A n n u a l R e p o r t a n d F n a n c i a i l S t a t e m e n t s 2 0 0 1 Annual Report and Financial Statements 2001 Contents Financial highlights Operating and financial review Report of the Directors Statement of corporate governance Report of the Remuneration Committee Statement of Directors’ responsibilities in respect of the financial statements Independent Auditors’ report to the members of J Sainsbury plc Group profit and loss account Group statement of total recognised gains and losses Reconciliation of movement in equity shareholders’ funds Balance sheets Group cash flow statement Accounting policies Notes to the financial statements Five year financial record 1 2 7 8 9 14 14 15 16 16 17 18 19 20 40 The Chairman’s statement, the Group Chief Executive’s review, the operating review and the summary financial statement are contained in a separate publication entitled Annual Review and Summary Financial Statement 2001. The full Annual Report and Accounts of J Sainsbury plc for 2001 comprises this publication together with the Annual Review and Summary Financial Statement 2001. Copies may be obtained through our website www.j–sainsbury.co.uk or by calling Freephone 0800 387504. Financial highlights 1 4 4 8 1 , 4 1 4 7 1 , 8 7 3 6 1 , 6 9 4 5 1 , 2 1 3 4 1 , 5 5 7 8 2 1 7 5 6 7 0 6 2 0 6 6 5 9 9 0 8 8 2 7 3 0 8 2 7 7 0 7 8 9 1 , 2 7 6 8 1 , 1 8 9 6 1 , 8 9 0 6 1 , 3 4 2 5 1 , 7 7 9 9 8 8 9 9 9 9 9 9 0 0 0 0 1 1 0 0 1 Group sales £ million 7 9 8 9 9 9 0 0 1 0 2 Group underlying profit before tax and e-commerce £ million 7 9 8 9 9 9 0 0 1 0 Group capital expenditure £ million 7 9 8 9 9 9 0 0 1 0 UK and US food retailing sales area 000 sq ft 2001 2000 % change Sales1 £ million 18,441 17,414 Underlying profit2 before tax and e-commerce costs £ million Underlying profit2 before tax Underlying earnings per share2 £ million pence 602 549 19.2 607 580 20.5 Dividend per share pence 14.32 14.32 5.9 (0.8) (5.3) (6.3) – 385p Total shareholder return (the increase in the value of a share including reinvested dividends) increased by 43 per cent over the year. 283p 1 2 Including VAT at Sainsbury’s Supermarkets and Homebase and sales tax at Shaw’s Supermarkets. Before amortisation of goodwill and exceptional items. S A M J J A 2000 J Sainsbury share price O N D J F M 2001 1 J Sainsbury plc Annual Report and Financial Statements 2001 Operating and financial review The results for the year reflect the very significant amount of change across the Group as we refocus the Group on food retailing and related activities in the UK and the US. We have successfully delivered the two key short-term financial objectives we set ourselves when we announced our preliminary results in May 2000. These were to stabilise the Group’s underlying profit before e-commerce costs (before amortisation of goodwill and exceptional items) and to stop the year-on-year decline in profitability in Sainsbury’s Supermarkets, which was achieved in the second half year. This has enabled the Group to achieve a substantial improvement in profitability in the second half year. We have embarked on a very comprehensive and ambitious three-year business transformation programme within Sainsbury’s Supermarkets aimed at delivering margins comparable with industry leaders by the end of the three-year programme. The disposal of Homebase, completed on 3 March 2001, and of our Egyptian operations after the year-end, has created a more focused Group with greater financial flexibility. As a result of the above, the Group closed the year in a much stronger position and better placed to deliver shareholder value going forward. Profit and loss account1 Sales2 Operating profit3 Profit sharing Interest payable Share of profit from joint ventures Underlying profit before tax and e-commerce E-commerce costs Underlying profit before tax Goodwill written off Exceptional items Profit before tax Tax Profit after tax Underlying earnings per share Dividend per share Continuing operations £m 2001 Discontinued operations £m Total £m 2000 Total £m 16,940 1,501 18,441 17,414 663 22 685 (8) (76) 1 602 (53) 549 (16) (99) 434 (168) 266 19.2p 688 (10) (72) 1 607 (27) 580 (11) (60) 509 (162) 347 20.5p 14.32p 14.32p Total Group sales2 reached £18,441 million, with sales from our continuing operations increasing by 6.1 per cent to £16,940 million. Total operating profit3 at £685 million was down by £3 million, held back by a disappointing second half result at Homebase and higher losses in Egypt. However, operating profit from continuing operations at £663 million, was 4.2 per cent up on the previous year. Underlying profit before tax and e-commerce at £602 million was broadly flat compared with the previous year. Underlying profit before tax including e-commerce costs was down by £31 million or 5.3 per cent, due to the investment in e-commerce, which at £53 million, was an increase of £26 million over the previous year. Results from operations Continuing operations Sainsbury’s Supermarkets Sainsbury’s Bank JS Developments Shaw’s Supermarkets (US) Discontinued operations Homebase Sainsbury’s Egypt Total Sales2 Operating profit3 2001 £m % change 13,894 154 149 2,743 16,940 1,421 80 1,501 18,441 4.7 13.2 (9.7) 14.6 6.1 (0.5) 233.3 3.4 5.9 2001 £m 510 13 25 115 663 57 (35) 22 685 % change (5.2) 333.3 56.3 45.6 4.2 (9.5) (218.2) (57.7) (0.4) 1 2 3 The full profit and loss account prepared in accordance with FRS3 is on page 15. Includes VAT at Sainsbury’s Supermarkets and Homebase and sales tax at Shaw’s Supermarkets. Profit before profit sharing, amortisation of goodwill, exceptional items and e-commerce costs. 2 J Sainsbury plc Annual Report and Financial Statements 2001 Our continuing operations have performed well, beating expectations. Sainsbury’s Supermarkets second half profits at £254 million were 21.0 per cent higher than last year, reflecting the success of our customer promotional campaign, our quality campaign and the impact from the accelerated store extension and refurbishment programme, while Shaw’s, Sainsbury’s Bank and JS Developments recorded excellent year-on-year profit increases. The profit improvement by Shaw’s reflects the full year impact and additional synergies from the Star Market business acquired in June 1999 and the impact of remodelled stores. In contrast, the trading results from Homebase for the 48 weeks to 3 March 2001 were disappointing and reflected the impact of poor weather, development costs associated with the large store formats and weaker trading during the sale process. Higher than expected second half losses of £25 million were incurred from our operations in Egypt, from which the Group has now exited. Continuing operations Sainsbury’s Supermarkets sales increased by 4.7 per cent to £13,894 million. The operating profit was down by £28 million and operating margins were down from 4.1 per cent to 3.7 per cent. Despite the decline in the full year’s profits, there was a significant turnaround in performance in the second half of the year. The like-for-like sales growth in the first half of 2.0 per cent compared with 2.2 per cent in the second half, a year-on-year profit reduction of 22.0 per cent in the first half compared with a growth of 21.0 per cent in the second and the operating margin increased from 3.5 per cent in the first half to 3.8 per cent in the second. The improved second half performance partly reflects a poor second half last year, and also an improved sales performance, particularly in the last quarter, and progress on business transformation projects leading to cost efficiencies which delivered £90 million. The key financial target of stopping the year-on-year decline in profitability was therefore achieved. E-commerce costs for the year increased from £20 million last year to £44 million in the current year (including £4 million costs of ‘taste.co.uk’), reflecting our change of strategy to accelerate the roll-out of our ‘Sainsbury’s to you’ home delivery service which can now reach in excess of 50 per cent of UK households. To enable this to happen, we have implemented a strategy of servicing customers from dedicated picking centres, store picking in 33 stores and smaller interim picking centres. Sainsbury’s Bank showed excellent profit progression from £3 million last year to £13 million. This included a one-off VAT credit of £3 million; after excluding this, the underlying profit increase was 233 per cent. We have developed and enhanced the product portfolio with the introduction of a low APR Visa card, direct saver account and single trip travel insurance, backed by strong customer service. Customer lending income rose by 32 per cent and commission by 17 per cent as we enhanced our key competitive advantage, our in-store offer. JS Developments had another very successful year with profits up from £16 million to £25 million. Eight major projects were completed: a town centre redevelopment at Cardiff; multi-unit retail parks at Birmingham, Dumfries and Exeter; single unit developments at Bristol, Norwich (two) and Solihull. Shaw’s Supermarkets had a very good year with like-for-like sales up 1.6 per cent and operating profit up 32.6 per cent to $171 million. The results reflect the full year impact of the acquisition of Star Market and some $35 million of synergies to date from merging the two operations. The synergies have been realised by merging ‘behind the scenes’ activities and economies of scale for buying. Attention is now focused on customer-facing activities with stores being opened in the new store format. In March 2001, Shaw’s completed the acquisition of 19 Grand Union stores with estimated annual revenues of $150 million for a total consideration of $42 million plus stock at a valuation of $8 million. Discontinued operations Homebase results for the 48 weeks to 3 March 2001 were disappointing. For the 48 weeks, sales rose by 8 per cent compared with the equivalent period last year, but operating profits fell by 9.5 per cent to £57 million. E-commerce costs at Homebase amounted to £9 million. The sale of Homebase completed on 3 March 2001. Sainsbury’s Egypt losses for the full year were £35 million (2000: £11 million). Trading conditions were difficult in Egypt due to the delays in obtaining trading permits, the deteriorating position in the Middle East and uncertainty regarding the outcome of the strategic review announced in November 2000. 3 J Sainsbury plc Annual Report and Financial Statements 2001 Operating and financial review > continued Exceptional items Operating exceptionals Exceptional costs of the business transformation programme Other Non-operating exceptionals Profit on sale of Homebase Profit on sale of properties – Homebase – Other Write down on Egyptian business Total exceptional items 2001 £m (68) (11) (79) 21 43 27 70 (111) (20) (99) 2000 £m (39) (73) (112) – – 52 52 – 52 (60) The major change programme now underway in the UK supermarkets is far reaching and covers all areas of the business. It includes infrastructure projects such as reinvigorating all our stores over the next three years (and the closure of unprofitable stores), modernising the supply chain and totally replatforming our IT systems. It also includes process simplification throughout the business and we are making significant organisational changes to help us work together more effectively and efficiently under the ‘faster, simpler, together’ programme. In the new financial year, our central functions will be consolidated from our current 11 buildings to one new building in Holborn to form our new Business Centre enabling new ways of working. In November 2000 we outsourced our IT to Accenture under a seven-year fixed-rate contract, enabling us to achieve a real competitive advantage in a timescale and to a cost that we could not have achieved alone. The business transformation programme will deliver significant cost efficiencies and our financial objective is to achieve annual savings of £600 million which will be used partly to enhance the customer offer and partly to improve our operating margins. Our objective is to achieve operating margins comparable with industry leaders by the end of the programme. We delivered £90 million of cost savings in the year and we are targeting £150 million of savings in the new financial year. However, such a major programme of change will result in significant exceptional one-off costs. For this year the total is £68 million and we estimate a further £35 million to £50 million of costs per annum over the next three years. The sale of Homebase completed on 3 March 2001 for a total consideration of £975 million (net of costs), including the value of properties retained for disposal. £636 million was received in cash prior to the year-end, which is before £156 million due from the sale of the freehold properties which completed on 31 March 2001. A further £75 million was received in the form of loan notes and properties worth £103 million have been retained for development purposes; £23 million was reinvested in the business in return for 17.8 per cent of the equity. Profit recognised in the year was £64 million (after writing back £149 million of goodwill previously written off to reserves), £21 million for the sale of the business and £43 million for properties, with a further £20 million expected when the development properties are sold in the open market. The final consideration will be based on completion accounts which are in the process of being agreed. In line with our objective of refocusing the Group’s activities and a growing concern at the longer term nature and level of investment required to develop our business in Egypt, we concluded that the Group should withdraw from this market. As