Annual Report and Financial Statements 2003 Contents 1 Financial highlights 2 Operating and financial review 8 Report of the Directors 10 Statement of corporate governance 12 Remuneration report 20 Statement of Directors’ responsibilities in respect of the financial statements 21 Independent Auditors’ report to the members of J Sainsbury plc 22 Group profit and loss account 23 Group statement of total recognised gains and losses 23 Reconciliation of movements in equity shareholders’ funds 24 Balance sheets 25 Group cash flow statement 26 Notes to the financial statements 47 Five year financial record The Chairman’s statement, the Group Chief Executive’s review, and the Summary Financial Statement are contained in a separate publication entitled Annual Review and Summary Financial Statement 2003. The full Annual Report and Accounts of J Sainsbury plc for 2003 comprises this publication together with the Annual Review and Summary Financial Statement 2003. Copies may be obtained through our website www.j–sainsbury.co.uk or by calling Freephone 0800 0154330. Financial highlights 10.8% Underlying profit before tax up 12.6% Underlying earnings per share up 5.0% Dividend per share up Sales – continuing operations1 Underlying profit before tax2 Profit before tax Underlying earnings per share2 Basic earnings per share 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 Including petrol, Easter adjusted. 2003 2002 % change £18,495m £18,198m £695m £667m 24.2p 23.7p 15.58p £627m £571m 21.5p 19.1p 14.84p 1.6 10.8 16.8 12.6 24.1 5.0 1 5 . 1 7 6 2 7 5 5 0 5 9 0 5 2 6 4 2 2 . 1 2 . 3 2 . 2 0 . 5 1 6 2 9 1 6 5 7 5 9 7 6 2 9 6 4 5 0 8 5 1 7 1 9 2 1 8 8 99 00 01 02 03 99 00 01 02 03 99 00 01 02 03 99 00 01 02 03 Sainsbury’s Supermarkets like-for-like sales growth 3 % Sainsbury’s Supermarkets underlying operating profit 2 £ million Shaw’s Supermarkets underlying operating profit 2 $ million Group underlying profit before tax 2 £ million J Sainsbury plc Annual Report and Financial Statements 2003 1 Operating and financial review for the 52 weeks to 29 March 2003 The results for the year reflect the good progress that has been made in more challenging market conditions. The Group’s underlying profit before tax, exceptional items and amortisation of goodwill has increased to £695 million (2002: £627 million), an increase of10.8 per cent, continuing the double-digit growth trend of last year. Profit before tax, after exceptional items and amortisation of goodwill was £667 million (2002: £571 million), an increase of 16.8 per cent. Sainsbury’s Supermarkets has continued to improve its results with underlying operating profit (before exceptional operating costs) growth of13.3 per cent year on year. Like–for–like sales growth* of 2.3 per cent, including petrol, was satisfactory in a market where growth returned to more normal levels. Huge progress has been made in delivering the transformation programme with significant IT systems changes becoming operational, with two major new supply chain depots opening and with the strengthening of the customer offer, through the launch of Nectar and other significant customer focused initiatives. This investment programme will drive sales growth and continue to deliver significant cost efficiencies over the long-term, strengthening Sainsbury’s Supermarkets’ competitive position and its ability to increase its operating margin over time. Shaw’s, the Group’s US supermarket chain, also performed well in challenging economic conditions with dollar underlying operating profit (before exceptional operating costs and amortisation of goodwill) increasing by 9.7 per cent to $215 million (2002: $196 million). The Group’s US dollar denominated assets are hedged by maintaining a corresponding amount of debt in US dollars. The US dollar continued to depreciate against sterling in the year which resulted in lower sterling operating profit, financing costs and net debt in sterling terms. At constant exchange rates, Group sales would have increased by 2.9 per cent, Group underlying operating profit by 12.4 per cent and underlying profit before tax by12.1 per cent. Sainsbury’s Bank’s operating profit was maintained at £22 million (2002: £22 million) as expected, resulting from a decision to invest in accelerating growth. Early results are very encouraging, with the number of customer accounts up by 29 per cent. Profit and loss account 2003 £m 2002 £m Increase % Sales1 Continuing operations Discontinued operations 18,495 – 18,198 8 1.6 Underlying operating profit/(loss) 18,495 18,206 Continuing operations2 Discontinued operations Net interest payable Share of profit/(loss) in joint ventures Underlying profit before tax3 Exceptional operating costs Other exceptional items4 Amortisation of goodwill Profit before tax Tax Profit after tax Equity minority interest Profit for the year 752 – (60) 3 695 (65) 50 (13) 667 (206) 461 (7) 454 Underlying earnings per share5 Basic earnings per share 24.2p 23.7p 679 (2) (49) (1) 627 (38) (4) (14) 571 (200) 371 (7) 364 21.5p 19.1p Dividend per share 15.58p 14.84p 10.8 10.8 16.8 24.7 12.6 24.1 5.0 1 Including VAT at Sainsbury’s Supermarkets of £1,043 million (2002: £1,019 million) and sales tax at Shaw’s Supermarkets of £22 million (2002: £25 million). 2 Before exceptional operating costs of £65 million (2002: £38 million) and amortisation of goodwill of £13 million (2002: £14 million). A statutory profit and loss account is provided on page 22. 3 Underlying profit before tax is shown before exceptional items of £15 million (2002: £42 million) and amortisation of goodwill of £13 million (2002: £14 million). 4 Other exceptional items comprise a profit on disposal of operations of £61 million (2002: nil) and a loss on disposal of properties of £11 million (2002: £4 million). 5 Underlying earnings per share is defined in note 12. * All like-for-like sales in this review are Easter adjusted. 0 3 7 7 0 6 2 5 9 7 7 5 6 1 6 6 5 7 5 9 7 6 2 6 0 8 5 9 4 5 . 8 6 2 . 5 0 2 . 2 4 5 2 1 8 2 8 1 . . 99 00 01 02 03 99 00 01 02 03 99 00 01 02 03 Group underlying operating profit – continuing operations2 £ million Group underlying profit before tax3 £ million Group underlying earnings per share5 pence The 2001 figures are restated for FRS 19. 2 J Sainsbury plc Annual Report and Financial Statements 2003 Group sales, including VAT and sales tax, from continuing operations were £18,495 million (2002: £18,198 million), an increase of1.6 per cent. Total underlying operating profit from continuing operations at £752 million (2002: £679 million), was 10.8 per cent up on the previous year, driven by a 13.3 per cent increase in UK supermarkets profits. This growth was achieved despite an adverse dollar exchange movement and, as predicted, profits maintained at £22 million, the same level as last year, in Sainsbury’s Bank, resulting from the Board’s decision to invest in the accelerated growth strategy. Underlying profit before tax at £695 million (2002: £627 million) was 10.8 per cent up on the previous year, the second year of double-digit profit growth. Profit before tax, after exceptional items and amortisation of goodwill was £667 million (2002: £571 million) an increase of 16.8 per cent. Results from continuing operations Sales and underlying operating profit were as follows: Sales1 2003 Underlying operating profit2 2003 % £m change % £m change Continuing operations Sainsbury’s Supermarkets 15,301 183 Sainsbury’s Bank JS Developments 145 Shaw’s Supermarkets (US) 2,866 3.0 10.9 29.5 (6.4) 572 22 19 139 13.3 – 26.7 1.5 Total 18,495 1.6 752 10.8 1 Includes VAT at Sainsbury’s Supermarkets of £1,043 million and sales tax at Shaw’s Supermarkets of £22 million. 2 Profit before exceptional operating costs of £55 million in Sainsbury’s Supermarkets, £10 million in Shaw’s Supermarkets and amortisation of goodwill of £13 million in Shaw’s Supermarkets. A statutory profit and loss account is shown on page 22. Continuing operations Sainsbury’s Supermarkets’ sales increased by 3.0 per cent to £15,301 million (2002: £14,860 million), and underlying operating profit was up by 13.3 per cent to £572 million (2002: £505 million). Like–for–like sales*, including petrol, were up 2.3 per cent for the year. The key drivers of sales growth were the continued store expansion and reinvigoration programme, together with further improvements in the customer offer. In total 39 new stores were opened, including 24 locals. In addition, 29 stores were extended and 40 refurbished. A total of 850,000 sq ft of net new space was added to the estate in the year, compared to 603,000 sq ft in 2002, which equates to 5.9 per cent of floor space added to its existing portfolio. Significant cost efficiencies continue to be achieved. A total of £210 million, £10 million above target, were delivered in the year, in addition to the £90 million and £160 million in the last two years. The Board are confident of achieving £250 million of savings in 2004, thereby delivering in excess of the targeted £700 million by March 2004. Further cost savings of at least £250 million are expected in 2005. The successful implementation of new systems and the simplification of end-to-end processes are now yielding results. New fulfilment centres in the supply chain, which will yield substantial long-term benefits of lower operating costs, improved in-store availability and lower working capital are starting to come on stream. Savings have also been achieved in the cost of products, whilst maintaining or increasing quality. Underlying operating profit of £572 million (2002: £505 million) included the investment in Sainsbury’s to You, the company’s home delivery service whose results have improved due to the acquisition and retention of new customers increasing sales, lower customer acquisition costs and improved operating efficiencies. As a result, the loss reduced to £29 million this year from £50 million last year. The Board are confident that Sainsbury’s to You results will continue to improve and reach break even at the end of the new financial year. Sainsbury’s Supermarkets’ operating margin (VAT inclusive, excluding Sainsbury’s to You) for the year increased from 3.8 per cent to 4.0 per cent (VAT exclusive, excluding Sainsbury’s to You, 4.1 per cent to 4.3 per cent). Going forward, as the level of cost 1 7 6 2 7 5 5 0 5 9 0 5 2 6 4 99 00 01 02 03 Sainsbury’s Supermarkets underlying operating profit £ million Sainsbury’s Supermarkets Sales1 Underlying operating profit2 Number of stores Sales area (000 sq ft) Full-time employees Part-time employees 1 Includes VAT. 2 Profit before exceptional operating costs. 2003 2002 £15,301m £14,860m £505m 463 14,349 44,000 101,400 £572m 498 15,199 44,700 100,700 J Sainsbury plc Annual Report and Financial Statements 2003 3 Operating and financial review continued savings increases and the revenue costs associated with the transformation programme reduce, operating margins will continue to improve towards the levels of the company’s major competitors. Shaw’s Supermarkets had another good year, underlying operating profit was up 9.7 per cent to $215 million (2002: $196 million), but up1.5 per cent in sterling terms. Like–for–like sales,* up 0.9 per cent, was a satisfactory performance in difficult economic conditions and was in the upper quartile of results published by other US food retailers. The store development programme, a significant contribution from the ex-Grand Union stores and excellent cost control all contributed to strong profit growth. In total, 20 Shaw’s stores were remodelled, four stores were extended and seven Star Markets were rebadged as Shaw’s. Operating margin continues to improve, increasing from 4.5 per cent to 4.8 per cent. Shaw’s acquired 17 stores from the liquidator of Ames in November for $75 million. This acquisition, together with the store development pipeline, will increase new space by 15 per cent by March 2004. Sainsbury’s Bank, 55 per cent owned by the Group and 45 per cent owned by HBoS, achieved net income growth of 31.1 per cent and maintained operating profits at £22 million (2002: £22 million), after substantial revenue investment in growing the long-term customer base of the business. Adjusting for a VAT credit in 2002, underlying profit increased by 10.0 per cent. The number of customers of Sainsbury’s Bank has grown by 29 per cent in the year, loan balances increased by 86 per cent and insurance sales have doubled. Sainsbury’s Bank has an attractive operating model whereby customer acquisition costs are lower than other banking competitors through utilising in–store merchandising and promotion of financial services products. JS Developments, the Group’s project based property development company, completed ten projects in the year and, as a result, made an operating profit of £19 million (2002: £15 million). It is the Board’s intention to sell the remaining property development portfolio in the current year and to focus on the Group’s core food retailing opportunities. Net interest payable of £60 million was £11 million higher than the previous year, due to higher Group net borrowings. Capitalised interest increased to £22 million (2002: £16 million). Exceptional items 2003 £m 2002 £m Exceptional operating costs UK Business Transformation Programme1 Shaw’s Supermarkets Non-operating exceptional items Profit on sale of Homebase (Loss)/profit on sale of properties – Sainsbury’s Supermarkets – Shaw’s Supermarkets Total exceptional items (55) (10) (65) 61 (7) (4) 50 (15) (30) (8) (38) – (5) 1 (4) (42) 1 Including the closure of the Taste joint venture amounting to £5 million in 2002. In October 2000, the Board announced a major transformation programme in Sainsbury’s Supermarkets including upgrading the company’s 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 re-organisation costs associated with this programme. This year, these costs amounted to £55 million, including provision for the costs of closure of two major depots. Over the last two years, these costs have been in line with the Board’s original indications. The exceptional operating costs of £10 million in Shaw’s relate to the acquisition of stores from the liquidator of Ames, being asset write offs and onerous lease provisions in respect of replacement stores. The Homebase disposal was concluded in the year with the sale of the remaining equity investment and the redemption 5 1 6 2 9 1 1 7 1 9 2 1 8 8 99 00 01 02 03 Shaw’s Supermarkets underlying operating profit 2 $ million Shaw’s Supermarkets Sales1 Underlying operating profit2 Number of stores Sales area (000 sq ft) Full-time employees Part-time employees 2003 2002 $4,436m (£2,866m) $215m (£139m) 185 6,330 9,400 18,100 $4,385m (£3,061m) $196m (£137m) 185 6,261 9,700 18,700 1 Includes sales tax. 2 Profit before exceptional operating costs and amortisation of goodwill. 