Annual Report and Financial Statements 2004 J Sainsbury plc is a leading UK food retailer with interests in financial services. It comprises Sainsbury’s Supermarkets, Bells Stores and Sainsbury’s Bank and employed 147,500 people at the end of March 2004. Our objective is to meet our customers’ needs effectively and thereby provide shareholders with good, sustainable financial returns. We aim to ensure all colleagues have opportunities to develop their abilities and are well rewarded for their contribution to the success of the business. Our policy is to work with all of our suppliers fairly, recognising the mutual benefit of satisfying customers’ needs. We also aim to fulfil our responsibilities to the communities and environments in which we operate. Contents 1 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 51 Five year financial record The Chairman’s statement, the Chief Executive’s statement, and the Summary financial statement are contained in a separate publication entitled Annual Review and Summary Financial Statement 2004. The full Annual Report and Accounts of J Sainsbury plc for 2004 comprises this publication together with the Annual Review and Summary Financial Statement 2004. Copies may be obtained through our website www.sainsburys.co.uk or by calling Freephone 0800 0154330. Highlights • Underlying operating profit from continuing operations £590 million • Substantially completed investment to modernise Sainsbury’s Supermarkets • Acquisition of Swan Infrastructure • Disposal of JS Developments • Sale of Shaw’s and proposed capital return (post year end) Sales – continuing operations1 Underlying profit before tax2 Profit before tax Underlying earnings per share2 Basic earnings per share Dividend per share 2004 Restated3 2003 % change £15,517m £15,147m £675m £610m 23.4p 20.7p 15.69p £695m £667m 24.2p 23.7p 15.58p 2.4 (2.9) (8.5) (3.3) (12.7) 0.7 1 Including VAT at Sainsbury’s Supermarkets of £1,077 million (2003: £1,043 million). 2 Before exceptional losses of £54 million (2003: £15 million) and amortisation of goodwill of £11 million (2003: £13 million). 3 2003 Restated for change of accounting policy for sales in accordance with FRS 5 (ANG) (see notes 1 and 2 on pages 26 and 28). 4 Before exceptional operating costs of £68 million (2003: £55 million). 5 2 0 5 1 , 7 4 1 5 1 , 7 1 5 5 1 , 8 4 0 4 1 , 3 0 4 3 1 , 4 9 5 0 9 5 2 1 5 5 7 4 7 2 5 5 9 6 5 7 6 7 2 6 0 8 5 9 4 5 9 5 1 1 , 7 9 1 1 , 6 5 8 5 9 6 8 3 8 00 01 02 03 04 00 01 02 03 04 00 01 02 03 04 00 01 02 03 04 Group sales continuing operations1, 3 £ million Group underlying operating profit – continuing operations4 £ million Group underlying profit before tax2 £ million Group capital expenditure £ million J Sainsbury plc Annual Report and Financial Statements 2004 1 Operating and financial review for the 52 weeks to 27 March 2004 This was a year of huge change with peak activity levels in the UK Business Transformation Programme and a significant rationalisation of Group activities. The rationalisation included the sale of JS Developments (JSD) the Group’s specialist property development company, the sale of Shaw’s Supermarkets, and the purchase of Swan Infrastructure Holdings Limited, part of the IT outsourcing arrangements. These transactions simplify the Group structure and will allow total focus of financial and management resources on growth in the UK business and strengthening its market position. This high level of change affected Group results for the year. In addition, the dollar weakened against sterling having an adverse translation effect of £9 million on the Group’s results. The underlying Group profit before tax, exceptional items and amortisation of goodwill was £675 million (2003: £695 million) a reduction of 2.9 per cent. Profit and loss account Accounting adjustments have been made to bring the Group in line with the latest guidance issued in November 2003 by the Accounting Standards Board in relation to FRS 5 (ANG) on revenue recognition. The total impact is a £280 million reduction in sales this year and £351 million last year (see pages 26 and 28). This increases total sales growth for continuing operations from 1.9 per cent to 2.4 per cent and from 0.1 per cent to 0.5 per cent for total sales. Profit and cash flow are not impacted. Group sales, including VAT, from continuing operations increased by 2.4 per cent to £15,517 million (2003 restated: £15,147 million). Underlying Group operating profit before exceptional operating costs from continuing operations at £590 million (2003: £594 million) was slightly down on last year (0.7 per cent) despite the disruption to stores and additional costs of the Business Transformation Programme during the year. Underlying Group profit before tax, exceptional items and amortisation of goodwill at £675 million (2003: £695 million) was 2.9 per cent down on the previous year, but 0.4 per cent down after adjusting for the sale of JSD and Shaw’s Supermarkets. Profit before tax and after exceptional items and amortisation of goodwill was £610 million (2003: £667 million) a decrease of 8.5 per cent. Last year’s exceptional items included a residual profit on disposal of Homebase of £61 million. In the 2004/05 accounts, exceptional items will include the profit on disposal of Shaw’s which is expected to be in excess of £250 million. 2 J Sainsbury plc Annual Report and Financial Statements 2004 2004 £m Restated1 2003 £m Increase/ (decrease) % Sales2 Continuing operations Discontinued operations 15,517 2,722 15,147 2,997 18,239 18,144 Underlying operating profit Continuing operations3 Discontinued operations4 Underlying operating profit Net interest payable Share of profit in joint ventures Underlying profit before tax5 Exceptional operating costs Other exceptional items6 Amortisation of goodwill Profit before tax Tax Profit after tax Equity minority interest Profit for the year 590 145 735 (60) – 675 (68) 14 (11) 610 (206) 404 (8) 396 Underlying earnings per share7 23.4p 20.7p Basic earnings per share 594 158 752 (60) 3 695 (65) 50 (13) 667 (206) 461 (7) 454 24.2p 23.7p 2.4 0.5 (0.7) (8.2) (2.3) (2.9) (8.5) (12.8) (3.3) (12.7) Dividend per share 15.69p 15.58p 0.7 1 Sales have been restated for the change in accounting policy in accordance with FRS 5 (ANG) (see notes 1 and 2 on pages 26 and 28). 2 Including VAT at Sainsbury’s Supermarkets of £1,077 million (2003: £1,043 million) and sales tax at Shaw’s Supermarkets of £21 million (2003: £22 million). 3 Before exceptional operating costs of £68 million (2003: £55 million). A statutory profit and loss account is provided on page 22. 4 Before exceptional operating costs of £nil (2003: £10 million) and amortisation of goodwill of £11 million (2003: £13 million). 5 Underlying profit before tax is shown before exceptional losses of £54 million (2003: £15 million) and amortisation of goodwill of £11 million (2003: £13 million). 6 Other exceptional items comprise a profit on disposal of properties of £17 million (2003: loss of £11 million) and a loss of £3 million on disposal of operations in 2004 (2003: profit of £61 million). 7 Underlying earnings per share is defined in note 12 on page 32. * All like-for-like sales in this review are Easter adjusted. . 2 4 2 . 4 3 2 . 5 1 2 . 5 0 2 . 8 8 1 2 3 4 1 . 2 3 4 1 . 4 8 4 1 . 8 5 5 1 . 9 6 5 1 . 00 01 02 03 04 00 01 02 03 04 Group underlying earnings per share pence The 2001 figures are restated for FRS 19. Dividends per share pence Results Sales and underlying operating profit before exceptional costs and amortisation of goodwill were as follows: Sales1 2004 Underlying operating profit2 2004 % £m change % change £m Continuing operations Sainsbury’s Supermarkets 15,297 Sainsbury’s Bank 220 Total continuing operations 15,517 JS Developments 13 Shaw’s Supermarkets (US) 2,709 2.2 22.2 2.4 (5.0) Total 18,239 0.5 564 26 590 7 138 735 (1.4) 18.2 (0.7) (0.7) (2.3) 1 Includes VAT at Sainsbury’s Supermarkets of £1,077 million and sales tax at Shaw’s Supermarkets of £21 million. 2 Profit before exceptional operating costs of £68 million and amortisation of goodwill of £11 million. A statutory profit and loss account is shown on page 22. Sainsbury’s Supermarkets’ sales (including VAT) increased by 2.2 per cent to £15,297 million (2003 restated: £14,967 million), and underlying operating profit was down by 1.4 per cent to £564 million (2003: £572 million). Like–for–like sales were down 0.2 per cent for the year. The priority during the year was the implementation of the Business Transformation Programme, particularly in relation to the modernisation of IT systems, the renewal of its depot infrastructure and the relaunch of its non-food ranges. These activities have been disruptive to store operations and product availability, which in turn has impacted sales. These investments are long-term and provide the opportunity for improved operational efficiency, a stronger platform for growth and lower costs in the future. Dual running costs of £24 million (2003: £9 million) were incurred in the supply chain in the year as the new depots were phased in. Cost savings delivered in the year were £250 million, £40 million more than last year and in line with the Group’s target. Cumulatively over the last four years cost savings were £710 million and the Board is targeting a further £250 million of cost savings in the new financial year. During the year the UK store portfolio was strengthened by opening 10 new supermarkets and a further 16 were either refurbished or extended. Eighty per cent of stores are new, have been refurbished or extended in the past 3.5 years. The Group’s position in the UK convenience market was also strengthened by opening 25 new Locals and the acquisition of 54 Bells convenience stores. The Board believes that there is significant growth potential in the convenience sector and further acquisitions are targeted in 2005. Two supermarkets were