a result, the net assets of the business have been written down to the estimated net realisable value, resulting in a write off of £111 million, including goodwill of £54 million previously capitalised. Subsequent to the year-end, the business was sold to the minority shareholder and proceeds of £14 million were received. Profit on sale of other properties was £27 million. Following on from our sale and leaseback transaction at the end of last year, we released further value from the store portfolio through a second transaction in the first half of this year. The transaction involved 10 supermarket properties and generated proceeds of £226 million, some 29 per cent above book value, resulting in a profit of £51 million. A number of other property disposals, mainly related to surplus properties, realised £63 million of proceeds and a loss of £24 million. Taxation The Group tax charge of £168 million, results in an effective underlying rate of 31.8 per cent (2000: 32.0 per cent). The effective rate exceeds the nominal rate of UK corporation tax due to the higher rate of tax incurred on US profits and the lack of effective tax relief on depreciation of UK properties. Earnings per share and dividends Basic earnings per share decreased by 24.6 per cent to 13.8 pence (2000: 18.3 pence). Underlying earnings per share before amortisation of goodwill and exceptional items decreased by 6.3 per cent to 19.2 pence (2000: 20.5 pence). A final dividend of 10.30 pence is proposed which results in a total dividend for the year of 14.32 pence, unchanged from the previous year. Cash flow The Group had a cash inflow before financing of £460 million during the year, reducing net debt by £405 million to £859 million. Operating cash inflow remained strong at £922 million, up 10 per cent on last year. Capital expenditure at £960 million was in line with our expectations and reflected the increased investment in Sainsbury’s Supermarkets, as well as the purchase of 19 Grand Union stores by Shaw’s in the US. 4 J Sainsbury plc Annual Report and Financial Statements 2001 The sale of fixed assets at £453 million included £226 million relating to the sale and leaseback of 10 stores, £63 million of surplus property disposals, £74 million from the sale of US shopping centres last year and £90 million for the sale of IT assets to Accenture under the outsourcing agreement. Non-operating cash flow benefited from the disposal of Homebase, with proceeds in the year amounting to £636 million. A further £156 million is due to be received from the sale of the freehold properties which completed on 31 March 2001. Operating cash inflows Net interest Taxation Dividends Capital expenditure Purchase of own shares Sale of fixed assets Cash outflow before sale and purchase of businesses Sale of business Investment in subsidiary and joint ventures Other Net cash inflow/(outflow) before financing Financing Decrease/(increase) in net debt 2001 £m 922 (95) (168) (274) (960) (18) 453 (140) 636 (45) 9 460 (55) 405 2000 £m 838 (80) (218) (294) (761) (68) 385 (198) – (293) 3 (488) (72) (560) Treasury management Treasury policy and significant treasury transactions are reviewed and approved by the Board; the Finance Committee of the Board is responsible for monitoring treasury activity and performance. Disclosures regarding derivatives and other financial instruments are contained in Note 24 to the financial statements. Treasury operations in respect of Sainsbury’s Bank are managed separately through Bank of Scotland which has a conservative approach to treasury management. Sainsbury’s Bank does not undertake any trading activities in derivative instruments and only uses derivative instruments to hedge risk. Credit limits have been established for all counterparties and these are reviewed and approved by Sainsbury’s Bank’s Board and the Risk Management Committee, a subcommittee of the Board. Details of Sainsbury’s Bank’s interest rate repricing gap are set out in Note 24 to the financial statements. The Group’s other major treasury activities 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 only for reducing exposures arising from underlying business activity 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’s operations. The Group finances its operations by a combination of cash generated by operating subsidiaries, bank loans, commercial paper, capital markets, leases and share capital. The Group’s long-term borrowings are raised centrally by the parent company and on-lent to operating subsidiaries 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 contracts. The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk, exchange risk and credit risk. The policies for managing each of these risks remained unchanged during the year ended 31 March 2001. Interest rate risk The Group’s exposure to interest rate fluctuations is managed by the use of interest rate swaps and options. The Group’s objective is to provide a degree of protection against interest rate volatility by holding a proportion of the Group’s net debt portfolio at fixed or capped rates of interest. Group policy allows the proportion of fixed rate borrowings to vary between 20 per cent and 80 per cent of net debt. As at the year-end, and after taking into account interest rate swaps, the proportion of the Group’s net debt at fixed rates was 57 per cent (2000: 44 per cent). The average period for which the fixed rate financial liabilities, including finance leases were fixed as at 31 March 2001 was 4.9 years (2000: 5.5 years). Liquidity risk The Group seeks to minimise the risk of uncertain funding in its operations by diversifying its borrowings sources within a spread of maturity periods. 5 J Sainsbury plc Annual Report and Financial Statements 2001 Operating and financial review > continued The Group’s principal debt raising operations are arranged through the Group’s £750 million Euro Commercial Paper programme and £1 billion Euro Medium Term Note programme. In addition the Group maintains a portfolio of committed bank facilities with a group of high quality international banks amounting to £620 million as at 31 March 2001 (2000: £765 million). All these facilities expire within one year, although facilities of £495 million contain 12 month term out options under which the Company has the option of drawing funds for this period prior to the stated expiry date. The facilities act as a store of liquidity as well as providing support for the Group’s commercial paper programme and other borrowing activity. As at 31 March 2001 there were no drawings under these facilities (2000: £nil). The Group aims to structure debt issues so that not more than 25 per cent of borrowings mature in any one financial year. The repayment analysis of the Group’s borrowings is set out in Note 23 to the financial statements. As at 31 March 2001 the weighted average maturity of the Group’s borrowings was 3.2 years (2000: 2.7 years). Currency risk The Group is subject to currency exposure on the translation of the net assets of its overseas subsidiaries, principally in the US. The Group limits the effects of exchange rate fluctuations on the value of its shareholder funds by borrowing in the same currencies as the operating currencies of its overseas subsidiaries. Company policy requires that foreign currency denominated borrowings are matched to a value at least equivalent to the Group’s foreign currency denominated tangible net assets. Exchange movements on foreign currency liabilities created in the UK 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 faces currency exposure on overseas trade purchases made predominantly in currencies other than the operating subsidiaries’ functional currency. Forward contracts are used to hedge a proportion of the Group’s 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 exposure may only be taken on a limited basis with banks or financial institutions that maintain a strong 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. Euro Whilst UK membership of the EMU remains uncertain, the Group is continuing with preparations to ensure that we will be ready to conduct business in euros in the event that the UK joins the EMU. Balance sheet The disposal of Homebase substantially improved the liquidity of the Group, reducing net debt to £859 million and gearing to 17 per cent (2000: 27 per cent), although the full year impact of the benefit to the fixed charge cover (the number of times interest including operating lease charges is covered by available profit) will not materialise until the current financial year. Shareholders’ funds increased by £173 million to £4,964 million and with the reduced gearing we have a strong balance sheet to fund the major investment programmes in the supermarket business over the next three years. Fixed assets Current assets1 Short-term creditors Net current liabilities Total assets less current liabilities Long-term creditors Provisions Total net assets Equity shareholders’ funds Minority interests Capital employed 2001 £m 6,657 3,710 (4,325) (615) 6,042 (1,000) (78) 4,964 4,911 53 4,964 2000 £m 6,977 3,575 (4,720) (1,145) 5,832 (993) (48) 4,791 4,742 49 4,791 1 Includes £420 million (2000: £353 million) due in more than one year. Shareholder return The share price increased from 283 pence at the start of the financial year to 385 pence at 31 March 2001 with a range of 272 pence to 431 pence. The Company’s equity market capitalisation at 31 March 2001 was £7.5 billion. Total shareholder return (the increase in the value of a share including reinvested dividends) increased by 43 per cent over the year, with J Sainsbury ranked fifth over its peer group of 13 European retailers. 6 J Sainsbury plc Annual Report and Financial Statements 2001 Report of the Directors for the year ended 31 March 2001 Group performance and dividends The Group’s principal activities are food retailing and financial services. The profit on the ordinary activities of the Group before tax amounted to £434 million (2000: £509 million). The Directors are proposing the payment of a final dividend of 10.30 pence per share on 27 July 2001 to shareholders on the Register at the close of business on 8 June 2001; together with the interim dividend paid of 4.02 pence per share, this makes a total dividend for the year of 14.32 pence per share (2000: 14.32 pence per share). A description of the performance of the main operating companies during the period and likely future developments is contained in the Chairman’s statement, the Group Chief Executive’s review and the operating review on pages 3 to 13 of the Annual Review and Summary Financial Statement. During the year the Homebase business was sold, as described in Note 4 to the financial statements. Sainsbury’s Egypt was sold after the year–end, as described in Note 5 to the financial statements. Annual General Meeting The Notice of the Annual General Meeting of shareholders and explanatory notes explaining the special business to be transacted at the meeting is sent to shareholders with this report. At the AGM, resolutions will be proposed to re-appoint PricewaterhouseCoopers as Auditors, to grant the Directors the authority to make political donations and expenditure, to renew the Directors’ authority under the employee Savings–Related Share Option Scheme (SAYE), to amend the J Sainsbury Discretionary Share Option Scheme 1996 and to enable the Company to make market purchases of its own shares up to a limit of approximately 10 per cent of the issued share capital. In accordance with the Articles of Association, Ian Coull will retire by rotation and will seek re-appointment. Ian Coull has a service contract on a 12 month rolling basis. Jamie Dundas and Lord Levene of Portsoken who were both appointed since the last AGM, will also retire and seek re-appointment. Sir Clive Thompson will retire and not seek re-appointment. Changes to the Board The current Directors are listed on pages 16 and 17 of the Annual Review and Summary Financial Statement. Jamie Dundas joined the Board on 1 September 2000 and Lord Levene joined the Board on 1 May 2001. Dino Adriano and Sir Terence Heiser retired from the Board on 26 May 2000 and 26 July 2000, respectively. All the other Directors served throughout the period. Directors’ interests No Director had, during or at the end of the year, any interest in any contract of significance to the Group’s business. Details of the Directors’ interests in the ordinary shares and options over ordinary shares of the Company are set out in the Report of the Remuneration Committee on pages 9 to 13. Share capital The changes in the issued share capital of the Group are shown in Note 27 to the financial statements. A total of 6.3 million shares (2000: 6.3 million) with a nominal value of £1.6 million (2000: £1.6 million) were allotted for the Group’s employee share schemes. Additionally, 6.8 million shares (2000: 21.6 million) were purchased in the market for £22 million (2000: £77 million) to satisfy obligations under the Group’s schemes (see Note 27). The purchases represent 0.4 per cent (2000:1.1 per cent) of the issued share capital. The Company operates a Dividend Reinvestment Plan. No new shares are allotted under this plan but the cash dividend of participating shareholders is used to purchase shares in the market. Some 27,400 shareholders have taken advantage of this scheme. Substantial interests The substantial interests in shares notified to the Company, 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 2001 the total holding of these trusts amounted to 28 per cent of the Company’s share capital. Christopher Stone, Andrew Cahn and John Rosenheim are trustees of various settlements, including charitable settlements. As at 29 May 2001 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 May 2001 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. All the above include duplications. Franklin Resources Inc. has a notifiable interest of 3 per cent. 