4 J Sainsbury plc Annual Report and Financial Statements 2003 of the loan notes for total proceeds of £184 million, which generated a net profit of £61 million. Total gross proceeds, in excess of £1 billion, have been generated from the sale of Homebase and the total profit on disposal was £125 million. Surplus properties were sold in the year generating cash proceeds of £130 million and a property loss of £11 million. Net exceptional operating costs and non-operating exceptional items amount to £15 million compared to £42 million last year. Taxation The Group’s underlying tax charge (before exceptional items and amortisation of goodwill) at £226 million (2002: £210 million), gives an underlying rate of 32.5 per cent (2002: 33.5 per cent). 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. Earnings per share and dividends Underlying earnings per share, before exceptional items and amortisation of goodwill, increased by12.6 per cent to 24.2 pence (2002: 21.5 pence). Basic earnings per share increased by 24.1 per cent to 23.7 pence (2002:19.1 pence). A final dividend of11.36 pence per share is proposed, which represents an increase of 5.0 per cent over last year. The total proposed dividend for the year is15.58 pence which represents an increase of 5.0 per cent on last year and dividend cover of1.52 times. This increase reflects the Directors’ aim to continue to deliver double-digit profit growth during the coming year and, if achieved, to increase the dividend by 5 per cent, thereby recognising the need to restore dividend cover. Cash flow The Group’s net debt has increased by £248 million during the year to £1,404 million. Operating cash inflow remained strong at £1,070 million. Underlying EBITDA, excluding exceptional items, increased by 10.3 per cent, virtually in line with earnings. Because of the timing of Easter and the introduction of new lines, working capital was broadly flat for the year, compared to an inflow of £78 million in the previous year. Summary cash flow Operating cash inflows Group net interest and dividends from joint venture Taxation Dividends Payments for fixed assets Acquisition of Ames stores Sale of fixed assets Cash outflow before sale and purchase of businesses Acquisitions and disposals Net cash outflow before financing Issue of ordinary share capital Non-cash movements Increase in net debt Net debt 2003 £m 2002 £m 1,070 1,067 (54) (224) (288) (1,124) (48) 130 (69) (171) (275) (1,073) – 218 (538) 210 (328) 3 77 (248) (303) (3) (306) 17 (8) (297) 1,404 1,156 The sale of the Group’s remaining investment in Homebase, together with the related loan notes generated cash of £184 million. Capital expenditure Group capital expenditure for the year was £1,197 million (2002: £1,159 million), excluding the £48 million cost of acquiring stores from the liquidator of Ames. Sainsbury’s Supermarkets’ capital expenditure was £1,035 million (2002: £1,023 million). Expenditure over the last two years has been high due to Business Transformation activities, primarily increased expenditure on refurbishments and the supply chain. On refurbishments, capital expenditure reduced from £230 million in 2002 to £93 million in 2003 and will be lower in 2004. On the supply chain, £374 million has been invested over the last two years. This is a long-term investment. Four new fulfilment centres will be open by the end of 2004 and significant operating efficiencies will be delivered in 2005. In the current financial year, Sainsbury’s Supermarkets’ capital expenditure will be reduced towards more normal levels Sainsbury’s Bank 9 7 7 9 1 4 9 1 2 2 3 9 4 2 3 1 1 02 03 Loan book £ million 02 03 02 03 Credit card sales Thousands Insurance policy sales Thousands J Sainsbury plc Annual Report and Financial Statements 2003 5 Operating and financial review continued at around £800 million. This includes continuing spend on new stores and on extensions, which add valuable retail space at attractive financial returns. Shaw’s capital expenditure was £155 million (2002: £133 million), excluding the £48 million cost of acquiring stores from the liquidator of Ames, and will increase in 2003 as a result of significant additions of new space during the year. Group capital expenditure is forecast to be £1.1 billion for 2004. 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. The Group’s central treasury function 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. 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. Sainsbury’s Bank does not undertake any trading activities and only uses derivative instruments to hedge risk. Credit limits have been established for all counterparties and these are reviewed and approved by Sainsbury’s Bank’s board and the risk management committee, a subcommittee of the board. Details of Sainsbury’s Bank’s interest rate re-pricing gap are set out in note 24 to the financial statements. 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 other 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 by a combination of bank loans, Commercial Paper, Notes and Bonds issued in the capital markets, leases, share capital and cash generated by operating subsidiaries. The Group’s long-term borrowings are principally raised by the parent company and 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 interest rate swaps and options, cross currency swaps and forward contracts. The main risks arising from the Group’s financial instruments are interest rate, liquidity, exchange rate and credit risk. 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 rate volatility by holding a proportion of the Group’s net debt 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 29 March 2003, after taking into account the effect of swaps, the proportion of the Group’s net debt at fixed rates of interest was 39 per cent (2002: 56 per cent) and the average period for which the fixed rate financial liabilities, including finance leases, were fixed was 9.5 years (2002: 6.3 years). Liquidity risk The Group’s exposure to liquidity risk is managed by conservative pre-funding of cash flow, maintaining a diversity of funding sources and spreading debt repayment obligations over a range of maturities. The Group’s principal debt raising operations are arranged through the Company’s £750 million Euro Commercial Paper programme and £2 billion Euro Medium Term Note programme. Contingency liquidity is maintained through the bank market where the Group holds a portfolio of 11 committed revolving credit facilities totalling £635 million as at 29 March 2003. The facilities all expire within one year, although facilities of £460 million contain term out options under which the Company has the option to draw funds for terms up to 12 months prior to the maturity date. The facilities act as a back stop for the Group’s commercial paper programme. 7 9 1 1 , 9 5 1 1 , 6 5 8 4 9 6 5 9 6 7 1 6 5 2 99 00 01 02 03 4 3 Group capital expenditure (continuing operations) £ million Group capital expenditure – 2003 £ million £ million Sainsbury’s Supermarkets 1 New stores 2 Extensions 3 Refurbishments 4 Supply chain 5 Other 6 Shaw’s Supermarkets 7 Sainsbury’s Bank 321 242 93 203 176 155 7 Total 1,197 6 J Sainsbury plc Annual Report and Financial Statements 2003 As at 29 March 2003 there were no drawings under these facilities (2002: nil). Group policy requires that not more than 25 per cent of borrowings should mature in any one financial year. The repayment analysis of the Group’s borrowings is set out in note 25. As at 29 March 2003 the weighted average maturity of the Group’s borrowings was 9.6 years (2002: 6 years). Currency risk The Group is subject to currency exposure on the translation of the US dollar denominated income and net assets of its US subsidiaries. The Group’s policy is to minimise volatility arising from unfavourable exchange rate movements by arranging the currency composition of net debt to match the Group’s US dollar denominated cash flows. Exchange movements on US dollar liabilities created in the UK for the purpose of hedging 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 foreign currency interest costs. The Group also incurs currency exposure on overseas 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 or financial institutions with first-class credit ratings. Counter party positions are monitored on a regular basis and dealing activity is controlled through dealing mandates and the operation of standard settlement instructions. Balance sheet Shareholders’ funds increased by £155 million to £5,003 million and net debt has increased by £248 million to £1,404 million in the year, increasing Group gearing to 28 per cent (2002: 24 per cent). As a result of issuing two long-term bonds in the year, the weighted average maturity of the Group’s borrowings increased from 6 years to 9.6 years. Return on Group capital employed increased from 11.1 per cent to 11.5 per cent in a year of major capital investment. 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 2003 £m 7,878 800 2,694 659 (2,063) (1,404) (4,896) 2002 £m 7,343 751 2,591 386 (1,542) (1,156) (4,620) 5,072 4,909 5,003 69 4,848 61 5,072 4,909 Pensions The Board has been proactive in the area of pensions and has taken a number of decisions to reduce pension fund liabilities and address the potential fund deficit. These include additional Company contributions of £15 million in 2002 and 2003, closing the defined benefit final salary schemes to new members and introducing defined contribution stakeholder schemes. Additionally, this year, the Company has offered existing members of the defined benefit final salary schemes the option of increasing their contributions from 4.25 per cent to 7.00 per cent, or moving to a career average arrangement at the current 4.25 per cent contribution level. The Company’s remuneration policy, now reinforced, is to limit budgets for salary and wage increases to RPI, relying on non-pensionable bonus payments and share based incentive schemes to provide additional performance related rewards. The Board believes these actions will significantly reduce pension liabilities while continuing to achieve the necessary motivation of colleagues and offering them opportunities to secure their financial well-being for retirement. The Board believes, irrespective of the notional numbers reported under FRS 17, that the actuarial valuation of the Group’s UK schemes, currently being prepared, will provide an appropriate basis for decisions to be made about funding for these schemes. At 29 March 2003, the notional deficit, net of deferred tax, of the Group’s defined benefit pension schemes, under FRS 17, was £607 million (2002: £257 million). The increase is due to weak global stock markets and lower discount rates on AA corporate bonds. Since the year end the net deficit has reduced by 10 per cent to £543 million due to improved asset values. The Group is not currently required to account for the profit and loss effect of FRS 17. The underlying FRS 17 (excluding settlement and curtailment gains) profit and loss account charge for the year would have been £13 million higher than the normal pension cost. IT outsourcing As outlined last year the importance of the need to completely replatform and redesign all of Sainsbury’s Supermarkets’ IT systems was identified in October 2000. 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 art technology. This programme is progressing well and will deliver substantial business benefits. J Sainsbury plc Annual Report and Financial Statements 2003 7 Operating and financial review continued Details of the financial commitment under the seven year contract with Swan are given in note 31 on page 43. Its operations are funded by net borrowings which will peak at £540 million. Shareholder return The share price decreased from 399.5 pence at the start of the financial year to 226 pence at 29 March 2003 with a range of 220 pence to 422 pence. The Company’s equity market capitalisation at 29 March 2003 was £4.4 billion. Total shareholder return (‘TSR’) was negative 37.7 per cent (the increase in the value of a share including reinvested Report of the Directors dividend based on the average share price for the three months ended 29 March 2003 compared with the equivalent period in 2002), due to the overall fall in the stock market and the uncertainty surrounding the various potential bidders for Safeway plc, together with the implications on the future structure of the UK food retailing market. Over a three year period from 31 March 2000, the Company’s TSR has outperformed the FTSE 100 Index by 48 per cent. The Directors present their report and audited financial statements for the 52 weeks to 29 March 2003. 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 2 to13 of the Annual Review and Summary Financial Statement. Dividends The Directors recommend the payment of a final dividend of 11.36 pence per share (2002: 10.82 pence), making a total dividend for the year of 15.58 pence per share (2002: 14.84 pence). Subject to shareholders approving this recommendation at the Annual General Meeting, the dividend will be paid on 25 July 2003 to shareholders on the register at the close of business on 30 May 2003. Changes to the Board and Board succession The Directors are listed on pages 16 and 17 of the Annual Review and Summary Financial Statement. Ian Coull retired from the Board on 31 December 2002. All the other Directors served throughout the period. On 31 January 2003, the Company announced that Stuart Mitchell was appointed Managing Director of Sainsbury’s Supermarkets Ltd with responsibility for the day-to-day management of the supermarkets business, whilst Sara Weller became Deputy Managing Director of the business. It was also announced that John Adshead, Group HR and IT Director, would retire from the Board at the end of March 2004. On 14 March 2003, the Company announced that Sir George Bull had agreed to extend his tenure as Chairman until 28 March 2004 and that Sir Peter Davis had also agreed to extend his time with the Group and assume the role of Chairman from 29 March 2004. The Group has started a formal recruitment process with a view to recruiting a new Chief Executive either internally or externally by March 2004. As part of the same process, the Group has initiated a search for an independent Non-Executive Deputy Chairman to be appointed during 2004 with the intention that this individual will in due course become Non-Executive Chairman. These appointments will maintain the momentum of the Group’s successful Business Transformation Programme and ensure management continuity in the next year to 24 months. In accordance with the Articles of Association, Sir George Bull, Sir Peter Davis, Roger Matthews, Keith Butler-Wheelhouse and June de Moller will retire by rotation at the Annual General Meeting and will seek re-appointment. Full biographical details of the Directors are set out on pages 16 and 17 of the Annual Review and Summary Financial Statement. Auditors Following the change of legal status of PricewaterhouseCoopers to a limited liability partnership at the start of 2003, PricewaterhouseCoopers resigned as auditors on 3 April 2003 and the Directors appointed PricewaterhouseCoopers LLP in their place. At the Annual General Meeting, shareholders will be asked to re-appoint PricewaterhouseCoopers LLP as auditors. Annual General Meeting The Annual General Meeting will be held on Wednesday 23 July 2003 at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE at 11.30am. The Chairman’s letter and Notice of the Meeting accompanies this Report, together with explanatory notes explaining the business to be transacted at the meeting. At the meeting, resolutions will be proposed to increase the Company’s authorised ordinary share capital, to renew the general authority of the Directors to issue shares (together with the authority to issue shares without applying the statutory pre-emption rights) and to authorise the Company to make market purchases of its own shares. No such purchase has been made during the last financial year. 8 J Sainsbury plc Annual Report and Financial Statements 2003 Colleagues have always been encouraged to hold shares in the Company and over 64,700 UK colleagues are shareholders directly or through the Profit Sharing Scheme Trust or the Sainsbury’s Share Purchase Plan. Sainsbury’s has a strong record on environmental matters and on its commitment to its social responsibilities. The Company’s Environment Report, which is published on the Internet (www.j-sainsbury.co.uk/csr/environment.htm) describes the Company’s environmental policies. The statement of corporate responsibilities is published on the Internet (www.j-sainsbury.co.uk/csr). 