sold during the year, generating a property profit of £42 million. A net total of 371,000 square feet of new floor space was added during the year, an increase of 2.4 per cent. Sainsbury’s Supermarkets extended the IT outsourcing contract with Accenture by three years to 2010, which reinforces the commercial relationship with Accenture, and will result in IT costs between 2004 and 2007 being reduced by £150 million. Further simplification was announced in January 2004 by the Group purchasing Swan Infrastructure Holdings Limited, part of the IT outsourcing arrangements (see Tangible fixed assets note 14 on page 33). Underlying operating profit of £564 million included the losses in Sainsbury’s to You, the company’s home delivery service, which reduced from £29 million to £15 million for the year. Its results have continued to improve due to the growth in new customers and basket size increasing sales (by 18.6 per cent year on year), lower customer acquisition costs and improved operating efficiencies. This enabled the business to break even, as planned, for the first time in March 2004. The closure of the picking centre in Park Royal, announced at the end of the year, will reduce costs further in 2004/5. Underlying operating margin (VAT inclusive) for the year decreased from 3.8 per cent to 3.7 per cent (VAT exclusive 4.1 per cent to 4.0 per cent). In the second half underlying operating margin reduced from 4.0 per cent to 3.5 per cent as a result of a disappointing sales performance and increasing competitive pressure. 2 7 5 4 6 5 9 0 5 2 6 4 5 0 5 Sainsbury’s Supermarkets Sales1, 2 Underlying operating profit3 Number of stores Sales area (000 sq ft) Full-time employees Part-time employees 2004 2003 £15,297m £14,967m £572m 498 15,199 44,700 100,700 £564m 583 15,570 45,400 102,100 00 01 02 03 04 Sainsbury’s Supermarkets underlying operating profit £ million 1 Includes VAT. 2 2003 restated for change of accounting policy for turnover in accordance with FRS 5 (ANG) (see notes 1 and 2 on pages 26 and 28). 3 Profit before exceptional operating costs. J Sainsbury plc Annual Report and Financial Statements 2004 3 Operating and financial review continued Sainsbury’s Bank, 55 per cent owned by the Group and 45 per cent owned by HBoS, achieved net income growth of 40 per cent and increased profits by 18 per cent to £26 million (2003: £22 million), despite substantial revenue investment in growing the long-term customer base of the business. Adjusting for a VAT credit (£2 million) in the current year, profit increased by 9 per cent. The number of customer accounts grew by 30 per cent in the year, credit card and loan balances increased by 34 per cent and 57 per cent respectively and insurance commission was up 40 per cent. Sainsbury’s Bank, which operates in an increasingly competitive market, continues to benefit from far lower customer acquisition costs than its banking competitors, as a result of its close association with Sainsbury’s Supermarkets, which facilitates in-store merchandising and promotion of financial services products. Shaw’s Supermarkets delivered a good profit performance in dollars, despite low like-for-like sales growth of 0.4 per cent and an ambitious store development programme. Underlying operating profit was 8.8 per cent higher at $234 million (2003: $215 million) and the underlying operating margin continued to improve, increasing from 4.9 per cent to 5.1 per cent. A number of factors contributed to Shaw’s profit performance; an improved gross margin, a good performance from the ex-Grand Union stores, a turnaround in the profitability of the stores in Connecticut and excellent cost controls. The sale of Shaw’s Supermarkets to Albertson’s Inc. was announced on 26 March 2004 and completed on 30 April 2004 (see Post balance sheet event note 36 on page 50). The excellent operating performance this year and in recent years enabled a good price to be realised on the sale of the business. JSD made an operating profit of £7 million prior to its disposal in November 2003 (2003: £19 million) (see Disposals note 31 on page 45). Net interest payable of £60 million was in line with the previous year, due to interest on higher Group net borrowings being offset by increased capitalised interest and lower interest rates. Capitalised interest increased to £26 million (2003: £22 million). Exceptional items Exceptional operating costs UK Business Transformation Programme Safeway bid costs Shaw’s Supermarkets Exceptional operating costs Non-operating exceptional items (Loss)/profit on disposal of operations Profit/(loss) on sale of properties – Sainsbury’s Supermarkets – Shaw’s Supermarkets Non-operating exceptional items 2004 £m 2003 £m (59) (9) – (68) (3) 18 (1) 14 (55) – (10) (65) 61 (7) (4) 50 Total exceptional items (54) (15) In October 2000, the Board announced a major transformation programme in Sainsbury’s Supermarkets including upgrading the IT systems, the supply chain and the 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 3 years. These costs primarily relate to the closure of depots and stores and reorganisation costs associated with this programme. This year, these costs amounted to £59 million (2003: £55 million), due mainly to the costs of closure of supply chain depots. The majority of this programme is expected to be completed by this summer and any further operating costs relating to this programme will not be treated as exceptional beyond the first half of the new financial year. The JSD disposal was concluded in the year for a total consideration of £199 million and a loss on disposal of £3 million (see Disposals note 31 on page 45). In total, surplus properties were sold in the year generating total cash proceeds of £152 million and a property profit of £17 million. This included the sale of the Stockton and Basildon supermarkets generating a profit of £42 million offset by the sale of 24 surplus non-trading properties in the UK and Shaw’s generating a loss on disposal of £15 million. Sainsbury’s Bank 0 2 2 1 , 9 7 7 9 1 4 3 9 5 3 4 4 3 5 2 7 5 2 02 03 04 02 03 04 02 03 04 Loan book balances £ million Credit card balances £ million Insurance commission income £ million 4 J Sainsbury plc Annual Report and Financial Statements 2004 At the year end the closure of the Sainsbury’s to You Park Royal picking centre was announced with an estimated property loss of £10 million. Total exceptional items amounted to a charge of £54 million, £39 million higher than last year, as last year included the residual profit on disposal of Homebase of £61 million. Taxation The Group’s tax charge at £206 million (2003: £206 million) gives an effective underlying rate of 32.4 per cent (2003: 32.5 per cent) before exceptional items and amortisation of goodwill. The underlying rate exceeds the nominal rate of UK corporation tax principally due to the higher rate of tax incurred on US profits and the lack of effective tax relief on depreciation of UK retail properties. Earnings per share and dividends Underlying Group earnings per share before exceptional items and amortisation of goodwill decreased by 3.3 per cent to 23.4 pence (2003: 24.2 pence). Basic earnings per share decreased by 12.7 per cent to 20.7 pence (2003: 23.7 pence) due mainly to higher profits on business disposals last year. A final dividend of 11.36 pence per share is proposed, which is maintained at the same level as last year. The total proposed dividend for the year is 15.69 pence which represents an increase of 0.7 per cent on last year. The decision to maintain the final dividend at last year’s level, rather than increasing it, reflects the reduction in underlying earnings per share of 3.3 per cent and the slight reduction in dividend cover (pre-exceptional items) from 1.51 to 1.45 times. Acquisitions and disposals The Group made a number of acquisitions and disposals during the year. i. The purchase of Swan Infrastructure Holdings Limited, part of its IT outsourcing arrangements, on 19 February 2004. IT services continue to be outsourced to Accenture including the maintenance and operations of existing systems and the development and delivery of new business critical systems and systems infrastructure. The acquisition of Swan provides a simplified, direct commercial relationship with Accenture following their contract extension to 2010. The purchase resulted in an increase in fixed assets and net debt of £554 million. In 2005, it is estimated that the financial impact will be to increase EBITDA by £155 million, depreciation by £100 million and financing costs by £30 million, resulting in a net reduction in costs of £25 million. ii. The acquisition of 54 Bells convenience stores in February 2004, which will be earnings enhancing in the first full year. iii. JSD was sold in two parts during the year. Sixteen properties were sold at net book value to Blue Investment Fund LP on 19 November 2003 for a total consideration of £167 million. A further eight properties were sold to Kier Property on 26 March 2004. The cash proceeds were £32 million and the property loss on disposal was £3 million. Post balance sheet events The sale of Shaw’s Supermarkets was announced on 26 March 2004 and completed on 30 April 2004. Shaw’s has been reported as a discontinued operation in the financial year ending 27 March 2004. Total consideration was $2,475 million and Albertson’s has assumed $368 million of store leases capitalised on the Group balance sheet. The Group has received cash proceeds of £1,177 million (net of expenses). The profit on disposal of Shaw’s is estimated to be in excess of £250 million and will be reported in the 2004/05 accounts. Following the completion of the sale, the Board has proposed a capital return of 35 pence per share to shareholders, representing approximately £680 million. The remaining proceeds from the sale will be reinvested to develop Sainsbury’s core UK retail business, to support future growth and to strengthen Sainsbury’s market position. On 14 May 2004 Sainsbury’s announced the purchase of 14 stores from Morrisons and one store from Somerfield. The remaining amount will be retained by Sainsbury’s to pursue additional investment opportunities, including further expansion into the convenience sector. The sale of Shaw’s Supermarkets will lead to earnings per share dilution in 2004/05, but this will be mitigated by the proposed return of capital and share consolidation together with the reinvestment in growth opportunities in the UK. On a proforma basis the Board expects the combination of the disposal, the return of capital and the reinvestment of residual proceeds to be accretive (see note 36 on page 50). 