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. Employees, social responsibility and the environment The Company has well developed policies for fair and equal treatment of all employees and on social responsibility and the environment and has always encouraged employees to own shares in the Company. About one half of the UK employees are shareholders directly or through the Profit Sharing Scheme Trust. Further details are available on pages 14 and 15 of the Annual Review and Summary Financial Statement. The Company Environment Report describes the environmental policies adhered to by the Company and outlines progress in achieving objectives. 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 DTI’s Better Payment Practice Code on the prompt payment of suppliers. A copy of the guide can be obtained from the DTI, 1 Victoria Street, London SW1H 0ET. The performance of the operating companies in respect of payment to suppliers is contained in their accounts. Donations Donations to UK charitable organisations and local community projects amounted to £14 million, which is a substantial increase on the figure reported last year. For the first time we have included the value of donations in kind, (see page 14 of the Annual Review and Summary Financial Statement for further details). There were no political donations. By order of the Board Nigel Matthews OBE Secretary 29 May 2001 7 J Sainsbury plc Annual Report and Financial Statements 2001 Statement of corporate governance 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 Financial Services Authority. This statement 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. J Sainsbury plc is committed to high standards of corporate governance in its business. 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 Composition The Board currently comprises five Executive Directors and six Non-Executive Directors, including the Chairman. Biographical details of the Directors and changes in the composition of the Board are provided in the Annual Review and Summary Financial Statement on pages 16 to 17. All the Non-Executive Directors are considered independent and Sir Clive Thompson is the nominated senior Non- Executive Director. New Non-Executive Directors are appointed for an initial term of two years and, subject to re-election, serve thereafter on a mutually agreed basis. On appointment they follow a process of induction to familiarise themselves with the Group’s operations. All Directors have access to the advice and services of the Company Secretary. There is an agreed procedure by which members of the Board may take independent professional advice in the furtherance of their duties. Responsibilities The Board is responsible to the shareholders for the strategic development of the Company, the management of the Company’s assets in a way that maximises performance and the control of the operation of the business. The Board meets ten times a year and there is a list of matters reserved exclusively for its consideration. These, and the levels and nature of delegated authority, are reviewed annually. The Board approves the strategic plans of the Group and its annual budget and, throughout the year, reviews the performance of the operating subsidiaries against their budgets and targets. The Group Chief Executive has authority delegated by the Board for implementing the strategy and for managing the Group. In doing so, he works with the Executive Committee comprising all of the Executive Directors and certain other senior executives of the Group. The Group Chief Executive also chairs the Boards of Sainsbury’s Supermarkets Ltd, Sainsbury’s Bank plc and Shaw’s Supermarkets Inc. Other Board Committees The Remuneration, Nomination and Audit Committees have written terms of reference which define their authorities, duties and membership. Details of membership are shown on pages 16 to 17 of the Annual Review and Summary Financial Statement. The Remuneration Committee, comprised solely of the Non- Executive Directors, is responsible for making recommendations on the remuneration framework for all Executive Directors and determining the remuneration arrangements for individual Executive Directors. The report of the committee is set out on pages 9 to 13. The Nomination Committee, whose membership includes a majority of Non-Executive Directors, advises the Board on the appointment of Directors. 8 J Sainsbury plc Annual Report and Financial Statements 2001 The Audit Committee, comprised solely of Non-Executive Directors, is responsible inter alia for making recommendations on the accounting and reporting policies of the Company and on defining and monitoring internal financial control. The Committee receives regular reports from the Group Internal Audit Department and the external Auditors. It also reviews the interim and annual financial statements before they are considered by the Board. The Head of Group Internal Audit has direct access to the Chairman of the Audit Committee. The Company’s external Auditors attend Committee meetings and also have the opportunity of a private meeting with the Committee. Internal control The Company has complied with Section D2 of the Combined Code in respect of the Company’s financial year ended 31 March 2001. The Board has reviewed the effectiveness of its internal controls. The Directors believe that proper accounting records are maintained and that financial information used within the business and for external publication is reliable. This belief is based on the maintenance of the Company’s well established control framework comprising clear structures and accountabilities, well understood policies and procedures and budgeting and review processes. The Group employs a Risk Self Assessment (RSA) process at Group level and in each of the operating subsidiaries, which it has developed over several years. 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 operating subsidiary through the RSA process itself, internal audit coverage and routine management review. The results are reviewed by the Boards of each of the operating subsidiaries and, following review by the Audit Committee, by the Group Board. Action is taken to address areas of non-compliance or to improve the effectiveness of controls. As part of this process, it was identified that weaknesses existed in the subsidiary in Egypt which contributed to the increase in reported losses. A number of actions were taken during the year to improve the standards of control. Their implementation was still in progress at the time of the decision by the Board to dispose of the business. The sale was completed after the year-end and is described in Note 5 to the financial statements. Systems of internal financial and operational controls can only provide reasonable and not absolute assurance against material misstatements, loss or operational failure. Within these parameters, the Directors have confidence in the effectiveness of the internal controls of the Group’s continuing operations. 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 financial statements. Shareholder relations The Company maintains a regular programme of meetings with major institutional shareholders to discuss information that is publicly available relating to the progress of the business. Developments in the Company’s Internet site have improved the availability of published material, including results information and presentations, making it accessible to shareholders and customers at all times. The corporate website address is www.j-sainsbury.co.uk. At the Annual General Meeting the Directors welcome the opportunity to gather the views of private shareholders. Many customers, and about one half of the UK employees, are also shareholders either directly or through the Profit Sharing Scheme Trust. 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’s composition and terms of reference are in line with the Combined Code of the Financial Services Authority’s Listing Rules. The Company complies fully with Section B of the Combined Code provisions on Directors’ remuneration and Schedule B to the code in respect of the Remuneration Report content. The Committee is chaired by Sir Clive Thompson; the other members are Sir George Bull, Jamie Dundas, June de Moller, Keith Butler-Wheelhouse and Lord Levene. Remuneration policy The Remuneration Committee recommends to the Board a remuneration framework for Executive Directors and determines the remuneration arrangements for individual Executive Directors. The Committee aims to maintain a remuneration policy consistent with the Company’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’ remuneration are: i) Basic salary Basic salary for each Director is determined taking into account assessments of the Director’s performance, experience and responsibility, together with market factors. Incentive arrangements ii) In addition to basic salary, the Company maintains incentive arrangements which combine an annual bonus plan with a long-term performance share plan. The Committee believes that these arrangements provide for rewards which reflect an appropriate balance between personal performance and Company performance. As such they align the rewards of Directors with the Company’s immediate business priorities and the long-term interests of shareholders. The arrangements may be summarised as follows: Annual Bonus Scheme– A cash bonus is payable subject to the achievement of both business and individual targets which are key to the businesses’ 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 executives) calculated according to performance against achievement of profit before tax targets and individual business targets. Long Term Performance Share Plan– This Plan allows 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’s long-term performance compared with a sample of comparator companies. The measure used to compare the Company’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 have elapsed and subject to the Company’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’s performance is below the median of the comparator group. Subject to the Company’s position in the comparator group the first release will be made after the end of the Company’s 2001-02 financial year. Executive Share Option Scheme– Grants are normally made annually to a value of one times annual basic salary for Directors and senior executives (and to a lesser value for other executives). Since 1995 these options have been subject to a performance criteria. Under the current performance criteria the Directors will only be able to exercise options granted in 1999 and subsequent years, if the Company achieves an average of 3 per cent per annum real growth in earnings per share (EPS) over three years. Where following a grant of options, the total value of a Director’s outstanding share options exceeds four times annual remuneration, a more stringent performance criterion determined by the Remuneration Committee will apply in respect of such options. iii) Other share options Directors may hold options under the SAYE Scheme. iv) Employee profit sharing Directors participate in the Company’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’ profit sharing is included on a paid basis in the table of Directors’ emoluments on page 10, based on the profitability of the Group in the previous year. Profit sharing in respect of the year ended 31 March 2001 will be paid in August 2001 and is expected to amount to approximately 1.0 per cent (2000: 1.2 per cent) of qualifying pay. v) Benefits Benefits include the provision of a company car and medical insurance premia. 9 J Sainsbury plc Annual Report and Financial Statements 2001 Report of the Remuneration Committee > continued Service contracts Non-Executive Directors including the Chairman do not have service contracts. All service contracts for Executive Directors are on a 12-month rolling basis. Sir Peter Davis has a contract which unless otherwise terminated or renewed, will automatically terminate on 27 March 2004 at which point Sir Peter will be aged 62. In all other cases Executive Directors will normally retire on their 60th birthday. 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’ 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. Pensions The Group’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’s pension In the case of three Directors, 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 £762,000 has been made in respect of the year ended 31 March 2001 (2000: £269,000). Directors’ emoluments The emoluments of the Directors of the Company were as follows: Executive Directors John Adshead CBE Ian Coull Sir Peter Davis Roger Matthews Robin Whitbread Dino Adriano David Bremner David Clapham Kevin McCarten Rosemary Thorne Non-Executive Directors Sir George Bull Keith Butler-Wheelhouse June de Moller Jamie Dundas Sir Clive Thompson Sir Terence Heiser GCB Rt Hon Sir Timothy Sainsbury Sir David Scholey CBE Note 1 2 3 4 5 4 6 7 7 8 9 10 11 12 Salary £000 300 300 750 340 269 150 – – – – 225 25 25 16 35 10 – – Bonus13 £000 Profit sharing £000 Benefits £000 Compensation for loss of office £000 111 141 300 201 99 – – – – – – – – – – – – – 3 3 5 4 3 6 – – – – – – – – – – – – 15 15 19 20 15 27 – – – – 17 – – – – – – – – – – – – 1,237 – – – – – – – – – – – – Total 2001 £000 429 459 1,074 565 386 1,420 – – – – 242 25 25 16 35 10 – – Total 2000 £000 307 314 68 140 272 546 1,187 550 812 602 240 13 13 – 35 31 7 25 Total 2001 2,445 852 24 128 1,237 4,686 5,162 Total 2000 2,695 – 108 158 2,201 5,162 Highest paid director. Appointed as a Director 1 March 2000. Appointed as a Director 15 November 1999. Retired as a Director 26 May 2000. Compensation for loss of office included a pension contribution of £218,000. Retired as a Director 9 March 2000. Retired as a Director 14 May 1999. Compensation for loss of office included a pension contribution of £171,000. Retired as a Director 30 November 1999. Compensation for loss of office included a pension contribution of £87,000. Appointed as a Director 23 September 1999. 