A n n u a l R e p o r t a n d i F n a n c i a l S t a t e m e n t s 2 0 0 2 J Sainsbury plc 33 Holborn, London EC1N 2HT www.j-sainsbury.co.uk Annual Report and Financial Statements 2002 Contents Financial highlights Operating and financial review Report of the Directors Statement of corporate governance Remuneration report 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 movements in equity shareholders’ funds Balance sheets Group cash flow statement Notes to the financial statements Five year financial record 1 2 9 10 12 17 17 18 19 19 20 21 22 44 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 2002. The full Annual Report and Accounts of J Sainsbury plc for 2002 comprises this publication together with the Annual Review and Summary Financial Statement 2002. Copies may be obtained through our website www.j–sainsbury.co.uk or by calling Freephone 0800 387504. Front cover Sainsbury’s colleague David Dullaghan in the fresh produce department at our Chiswick, London store. Best practice shared with Shaw’s in the US, helped us win the title ‘Fresh Produce Retailer of the Year’. Back cover Shaw’s associate Bob Murphy in the fresh produce department at our Canton, Massachusetts store. Like Sainsbury’s, Shaw’s is undertaking a major training programme to deliver great service to customers. Visit our websites Information about the Group may be found on the Internet at: www.j-sainsbury.co.uk For information about Sainsbury's Supermarkets log on to: www.sainsburys.co.uk For information about Sainsbury's Bank log on to: www.sainsburysbank.co.uk For information about Shaw's log on to: www.shaws.com To shop on-line log on to: www.sainsburystoyou.co.uk Designed and produced by CGI BrandSense. Front cover photography by John Sturrock. Back cover photography Jason Grow (Network Photographers). Printed by Royle Corporate Print. The paper used in this Report combines materials utilising recycled board with Nordic Swan label and paper which is elemental chlorine free. The paper mills have achieved accreditation to the environmental standard ISO 14001. Financial highlights Group sales 1 – continuing operations £ million UK and US food retailing sales areas 000 sq ft Sainsbury’s Supermarkets like–for–like sales growth % 4 Group underlying 2 profit before tax £ million 1 6 2 4 1 , 0 8 0 5 1 , 2 6 9 5 1 , 0 4 9 6 1 , 8 9 1 8 1 , 8 9 0 6 1 , 1 8 9 6 1 , 2 7 6 8 1 , 0 7 8 9 1 , 0 1 6 0 2 , 8 2 . 9 0 . . 2 2 – 5 1 . 0 6 . 8 2 7 6 5 7 0 8 5 9 4 5 7 2 6 S S U S U U S S U U K K U K U K U K U U 98 99 00 01 02 98 99 00 01 02 98 99 00 01 02 98 99 00 01 02 2002 Sales – continuing operations1 Underlying profit before tax2 Profit before tax Underlying earnings per share2 Dividend per share 1 Including VAT at Sainsbury’s Supermarkets and sales tax at Shaw’s Supermarkets. 2 Before exceptional items and amortisation of goodwill. 3 Restated for change in accounting policy for deferred tax. 4 Excluding petrol, adjusted to remove the effect on sales of two Easters in a year. £18,198m £16,940m £549m £437m3 18.8p3 14.32p £627m £571m 21.5p 14.84p 2001 % change 7.4 14.2 30.7 14.4 3.6 Total shareholder return was 10 per cent over the year (the increase in the value of a share, including reinvested dividends, based on the average share price for the three months ended 30 March 2002 compared with the equivalent period in 2001). J Sainsbury plc 1 Annual Report and Financial Statements 2002 Operating and financial review for the 52 weeks to 30 March 2002 The results for the year reflect good progress across the Group. The Group’s underlying profit before tax has increased to £627 million (2001: £549 million), an increase of 14.2 per cent, reversing the profit declines in recent years. Profit before tax after exceptional items and amortisation of goodwill was £571 million (2001: £437 million), an increase of 30.7 per cent. In its first full year of recovery Sainsbury’s Supermarkets has reversed the profit declines experienced in the previous three financial years and reported a 10 per cent year-on-year profit growth. We have seen a step change in sales performance with like–for–like growth of 6.3 per cent, excluding petrol (Easter contributing 0.3 per cent), the best like–for–like growth reported for over a decade. Significant progress has been made in delivering our transformation programme with accelerated investment in our IT systems, supply chain and the reinvigoration of our stores. This investment programme will continue to drive sales growth and deliver significant cost efficiencies over the long term. Shaw’s, the Group’s US supermarket chain, and Sainsbury’s Bank continued their recent strong performances with reported operating profit growth of 19 per cent and 66 per cent respectively. The Group is in a stronger financial position than a year ago and remains focused on delivering long-term, sustainable growth in Sainsbury’s Supermarkets, together with exploiting growth opportunities in Shaw’s and Sainsbury’s Bank. Profit and loss account Sales1 Continuing operations Discontinued operations Operating profit Continuing operations Profit sharing Total operating profit – continuing operations2 Operating (loss)/profit – discontinued operations Net interest payable Share of loss in joint ventures Underlying profit before tax Exceptional items3 Amortisation of goodwill Profit before tax Tax3 Profit after tax Equity minority interest Profit for the year Underlying earnings per share Dividend per share (p per share) 2002 £m 2001 £m Increase % 18,198 8 16,940 1,501 18,206 18,441 689 (10) 679 (2) (49) (1) 627 (42) (14) 571 (200) 371 (7) 364 623 (8) 615 13 (76) (3) 549 (96) (16) 437 (157) 280 (4) 276 21.5p 18.8p 14.84p 14.32p 7.4 10.4 14.2 30.7 31.9 14.4 3.6 1 2 3 Including VAT at Sainsbury’s Supermarkets and Homebase and sales tax at Shaw’s Supermarkets. Before exceptional operating costs and amortisation of goodwill. Restated for change in accounting policy for deferred tax (see notes 1, 5 and 10 to the financial statements). Total Group sales were £18,206 million (2001: £18,441 million), with sales from continuing operations increasing by 7.4 per cent to £18,198 million (2001: £16,940 million). Total operating profit from continuing operations at £679 million (2001: £615 million), was 10.4 per cent up on the previous year with all operations, except JS Developments, making a strong contribution to growth. Total operating profit includes an investment in Sainsbury’s to You, our home delivery service, which amounted to £50 million, an increase of £10 million over the previous year. Net interest payable of £49 million was £27 million lower than the previous year, benefiting from the Homebase disposal proceeds and lower interest rates. Underlying profit before tax at £627 million (2001: £549 million) was 14.2 per cent up on the previous year. J Sainsbury plc 2 Annual Report and Financial Statements 2002 Group operating profit – continuing operations £ million 4 4 7 0 3 7 7 0 6 5 1 6 9 7 6 98 99 00 01 02 Group profit before tax £ million 1 9 6 2 3 8 9 0 5 7 3 4 1 7 5 98 99 00 01 02 Group underlying earnings per share pence . 6 6 2 . 8 6 2 . 5 0 2 . 8 8 1 . 5 1 2 98 99 00 01 02 The 2001 figures are restated for FRS 19. Sainsbury’s Supermarkets Operating profit £ million 1 5 7 1 1 7 8 1 5 0 7 4 5 1 5 98 99 00 01 02 Sainsbury’s Supermarkets Sales1 Operating profit2 Number of stores Sales area (000 sq ft) Full-time employees 2002 2001 £14,860m £13,894m £515m £470m 463 14,349 44,000 453 13,746 42,300 99,600 Part-time employees 101,400 1 2 Includes VAT. Profit before profit sharing and exceptional operating costs. Shaw’s Supermarkets Operating profit £ million 7 3 2 5 9 7 5 1 1 7 3 1 98 99 00 01 02 Shaw’s Supermarkets Sales1 Operating profit2 Number of stores Sales area (000 sq ft) Full-time employees 2002 2001 £3,061m £2,743m £137m £115m 185 6,261 9,700 185 6,124 9,200 Part-time employees 18,700 18,400 1 2 Includes sales tax. Profit before exceptional operating costs and amortisation of goodwill. J Sainsbury plc 3 Annual Report and Financial Statements 2002 Results from continuing operations Sales and underlying operating profit before exceptional costs and amortisation of goodwill were as follows: Sales1 2002 Operating profit2 2002 £m % change £m % change Continuing operations Sainsbury’s Supermarkets Sainsbury’s Bank JS Developments Shaw’s Supermarkets (US) Profit sharing 14,860 165 112 3,061 7 7 (25) 12 Total 18,198 7 1 2 Includes VAT at Sainsbury’s Supermarkets and sales tax at Shaw’s Supermarkets. Profit before exceptional operating costs and amortisation of goodwill. 515 22 15 137 (10) 679 10 66 (40) 19 (30) 10 Continuing operations Sainsbury’s Supermarkets’ sales increased by 7 per cent to £14,860 million (2001: £13,894 million), and underlying operating profit was up by 9.5 per cent to £515 million (2001: £470 million). Like–for–like sales were up 6.3 per cent excluding petrol (Easter contributing 0.3 per cent) for the year. This represents a step change in sales performance. Sainsbury’s Supermarkets have now had five quarters of strong like–for–like growth and outperformed the industry average for total and like–for–like sales growth in the year. The key drivers of sales growth were the improvements to the customer offer and the acceleration of our store reinvigoration programme. In total, 117 stores were extended (27) or refurbished (90), compared with a total of 50 in the previous year. These are effectively new stores with our latest food and non-food ranges, and sales uplifts from these stores remain encouraging. New formats are currently being trialled or are in the process of being developed which will contribute to our future sales growth. In total 25 new stores were opened, including 15 Locals. A total of 603,000 sq. ft of net new space was added to the estate in the year. Significant cost efficiencies continue to be delivered. A total of £160 million was delivered in the year, in addition to the £90 million last year, and our cost reduction programme remains on track. Savings have been achieved in the cost of products, whilst maintaining or increasing quality, and through the simplification of end-to-end processes where the implementation of new systems and new fulfilment centres in the supply chain remain the key enablers. Underlying operating profit of £515 million included the investment in Sainsbury’s to You, the Group’s home delivery service. This investment increased from £40 million last year to £50 million in the current year. Results improved in the second half due to increased sales, lower customer acquisition costs and improved operating efficiencies. We are confident that Sainsbury’s toYouresults will improve significantly in the new financial year as sales grow and operating efficiencies continue to improve. Excluding Sainsbury’s to You, operating profit increased by 10.8 per cent to £565 million (2001: £510 million) and operating margins (VAT inclusive) for the year increased from 3.7 per cent to 3.8 per cent (VAT exclusive 4 per cent to 4.1 per cent). We are confident that operating margins will continue to improve in the future. Shaw’s Supermarkets had another excellent year with like–for–like sales up 3.9 per cent (Easter contributing 0.4 per cent). Underlying operating profit was up 18.9 per cent to £137 million (2001: £115 million) reflecting the full year impact of the successful acquisition of 19 Grand Union stores in 2001, of which 17 have now been smoothly integrated and rebadged as Shaw’s. Excluding the contribution from Grand Union, the underlying increase in profits was a very healthy15 per cent. The like–for–like sales performance has improved over last year, despite more difficult economic conditions and a mild winter. This was due to a new improved store format and customer offer and the acceleration of the store extension and refurbishment programme. In total, 17 Grand Union stores were fully integrated, 15 Shaw’s stores were remodelled, two stores were extended and 11 Star Markets were rebadged as Shaw’s. Sales uplifts were very encouraging. Distribution efficiencies resulting from the closure of the East Bridgewater depot, together with the improved trading results from the Connecticut stores have contributed to the 18.9 per cent increase in operating profit and a continuing improvement in operating margin from 4.2 per cent to 4.5 per cent. Operating and financial review continued Sainsbury’s Bank Operating profit £ million 5 1 – 5 3 – 3 1 2 2 98 99 00 01 02 Sainsbury’s Bank, 55 per cent owned by the Group and 45 per cent owned by HBoS, achieved strong profit growth of 66.4 per cent to £22 million (2001: £13 million). Adjusting for VAT credits in both years, underlying profit increased by 95 per cent. Customer acquisition costs are minimised through in–store merchandising and promotion of financial services products. New permanent point of sale programmes had been implemented in 127 stores by the year-end and resulted in significant sales increases. Sales of personal loans doubled and insurance products increased threefold in the year. JS Developments is the Group’s project based property development company where, depending on activity, profits can fluctuate from year to year. Fewer projects were completed in the year and three substantial projects were carried forward into 2003. As a result, operating profit at £15 million was down on the previous year (2001: £25 million). Discontinued operations Losses from discontinued businesses were £2 million (2001: profit of £13 million). The withdrawal from Egypt benefited operating profit by £33 million with losses reducing from £35 million last year to £2 million this year. The disposal of Homebase was slightly earnings positive during the year, last year’s profit contribution of £48 million being offset by the interest benefit on the disposal proceeds. Exceptional items Sainsbury’s Bank Sales Operating profit 2002 £165m £22m 2001 £154m £13m Exceptional operating costs UK business transformation programme2 Shaw’s Supermarkets Homebase Non-operating exceptional items Profit on sale of Homebase (Loss)/profit on sale of properties – Homebase – other Impairment of Egyptian business Total exceptional items 1 2 Restated for FRS 19. Including the closure of the Taste joint venture amounting to £5 million. 