9 5 1 1 , 7 9 1 1 , 6 5 8 5 9 6 8 3 8 6 1 5 2 3 4 00 01 02 03 04 Group capital expenditure £ million Group capital expenditure – 2004 £ million Sainsbury’s Supermarkets 1 New stores 2 Extensions 3 Supply chain 4 Other 5 Shaw’s Supermarkets 6 Sainsbury’s Bank Total £ million 178 136 61 197 248 18 838 J Sainsbury plc Annual Report and Financial Statements 2004 5 Operating and financial review continued Summary cash flow Operating cash inflow Group net interest and dividends from joint venture Taxation Dividends Payments for fixed assets Purchase of IT assets 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 2004 £m 847 (88) (183) (300) (801) (187) 152 (560) 133 (427) 16 (273) (684) 2003 £m 1,070 (54) (224) (288) (1,172) – 130 (538) 210 (328) 3 77 (248) 2,088 1,404 The Group’s net debt has increased by £684 million during the year to £2,088 million of which £554 million relates to the purchase of IT assets through the acquisition of Swan. Operating cash inflow remained strong at £847 million (2003: £1,070 million), but was lower than last year due to an adverse working capital movement. Working capital increased in the year by £221 million as a result of higher stock levels in Sainsbury’s Supermarkets, due to the timing of Easter and the expansion of the General Merchandising activities. Creditors and other provisions have decreased due to lower incentive accruals and exceptional provisions required at the end of the year. Proforma net debt, at 27 March 2004, after the sale of Shaw’s and proposed return of capital reduces to £1,421 million and gearing decreases to 29 per cent. Group capital expenditure Group capital expenditure for the year was £838 million (2003: £1,197 million). Sainsbury’s Supermarkets’ capital expenditure was substantially reduced to £572 million (2003: £1,035 million) including £178 million (2003: £321 million) on new stores, £136 million (2003: £242 million) on extensions, £61 million (2003: £203 million) on the supply chain and £197 million (2003: £269 million) on other capital expenditure. Shaw’s capital expenditure was £248 million (2003: £155 million). Group capital expenditure (excluding Shaw’s) is forecast to be £715 million for 2004/05. Treasury management Treasury policies are reviewed and approved by the Board. The Chief Executive and 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 responsibility for funding, interest rate and currency risk management and 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 on page 38. 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 repricing gap are set out in note 24 to the financial statements on page 40. 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 occur as a direct result of the Group’s commercial operations. The Group finances its operations by a combination of bank loans, issues of Commercial Paper, Notes and Bonds in the capital markets, leases, share capital and cash generated by operating subsidiaries. The Group’s borrowings are principally raised by the parent company and on-lent to operating subsidiaries on commercial terms. The Group borrows in a range of currencies at both fixed and floating rates of interest, using derivatives where appropriate to generate the desired currency and interest rate profile. The derivatives used for this purpose are 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 and cost 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 range between 20 per cent and 80 per cent of net debt versus a performance benchmark of one third. As at 27 March 2004, after taking into account the effect of swaps, the proportion of the Group’s net debt at fixed rates of interest was 33 per cent (2003: 39 per cent) and the average period for which the fixed rate financial liabilities, including finance leases, were fixed was 6.1 years (2003: 9.5 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 €1 billion Euro commercial paper programme and £2.25 billion Euro medium term note programme. Contingency liquidity is maintained through 6 J Sainsbury plc Annual Report and Financial Statements 2004 the bank market where the Group holds a portfolio of 11 committed revolving credit facilities totalling £635 million as at 27 March 2004. 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 backstop for the Group’s commercial paper programme. As at 27 March 2004 there were no drawings under these facilities (2003: £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 23 on page 38. As at 27 March 2004 the weighted average maturity of the Group’s borrowings was 8.6 years (2003: 9.6 years). Currency risk In the year ended 27 March 2004 the Group was subject to currency exposure on the translation of the US dollar denominated income and net assets of its US subsidiaries. The Group’s objective is to reduce leverage volatility at the least long-term cost by holding a proportion of debt in US dollars. 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 other than where those profits are matched by foreign currency interest costs. The Group also incurs currency exposure in respect of overseas trade purchases made in currencies other than the relevant 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 A1/P1 credit ratings. Counterparty positions are monitored on a regular basis and dealing activity is controlled through the use of dealing mandates and the operation of standard settlement instructions. Balance sheet Shareholders’ funds increased by £101 million to £5,104 million. Net debt has increased by £684 million to £2,088 million, of which £554 million relates to the purchase of the IT fixed assets through the acquisition of Swan in the year. Group gearing increased to 41 per cent (2003: 28 per cent). Return on Group capital employed decreased from 11.5 per cent to 10.1 per cent in the year. The decrease was partly due to the timing of the acquisition of the Swan IT assets, the benefits from which will accrue in 2004/05, and partly due to the second half performance of Sainsbury’s Supermarkets. 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 2004 £m 8,538 753 2,818 484 (2,572) (2,088) (4,836) 5,185 5,104 81 5,185 2003 £m 7,878 800 2,694 659 (2,063) (1,404) (4,896) 5,072 5,003 69 5,072 Pensions The Board has already taken action to address any deficit in its pension schemes by increasing total UK contributions from £55 million in 2001 to £79 million in 2004. During the year 67 per cent of colleagues moved from final salary to a career average salary defined benefit arrangement and the remaining colleagues opted to increase their contributions along with the Company. The Board believes that such actions will significantly reduce pension liabilities longer term whilst continuing to secure the financial security of colleagues. An actuarial valuation of the Group’s UK defined benefit schemes as at 29 March 2003 indicated a deficit of £161 million. The Board firmly believes this valuation provides the most appropriate basis for decisions to be made about funding for these schemes and has, accordingly, increased contributions in order to eliminate the deficit over time, in line with actuarial advice. At 27 March 2004, the notional net deficit (after tax), under FRS 17, on the UK defined benefit pension schemes was £441 million (2003: £574 million). The Group is not currently required to account for the profit and loss effect of FRS 17. If the Group were to do this today, however, the profit before tax charge would increase by £9 million. Shareholder return The share price increased from 226 pence at the start of the financial year to 261 pence at 27 March 2004 moving within a range of 220 pence to 314 pence. The Company’s equity market capitalisation at 27 March 2004 was £5.1 billion. Total shareholder return (TSR) was a positive 29.7 per cent and outperformed the FTSE 100 index by 1.3 per cent (the increase in the value of a share including reinvested dividend based on the average share price for the three months ended 27 March 2004 compared with the equivalent period in 2003). Over a four year period from 31 March 2000, the Company’s TSR was 19.7 per cent and has outperformed the FTSE 100 index by 50 per cent. J Sainsbury plc Annual Report and Financial Statements 2004 7 Report of the Directors The Directors present their report and audited financial statements for the 52 weeks to 27 March 2004. 