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. Statements on the operating companies’ payment of suppliers are contained in their accounts. Donations During the year, donations to the value of £7.1 million (2002: £11 million) were made to UK charitable organisations and local community projects. In the US, Shaw’s made donations to the value of $13.6 million (2002: $19.5 million) to charitable community projects. Sainsbury’s colleagues, customers and suppliers also raised £10.5 million for charitable purposes through events supported by the Company; see page 14 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 20 May 2003 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 20 May 2003, 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 20 May 2003, notified holdings of these trusts amounted to 23 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 20 May 2003, 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 20 May 2003, the notifiable interests, held beneficially and as trustees of charitable and other trusts, of Lord Sainsbury of Preston Candover KG, the Hon Simon Sainsbury, the Rt Hon Sir Timothy Sainsbury and Lady Sainsbury, the wife of Sir Timothy Sainsbury, were 4 per cent, 3 per cent, 3 per cent and 3 per cent respectively. All of the above disclosures include duplication. As at 20 May 2003, Franklin Resources Inc. had a notifiable interest of 5 per cent. Post balance sheet events There have been no events affecting the Company or Group since the year end. Directors’ interests The beneficial interests of the Directors and their families in the shares of the Company are shown on page 19. During the year, no Director had any material interest in any contract of significance to the Group’s business. Market value of properties The Directors believe that the aggregate open market value of Group properties exceeds the net book value of £6 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 colleague participation. The Company’s interim and annual results are presented to all senior management and processes exist at local level to communicate these results to all colleagues. J Sainsbury plc Annual Report and Financial Statements 2003 9 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 five Executive Directors and six Non-Executive Directors. Biographical details of the Directors are set out in the Annual Review and Summary Financial Statement on pages 16 and 17. Changes to the composition of the Board during the year and the Board succession plans appear on page 8 of this report. 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 wide and varied commercial experience to Board deliberations. Lord Levene is the senior Non-Executive Director. The Board meets10 times a year, including a two day strategy conference. There is a formal schedule of matters reserved 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 which comprises of 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 all relevant information to enable 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 matters reserved 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 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 both internal and external audits 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 monitors their effectiveness, and it reviews the interim and annual financial statements before they are considered by the Board. The Board had adopted a revised policy on the engagement of the external auditors to supply non-audit services, the objective of which is to ensure that the provision of such services does not impact the external auditors’ independence and objectivity. The Head of Group Internal Audit has direct access to the Chairman of the Audit Committee and the Company’s external auditors attend Committee meetings. The Chairman of the Audit Committee holds separate meetings with the Head of the Group Internal Audit and the external auditors, whilst the Committee meets with the external auditors without management being present. The Nomination Committee advises the Board on the appointment of Directors and meets when necessary. All Directors are required to seek re-appointment 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 responsibilities of the Remuneration Committee are set out in the Directors’ Remuneration Report on pages 12 to 19. 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 higher 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. 10 J Sainsbury plc Annual Report and Financial Statements 2003 Investor relations The Company is committed to maintaining good communications with shareholders. Institutional investors and buyside and sellside 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, which will be held on 23 July 2003. There will be a display of various aspects of the Group’s activities and a business presentation by the Group Chief Executive. The Chairman 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 page 30 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. 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 twice a year 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; and 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 the actions taken to mitigate any weaknesses are carefully 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. J Sainsbury plc Annual Report and Financial Statements 2003 11 Remuneration report This report is made by the Board on the recommendation of the Remuneration Committee. The first part of the report provides details of remuneration policy. The second part provides details of the remuneration, pensions and share interests of the Directors for the year ended 29 March 2003. The Directors confirm that this report has been drawn up in accordance with the Combined Code and the Directors’ Remuneration Report Regulations. Remuneration Committee The Remuneration Committee meets at least three times a year. Its responsibilities include setting the remuneration policy for all Executive Directors and determining the remuneration for individual Executive Directors. It is chaired by Keith Butler- Wheelhouse and comprises all of the Non-Executive Directors, namely Sir George Bull, June de Moller, Jamie Dundas, Lord Levene and Bridget Macaskill. During the year, the Committee received advice on general remuneration matters from Linklaters and Towers Perrin, who were instructed by the Company, and on specific issues from ABN Amro and UBS Warburg, who were instructed by the Committee. They also provided various banking, legal and employee benefit services to the Company. The Committee has appointed Towers Perrin to provide advice direct to the Committee for the new financial year. The Committee considers the views of the Group Chief Executive and the Group HR Director when reviewing the remuneration of the other Executive Directors, but neither is involved in discussions concerning their own remuneration. Remuneration policy The Remuneration Committee adopted a remuneration policy in 2002 consistent with the Company’s business objectives which: • attracts, retains and motivates high calibre Directors; • 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 short-term and long-term incentive plans which are targeted at both personal and Company performance; • aligns the interests of Directors with those of the shareholders by linking share and cash incentive payments to performance; and • is based on information from a range of remuneration sources, which takes into account the retail sector as well as other large companies of a comparable size and complexity. The policy will continue to apply for the next financial year. For subsequent years, the Committee will review the policy on a regular basis and recommend changes as and when appropriate. The main components of Executive Directors’ remuneration are set out below: i) Basic salary Basic salary for each Director is determined taking into account professional advice based on assessments of the Director’s performance, experience and responsibilities, and advice on market factors, which provides the best available benchmark for the Director’s specific position. ii) Incentive arrangements 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 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 proportion of each Director’s total remuneration that is performance related is significant. Approximately 70 per cent of the Group Chief Executive’s total remuneration is linked to performance, assuming target level is achieved under the bonus plan and that the Board agrees to the release of half of the total number of shares available for 2003/04 performance under the Share Award Plan described below. For the other Executive Directors, the proportion of total remuneration delivered through bonus and under the Performance Share Plan is 40 per cent, assuming target levels are achieved. Share options also provide a performance rated incentive, but as the exercise prices of all outstanding grants were above the market price of Sainsbury’s shares at the year end, they are not included within this percentage. If the share price were to increase, the proportion of performance related remuneration would be higher. In order to maximise value from the incentive plans, performance measures are designed to ensure that participants are not rewarded for the delivery of the same measures through different elements of the package. Accordingly, relative total shareholder return is the measure for the Performance Share Plan, which rewards executives for maximising shareholder returns over the medium term, whilst earnings per share growth applies to the Executive Share Option Plan, which ensures that executives are focused on the underlying financial performance of the business as well as on absolute share price growth. The performance measures for the Share Award Plan focus on the achievement of specific profit targets and key business milestones, and the successful implementation of succession plans. 12 J Sainsbury plc Annual Report and Financial Statements 2003 The incentive arrangements may be summarised as follows: Annual Bonus Plan A cash bonus is awarded subject to a condition based on year on year profit growth and individual targets, which are key to the businesses’ performance. The bonus is a percentage of basic salary, with a maximum of 80 per cent for Executive Directors, other than the Group Chief Executive, whose maximum award is 100 per cent of basic salary. That part of the bonus relating to Company performance will only be paid if the threshold level of year on year profit growth has been achieved and a pro rated bonus will then be paid up to a maximum level of profit growth. That part of the bonus relating to individual targets can be earned if any year on year profit growth is achieved and the maximum which can be earned for individual targets is 20 per cent of basic salary. 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 over the three year performance period. 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, Morrisons, Next, Safeway, Somerfield and Tesco). In future years Casino and Loblaw will be added to the comparator group. 