2002 £m (30) (8) – (38) – – (4) (4) – (4) (42) 20011 £m (68) (10) (1) (79) 24 43 27 70 (111) (17) (96) In October 2000, we announced a major transformation programme in Sainsbury’s Supermarkets including upgrading IT systems, supply chain and store portfolio. Due to the scale, scope and pace of this programme it was estimated that exceptional operating costs of between £35 million and £50 million per annum would be incurred for at least three years. These costs primarily relate to the closure of depots and stores and reorganisation costs associated with this programme. In the year, total exceptional operating costs were £38 million, a £41 million reduction over the previous year. These costs included transformation programme costs of £25 million, the cost of the closure of the Taste joint venture amounting to £5 million, and costs of £8 million at Shaw’s relating to the closure of the East Bridgewater depot. Surplus properties were sold in the year generating cash proceeds of £54 million and a property loss of £4 million. No further adjustments were made this year-end to the Homebase profit on disposal nor to the Egyptian impairment provision reported in last year’s accounts. A full withdrawal from the Egyptian business was completed during the year within the costs provided. Substantial progress has been made in completing outstanding matters associated with the Homebase disposal. It is now estimated that total gross proceeds of around £1 billion will be generated and a further profit on disposal will be realised when the Group’s 17.8 per cent retained equity investment in Homebase is sold, and when all outstanding property matters are resolved. J Sainsbury plc 4 Annual Report and Financial Statements 2002 Taxation The Group’s underlying tax charge at £210 million (2001 restated: £187 million), gives an effective underlying rate of 33.5 per cent (2001 restated: 34.1 per cent) before exceptional items and amortisation of goodwill. The underlying rate exceeds the nominal rate of UK corporation tax principally due to the higher rate of tax incurred on US profits and the lack of effective tax relief on depreciation of UK retail properties. FRS 19 on deferred tax was adopted this year, which has increased the underlying rate for the year by 2 per cent and reduced opening shareholders’ funds by £160 million. FRS 19 requires that deferred tax be recognised in respect of all timing differences that have originated, but not reversed, by the balance sheet date. Prior to FRS 19, the Group’s accounting policy was to provide for the deferred tax which was likely to be payable or recoverable. Earnings per share and dividends Underlying earnings per share before exceptional items and amortisation of goodwill increased by 14.4 per cent to 21.5 pence (2001 restated: 18.8 pence). Basic earnings per share increased by 31.7 per cent to 19.1 pence (2001 restated: 14.5 pence). A final dividend of 10.82 pence per share is proposed, which represents an increase of 5 per cent over last year. The total proposed dividend for the year is 14.84 pence which represents an increase of 3.6 per cent on last year and dividend cover of 1.3 times. The decision to propose an increase in the final dividend reflects the Directors’ confidence in the Group’s future growth prospects. This increase is at a lower rate than the increase in earnings, recognising the need to restore dividend cover. Cash flow Summary cash flow Operating cash inflows Net interest Taxation Dividends Payments for fixed assets Purchase of own shares Sale of fixed assets Cash outflow before sale and purchase of businesses Sale of business Investment in joint ventures Other Net cash (outflow)/inflow before financing Issue of ordinary share capital Non cash movements (Increase)/decrease in net debt Net debt 2002 £m 1,067 (69) (171) (275) (1,073) – 218 (303) 3 (6) – (306) 17 (8) (297) 1,156 2001 £m 922 (95) (168) (274) (960) (18) 453 (140) 636 (45) 9 460 24 (79) 405 859 The Group’s net debt has increased by £297 million during the year to £1,156 million. Operating cash inflow remained strong at £1,067 million, up 16 per cent on last year. Group capital expenditure for the year was £1,156 million (2001: £956 million). Sainsbury’s Supermarkets’ capital expenditure was £1,023 million including £221 million on new stores, £530 million on existing stores, £171 million on the supply chain and £101 million on other capital expenditure. Shaw’s capital expenditure was £133 million. Group capital expenditure is forecast to be £1.1 billion for 2003. Sale of fixed assets benefited from Homebase freehold properties disposal proceeds amounting to £196 million, less indemnity payments provided for at the time of the Homebase sale. Since the year-end £78 million has been received being the partial repayment of vendor loan notes in Homebase. Group capital expenditure £ million 9 0 8 2 7 7 3 0 8 6 5 9 6 5 1 1 , 98 99 00 01 02 J Sainsbury plc 5 Annual Report and Financial Statements 2002 Operating and financial review continued Treasury management Treasury policies are reviewed and approved by the Board. The Group Chief Executive and Group Finance Director have joint delegated authority from the Board to approve finance transactions up to £300 million and responsibility 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 HBoS, which maintains a conservative approach to treasury management. Sainsbury’s Bank does not undertake any trading activities and only uses derivative instruments to hedge risk. Credit limits have been established for all counter-parties and these are reviewed and approved by Sainsbury’s Bank’s Board and Risk Management Committee, a sub–committee 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 responsibility for funding, interest rate and currency risk management and UK cash management. 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. Various financial instruments, e.g. trade debtors, trade creditors, accruals and prepayments, also arise as a direct result of the Group’s commercial operations. The Group finances its operations through 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 were last reviewed by the Board in July 2001. Interest rate risk The Group’s exposure to interest rate fluctuations is managed through the use of interest rate swaps and options. The Group’s objective is to reduce interest costs whilst maintaining a defined minimal level of 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 30 March 2002, and after taking into account swaps, the proportion of the Group’s net debt at fixed rates was 56 per cent (2001: 57 per cent) and the average period for which the fixed rate financial liabilities, including finance leases, were fixed was 6.3 years (2001: 4.9 years). The average rate of interest during the year was 5.9 per cent (2001: 8.2 per cent). A 1 per cent rise in UK and US interest rates would reduce profit before tax by less than 0.1 per cent. Changes in other currency interest rates would have no significant impact on Group profits. Liquidity risk The Group’s exposure to liquidity risk is managed by pre-funding significant cash flow and refinancing obligations, maintaining a diversity of funding sources and spreading debt repayments over a range of maturities. The Group’s principal debt raising operations are arranged through the Company’s £750 million Commercial Paper programme and £2 billion Medium Term Note programme. In addition the Group maintains a portfolio of committed facilities with a group of high quality international banks amounting to £620 million as at 30 March 2002 (2001: £620 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 to draw funds for periods up to this term prior to the expiry date. The facilities act as a store of liquidity and back-stop the Group’s commercial paper programme. As at 30 March 2002 there were no drawings under these facilities (2001: £nil). J Sainsbury plc 6 Annual Report and Financial Statements 2002 In July 2001 the Company issued a dual tranche bond comprising Euro 800 million 5.625% Notes due 2008 and £300m 6.5% Notes due 2012. The Euro tranche represents the Company’s debut Euro issue. Subsequent to the year–end, the Company issued a further dual tranche Sterling bond comprising £250m 6.125% Notes due 2017 and £350m 6.0% Notes due 2032 and Sainsbury Supermarkets Ltd entered into a £200 million sale and finance leaseback transaction in respect of various store equipment. Proceeds from these transactions will be used to repay maturing borrowings and finance ongoing capital expenditure. Group policy requires that not more than 25 per cent of borrowings should mature in any one financial year. As at 30 March 2002 the weighted average maturity of the Group’s borrowings was six years (2001: 3.2 years). Including the bonds issued after the year–end, the Group’s weighted average borrowings maturity has been extended to 11 years. Currency risk The Group is subject to currency exposure on the translation of the profits and net assets of its US subsidiaries. The Group’s policy is to minimise the volatility of its net asset value from unfavourable exchange rate movements by arranging the currency composition of its net debt to provide the best natural hedge for the Group’s foreign currency denominated cash flows. Exchange movements on US dollar liabilities created in the UK for the purpose of hedging the Group’s US investments 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 UK foreign currency interest costs. The Group incurs currency exposure on trade purchases made in currencies other than the relevant operating subsidiaries’ functional currency. The Company employs a layered hedging programme of rolling forward contracts to reduce the exchange rate risk associated with these purchases, which may be either contracted or not contracted. Gains and losses on these contracts are deferred until recognition of the purchase, which is normally within one year. Credit risk The Group’s exposure to credit risk is managed by limiting credit positions to banks and financial institutions maintaining strong credit ratings. Counter-party positions are monitored on a regular basis and dealing activity is controlled through the provision of dealing mandates and the operation of standard settlement instructions. Balance sheet Shareholders’ funds increased by £97million to £4,848 million and net debt has increased by £297 million to £1,156 million in the year, increasing Group gearing to 24 per cent (2001 restated:18 per cent). The adjustment for the change in accounting policy for deferred tax reduced opening reserves by £160 million and increased gearing by 1 per cent. Summary balance sheet Fixed assets Stock Debtors and other assets Cash and current asset investments Debt Net debt Other creditors and provisions Net assets Equity shareholders’ funds Minority interests Capital employed 2002 £m 7,343 751 2,591 386 (1,542) (1,156) (4,620) 4,909 4,848 61 4,909 20011 £m 6,657 763 2,460 487 (1,346) (859) (4,217) 4,804 4,751 53 4,804 1 Restated for change in accounting policy for deferred tax (see notes 1 and 10 to the financial statements). J Sainsbury plc 7 Annual Report and Financial Statements 2002 Operating and financial review continued FRS 17 – Retirement benefits FRS 17 will be fully adopted by the Group over the next two years. This accounting standard gives rise to a notional surplus or deficit on defined benefit pension schemes based on certain required parameters, some of which are tied specifically to the last day of the financial year and could, therefore, be subject to large year-on-year fluctuations. At 30 March 2002, the notional deficit, using these prescribed parameters, on the Group’s defined benefit pension schemes was £257 million (a gross deficit of £368 million offset by a notional deferred tax asset of £111 million). The new standard does not allow the amortisation of any pension surpluses through the profit and loss account. This credit amounted to £19 million in 2002. The Group will not account for the profit and loss effect until 2004 as required by FRS 17. If the Group were to do this today, the additional profit before tax charge is estimated to be less than £15 million. Whatever notional numbers are reported under FRS 17, the Board firmly believes that funding decisions for the Group’s schemes should be based on actuarial valuations, undertaken every three years. The Board is committed to balancing the financial security of colleagues with the needs of the Group’s shareholders. IT – outsourcing In the recovery programme outlined in October 2000 the importance of the need to completely replatform and redesign all of Sainsbury’s Supermarkets’ IT systems was identified. The Board felt that, in view of the scale and pace necessary, outside expertise was required. As a result, in November 2000, Sainsbury’s Supermarkets entered into an agreement with Swan Infrastructure plc (‘Swan’), a wholly-owned subsidiary of Barclays UK Infrastructure Fund. Under the terms of this agreement, Sainsbury’s Supermarkets sold its IT assets to Swan, which will manage its IT operations and build a new systems infrastructure for Sainsbury’s Supermarkets under a seven year contract. In turn, Swan contracted with Accenture to manage IT operations for Sainsbury’s Supermarkets and build the new system. All Sainsbury’s Supermarkets’ IT staff were transferred, through Swan, to Accenture. Since 2000, Accenture has been wholly responsible for managing the ongoing operation of IT support and systems to specified service levels. In addition, Accenture is responsible for developing and delivering a new systems infrastructure to position the UK supermarket business with modern state of the the art technology. This programme is progressing well and will deliver substantial business benefits. Details of the financial commitment under the seven-year contract with Swan are given in note 31 on page 41. Its operations are funded by net borrowings which will peak at £540 million. Shareholder return The share price increased from 385 pence at the start of the financial year to 399.5 pence at 30 March 2002 with a range of 