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 7 of this Report and on pages 24 to 29 of the Annual Review and Summary Financial Statement. Dividends The Directors recommend the payment of a final dividend of 11.36 pence per share (2003: 11.36 pence), making a total dividend for the year of 15.69 pence per share (2003:15.58 pence). Subject to shareholders approving this recommendation at the Annual General Meeting (AGM), the dividend will be paid on 23 July 2004 to shareholders on the register at the close of business on 28 May 2004. Changes to the Board The Directors as at the date of the report are listed on pages 16 and 17 of the Annual Review and Summary Financial Statement. Sir George Bull and John Adshead retired from the Board on 27 March 2004. On 28 March, Sir Peter Davis became Chairman and, on 29 March, Justin King was appointed Chief Executive. Stuart Mitchell and Sara Weller will resign from the Board on 19 May 2004. In accordance with the Articles of Association, Lord Levene of Portsoken and Jamie Dundas will retire by rotation at the AGM and will seek reappointment. Justin King, who was appointed since the last AGM, will also retire and seek reappointment. Full biographical details of the Directors are set out on pages 16 and 17 of the Annual Review and Summary Financial Statement. Annual General Meeting The AGM will be held on Monday 12 July 2004 at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE at 11.00am. The Chairman’s letter and Notice of the Meeting accompanies this Report, together with notes explaining the business to be transacted at the meeting. At the meeting, resolutions will be proposed to reappoint PricewaterhouseCoopers LLP as Auditors, 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 authorise the Company to make market purchases of its own shares. No such purchase has been made during the last financial year. The AGM will be followed at 12.30pm by the Extraordinary General Meeting (EGM) referred to below or, if later, immediately following the conclusion or adjournment of the AGM. Share capital The changes to the issued share capital of the Group are shown in note 27 to the financial statements on page 42. On 26 March 2004, the Company announced that it proposed to return approximately £680 million to shareholders. This will result in changes to the issued share capital as explained below. Major interests in shares As at 18 May 2004, 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 18 May 2004, 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 18 May 2004, 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 18 May 2004, 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 18 May 2004, Franklin Resources Inc. had a notifiable interest of 5 per cent and Brandes Investment Partners L.L.C. had a notifiable interest of 7 per cent. Post balance sheet events On 30 April 2004, the Company announced that it had completed the sale of Shaw’s, its US supermarkets business, to Albertson’s Inc. for $2,475 million. Subject to obtaining shareholder approval, the Company intends to return 35 pence per share to shareholders, representing approximately £680 million. This return of capital will be made by way of a B share scheme, providing shareholders with maximum flexibility in terms of tax treatment by allowing them to choose whether to receive the return as either income or capital. The B share scheme will be accompanied by a share capital consolidation. A resolution to effect the B share scheme and the share consolidation will be proposed at an EGM to be held immediately following the AGM on 12 July 2004. A circular explaining the details of the B share scheme and the consolidation has been sent to shareholders with this Report, together with the notice of the EGM. Directors’ interests The beneficial interests of the Directors and their families in the shares of the Company are shown on page 20. 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. 8 J Sainsbury plc Annual Report and Financial Statements 2004 The Company’s interim and annual results are presented to all senior management and are communicated to all colleagues. Colleagues have always been encouraged to hold shares in the Company and over 74,000 colleagues are shareholders directly or through the Profit Sharing Scheme Trust, the Commitment Shares Plan Trust or the Sainsbury’s Share Purchase Plan Trust. Sainsbury’s has a strong record on environmental matters and on its commitment to corporate social responsibility, which is an everyday part of how the Company does business. During the year, the Company won numerous awards as referred to in the Operating review of the Annual Review and Summary Financial Statement. The Company’s Environment Report, which is published on the Internet (www.j-sainsbury.co.uk/environment) describes the Company’s environmental policies. 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 £6.1 million (2003: £7.1million) were made to UK charitable organisations and local community projects. Sainsbury’s colleagues, customers and suppliers also raised £5 million for charitable purposes through events supported by the Company; see page 15 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 18 May 2004 Statement of corporate governance The Company is committed to high standards of corporate governance and has complied throughout the period under review with all the provisions of the 1998 Combined Code on Corporate Governance (the Code). The Company is making good progress on compliance with the provisions of the 2003 Combined Code as disclosed in this statement and the Remuneration Report. The Board During the year under review, the Board was chaired by Sir George Bull and comprised five Executive Directors and six Non-Executive Directors. On Sir George’s retirement on 27 March 2004, Sir Peter Davis took on the role of Chairman having been Group Chief Executive since 1 March 2000. In view of the requirements of the Higgs Report and the 2003 Combined Code, the Board consulted nearly 60 per cent of the shareholder base at that time, including family shareholders, on its succession plans before they were announced. It proposed that Sir Peter should take on the role of Chairman for a limited period of transition, and that a new independent Deputy Chairman should be appointed in time to take over as Chairman in July 2005 on Sir Peter’s retirement. At last year’s AGM the vast majority of shareholders supported Sir Peter’s re-election. Justin King was appointed Chief Executive on 29 March 2004. The other changes to the composition of the Board during the year are set out on page 8. Biographical details of the Directors are set out in the Annual Review and Summary Financial Statement on pages 16 and 17. There is a clear division of responsibilities between the Chairman and the Chief Executive which has been approved by the Board. The Chairman is responsible for leadership of the Board, ensuring its effectiveness on all aspects of its role and setting its agenda. He ensures that the Board as a whole is aware of the views of major shareholders and facilitates both the contribution of the Non-Executive Directors, and constructive relations between the Executive and Non- Executive Directors. He ensures that the Chief Executive develops a strategy with which the Board as a whole is comfortable. The Chief Executive is responsible for formulating strategy and for ensuring its delivery once agreed by the Board. He creates a framework of strategy, values, organisation and objectives to ensure the successful delivery of results, allocating decision making and responsibility to support this. All the Non-Executive Directors are considered to be independent according to the principles of the 2003 Combined Code. They bring wide and varied commercial experience to Board deliberations. Lord Levene is the Senior Independent Director. The Non-Executive Directors held several meetings during the year without the Executive Directors being present. During the year the Board held 10 meetings, 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. J Sainsbury plc Annual Report and Financial Statements 2004 9 Statement of corporate governance continued 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 Board has commenced an evaluation of its effectiveness and performance and of its committees. During the year, the Directors attended the following number of meetings of the Board and its Committees: Board Committee Audit Nomination Remuneration Committee Committee Number of meetings Sir George Bull Keith Butler-Wheelhouse Jamie Dundas June de Moller Lord Levene Bridget Macaskill Sir Peter Davis John Adshead Roger Matthews Stuart Mitchell Sara Weller 10 9 9 10 9 9 9 10 10 10 10 10 3 3 3 3 3 3 3 4 3 3 4 4 4 4 4 5 5 5 5 5 5 5 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 receive accurate, timely and clear information. 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. The Board has delegated certain responsibilities to the Audit, Nomination and Remuneration Committees. Board Committees Audit Committee The Audit Committee is chaired by Jamie Dundas and, during the year under review, held three meetings. In 2004/05 an additional meeting has been scheduled. During 2003/04 the Committee comprised all of the Non-Executive Directors, including Sir George Bull. Following the adoption of the new terms of reference referred to below at the start of the current financial year, the Company Chairman is no longer a member of the Committee, although it is expected that he will be invited to attend Committee meetings, together with the Chief Executive, the Finance Director, the Head of Internal Audit and the external auditors. The Committee’s new terms of reference, (which are available on the website, at www.j-sainsbury.co.uk/governance), set out 10 J Sainsbury plc Annual Report and Financial Statements 2004 the Committee’s responsibilities, which it has fulfilled during the year under review, and which include: • monitoring the integrity of the financial statements and any formal announcements relating to the Company’s financial performance, reviewing significant financial reporting judgments contained in them; • reviewing the effectiveness of the Company’s financial controls and the internal control and risk management systems; • making recommendations to the Board in relation to the appointment, reappointment and removal of the external auditors and approving the remuneration and terms of engagement of the external auditors; • • reviewing and monitoring the external auditors’ independence and objectivity; reviewing the external auditors’ overall work plan, the results of the audit, the performance of the external auditors and the effectiveness of the