1992(cid:160) 1993 1994(cid:160)(cid:160) 1995 1996(cid:160)(cid:160)(cid:160) 1997(cid:160)(cid:160)(cid:160)(cid:160) 1998(cid:160)(cid:160)(cid:160)(cid:160)(cid:160) 1999(cid:160)(cid:160)(cid:160)(cid:160)(cid:160)(cid:160) Results (£ million) Group sales (including VAT and sales taxes) 7,257 8,201 9,202 10,270 11,224 12,065 13,499 14,312 15,496 16,269 Increase on previous year 22.7% 13.0% 12.2% 11.6% 9.3% 7.5% 11.9% 6.0% 8.3% 5.0% Group operating profit (before Year 2000 costs and profit sharing) Sainsbury(cid:213)s Supermarkets 409 516 604 716 697 784 744 662 735 714 Savacentre Homebase Shaw(cid:213)s Sainsbury(cid:213)s Bank Other operating activities 17 11 34 — — 23 13 30 — 3 28 15 21 — 36 18 19 — (2) (4) 38 23 31 — 7 41 31 40 — 3 34 26 51 — (1) 30 16 41 (6) 2 31 55 38 (15) 10 28 67 51 (6) 13 471 585 666 785 796 899 854 745 854 867 Year 2000 costs Profit sharing Associated Undertakings Interest receivable/(payable) — (34) 1 (18) — — — — (44) (49) (59) (56) — (36) 1 13 — 9 — (9) — (61) 6 (36) — (50) 19 (59) — (37) 19 (76) (20) (44) 16 (78) (28) (42) 12 (53) Group profit before tax, exceptional costs, property and investments profits 420 505 631 735 731 808 764 651 728 756 Increase/(decrease) on previous year 19.3% 20.2% 25.0% 16.5% (0.5)% 10.5% (5.4)% (14.8)% 11.8% 3.8% Earnings per share* Basic 20.57p 23.11p 25.69p 28.47p 28.0p 29.8p 26.8p 22.0p 25.1p 29.4p Increase/(decrease) on previous year 24.1% 12.4% 11.2% 10.8% (1.6)% 6.3% (10.1)% (17.9)% 14.1% 17.1% Diluted (before exceptional costs, property and investments profits) 18.15p 21.74p 25.34p 28.07p 27.0p 29.0p 27.8p 23.1p 26.6p 26.9p Increase/(decrease) on previous year 25.7% 19.7% 16.6% 10.8% (3.7)% 7.4% (4.1)% (16.9)% 15.2% 1.1% Dividend per share* 6.03p 7.27p 8.75p 10.0p 10.6p 11.7p 12.1p 12.3p 13.9p 14.32p** * ** (cid:160) (cid:160)(cid:160) (cid:160)(cid:160)(cid:160) (cid:160)(cid:160)(cid:160)(cid:160) (cid:160)(cid:160)(cid:160)(cid:160)(cid:160) Adjusted in respect of the rights issue in 1991. Excludes a 1p per share payment to cover the extra four weeks in 1999. Property profits for 1992 restated to comply with FRS 3. 1994 figures for profits and earnings per share are stated before exceptional costs of £369.5 million but after changes in accounting for depreciation of £38.7 million. 1996 figures for profits and diluted earnings per share are stated before exceptional costs of £48 million (£5 million as restated under FRS 12). 1997 figures for profits and diluted earnings per share are stated before exceptional costs of £50 million (£44 million as restated under FRS 12). 1998 figures for profits, basic earnings per share and diluted earnings per share are restated to comply with FRS 12 and FRS 14 and are before exceptional costs of £28 million and a loss of £12 million on the disposal of a subsidiary. (cid:160)(cid:160)(cid:160)(cid:160)(cid:160)(cid:160) 1999 figures for profits and diluted earnings per share are for the 52 week period to 6 March 1999 and are stated before exceptional costs of £21 million and a profit of £84 million on the sale of an interest in an associate. 60 J Sainsbury plc Annual report and accounts 1999 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999(cid:160) Retail statistics Number of outlets at financial year-end Sainsbury(cid:213)s Supermarkets — over 40,000 sq ft sales area 25,000 — 40,000 sq ft sales area 15,000 — 25,000 sq ft sales area under 15,000 sq ft sales area Sainsbury(cid:213)s Supermarkets Savacentre Homebase Shaw(cid:213)s 7 109 106 69 291 8 55 66 8 128 102 61 299 9 61 70 12 147 98 56 12 165 99 52 12 181 99 49 14 194 98 49 313 328 341 355 9 64 73 9 70 79 10 76 87 10 83 87 16 211 87 49 363 12 310 96 21 223 87 47 378 12 297 115 26 229 93 43 391 13 298 121 29 233 98 45 405(cid:224) 13 288 127 Total number of stores 420 439 459 486 514 535 781 802 823 833 Sales area (000 sq ft) Sainsbury(cid:213)s Supermarkets Savacentre Homebase (approx. 