326.75 pence to 447.75 pence. The Company’s equity market capitalisation at 30 March 2002 was £7.7 billion. Total shareholder return was 10 per cent (the increase in the value of a share, including reinvested dividends, based on the average share price for the three months ended 30 March 2002 compared with the equivalent period in 2001) with J Sainsbury plc ranked seventh in its peer group of 13 European retailers (see page 12). J Sainsbury plc 8 Annual Report and Financial Statements 2002 Report of the Directors The Directors present their report and audited financial statements for the 52 weeks to 30 March 2002. Principal activities and review of performance The Group’s principal activities are food retailing and financial services. A review of the performance of the Group and its principal operating subsidiaries during the period is set out in the Operating and Financial Review on pages 2 to 8 of this Report and on pages 3 to 17 of the Annual Review and Summary Financial Statement. Dividends The Directors recommend the payment of a final dividend of 10.82 pence per share (2001: 10.30 pence), making a total dividend for the year of 14.84 pence per share (2001: 14.32 pence). Subject to shareholders approving this recommendation at the Annual General Meeting, the dividend will be paid on 26 July 2002 to shareholders on the register at the close of business on 14 June 2002. The Board The Directors are listed on page 20 of the Annual Review and Summary Financial Statement. Sir Clive Thompson and Robin Whitbread retired from the Board on 25 July 2001 and 15 October 2001 respectively. Lord Levene joined the Board on 1 May 2001 and both Stuart Mitchell and Sara Weller were appointed to the Board on 1 January 2002. Bridget Macaskill joined the Board as a Non-Executive Director on 1 February 2002. All the other Directors served throughout the period. In accordance with the Articles of Association, John Adshead will retire by rotation at the Annual General Meeting and will seek re–election. Stuart Mitchell, Sara Weller and Bridget Macaskill, who were appointed since the last Annual General Meeting, will also retire and seek re–election. Full biographical details of the Directors seeking re–election are set out on pages 20 and 21 of the Annual Review and Summary Financial Statement. J Sainsbury plc 9 Annual Report and Financial Statements 2002 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, employment of disabled persons and employee participation as described in the statement of corporate social responsibility set out on pages 18 and 19 of the Annual Review and Summary Financial Statement. The Company’s Environment Report, which is published on the Internet (www.j-sainsbury.co.uk/environment) describes the Company’s environmental policies. Policy on payment of creditors 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 on the timely submission of satisfactory invoices. The Company is a holding company and therefore has no trade creditors. The policy and performance of the operating companies in respect of payment to suppliers are set out in their accounts. Donations During the year donations to UK charitable organisations and local community projects amounted to £11 million (2001: £14 million); see page 19 of the Annual Review and Summary Financial Statement for further details. There were no political donations. By order of the Board Tim Fallowfield Company Secretary 28 May 2002 Annual General Meeting The Annual General Meeting will be held on Wednesday, 24 July 2002 at the Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE at 11.30am. The Chairman’s letter and the Notice of Meeting with explanatory notes on the special business to be transacted at the meeting accompany this Report. At the Annual General Meeting, resolutions will be proposed to reappoint PricewaterhouseCoopers as auditors and to renew the authority for the Company to make market purchases of its own shares. No such purchase has been made during the period. In addition, shareholders will be asked to approve a new executive share option plan. A detailed summary of the new plan is set out in the Chairman’s letter. Share capital The changes to the issued share capital of the Group are shown in note 27 to the financial statements. Major interests in shares As at 28 May 2002, the Company had been advised of the following notifiable interests in its shares: Judith Portrait is a trustee of various settlements, including charitable trusts and the blind trust for Lord Sainsbury of Turville. As at 28 May 2002, the total holdings of these trusts amounted to 27 per cent of the Company’s issued share capital. Christopher Stone, Andrew Cahn and John Rosenheim are trustees of various settlements, including charitable settlements. As at 28 May 2002, the total holdings of the settlements of which they are trustees, as notified to the Company, amounted to 5 per cent, 5 per cent and 3 per cent respectively. As at 28 May 2002, the notifiable interests, held beneficially and as trustees of charitable and other trusts by 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 of the above include duplication. Franklin Resources Inc. has a notifiable interest of 5 per cent. Directors’ interests The beneficial interests of the Directors and their families in the shares of the Company are shown on page 16. During the year, no Director had any material interest in any contract of significance to the Group’s business. Statement of corporate governance The Company is committed to high standards of corporate governance in its business and has complied throughout the period under review with all the provisions of the Combined Code on Corporate Governance (‘the Code’). This statement, together with the Remuneration report, explains how the Company has applied the governance principles of the Code. The Board The Board comprises six Executive Directors and six Non-Executive Directors, including the Chairman. Biographical details of the Directors and the changes to the composition of the Board during the year are set out in the Annual Review and Summary Financial Statement on pages 20 and 21. There is a clear division of responsibilities between the Chairman, who is part time, and the Group Chief Executive. All the Non-Executive Directors are considered to be independent. They bring a wide and varied commercial experience to Board deliberations. Lord Levene is the senior Non-Executive Director. The Board meets 10 times a year, including a two-day strategy conference. There is a formal schedule of matters reserved exclusively for its consideration. It is responsible to shareholders for the strategic development of the Group, the management of assets in a way that maximises performance and the control of the operation of the business. The Board approves the Group’s strategic plan 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 Group 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 and Shaw’s Supermarkets Inc. The Company has a programme for meeting Directors’ training requirements. Newly appointed Directors who do not have previous public company experience at Board level are provided with appropriate training on their role and responsibilities. New Non-Executive Directors are offered an appropriate induction programme. Subsequent training is available on an ongoing basis to meet particular needs. The Board has full and timely access to information enabling it to discharge its duties effectively. The Chairman is responsible for ensuring that all Directors are properly briefed on issues arising at Board meetings. 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 at the Company’s expense in the furtherance of their duties. The Company Secretary has responsibility for ensuring that Board procedures are followed. The appointment and removal of the Company Secretary is one of the reserved matters for the Board. Board Committees The Remuneration, Nomination and Audit Committees have written terms of reference which define their authorities, duties and membership. These committees are made up exclusively of the Non-Executive Directors, other than the Group Chief Executive’s membership of the Nomination Committee. The Remuneration Committee meets four times a year. Its responsibilities include setting remuneration policy for all Executive Directors and determining the remuneration arrangements for individual Executive Directors. The report on Directors’ remuneration is set out on pages 12 to 16. The Nomination Committee advises the Board on the re–election of Directors and meets when necessary. All Directors are required to seek re–election by shareholders at the first opportunity after their appointment and must stand for re–election to the Board every three years under the Company’s Articles of Association. The Audit Committee meets at least three times a year. Its responsibilities include making recommendations on the Company’s accounting and reporting policies, reviewing the scope and results of the audit and defining and monitoring internal financial control. It also reviews the performance, independence and objectivity of the auditors. The Committee receives regular reports from the Group internal audit department and the external auditors, and it 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. The Committee may, at its discretion, meet with the internal and external auditors without management being present. 10 J Sainsbury plc Annual Report and Financial Statements 2002 Investor relations The Company is committed to maintaining good communications with shareholders. Institutional investors and analysts are invited to briefings by the Company immediately after the announcement of the Company’s interim and full-year results. The content of these briefings is posted on the Company’s website (www.j-sainsbury.co.uk/investors/) so as to be available to all shareholders. Shareholders have the opportunity to meet and question the Board at the Annual General Meeting. At the Annual General Meeting to be held on 24 July 2002, there will be a display of various aspects of the Group’s activities and a business presentation by the Group Chief Executive. The Chairmen of the Audit, Remuneration and Nomination Committees will be available to answer questions. Proxy votes will be announced after each resolution. A detailed explanation of each item of special business to be considered at the Annual General Meeting is included with the Notice of Meeting, which will be sent to shareholders at least 20 working days before the meeting. Information on matters of particular interest to private shareholders is set out on pages 30 and 31 of the Annual Review and Summary Financial Statement. In addition, the Company’s website (www.j-sainsbury.co.uk/investors/) makes available a wide range of information to all shareholders. Internal control The Board has overall responsibility for the system of internal controls and for reviewing its effectiveness. The system of internal controls is designed to manage rather than eliminate the risk of failure to achieve the Group’s business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. It includes all controls including financial, operational and compliance controls and risk management. The processes used to assess the effectiveness of the internal control systems include the following: • regular operational and financial reviews of performance against budgets and forecasts by management and the Board; • regular reviews by management and the Audit Committee of the scope and results of internal audit work across the Group. The scope of the work covers all key activities of the Group and concentrates on high risk areas; • reviews of the scope of the work of the external auditors by the Audit Committee and any significant issues arising; • reviews by the Audit Committee and the Board of accounting policies and delegated authority levels; and • consideration by the Board of the major risks facing the Group and procedures to manage them. These include health and safety, legal compliance, quality assurance, insurance, security and social, ethical and environmental risks. The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group. This process has been in place throughout the year under review and up to the date of approval of the Annual Report and Financial Statements and accords with the Turnbull guidance. The effectiveness of the process is reviewed semi-annually by the Audit Committee which then reports to the Board. The process consists of: • formal identification by management at each level of the Group through a self- assessment process of the key risks to achieving their business objectives and the controls in place to manage them. The likelihood and potential impact of each risk is evaluated; • certification by management that they are responsible for the risks to their business objectives and that the internal controls are such that they provide reasonable but not absolute assurance that the risks are appropriately identified, evaluated and managed; • reporting and review by the board of each operating company of risk management activities and action taken to address non- compliance with controls or to improve their effectiveness; • independent assurance by internal audit as to the existence and effectiveness of the risk management activities described by management. The system of internal control and risk management is embedded into the operations of the Group, and action to mitigate any weaknesses found is monitored. Going concern The Directors confirm that they are satisfied that the Company has sufficient resources to continue in operation for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Group Financial Statements. 