audit process; and • developing and implementing the policy of engagement of the external auditors to supply non-audit services. The policy is designed to ensure that the provision of such services does not impact the external auditors’ independence and objectivity. It identifies certain types of engagement that the external auditors shall not undertake, and others that can only be undertaken with appropriate authority, including approval from the Committee Chairman or the Committee where non-audit fees will exceed preset thresholds. The Committee receives regular reports on the non-audit services provided by the external auditors. The Committee regularly reviews the Internal Audit department’s resources, budget, work programme, results and management’s implementation of its recommendations, and will conduct a formal review of the department’s effectiveness in the current financial year. The Head of Internal Audit has direct access to the Committee Chairman and the Company Chairman. The Committee Chairman holds separate meetings with him and the external auditors, whilst the Committee meets regularly with the external auditors, without management being present, and may meet the Head of Internal Audit when it deems necessary. The Committee has reviewed the ‘whistle blowing’ procedures whereby colleagues may confidentially raise concerns about possible improprieties in matters of financial reporting and other matters. Nomination Committee During the year under review, the Nomination Committee was chaired by Sir George Bull and comprised each of the Non-Executive Directors and Sir Peter Davis. Following the adoption of the new terms of reference at the start of the current financial year, the Chief Executive is no longer a member of the Committee although it is expected that he will be invited to attend meetings. The current Chairman of the Committee is Lord Levene. The Committee’s new terms of reference are available on the website and set out the Committee’s responsibilities, which include leading the process for Board appointments and making recommendations to the Board. The Committee meets when necessary and in 2003/04 met on four occasions. All Directors are required to seek reappointment 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. During the year, the Committee led the selection process for the new Chief Executive, instigating a thorough search nationally and internationally through a leading executive search agency, and considered a number of suitable candidates. Following the withdrawal of the preferred candidate in February, the Committee re-commenced its search for a new independent Deputy Chairman and carried out a thorough review of the process and communication exercise previously adopted. Remuneration Committee The Director’s Remuneration report is set out on pages 12 to 20. Internal control The Board has overall responsibility for the system of internal controls and has delegated responsibility for reviewing its effectiveness to the Audit Committee. 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 are ongoing, enabling a cumulative assessment to be made, and include the following: • discussion and approval by the Board of the strategic direction, plans and objectives of the Group and each operating company, and the risks to achieving them; • • • • • reviews and approval by the Board of budgets and forecasts, including both revenue and capital expenditure; 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 of accounting policies and delegated authority levels; and • consideration by the Audit Committee 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. 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 annually by the Audit Committee which then reports to the Board. The process consists of: • formal identification by management at each level of the Group through a self assessment process of the key risks to achieving their business objectives and the controls in place to manage them. The likelihood and potential impact of each risk is evaluated; • certification by management that they are responsible for managing 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. Investor relations The Company is committed to maintaining good communications with shareholders. Normal shareholder contact is the responsibility of the Chief Executive and the Finance Director. The Chairman and Senior Independent Director are available to major shareholders. There is regular dialogue with institutional investors who, along with 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. In March, Makinson Cowell were appointed to provide investor relations consultancy services to the Company and will report on the views of institutional investors to the Board. Shareholders have the opportunity to meet and question the Board at the AGM which will be held on 12 July 2004. There will be a display of various aspects of the Company’s activities and a business presentation will be made. The Chairmen of the Audit, Remuneration and Nomination Committees will be available to answer questions. Proxy votes will be announced after each resolution. A detailed explanation of each item of special business to be considered at the AGM 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. J Sainsbury plc Annual Report and Financial Statements 2004 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 27 March 2004. The Directors confirm that this report has been drawn up in accordance with the 1998 Combined Code and the Directors’ Remuneration Report Regulations 2002. Remuneration Committee The Remuneration Committee is chaired by Keith Butler- Wheelhouse and met five times in 2003/04. During the year under review the Committee comprised all of the Non-Executive Directors, including Sir George Bull. At the start of the current financial year, the Committee adopted new terms of reference which provide that membership shall consist only of independent Non-Executive Directors and that the Company Chairman shall not be a member, although it is expected that he will be invited to attend Committee meetings, together with the Chief Executive and the HR Director. The Committee consider their views when reviewing the remuneration of the other Executive Directors. They are not involved in discussions concerning their own remuneration. The current members of the Committee are all of the independent Non-Executive Directors namely Keith Butler-Wheelhouse, Jamie Dundas, June de Moller, Lord Levene and Bridget Macaskill. The responsibilities of the Committee include: • determining and agreeing with the Board the broad policy for the remuneration of the Executive Directors, the Chairman and certain other members of senior management; • • setting individual remuneration arrangements for the Company Chairman, the Chief Executive and the other Executive Directors; recommending and monitoring the level and structure of remuneration for those members of senior management determined by the Committee; and • approving the service contracts of each Executive Director, including termination arrangements. The terms of reference are available on the Company’s website at (www.j-sainsbury.co.uk/governance). Towers Perrin have been appointed by the Committee to advise on remuneration matters. They also provide employee benefit services to the Company. Remuneration policy The Remuneration Committee has adopted a remuneration policy 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 current 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 the Chairman’s and Executive Directors’ remuneration are set out below: i) Basic salary Basic salary for each Executive Director is determined by the Committee taking account of the Director’s performance, experience and responsibilities. The Committee considers salary levels in comparable companies by referring to the pay practices in the FTSE 50, the retail sector and companies with revenues over £5 billion, in order to obtain the best available benchmark for the Director’s specific position. The Committee also has regard to the level of salary increases throughout the Company when determining Executive Directors’ salaries. When his service contract was amended in March 2003, Sir Peter Davis entered into a fixed term contract to 31 July 2005, which called for his availability full time if so required by the Board and required him not to take on other commitments. It was agreed at that time that his then salary of £850,000 would continue at that rate until July 2005, but that on becoming Chairman in March 2004 he would no longer be entitled to his annual bonus opportunity of 100 per cent. The Board has now reviewed the division of roles between the Chief Executive and Chairman and the timing of the transitional arrangements. From this year’s AGM in July, Sir Peter will progressively cut back his workload moving in time to a more flexible basis, but will be fully available throughout his final 12 months whenever necessary. Sir Peter has offered to reduce his salary in line with this change in responsibilities. The Remuneration Committee, following advice, has agreed a salary of £500,000. Incentive arrangements ii) In addition to basic salary, the Company maintains incentive arrangements which combine an annual bonus plan with long-term incentive share plans. The Committee believes that these arrangements provide 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 45 per cent of Justin King’s total remuneration is linked to performance, assuming the target level is achieved under the bonus plan and the Performance Share Plan. For the other Executive Directors, the proportion of total remuneration delivered through bonus and under the Performance Share Plan is 12 J Sainsbury plc Annual Report and Financial Statements 2004 40 per cent, assuming target levels are achieved. Share options also provide a performance related incentive, but as the