80% covered sales area) Shaw(cid:213)s Group total Net increase on previous year: Sainsbury(cid:213)s Supermarkets Group 6,434 6,951 7,632 8,303 8,827 9,338 9,767 10,387 10,860 11,425(cid:224) 665 798 798 798 864 864 1,034 1,034 1,119 1,119 2,107 2,317 2,406 2,609 2,810 3,082 11,632 11,246s 11,201 10,851 1,928 2,107 2,229 2,448 2,740 2,762 3,137 3,822 4,119 4,410 11,134 12,173 13,065 14,158 15,241 16,046 25,570⁄ 26,489s 27,299 27,805 7.9% 10.4% 8.0% 9.3% 9.8% 7.3% 8.8% 8.4% 6.3% 7.6% 5.8% 4.6% 5.3% 59.1% 6.3% 3.6% 4.6% 5.2% 3.1% 1.9% New Sainsbury(cid:213)s Supermarkets openings 22 20 21 23 23 20 10 18 1 9 20(cid:224) Sainsbury(cid:213)s Supermarkets(cid:213) sales intensity (including VAT)** Per square foot (£ per week) 17.26 18.17 18.51 18.84 18.60 18.53 18.59 18.69 18.87 18.61 Share of national trade in predominantly food stores and pharmaceutical, medical, cosmetic and toilet goods outlets*** Restated to exclude concession areas. 10.5% 11.1% 11.4% 12.1% 12.1% 12.3% 12.2% 12.3% 12.5% 12.3% ** Excluding petrol. *** Based on Central Statistical Office/Office for National Statistics (Re-based during 1999) and Sainsbury(cid:213)s Supermarkets and Savacentre sales, excluding petrol. ⁄ Excluding Texas — Group total = 17,408,000 sq ft. Net increase 1,362,000 sq ft; increase of 8.5 per cent. Number of outlets and sales area are as at 3 April 1999. Including two Sainsbury(cid:213)s Local stores with a total sales area of 6,000 sq ft. (cid:160) (cid:224) J Sainsbury plc Annual report and accounts 1999 61 s Investor information Number of shareholders: 113,403 (1998: 108,050) Number of shares in issue: 1,918,215,654 (1998: 1,902,453,905) Shareholders % Shares % Range of shareholdings 1999 1998 1999 1998 500 and under 49.45 47.36 0.50 501 to 1,000 18.67 18.43 0.83 1,001 to 10,000 29.23 31.32 4.39 10,001 to 100,000 1.93 2.05 3.09 0.46 0.78 4.55 3.18 100,001 to 1,000,000 0.52 0.62 10.07 11.54 over 1,000,000 0.20 0.22 81.12 79.49 100.00 100.00100.00 100.00 Annual General Meeting The Annual General Meeting will be held at 12 noon on Wednesday 21 July 1999 at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE. The Notice of the Meeting and the proxy card accompany this Annual Report. American Depository Receipts (ADRs) In the US, the Company(cid:213)s ordinary shares are traded in the form of American Depository Shares, evidenced by ADRs, and trade under the symbol JSNSY. Each American Depository Share represents four ordinary shares. Citibank is the authorised Depository Bank for the Sainsbury ADR programme. All enquiries regarding ADR holder accounts and payment of dividends should be addressed to: Citibank, N.A. ADR Shareholder Services 111 Wall Street New York, NY 10043 62 J Sainsbury plc Annual report and accounts 1999 Shareholders(cid:213) interests at 3 April 1999 (cid:13) 1999 Shareholders % (cid:13) 1999 Shares % (cid:13) (cid:13) (cid:9) Individual and other shareholders(cid:9) Insurance companies(cid:9) Banks and nominees(cid:9) Investment trusts(cid:9) Pension funds(cid:9) Other corporate bodies(cid:9) (cid:13) 43.27(cid:13) 0.70(cid:13) 53.20(cid:13) 0.08(cid:13) 0.81(cid:13) 1.94(cid:13) 100.00 At the year-end, the Trustees of the J Sainsbury Profit Sharing Scheme Trust held 9.9 million shares (1998: 11.1 million) on behalf of 52,105 participants (1998: 45,396). The Trustees(cid:213) holding is included in (cid:210)Individual and other shareholders(cid:211). Individual Savings Plan (ISA) On the Company(cid:213)s behalf, a corporate ISA is being operated by Sainsbury(cid:213)s Bank in association with Bank of Scotland. The plans being offered are a Maxi ISA to include shares and cash and a Mini shares ISA. The contact address and telephone number are included in the (cid:210)Useful Contacts(cid:211) section on the next page. Tax information - Capital Gains Tax For Capital Gains Tax purposes, the market value of ordinary shares on 31 March 1982 is 69.375p. (cid:9) Individual and other shareholders(cid:9) Insurance companies(cid:9) Banks and nominees(cid:9) Investment trusts(cid:9) Pension funds(cid:9) Other corporate bodies(cid:9) (cid:13) 91.44(cid:13) 0.02(cid:13) 7.33(cid:13) 0.34(cid:13) 0.03(cid:13) 0.84(cid:13) 100.00 Low cost dealing service The Company offers a share dealing service for J Sainsbury plc ordinary shares through The Share Centre Ltd. in conjunction with SBC Warburg Dillon Read. Dealing commission on both purchases and sales of J Sainsbury plc ordinary shares is one per cent. Purchases are subject to a minimum charge of £5. For further information contact