11 J Sainsbury plc Annual Report and Financial Statements 2002 Remuneration policy The Remuneration Committee has adopted a remuneration policy consistent with the Company’s business objectives and which: • • • • • • • attracts, retains and motivates high calibre Directors and senior management; in general terms, sets base salary broadly in line with median market practice, whilst moving total remuneration towards upper quartile market levels for superior performers; creates overall packages in which performance-related elements form a significant proportion; reinforces the performance orientated culture by providing enhanced rewards for stretch performance; supports a short-term and long-term incentive plan which is targeted at both personal and Company performance; aligns the interests of Directors and senior management with those of the shareholders by linking share and cash incentive payments to performance; and is based on information from independent remuneration sources which takes into account 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 by taking into account assessments of the Director’s performance, experience and responsibilities, together with market factors which provide the best possible benchmark for the Director’s specific position. Incentive arrangements ii) In addition to basic salary, the Company maintains incentive arrangements which combine an Annual Bonus Plan with long- term incentive share plans. The Committee believes that these arrangements provide for rewards which reflect an appropriate balance between personal 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 Plan A cash bonus is payable conditional upon the achievement of business and individual targets which are key to the businesses’ performance. The bonus is a percentage of salary, with a maximum of 50 per cent for Executive Directors for the period under review, and a lower maximum for other senior executives, and is calculated according to performance against profit before tax and individual targets. Bonuses are not pensionable. Performance Share Plan This Plan allows shares to be allocated to individuals on a conditional basis, but not released unless the performance criterion is met. The number of shares actually released depends upon the Company’s performance compared with 12 comparator companies (namely Ahold, Boots, Carrefour, Dixons, GUS, Kingfisher, Marks & Spencer, Morrison, Next, Safeway, Somerfield and Tesco). The Company’s relative performance is determined by reference to total shareholder return, being the increase in the value of a share, including reinvested dividends, over a three-year period. The conditional share allocation to each individual participant is set as a percentage of their salary, being up to 50 per cent for Executive Directors for the three conditional awards to date. In respect of these allocations, no shares will be released if the Company’s position in the comparator group at the end of the three- year period is below the median; 50 per cent of the shares will be released at median performance; the full award will be released at upper quartile performance, and between median and upper quartile performance a pro rata award will be made. The Remuneration Committee has reviewed the performance criterion relating to the conditional allocation made in 1999 and has determined that 83.3 per cent of the award should be released to participants on 29 May 2002 in the form of an option over the appropriate number of shares. Remuneration report Remuneration Committee The Remuneration Committee is chaired by Keith Butler-Wheelhouse and comprises all of the Non-Executive Directors. Its constitution and operation comply with the provisions of the Code. The Committee takes professional advice in setting the remuneration policy for Executive Directors and in determining their individual remuneration levels. It considers the views of the Group Chief Executive and the Group HR Director when reviewing the remuneration of the other Executive Directors, but neither are involved in discussions concerning their own remuneration. 12 J Sainsbury plc Annual Report and Financial Statements 2002 iii) Other share schemes Employee share ownership is an important aspect of the Company’s culture. Share schemes provide colleagues with an additional focus on the Company’s financial performance, align colleagues’ interests directly with shareholders’ interests and enable colleagues to benefit directly from increases in the Company’s share price. Approximately 52,000 colleagues hold shares in the Company’s Employee Profit Sharing Scheme Trust, 6,000 in the Share Purchase Plan Trust and 30,000 participate in the Savings–Related Share Option Scheme. Directors may participate in these plans in the same way as all other colleagues. Profit sharing in respect of the year ended 30 March 2002 is expected to amount to approximately 1.1 per cent (2001: 1 per cent) of qualifying pay. The last payment under the Employee Profit Sharing Scheme will be made in August 2002 and the Company has introduced a free share element under the Company’s Share Incentive Plan for all colleagues with one complete financial year’s service, with the first allocation of shares taking place in mid 2003. iv) Pensions Executive Directors are members of the J Sainsbury Executive Pension Scheme, a funded, Inland Revenue approved, final salary, occupational pension scheme. Under the Group’s pension arrangements, Directors are entitled after a minimum of 20 years of pensionable service to a pension on retirement at age 60 (or earlier in the event of 40 years’ 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 dependents on death and a lump sum is payable if death occurs in service. Members contribute 4.25 per cent of their salaries to the scheme. In the case of four Directors, the Company has agreed to make up that portion of the standard pension entitlement which is in excess of Inland Revenue limits. This obligation is unfunded, although full provision of £1,616,000 has been made in respect of the year ended 30 March 2002 (2001: £762,000). New appointments will be eligible to become members of the recently announced Executive Stakeholder Pension Plan which is a defined contribution arrangement. Executive Share Option Scheme Grants under the Company’s Executive Share Option Scheme have normally been made annually to a value of one times annual basic salary for Directors and senior executives (and to a lesser value for other executives). In 2001/02, shareholders approved an additional grant of up to one times annual basic salary to participants. Since 1995, options have been subject to a performance criterion. Under the current performance criterion, Executive Directors will only be able to exercise options granted in 1999–2001 if the Company achieves an average of 3 per cent per annum real (above inflation) growth in earnings per share (EPS) over three years. If the criterion is not achieved, it is retested at the end of the fourth year using the year of the grant as the fixed starting point. If 3 per cent average real EPS growth per annum is still not achieved after the fourth year, the option will lapse. For options granted from July 2001, a further testing at the end of the fifth year is permitted. 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. Changes to incentive arrangements Professional advisors have carried out a full review of the Company’s incentive arrangements and concluded that the plans, both annual and longer term, have fallen behind market practice. The Remuneration Committee has therefore considered improving the Company’s incentive arrangements in a manner which will establish more fully a performance culture in Sainsbury’s and which will be extended to all levels of management who participate in the incentive schemes. The Committee has approved changes to the Annual Bonus Plan and the Performance Share Plan for 2002/03 and is seeking shareholder approval for the implementation of a new Executive Share Option Plan. The background to and details of the changes to each of the plans are set out in the Chairman’s letter which accompanies this Report. The result of the changes is that the Executive Directors and the management team have the potential to earn higher rewards, but only for superior performance, thereby further aligning their interests with those of shareholders. 13 J Sainsbury plc Annual Report and Financial Statements 2002 Remuneration report continued The pension entitlements of the Directors who served during the year were as follows: John Adshead CBE Ian Coull Sir Peter Davis Roger Matthews Stuart Mitchell1 Sara Weller1 Robin Whitbread2 1 2 Appointed as a Director 1 January 2002. Retired as a Director on 15 October 2001. Additional pension earned in the year £000 Length of service years Transfer value of increase £000 Accrued entitlements at year-end £000 13 15 2 2 18 2 33 20 16 25 15 32 12 13 315 190 371 141 238 80 143 174 136 52 31 101 21 160 Age 57 51 60 47 41 40 51 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. v) Benefits Other benefits for Executive Directors include the provision of a company car and free medical insurance. Service contracts All service contracts for Executive Directors are on a 12 month rolling basis. Sir Peter Davis is also on a 12 month rolling 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. Non-Executive Directors, including the Chairman, do not have service contracts. Directors’ remuneration The remuneration of the Directors for the year was as follows: Note Salary £000 Bonus8 £000 Profit sharing £000 Compensation for loss of office £000 Benefits £000 Executive Directors John Adshead CBE Ian Coull Sir Peter Davis Roger Matthews Stuart Mitchell Sara Weller Robin Whitbread Non-Executive Directors Sir George Bull Keith Butler-Wheelhouse June de Moller Jamie Dundas Lord Levene Bridget Macaskill Sir Clive Thompson Directors who left the Board before the start of the financial year Total 2002 Total 2001 1 2 2 3 4 5 6 7 320 320 750 380 75 76 300 225 29 25 30 23 4 11 130 130 320 158 30 30 116 – – – – – – – 2,568 914 2,445 852 3 3 7 3 – – 3 – – – – – – – 19 24 23 16 21 21 5 4 16 20 – – – – – – – – – – – – 525 – – – – – – – Total 2002 £000 476 469 1,098 562 110 110 960 245 29 25 30 23 4 11 Total 2001 £000 429 459 1,074 565 – – 386 242 25 25 16 – – 35 1,430 126 525 4,152 128 1,237 4,686 1 2 3 4 5 6 7 8 Highest paid director. Appointed as a Director on 1 January 2002. Retired as a Director on 15 October 2001. Compensation for loss of office has been accrued but not paid in the financial year. Appointed as a Director on 1 September 2000. Appointed as a Director on 1 May 2001. Appointed as a Director on 1 February 2002. Retired as a Director on 25 July 2001. The fees of Sir Clive Thompson were remitted to Rentokil Initial plc. Includes performance bonuses earned in the period under review but not paid in the financial year. Bonuses have been apportioned for Directors appointed since 1 April 2001. 14 J Sainsbury plc Annual Report and Financial Statements 2002 Performance Share Plan Under the Plan, shares conditionally allocated to individuals are released to them in the form of options if a future performance criterion, based on a comparator group of companies, is met at the end of the three-year performance period. Sir Peter Davis does not participate in this Plan. The Remuneration Committee has reviewed the performance criterion relating to the conditional allocation made in 1999 and determined that 83.3 per cent of the award should be released to participants on 29 May 2002 in the form of an option over the appropriate number of shares. This is shown below together with the conditional allocations for 2000 and 2001. John Adshead CBE Ian Coull Roger Matthews Stuart Mitchell Sara Weller 26 July 1999 30,067 31,738 – 9,977 – 2 June 2000 55,146 55,146 62,500 37,223 41,359 7 June 2001 37,470 37,470 44,496 28,981 30,035 The above figures for 2000 and 2001 show the maximum award that would be released provided that the Company achieves the upper quartile position within the comparator group at the end of the three-year performance period. Options over ordinary shares As at the end of the year under review, the Directors’ share options were as follows: Number of options 1 April 2001 Granted during the year Exercised during the year Lapsed during the year 30 March 2002 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 Stuart Mitchell Executive Share Option Scheme (With performance criteria attached) John Adshead CBE Ian Coull Sir Peter Davis Roger Matthews Stuart Mitchell Sara Weller Sharesave scheme John Adshead CBE Ian Coull Sir Peter Davis Roger Matthews Stuart Mitchell 119,437 101,062 10,290* – – – 351,407 374,402 3,009,596 231,333 319,385* 316,315* 153,565 153,565 – 182,358 – – – – – – – – – – – – – – 119,437 101,062 10,290 393 425 447 359-447 28.08.95 12.03.04 359-447 28.08.95 12.03.04 447 28.08.95 28.08.02 504,972 – – 527,967 – 3,009,596 413,691 – 319,385 – 316,315 – 400 401 260.5 348 384 346 272-545 08.09.98 26.07.11 272-545 08.09.98 26.07.11 260.5 01.03.03 01.03.10 272-427 24.11.02 26.07.11 272-545 08.09.98 26.07.11 272-427 17.01.03 26.07.11 2,473 4,295 – 1,879 4,371* 427 723 4,384 692 – – 141 – – 141 820 – – – – 2,080 4,877 4,384 2,571 4,230 289 276 301 300 318 253-416 01.03.03 31.08.05 253-301 01.03.05 31.08.07 301 01.03.07 31.08.07 299-301 01.03.04 31.08.05 253-416 01.02.04 31.08.07 * As at date of appointment, including options granted during the year, but prior to appointment. The options outstanding under the Company’s Executive Share Option Scheme and Savings-Related Share Option Scheme are exercisable at prices between 253.0 pence and 545.0 pence. Details of options held at 30 March 2002, split between those with exercise prices below and above the market value of the Company’s shares on that date, are set out below. 