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. If the performance criterion is satisfied, the individual is granted an option to acquire the shares which can be exercised over the following 10 years. In 2002, the Committee revised the Plan to strengthen the link between rewards and Company performance. Under the revised structure, no awards will be made unless median performance is achieved at the end of the three year performance period. At median level, shares to the value of 30 per cent of salary will be released and the award will be pro rated at every position between the median and first position in the comparator group. The maximum allocation for Directors is a conditional grant of shares equal to 75 per cent of salary. This performance measure will apply to conditional awards made in 2003. Sir Peter Davis does not participate in this plan. Executive Share Option Plan At last year’s Annual General Meeting, shareholders approved the Executive Share Option Plan 2002. The maximum annual option award is two times basic salary and the actual grants are agreed by the Committee according to the assessed performance and potential of participants. The exercise of options is conditional upon a performance target based on the growth in the Company’s underlying earnings per share (before goodwill and exceptionals) (‘EPS’) relative to inflation over a three year period. The Committee reviews the performance condition prior to the annual award of options to ensure that it is set at appropriately challenging levels. For the 2003/04 grant, no options will be exercisable for average annual real growth of less than 3 per cent per annum over the three year performance period, 50 per cent of the option will be exercisable if average real growth of 3 per cent per annum is achieved and, for average real growth of 5 per cent per annum, the option is exercisable in full, with a pro rating between 3 per cent and 5 per cent. EPS is measured against a fixed starting point over a performance period of three financial years beginning with the year in which the option is granted. To the extent that the condition is not satisfied in full after three years, it will be retested over four and then over five financial years. To the extent the condition is not met after five financial years, the option will lapse. Share Award Plan 2003 On 14 March 2003, the Company announced that, at the request of the Board, Sir Peter Davis had agreed to extend his time with the Group and will assume the role of Chairman on 29 March 2004. In conjunction with the appointment, the Board believed that it was appropriate to award a package of restricted shares in the Company to Sir Peter in respect of his extended term in office. The new award will be in the form of conditional awards of restricted shares to be released on 31 July 2005, subject to the achievement of specific profit targets and business milestones set by the Committee and dependent on the successful implementation of succession plans. Accordingly on 27 March 2003, two conditional awards of one million shares and 500,000 shares were made to Sir Peter under the terms of the restricted Share Award Plan, to be held by the Company’s Employee Share Ownership Trust and released to him on 31 July 2005 provided that he remains in employment as Chairman until that date and that the following conditions have been met: a) 300,000 shares will be released if: • business transformation targets and timescales (in respect of the renewal of the supply chain network, the implementation of new IT systems and the programme for introducing new store formats, opening new stores and extending and updating stores) have been achieved (in the reasonable opinion of the Board) in line with the agreed programme for 2003/04; and • to the extent the same is within Sir Peter’s control, he has used his best endeavours to procure that a new Group Chief Executive designate is appointed (acceptable to the Nomination Committee) by 31 March 2004 or such longer period as the Board decides; and • a Non-Executive Deputy Chairman has been appointed (acceptable to the Nomination Committee) by 31 March 2004; b) 700,000 shares will be released if the Company’s profits for 2003/04 are at least 90 per cent of the profit level agreed by the Board in the financial, budgeting and corporate planning process. 350,000 shares will be released if at least 70 per cent of the J Sainsbury plc Annual Report and Financial Statements 2003 13 Remuneration report continued agreed profit level has been achieved, with a pro rata number of shares between 350,000 and 700,000 being released for profit between 70 per cent and 90 per cent of the agreed profit level. The second award will be released to Sir Peter on 31 July 2005 if the following conditions have been met: a) 300,000 shares will be released if: • business transformation targets and timescales (in respect of the renewal of the supply chain network, the implementation of new IT systems and the programme for introducing new store formats, opening new stores and extending and updating existing stores) have been achieved (in the reasonable opinion of the Board) in line with the agreed programme for 2004/05; and • to the extent the same is within Sir Peter’s control, he has used his best endeavours to procure that the new Group Chief Executive and the Non-Executive Deputy Chairman have been introduced to their new responsibilities and supported appropriately by him by 31 March 2005; b) 200,000 shares will be released if the Company’s profits for 2004/05 are at least 90 per cent of the profit level agreed by the Board in the financial, budgeting and corporate planning process. 100,000 shares will be released if at least 70 per cent of the agreed profit level has been achieved, with a pro rata number of shares between 100,000 and 200,000 for profit between 70 per cent and 90 per cent of the agreed profit level. The Board shall (other than in circumstances of early vesting) be capable of adjusting the number of shares to be released referable to profit and business transformation targets downwards or upwards if, in the reasonable opinion of the Board, the Company has in the relevant financial year materially underperformed or outperformed by comparison with other publicly quoted food retailers. In relation to leaving the Company or a change in control occurring the following will apply: • subject to the following points, where Sir Peter leaves before the release date for the shares, the award will lapse and no shares will be received. • either if Sir Peter leaves before the release date of the shares due to: – early retirement agreed by the Board; or – dismissal (including constructive dismissal) by the Company (other than for cause); or – death or, if there is a change in control, then the awards will vest and the shares will be received on the date of leaving or the date of the change in control (as the case may be: the ‘vesting event’). The number of shares received referable to profit will be calculated by reference to the budgeted profit for the period from the commencement of the relevant financial year up to the vesting event. If the vesting event occurs in the financial year 2003/04 then the award related to profit for 2004/05 shall be 50 per cent of the number of shares to be released in relation to 2003/04. The business transformation targets shall be deemed satisfied. iii) Other share schemes In order to encourage share ownership, the Company provides two all employee share plans for its UK employees, namely the Savings Related Share Option Scheme and the Share Incentive Plan, which has two parts, the Commitment Shares Plan and the Share Purchase Plan. Directors may participate in these plans in the same way as all other colleagues. The final payment under the Employee Profit Sharing Scheme was made in August 2002. Performance Graph The graph below shows the Total Shareholder Return (‘TSR’) performance of an investment of £100 in J Sainsbury plc shares over the last five years compared with an equivalent investment in the FTSE 100 Index. 120 100 80 60 40 98 99 00 01 02 03 J Sainsbury plc FTSE 100 Index Over a three year period from 31 March 2000, the Company’s TSR outperformed the FTSE 100 Index by 48 per cent. 14 J Sainsbury plc Annual Report and Financial Statements 2003 iv) Pensions Executive Directors are members of the J Sainsbury Executive Pension Scheme, a funded, Inland Revenue approved, defined benefit 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 basic salary in the last 12 months of service) subject to Inland Revenue limits. Pensions are also payable to dependants on death and a lump sum is payable if death occurs in service. With effect from March 2004, the Company will be introducing a new scale of benefits with pension payments based on career averaged salary. Executive Directors may choose which scale of benefits will apply to them from that date. If they opt to switch to the new career average scale, they will continue to contribute at the current rate of 4.25 per cent of basic salary. If they wish to retain the current scale of benefits based on their final basic salary, their contributions will increase to 7 per cent of basic salary. External appointments to the Board are eligible to become members of the Executive Stakeholder Pension Plan which is a defined contribution arrangement. v) Benefits Other benefits for Executive Directors include the provision of company car benefits and free medical insurance. Service contracts Sir Peter Davis has an amended service contract which (unless terminated earlier or renewed by mutual agreement) will now terminate automatically on 31 July 2005. John Adshead, Roger Matthews, Stuart Mitchell and Sara Weller have rolling service contracts which can be terminated by either party by giving 12 months’ written notice and if any of these service contracts is terminated without cause (otherwise than in circumstances where the Company is entitled to terminate by summary notice) the Company will pay an amount equal to one times basic salary for the notice period plus 75 per cent of basic salary in lieu of all other benefits. In addition, if a Director is dismissed within six months of a change of control the above sum will become payable. The Executive Directors’ service contracts became effective on the following dates: Executive Director John Adshead Sir Peter Davis Roger Matthews Stuart Mitchell Sara Weller Contract date 2 March 2000 17 January 2000* 8 May 2000 22 June 2002 4 July 2002 *Supplemental agreement entered into on 14 March 2003. Non-Executive Directors, including the Chairman, do not have service contracts. They are appointed for an initial two year period and thereafter by mutual consent on a yearly basis. The initial appointment and any subsequent re-appointment is subject to election or re-election by shareholders. Non-Executive Directors are paid a basic fee with additional fees being payable for chairing a Board Committee. The level of fees is reviewed against market practice, taking into account the required time commitment. They do not participate in any performance related plans. J Sainsbury plc Annual Report and Financial Statements 2003 15 Remuneration report continued The following section provides details of the remuneration, pension and share interests of all the Directors for the year ended 29 March 2003 and has been audited. Directors’ remuneration The remuneration of the Directors for the year was as follows: Note Salary £000 Bonus6 £000 Profit sharing7 £000 Compensation for loss of office £000 Benefits8 £000 1 2 3 3 4 5 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 Directors who left the Board before the start of the financial year including compensation for loss of office Total 2003 Total 2002 340 258 800 405 350 350 250 35 30 35 30 30 – 2,913 2,568 166 – 408 195 181 167 – – – – – – – 4 4 9 4 4 3 – – – – – – – 1,117 914 28 19 – – – – – – – – – – – – – – 525 Total 2003 £000 538 283 1,219 632 556 536 277 35 30 35 30 30 Total 2002 £000 476 469 1,098 562 110 110 245 29 25 30 23 4 28 21 2 28 21 16 27 – – – – – – 143 126 – 971 4,201 4,152 1 Retired as a Director on 31 December 2002. 2 Highest paid Director. 3 Appointed as a Director on 1 January 2002. 4 Appointed as a Director on 1 May 2001. 5 Appointed as a Director on 1 February 2002. 6 Includes performance bonuses earned in the period under review but not paid in the financial year. 7 Profit sharing amounted to 1.17 per cent of qualifying pay. 8 Benefits include company car benefits and medical insurance. Pensions The pension entitlements of the Directors for the year were as follows: Transfer value of increase in accrued pension during the year (net of inflation)(2) Increase in accrued pension during the year (net of and net of Directors’ inflation) contributions vi £000 v £000 Directors’ contributions during the year iii £000 Increase in accrued pension during the year iv £000 14 34 17 15 15 11 25 28 15 23 15 14 22 27 14 21 15 12 Transfer value of accrued pension at 29 March 2003(2) vii £000 3,307 1,224(4) 365 714 207 354 381(4) 100 113 72 129(3) (7) 2,312(6) Transfer value of accrued pension at 30 March Increase in transfer value over the year net of Directors’ contributions 2002(2) =(vii)-(viii)-(iii) ix £000 viii £000 2,785 854(5) 320 758 156 1,738 508 336 28 (59) 36 563 Age at 29 March 2003 i years 58 61 48 42 41 52 Accrued pension at 29 March 2003(1) ii £000 198 80 45 119 35 150(3) John Adshead CBE Sir Peter Davis Roger Matthews Stuart Mitchell Sara Weller Ian Coull 1 The accrued pensions are the amounts that would be paid if the Director left service at the relevant date. 2 The transfer values have been calculated in accordance with the guidance note ‘GN11’ published by the Institute of Actuaries and Faculty of Actuaries. 3 Retired as a Director on 31 December 2002. 4 Allows for a retirement date of July 2005. 5 Allows for a retirement date of March 2004. 6 Allows for enhanced value of immediate early retirement pension of £105,000 per annum. 7 No allowance made for additional liability arising from immediate payment of pension. 16 J Sainsbury plc Annual Report and Financial Statements 2003 The transfer values represent the capital sum that would need to be appropriately invested to provide the relevant pension assuming it is paid from the Executive Director’s normal retirement age (or at the date of retirement for Directors who retired during the year). 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). 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. In the case of Sir Peter Davis, John Adshead, Roger Matthews and Sara Weller, 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 £2,552,000 has been made in respect of the period ended 29 March 2003 (2002: £1,616,000). Performance Share Plan Under the Plan, shares conditionally allocated to individuals are released to them in the form of options if the performance condition is met at the end of the three year performance period. Number of shares conditionally allocated 31 March 2002 36,096 55,146 37,470 – 38,101 55,146 37,470 – Lapsed during the year 6,029 55,146 – – 6,363 55,146 37,470 68,918 62,500 44,496 – 62,500 – – 11,978 37,223 28,981 – 2,001 37,223 – – 41,359 30,035 – 41,359 – – Number of shares conditionally allocated during the year Mid market price on date of conditional allocation (pence) Options granted during the year under the plan Mid market price on day option granted (pence) Number of shares conditionally allocated 29 March 2003 – – – 68,918 – – – 68,918 – – 82,094 – – – 70,945 – – 70,945 374 272 427 370 374 272 427 370 272 427 370 374 272 427 370 272 427 370 30,067 – – – 31,738 – – – – – – 9,977 – – – – – – 287 – – – 287 – – – – – – 287 – – – – – – – – 37,470 68,918 – – – – – 44,496 82,094 – – 28,981 70,945 – 30,035 70,945 John Adshead CBE 26 July 1999 2 June 2000 7 June 2001 30 May 2002 Ian Coull 26 July 1999 2 June 2000 7 June 2001 30 May 2002 Roger Matthews 2 June 2000 7 June 2001 30 May 2002 Stuart Mitchell 26 July 1999 2 June 2000 7 June 2001 30 May 2002 Sara Weller 2 June 2000 7 June 2001 30 May 2002 End of performance period 29.03.03 27.03.04 26.03.05 29.03.03 27.03.04 26.03.05 29.03.03 27.03.04 26.03.05 29.03.03 27.03.04 26.03.05 1 The above figures for 2001 show the maximum awards that will be released if the Company achieves the upper quartile position within the comparator group at the end of the three year performance period. No shares will be released if the Company’s position 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 pro rata awards will be made. 2 The above figures for 2002 show the maximum awards that will be released if the Company achieves first position within the comparator group. Shares to the value of 30 per cent of salary will be released at median performance. Awards will be pro rated at every position between the median and first position in the comparator group. 3 Ian Coull retired as a Director on 31 December 2002. 