1 2 3 4 5 6 7 8 Appointed as a Director 1 September 2000. 9 10 Retired as a Director 26 July 2000. 11 Retired as a Director 21 July 1999. 12 Retired as a Director 1 February 2000. 13 Includes performance bonuses accrued but not paid in the financial year. The fees of Sir Clive Thompson are remitted to Rentokil Initial plc. 10 J Sainsbury plc Annual Report and Financial Statements 2001 Directors’ pension entitlements The pension entitlements of the Directors who served during the year were as follows: John Adshead CBE Ian Coull Sir Peter Davis Roger Matthews Robin Whitbread Dino Adriano1 1 As at date of retirement as a Director. Length of service years Additional pension earned in the year £000 12 14 1 1 32 36 19 11 27 11 18 90 Transfer value of increase £000 300 135 408 113 235 1,980 Accrued entitlements at year end £000 151 118 27 16 145 351 Age 56 50 59 46 50 58 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. Directors’ interests The Directors’ interests in the ordinary shares of the Company and shares held in trust on behalf of Directors were as follows: John Adshead CBE Ian Coull Sir Peter Davis Roger Matthews Robin Whitbread Sir George Bull Keith Butler-Wheelhouse June de Moller Jamie Dundas Sir Clive Thompson Ordinary shares1 2001 2000 Long Term Incentive Plan2 Performance Share Plan3 54,732 32,434 100,000 50,000 45,955 17,500 3,300 1,500 1,200 881 50,679 30,963 100,000 25,000 57,102 12,500 – 1,500 –4 881 19,433 21,031 – – 17,458 – – – – – 91,243 93,248 – 62,500 80,548 – – – – – 1 2 3 4 The ordinary shares above are beneficial holdings which include the Directors’ 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 in May 1998. Subject to the rules of the Plan, these shares were released to the Director on 29 May 2001. The Plan allows shares to be allocated to individuals, to be released to them in the form of options if a future performance criterion, based on a comparator group of companies is met. Subject to the Company’s position in the comparator group the first release of the annual allocation will be made after the Company’s 2001-02 financial year. At date of appointment. There were no changes to the Directors’ interests in ordinary shares shown above between 31 March 2001 and 29 May 2001 with the exception to the release to certain Directors of shares held under the Long Term Incentive Plan as set out above. 11 J Sainsbury plc Annual Report and Financial Statements 2001 Report of the Remuneration Committee > continued Options over ordinary shares The Directors’ share options were as follows: Number of options 2 April 2000 Granted during the year Exercised during the year Lapsed during the year 31 March 2001 Weighted average exercise price pence Range of exercise prices pence Date From which exercisable Of expiry Executive Share Option Scheme John Adshead CBE Ian Coull Robin Whitbread Dino Adriano 119,437 101,062 96,868 129,047 – – – – – – 29,180 – – – – – 119,437 101,062 67,688 129,047 393 425 359 397 359-447 28.08.95 12.03.04 359-447 28.08.95 12.03.04 359 12.03.97 12.03.04 359-447 28.08.95 12.03.04 Executive Share Option Scheme With performance criteria attached John Adshead CBE Ian Coull Sir Peter Davis Roger Matthews Robin Whitbread Dino Adriano 241,113 264,108 3,009,596 106,333 224,746 395,078 110,294 110,294 – 125,000 95,588 – – – – – – – – 351,407 374,402 – – 3,009,596 231,333 – 320,334 – 395,078 – SAYE scheme John Adshead CBE Ian Coull Roger Matthews Robin Whitbread Dino Adriano 2,528 2,956 – 4,529 2,563 1,179 1,647 1,879 993 – 1,234 308 – 220 671 – – – 1,959 1,892 2,473 4,295 1,879 3,343 – 392 394 261 294 384 429 326 272 299 348 272-545 08.09.98 02.06.10 272-545 08.09.98 02.06.10 261 01.03.03 01.03.10 272-320 24.11.02 02.06.10 272-545 08.09.98 02.06.10 367-545 08.09.98 02.02.03 352-416 01.02.01 31.08.04 253-299 01.02.02 31.08.06 299 01.03.04 31.08.04 253-416 01.02.02 31.08.06 Details of options held at 31 March 2001 at prices below and above the market value of the shares are set out on page 13. The profit before dealing costs inherent in unexercised options capable of being exercised at a surplus granted under the Executive Share Option Scheme at 31 March 2001, subject to any performance criteria being met, are also set out on page 13. 12 J Sainsbury plc Annual Report and Financial Statements 2001 Options over ordinary shares continued John Adshead CBE Ian Coull Sir Peter Davis Roger Matthews Robin Whitbread Dino Adriano Unexercised options at prices below market value Options at prices above market value Range of option prices pence 253-377 253-377 260 272-320 253-377 359-377 Number of options 290,263 257,451 3,009,596 233,212 290,208 314,560 Inherent profit £000 157 149 3,747 212 143 49 Range of option prices pence 398-545 447-545 – – 398-545 447-545 Number of options 183,054 222,308 – – 101,157 209,565 The above figures have been calculated by reference to a mid-market price on 30 March 2001 of 385 pence (2000: 283 pence). The range during the 52 weeks ended 31 March 2001 was 272 pence to 431 pence. Details of share options exercised by the Directors were as follows: John Adshead CBE Ian Coull Robin Whitbread Dino Adriano Date of exercise 02.03.01 02.03.01 16.02.01 02.03.01 22.11.00 22.11.00 29.11.00 Number of shares exercised 1,234 308 29,180 220 351 186 134 Option price pence 313 313 322 313 313 253 292 Market price on date of exercise pence 375 375 373 375 396 396 413 Gains on options exercised £ 771 192 14,855 138 291 266 163 16,676 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’s register of Directors’ interests (which is open to inspection) contains full details of Directors’ share dealings. Approved by the Board on 29 May 2001 Sir Clive Thompson Chairman of the Remuneration Committee 13 J Sainsbury plc Annual Report and Financial Statements 2001 Statement of Directors’ responsibilities in respect of the financial statements Company law requires the Directors to prepare financial statements 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 financial statements, 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 financial statements; and • prepare the financial statements 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 financial statements 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. Independent Auditors’ report to the members of J Sainsbury plc 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 financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’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 financial statements 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 financial statements. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group at 31 March 2001 and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985. PricewaterhouseCoopers Chartered Accountants and Registered Auditors London 29 May 2001 We have audited the financial statements which comprise statutory primary financial statements such as the profit and loss account, the balance sheet, the cash flow statement, the statement of total recognised gains and losses, and the related notes and the accounting policies set out in the statement of accounting policies. Respective responsibilities of Directors and Auditors The Directors’ responsibilities for preparing the Annual Report and the Financial Statements in accordance with applicable United Kingdom law and accounting standards are set out in the statement of Directors’ responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements, United Kingdom Auditing Standards issued by the Auditing Practices Board and the Listing Rules of the Financial Services Authority. We report to you our opinion as to whether the financial statements 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 report of the Directors is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding Directors’ remuneration and transactions 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 financial statements. The other information comprises the report of the Directors, the report of the remuneration committee and the statement of corporate governance. We review whether the statement of corporate governance reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. 14 J Sainsbury plc Annual Report and Financial Statements 2001 Group profit and loss account for the year ended 31 March 2001 Turnover including VAT and sales tax1 VAT and sales tax Continuing operations Discontinued operations Turnover excluding VAT and sales tax Cost of sales Gross profit Administrative expenses Profit sharing Amortisation of goodwill Group administrative expenses Continuing operations Discontinued operations Operating profit Share of operating (loss)/profit in joint ventures Profit on sale of properties Disposal of Homebase operations Impairment of Egyptian business Disposal of operations – discontinued Profit on ordinary activities before interest Net interest payable Underlying profit on ordinary activities before tax Amortisation of goodwill Profit on ordinary activities before tax Tax on profit on ordinary activities Profit on ordinary activities after tax Equity minority interest Profit for the year Dividends Retained (deficit)/profit Basic earnings per share Underlying earnings per share2 Diluted earnings per share Underlying diluted earnings per share2 Note Before exceptional items £m 18,441 (1,197) 15,954 1,290 2001 Exceptional items £m Before exceptional items £m Total £m 2000 Exceptional items £m – – – – 18,441 (1,197) 17,414 (1,143) 15,954 1,290 15,030 1,241 1 17,244 (16,037) – (45) 17,244 (16,082) 16,271 (15,118) 1,207 (45) 1,162 1,153 (571) (8) (16) (595) 603 9 612 (3) – – – – 609 (76) 549 (16) 533 (181) 352 (4) 348 (34) – – (34) (78) (1) (79) – 70 21 (111) (90) (99) – (99) – (99) 13 (86) – (86) (492) (10) (11) (513) 652 (12) 640 1 – – – – 641 (72) 580 (11) 569 (189) 380 2 382 (605) (8) (16) (629) 525 8 533 (3) 70 21 (111) (90) 510 (76) 450 (16) 434 (168) 266 (4) 262 (274) (12) 13.8p 19.2p 13.7p 19.0p 8 13 2 3 4 5 1 6 1, 7 10 11 29 12 12 12 12 – – – – – (83) (83) (29) – – (29) (63) (49) (112) – 52 – – – (60) – (60) – (60) 27 (33) – (33) Total £m 17,414 (1,143) 15,030 1,241 16,271 (15,201) 1,070 (521) (10) (11) (542) 589 (61) 528 1 52 – – – 581 (72) 520 (11) 509 (162) 347 2 349 (274) 75 18.3p 20.5p 18.2p 20.5p 1 2 Including VAT at Sainsbury’s Supermarkets and Homebase and sales tax at Shaw’s Supermarkets. Before amortisation of goodwill and exceptional items. 15 J Sainsbury plc Annual Report and Financial Statements 2001 Group statement of total recognised gains and losses for the year ended 31 March 2001 Profit for the year Currency translation differences on foreign currency net investments Total recognised gains and losses relating to the year There is no material difference between the above profit for the year and the historical cost equivalent. 2001 £m 262 10 272 2000 £m 349 3 352 Reconciliation of movements in equity shareholders’ funds for the year ended 31 March 2001 Profit for the year Dividends Currency translation differences Goodwill on disposals charged to profit for the year New share capital subscribed for less expenses of capital issues Amounts deducted in respect of shares issued to the QUEST Net movement in equity shareholders’ funds Opening equity shareholders’ funds Closing equity shareholders’ funds Group Company 2001 £m 262 (274) (12) 10 149 24 (2) 169 4,742 4,911 2000 £m 349 (274) 75 3 – 21 (1) 98 4,644 4,742 2001 £m 174 (274) (100) 62 – 24 (2) (16) 4,435 4,419 2000 £m 262 (274) (12) 4 – 21 (1) 12 4,423 4,435 16 J Sainsbury plc Annual Report and Financial Statements 2001 Balance sheets at 31 March 2001 and 1 April 2000 Fixed assets Intangible assets Tangible assets Investments Current assets Stocks Debtors Sainsbury’s Bank Investments Cash at bank and in hand Creditors: falling due within one year Sainsbury’s Bank Other Net current liabilities Total assets less current liabilities Creditors: falling due after more than 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’ funds Equity minority interest Total capital employed Note 13 14 15 18 19 20 21 20 22 22 26 27 27 28 29 Group Company 2001 £m 278 6,215 164 6,657 763 546 1,914 12 475 3,710 (1,796) (2,529) (4,325) (615) 6,042 (1,000) (78) 4,964 483 1,401 39 2,988 4,911 53 4,964 2000 £m 316 6,563 98 6,977 986 320 1,718 18 533 3,575 (1,607) (3,113) (4,720) (1,145) 2001 £m – 535 5,370 5,905 – 380 – – 222 602 – (762) (762) (160) 5,832 5,745 (993) (48) (1,266) (60) 4,791 4,419 481 1,379 39 2,843 4,742 49 4,791 483 1,401 – 2,535 4,419 – 4,419 2000 £m – 394 6,131 6,525 – 120 – – 237 357 – (1,035) (1,035) (678) 5,847 (1,412) – 4,435 481 1,379 – 2,575 4,435 – 4,435 Notes to the financial statements are on pages 20 to 39. The financial statements on pages 15 to 39 were approved by the Board of Directors on 29 May 2001, and are signed on its behalf by Sir Peter Davis Group Chief Executive Roger Matthews Group Finance Director 17 J Sainsbury plc Annual Report and Financial Statements 2001 Group cash flow statement for the year ended 31 March 2001 Net cash inflow from operating activities 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 