15 J Sainsbury plc Annual Report and Financial Statements 2002 Remuneration report continued Options over ordinary shares continued John Adshead CBE Ian Coull Sir Peter Davis Roger Matthews Stuart Mitchell Sara Weller Unexercised options at prices below market value Range of option prices pence Number of options 253 –377.5 253 –377.5 260.5–301 272 –319.75 253 –377 272 –319.5 290,690 258,033 3,013,980 233,904 146,855 179,547 Inherent profit £000 199 187 4,187 246 125 191 Unexercised options at prices above market value Range of option prices pence 407–545 407–545 – 407–427 407–545 407–427 Number of options 335,799 375,873 – 182,358 187,050 136,769 The inherent profit figures have been calculated by reference to a mid–market price of the Company’s shares on 30 March 2002 of 399.5 pence (2001: 385.0 pence) and assume that all unexercised options with exercise prices below that mid–market price were exercised on that date, on the basis that all performance conditions had been satisfied. In the period from 31 March 2001 to 30 March 2002 the highest mid-market price of the Company’s shares was 447.75 pence and the lowest mid-market price was 326.75 pence. Details of share options exercised by Directors during the period are as follows: Ian Coull Stuart Mitchell Date of exercise 06.02.2002 06.02.2002 Number of shares exercised 141 141 Mid-market price on date of exercise pence 403 403 Option price pence 292 292 Gains on options exercised £ 156.51 156.51 313.02 Gains on exercised options have been calculated using the difference between the share option price and the mid-market price on the date of the exercise. In each case, the shares have been retained by the individual and the gain shown is the notional gain at the date of exercise. Directors’ interests The Directors’ interests in the ordinary shares of the Company and shares held in trust on behalf of Directors are as follows: Executive Directors John Adshead CBE Ian Coull Sir Peter Davis Roger Matthews Stuart Mitchell Sara Weller Non-Executive Directors Sir George Bull Keith Butler-Wheelhouse June de Moller Jamie Dundas Lord Levene Bridget Macaskill Ordinary shares1 Ordinary shares3 1 April 2001 30 March 2002 28 May 2002 54,732 32,434 100,000 50,000 12,1792 1872 69,345 46,101 101,106 50,391 12,407 243 17,500 3,300 1,500 1,200 –2 –2 20,000 3,300 1,500 1,200 2,500 – 69,401 46,157 101,162 50,391 12,463 299 20,000 3,300 1,500 1,200 2,500 – 1 Ordinary shares 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 also include the beneficial interests in shares which are held in trust under the J Sainsbury Profit Sharing Scheme and the Sainsbury’s Share Purchase Plan. At date of appointment. Changes to the Directors’ interests in ordinary shares between 31 March 2002 and 28 May 2002 occurred as a result of purchases under the Sainsbury’s Share Purchase Plan. 2 3 16 J Sainsbury plc Annual Report and Financial Statements 2002 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. The maintenance and integrity of the J Sainsbury plc website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Independent Auditors’ report to the members of J Sainsbury plc We have audited the financial statements which comprise 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 annual review and summary financial statements, the operating and financial review, the report of the Directors, the remuneration report 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 Company’s or Group’s corporate governance procedures or its risk and control procedures. 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 30 March 2002 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 28 May 2002 17 J Sainsbury plc Annual Report and Financial Statements 2002 Group profit and loss account for the 52 weeks to 30 March 2002 Turnover including VAT and sales taxB VAT and sales tax Continuing operations Discontinued operations Turnover excluding VAT and sales tax Cost of sales (including exceptional costs) Gross profit Group administrative expenses (including exceptional costs) Continuing operations – operating profit before exceptional costs and amortisation of goodwill Exceptional operating costs Amortisation of goodwill Continuing operations – operating profit Discontinued operations – operating (loss)/profit Operating profit Share of loss in joint ventures (Loss)/profit on sale of properties Disposal of operations – discontinued Profit on ordinary activities before interest Net interest payable Underlying profit on ordinary activities before taxC Exceptional items Amortisation of goodwill Profit on ordinary activities before tax Taxation Profit on ordinary activities after tax Equity minority interest Profit for the financial year Equity dividends Retained profit for the financial year Basic earnings per share Underlying earnings per shareC Diluted earnings per share Underlying diluted earnings per shareC A B C Restated for change in accounting policy for deferred tax (see notes 1, 5 and 10). Including VAT at Sainsbury’s Supermarkets and Homebase and sales tax at Shaw’s Supermarkets. Before exceptional items and amortisation of goodwill. Notes to the financial statements are on pages 22 to 43. Note 2002 £m 18,206 (1,044) Restated 2001A £m 18,441 (1,197) 17,154 8 15,954 1,290 2,3 3 17,162 (15,905) 17,244 (16,082) 1,257 1,162 3 (632) (629) 3 13 3 4 5 6 10 11 12 12 12 12 679 (38) (14) 627 (2) 625 (1) (4) – 620 (49) 627 (42) (14) 571 (200) 371 (7) 364 (285) 79 19.1p 21.5p 18.9p 21.3p 615 (78) (12) 525 8 533 (3) 70 (87) 513 (76) 549 (96) (16) 437 (157) 280 (4) 276 (274) 2 14.5p 18.8p 14.4p 18.7p 18 J Sainsbury plc Annual Report and Financial Statements 2002 Group statement of total recognised gains and losses for the 52 weeks to 30 March 2002 Profit for the financial year Currency translation differences on foreign currency net investments Total recognised gains relating to the financial year Change in accounting policy for deferred tax Total recognised gains since last annual report * Restated for change in accounting policy for deferred tax (see notes 1, 5 and 10). 2001* £m 276 10 286 2002 £m 364 1 365 (160) 205 There is no material difference between the above profit for the financial year and the historical cost equivalent. Reconciliation of movements in equity shareholders’ funds for the 52 weeks to 30 March 2002 Profit for the financial year Equity dividends Currency translation differences Goodwill on disposal of subsidiaries charged to profit for the year Proceeds from ordinary shares issued for cash (note 27) Amounts deducted in respect of shares issued to the QUEST Net movement in equity shareholders’ funds Opening equity shareholders’ funds as restated* Closing equity shareholders’ funds Group Company 2002 £m 364 (285) 79 1 – 21 (4) 97 4,751 4,848 2001* £m 276 (274) 2 10 149 24 (2) 183 4,568 4,751 2002 £m 131 (285) (154) – – 21 (4) (137) 4,419 4,282 2001 £m 174 (274) (100) 62 – 24 (2) (16) 4,435 4,419 * Restated for change in accounting policy for deferred tax (see notes 1, 5 and 10). Shareholders’ funds as published were £4,911 million at 31 March 2001 before deducting prior year adjustment of £160 million (£4,742 million at 1 April 2000 before deducting prior year adjustment of £174 million). Notes to the financial statements are on pages 22 to 43. 19 J Sainsbury plc Annual Report and Financial Statements 2002 Balance sheets at 30 March 2002 and 31 March 2001 Fixed assets Intangible assets Tangible assets Investments Current assets Stock Debtors Sainsbury’s Bank Investments Cash at bank and in hand Creditors: amounts falling due within one year Sainsbury’s Bank Other Net current liabilities Total assets less current liabilities Creditors: amounts 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 Group Company Note 2002 £m 2001* £m 2002 £m 2001 £m 13 14 15 18 19 20 21 20 22 22 26 27 27 28 29 263 6,906 174 7,343 751 398 2,193 16 370 3,728 278 6,215 164 6,657 763 546 1,914 12 475 3,710 (2,060) (2,648) (1,796) (2,529) (4,708) (4,325) (980) (615) – 471 6,285 6,756 – 208 – – 1 209 – (747) (747) (538) – 535 5,370 5,905 – 380 – – 222 602 – (762) (762) (160) 6,363 6,042 6,218 5,745 (1,223) (231) (1,000) (238) (1,907) (29) (1,266) (60) 4,909 4,804 4,282 4,419 484 1,421 39 2,904 4,848 61 4,909 483 1,401 39 2,828 4,751 53 4,804 484 1,421 – 2,377 4,282 – 4,282 483 1,401 – 2,535 4,419 – 4,419 * Restated for change in accounting policy for deferred tax (see notes 1 and 10). Notes to the financial statements are on pages 22 to 43. The financial statements on pages 18 to 43 were approved by the Board of Directors on 28 May 2002, and are signed on its behalf by Sir Peter Davis Group Chief Executive Roger Matthews Group Finance Director 20 J Sainsbury plc Annual Report and Financial Statements 2002 Note 30 2002 £m 1,067 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) 66 (114) (21) (69) (171) (1,070) 218 – (3) (855) (6) – 3 – (3) (275) (306) 17 (116) 434 (4) 331 25 25 (314) (8) – (297) (859) (1,156) (859) Group cash flow statement for the 52 weeks to 30 March 2002 Net cash inflow from operating activities Returns on investments and servicing of finance Interest received Interest paid Interest element of finance lease payments Net cash outflow from returns on investments and servicing of finance Taxation Capital expenditure and financial investment Purchase of tangible fixed assets Sale of tangible fixed assets Purchase of own shares Purchase of intangible fixed assets Net cash outflow from capital expenditure and financial investment Acquisitions and disposals Investment in joint ventures Investment in Sainsbury’s Bank by minority shareholder Sale of subsidiary undertakings Proceeds from disposal of other fixed asset investments Net cash (outflow)/inflow for acquisitions and from disposals Equity dividends paid to shareholders Net cash (outflow)/inflow before use of liquid resources and financing Financing Issue of ordinary share capital Decrease in short-term borrowings Increase/(decrease) in long-term borrowings Capital element of finance lease payments Net cash inflow/(outflow) from financing Increase/(decrease) in net cash Reconciliation of net cash flow to movement in net debt Increase/(decrease) in net cash Cash (outflow)/inflow from increase/(decrease) in debt and lease financing Movement in finance leases Exchange adjustments Movement in net debt in the year Net debt at the beginning of the year Net debt at the end of the year Notes to the financial statements are on pages 22 to 43. 25 25 25 21 J Sainsbury plc Annual Report and Financial Statements 2002 Notes to the financial statements 1 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 Saturday 30 March 2002 (prior year the 52 weeks ended Saturday 31 March 2001). The Group has adopted Financial Reporting Standard (FRS) 18 ‘Accounting Policies’, FRS 19 ‘Deferred tax’ and the transitional provisions of FRS 17 ‘Retirement benefits’ in the financial statements. Details of the changes arising from the adoption of FRS 17 and FRS 19 are given below. The adoption of FRS 18 did not require any change in accounting policies. Accounting policies are periodically reviewed to ensure that they continue to be the most appropriate for the Group. 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. The Group agreed to sell its Homebase business in December 2000 and the Egyptian business in May 2001. These businesses have been treated as discontinued operations in the profit and loss account, but the comparative figures on the ‘Group cash flow statement’ include the cash flows of these businesses. 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. 22 J Sainsbury plc Annual Report and Financial Statements 2002 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. 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. Deferred tax FRS 19 ‘Deferred tax’ has been adopted with effect from 1 April 2001. FRS 19 requires that deferred tax be recognised in respect of all timing differences that have originated, but not reversed, by the balance sheet date. Prior to 1 April 2001 the Group’s accounting policy was to provide the deferred tax which was likely to be payable or recoverable. The effect of this change on prior year earnings and net assets is disclosed in note 10 on page 27. Intangible fixed assets Pharmacy licences are included in intangible assets and amortised on a straight line basis over their useful economic life of 15 years. Other licences are amortised over three 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. 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 using the projected unit cost method. The Group has adopted the transitional balance sheet disclosure requirements of FRS 17. Full compliance with this standard is not required until the year ended 27 March 2004. Stock Stocks are valued at the lower of cost and net realisable value. Stocks at warehouses are valued on a first in first out basis. 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. The derivative financial instruments used by the Group to manage its interest rate and currency risks are interest rate swaps and swap options, cross currency swaps, forward rate contracts and currency options. Interest payments or receipts arising from derivative instruments are recognised within net interest payable 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. 2 Segmental analysis of turnover, profit and net assets Profit on ordinary activities before tax 2002 Food retailing and financial services – UK Property development – UK Food retailing – US Profit sharing – Food retailing UK Continuing operations Discontinued operations – Food retailing Egypt Total Joint ventures Loss on sale of properties – Food retailing UK Net interest payable Underlying profit before tax Amortisation of goodwill – US Group profit before tax Non-operating assets and liabilities (not allocated) Net borrowings (not allocated)3 Group net assets 2001 Food retailing and financial services – UK Property development – UK Food retailing – US Profit sharing – Food retailing UK Continuing operations DIY retailing – UK Food retailing – Egypt Discontinued operations Total Joint ventures Profit on sale of properties – Food retailing UK Disposal of Homebase operations Impairment of Egyptian business Net interest payable Underlying profit before tax Amortisation of goodwill – US – Egypt Amortisation of goodwill Group profit before tax Non-operating assets and liabilities (not allocated) Net borrowings (not allocated)3 Group net assets Turnover1 £m 14,006 112 3,036 17,154 8 17,162 Before exceptional items £m Exceptional items £m 537 15 137 (10) 679 (2) 677 (1) – (49) 627 (14) 613 (30) – (8) – (38) – (38) – (4) – (42) – (42) Group total £m 507 15 129 (10) 641 (2) 639 (1) (4) (49) 585 (14) 571 Turnover1 £m 13,085 149 2,720 15,954 1,210 80 1,290 17,244 Profit on ordinary activities before tax Before exceptional items £m Exceptional items* £m 483 25 115 (8) 615 48 (35) 13 628 (3) – – – (76) 549 (12) (4) (16) 533 (68) – (10) – (78) (1) – (1) (79) – 27 67 (111) – (96) – – – (96) Group total* £m 415 25 105 (8) 537 47 (35) 12 549 (3) 27 67 (111) (76) 453 (12) (4) (16) 437 Net assets2 £m 5,274 174 960 6,408 – 6,408 44 (387) (1,156) 4,909 Net* assets2 £m 4,847 114 932 5,893 – – – 5,893 22 (252) (859) 4,804 * Restated for change in accounting policy for deferred tax (see notes 1, 5 and 10). 