4 Sir Peter Davis does not participate in the plan. J Sainsbury plc Annual Report and Financial Statements 2003 17 Remuneration report continued The following table shows the options that were granted during the year as a result of the partial satisfaction of the performance condition attaching to the conditional allocation awarded in 1999. Number of options 31 March during 2002 the year Granted Exercised during the year Mid market price on date of Gains on option exercise exercises (£) (pence) Lapsed during 29 March the year Total exercise price 2003 (pence) Inherent profit (£) Date from which exercisable Date of expiry Performance Share Plan John Adshead CBE Ian Coull Stuart Mitchell – 30,067 – – – 31,738 31,738 324.25102,909 – – – 9,977 – – – 30,067 100 67,950 29.05.02 28.05.12 – – – 9,977 100 22,547 29.05.02 28.05.12 – 100 The inherent profit figures have been calculated by reference to a mid market price of the Company’s shares on 29 March 2003 of 226 pence and assume that all unexercised options were exercised on that date. Options over ordinary shares At the end of the year, the Directors’ share options were as follows: Executive Share Option Plan with no performance conditions Exercised during the year Granted during the year Lapsed during the year 31 March 2002 Number of options John Adshead CBE Ian Coull Stuart Mitchell 119,437 101,062 10,290 – – – – 45,482 – 101,062 10,290 – Weighted average exercise price (pence) 359 – – Range of exercise prices (pence) 359 – – Date From which exercisable 12.03.97 – – Of expiry 12.03.04 – – 29 March 2003 73,955 – – 1 No performance condition applied in accordance with market practice at the date of grant. 2 Ian Coull retired as a Director on 31 December 2002. Number of options 31 March 2002 Granted Exercised during the year during the year Lapsed during the year Weighted average exercise price 2003 (pence) 29 March Range of exercise prices (pence) Executive Share Option Plan with performance conditions John Adshead CBE Ian Coull Sir Peter Davis Roger Matthews Stuart Mitchell Sara Weller Note 1 2 3,5 4,5 6 1 2 3,5 4,5 6 6 1 2 3 4,5 6 3 4 6 60,631 108,959 181,817 153,565 68,210 120,402 185,790 153,565 21,157 49,632 116,627 131,969 179,547 136,768 – – – – – 236,933 – – – – – 236,933 – – – – 282,229 – – – – – 243,902 – – – 243,902 3,5 3,009,596 231,333 182,358 3 4 – – – – – – – – – – – 68,210 – 120,402 – 185,790 – 153,565 – 236,933 – – – – – – – – – – – – 60,631 108,959 181,817 153,565 236,933 – – – – – 475 478 314 417 287 – – – – – – 3,009,596 260.5 – – – – – – – – – – – 231,333 182,358 282,229 21,157 49,632 116,627 131,969 243,902 179,547 136,768 243,902 475 367-545 272-377.5 407-427 287 – – – – – 260.5 294 272-319.75 407-427 417 287 287 475 475 447 367-545 272-377.5 303 407-427 417 287 287 272-319.5 293 407-427 417 287 287 Date From which exercisable Of expiry – – – – – 08.09.98 05.09.05 20.05.00 10.11.08 02.08.02 02.06.10 07.06.04 26.07.11 25.07.05 24.07.12 – – – – – 01.03.03 01.03.10 24.11.02 02.06.10 07.06.04 26.07.11 25.07.05 24.07.12 08.09.98 05.09.05 20.05.00 10.11.08 02.08.02 02.06.10 07.06.04 26.07.11 25.07.05 24.07.12 17.01.03 02.06.10 07.06.04 26.07.11 25.07.05 24.07.12 1 Performance condition of 2.5 per cent real annual average growth in EPS over a rolling three year period up to the tenth anniversary of the grant. 2 Performance condition of 2.0 per cent real annual average growth in EPS over a rolling three year period up to the tenth anniversary of the grant. 3 Performance condition of 3.0 per cent real annual average growth in EPS over a rolling three year period up to the tenth anniversary of the grant. 4 Performance condition of 3.0 per cent real annual average growth in EPS over the three years from the date of grant, which if not satisfied is retested over a 4 year period. If the performance condition is not met after the fourth year the option lapses. 18 J Sainsbury plc Annual Report and Financial Statements 2003 Options over ordinary shares (continued) 5 For each of (3) and (4) above, the performance condition is increased to 4.0 per cent real annual average growth in EPS to the extent that the total value of outstanding options was in excess of four times basic salary at the date of grant. 6 Performance conditions are set out on page 13. 7 The performance conditions relating to grants up to and including 2 June 2000 have been met. 8 Ian Coull retired as a Director on 31 December 2002. Number of options 31 March 2002 Granted during the year Exercised during the year Lapsed during the year 29 March 2003 Weighted average exercise price (pence) Date Range of exercise prices (pence) From which exercisable Of expiry Savings Related Share Option Scheme John Adshead CBE Ian Coull Sir Peter Davis Roger Matthews Stuart Mitchell 2,080 4,877 4,384 2,571 4,230 1,107 – – – – – – – – – 474 4,877 – – – 2,713 – 4,384 2,571 4,230 275 239-301 01.03.03 31.08.06 301 300 318 301 299-301 253-416 01.03.07 01.03.04 01.02.04 31.08.07 31.08.05 31.08.07 1 The Savings Related Share Option Scheme is an all employee share option scheme and has no performance conditions as per Inland Revenue Regulations. 2 Ian Coull retired as a Director on 31 December 2002. The options outstanding under the Company’s Executive Share Option Plan and Savings Related Share Option Scheme are exercisable at prices between 239 pence and 545 pence. In the period from 31 March 2002 to 29 March 2003, the highest mid market price of the Company’s shares was 422 pence and the lowest mid market price was 220 pence and at 29 March was 226 pence. As at that date, all exercise prices exceeded 226 pence and accordingly no inherent profit arose under the Executive Share Option Plan or the Savings Related Share Option Scheme. Directors’ interests Directors’ interests in the ordinary shares of the Company and shares held in trust on behalf of Directors are as follows: Ordinary shares2 Ordinary shares6 Executive Directors John Adshead CBE 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 30 March 2002 29 March 2003 69,345 101,106 50,391 12,407 243 20,000 3,300 1,500 1,200 2,500 – 72,226 103,397 51,295 14,393 3,472 25,000 3,300 1,500 1,200 2,500 2,500 20 May 2003 72,323 103,494 51,295 14,490 3,569 25,000 3,300 1,500 1,200 2,500 2,500 1 The above table has not been audited. 2 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. 3 The Executive Directors are potential beneficiaries of the Company’s employee benefit trusts, which are used to satisfy awards under the Company’s employee share plans, and are therefore treated as interested in the 24.8 million (2002: 25.1 million) shares held by the Trustees. 4 The Company’s Register of Directors’ Interests contains full details of Directors’ interests, shareholdings and options over ordinary shares of the Company. 5 Ian Coull retired as a Director on 31 December 2002 and had a reportable interest on that date over 47,473 (2002: 46,101) ordinary shares. 6 Changes to the Directors’ interests in ordinary shares between 30 March 2003 and 20 May 2003 occurred as a result of purchases under the Company’s Share Purchase Plan. Approved by the Board on 20 May 2003 Keith Butler-Wheelhouse Chairman of the Remuneration Committee J Sainsbury plc Annual Report and Financial Statements 2003 19 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 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 and detection 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. • prepare the financial statements on the going concern basis unless it is inappropriate to assume that the Company will continue in business. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 20 J Sainsbury plc Annual Report and Financial Statements 2003 Independent Auditors’ report to the members of J Sainsbury plc We have audited the financial statements which comprise the Group profit and loss account, the balance sheets, the Group cash flow statement, the Group statement of total recognised gains and losses, the reconciliation of movements in equity shareholders’ funds and the related notes. We have also audited the disclosures required by Part 3 of Schedule 7A to the Companies Act 1985 contained in the remuneration report (‘the auditable part’). Respective responsibilities of Directors and Auditors The Directors’ responsibilities for preparing the Annual Report and Financial Statements in accordance with applicable United Kingdom law and accounting standards are set out in the statement of Directors’ responsibilities on page 20. The Directors are also responsible for preparing the remuneration report. Our responsibility is to audit the financial statements and the auditable part of the remuneration report in accordance with relevant legal and regulatory requirements and United Kingdom Auditing Standards issued by the Auditing Practices Board. This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the auditable part of the remuneration report have been 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 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 only the report of the Directors, the unaudited part of the remuneration report, the Chairman’s statement, the operating and financial review 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 of the Financial Services Authority, 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 and the auditable part of the remuneration report. 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 and the auditable part of the remuneration report 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 29 March 2003, and of the profit and cash flows of the Group for the year then ended; the financial statements have been properly prepared in accordance with the Companies Act 1985; and those parts of the remuneration report required by Part 3 of Schedule 7A to the Companies Act 1985 have been properly prepared in accordance with the Companies Act 1985. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors London 20 May 2003 J Sainsbury plc Annual Report and Financial Statements 2003 21 Group profit and loss account for the 52 weeks to 29 March 2003 Turnover including VAT and sales taxA 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 Group operating profit Share of profit/(loss) in joint ventures Loss on sale of properties Disposal of operations – discontinued Profit on ordinary activities before interest Net interest payable and similar items Underlying profit on ordinary activities before taxB Exceptional items Amortisation of goodwill Profit on ordinary activities before tax Tax on profit on ordinary activities Profit on ordinary activities after tax Equity minority interest Profit for the financial year Equity dividends Retained profit for the financial year Basic earnings per share Underlying earnings per shareB Diluted earnings per share Underlying diluted earnings per shareB A Including VAT at Sainsbury’s Supermarkets and sales tax at Shaw’s Supermarkets. B Before exceptional items and amortisation of goodwill. Notes to the financial statements are on pages 26 to 46. Note 2003 £m 2002 £m 18,495 (1,065) 18,206 (1,044) 17,430 – 17,154 8 17,430 (16,039) 17,162 (15,905) 1,391 1,257 (717) (632) 752 (65) (13) 674 – 674 3 (11) 61 727 (60) 695 (15) (13) 667 (206) 461 (7) 454 (298) 156 23.7p 24.2p 23.7p 24.1p 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 2,3 3 3 3 13 3 4 5 6 7 10 11 12 12 12 12 22 J Sainsbury plc Annual Report and Financial Statements 2003 Group statement of total recognised gains and losses for the 52 weeks to 29 March 2003 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 2003 £m 454 (4) 450 – 450 2002 £m 364 1 365 (160) 205 The above profit for the financial year, on an historical cost equivalent basis, would be £463 million (2002: £364 million) as a result of the realisation of a property revaluation gain of £9 million (2002: nil) of previous years. Reconciliation of movements in equity shareholders’ funds for the 52 weeks to 29 March 2003 Profit for the financial year Equity dividends Currency translation differences 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 Closing equity shareholders’ funds Notes to the financial statements are on pages 26 to 46. Group Company 2003 £m 454 (298) 156 (4) 3 – 155 4,848 5,003 2002 £m 364 (285) 79 1 21 (4) 97 4,751 4,848 2003 £m 348 (298) 50 (33) 3 – 20 4,282 4,302 2002 £m 131 (285) (154) – 21 (4) (137) 4,419 4,282 J Sainsbury plc Annual Report and Financial Statements 2003 23 Balance sheets at 29 March 2003 and 30 March 2002 Group 2003 £m Company 2002 £m 2003 £m Note Fixed assets Intangible assets Tangible assets Investments Current assets Stock Debtors Sainsbury’s Bank’s current assets Investments Cash at bank and in hand Creditors: amounts falling due within one year Sainsbury’s Bank’s current liabilities 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 13 14 15 18 19 20 21 20 22 22 26 27 27 28 29 226 7,540 112 7,878 800 297 2,397 20 639 4,153 263 6,906 174 7,343 751 398 2,193 16 370 3,728 (2,237) (2,537) (2,060) (2,648) (4,774) (4,708) (621) (980) – 368 7,667 8,035 – 111 – – 242 353 – (467) (467) (114) 2002 £m – 471 6,285 6,756 – 208 – – 1 209 – (747) (747) (538) 7,257 6,363 7,921 6,218 (1,885) (300) (1,223) (231) (3,567) (52) (1,907) (29) 5,072 4,909 4,302 4,282 484 1,424 22 3,073 5,003 69 5,072 484 1,421 39 2,904 4,848 61 4,909 484 1,424 – 2,394 4,302 – 4,302 484 1,421 – 2,377 4,282 – 4,282 Notes to the financial statements are on pages 26 to 46. The financial statements on pages 22 to 46 were approved by the Board of Directors on 20 May 2003, and are signed on its behalf by Sir Peter Davis Group Chief Executive Roger Matthews Group Finance Director 24 J Sainsbury plc Annual Report and Financial Statements 2003 Group cash flow statement for the 52 weeks to 29 March 2003 Net cash inflow from operating activities Dividend received from joint venture 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 intangible fixed assets Net cash outflow from capital expenditure and financial investment Acquisitions and disposals Repayments of loans to joint ventures Investment in joint ventures and fixed asset investments Proceeds from sale of subsidiary undertakings Proceeds from disposal of other fixed asset investments Net cash inflow/(outflow) for acquisitions and from disposals Equity dividends paid to shareholders Net cash outflow before use of liquid resources and financing Financing Issue of ordinary share capital Decrease in short-term borrowings Increase in long-term borrowings Increase in finance leases Capital element of finance lease payments Net cash inflow from financing Increase in net cash Reconciliation of net cash flow to movement in net debt Increase in net cash Increase 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 26 to 46. Note 30 25 25 25 2003 £m 1,070 8 67 (108) (21) (62) (224) (1,169) 130 (3) (1,042) 27 (1) – 184 210 (288) (328) 3 (88) 550 151 (5) 611 283 283 (462) (156) 87 (248) (1,156) 2002 £m 1,067 – 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) (1,404) (1,156) J Sainsbury plc Annual Report and Financial Statements 2003 25 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 the Companies Act 1985 and applicable accounting 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 29 March 2003 (prior year the 52 weeks ended Saturday 30 March 2002). The Group has adopted the transitional disclosure requirements of FRS 17. Consolidation The Group’s financial statements combine the results of the Company and all its subsidiaries, associated undertakings and joint ventures, to the extent of group ownership. The results of subsidiaries and associated undertakings are included in the Group profit and loss account from the date of acquisition, or in the case of disposals, up to the effective date of disposal. The Group’s interests in its joint ventures are accounted for using the gross equity method. The Group’s interests in its associated undertakings are accounted for using the equity method. In a joint arrangement that is not an entity, the Group accounts for its own assets, liabilities and cash flows measured according to the terms of the agreement governing the arrangement. Goodwill Goodwill is recognised as an asset on the Group’s balance sheet in the year in which it arises and, subject to impairment review, is amortised on a straight line basis over its finite life, a maximum of 20 years, and only under specific circumstances will it be assumed that goodwill has an indefinite economic life. Goodwill arising on acquisitions prior to 8 March 1998 has been set off against reserves. Turnover Turnover consists of sales through retail outlets, sales of completed development properties and, in the case of Sainsbury’s Bank plc, interest receivable, fees and commissions. 