Taxation Capital expenditure and financial investment Payments to acquire tangible fixed assets Receipts from sale of tangible fixed assets Purchase of own shares Payments for intangible fixed assets Net cash outflow from capital expenditure and financial investment Acquisitions and disposals Acquisition of and investment in subsidiary and joint ventures Investment in Sainsbury’s Bank by minority shareholder Proceeds from disposal of operations Proceeds from disposal/(investment in) other fixed asset investments Net cash inflow/(outflow) from acquisitions and disposals Equity dividends paid Net cash inflow/(outflow) before management of liquid resources and financing Financing Issue of ordinary share capital (Decrease)/increase in short-term borrowings (Decrease)/increase in long-term borrowings Capital element of finance lease rental payments Net cash (outflow)/inflow from financing Decrease in cash in the year Reconciliation of net cash flow to movement in net debt Decrease in cash in the year Cash inflow/(outflow) from increase/(decrease) in debt and lease financing Debt in subsidiaries acquired New finance leases Currency translation difference Movement in net debt in the year Net debt at the beginning of the year Net debt at the end of the year 18 J Sainsbury plc Annual Report and Financial Statements 2001 Note 30 31 25 25 25 2001 £m 922 55 (130) (20) (95) (168) (951) 453 (18) (9) (525) (45) 4 636 5 600 (274) 460 24 (497) (36) (3) (512) (52) (52) 536 – (28) (51) 405 (1,264) 2000 £m 838 46 (109) (17) (80) (218) (755) 385 (68) (6) (444) (293) 4 – (1) (290) (294) (488) 16 79 173 (4) 264 (224) (224) (248) (76) (7) (5) (560) (704) (859) (1,264) Accounting policies Basis of the financial statements These financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain properties, in accordance with applicable accounting and financial reporting standards. No profit and loss account is presented for the Company as permitted by Section 230(3) of the Companies Act 1985. The financial year represents the 52 weeks ended 31 March 2001 (prior year the 52 weeks ended 1 April 2000). Consolidation The Group’s financial statements combine the results of the Company and all its subsidiaries, associated undertakings and joint ventures, to the extent of group ownership. 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 of disposal. The Group’s interests in its joint ventures are accounted for using the gross equity method. The Group’s interests in its associated undertakings are accounted for using the equity method. In a joint arrangement that is not an entity, the Group accounts for its own assets, liabilities and cash flows measured according to the terms of the agreement governing the arrangement. Goodwill Goodwill is recognised as an asset on the Group’s balance sheet in the year in which it arises and, subject to impairment reviews, is amortised on a straight line basis over its finite life, a maximum of 20 years, and only under specific circumstances will it be assumed that goodwill has an indefinite economic life. Goodwill arising on acquisitions prior to 8 March 1998 has been set off against reserves. Turnover Turnover consists of sales through retail outlets, sales of completed development properties and, in the case of Sainsbury’s Bank plc, interest receivable, fees and commissions. Capitalisation of interest Interest incurred on borrowings for the financing of specific property developments is capitalised gross of tax relief. Leased assets Assets funded through finance leases are capitalised and the resulting lease obligations are included in creditors net of finance charges. Interest costs on finance leases are charged direct to the profit and loss account. Rentals under operating leases are charged on a straight line basis up to the date of the next rental review. 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, those at retail outlets are valued 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 Trading transactions denominated in foreign currencies are translated at the exchange rate at the date of the transaction. 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’s Bank plc, interest payable. 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. Deferred tax Deferred tax is provided for all timing differences, only to the extent that it is likely that a liability will crystallise. Intangible fixed assets Pharmacy licences are included in intangible assets and amortised on a straight line basis over a useful economic life of 15 years. Tangible fixed assets Depreciation is provided on a straight line basis over the anticipated useful economic lives of the assets using the following rates: Freehold buildings and leasehold properties – 50 years, or the lease term if shorter Fixtures, equipment (including computer software) and vehicles – 3 to 15 years Freehold land is not depreciated. Interest payments or receipts arising from derivative instruments are recognised within net interest payable over the period of the contract. Any premia or discounts arising are amortised over the life of the instruments. Forward currency contracts entered into with respect to trading transactions are accounted for as hedges, with the instrument’s impact on profit deferred until the underlying transaction is recognised in the profit and loss account. 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. 19 J Sainsbury plc Annual Report and Financial Statements 2001 Notes to the financial statements 1 Segmental analysis of turnover, profit and net assets 2001 Food retailing and financial services – UK Property development – UK Food retailing – US Continuing operations DIY retailing – UK Food retailing – Egypt Discontinued operations Total Joint ventures Goodwill amortisation Net interest payable Group profit before tax Non-operating assets and liabilities (not allocated) Net borrowings (not allocated)3 Group net assets 2000 Food retailing and financial services – UK Property development – UK Food retailing – US Continuing operations DIY retailing – UK Food retailing – Egypt Discontinued operations Total Joint ventures Goodwill amortisation Net interest payable Group profit before tax Non-operating assets and liabilities (not allocated) Net borrowings (not allocated)3 Group net assets Turnover1 £m 13,085 149 2,720 15,954 1,210 80 1,290 17,244 Turnover1 £m 12,489 165 2,376 15,030 1,217 24 1,241 16,271 Profit on ordinary activities before tax Before exceptional items £m Exceptional items £m 475 25 115 615 48 (35) 13 628 (3) (16) 609 (76) 533 (41) – (10) (51) 63 (111) (48) (99) – – (99) – (99) Profit on ordinary activities before tax Before exceptional items £m Exceptional items £m 512 16 79 607 55 (11) 44 651 1 (11) 641 (72) 569 30 – (39) (9) (51) – (51) (60) – – (60) – (60) Group total £m 434 25 105 564 111 (146) (35) 529 (3) (16) 510 (76) 434 Group total £m 542 16 40 598 4 (11) (7) 591 1 (11) 581 (72) 509 Net assets2 £m 4,847 114 932 5,893 – – – 5,893 22 (92) (859) 4,964 Net assets2 £m 4,828 123 796 5,747 522 18 540 6,287 26 (258) (1,264) 4,791 Turnover is disclosed by origin. There is no material difference in turnover by destination. Sales between the Group’s business segments are not material. 1 2 3 Excludes VAT at Sainsbury’s Supermarkets and Homebase and sales tax at Shaw’s Supermarkets. Excludes borrowings and intercompany assets and liabilities. Net borrowings include cash and current asset investments, excluding those of financial services. 20 J Sainsbury plc Annual Report and Financial Statements 2001 2 Analysis of operating profit Turnover Cost of sales Exceptional cost of sales Gross profit Administrative expenses Exceptional administrative expenses Profit sharing (Note 8) Amortisation of goodwill Group administrative expenses Operating profit Continuing operations £m 15,954 (14,862) (45) 1,047 (465) (33) (8) (16) (522) 525 2001 Discontinued operations £m 1,290 (1,175) – 115 (106) (1) – – (107) 8 Total £m 17,244 (16,037) (45) Continuing operations £m 15,030 (13,953) (38) 1,162 1,039 (571) (34) (8) (16) (629) 533 (405) (25) (9) (11) (450) 589 The exceptional operating costs comprise the following: Sainsbury’s Supermarkets Homebase Shaw’s Supermarkets Exceptional cost of sales Sainsbury’s Supermarkets Homebase Shaw’s Supermarkets Exceptional administrative expenses Total exceptional operating costs 2000 Discontinued operations £m 1,241 (1,165) (45) 31 (87) (4) (1) – (92) (61) 2001 £m 37 – 8 45 31 1 2 34 79 Total £m 16,271 (15,118) (83) 1,070 (492) (29) (10) (11) (542) 528 2000 £m 27 45 11 83 12 4 13 29 112 The costs in Sainsbury’s Supermarkets relate to the business transformation programme which involves significant changes across the whole business and includes infrastructure projects such as reinvigorating the entire store portfolio, modernising the supply chain, replatforming all IT systems and introducing new ways of working. By the end of the year, four unprofitable stores had been closed with the closure of a further seven underway. At Shaw’s Supermarkets, the reorganisation costs relate to the integration of 19 stores acquired from Grand Union. One unprofitable store was closed. 21 J Sainsbury plc Annual Report and Financial Statements 2001 Notes to the financial statements > continued 3 Profit on sale of properties Sale and leaseback of UK supermarket freeholds Disposal of Shaw’s Supermarkets’ shopping centres Disposal of Homebase properties (Note 4) Other 2001 £m 51 – 43 (24) 70 2000 £m 82 (15) – (15) 52 Property profits of £51 million were realised from the sale and leaseback of 10 Sainsbury’s Supermarkets to an unrelated company for proceeds of £226 million. The leases are for 23 years at market rental increasing by 1 per cent per annum over the period of the lease. They have been treated as operating leases. 4 Disposal of Homebase operations On 21 December 2000, the Group agreed to sell the Homebase business for a total consideration of £975 million (net of costs), which comprised: Sale of Homebase Limited to Schroder Ventures Cash Loan notes Sale of development sites to B&Q plc Freehold properties retained Consideration (net of costs) £m 422 75 219 259 975 The sale to Schroder Ventures was completed on 3 March 2001, with a final consideration based on completion accounts which are in the process of being agreed. The consideration included £422 million of cash and £75 million of loan notes with a 10 per cent coupon, repayable at the earlier of Schroder’s disposal of Homebase or 2013. The sale of the development sites to B&Q plc took place on 21 December 2000 and is subject to a refund mechanism in the event that any of the sites are not completed in specified time limits. Agreement was reached on 31 March 2001 to sell £156 million of the freehold properties retained. The remaining properties, worth £103 million at independent valuation, have been retained for development and subsequent disposal. £23 million was reinvested in the Homebase business in exchange for a 17.8 per cent share, comprising £1 million of equity and a further £22 million of 10 per cent loan notes (see Note 15). Profit of £64 million was recognised in the year, £21 million for the disposal of the business and development sites to B&Q plc (after charging goodwill previously written off of £149 million) and £43 million as profit on disposal of properties (see Note 3). A further £20 million is anticipated on the disposal of the remaining properties, based on independent valuation. 5 Impairment of Egyptian business The net assets of Egyptian Distribution Group SAE (EDGE) have been written down to reflect the estimated net realisable value. This resulted in a write off of £111 million, including £54 million of goodwill previously capitalised. Subsequent to the year end, the Group’s 80.1 per cent interest in the business was sold to Mr A Nasharty, the Chairman of EDGE and owner of the remaining shares, for an initial consideration for $20 million (£14 million), with the Group settling the external overdraft and financing debts which amounted to £97 million at 31 March 2001. The sale was substantially completed on 24 May 2001. The trading result for the period from 1 April 2001 to 24 May 2001 and the costs of disposal will be included in the results for the year to 30 March 2002. 22 J Sainsbury plc Annual Report and Financial Statements 2001 6 Net interest payable Interest receivable Interest payable and similar charges Bank loans and overdrafts Other loans Finance leases Interest capitalised Net interest payable 2001 £m 63 20 123 20 163 (24) 139 76 2000 £m 36 28 77 17 122 (14) 108 72 Including interest receivable attributable to Sainsbury’s Bank of £124 million (2000: £111 million) included in sales, and interest payable attributable to Sainsbury’s Bank of £86 million (2000: £74 million) included in cost of sales, total interest receivable for the year ended 31 March 2001 amounted to £187 million (2000: £147 million) and total interest payable amounted to £249 million (2000: £196 million). Interest is capitalised at the weighted average cost of related borrowings, and of the interest capitalised, £16 million (2000: £10 million) has been capitalised into tangible fixed assets (see Note 14) and £8 million (2000: £4 million) has been capitalised into land held for and in the course of development during the financial year. 7 Profit on ordinary activities before tax Profit on ordinary activities before tax is stated after charging/(crediting): Depreciation – owned assets – assets under finance leases Amortisation of intangible assets Pension costs (see Note 34) Operating lease rentals – properties – fixtures, equipment and vehicles – receivable 2001 £m 402 7 17 66 305 7 (10) 2000 £m 394 16 12 64 257 11 (15) The Auditors’ remuneration amounted to £0.7 million (2000: £0.7 million) for the Group and £0.1 million (2000: £0.1 million) for the Company. The Auditors also received £12.9 million (2000: £5.2 million) for non-audit services relating to consultancy fees for business process reviews, systems implementation and taxation advice. The increase includes £4.3 million relating to Homebase systems development. 