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. Turnover is disclosed by origin. There is no material difference in turnover by destination. Sales between the Group’s business segments are not material. 23 J Sainsbury plc Annual Report and Financial Statements 2002 Notes to the financial statements continued 3 Analysis of operating profit 2002 2001 Continuing operations £m Discontinued operations £m Total £m Continuing operations £m Discontinued operations £m 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 17,154 (15,867) (28) 1,259 (598) (10) (10) (14) (632) 627 The exceptional operating costs comprise the following: 8 (10) – (2) – – – – – (2) 17,162 (15,877) (28) 15,954 (14,862) (45) 1,290 (1,175) – 1,257 1,047 (598) (10) (10) (14) (632) 625 (469) (33) (8) (12) (522) 525 115 (102) (1) – (4) (107) 8 Total £m 17,244 (16,037) (45) 1,162 (571) (34) (8) (16) (629) 533 Sainsbury’s Supermarkets Shaw’s Supermarkets Exceptional cost of sales Sainsbury’s Supermarkets Shaw’s Supermarkets Discontinued operations Exceptional administrative expenses Total exceptional operating costs 2002 £m 2001 £m 20 8 28 10 – – 10 38 37 8 45 31 2 1 34 79 The costs in Sainsbury’s Supermarkets relate to the business transformation programme which involves upgrading its IT systems, supply chain and store portfolio. These costs are exceptional operating costs due to the scale, scope and pace of the transformation programme. These costs primarily relate to the closure of depots and stores and associated reorganisation costs. The cost of closure of the Taste joint venture of £5 million is also included in Sainsbury’s Supermarkets’ exceptional administrative expenses. At Shaw’s Supermarkets, the exceptional costs relate to the closure of a depot during the year. 4 (Loss)/profit on sale of properties Sale and leaseback of UK supermarket freeholds Disposal of Shaw’s supermarket freeholds Disposal of Homebase properties Other 5 Disposal of operations – discontinued Disposal of Homebase operations1 Impairment of Egyptian business 1 Restated for FRS 19. 2002 £m – 1 – (5) (4) 2002 £m – – – 2001 £m 51 – 43 (24) 70 2001 £m 24 (111) (87) The Egyptian business was sold during the current year for a cash consideration of £14 million (net proceeds £3 million). The trading results of the business up to the date of sale have been shown in discontinued operations. 24 J Sainsbury plc Annual Report and Financial Statements 2002 6 Net interest payable Interest receivable Interest payable and similar charges: Bank loans and overdrafts Other loans Finance leases Interest capitalised – tangible fixed assets (note 14) – land held for and in the course of development (note 18) Net interest payable 2002 £m 79 3 120 21 144 (12) (4) 128 49 2001 £m 63 20 123 20 163 (16) (8) 139 76 Total interest receivable amounted to £202 million (2001: £187 million), including interest receivable attributable to Sainsbury’s Bank of £123 million (2001: £124 million) included in sales. Total interest payable amounted to £224 million (2001: £249 million) including interest payable attributable to Sainsbury’s Bank of £80 million (2001: £86 million) included in cost of sales. Interest is capitalised at the weighted average cost of related borrowings. 7 Profit on ordinary activities before tax Profit on ordinary activities before tax is stated after charging/(crediting): Depreciation of tangible fixed assets – owned assets – assets under finance leases Amortisation of intangible assets Pension costs (see note 33) Operating lease rentals – properties – fixtures, equipment and vehicles – receivable 2002 £m 350 8 18 71 252 7 (26) 2001 £m 402 7 17 66 305 7 (10) The Auditors’ remuneration for audit services amounted to £0.5 million (2001: £0.7 million) for the Group including £0.1 million (2001: £0.1 million) for the Company. The Auditors also received £2.2 million (2001: £12.9 million) for non-audit services relating to consultancy fees for business process reviews, systems implementation and taxation advice. 25 J Sainsbury plc Annual Report and Financial Statements 2002 Notes to the financial statements continued 8 Employees Employees’ and Executive Directors’ remuneration and related costs during the year amounted to: Wages and salaries Social security costs Other pension costs Profit sharing 2002 £m 2001 £m 1,725 104 71 1,900 10 1,910 1,785 105 66 1,956 8 1,964 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. At 30 March 2002, the Trustees of the J Sainsbury Profit Sharing Scheme Share Trust held 5.7 million shares (2001: 7.9 million) on behalf of 52,600 participants (2001: 56,800) in the Scheme. The average numbers of employees during the year were: Full-time Part-time Full-time equivalent 2002 Number 000’s 53.4 121.3 174.7 108.5 2001 Number 000’s 55.9 129.3 185.2 111.6 9 Advances to Directors and connected persons As at 30 March 2002, authorisations, arrangements and agreements entered into by Directors and connected persons in the normal course of business with Sainsbury’s Bank amounted to £36,000 (2001: £29,000) (number of persons: 5 (2001: 4)). The details of Directors’ emoluments and interests are set out in the Remuneration Report on pages 12 to 16. 26 J Sainsbury plc Annual Report and Financial Statements 2002 10 Tax on profit on ordinary activities The tax charge based on the profit for the year is: UK Corporation tax at 30 per cent (2001: 30 per cent) Over provision in prior periods – UK Deferred tax Overseas tax – current – deferred Taxation on exceptional items – current – deferred Tax on profit on ordinary activities 2002 £m 151 (1) 150 26 38 (4) (7) (3) 200 2001* £m 162 (6) 156 7 30 (6) (13) (17) 157 * Restated for change in accounting policy for deferred tax (see note 1). The taxation credit on exceptional items comprises a tax credit of £10 million (2001: £21 million) on the exceptional operating costs and a tax credit of £9 million in 2001 on the divestment of Homebase. Compliance with FRS 19 ‘Deferred tax’ results in an additional tax charge of £10 million in the current financial year, which reduces profit after tax from £381 million to £371 million and earnings per share by 0.5 pence. The prior year comparatives have been restated to comply with FRS 19 ‘Deferred tax’. The effect is to increase profit after tax by £14 million from £266 million to £280 million and to reduce opening net assets by £160 million to £4,751 million. Earnings per share have been restated from 13.8 pence to 14.5 pence. Underlying earnings per share have been restated from 19.2 pence to 18.8 pence. A reconciliation of the standard tax rate to the effective tax rate is as follows: Tax on profit at UK standard rate of 30 per cent (2001: 30 per cent) Effects of: Higher tax rate on US profits Disallowed depreciation on UK properties Amortisation of goodwill Property profits Discontinued operations Prior year items Other items Effective tax rate 11 Dividends Interim Final proposed 2002 pence per share 4.02 10.82 14.84 2001 pence per share 4.02 10.30 14.32 2002 % 30.0 0.7 3.6 0.8 – 0.1 (0.3) 0.1 2001 % 30.0 0.3 4.6 0.9 (3.5) 4.5 (1.5) 0.6 35.0 35.9 2002 £m 78 207 285 2001 £m 77 197 274 27 J Sainsbury plc Annual Report and Financial Statements 2002 Notes to the financial statements continued 12 Earnings per share 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 2002 million 1,907.5 16.0 2001 million 1,901.5 9.9 1,923.5 1,911.4 The alternative measure of earnings per share is provided because it reflects the Group’s underlying trading performance by excluding the effect of exceptional items and amortisation of goodwill. Basic earnings Exceptional items net of tax: Included in operating profit Profit on sale of properties, disposal of operations and impairment write down Amortisation of goodwill Underlying earnings before exceptional items and amortisation of goodwill Diluted earnings 2002 2001* Earnings £m Per share amount pence Earnings £m Per share amount pence 364 19.1 276 14.5 28 4 14 410 364 1.5 0.2 0.7 21.5 18.9 64 2 16 358 276 358 3.4 0.1 0.8 18.8 14.4 18.7 Underlying diluted earnings before exceptional items and amortisation of goodwill 410 21.3 * Restated for change in accounting policy for deferred tax (see notes 1 and 10). 28 J Sainsbury plc Annual Report and Financial Statements 2002 13 Intangible fixed assets Cost At 1 April 2001 Additions Disposal of subsidiary – Egypt At 30 March 2002 Amortisation At 1 April 2001 Charge for the year Disposal of subsidiary – Egypt At 30 March 2002 Net book value At 30 March 2002 At 31 March 2001 14 Tangible fixed assets Cost or valuation At 1 April 2001 Additions (see below) Disposals Disposal of subsidiary – Egypt Exchange adjustments At 30 March 2002 Accumulated depreciation At 1 April 2001 Charge for the year Disposals Disposal of subsidiary – Egypt At 30 March 2002 Net book value At 30 March 2002 At 31 March 2001 Capital work-in-progress included above At 30 March 2002 At 31 March 2001 Goodwill £m Pharmacy and other licences £m 327 – (55) 272 78 14 (55) 37 235 249 32 3 – 35 3 4 – 7 28 29 Total £m 359 3 (55) 307 81 18 (55) 44 263 278 Group Fixtures, equipment and vehicles £m Company Total £m Properties £m Properties £m 5,855 598 (110) (37) (1) 3,124 558 (86) (19) – 8,979 1,156 (196) (56) (1) 6,305 3,577 9,882 895 102 (12) (37) 1,869 256 (78) (19) 2,764 358 (90) (56) 948 2,028 2,976 5,357 4,960 1,549 1,255 6,906 6,215 306 132 73 16 379 148 544 – (60) – – 484 9 5 (1) – 13 471 535 – – Interest capitalised included in additions amounted to £12 million (2001: £16 million). Accumulated interest capitalised included in the cost or valuation total above amounts to £263 million (2001: £251 million) for the Group and £nil (2001: £nil) for the Company. 29 J Sainsbury plc Annual Report and Financial Statements 2002 Notes to the financial statements continued 14 Tangible fixed assets continued Group Company The net book value of properties comprised: Freehold Long leasehold Short leasehold Analysis of property finance leases – Group Cost Depreciation Net book value Analysis of properties At 30 March 2002 Freehold Cost 1973 valuation 1992 valuation Long leasehold Cost 1973 valuation 1992 valuation Short leasehold Cost 2002 £m 2001 £m 4,024 704 629 3,852 647 461 2002 £m 248 223 – 2002 £m 196 65 131 2001 £m 284 251 – 2001 £m 185 56 129 Group Company Cost £m Valuation £m Cost £m Valuation £m 4,482 869 865 6,216 252 232 2 62 3 22 89 484 – – – – – 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. The Directors believe that the aggregate open market value of Group properties exceeds the net book value of £5 billion by a considerable margin. If the properties included at valuation had been included at cost, the cost and accumulated depreciation figures at 30 March 2002 would have been: Freehold Long leasehold Short leasehold Group Company Cost £m Depreciation £m Cost £m Depreciation £m 4,503 885 865 519 181 239 252 232 – 4 9 – 30 J Sainsbury plc Annual Report and Financial Statements 2002 15 Fixed asset investments Subsidiaries (note 16) Joint ventures (note 17) Own shares at cost1 Other unlisted investments at cost Group Company 2002 £m 44 88 42 174 2001 £m 22 88 54 164 2002 £m 6,227 33 – 25 6,285 2001 £m 5,320 9 – 41 5,370 1 The Group owned 25,140,223 (2001: 25,482,870) shares at 30 March 2002 with a nominal value of £6.3 million (2001: £6.4 million). 802,640 shares (2001: 704,164) are held by an Employee Share Ownership Trust ‘ESOT’ on behalf of certain Directors and senior employees under the Group’s Performance Share Plan. Under the Plan, shares conditionally allocated to participants are released to them in the form of a £1 option if a future performance criterion, based on a comparator group of companies, is met at the end of the three-year performance period. The Remuneration Committee has reviewed the performance criterion relating to the allocation made in 1999 and determined that 83.3 per cent of that award should be released to participants on 29 May 2002 in the form of an option over the appropriate number of shares. A charge is taken to the profit and loss account only when it becomes clear that a grant of options will be made. 24,337,583 shares (2001: 24,345,409) 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 the options are granted at market value. The market value of the shares held by the ESOTs at 30 March 2002 was £100.4 million (2001: £98.1 million). The ESOTs waive the rights to the dividends receivable in respect of the shares held under all the above schemes. Unlisted investments include a 17.8 per cent equity investment in the Homebase business at a cost of £1 million (2001: £1 million) and 10 per cent loan notes of £25 million (2001: £22 million) due from Homebase. 