exercise prices of outstanding grants were mostly 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 is applied 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. On becoming Chairman, Sir Peter Davis’ participation in the Bonus Plan ceased. He has never participated in the Performance Share Plan and has not received any grant of options since March 2000. The incentive arrangements may be summarised as follows: Annual Bonus Plan The bonus is a percentage of basic salary, with a maximum of 80 per cent for Executive Directors, other than the Chief Executive, whose maximum award is 100 per cent of basic salary. The bonus plan for 2003/04 was subject to a condition based on year on year profit growth and individual targets, which were key to the businesses’ performance. No payments under the bonus plan were made to the Executive Directors for the year under review. Roger Matthews was awarded a special discretionary bonus. The 2004/05 plan will be linked to achievement of key business targets, including profitability, sales and product availability, and to the achievement of individual targets. Bonuses are not pensionable. Performance Share Plan Under this Plan, shares are 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 13 comparator companies (namely Ahold, Boots, Carrefour, Casino, Dixons, GUS, Kingfisher, Loblaw, Marks & Spencer, Morrisons, Next, Somerfield and Tesco). The Company’s relative performance is determined by reference to Total Shareholder Return, being the increase in the value of a share, including reinvested dividends, over a three year period. 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. Under the Plan, no awards will vest unless median performance against the comparator group 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 condition will apply to conditional awards made in 2004. The conditional allocation made in 2001 has lapsed as the performance condition was not achieved. Executive Share Option Plan Under 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. An award of two times basic salary was granted to Justin King as part of his recruitment package when he joined the Company. He will participate in the annual grant in May 2004. 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. This definition of EPS has been chosen as the Committee believes that it provides the most accurate reflection of the Company’s underlying financial performance. 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 2004/05 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 the performance period 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 on a fixed point basis over four and then over five financial years. To the extent the condition is not met after five financial years, the option will lapse. Shareholders approved the inclusion of two retesting opportunities when the Plan was approved in 2002. The Committee is currently reviewing its policy on retesting. Restricted Share Plan 2004 An award of 261,950 restricted shares was made to Justin King when he joined the Company. The award compensates him for his lost entitlements arising from the Marks & Spencer executive incentive plans and therefore there are no performance conditions. 191,204 shares will be released on 1 June 2005 and 70,746 shares will be released on 1 June 2006, in each case, if he remains an employee of the Company on the relevant date. The awards will vest before the release dates if his service contract is terminated by the Company other than for cause, in the event of death or on a change of control, unless the awards are replaced by the acquiring company. The awards are not pensionable. 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 would assume the role of Chairman on 28 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 J Sainsbury plc Annual Report and Financial Statements 2004 13 Remuneration report continued of his extended term in office. The award is in the form of two conditional awards totalling 1.5 million restricted shares to be released on 31 July 2005, which are subject to the achievement in 2003/04, and the current financial year, of specific profit targets and business milestones set by the Committee and dependent on the successful implementation of succession plans. Full details were disclosed in last year’s Directors’ Remuneration report which was approved by the vast majority of shareholders at the 2003 AGM. 20 years of pensionable service to a pension on retirement (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 dependents on death and a lump sum is payable if death occurs in service. During the year, members contributed 4.25 per cent of basic salary to the Scheme. This Scheme was closed to new entrants on 31 January 2002. The Committee, with advice from its consultants, has determined that, of the one million shares conditionally awarded in respect of the targets for 2003/04, a total of 864,000 shares should be released to Sir Peter on 31 July 2005. This consists of 110,000 shares (out of a maximum of 150,000) in respect of business transformation targets, 75,000 (out of 150,000) in respect of the appointments of a new Chief Executive and Deputy Chairman, and 679,000 (out of 700,000) in respect of the Group’s underlying pre-tax profit. As disclosed in last year’s report, the terms of the award were that 700,000 shares would be released if underlying profit was at least 90 per cent of the figure agreed in the financial, budgeting and corporate planning process, 350,000 would be released if at least 70 per cent of the figure was achieved with prorating between those levels. iii) Other share plans In order to encourage share ownership, the Company provides two all employee share plans for its 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. As these are all employee plans there are no performance conditions. Performance graph The graph below shows the total shareholder return 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. This index has been selected to provide an established and broad-based comparator group. Justin King is a member of the Executive Stakeholder Pension Plan which is a defined contribution arrangement. The Company contributes 12.5 per cent of salary into this Plan and the individual contributions are 5 per cent of basic salary. v) Benefits Other benefits for Executive Directors include the provision of company car benefits and free medical insurance. Service contracts All of the Executive Directors listed below have rolling service contracts which can be terminated by either party by giving 12 months’ written notice. If any of these service contracts are terminated without cause the Company can request that the Director works his notice period or takes a period of garden leave, or pay an amount in lieu of notice equal to one times basic salary for the notice period plus 75 per cent of basic salary in lieu of all other benefits including pension and bonus. In addition, if a Director is dismissed within six months of a change of control the above sum will become payable. On the termination of Stuart Mitchell’s service contract, the Board has agreed that his termination payment will be made on a phased basis until he finds appropriate alternative employment. The Executive Directors’ service contracts became effective on the following dates: Executive Director Justin King Roger Matthews Stuart Mitchell (resigning 19 May 2004) Sara Weller (resigning 19 May 2004) Contract date 29 March 2004 8 May 2000 22 June 2002 4 July 2002 120 100 80 60 40 Sir Peter Davis has a service contract, which was amended on 15 March 2003, which (unless terminated earlier or renewed by mutual agreement) will terminate automatically on 31 July 2005. Non-Executive Directors 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 reappointment is subject to election or re-election by shareholders. Non-Executive Directors are paid a basic fee with additional fees being payable to the Senior Independent Director and to the chairmen of the Board Committees. The level of fees is reviewed against market practice by a sub-committee of the Board, consisting of the Chairman and one or more Executive Directors, and takes into account market rates and the required time commitment. Non-Executive Directors do not participate in any performance related plans. 99 00 01 02 03 04 J Sainsbury plc FTSE 100 Index iv) Pensions Sir Peter Davis and the Executive Directors, other than Justin King, are members of the J Sainsbury Executive Pension Scheme, a funded, Inland Revenue approved, defined benefit occupational pension scheme. Under the Group’s pension arrangements, Directors are entitled after a minimum of 14 J Sainsbury plc Annual Report and Financial Statements 2004 – – – – – – – – – – – – – – The following section provides details of the remuneration, pension and share interests of all the Directors for the year ended 27 March 2004 and has been audited. Directors’ remuneration The remuneration of the Directors for the year was as follows: Compensation for loss of office £000 Bonus3 £000 Benefits4 £000 Note 1 2 1 Salary £000 370 850 445 450 400 250 40 35 40 40 35 – – 178 – – – – – – – – Total 2004 £000 397 852 652 470 416 277 40 35 40 40 35 Total 2003 £000 538 1,219 632 556 536 277 35 30 35 30 30 27 2 29 20 16 27 – – – – – John Adshead CBE Sir Peter Davis Roger Matthews Stuart Mitchell Sara Weller 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 2004 Total 2003 – 2,955 2,913 – 178 1,117 – 121 143 – 283 3,254 4,201(5) 1 Retired from the Board on 27 March 2004. 2 Highest paid Director. 