23 J Sainsbury plc Annual Report and Financial Statements 2001 Notes to the financial statements > continued 8 Employees Employees’ remuneration and related costs during the year amounted to: Wages and salaries Social security costs Other pension costs Profit sharing 2001 £m 1,634 95 66 1,795 8 1,803 2000 £m 1,633 103 64 1,800 10 1,810 The amount provided for profit sharing for the UK retail companies is calculated based on the operating profits and net interest reflected in the financial statements of the participating companies. Employees participate in the Profit Sharing Scheme after completing one financial year’s service and obtain full benefits after the third year. 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 August 2000 is set out in Note 27. At 31 March 2001, the Trustees of the J Sainsbury Profit Sharing Scheme Share Trust held 7.9 million shares (2000: 9.8 million) on behalf of 56,800 participants (2000: 55,300) in the Scheme. The average number of employees during the year was: Full-time Part-time Full-time equivalent 2001 Number 000’s 55.9 129.3 185.2 111.6 2000 Number 000’s 60.2 129.0 189.2 116.9 9 Advances to Directors and connected persons As at 31 March 2001, authorisations, arrangements and agreements entered into by Directors and connected persons in the normal course of business with Sainsbury’s Bank amounted to £29,000 (2000: £37,000) (number of persons: 4 (2000: 5)). The details of Directors’ emoluments and interests are set out in the report of the Remuneration Committee on pages 9 to 13. 10 Tax on profit on ordinary activities The tax charge based on the profit for the year is: UK Corporation tax at 30% (2000: 30%) Over provision in prior periods – UK Less double tax relief Deferred tax Overseas tax – current Overseas tax – deferred Taxation on exceptional items 2001 £m 181 (6) 175 (19) 156 1 30 (6) (13) 168 2000 £m 200 – 200 (20) 180 3 10 (4) (27) 162 The taxation credit on exceptional items comprises a tax credit of £15 million (2000: £27 million) on the operating exceptional items and a tax charge of £2 million (2000: £nil) on the divestment of Homebase. 24 J Sainsbury plc Annual Report and Financial Statements 2001 11 Dividends Interim Final proposed 12 Earnings per share 2001 pence per share 4.02 10.30 14.32 2000 pence per share 4.02 10.30 14.32 2001 £m 77 197 274 2000 £m 77 197 274 Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding those held by the Employee Share Ownership Trusts (see Note 15) which are treated as cancelled. 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. These represent share options granted to employees where the exercise price is less than the average market price of the Company’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 2001 million 1,901.5 9.9 1,911.4 2000 million 1,913.5 4.1 1,917.6 The alternative measure of earnings per share is provided because it reflects the Group’s underlying trading performance by excluding the effect of amortisation of goodwill and exceptional items. Basic earnings per share Amortisation of goodwill Exceptional items net of tax Operating profit Profit on sale of properties, disposal of operations and impairment write down Underlying earnings per share before amortisation of goodwill and exceptional items Diluted earnings per share Underlying diluted earnings per share before amortisation of goodwill and exceptional items 2001 2000 Earnings £m Per share amount pence Earnings £m Per share amount pence 262 16 64 22 364 262 364 13.8 0.8 3.4 1.2 19.2 13.7 349 11 84 (52) 392 349 18.3 0.6 4.4 (2.8) 20.5 18.2 19.0 392 20.5 25 J Sainsbury plc Annual Report and Financial Statements 2001 Notes to the financial statements > continued 13 Intangible fixed assets Cost At 2 April 2000 Disposal of subsidiary Additions Exchange adjustments At 31 March 2001 Amortisation At 2 April 2000 Impairment of Egyptian business Charge for the year At 31 March 2001 Net book value At 31 March 2001 At 1 April 2000 14 Tangible fixed assets Cost or valuation At 2 April 2000 Additions (see below) Disposals Disposal of subsidiary Exchange adjustments At 31 March 2001 Accumulated depreciation At 2 April 2000 Charge for the year Disposals Disposal of subsidiary Impairment of Egyptian business Exchange adjustments At 31 March 2001 Net book value At 31 March 2001 At 1 April 2000 Capital work-in-progress included above At 31 March 2001 At 1 April 2000 Goodwill £m Pharmacy licences £m 313 (8) – 22 327 11 51 16 78 249 302 16 – 16 – 32 2 – 1 3 29 14 Total £m 329 (8) 16 22 359 13 51 17 81 278 316 Company Total £m Properties £m 9,632 956 (1,005) (720) 116 8,979 3,069 409 (400) (412) 50 48 2,165 317 (332) (316) 13 22 1,869 2,764 1,255 1,499 16 125 6,215 6,563 148 249 399 521 (376) – – 544 5 4 – – – – 9 535 394 – – Group Fixtures, equipment and vehicles £m 3,664 338 (426) (489) 37 Properties £m 5,968 618 (579) (231) 79 5,855 3,124 904 92 (68) (96) 37 26 895 4,960 5,064 132 124 Interest capitalised included in additions amounted to £16 million (2000: £10 million). Accumulated interest capitalised included in the cost or valuation total above amounts to £251 million (2000: £247 million) for the Group and £nil (2000: £nil) for the Company. 26 J Sainsbury plc Annual Report and Financial Statements 2001 14 Tangible fixed assets continued Group Company The net book value of properties comprised: Freehold Long leasehold Short leasehold Analysis of finance leases – Group Cost Depreciation Net book value 2001 Fixtures, equipment and vehicles £m – – – Properties £m 185 56 129 Analysis of properties At 31 March 2001 Freehold Cost 1973 valuation 1992 valuation Long leasehold Cost 1973 valuation 1992 valuation Short leasehold Cost 2001 £m 3,852 647 461 Total £m 185 56 129 2000 £m 3,796 790 478 Properties £m 145 45 100 2001 £m 284 251 – 2000 Fixtures, equipment and vehicles £m 1 1 – 2000 £m 170 224 – Total £m 146 46 100 Group Company Cost £m Valuation £m Cost £m Valuation £m 4,304 811 651 5,766 2 62 3 22 89 286 258 – 544 – – – – – The Group has followed the transitional provisions in FRS 15, Tangible Fixed Assets, to retain the book value of land and buildings, certain of which were revalued in 1973 and 1992, without updating the valuations. The 1973 valuation, covering substantially the whole of the Group’s properties at that time, was made on the basis of open market values by Healey & Baker and G.L. Hearn and Partners. The 1992 valuation, covering a number of non-retail properties, was made on the basis of open market values by J. Trevor & Sons. If the properties included at valuation had been included at cost, the cost and accumulated depreciation figures at 31 March 2001 would have been: Freehold Long leasehold Short leasehold Group Company Cost £m Depreciation £m 4,326 827 654 513 180 193 Cost £m 286 258 – Depreciation £m 2 7 – 27 J Sainsbury plc Annual Report and Financial Statements 2001 Notes to the financial statements > continued 15 Fixed asset investments Subsidiaries (Note 16) Joint ventures (Note 17) Own shares at cost1 Other unlisted investments at cost Group Company 2001 £m 22 88 54 164 2000 £m 26 70 2 98 2001 £m 5,320 9 – 41 5,370 2000 £m 6,115 16 – – 6,131 1 The Group owned 25,482,870 (2000: 19,469,350) shares at 31 March 2001 with a nominal value of £6.4 million (2000: £4.9 million). 433,297 shares (2000: 415,186 shares) are held in an Employee Share Ownership Trust (ESOT) on behalf of certain Directors and senior executives under the Group’s Long Term Incentive Plan in respect of an award dated 29 May 1998. Under this Plan, awards under which have now ceased, an amount equal to 50 per cent of the annual bonus of participating Directors and senior employees was retained and used by the Company to purchase shares in the Company. It is a condition of the Plan that the shares are held by the ESOT for a period of three years from the date of the award. On the third anniversary of the award, beneficial ownership of the shares transferred to those Directors and senior employees who remain in the Company’s employment or who have left for certain permitted reasons. The cost for the long-term incentive scheme is reflected in the relevant year’s profit and loss account and shares are purchased at fair value from the market. The increase in the number of shares held by the Trust is the result of the reinvestment of dividends. 704,164 shares (2000: 704,164) are held by an ESOT on behalf of certain Directors and senior employees under the Group’s Long Term Performance Share Plan in respect of an award dated 26 July 1999. All participants remaining in the Company’s employment, or leaving for certain permitted reasons, are entitled to receive a grant of option after a period of three years to purchase the shares awarded to them for the sum of £1, at any time during the 10 years following the date of grant. The participants’ entitlement to receive the grant depends on the Company’s total shareholder return (TSR), compared to a peer group of companies, over the three-year period from the original award. If the appropriate level of TSR is not achieved, the entitlement to receive a grant of option will lapse. A charge is taken to the profit and loss account only when it becomes clear that a grant will be made. 24,345,409 shares (2000: 18,350,000) are held by an ESOT for the Colleague Share Option Plan (see Note 27). There is no charge to the profit and loss account because substantially all UK employees are entitled to participate in the Plan. The market value of the shares held by the ESOTs at 31 March 2001 was £98.1 million (2000: £55.1 million). The ESOTs waive the rights to the dividends receivable in respect of the shares held under all the above schemes except for the Long Term Incentive Plan. Unlisted investments include the 17.8 per cent investment (£23 million) in the Homebase business (see Note 4). 16 Investment in subsidiaries The Company’s principal operating subsidiaries are: Sainsbury’s Supermarkets Ltd (food retailing) J Sainsbury Developments Ltd (property development) Shaw’s Supermarkets Inc.1 (food retailing) Sainsbury’s Bank plc (banking) Egyptian Distribution Group SAE (food retailing) 1 Not directly owned by J Sainsbury plc. All principal operating subsidiaries operate in the countries of their registration or incorporation. Share of ordinary allotted capital and voting rights Country of registration or incorporation 100% 100% 100% 55% 80.1% England England USA England Egypt 28 J Sainsbury plc Annual Report and Financial Statements 2001 16 Investment in subsidiaries continued Sainsbury’s Bank plc’s audited financial statements are drawn up to 28 February 2001 to conform with Bank of Scotland (the 45 per cent shareholder) and Shaw’s Supermarkets Inc’s audited financial statements are drawn up to 3 March 2001. Management accounts have been used to include the Sainsbury’s Bank plc and Shaw’s Supermarkets Inc. results up to 31 March 2001. All other principal operating subsidiaries have been included up to 31 March 2001. Summary of movements – Company At 2 April 2000 Investment in subsidiaries Net repayment of long-term capital advances At 31 March 2001 17 Investment in joint ventures The Group’s principal joint ventures were: Hedge End Park Limited (property investment – UK) Ordinary shares (other shareholder Marks and Spencer p.l.c.) taste.co.uk Shares (at cost) £m 4,847 11 – 4,858 Long-term capital advances £m 1,268 – (806) 462 Total net investment £m 6,115 11 (806) 5,320 Year end Share of ordinary allotted capital Country of registration or incorporation 31 March 50% England Hedge End Park Limited For the year ended 31 March 2001, the Group’s share of turnover amounted to £2 million (2000: £2 million) and its share of operating profit amounted to £1 million (2000: £1 million). At 31 March 2001, the Group’s share of gross assets amounted to £13 million (2000: £26 million) and its share of gross liabilities amounted to £3 million (2000: £11 million). The investment in Hedge End Park Limited is held directly by the Company. taste.co.uk The Group’s interest has been accounted for as a joint arrangement on the basis of a contract between Sainsbury’s Supermarkets Limited and Carlton Communications plc to establish a joint venture to be called ‘taste’. For the year ended 31 March 2001, the Group’s 50 per cent share of turnover amounted to £1 million (2000: £nil) and its 50 per cent share of operating loss amounted to £4 million (2000: £nil). Summary of movements Group At 2 April 2000 Repayment of long-term capital advances Share of retained profit At 31 March 2001 Company At 2 April 2000 Repayment of long-term capital advances At 31 March 2001 Shares (at cost) £m Group share of post acquisition reserves £m Long-term capital advances £m 10 – 3 13 6 – – 6 6 – 6 10 (7) – 3 10 (7) 3 Total £m 26 (7) 3 22 16 (7) 9 29 J Sainsbury plc Annual Report and Financial Statements 2001 Notes to the financial statements > continued 18 Stocks Goods for resale Land held for and in the course of development 2001 £m 631 132 763 19 Debtors Group Company Trade debtors Amounts owed by subsidiaries Other debtors due in less than one year Other debtors due in more than one year1 Prepayments 2001 £m 80 297 87 82 546 2000 £m 54 142 24 100 320 1 Other debtors due in more than one year includes £75 million of vendor loan notes received on the sale of Homebase (see Note 4). 