16 Investment in subsidiaries The Company’s principal operating subsidiaries are: Sainsbury’s Supermarkets Ltd (food retailing) J Sainsbury Developments Ltd (property development) J Sainsbury Distribution Ltd (logistical services) JS Insurance Ltd1 (insurance services) Shaw’s Supermarkets Inc.1 (food retailing) Sainsbury’s Card Services Ltd1 (card handling services) Sainsbury’s Bank plc (financial services) 1 Not directly owned by J Sainsbury plc. Share of ordinary allotted Country of capital and registration or incorporation voting rights England 100% England 100% England 100% 100% Isle of Man USA 100% England 100% England 55% All principal operating subsidiaries operate in the countries of their registration or incorporation. Sainsbury’s Bank plc’s audited financial statements are drawn up to 28 February 2002 to conform with HBoS (the 45 per cent shareholder) and Shaw’s Supermarkets Inc’s audited financial statements are drawn up to 2 March 2002. Management accounts have been used to include the Sainsbury’s Bank plc and Shaw’s Supermarkets Inc. results up to 30 March 2002. All other principal operating subsidiaries have been included up to 30 March 2002. Summary of movements – Company At 1 April 2001 Movement in long term capital advances At 30 March 2002 Shares (at cost) £m 4,858 – Long-term capital advances £m 462 907 Total net investment £m 5,320 907 4,858 1,369 6,227 31 J Sainsbury plc Annual Report and Financial Statements 2002 Notes to the financial statements continued 17 Investment in joint ventures The Group’s principal joint ventures were: Hedge End Park Limited (property investment – UK) The HSPUT – Homebase Limited Partnership (property investment – UK) Share of ordinary Country of allotted registration or incorporation capital 50% 50% England England Year-end 30 March 30 March Hedge End Park Limited For the year ended 30 March 2002, the Group’s share of turnover amounted to £1 million (2001: £2 million) and its share of profit before tax amounted to £1 million (2001: £1 million). At 30 March 2002, the Group’s share of gross assets amounted to £21 million (2001: £13 million) and its share of gross liabilities amounted to £3 million (2001: £3 million). The investment in Hedge End Park Limited is held directly by the Company. HSPUT – Homebase Limited Partnership (‘HSPUT’) For the year ended 30 March 2002, the Group’s share of turnover amounted to £1 million (2001: £nil) and its share of profit before tax amounted to £1 million (2001: £nil). At 30 March 2002 the Group’s share of gross assets amounted to £25 million and its share of gross liabilities amounted to £24 million. The investment in HSPUT is held directly by the Company. Summary of movements Group At 1 April 2001 Advances Share of retained loss Transfer from other unlisted investments – HSPUT At 30 March 2002 Company At 1 April 2001 Advances Transfer from other unlisted investments – HSPUT At 30 March 2002 Group share of post acquisition reserves £m Shares (at cost) £m Long-term capital advances £m 6 – – – 6 6 – – 6 13 – (2) – 11 3 5 – 19 27 3 5 19 27 Total £m 22 5 (2) 19 44 9 5 19 33 The Group share of retained loss includes operating losses of £4 million relating to the Taste joint venture up to the date of its closure. 18 Stock Goods for resale Land held for and in the course of development Property held for resale 2002 £m 586 135 30 751 2001 £m 631 132 – 763 32 J Sainsbury plc Annual Report and Financial Statements 2002 19 Debtors Trade debtors Amounts owed by subsidiaries Other debtors due in less than one year Other debtors due in more than one year1 Prepayments Group Company 2002 £m 82 116 104 96 398 2001 £m 80 297 87 82 546 2002 £m – – 125 83 – 208 1 Other debtors due in more than one year includes £83 million (2001: £75 million) of vendor loan notes received on the sale of Homebase. 20 Current assets and creditors of Sainsbury’s Bank Current assets Cash 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 30 59 605 781 422 17 2002 £m 57 56 602 959 500 19 2,193 1,914 2,023 37 2,060 1,766 30 1,796 1 Loans and advances to customers include £416 million (2001: £333 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 £7 million at 30 March 2002 (2001: £6 million) included in tangible fixed assets (note 14). 21 Current asset investments Investments listed on a recognised stock exchange at cost (equivalent to market value) Unlisted investments at cost 2002 £m 16 – 16 2001 £m 1 11 12 33 J Sainsbury plc Annual Report and Financial Statements 2002 Notes to the financial statements continued 22 Creditors Group Company Due within one year Bank loans and overdrafts US $200m 6.25% Notes – March 2002 £200m 7.25% Notes – June 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 £200m 7.25% Notes – June 2002 Euro 800m 5.625% Notes £300m 6.5% Notes 8% Irredeemable unsecured loan stock Obligations under finance leases Total borrowings due after one year: Amounts due to subsidiaries Other creditors 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 2002 £m 65 – 200 76 4 2001 £m 159 141 – 70 4 345 1,139 374 1,054 140 76 535 206 207 127 121 460 196 197 2,648 2,529 – 227 – 487 300 3 180 1,197 26 360 233 200 – – 3 176 972 28 1,223 1,000 2002 £m 65 – 200 76 – 341 – 98 49 – 4 48 207 747 – 227 – 487 300 3 – 1,017 890 – 1,907 Group Company 2002 £m 341 4 50 6 177 20 790 154 2001 £m 370 4 217 10 405 20 174 146 2002 £m 341 – 50 – 177 – 790 – 2001 £m 119 141 – 70 – 330 – 106 35 42 5 47 197 762 360 233 200 – – 3 – 796 470 – 1,266 2001 £m 330 – 217 – 405 – 174 – 1,542 1,346 1,358 1,126 Obligations under finance leases due after five years at 30 March 2002 are repayable by instalments. Bank and other loans due after five years are not repayable by instalments. Subsequent event Subsequent to the year-end, the Company issued a dual tranche sterling bond comprising £250m 6.125% Notes due 2017 and £350m 6.0% Notes due 2032 and Sainsbury’s Supermarkets Ltd entered into a £200 million sale and finance leaseback transaction in respect of various store equipment. Proceeds from these transactions will be used to repay maturing borrowings and finance ongoing capital expenditure. 34 J Sainsbury plc Annual Report and Financial Statements 2002 24 Financial instruments The financial assets and financial liabilities which are analysed below include fixed rate financial assets of £115 million (2001: £105 million), financial assets on which no interest is paid (i.e. debtors receivable in more than one year) of £14 million (2001: £6 million) and financial liabilities on which no interest is paid of £26 million (2001: £28 million) not included in Group net debt, as analysed in note 23. 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 six and seven. Fair values of financial assets and financial liabilities 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 and currency swaps 2002 2001 Book value £m Fair value £m Book value £m Fair value £m (345) (1,197) (26) 386 115 (346) (1,207) (26) 386 115 (374) (972) (28) 487 105 (376) (995) (28) 487 105 – 13 – 19 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 £184 million (2001: £180 million). These leases primarily finance stores in the Group’s US operations. Included in deposits are vendor Loan Notes, with a value of £115 million (2001: £105 million) arising from prior year disposals. It is not considered practicable to estimate the fair value of these financial liabilities and financial assets as no appropriate external benchmark is available. They are therefore included in the above analysis 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 30 March 2002 Sterling US Dollar At 31 March 2001 Floating rate financial assets £m 1,014 105 1,119 877 136 Total £m 1,140 108 1,248 982 142 1,124 1,013 Fixed rate financial assets £m 115 – 115 105 – 105 Financial assets on which no interest is paid £m 11 3 14 – 6 6 Floating rate financial assets comprise bank balances linked to bank base rate and money market fund balances, money market deposits, commercial paper investments and currency swaps bearing interest rates linked to LIBOR. The fixed rate financial assets have a weighted average interest rate of 9.86 per cent (2001: 9.85 per cent) fixed for an average period of 10.5 years (2001: 11.4 years). The financial assets on which no interest is paid have a weighted average period until maturity of three years. 35 J Sainsbury plc Annual Report and Financial Statements 2002 Notes to the financial statements continued 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 £m Financial liabilities on which no interest is paid £m Fixed rate debt Weighted average interest rate % Average time for which rate is fixed years Sterling US Dollar At 30 March 2002 Sterling US Dollar Other Total £m 1,314 987 2,301 860 943 97 961 671 1,632 657 630 97 At 31 March 2001 1,900 1,384 353 290 643 203 285 – 488 – 26 26 – 28 – 28 6.91 9.35 8.01 7.26 9.52 – 8.58 3.3 10.0 6.3 1.9 7.0 – 4.9 Floating rate financial liabilities comprise bank borrowings, commercial paper and short term currency swaps 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 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 counter-party 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 £19 million (2001: £18 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 held euro denominated monetary assets of £40 million (2001: £36 million), US dollar denominated monetary assets of £4 million (2001: £7 million) and Australian dollar monetary assets of £1 million (2001: £nil). 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 2001 Arising in previous years included in 2002 income Gains and losses not included in 2002 income: Arising in previous years Arising in 2002 Gains and losses on hedges at 30 March 2002 Of which: Gains expected to be included in 2003 income Gains and losses expected to be included in 2004 income or later Gain £m 25 (15) 10 11 21 3 18 Loss £m (6) – Total gain/(loss) £m 19 (15) (6) (2) (8) (3) (5) 4 9 13 – 13 Gain £m 1 (1) – – – – – Loss £m (11) 11 Total gain/(loss) £m (10) 10 – (4) (4) (4) – – (4) (4) (4) – 36 J Sainsbury plc Annual Report and Financial Statements 2002 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 6 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 30 March 2002. 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 30 March 2002 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 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 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 56 530 433 500 – 1,519 1,961 – – 1,961 (442) 322 (120) (120) – – 46 – – 46 7 – – 7 39 (53) (14) (134) – 72 64 – – 136 32 – – 32 104 (20) 84 (50) – – 316 – – 316 23 – – 23 293 (209) 84 34 – – 95 – – 95 – – – – 95 (40) 55 89 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 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 – – 5 – – 5 – – – – 5 – 5 94 Over 5 years £m – – 1 – – 1 – – – – 1 – 1 101 – – – – 83 83 – 39 138 177 (94) – (94) – Non- interest bearing £m – – – – 53 53 – 33 121 154 (101) – (101) – Total £m 56 602 959 500 83 2,200 2,023 39 138 2,200 – – – – Total £m 59 605 781 422 53 1,920 1,766 33 121 1,920 – – – – As set out above, the Bank has entered into interest rate swaps on a notional principal amount of £371 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 £4 million) and their fair value represented by replacement cost (total of £1 million). 37 J Sainsbury plc Annual Report and Financial Statements 2002 Notes to the financial statements continued 25 Analysis of net debt Current asset investments Cash at bank and in hand Bank overdrafts Due within one year: Borrowings Finance leases Due after one year: Borrowings Finance leases Total net debt At 1 April 2001 £m 12 475 (140) 347 (230) (4) (796) (176) (1,206) (859) Cash flow £m 4 (105) 126 25 116 – (434) 4 (314) (289) Other non-cash movements £m Exchange movements £m At 30 March 2002 £m – – – – (213) – 213 (8) (8) (8) – – – – – – – – – – 16 370 (14) 372 (327) (4) (1,017) (180) (1,528) (1,156) 26 Provisions for liabilities and charges Group Company At 1 April 2001 – as published Change in accounting policy for deferred tax At 1 April 2001 – as restated* Deferred tax – UK Deferred tax – US Transfer to corporation tax Utilised Charge to the profit and loss account At 30 March 2002 Closure; disposal and business Onerous transformation costs £m leases £m Unfunded pension liabilities £m 18 – 18 – – – (4) 5 19 60 – 60 – – – (47) 23 36 4 – 4 – – – – – 4 Deferred tax £m (4) 160 156 23 (4) (3) – – 172 Total £m 78 160 238 23 (4) (3) (51) 28 231 Disposal costs £m 60 – 60 – – – (47) 16 29 * Restated for change in accounting policy for deferred tax (see notes 1 and 10). 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 and disposal costs (£29 million) relate to indemnities and warranties arising from the disposal of subsidiaries. The provisions for business transformation costs (£7 million) relate to supply chain commitments (see note 3). The provisions for closure, disposals and business transformation costs are expected to crystallise in the year ended 29 March 2003. The provision for deferred tax comprises: Timing differences between depreciation and capital allowances Other timing differences * Restated for change in accounting policy for deferred tax (see notes 1 and 10). 2002 £m 180 (8) 172 2001* £m 164 (8) 156 38 J Sainsbury plc Annual Report and Financial Statements 2002 27 Called up share capital and share premium account Shares authorised Ordinary shares of 25 pence each – 2,200 million shares (2001: 2,200 million) Shares allotted At 1 April 2001 SAYE Share Option Scheme Executive Share Option Scheme At 30 March 2002 Allotted fully paid shares million Aggregate nominal value £m Share premium Consideration £m £m 550 483 1 – 484 1,930.8 4.2 1.3 1,936.3 1,401 16 4 1,421 17 4 21 Further details of these schemes at 30 March 2002 are set out below: (a) SAYE Share Option Scheme The Company operates a Savings–Related 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. At 30 March 2002, UK employees held 41,000 five-year savings contracts in respect of options over 21.1 million shares and 38,600 three-year savings contracts in respect of options over 12.4 million shares. Details of these options at 30 March 2002 are set out below: Date of grant 20 December 1995 (5 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) 20 December 2001 (3 year period) 20 December 2001 (5 year period) Date of expiry 31 July 2001 31 July 2002 31 July 2001 31 July 2003 31 July 2002 31 July 2004 31 August 2003 31 August 2005 31 August 2004 31 August 2006 31 August 2005 31 August 2007 Options outstanding Price pence 2002 million 2001 million 313 292 398 398 416 416 253 253 299 299 302 302 – 0.5 – 3.5 1.7 3.5 2.6 3.9 3.7 4.7 4.4 5.0 2.7 4.7 1.9 4.8 2.7 5.0 3.9 5.3 4.2 5.4 – – 33.5 40.6 The J Sainsbury plc Qualifying Employee Share Ownership Trust (the QUEST) was established in 1998 to acquire shares for employees, including Directors, in satisfaction of their options under the Savings-Related Share Option Scheme. Of the 4.2 million ordinary shares allotted in relation to the Savings–Related Share Option Scheme, 4.1 million ordinary shares were subscribed for by the QUEST at a market value of £16.4 million. These shares were allocated to employees, including Directors, in satisfaction of options exercised under the Scheme. The Company provided £4.2 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). 