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 Provision for deferred tax is made in respect of all timing differences that have originated, but not reversed, by the balance sheet date. The provision for deferred tax is not discounted. Deferred tax assets are only recognised to the extent that it is regarded that they will be recovered. Deferred tax is not provided on unremitted earnings of subsidiaries, where no commitment to remit these earnings had been made. 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. Operating lease income consists of rentals from properties held for disposal or subtenant agreements. 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. 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. Trading transactions denominated in foreign currencies are translated at the exchange rate at the date of the transaction. Financial instruments The derivative financial instruments used by the Group to manage its interest rate and currency risks are interest rate swaps and swap options, cross currency swaps, forward rate contracts and currency options. Interest payments or receipts arising from derivative instruments are recognised within net interest payable 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 not recognised 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. 26 J Sainsbury plc Annual Report and Financial Statements 2003 2 Segmental analysis of turnover, profit and net assets Profit on ordinary activities before tax 2003 Food retailing and financial services – UK Property development – UK Food retailing – US Total Joint ventures Loss on sale of properties – Food retailing UK – Food retailing US Profit on disposal of operations – DIY retailing UK Net interest payable Underlying profit before tax Amortisation of goodwill – US Group profit before tax Non-operating assets and liabilities (not allocated)3 Net borrowings (not allocated)4 Group net assets All of the above amounts relate to continuing operations. 2002 Food retailing and financial services – UK Property development – UK Food retailing – US Continuing operations Discontinued operations – Food retailing Egypt Total Joint ventures (Loss)/profit on sale of properties – Food retailing UK – Food retailing US Net interest payable Underlying profit before tax Amortisation of goodwill – US Group profit before tax Non-operating assets and liabilities (not allocated)3 Net borrowings (not allocated)4 Group net assets Turnover1 £m 14,441 145 2,844 17,430 Before exceptional items £m Exceptional items £m 594 19 139 752 3 (60) 695 (13) 682 (55) – (10) (65) – (7) (4) 61 – (15) – (15) Group total £m 539 19 129 687 3 (7) (4) 61 (60) 680 (13) 667 Turnover1 £m 14,006 112 3,036 17,154 8 17,162 Profit on ordinary activities before tax Before exceptional items £m Exceptional items £m Group total £m 527 15 137 679 (2) 677 (1) (49) 627 (14) 613 (30) – (8) (38) – (38) – (5) 1 – (42) – (42) 497 15 129 641 (2) 639 (1) (5) 1 (49) 585 (14) 571 Net assets2 £m 5,753 195 923 6,871 9 (404) (1,404) 5,072 Net assets2 £m 5,274 174 960 6,408 – 6,408 44 (387) (1,156) 4,909 1 Excludes VAT at Sainsbury’s Supermarkets and sales tax at Shaw’s Supermarkets. 2 Excludes borrowings and intercompany assets and liabilities. 3 Non-operating assets and liabilities (not allocated) comprise proposed dividends, current and deferred taxation, own shares at cost and unallocated unlisted investments. 4 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. J Sainsbury plc Annual Report and Financial Statements 2003 27 Notes to the financial statements continued 3 Analysis of operating profit Turnover Cost of sales Exceptional cost of sales Gross profit Administrative expenses Exceptional administrative expenses Amortisation of goodwill Group administrative expenses Operating profit The exceptional operating costs comprise the following: Sainsbury’s Supermarkets Shaw’s Supermarkets Exceptional cost of sales Sainsbury’s Supermarkets Shaw’s Supermarkets Exceptional administrative expenses Total exceptional operating costs 2002 Continuing operations £m Discontinued operations £m 2003 Continuing operations £m 17,430 (15,988) (51) 17,154 (15,867) (28) 1,391 1,259 (690) (14) (13) (717) 674 (608) (10) (14) (632) 627 Total £m 17,162 (15,877) (28) 1,257 (608) (10) (14) (632) 625 8 (10) – (2) – – – – (2) 2003 £m 2002 £m 51 – 51 4 10 14 65 20 8 28 10 – 10 38 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 asset write offs and reorganisation costs. The cost of closure of the Taste joint venture of £5 million in 2002 is also included in Sainsbury’s Supermarkets’ exceptional administrative expenses for that year. At Shaw’s Supermarkets, the exceptional costs relate to costs associated with the acquisition of stores from the liquidator of Ames during the year. Exceptional cost of sales for Shaw’s Supermarkets in 2002 relates to the closure of a depot. 4 Loss on sale of properties Loss on disposal of Sainsbury’s Supermarkets’ properties (Loss)/profit on disposal of Shaw’s Supermarkets’ properties 5 Disposal of operations – discontinued Disposal of investment in Homebase 2003 £m (7) (4) (11) 2003 £m 61 2002 £m (5) 1 (4) 2002 £m – The Group sold its remaining investment in Homebase Limited and redeemed the outstanding loan notes in the year for a total consideration of £184 million. The profit on sale of the investment, after making provision for further liabilities arising from sites associated with the sale in 2001, amounted to £61 million. 28 J Sainsbury plc Annual Report and Financial Statements 2003 6 Net interest payable and similar items 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 and similar items 2003 £m 45 2 97 28 127 (20) (2) 105 60 2002 £m 79 3 120 21 144 (12) (4) 128 49 Total interest receivable amounted to £171 million (2002: £202 million), including interest receivable attributable to Sainsbury’s Bank of £126 million (2002: £123 million) included in sales. Total interest payable amounted to £199 million (2002: £224 million) including interest payable attributable to Sainsbury’s Bank of £72 million (2002: £80 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 Employee costs Pension costs (note 33) Operating lease rentals – properties – fixtures, equipment and vehicles – receivable 2003 £m 2002 £m 348 45 18 1,913 73 275 6 (29) 350 8 18 1,910 71 252 7 (26) The Auditors’ remuneration for audit services amounted to £0.6 million (2002: £0.5 million) for the Group including £0.1 million (2002: £0.1 million) for the Company. The Auditors also received £1.4 million (2002: £2.2 million) for non-audit services relating to consultancy fees for strategic (£0.6 million), regulatory (£0.1 million) and taxation (£0.7 million) advice. 8 Employees Employees’ and Executive Directors’ remuneration and related costs during the year amounted to: Wages and salaries Social security costs Other pension costs The average numbers of employees during the year were: Full-time Part-time Full-time equivalent 2003 £m 1,739 101 73 1,913 2002 £m 1,735 104 71 1,910 2003 Number 000’s 2002 Number 000’s 54.2 120.3 174.5 108.7 53.4 121.3 174.7 108.5 J Sainsbury plc Annual Report and Financial Statements 2003 29 Notes to the financial statements continued 8 Employees continued The average number of employees (full-time equivalent) during the year were employed in the following countries: United Kingdom United States of America 2003 Number 000’s 2002 Number 000’s 88.1 20.6 87.4 21.1 108.7 108.5 9 Advances to Directors and connected persons As at 29 March 2003, authorisations, arrangements and agreements entered into by Directors and connected persons in the normal course of business with Sainsbury’s Bank amounted to £30,000 (2002: £36,000) (number of persons: 5 (2002: 5)). The details of Directors’ emoluments and interests are set out in the Remuneration Report on pages 12 to 19. 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 (2002: 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 The taxation credit on exceptional items comprises £20 million (2002: £10 million) on exceptional operating costs. A reconciliation of the standard tax rate to the current tax charge is as follows: Tax on profit at UK standard rate of 30 per cent (2002: 30 per cent) Effects of: Higher tax rate on US profits Disallowed depreciation on UK properties Amortisation of goodwill Capital allowances in excess of depreciation and other timing items Disposal of investment in Homebase Prior year items Other items 2003 % 30.0 0.8 2.4 0.6 (1.3) (2.8) (1.4) 0.9 Current tax charge 29.2 31.7 The rate of tax payable in future periods will be affected by the effects of the higher tax rate on US profits, disallowed depreciation on UK properties and amortisation of goodwill. 11 Dividends Interim Final proposed 2003 pence per share 4.22 11.36 15.58 2002 pence per share 4.02 10.82 14.84 2003 £m 81 217 298 2002 £m 78 207 285 30 J Sainsbury plc Annual Report and Financial Statements 2003 2003 £m 2002 £m 173 (9) 164 23 43 (4) (11) (9) 206 151 (1) 150 26 38 (4) (7) (3) 200 2002 % 30.0 0.7 3.6 0.8 (3.3) – (0.3) 0.2 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 (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 2003 million 1,911.9 7.4 2002 million 1,907.5 16.0 1,919.3 1,923.5 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 Loss on sale of properties Disposal of operations Amortisation of goodwill Underlying earnings before exceptional items and amortisation of goodwill Diluted earnings Underlying diluted earnings before exceptional items and amortisation of goodwill 13 Intangible fixed assets – Group Cost At 31 March 2002 Additions Exchange adjustments At 29 March 2003 Amortisation At 31 March 2002 Charge for the year Exchange adjustments At 29 March 2003 Net book value At 29 March 2003 At 30 March 2002 2003 2002 Earnings £m Per share amount pence Earnings £m Per share amount pence 454 23.7 364 19.1 45 11 (61) 13 462 454 2.4 0.6 (3.2) 0.7 24.2 23.7 462 24.1 28 4 – 14 410 364 410 Pharmacy and other licences £m Goodwill £m 272 – (24) 248 37 13 (2) 48 200 235 35 3 – 38 7 5 – 12 26 28 1.5 0.2 – 0.7 21.5 18.9 21.3 Total £m 307 3 (24) 286 44 18 (2) 60 226 263 J Sainsbury plc Annual Report and Financial Statements 2003 31 Notes to the financial statements continued 14 Tangible fixed assets Cost or valuation At 31 March 2002 Additions (see below) Disposals Exchange adjustments At 29 March 2003 Accumulated depreciation At 31 March 2002 Charge for the year Disposals Exchange adjustments At 29 March 2003 Net book value At 29 March 2003 At 30 March 2002 Capital work-in-progress included above At 29 March 2003 At 30 March 2002 Group Fixtures, equipment and vehicles £m 3,577 391 (192) (37) Land and buildings £m 6,305 851 (176) (71) Total £m 9,882 1,242 (368) (108) 6,909 3,739 10,648 948 92 (65) (23) 2,028 301 (151) (22) 2,976 393 (216) (45) 952 2,156 3,108 5,957 5,357 1,583 1,549 7,540 6,906 607 306 121 73 728 379 Interest capitalised included in additions amounted to £20 million (2002: £12 million) for the Group and nil (2002: nil) for the Company. Accumulated interest capitalised included in the cost or valuation total above amounts to £279 million (2002: £263 million) for the Group and nil (2002: nil) for the Company. The net book value of properties comprised: Freehold Long leasehold Short leasehold Group 2003 £m 4,399 767 791 2002 £m 4,024 704 629 Company 2003 £m 150 218 – Analysis of finance leases – Group Cost Depreciation Net book value 2003 Fixtures, equipment and vehicles £m 372 233 139 Properties £m 187 67 120 2002 Fixtures, equipment and vehicles £m – – – Total 559 300 259 Properties £m 196 65 131 For details of the increase in fixtures, equipment and vehicles see note 23. 