20 Current assets and creditors of Sainsbury’s Bank Current assets Treasury bills and other eligible bills Loans and advances to banks Loans and advances to customers1 Debt securities Prepayments and accrued income Creditors: due within one year Customer accounts Accruals and deferred income 2001 £m – 16 289 75 – 380 2001 £m 59 605 781 422 47 2000 £m 868 118 986 2000 £m – – 117 – 3 120 2000 £m 64 542 684 399 29 1,914 1,718 1,766 30 1,796 1,590 17 1,607 1 Loans and advances to customers include £333 million (2000: £329 million) of loans and advances repayable in more than one year (see Note 24). In addition to the above assets and liabilities, Sainsbury’s Bank had fixed assets of £6 million at 31 March 2001 (2000: £5 million). 21 Current asset investments Investments listed on a recognised stock exchange at cost (equivalent to market value) Unlisted investments at cost 2001 £m 1 11 12 2000 £m 4 14 18 30 J Sainsbury plc Annual Report and Financial Statements 2001 22 Creditors Group Company Due within one year Bank loans and overdrafts 8.25% Bond – December 2000 US $200 million 6.25% Notes – March 2002 Short-term notes 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 Due after more than one year Bank and other loans Medium-term notes US $200 million 6.25% Notes – March 2002 7.25% Bond – June 2002 8% Irredeemable Unsecured Loan Stock Obligations under finance leases Total borrowings due after one year Amounts due to subsidiaries Other creditors 2001 £m 159 – 141 70 4 374 1,054 127 121 460 196 197 2000 £m 178 150 – 523 3 854 1,148 128 132 428 226 197 2,529 3,113 360 233 – 200 3 176 972 28 1,000 385 115 125 200 3 133 961 32 993 2001 £m 119 – 141 70 – 330 – 106 35 42 5 47 197 762 360 233 – 200 3 – 796 470 – 2000 £m 13 150 – 523 – 686 – 34 26 57 16 19 197 1,035 350 115 125 200 3 – 793 597 22 1,266 1,412 Bank and other loans includes debt of £350 million (2000: £350 million) which is repayable in December 2003. Interest is payable at a fixed rate of 6.54 per cent. 23 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 2000 £m 851 3 192 4 566 18 70 111 2001 £m 330 – 217 – 405 – 174 – 2000 £m 686 – 167 – 556 – 70 – 2001 £m 370 4 217 10 405 20 174 146 1,346 1,815 1,126 1,479 Obligations under finance leases due after five years at 31 March 2001 are repayable by instalment. Bank and other loans due after five years are not repayable by instalment. 31 J Sainsbury plc Annual Report and Financial Statements 2001 Notes to the financial statements > continued 24 Financial instruments The financial assets and financial liabilities analysed below include fixed rate financial assets of £105 million (2000: £7 million), financial assets on which no interest is paid (i.e. debtors receivable in more than one year) of £6 million (2000: £15 million) and financial liabilities on which no interest is paid of £28 million (2000: £32 million) which are not included in Group net debt, as analysed in Note 25. Debtors receivable and creditors payable in less than one year, and the current assets and current liabilities of Sainsbury’s Bank are excluded from the analysis. The Group’s policies and procedures in relation to its treasury management, including management of interest rate and currency risk, are set out in the operating and financial review on pages 2 to 6. Fair values of financial assets and financial liabilities 2001 2000 Book value £m Fair value £m Book value £m Fair value £m Primary financial instruments held or issued to finance Group operations Borrowings due within one year Borrowings due after one year Other creditors Deposits maturing within one year Deposits maturing after one year Derivative financial instruments held to manage the interest rate and currency profile Interest rate swaps Currency swaps (374) (972) (28) 487 105 – – (376) (995) (28) 487 105 19 – (854) (961) (32) 551 7 – – (857) (953) (32) 551 7 3 (3) Fair values of financial assets and financial liabilities have been calculated by discounting future cash flows at prevailing interest and exchange rates. The above analysis includes finance leases with a capitalised value of £180 million (2000: £136 million). These leases primarily finance stores in the Group’s US operations and it is not practicable to estimate the fair value of these loans as no appropriate external benchmark is available. They are therefore included at book value. Financial assets After taking into account various interest rate and currency swaps the interest rate profile of the Group’s financial assets was: Sterling US Dollar At 31 March 2001 Sterling US Dollar Other At 1 April 2000 Floating rate financial assets £m 877 136 Total £m 982 142 1,124 1,013 767 140 6 913 747 138 6 891 Fixed rate financial assets £m 105 – 105 7 – – 7 Financial assets on which no interest is paid £m – 6 6 13 2 – 15 Floating rate financial assets comprise bank balances linked to bank base rate and money market fund balances, deposits and commercial paper investments bearing interest rates linked to LIBOR. The fixed rate financial assets have a weighted average interest rate of 9.85 per cent (2000: 7.75 per cent) fixed for an average period of 11.4 years (2000: 5.2 years). The financial assets on which no interest is paid have a weighted average period until maturity of 2 years. 32 J Sainsbury plc Annual Report and Financial Statements 2001 24 Financial instruments continued Financial liabilities After taking into account various interest rate and currency swaps, the interest rate profile of the Group’s financial liabilities was: Floating rate financial liabilities £m Fixed rate Financial liabilities on which no interest is paid £m financial liabilities £m Sterling US Dollar Other Total £m 860 943 97 657 630 97 At 31 March 2001 1,900 1,384 Sterling US Dollar Other At 1 April 2000 1,296 861 31 2,188 1,079 486 31 1,596 203 285 – 488 204 356 – 560 – 28 – 28 13 19 – 32 Fixed rate debt Weighted average interest rate % 7.26 9.52 – 8.58 7.26 8.82 – 8.25 Average time for which rate is fixed years 1.9 7.0 – 4.9 2.9 7.0 – 5.5 Floating rate financial liabilities comprise bank borrowings and commercial paper, linked to bank base rate and LIBOR, and fixed-rate long-term borrowings swapped into floating rate 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 four interest rate swaps which convert fixed rate financial liabilities of £350 million at 6.54 per cent, £100 million at 6.875 per cent and £19 million at 7.36 per cent and nominal $200 million at 6.40 per cent into floating rate sterling and US dollar LIBOR, and one interest rate swap which converts $150 million floating rate borrowing into a fixed-rate financial liability at 6.95 per cent. The above analysis excludes a cancellable swap in a notional principal amount of £150 million under which the Company pays a fixed rate of 4.09 per cent and receives floating rate LIBOR. The counterparty may exercise an option to cancel the swap on quarterly dates through to August 2030. In addition to the above, the Group’s provision of £18 million (2000: £40 million) for onerous leases meets the definition of a financial liability. This financial liability is considered to be a floating rate financial liability as, in establishing the provision, the cash flows have been discounted. The discount rate is re-appraised at each half-yearly reporting date to ensure that it reflects current market assessments of the time value of money and the risks specific to the liability. Currency exposures After taking into account forward contracts the Group had euro denominated monetary assets of £36 million and US dollar denominated monetary assets of £7 million. Excluded from these figures are non-sterling borrowings undertaken by the Company to hedge investments in overseas operations. Gains and losses on hedges The Group’s off-balance sheet (unrecognised) and on-balance sheet (deferred) gains and losses in respect of hedges, excluding Sainsbury’s Bank (see below), were: Unrecognised Deferred Gains and losses on hedges at 1 April 2000 Arising in previous years included in 2000–01 income Gains and losses not included in 2000–01 income Arising in previous years Arising in 2000–01 Gains and losses on hedges at 31 March 2001 Of which: Gains expected to be included in 2002 income Gains and losses expected to be included in 2003 income or later Gain £m 3 (2) 1 24 25 – 25 Loss £m (3) – (3) (3) (6) (2) (4) Total gain/loss £m – (2) (2) 21 19 (2) 21 Gain £m – – – 1 1 1 – Loss £m (6) 6 – (11) (11) (11) – Total gain/loss £m (6) 6 – (10) (10) (10) – 33 J Sainsbury plc Annual Report and Financial Statements 2001 Notes to the financial statements > continued 24 Financial instruments continued Financial instruments – Sainsbury’s Bank The financial assets and financial liabilities of Sainsbury’s Bank are shown separately as current assets and current liabilities in the Group balance sheet (see Note 20). The management of the Bank’s treasury operations is separate from that of the Group, as described on page 5 of the operating and financial review. Sainsbury’s Bank’s exposure to movements in interest rates is shown in the following table which discloses the interest rate re-pricing profile of assets and liabilities as at 31 March 2001. Any asset (or positive) gap position reflects the fact that the Bank’s financial assets re-price more quickly, or in greater proportion than liabilities in a given time period and will tend to benefit net interest rate income in a rising interest rate environment. A liability (or negative) gap exists when liabilities re-price 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 re-pricing date and the maturity date. Interest rate sensitivity table of Sainsbury’s Bank at 31 March 2001 Assets Eligible bank bills Loans and advances to banks Loans and advances to customers Debt securities Other assets Total assets Liabilities Customer accounts Other liabilities Shareholders’ funds Total liabilities On balance sheet gap Derivative instruments Net interest rate sensitivity gap Cumulative gap Interest rate sensitivity table of Sainsbury’s Bank at 1 April 2000 Assets Eligible bank bills Loans and advances to banks Loans and advances to customers Debt securities Other assets Total assets Liabilities Customer accounts Other liabilities Shareholders’ funds Total liabilities On balance sheet gap Derivative instruments Net interest rate sensitivity gap Cumulative gap Not more than 3 mths £m Over 3 mths but not over 6 mths £m Over 6 mths but not over 1 year £m Over 1 year Over 3 years but not over but not over 5 years 3 years £m £m Over 5 years £m Non- interest bearing £m 59 535 390 422 – 1,406 1,693 – – 1,693 (287) 212 (75) (75) – 40 18 – – 58 5 – – 5 53 (7) 46 (29) – 30 40 – – 70 14 – – 14 56 (37) 19 (10) – – 191 – – 191 44 – – 44 147 (89) 58 48 – – 141 – – 141 10 – – 10 131 (79) 52 100 – – 1 – – 1 – – – – 1 – 1 – – – – 53 53 – 33 121 154 (101) – (101) 101 – Not more than 3 mths £m Over 3 mths but not over 6 mths £m Over 6 mths but not over 1 year £m Over 1 year but not over 3 years £m Over 3 years but not over 5 years £m Over 5 years £m Non- interest bearing £m 64 499 350 399 – 1,312 1,533 – – 1,533 (221) 88 (133) (133) – 10 1 – – 11 – – – – 11 – 11 – 33 4 – – 37 8 – – 8 29 5 34 (122) (88) – – 119 – – 119 40 – – 40 79 (76) 3 (85) – – 197 – – 197 9 – – 9 188 (17) 171 86 – – 13 – – 13 – – – – 13 – 13 99 – – – – 34 34 – 21 112 133 (99) – (99) – Total £m 59 605 781 422 53 1,920 1,766 33 121 1,920 – – – – Total £m 64 542 684 399 34 1,723 1,590 21 112 1,723 – – – – As set out above, the Bank has entered into interest rate swaps on a notional principal amount of £742 million. The underlying risks involved are significantly lower than the contract or notional principal amounts, as shown by the risk weighted amounts calculated using the Financial Services Authority’s capital adequacy rules (total of £3 million) and their fair value represented by replacement cost (total of £1 million). 34 J Sainsbury plc Annual Report and Financial Statements 2001 25 Analysis of net debt Current asset investments Cash at bank and in hand Due within one year Bank overdrafts Borrowings Finance leases Due after one year Borrowings Finance leases Total net debt 26 Provisions for liabilities and charges At 2 April 2000 Profit & loss account Deferred tax – UK Deferred tax – US Utilised New provisions Disposal of subsidiary At 31 March 2001 Disposal of subsidiary £m Other non-cash movements £m Exchange movements £m At 31 March 2001 £m At 2 April 2000 £m 18 533 551 (162) (689) (3) (854) (828) (133) (961) (1,264) Cash flow £m (6) (31) (37) 22 497 3 522 36 – 36 521 – (37) (37) – – – – – – – (37) – – – – – – – – (28) (28) (28) Deferred tax £m Onerous leases £m Group Closure and business transformation costs £m (3) 1 (6) – – 4 (4) 40 – – (11) 8 (19) 18 11 – – (7) 60 – 64 – 10 10 – (38) (4) (42) (4) (15) (19) (51) Total £m 48 1 (6) (18) 68 (15) 78 12 475 487 (140) (230) (4) (374) (796) (176) (972) (859) Company Closure and business transformation costs £m – – – – 60 – 60 The provisions for onerous leases cover residual lease commitments of up to 80 years, after allowance for existing or anticipated sublet rental income. The provisions for closure costs (£55 million) relate to indemnities and warranties arising from the disposal of Homebase (see Note 4) and future claims arising from the disposal of EDGE (see Note 5). The provisions for business transformation costs (£9 million) relate to supply chain commitments (see Note 2). The provisions for closure and business transformation costs are expected to crystallise in the year ended 30 March 2002. The provided and unprovided liabilities for deferred tax are as follows: Timing differences between depreciation and capital allowances Other timing differences 2001 2000 Provided £m Unprovided £m Provided £m Unprovided £m 2 (6) (4) 159 (22) 137 9 (12) (3) 178 (27) 151 The potential liability for tax which might arise on disposal of the Group’s properties has not been quantified. In the opinion of the Directors the likelihood of any such liability arising is remote. No provision has been made for tax which would arise if profits of overseas subsidiaries were distributed. 