39 J Sainsbury plc Annual Report and Financial Statements 2002 Notes to the financial statements continued 27 Called up share capital and share premium account continued (b) Executive Share Option Scheme Date of grant Date of expiry 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 27 July 2000 2 June 2001 26 July 2001 27 August 2002 11 March 2004 7 September 2005 30 November 2005 19 May 2007 10 November 2007 9 November 2007 1 August 2008 23 November 2009 16 January 2009 28 February 2010 1 June 2010 26 July 2010 1 June 2011 25 July 2011 Price pence 447 359 475 386 367 489 545 378 320 320 261 272 315 427 407 Options outstanding 2002 million 3.3 2.4 5.0 0.1 6.1 0.4 7.5 10.1 0.1 0.2 3.0 16.6 0.1 8.9 9.7 73.5 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 These options were held by 2,644 executives (2001: 2,144). (c) Colleague Share Option Plan The Colleague Share Option Plan operates under the rules of the Inland Revenue Approved Discretionary Share Option Scheme. A total of 92,900 (2001: 123,800) UK employees participate in the Plan and hold options over 31.3 million shares (2001: 39.8 million). There have been a total of 17 options exercised in respect of 7,826 ordinary shares during the year by executors of deceased participants. Options will normally be exercisable 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 31 March 2001 and 30 March 2002 29 Profit and loss account At 1 April 2001 – as published Change in accounting policy for deferred tax At 1 April 2001 – as restated* Profit/(loss) retained for the period Currency translation differences Amounts deducted in respect of shares issued to the QUEST At 30 March 2002 * Restated for change in accounting policy for deferred tax (see notes 1 and 10). Group £m 39 Company £m – Group £m 2,988 (160) 2,828 79 1 (4) Company £m 2,535 – 2,535 (154) – (4) 2,904 2,377 The cumulative goodwill deducted from the reserves of the Group at 30 March 2002 amounted to £140 million (2001: £140 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 financial year of the Company was £131 million (2001: £174 million). 40 J Sainsbury plc Annual Report and Financial Statements 2002 30 Reconciliation of operating profit to net cash inflow from operating activities Operating profit Depreciation Amortisation of intangible assets Loss on sale of equipment, fixtures and vehicles Decrease/(increase) in stocks Increase in debtors Increase in creditors and provisions Increase in Sainsbury’s Bank current assets Increase in Sainsbury’s Bank creditors Net cash inflow from operating activities 2002 £m 625 358 18 3 23 (2) 57 (279) 264 1,067 31 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 one and five years Leases which expire after five years Land and buildings Other leases 2002 £m 1 5 270 2001 £m 1 6 305 2002 £m – 7 – 2001 £m 533 409 17 2 (36) (147) 151 (196) 189 922 2001 £m – 7 – Operating lease commitments include payments in respect of 16 supermarket properties which were sold in March 2000 for £325 million and leased back by Sainsbury’s Supermarkets for a period of 23 years at a market rental, which increases by 1 per cent per annum over the lease period. Under the arrangement the Company has provided a residual value guarantee that the properties will realise at least £170 million at the end of the lease period. In view of the relatively low amount of this guarantee when compared to the present market value of the freehold interests, the likelihood of this guarantee being invoked is regarded by the Directors as remote and, therefore no contingency is recognised in the accounts. Operating lease commitments include payments in respect of 10 Sainsbury’s Supermarkets properties which were sold in July 2000 for £226 million and leased back by Sainsbury’s Supermarkets for a period of 23 years at a market rental, which increases by 1 per cent per annum over the lease period. A residual value guarantee of £39 million has been given by the Company in respect of this transaction. In view of the relatively low amount of this guarantee when compared to the present market value of the relevant freehold interests, the Directors believe that the likelihood of this guarantee being invoked is remote and, therefore, no contingency is recognised in the accounts. Sainsbury’s Supermarkets has an executory contract with Swan Infrastructure plc ‘Swan’ (a wholly owned subsidiary of Barclays UK Infrastructure Fund) for the provision of IT services, which expires on 12 November 2007. Swan subcontracts to Accenture. In the very unlikely event of a credit rating downgrade of the Company below investment grade, Sainsbury’s Supermarkets would be liable to lodge, with Swan, an advance against future service charges equivalent to Swan’s prevailing net borrowings, which are capped at a maximum of £540 million. The likelihood of this event materialising is regarded by the Directors as remote, therefore no contingency is recognised in the accounts. There are a number of contingent liabilities relating to disposals and other contractual liabilities under which it is not considered any liability will arise. 41 J Sainsbury plc Annual Report and Financial Statements 2002 Notes to the financial statements continued 32 Future capital expenditure Contracted but not provided for 2002 £m 380 2001 £m 240 33 Pension costs 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). These schemes were closed to new employees on 31 January 2002. The assets of these schemes are held separately from the Group’s assets. The Group Personal Pension Plan was closed on 31 January 2002. Two new Stakeholder Pension Schemes were launched in April 2002. The pension cost for the year ended 30 March 2002 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 assumptions underlying this valuation were subsequently updated in April 2001 to take account of the change in economic circumstances. The principal actuarial assumptions used in the revised actuarial valuations are: Long term rate of return on investments – before retirement – after retirement Average annual increase in total pensionable salary (excluding promotional increments) Average annual increase in present and future payments Average rate of inflation % 6.75 5.00 3.75 2.25 2.25 As at 1 April 2001, the market value of the UK schemes was £2,687 million (2000: £2,943 million). The market value was sufficient to cover 106 per cent (2000: 113 per cent) of the total liabilities of the schemes, a surplus of £145 million (2000: £346 million). Total pension contribution costs for the Group were £71 million for the year ended 30 March 2002 (2001: £66 million) of which the pension contribution costs of the UK defined benefit schemes and UK defined contribution schemes amounted to £59 million and £4 million respectively (2001: £53 million and £2 million respectively). 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 2010 for the JSPDBS and 2006 for the JSEPS. Total costs for 2002 are after taking account of an amortisation of scheme surpluses of £19 million (2001: £19 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 defined benefit pension schemes in the US. The pension costs relating to the US benefit schemes have been determined with the advice of independent actuaries. The charge to the profit and loss account of £8 million (2001: £11 million) has been calculated in accordance with US accounting principles but would not have been materially different had UK accounting principles been applied. FRS 17 disclosures Actuarial valuations at 30 March 2002 were carried out by Watson Wyatt for the UK schemes and Fidelity Employer Services Company LLC doing business as Fidelity Investments Actuarial and Consulting Services for the US schemes using the following assumptions: Average annual increase in total pensionable salary Average annual increase in pensions Discount rate Average rate of inflation UK Schemes % US Schemes % 3.75–4.00 2.50 6.00 2.50 4.25 3.25 7.28 3.25 42 J Sainsbury plc Annual Report and Financial Statements 2002 The assets in the schemes and their expected returns were: UK Schemes US Schemes Equities – UK – overseas Bonds Other Total market value of assets Present value of schemes’ liabilities Deficit in schemes Related deferred tax asset Net pension schemes’ liabilities Expected long-term rate of return % 8.25 8.25 5.00 5.00 7.50 Expected long-term rate of return % – 9.20 7.25 – 8.50 Value £m 1,232 812 581 32 2,657 £m 2,657 (3,023) (366) 110 (256) Value £m – 101 56 – 157 £m 157 (159) (2) 1 (1) If the above net pension assets/(liabilities) had been recognised in the financial statements, the Equity shareholders’ funds and profit and loss reserve at 30 March 2002 would be as follows: Equity shareholders’ funds excluding pension liability Net pension schemes’ liabilities Equity shareholders’ funds including pension asset liability Profit and loss reserve excluding pension liability Net pension schemes’ liabilities Profit and loss reserve £m 4,848 (257) 4,591 2,904 (257) 2,647 34 Related party transactions The following transactions fall to be disclosed under the terms of FRS 8. Sainsbury’s Bank is a subsidiary of the Company and has as joint shareholders the Company and HBoS, which hold 55 per cent and 45 per cent respectively of the issued share capital. In the year ended 30 March 2002, HBoS 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 HBoS Payable to the Group 2002 £m 27 10 2001 £m 21 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 30 March 2002 of £602 million (2001: £605 million) are loans and advances to HBoS Group of £437 million (2001: £429 million). 43 J Sainsbury plc Annual Report and Financial Statements 2002 Five year financial record Financial results (£m) Group turnover4 Turnover – continuing operations Operating profit Sainsbury’s Supermarkets Sainsbury’s Bank Shaw’s Supermarkets Other operating activities Profit sharing Discontinued operations Interest payable Joint ventures Group underlying profit before tax5 19981 19992 2000 20013 2002 15,496 14,261 16,378 15,080 17,414 15,962 18,441 16,940 18,206 18,198 751 (15) 37 10 (39) 46 790 (78) 16 728 711 (5) 52 12 (40) 64 794 (50) 12 756 518 3 79 16 (9) 44 651 (72) 1 580 470 13 115 25 (8) 13 628 (76) (3) 549 515 22 137 15 (10) (2) 677 (49) (1) 627 (Decrease)/increase on previous year 11.8% 3.9% (23.2)% (5.3)% 14.2% Earnings per share Basic (Decrease)/increase on previous year Underlying5 (Decrease)/increase on previous year Dividend per share 25.1p 14.1% 26.6p 15.2% 13.9p 29.2p 16.3% 26.8p 0.8% 14.32p6 18.3p (37.3)% 20.5p (23.5)% 14.32p 14.5p (20.8)% 18.8p (8.3)% 14.32p 19.1p 31.7% 21.5p 14.4% 14.84p 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 39 – 25,000 – 40,000 sq ft sales area 229 93 – 15,000 – 25,000 sq ft sales area 43 – under 15,000 sq ft sales area Sainsbury’s Supermarkets Shaw’s Supermarkets Total number of stores – continuing operations 404 121 525 42 233 98 45 418 127 545 61 225 99 47 432 168 600 86 209 93 65 453 185 638 121 184 84 74 463 185 648 Sales area (000 sq ft) Sainsbury’s Supermarkets Shaw’s Supermarkets 11,979 4,119 12,571 4,410 13,055 5,617 13,746 6,124 14,349 6,261 Group total – continuing operations 16,098 16,981 18,672 19,870 20,610 Net increase on previous year: Sainsbury’s Supermarkets Shaw’s Supermarkets New Sainsbury’s Supermarkets openings 4.9% 7.8% 19 4.9% 7.1% 20 3.9% 27.4% 20 5.3% 9.0% 27 4.4% 2.2% 25 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 18.26 18.04 16.98 16.79 17.54 12.4% 12.2% 11.9% 11.9% 11.9% 1 2 3 4 5 6 7 8 Restated under FRS 12 and FRS 14. Turnover, profit and diluted earnings per share are for the 52 week period to 3 April 1999. Earnings per share in 2001 has been restated under FRS 19. Published basic earnings per share was 13.8 pence and published underlying earnings per share was 19.2 pence. 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 £37 million in 1998, £60 million in 2000, £96 million in 2001 and £42 million in 2002 and exceptional profits of £76 million in 1999 and before amortisation of goodwill of £11 million in 2000, £16 million in 2001 and £14 million in 2002. 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. 44 J Sainsbury plc Annual Report and Financial Statements 2002 Contents Financial highlights Operating and financial review Report of the Directors Statement of corporate governance Remuneration report 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 movements in equity shareholders’ funds Balance sheets Group cash flow statement Notes to the financial statements Five year financial record 1 2 9 10 12 17 17 18 19 19 20 21 22 44 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 2002. The full Annual Report and Accounts of J Sainsbury plc for 2002 comprises this publication together with the Annual Review and Summary Financial Statement 2002. Copies may be obtained through our website www.j–sainsbury.co.uk or by calling Freephone 0800 387504. Front cover Sainsbury’s colleague David Dullaghan in the fresh produce department at our Chiswick, London store. Best practice shared with Shaw’s in the US, helped us win the title ‘Fresh Produce Retailer of the Year’. Back cover Shaw’s associate Bob Murphy in the fresh produce department at our Canton, Massachusetts store. Like Sainsbury’s, Shaw’s is undertaking a major training programme to deliver great service to customers. Visit our websites Information about the Group may be found on the Internet at: www.j-sainsbury.co.uk For information about Sainsbury's Supermarkets log on to: www.sainsburys.co.uk For information about Sainsbury's Bank log on to: www.sainsburysbank.co.uk For information about Shaw's log on to: www.shaws.com To shop on-line log on to: www.sainsburystoyou.co.uk Designed and produced by CGI BrandSense. Front cover photography by John Sturrock. Back cover photography Jason Grow (Network Photographers). Printed by Royle Corporate Print. The paper used in this Report combines materials utilising recycled board with Nordic Swan label and paper which is elemental chlorine free. The paper mills have achieved accreditation to the environmental standard ISO 14001. A n n u a l R e p o r t a n d i F n a n c i a l S t a t e m e n t s 2 0 0 2 J Sainsbury plc 33 Holborn, London EC1N 2HT www.j-sainsbury.co.uk Annual Report and Financial Statements 2002