32 J Sainsbury plc Annual Report and Financial Statements 2003 Company Land and buildings £m 484 – (101) – 383 13 4 (2) – 15 368 471 – – 2002 £m 248 223 – Total £m 196 65 131 Analysis of properties At 29 March 2003 Freehold Cost 1973 valuation 1992 valuation Long leasehold Cost 1973 valuation 1992 valuation Short leasehold Cost Group Company Cost £m Valuation £m Cost £m Valuation £m 4,874 896 1,063 6,833 154 229 2 49 3 22 76 383 – – – – – 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 £6 billion by a considerable margin. If the properties included at valuation had been included at cost, the cost and accumulated depreciation figures at 29 March 2003 would have been: Freehold Long leasehold Short leasehold 15 Fixed asset investments Shares in group undertakings (note 16) Joint ventures (note 17) Own shares at cost1 Other unlisted investments at cost Group Company Cost £m Depreciation £m Cost £m Depreciation £m 4,892 912 1,063 520 153 272 154 229 – Group Company 2003 £m – 9 86 17 2002 £m – 44 88 42 112 174 2003 £m 7,661 6 – – 7,667 4 11 – 2002 £m 6,227 33 – 25 6,285 1 The Group owned 24,857,152 (2002: 25,140,223) shares at 29 March 2003 with a nominal value of £6.2 million (2002: £6.3 million). • 520,294 shares (2002: 802,640) are held by an ESOT on behalf of certain Directors and senior employees under the Group’s Long Term Performance Share Plan (note 27). All participants remaining in the Company’s employment or leaving for certain reasons, are entitled to receive a grant of options after a period of three years to purchase the shares awarded to them for the sum of £1, at any time during the 10 years following the date of grant. The participant’s entitlement to receive the grant depends on the Company’s total shareholder return (‘TSR’), compared with a peer group of companies, over the three year performance period. If the appropriate level of TSR is not achieved, the entitlement to receive the grant of options will lapse. A charge is taken to the profit and loss account when it becomes clear that a grant will be made. • 24,336,858 shares (2002: 24,337,583) are held by an ESOT for the Colleague Share Option Plan (note 27) and Executive Share Option Plan (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 29 March 2003 was £56.2 million (2002: £100.4 million). The ESOTs waive the rights to the dividends receivable in respect of the shareholder under the above schemes. The 17.8 per cent equity investment in the Homebase business, which cost £1 million, was sold on 20 December 2002 and the 10 per cent loan notes of £25 million due from Homebase were redeemed during the year. J Sainsbury plc Annual Report and Financial Statements 2003 33 Notes to the financial statements continued 16 Shares in Group undertakings 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% 100% England 100% Isle of Man USA 100% England 100% England 55% All principal operating subsidiaries operate in the countries of their registration or incorporation. Shaw’s Supermarkets Inc.’s audited financial statements are drawn up to 1 March 2003. Management accounts have been used to include the Shaw’s Supermarkets Inc. results up to 29 March 2003. All other principal operating subsidiaries have been included up to 29 March 2003. Summary of movements – Company At 31 March 2002 Investment in subsidiary Long-term capital advances Exchange adjustments At 29 March 2003 17 Investment in joint ventures The Group’s principal joint ventures, owned by J Sainsbury plc, were: Shares at cost £m 4,858 122 – (122) Long-term capital advances £m 1,369 – 1,434 – Total net investment £m 6,227 122 1,434 (122) 4,858 2,803 7,661 Share of ordinary Country of allotted registration or incorporation capital Year-end Hedge End Park Limited (property investment – UK) 29 March 50% England Hedge End Park Limited For the year ended 29 March 2003, the Group’s share of turnover amounted to £1 million (2002: £1 million) and its share of profit before tax amounted to £2 million (2002: £1 million). At 29 March 2003, the Group’s share of gross assets amounted to £10 million (2002: £21 million) and its share of gross liabilities amounted to £2 million (2002: £3 million). The investment in Hedge End Park Limited is held directly by the Company. HSPUT – Homebase Limited Partnership The Group sold its 50 per cent share investment in HSPUT in July 2002 for a consideration of £25 million, realising a profit on sale of £1 million. For the year ended 29 March 2003 the Group’s share of turnover amounted to £1 million (2002: £1 million) and its share of profit before tax amounted to £1 million (2002: £1 million) Summary of movements Group At 31 March 2002 Repayments Share of profit for the financial year Dividends Other reserve movements At 29 March 2003 Company At 31 March 2002 Repayments At 29 March 2003 34 J Sainsbury plc Annual Report and Financial Statements 2003 Group share of post acquisition reserves £m Shares at cost £m Long-term capital advances £m 6 – – – – 6 6 – 6 11 – 3 (8) (3) 3 27 (27) – – – – 27 (27) – Total £m 44 (27) 3 (8) (3) 9 33 (27) 6 18 Stock Goods for resale Land held for and in the course of development Property held for resale 19 Debtors Trade debtors Other debtors due in less than one year Other debtors due in more than one year Prepayments and accrued income 2003 £m 660 107 33 800 Group Company 2003 £m 116 101 10 70 297 2002 £m 82 116 104 96 398 2003 £m – 105 – 6 111 2002 £m 586 135 30 751 2002 £m – 125 83 – 208 Loan notes received on the sale of Homebase amounting to £83 million, included in other debtors due in more than one year in 2002, were redeemed during the year ended 29 March 2003. 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 Loan from minority shareholder (note 34) Deposits by banks Customer accounts Accruals and deferred income 2003 £m 40 70 298 1,528 448 13 2,397 11 12 2,166 48 2,237 2002 £m 57 56 602 959 500 19 2,193 – – 2,023 37 2,060 1 Loans and advances to customers include £867 million (2002: £547 million) of loans and advances repayable in more than one year. In addition to the above assets and liabilities, Sainsbury’s Bank had fixed assets of £12 million at 29 March 2003 (2002: £7 million) included in tangible fixed assets (note 14) and inter company liabilities of £18 million (2002: £2 million). 21 Current asset investments Investments listed on a recognised stock exchange at cost (equivalent to market value) 2003 £m 20 2002 £m 16 J Sainsbury plc Annual Report and Financial Statements 2003 35 Notes to the financial statements continued 22 Creditors Group Company Due within one year Bank loans and overdrafts £200m 7.25% Notes – June 2002 Short-term notes Obligations under finance leases Total short-term borrowings Trade creditors Amounts due to Group undertakings Corporation tax Social security and other taxes Other creditors Accruals Proposed dividend Due after more than one year Medium-term notes ¤¤800m 5.625% Notes – July 2008 £300m 6.5% Notes – July 2012 £250m 6.125% Notes – April 2017 £350m 6.0% Notes – April 2032 8% Irredeemable unsecured loan stock Obligations under finance leases Total borrowings due after one year: Amounts due to Group undertakings 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 2003 £m 2002 £m 2003 £m 127 – 49 37 2002 £m 65 200 76 4 213 1,237 345 1,139 98 60 443 269 217 140 76 535 206 207 2,537 2,648 174 487 300 250 350 3 286 227 487 300 – – 3 180 28 – 49 – 77 – 77 46 – 6 44 217 467 174 487 300 250 350 3 – 1,850 1,197 35 26 1,885 1,223 1,564 2,003 – 3,567 Group 2003 £m Company 2002 £m 2003 £m 176 37 6 43 168 107 1,390 136 2,063 341 4 50 6 177 20 790 154 1,542 77 – 6 – 168 – 1,390 – 1,641 65 200 76 – 341 – 98 49 – 4 48 207 747 227 487 300 – – 3 – 1,017 890 – 1,907 2002 £m 341 – 50 – 177 – 790 – 1,358 Obligations under finance leases due after five years at 29 March 2003 are repayable by instalments. Bank and other loans due after five years are not repayable by instalments. During the year Sainsbury’s Supermarkets Ltd entered into a £200 million sale and finance leaseback transaction in respect of various store equipment, for a period of five years at a market rental. Repayment of £49 million was made in the year. The Company has no finance leases (2002: nil). The Group holds a portfolio of 11 committed revolving credit facilities totalling £635 million as at 29 March 2003. The facilities all expire within one year, although facilities of £460 million contain term out options under which the Company has the option to draw funds for terms up to 12 months prior to the maturity date. As at 29 March 2003 there was no drawings under these facilities (2002: nil). 36 J Sainsbury plc Annual Report and Financial Statements 2003 24 Financial instruments Within the financial assets and financial liabilities analysed below, fixed rate financial assets of £7 million (2002: £115 million), financial assets on which no interest is paid of £3 million (2002: £14 million) financial liabilities on which no interest is paid of £35 million (2002: £26 million) and floating rate financial liabilities of £40 million (2002: £19 million) are not included in net debt, as analysed in note 25. Debtors receivable and creditors payable in less than one year, and the current assets and current liabilities of Sainsbury’s Bank are excluded from the analysis. The Group’s policies and procedures in relation to treasury management, including the management of interest and currency risk, are set out in the operating and financial review on pages 2 to 8. 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 in one year Deposits maturing after one year Debtors Derivative financial instruments held to manage the interest and currency profile Interest rate and currency swaps Forward foreign exchange contracts 2003 2002 Book value £m Fair value £m Book value £m Fair value £m (213) (1,850) (75) 659 7 3 (208) (1,955) (75) 659 8 3 (345) (1,197) (45) 386 115 14 (346) (1,207) (45) 386 115 14 – – 141 2 – – 14 (1) The fair value of financial assets and financial liabilities are calculated by reference to market prices wherever these are available and otherwise by discounting future cash flows at prevailing interest and exchange rates. The above analysis includes store finance leases held in the Group’s US operations with a capitalised value of £172 million (2002: £184 million). It is not considered practicable to estimate the fair value of these financial liabilities 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 Other At 29 March 2003 Sterling US Dollar At 30 March 2002 Floating rate financial assets £m 1,353 120 9 1,482 1,014 105 1,119 Fixed rate financial assets £m Financial assets on which no interest is paid £m 7 – – 7 115 – 115 – 3 – 3 11 3 14 Total £m 1,360 123 9 1,492 1,140 108 1,248 Floating rate financial assets comprise bank balances linked to bank base rates 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 7.75 per cent (2002: 9.86 per cent) fixed for an average period of 2.2 years (2002: 10.5 years). The financial assets on which no interest is paid have a weighted average period until maturity of 5 years. J Sainsbury plc Annual Report and Financial Statements 2003 37 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 1,636 738 2,374 975 676 1,651 253 299 552 353 290 643 Total £m 1,889 1,072 2,961 1,328 992 2,320 Financial liabilities on which no interest is paid £m Fixed rate debt Weighted average interest rate % Average time for which rate is fixed years – 35 35 – 26 26 6.05 8.10 7.20 6.91 9.35 8.01 11.3 7.9 9.5 3.3 10.0 6.3 Sterling US Dollar At 29 March 2003 Sterling US Dollar At 30 March 2002 Floating rate financial liabilities comprise bank overdrafts linked to bank base rates and money market loans, bank borrowings, currency swaps and interest rate swaps bearing interest rates linked to LIBOR. The 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. Onerous leases are 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. The above analysis excludes a cancellable swap in a notional principal amount of £150 million under which the Company pays a fixed rate of 4.09 per cent and receives floating rate LIBOR. The counterparty may exercise an option to cancel the swap on quarterly dates through to August 2030. Currency exposures After taking into account forward contracts the Group had net euro denominated monetary assets of £42 million (2002: £40 million), US dollar denominated monetary assets of £29 million (2002: £4 million) and Australian dollar monetary assets of £1 million (2002: £1 million). Excluded from these figures are non-sterling borrowings undertaken by the Company to hedge investments in overseas operations. Gains and losses on hedges The Group’s unrecognised and deferred gains and losses in respect of hedges, excluding Sainsbury’s Bank (see below) were: Unrecognised Recognised Total gain/(loss) £m Gain £m Loss £m Total gain/(loss) £m Gains and losses on hedges at 30 March 2002 Arising in previous years included in 2002/03 income Gains and losses not included in 2002/03 income Arising in previous years Arising in 2002/03 Gains and losses on hedges at 29 March 2003 Of which: Losses expected to be included in 2004 income Gains and losses expected to be included in 2005 income or later Gain £m 21 (3) 18 173 191 Loss £m (8) 4 (4) (44) (48) 13 1 14 129 143 – (7) (7) 191 (41) 150 – – – – – – – (4) 4 – (4) (4) (4) – (4) 4 – (4) (4) (4) – 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 (note 20). The management of the Bank’s treasury operations is separate from that of the Group, as described on page 6 in 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 29 March 2003. 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 38 J Sainsbury plc Annual Report and Financial Statements 2003 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 29 March 2003 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 Subordinated 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 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 Not more Over 3 mths Over 6 mths Over 1 year than but not over but not over but not over 5 years £m 3 mths £m 6 mths £m 1 year £m 70 298 713 448 – 1,529 2,107 – 25 – 2,132 (603) 619 16 16 – – 64 – – 64 8 – – – 8 56 (79) (23) (7) – – 111 – – 111 28 – – – 28 83 (133) (50) (57) – – 616 – – 616 23 – – – 23 593 (404) 189 132 Not more Over 3 mths Over 6 mths Over 1 year than but not over but not over but not over 5 years £m 3 mths £m 6 mths £m 1 year £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) – – 411 – – 411 23 – – 23 388 (249) 139 89 Over 5 years £m Non- interest bearing £m – – 24 – – 24 – – – – – 24 (3) 21 153 – – – – 65 65 – 64 – 154 218 (153) – (153) – Over 5 years £m Non- interest bearing £m – – 5 – – 5 – – – – 5 – 5 94 – – – – 83 83 – 39 138 177 (94) – (94) – Total £m 70 298 1,528 448 65 2,409 2,166 64 25 154 2,409 – – – – Total £m 56 602 959 500 83 2,200 2,023 39 138 2,200 – – – – As set out above, the Bank has entered into interest rate swaps on a notional principal amount of £772 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 £1 million) and their fair value represented by replacement cost (total of £1 million). J Sainsbury plc Annual Report and Financial Statements 2003 39 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 31 March 2002 £m 16 370 (14) 372 (327) (4) (1,017) (180) (1,528) (1,156) 26 Provisions for liabilities and charges Group Closure, disposal and business Onerous transformation costs £m leases £m Unfunded pension liabilities £m 19 – (14) (1) 36 – – 40 36 – (39) – 66 – – 63 4 – – – 3 – – 7 Deferred tax £m 172 6 – 2 – 18 (8) 190 At 31 March 2002 Transfer to corporation tax Utilised Exchange adjustments Charge to the profit and loss account Deferred tax – UK Deferred tax – US At 29 March 2003 Cash flow £m 4 279 – 283 88 (33) (550) (113) (608) (325) Total £m 231 6 (53) 1 105 18 (8) 300 Other non-cash movements £m Exchange movements £m At 29 March 2003 £m – – – – – – – (10) (10) (10) – (10) – (10) 77 – 3 17 97 87 20 639 (14) 645 (162) (37) (1,564) (286) (2,049) (1,404) Company Disposal costs £m Onerous leases £m 29 – (35) – 38 – – 32 – – (6) – 26 – – 20 Total £m 29 – (41) – 64 – – 52 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 (£34 million) relate to indemnities arising from the disposal of subsidiaries. The provisions for business transformation costs (£29 million) relate to retail and supply chain commitments (note 3). The provisions for closure, disposals and business transformation costs are expected to crystallise in the year ended 28 March 2004. The provision for deferred tax comprises: Timing differences between depreciation and capital allowances Other timing differences 