3 Includes performance bonuses earned in the period under review but not paid in the financial year. 4 Benefits include company car benefits, medical insurance and Commitment Shares Plan. 5 The total for 2002/03 includes £28,000 paid under the Profit Sharing Scheme. No further payments will be made. J Sainsbury plc Annual Report and Financial Statements 2004 15 Remuneration report continued Pensions The pension entitlements of the Directors for the year were as follows: Age at 27 March 2004 i years Accrued pension at 27 March 20041 ii £000 Directors’ contributions during the year iii £000 Sir Peter Davis Roger Matthews Stuart Mitchell Sara Weller John Adshead CBE 62 49 43 42 59 111 64 161 52 230 36 19 19 17 16 Increase in accrued pension during the year iv £000 31 19 42 17 32 Increase in accrued pension during the year (net of inflation) v £000 29 18 39 16 26 Transfer value of increase in accrued pension during the year (net of inflation)2 and net of Directors’ contributions vi £000 Transfer value of accrued pension at 27 March 20042 vii £000 Transfer value of accrued pension at 30 March Increase in transfer value over the year net of Directors’ contributions 20032 =(vii)-(viii)-(iii) ix £000 viii £000 456 169 282 105 464(3) 1,882 668 1,243 397 4,487(4) 1,224 365 714 207 3,307(3) 622 284 510 173 1,164 1 The accrued pensions are the amounts that would be paid if the Director left service with deferred benefits 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 No allowance made for additional liability arising from immediate payment of pension. 4 Allows for value of immediate early retirement pension of £220,000 per annum. 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, Stuart Mitchell 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 £4,122,000 has been made in respect of the period ended 27 March 2004 (2003: £2,552,000). 16 J Sainsbury plc Annual Report and Financial Statements 2004 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. The numbers of shares conditionally allocated since 2001 are shown below. Number of shares conditionally allocated 30 March 2003 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) Lapsed during the year John Adshead CBE 7 June 2001 30 May 2002 22 May 2003 Roger Matthews 7 June 2001 30 May 2002 22 May 2003 Stuart Mitchell 7 June 2001 30 May 2002 22 May 2003 Sara Weller 7 June 2001 30 May 2002 22 May 2003 37,470 68,918 – 37,470 – – – – 108,187 44,496 82,094 – 44,496 – – – – 130,116 28,981 70,945 – 28,981 – – – – 131,578 30,035 70,945 – 30,035 – – – – 116,959 427 370 256.5 427 370 256.5 427 370 256.5 427 370 256.5 – – – – – – – – – – – – – – – – – – – – – – – – Number of shares conditionally allocated 27 March 2004 – 68,918 108,187 – 82,094 130,116 – 70,945 131,578 – 70,945 116,959 End of performance period 27.03.04 26.03.05 25.03.06 27.03.04 26.03.05 25.03.06 27.03.04 26.03.04 25.03.06 27.03.04 26.03.05 25.03.06 1 The conditional award made in 2001 has lapsed as it has not met the performance condition. 2 The above figures for 2002 and 2003 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 Sir Peter Davis does not participate in the plan. The following table shows the options that were granted in May 2002 as a result of the partial satisfaction of the performance condition attaching to the conditional allocation awarded in 1999. Number of options 30 March 2003 Granted during the year Exercised during the year Mid market price on date of exercise (pence) Gains on option exercises (£) Lapsed during the year Total exercise price 2004 (pence) 27 March Inherent profit (£) Date from which exercisable Date of expiry Performance Share Plan John Adshead CBE Stuart Mitchell 30,067 9,977 – – – – – – – – – 30,067 100 78,625 29.05.02 28.05.12 9,977 100 26,089 29.05.02 28.05.12 – The inherent profit figures have been calculated by reference to the mid market price of the Company’s shares on 27 March 2004 of 261 pence and assume that all unexercised options were exercised on that date. J Sainsbury plc Annual Report and Financial Statements 2004 17 Remuneration report continued Options over ordinary shares At the end of the year, the Directors’ share options were as follows: Number of options 30 March 2003 Granted during the year Exercised during the year Lapsed during the year 27 March 2004 Weighted average exercise price (pence) Range of exercise prices (pence) Date From which exercisable Of expiry Executive Share Option Plan with no performance conditions John Adshead CBE 73,955 – – 73,955 – 1 No performance condition applied in accordance with market practice at the date of grant. Number of options Note 30 March 2003 Granted during the year Exercised during the year Lapsed during the year 27 March 2004 Weighted average exercise price (pence) Range of exercise prices (pence) Date Inherent profit (£) From which exercisable Of expiry Executive Share Option Plan with performance conditions John Adshead CBE 1 2 3,5 4,5 6 60,631 108,959 181,817 153,565 236,933 – – – – 288,499 Sir Peter Davis 3,5 3,009,596 – Roger Matthews Stuart Mitchell Sara Weller 3 4 6 1 2 3 4,5 6 3 4 6 231,333 182,358 282,229 – – 346,978 21,157 49,632 116,627 131,969 243,902 – – – – 350,877 170,158 136,768 243,902 – – 311,890 – – – – – – – – – – – – – – – – – – – – – – 60,631 108,959 181,817 153,565 525,432 475 478 314 417 270 475 367-545 272-377.5 407-427 256.5-287 – 08.09.98 05.09.05 – 20.05.00 10.11.08 – 02.08.02 02.06.10 – 07.06.04 26.07.11 14,425 25.07.05 21.05.13 – 3,009,596 260.5 260.5 30,095 01.03.03 01.03.10 – – – – – – – – – – – 231,333 182,358 629,207 21,157 49,632 116,627 131,969 594,779 170,158 136,768 555,792 294 272-319.75 407-427 417 256.5-287 270 – 24.11.02 02.06.10 – 07.06.04 26.07.11 17,349 25.07.05 21.05.13 475 447 303 417 269 294 417 270 475 367-545 272-377.5 407-427 256.5-287 – 08.09.98 05.09.05 – 20.05.00 10.11.08 – 02.08.02 02.06.10 – 07.06.04 26.07.11 17,544 25.07.05 21.05.13 272-319.5 407-427 256.5-287 – 17.01.03 02.06.10 – 07.06.04 26.07.11 15,594 25.07.05 21.05.13 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. 5 For each of (3) and (4) above, the performance condition is increased to 4.0 per cent real average annual 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 attaching to grants up to and including 25 July 2001 have been met. 18 J Sainsbury plc Annual Report and Financial Statements 2004 Options over ordinary shares (continued) Number of options 30 March 2003 Granted during the year Exercised during the year Lapsed during the year 27 March 2004 Weighted average exercise price (pence) Range of exercise prices (pence) Date Inherent profit (£) From which exercisable Of expiry Savings Related Share Option Scheme John Adshead CBE Sir Peter Davis Roger Matthews Stuart Mitchell 2,713 4,384 2,571 4,230 – – – 995 – – – – – 1,879 – 1,249 2,713 4,384 692 3,976 275 301 301 268 239-301 301 301 241-301 249 01.03.04 31.08.06 – 01.03.07 31.08.07 – 01.03.05 31.08.05 326 01.03.05 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. The options outstanding under the Company’s Executive Share Option Plan and Savings Related Share Option Scheme are exercisable at prices between 239 and 545 pence. In the period from 30 March 2003 to 27 March 2004, the highest mid-market price of the Company’s shares was 314 pence and the lowest mid-market price was 220 pence and at 27 March 2004 was 261 pence. Share Award Plan 2003 Number of restricted shares conditionally awarded 30 March 2003 relating to 2003/04 Number of restricted shares awarded relating to 2003/04 Price Inherent profit £000 Vesting date Sir Peter Davis 1,000,000 – 864,000 2,259 31.07.05 The inherent profit figures have been calculated by reference to a mid-market price of the Company’s shares on 27 March 2004 of 261 pence and assume that the shares are transferred to Sir Peter Davis on that date. The shares will not be released to Sir Peter until 31 July 2005. J Sainsbury plc Annual Report and Financial Statements 2004 19 Remuneration report continued Directors’ interests Directors’ interests in the ordinary shares of the Company and shares held in trust on behalf of Directors are as follows: John Adshead CBE Sir Peter Davis Roger Matthews Stuart Mitchell Sara Weller Sir George Bull Keith Butler-Wheelhouse June de Moller Jamie Dundas Lord Levene Bridget Macaskill Ordinary shares2 Ordinary shares5 30 March 2003 72,226 103,397 51,295 14,393 3,472 25,000 3,300 1,500 1,200 2,500 2,500 27 March 2004 18 May 2004 75,547 104,957 51,352 15,609 4,024 75,547 105,040 51,352 15,692 4,107 25,000 3,300 1,500 1,200 2,500 2,500 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, the Commitment Shares Plan 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 (2003: 24.8 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 Changes to the Directors’ interests in ordinary shares between 28 March 2004 and 18 May 2004 occurred as a result of purchases under the Company’s Share Purchase Plan. 6 Executive Directors are encouraged to build up their shareholdings in the Company to the equivalent of one year’s basic salary over a five year period, assuming that awards under the executive share incentive plans become exercisable. Approved by the Board on 18 May 2004 Keith Butler-Wheelhouse Chairman of the Remuneration Committee 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 judgments and estimates that are reasonable and prudent; • state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to assume that the Company will continue in business. The Directors confirm that they have complied with the above requirements in preparing the financial statements. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and the Group 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 the Group and hence 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. 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 2004 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, which have been prepared under the historical cost convention (as modified by the revaluation of certain fixed assets) and the accounting policies set out in the notes to the financial statements. We have also audited the disclosures required by Part 3 of Schedule 7A to the Companies Act 1985 contained in the Directors’ Remuneration report (‘the auditable part’). 