35 J Sainsbury plc Annual Report and Financial Statements 2001 Notes to the financial statements > continued 27 Called up share capital and share premium account Shares authorised Ordinary shares of 25 pence each – 2,200 million shares (2000: 2,000 million) Shares allotted At 2 April 2000 Profit Sharing Scheme SAYE Share Option Scheme Executive Share Option Scheme At 31 March 2001 Further details of these Schemes at 31 March 2001 are set out below: (a) SAYE Share Option Scheme Allotted fully paid shares million Aggregate nominal value £m Share premium £m Consideration £m 550 481 – 1 1 483 1,924.5 0.5 4.3 1.5 1,930.8 1,379 2 15 5 1,401 2 16 6 24 The Company operates a SAYE Share Option Scheme for all UK employees with more than one year’s service. This is an approved Inland Revenue Scheme and was established in 1980. The Scheme is renewable every 10 years and approval will again be sought at this year’s Annual General Meeting. At 31 March 2001, UK employees held 66,500 five-year savings contracts in respect of options over 27.9 million shares and 48,000 three-year savings contracts in respect of options over 12.7 million shares. Details of these options at 31 March 2001 are set out below: Date of grant 16 December 1994 (5 year period) 20 December 1995 (5 year period) 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) 7 January 2000 (3 year period) 7 January 2000 (5 year period) 28 November 2000 (3 year period) 28 November 2000 (5 year period) Price p 331 313 292 292 398 398 416 416 253 253 299 299 Options outstanding 2001 million 2000 million – 2.7 – 4.7 1.9 4.8 2.7 5.0 3.9 5.3 4.2 5.4 3.5 6.4 0.9 5.1 2.3 5.3 3.0 5.5 4.4 5.6 – – 40.6 42.0 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 4.3 million ordinary shares allotted in relation to the Savings–Related Share Option Scheme, 3.6 million ordinary shares were subscribed for by the QUEST at a market value of £13.5 million. These shares were allocated to employees, including Directors, in satisfaction of options exercised under the Scheme. The Company provided £2 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 29). 36 J Sainsbury plc Annual Report and Financial Statements 2001 27 Called up share capital and share premium account continued (b) Executive Share Option Scheme Date of grant 28 February 1991 (adjusted for the rights issue July 1991) 28 August 1992 12 March 1994 8 September 1995 1 December 1995 20 May 1997 11 November 1997 10 November 1998 2 August 1999 24 November 1999 17 January 2000 1 March 2000 2 June 2000 These options were held by 2,144 executives (2000: 1,873). (c) Colleague Share Option Plan Options outstanding Price p 322 447 359 475 386 367 489 545 378 320 320 261 272 2001 million – 3.4 2.8 5.2 0.1 7.1 0.4 7.8 10.5 0.1 0.2 3.0 16.4 57.0 2000 million 0.8 3.5 3.1 5.4 0.1 7.9 0.4 8.0 10.9 0.1 0.2 3.0 – 43.4 In July 1999 the Company established a Colleague Share Option Plan to operate under the rules of the Inland Revenue Approved Discretionary Share Option Scheme and granted options at a price of 378 pence. In August 2000 a further option was granted to employees who did not qualify for the first grant with an option price of 272 pence per share. A total of 123,800 (2000: 111,000) UK employees participated in the Plan and held options over 39.8 million shares (2000: 36.0 million). The options will normally be exercisable during certain two week periods between three and ten years from the date of the grant of option. It is intended that there will be no further options granted under this Plan. 28 Revaluation reserve At 2 April 2000 and 31 March 2001 29 Profit and loss account At 2 April 2000 Loss retained for the period Currency translation differences Goodwill on disposals written back Amounts deducted in respect of shares issued to the QUEST At 31 March 2001 Group £m 39 Group £m 2,843 (12) 10 149 (2) Company £m – Company £m 2,575 (100) 62 – (2) 2,988 2,535 The cumulative goodwill deducted from the reserves of the Group at 31 March 2001 amounted to £140 million (2000: £289 million). This goodwill will be charged to the profit and loss account on disposal of the businesses to which it relates. The profit for the year of the Company was £174 million (2000: £262 million). 37 J Sainsbury plc Annual Report and Financial Statements 2001 Notes to the financial statements > continued 30 Reconciliation of operating profit to net cash inflow from operating activities Operating profit Depreciation Amortisation of intangible assets Loss/(profit) on sale of equipment, fixtures and vehicles Increase in stocks Increase in debtors Increase in creditors and provisions (Increase)/decrease in Sainsbury’s Bank current assets Increase/(decrease) in Sainsbury’s Bank creditors 2001 £m 533 409 17 2 (36) (147) 151 (196) 189 922 2000 £m 528 410 12 (4) (86) (47) 39 48 (62) 838 31 Sale of Homebase business As described in Note 4, the sale of the Homebase business completed on 3 March 2001 for a total consideration of £975 million, net of costs, including freehold properties retained. Of the total consideration, £636 million was received in cash prior to the year–end. Net assets disposed of: Fixed assets Goodwill Stock Debtors Cash Creditors and provisions Goodwill written back Profit on disposal Satisfied by: Cash Loan notes Debtors (net of transaction costs) £m 339 8 247 60 37 (145) 546 149 21 716 636 75 5 716 On 31 March 2001 retained freehold properties with a net book value of £113 million were sold for a consideration of £156 million. The consideration was a debtor at the year-end. The business sold during the year contributed £66 million to the Group’s net operating cash flows, paid £3 million in respect of net returns on investments and servicing of finance, paid £3 million in respect of taxation, utilised £89 million for capital expenditure, invested £19 million in an associate and received £12 million from sales of fixed assets. 32 Contingent liabilities and financial commitments Group commitments to make operating lease payments during the next financial year are as follows: Leases which expire within one year Leases which expire between 1 and 5 years Leases which expire after 5 years Land and buildings Other leases 2001 £m 1 6 305 2000 £m 3 6 310 2001 £m – 7 – 2000 £m 1 10 – There are a number of contingent liabilities relating to disposals and other contractual liabilities under which it is not considered any liability will arise. The Company has guaranteed borrowings of a subsidiary amounting to £27 million (2000: £nil) and Group annual commitments under lease obligations on land and buildings of £43 million (2000: £25 million), increasing by one per cent per annum to 2023. 38 J Sainsbury plc Annual Report and Financial Statements 2001 33 Future capital expenditure Contracted but not provided for 34 Pension costs Group Company 2001 £m 240 2000 £m 260 2001 £m – 2000 £m – The pension costs for the UK mainly 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 separately from the Group’s assets by trustee companies. In June 1998, the Group 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. New employees are eligible to join only the Group Personal Pension Plan but may join the JSPDBS after five years’ service. New Directors and senior employees will continue to join the JSEPS. The pension cost for the year ended 31 March 2001 is based on the results of a triennial valuation carried out by Watson Wyatt, the schemes’ independent actuaries, as at 1 April 2000, on the projected unit basis. The principal actuarial assumptions used in the actuarial valuations are: Long term rate of return on investments – before retirement – after retirement 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 % 7.0 5.5 5.5 4.5 3.0 3.0 As at 1 April 2000, the market value of the UK schemes was £2,943 million (1997: £1,999 million). The actuarial value was sufficient to cover 101 per cent (1997: 109 per cent) of the liabilities of the JSPDBS, a surplus of £248 million (1997: £111 million) and 110 per cent (1997: 115 per cent) of the JSEPS, a surplus of £98 million (1997: £44 million). Total pension contribution costs for the Group were £66 million for the year ended 31 March 2001 (2000: £64 million) of which the pension contribution costs of the UK schemes amounted to £55 million (2000: £53 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 2006 for the JSEPS. Total costs for 2001 are after taking account of an amortisation of scheme surpluses of £19 million (2000: £22 million). The Group’s UK pension cost is not expected to change until the results of the next triennial valuation in April 2003. 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 £11 million (2000: £11 million) has been calculated in accordance with US accounting principles but would not have been materially different had UK accounting principles been applied. 35 Related party transactions The following transactions fall to be disclosed under the terms of FRS8. Sainsbury’s Bank is a subsidiary of the Company and has as joint shareholders the Company and Bank of Scotland, which hold 55 per cent and 45 per cent respectively of the issued share capital. In the year ended 31 March 2001, Bank of Scotland provided both management and banking services to Sainsbury’s Bank. In the same period the Group provided management services and reward points (relating to customer loyalty cards) to Sainsbury’s Bank. The amounts in respect of management, banking services and reward points payable during the year were: Payable to Bank of Scotland Payable to the Group 2001 £m 21 10 2000 £m 19 10 In addition Sainsbury’s Bank made loans and advances to, and entered into interest rate swaps with, Bank of Scotland Treasury Services plc and operated a current account at Bank of Scotland during the year, all under normal commercial terms. Included in loans and advances to banks at 31 March 2001 of £605 million (2000: £542 million) are loans and advances to Bank of Scotland Group of £429 million (2000: £376 million). 39 J Sainsbury plc Annual Report and Financial Statements 2001 Five year financial record Financial results (£ million) Group turnover4 Increase on previous year Operating profit Sainsbury’s Supermarkets Sainsbury’s Bank Shaw’s Supermarkets Other operating activities Homebase Sainsbury’s Egypt Profit sharing Interest payable Joint ventures E-commerce Group underlying profit before tax5 (Decrease)/increase on previous year Earnings per share Basic (Decrease)/increase on previous year Underlying5 (Decrease)/increase on previous year Dividend per share Retail statistics for UK and US food retailing Number of outlets at financial year-end Sainsbury’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’s Supermarkets Shaw’s Supermarkets Total number of stores – continuing operations Sales area (000 sq ft) Sainsbury’s Supermarkets Shaw’s Supermarkets Group total – continuing operations Net increase on previous year: Sainsbury’s Supermarkets Shaw’s Supermarkets New Sainsbury’s Supermarkets openings Sainsbury’s Supermarkets’ sales intensity (including VAT)7 Per square foot (£ per week) Share of national trade in predominantly food stores and pharmaceutical, medical, cosmetic and toilet goods outlets8 19971 19982 19993 2000 2001 14,312 6.0% 15,496 8.3% 16,378 5.7% 17,414 6.3% 18,441 5.9% 692 (6) 41 2 16 – 745 (37) (76) 19 – 651 751 (15) 37 10 51 – 834 (44) (78) 16 – 728 711 (5) 52 12 69 – 839 (45) (50) 11 – 755 538 3 79 16 63 (11) 688 (10) (72) 1 (27) 580 510 13 115 25 57 (35) 685 (8) (76) 1 (53) 549 (14.8)% 11.8% 3.7% (23.2)% (5.3)% 22.0p (17.9)% 23.1p (16.9)% 12.3p 25.1p 14.1% 26.6p 15.2% 13.9p 29.2p 13.8p 18.3p 16.3% (37.3)% (24.6)% 26.8p 19.2p 20.5p 0.8% (23.5)% (6.3)% 14.32p 14.32p 14.32p6 33 223 87 47 390 115 505 39 229 93 43 404 121 525 42 233 98 45 418 127 545 61 225 99 47 432 168 600 86 209 93 65 453 185 638 11,421 3,822 11,979 4,119 12,571 4,410 13,055 5,617 13,746 6,124 15,243 16,098 16,981 18,672 19,870 6.3% 21.8% 18 4.9% 7.8% 19 4.9% 7.1% 20 3.9% 27.4% 20 5.3% 9.0% 27 18.09 18.26 18.04 16.98 16.79 12.3% 12.5% 12.3% 11.9% 11.9% 1 2 3 4 5 6 7 8 Restated under FRS 12. Restated under FRS 12 and FRS 14. Turnover, profits and diluted earnings per share are for the 52 week period to 3 April 1999. Includes VAT at Sainsbury’s Supermarkets and Homebase and sales tax at Shaw’s Supermarkets. Underlying profit before tax and diluted earnings per share are stated before exceptional costs of £44 million in 1997, £40 million in 1998, £60 million in 2000 and £99 million in 2001 and exceptional profits of £63 million in 1999 and before amortisation of goodwill of £11 million in 2000 and £16 million in 2001. Excludes a one penny per share payment to cover the extra four weeks in 1999. Including Savacentre, excluding petrol. Based on Office for National Statistics data and Sainsbury’s Supermarkets sales, excluding petrol. 40 J Sainsbury plc Annual Report and Financial Statements 2001 Information about the Group may be found on the Internet at: www.j-sainsbury.co.uk Designed and produced by CGI. Front cover photography by John Sturrock (Network Photographers). Printed by Royle Corporate Print on Mega Matt made with Nordic Swan accreditation for low emission during production. J Sainsbury plc Stamford House Stamford Street London SE1 9LL www.j-sainsbury.co.uk A n n u a l R e p o r t a n d F n a n c i a i l S t a t e m e n t s 2 0 0 1