2003 £m 194 (4) 190 2002 £m 180 (8) 172 40 J Sainsbury plc Annual Report and Financial Statements 2003 27 Called up share capital and share premium account Shares authorised Ordinary shares of 25 pence each – 2,200 million shares (2002: 2,200 million) Shares allotted At 31 March 2002 SAYE Share Option Scheme Executive Share Option Plan At 29 March 2003 Allotted fully paid shares million Aggregate nominal value £m Share premium Consideration £m £m 550 484 – – 484 1,936.3 0.6 0.6 1,937.5 1,421 1 2 1,424 1 2 3 Further details of these schemes at 29 March 2003 are set out below: (a) Savings Related 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. At 29 March 2003, UK employees held 41,400 five year savings contracts in respect of options over 23.4 million shares and 33,700 three year savings contracts in respect of options over 12.8 million shares. Details of these options at 29 March 2003 are set out below: Date of grant 11 December 1996 (5 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) 3 January 2003 (3 year period) 3 January 2003 (5 year period) Date of expiry 31 July 2002 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 31 August 2006 31 August 2008 Options outstanding Price pence 2003 million 2002 million 292 398 416 416 253 253 299 299 302 302 239 239 – 3.3 – 3.0 2.0 3.4 3.0 4.0 3.5 4.3 4.4 5.3 0.5 3.5 1.7 3.5 2.6 3.9 3.7 4.7 4.4 5.0 – – 36.2 33.5 The J Sainsbury plc Qualifying Employee Share Ownership Trust (the QUEST) was established under a deed of trust dated 11 December 1998. The purpose of the QUEST is to acquire shares for UK employees, including Directors, in satisfaction of their options under the Savings Related Share Option Scheme. Of the 591,396 ordinary shares allotted in relation to the Savings Related Share Option Scheme, 146,444 ordinary shares were subscribed for by the QUEST at a market value of £0.6 million. These shares were allocated to employees, including Directors, in satisfaction of options exercised under the Scheme. The Company provided £0.2 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. J Sainsbury plc Annual Report and Financial Statements 2003 41 Notes to the financial statements continued 27 Called up share capital and share premium account continued (b) Executive Share Option Plan Date of grant 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 25 July 2002 Date of expiry 27 August 2002 11 March 2004 7 September 2005 30 November 2005 19 May 2007 10 November 2007 9 November 2008 1 August 2009 23 November 2009 16 January 2010 28 February 2010 1 June 2010 26 July 2010 1 June 2011 25 July 2011 24 July 2012 Options outstanding Price pence 2003 million 2002 million 447 359 475 386 367 489 545 378 320 320 261 272 315 427 407 287 – 1.9 3.4 – 4.3 0.3 5.5 8.2 0.1 0.1 3.0 14.9 0.1 7.5 8.2 24.0 81.5 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 These options were held by 2,215 executives (2002: 2,644). (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 83,000 (2002: 92,900) UK employees participated in the Plan and hold options over 27.8 million shares (2002: 31.3 million). There have been a total of 2 options exercised in respect of 725 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. (d) Performance Share Plan Date of grant 29 May 2002 Date of expiry 28 May 2012 *These options were held by a total number of six executives. Options outstanding Price pence 2003 2002 100 86,223* – There have been a total of 33 options exercised in respect of 283,346 ordinary shares during the year by executive participants. 28 Revaluation reserve At 31 March 2002 Transfer to profit and loss account At 29 March 2003 Group £m Company £m 39 (17) 22 – – – The transfer to profit and loss account represents amounts previously charged to the profit and loss account and disposals of revalued assets. 29 Profit and loss account At 31 March 2002 Profit retained for the period Currency translation differences Transfer from revaluation reserve At 29 March 2003 Group £m 2,904 156 (4) 17 Company £m 2,377 50 (33) – 3,073 2,394 The cumulative goodwill deducted from the reserves of the Group at 29 March 2003 amounted to £140 million (2002: £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 £348 million (2002: £131 million). 42 J Sainsbury plc Annual Report and Financial Statements 2003 30 Reconciliation of operating profit to net cash inflow from operating activities Group operating profit Depreciation Amortisation of intangible assets Loss on sale of equipment, fixtures and vehicles (Increase)/decrease in stocks Increase in debtors Increase in creditors and provisions Increase in Sainsbury’s Bank current assets Increase in Sainsbury’s Bank current liabilities Net cash inflow from operating activities 2003 £m 674 393 18 9 (62) (20) 85 (204) 177 2002 £m 625 358 18 3 23 (2) 57 (279) 264 1,070 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 2003 £m 4 5 271 2002 £m 1 5 270 2003 £m – 5 – 2002 £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, therefore, no contingency is recognised in the accounts. Operating lease commitments include payments in respect of 10 supermarket 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, 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. 32 Future capital expenditure Contracted but not provided for 2003 £m 545 2002 £m 380 J Sainsbury plc Annual Report and Financial Statements 2003 43 Notes to the financial statements continued 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 29 March 2003 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 assets of the UK schemes were £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 £73 million for the year ended 29 March 2003 (2002: £71 million) of which the pension contribution costs of the UK defined benefit schemes and UK defined contribution schemes amounted to £55 million and £9 million respectively (2002: £59 million and £4 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 2003 are after taking account of an amortisation of scheme surpluses of £17 million (2002: £19 million). The Group’s UK pension cost is not expected to change until the results of the recent triennial valuation are known. 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 £9 million (2002: £8 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 29 March 2003 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: UK schemes US schemes 2003 % 2.25 2.25 5.50 2.25 2002 % 3.75–4.00 2.50 6.00 2.50 2003 % 4.25 3.25 6.28 3.25 UK schemes US schemes Expected long-term rate of return % 8.25 8.25 5.36 3.50 7.03 Expected long-term rate of return % – 9.20 7.25 – 8.50 Value £m 758 579 864 51 2,252 2002 % 4.25 3.25 7.28 3.25 Value £m – 82 46 – 128 Average annual increase in total pensionable salary Average annual increase in pensions Discount rate Average rate of inflation The assets in the schemes and their expected returns at 29 March 2003 were: Equities – UK – overseas Bonds Other 44 J Sainsbury plc Annual Report and Financial Statements 2003 The assets in the schemes and their expected returns at 30 March 2002 were: Equities – UK – overseas Bonds Other The net pension schemes liabilities were: Total market value of assets Present value of schemes’ liabilities Deficit in schemes Related deferred tax asset Net pension schemes’ liabilities UK schemes US schemes 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 UK schemes US schemes 2003 £m 2,252 (3,072) (820) 246 (574) 2002 £m 2,657 (3,023) (366) 110 (256) 2003 £m 128 (184) (56) 23 (33) Value £m – 101 56 – 157 2002 £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 29 March 2003 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 2003 £m 5,003 (607) 4,396 3,073 (607) 2,466 The following amounts would have been recognised in the performance statements had FRS 17 been adopted: Operating charge Current service cost Gain due to settlements Gain due to curtailments Total operating charge Other finance income/(charge) Expected return on pension schemes’ assets Interest on pension schemes’ liabilities Net return included in other financial income Net profit and loss impact Statement of recognised gains and losses Actual return less expected return on pension schemes’ assets Experience gains and losses arising on schemes’ liabilities Changes in assumptions underlying the present value of the schemes’ liabilities Actuarial loss included in the Group statement of total recognised gains and losses 2002 £m 4,848 (257) 4,591 2,904 (257) 2,647 2003 £m (99) 1 13 (85) 211 (189) 22 (63) (620) 35 94 (491) Because of the high number of expected leavers, the current service costs is not expected to rise significantly despite the fact the scheme is now closed. J Sainsbury plc Annual Report and Financial Statements 2003 45 Notes to the financial statements continued 33 Pension costs continued FRS17 disclosures continued The movement in the deficit during the year arose as follows: Deficit in the schemes at the beginning of year Current service cost Contributions Gain due to settlements Gain due to curtailments Other finance income Actuarial loss Deficit in schemes at the end of the year Related deferred tax asset Net pension deficit The experience gains and losses were as follows: Difference between the expected and actual return on schemes assets: Amount (£ million) Percentage of schemes’ assets Experience gains and losses on schemes’ liabilities: Amount (£ million) Percentage of the present value of the schemes’ liabilities Total amount included in Group statement of total recognised gains and losses: Amount (£ million) Percentage of the present value of the schemes’ liabilities 34 Related party transactions The following transactions fall to be disclosed under the terms of FRS 8. UK £m (366) (88) 42 1 13 20 (442) (820) 246 US £m (2) (11) 4 – – 2 (49) (56) 23 (574) (33) 2003 £m (620) 26.0% 35 1.1% (491) 15.1% 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 29 March 2003, 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 2003 £m 18 18 2002 £m 27 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 29 March 2003 of £298 million (2002: £602 million) are loans and advances to HBoS Group of £298 million (2002: £437 million). On 12 December 2002 Sainsbury’s Bank received £14 million from J Sainsbury plc and £11 million from Bank of Scotland in respect of an interest bearing loan, which, in the event of a winding up of the company is subordinated to ordinary unsecured liabilities. This loan remained outstanding at the year-end. Interest of £196,000 and £160,000 was paid to J Sainsbury plc and Bank of Scotland respectively. Included in deposits by banks at 29 March 2003 is £12 million advanced by Bank of Scotland, under normal commercial terms. 46 J Sainsbury plc Annual Report and Financial Statements 2003 Five year financial record Financial results (£m) Group turnover3 Turnover – continuing operations Operating profit Sainsbury’s Supermarkets Sainsbury’s Bank Shaw’s Supermarkets Other operating activities Discontinued operations Interest payable Joint ventures Group underlying profit before tax4 19991 2000 20012 2002 2003 16,378 15,080 17,414 15,962 18,441 16,940 18,206 18,198 18,495 18,495 671 (5) 52 12 64 794 (50) 12 756 509 3 79 16 44 651 (72) 1 580 462 13 115 25 13 628 (76) (3) 549 505 22 137 15 (2) 677 (49) (1) 627 572 22 139 19 – 752 (60) 3 695 (Decrease)/increase on previous year 3.9% (23.2)% (5.3)% 14.2% 10.8% Earnings per share Basic (Decrease)/increase on previous year Underlying4 (Decrease)/increase on previous year Dividend per share Retail statistics for UK and US food retailing Number of outlets at financial year-end Sainsbury’s Supermarkets – over 40,000 sq ft sales area – 25,000 – 40,000 sq ft sales area – 15,000 – 25,000 sq ft sales area – under 15,000 sq ft sales area Sainsbury’s Supermarkets Shaw’s Supermarkets Total number of stores – continuing operations Sales area (000 sq ft) Sainsbury’s Supermarkets Shaw’s Supermarkets 29.2p 16.3% 26.8p 0.8% 14.32p5 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 23.7p 24.1% 24.2p 12.6% 15.58p 42 233 98 45 418 127 545 61 225 99 47 432 168 600 86 209 93 65 453 185 638 121 184 84 74 463 185 648 152 162 79 105 498 185 683 12,571 4,410 13,055 5,617 13,746 6,124 14,349 6,261 15,199 6,330 Group total – continuing operations 16,981 18,672 19,870 20,610 21,529 Net increase on previous year: Sainsbury’s Supermarkets Shaw’s Supermarkets New Sainsbury’s Supermarkets store openings Sainsbury’s Supermarkets’ sales intensity (including VAT)6 Per square foot (£ per week) Share of national trade in predominantly food stores and pharmaceutical, medical, cosmetic and toilet goods outlets7 4.9% 7.1% 20 3.9% 27.4% 20 5.3% 9.0% 27 4.4% 2.2% 25 5.9% 1.1% 39 18.04 16.98 16.79 17.54 17.56 12.2% 11.9% 11.9% 11.9% 11.8% 1 Turnover, profit and diluted earnings per share are for the 52 week period to 3 April 1999. 2 Earnings per share in 2001 has been restated under FRS19. Published basic earnings per share was 13.8 pence and published underlying earnings per share was 19.2 pence. 3 Includes VAT at Sainsbury’s Supermarkets and Homebase and sales tax at Shaw’s Supermarkets. 4 Underlying profit before tax and diluted earnings per share are stated before exceptional costs of £60 million in 2000, £96 million in 2001, £42 million in 2002 and £15 million in 2003 and exceptional profits of £76 million in 1999 and before amortisation of goodwill of £11 million in 2000, £16 million in 2001, £14 million in 2002 and £13 million in 2003. 5 Excludes a one penny per share payment to cover the extra four weeks in 1999. 6 Including Savacentre, excluding petrol. 7 Based on Office for National Statistics data and Sainsbury’s Supermarkets sales, excluding petrol. J Sainsbury plc Annual Report and Financial Statements 2003 47 Visit our websites Information about the Group: www.j-sainsbury.co.uk Information about Sainsbury’s Supermarkets: www.sainsburys.co.uk Information about Sainsbury’s Bank: www.sainsburysbank.co.uk Information about Shaw’s Supermarkets: www.shaws.com To shop on-line: www.sainsburystoyou.co.uk Electronic communication for shareholders The Company has set up a facility for shareholders to take advantage of electronic communications. If you would like to: • check the balance and current value of your shareholding and view your dividend history • register your e-mail address so that future shareholder information can be sent to you electronically • submit your vote on-line prior to a general meeting log on to www.j-sainsbury.co.uk/shareholders and complete the following steps: 1 click on ‘visit our Registrars’ 2 enter the required information and click on ‘submit’. You will need your 11 character shareholder reference number located on your latest tax voucher 3 click on ‘Communication Details’ and register on-line. www.j-sainsbury.co.uk/shareholders Designed and produced by CGI BrandSense. Photography by Matt Harris. 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. J Sainsbury plc 33 Holborn, London EC1N 2HT www.j-sainsbury.co.uk