The Share Centre. Details are shown in (cid:210)Useful Contacts(cid:211) section on the next page. The publication of the above information relating to the low cost dealing service has been approved, for the purposes of section 57 of the Financial Services Act 1986, by The Share Centre Ltd. a member of the Securities and Futures Authority. (cid:9) (cid:9) An audio tape of the Annual Review and Summary Financial Statement can be obtained by calling: 01435 862737 The Group(cid:213)s Environment Report is available on the Internet and by calling: 0800 387504 For general enquiries about Sainsbury(cid:213)s Bank call: 0500 405060 For any other enquiries please contact our Customer Services: 0800 636262 Information about the Group may be found on the Internet at: www.j-sainsbury.co.uk Dividend Reinvestment Plan The Company introduced a dividend reinvestment plan for the forthcoming and future dividends. This will allow shareholders to reinvest their cash dividend in shares bought on the London Stock Exchange through a specially arranged sharedealing service. An explanation of how the plan operates and the charges, together with a mandate for shareholders to complete if they wish to join the plan, accompanies this Annual Report. Alternatively, details are available from our Registrar, Computershare Services PLC. See the (cid:210)Useful Contacts(cid:211) section on this page for their address. Plan booklet and mandates issued 28 June 1999 Last date for return of plan mandates 28 July 1999 Plan shares purchased for shareholders 18 August 1999 Plan share certificates issued 8 September 1999 Share Dividend Alternative The Share Dividend Alternative facility was operated for the last time in conjunction with the final dividend paid in July 1998 and the details are included below. The authority to operate this scheme expired at the AGM in 1998. Dividend Cash equivalent Gross income for UK tax purposes* Final 1997/8 paid 24 July 1998 499.4p 624.25p * Cash equivalent grossed up for tax at 20 per cent. Useful contacts For information about the AGM, shareholding, dividends and changes to personal details all shareholders should contact: Computershare Services PLC PO Box 82 Caxton House Redcliffe Way Bristol BS99 7NH Telephone: 0117 930 6600 Institutional investors may wish to contact Investor Relations: 0171 695 6215 / 6227 For information about low cost dealing facilities contact: The Share Centre PO Box 1000 Tring Hertfordshire HP23 4JR Telephone: 01442 890844 Information about ISAs can be obtained from: Sainsbury(cid:213)s Corporate ISA Bank of Scotland 101 George Street Edinburgh EH2 3JH Telephone: 0131 243 8053 J Sainsbury plc Annual report and accounts 1999 63 Financial calendar, registered office and advisers Financial calendar 1999/2000 Dividend and interest payments Ordinary dividend: Final payable Interim payable 18 August 1999 January 2000 8% Irredeemable Unsecured Loan Stock 1 March/1 September £150m 8.25% Notes 2000 $200m 6.625% Notes1999 $200m 6.25% Notes 2002 £200m 7.25% Notes 2002 Other dates Quarter 2 Trading results announced Interim results announced Interim report circulated Quarter 3 Trading results announced Quarter 4 Trading results announced Results for the year announced Report and accounts circulated 22 December 31 December 27 March 7 June October 1999 November 1999 November 1999 January 2000 April 2000 May 2000 June 2000 Annual General Meeting and Quarter 1 Trading results announced July 2000 Registered office J Sainsbury plc Stamford House Stamford Street London SE1 9LL Registered number 185647 Registrars Computershare Services PLC PO Box 82 Caxton House Redcliffe Way Bristol BS99 7NH Auditors PricewaterhouseCoopers 1 Embankment Place London WC2N 6NN Solicitors Denton Hall Five Chancery Lane Clifford(cid:213)s Inn London EC4A 1BU Stockbrokers SBC Warburg Dillon Read 1 Finsbury Avenue London EC2M 2PP Hoare Govett Ltd 4 Broadgate London EC2M 7LE 64 J Sainsbury plc Annual report and accounts 1999 Designed and produced by CGI Æ Printed by Royle Print Ltd Æ UK Printed on Zanders Mega-Matt paper made from chlorine-free bleached pulp and awarded the Nordic Swan environmental label. J Sainsbury plc Stamford House Stamford Street London SE1 9LL www.j-sainsbury.co.uk