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 Directors’ Remuneration report. It also includes an assessment of the significant estimates and judgments 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 Directors’ 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 27 March 2004 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 Directors’ 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 18 May 2004 Respective responsibilities of Directors and Auditors The Directors’ responsibilities for preparing the annual report and the financial statements in accordance with applicable United Kingdom law and accounting standards are set out in the Statement of Directors’ responsibilities. The Directors are also responsible for preparing the Directors’ Remuneration report. Our responsibility is to audit the financial statements and the auditable part of the Directors’ 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 Directors’ 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 Operating and financial review, the Report of the Directors, the Statement of corporate governance and the unaudited part of the Remuneration report. We review whether the Statement of corporate governance reflects the Company’s compliance with the seven provisions of the Combined Code issued in June 1998 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 Group’s corporate governance procedures or its risk and control procedures. J Sainsbury plc Annual Report and Financial Statements 2004 21 Group profit and loss account for the 52 weeks to 27 March 2004 Turnover including VAT and sales tax2 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 Exceptional operating costs Continuing operations – operating profit Discontinued operations – operating profit before exceptional costs and amortisation of goodwill – exceptional operating costs – amortisation of goodwill Group operating profit Share of profit in joint ventures Profit/(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 tax3 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 share3 Diluted earnings per share Underlying diluted earnings per share3 Note 2004 £m 18,239 (1,098) 14,440 2,701 2, 3 3 17,141 (15,658) Restated1 2003 £m 18,144 (1,065) 14,104 2,975 17,079 (15,688) 1,483 1,391 3 3 13 3 4 5 6 7 10 11 12 12 12 12 (827) 590 (68) 522 145 – (11) 656 – 17 (3) 670 (60) 675 (54) (11) 610 (206) 404 (8) 396 (301) 95 20.7p 23.4p 20.6p 23.3p (717) 594 (55) 539 158 (10) (13) 674 3 (11) 61 727 (60) 695 (15) (13) 667 (206) 461 (7) 454 (298) 156 23.7p 24.2p 23.7p 24.1p 1 Restated for the change in accounting policy for turnover in accordance with FRS 5 Application note G (see notes 1 and 2 on pages 26 and 28). 2 Including VAT at Sainsbury’s Supermarkets and sales tax at Shaw’s Supermarkets. 3 Before exceptional items and amortisation of goodwill. Notes to the financial statements are on pages 26 to 50. 22 J Sainsbury plc Annual Report and Financial Statements 2004 Group statement of total recognised gains and losses for the 52 weeks to 27 March 2004 Profit for the financial year Currency translation differences on foreign currency net investments Total recognised gains relating to the financial year 2004 £m 396 (10) 386 2003 £m 454 (4) 450 There is no material difference between the above profit for the financial year and the historical cost equivalent (2003: £9 million difference as a result of the realisation of a property revaluation gain of previous years). Reconciliation of movements in equity shareholders’ funds for the 52 weeks to 27 March 2004 Profit for the financial year Equity dividends Currency translation differences Proceeds from ordinary shares issued for cash (note 27) Net movement in equity shareholders’ funds Opening equity shareholders’ funds Closing equity shareholders’ funds Notes to the financial statements are on pages 26 to 50. Group Company 2004 £m 396 (301) 95 (10) 16 101 5,003 5,104 2003 £m 454 (298) 156 (4) 3 155 4,848 5,003 2004 £m 308 (301) 7 (45) 16 (22) 4,302 4,280 2003 £m 348 (298) 50 (33) 3 20 4,282 4,302 J Sainsbury plc Annual Report and Financial Statements 2004 23 Balance sheets at 27 March 2004 and 29 March 2003 Fixed assets Intangible assets Tangible assets Investments Current assets Stock Debtors Sainsbury’s Bank’s current assets Sainsbury’s Bank’s debtors due after more than one year 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 Group 2004 £m Note Company 2003 £m 2004 £m 2003 £m 13 14 15 18 19 20 20 21 25 20 22 22 26 27 27 28 29 208 8,214 116 8,538 753 319 1,329 1,170 19 465 4,055 226 7,540 112 7,878 800 297 1,530 867 20 639 4,153 – 361 8,109 8,470 – 100 – – – 159 259 (2,306) (2,600) (2,237) (2,537) – (1,043) (4,906) (4,774) (1,043) (851) 7,687 (2,194) (308) (621) 7,257 (1,885) (300) (784) 7,686 (3,377) (29) – 368 7,667 8,035 – 111 – – – 242 353 – (467) (467) (114) 7,921 (3,567) (52) 5,185 5,072 4,280 4,302 486 1,438 22 3,158 5,104 81 5,185 484 1,424 22 3,073 5,003 69 5,072 486 1,438 – 2,356 4,280 – 4,280 484 1,424 – 2,394 4,302 – 4,302 Notes to the financial statements are on pages 26 to 50. The financial statements on pages 22 to 50 were approved by the Board of Directors on 18 May 2004, and are signed on its behalf by Sir Peter Davis Chairman Roger Matthews Finance Director 24 J Sainsbury plc Annual Report and Financial Statements 2004 Group cash flow statement for the 52 weeks to 27 March 2004 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 Purchase of IT 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 Acquisition of subsidiaries Investment in Sainsbury’s Bank by minority shareholder Proceeds from disposal of operations (Payments)/proceeds relating to disposal of other fixed asset investments Net cash inflow 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 Increase/(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 (Decrease)/increase in net cash Reconciliation of net cash flow to movement in net debt (Decrease)/increase in net cash Increase in debt Assumption of Swan loan notes Loans acquired with subsidiaries 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 50. Note 30 14 31 23 25 25 25 2004 £m 847 – 12 (71) (29) (88) (183) (801) (187) 152 – (836) – (5) (23) 4 185 (28) 133 (300) (427) 16 305 2 – (41) 282 (145) (145) (307) (314) (4) (31) 117 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 (684) (1,404) (2,088) (248) (1,156) (1,404) J Sainsbury plc Annual Report and Financial Statements 2004 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 27 March 2004 (prior year the 52 weeks ended Saturday 29 March 2003). The Group has adopted Financial Reporting Standard 5 – Application note G – Revenue Recognition (FRS 5 ANG). Details of the changes arising from the adoption of FRS 5 (ANG) are given below. Consolidation The Group’s financial statements include 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, interest receivable, fees and commissions. In accordance with FRS 5 (ANG), sales through retail outlets are shown net of the cost of Nectar reward points issued and redeemed, staff discounts, vouchers and sales made on an agency basis. Previously, these costs were reported as an expense in cost of sales. FRS 5 (ANG) requires that only commission earned from sales through concessions can be recognised in turnover, whereas previously gross concession turnover was included as sales. The effect of these changes in accounting policy is to reduce turnover in 2004 by £280 million (2003: £351 million) and to reduce cost of sales correspondingly. 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, 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. Impairment Fixed assets and goodwill are subject to review for impairment in accordance with FRS 11 ‘Impairment of fixed assets and goodwill’. Any impairment is recognised in the profit and loss account in the year in which it occurs. Capitalisation of interest Interest incurred on borrowings for the financing of specific property developments is capitalised gross of tax relief. Fixed asset investments Fixed asset investments, including own shares, are valued at cost less any provision for permanent diminution in value. Leased assets Assets funded through finance leases are capitalised as fixed assets and depreciated over their estimated useful lives or the lease term, whichever is shorter. 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 sub-tenant agreements and is recognised as earned. 26 J Sainsbury plc Annual Report and Financial Statements 2004 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. Pension costs The Group accounts for pension plans in accordance with SSAP 24 and has adopted the transitional disclosure requirements of FRS 17. 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. J Sainsbury plc Annual Report and Financial Statements 2004 27 Notes to the financial statements continued 2 Segmental analysis of turnover, profit and net assets Profit on ordinary activities before tax 2004 Food retailing – UK Financial services – UK Continuing operations Food retailing – US Property development – UK Discontinued operations Total Joint ventures Profit on sale of properties – Food retailing UK Loss on sale of properties – Food retailing US Loss on disposal of operations – Property development UK Net interest payable Underlying profit before tax Goodwill amortisation – US Group profit before tax Non-operating assets and liabilities (not allocated)4 Net borrowings (not allocated)5 Group net assets 2003 Food retailing – UK Financial services – UK Continuing operations Food retailing – US Property development – UK Discontinued operations 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 Goodwill amortisation – US Group profit before tax Non-operating assets and liabilities (not allocated)4 Net borrowings (not allocated)5 Group net assets Turnover1 £m 14,220 220 14,440 2,688 13 2,701 17,141 Before exceptional items £m Exceptional items £m 564 26 590 138 7 145 735 – (60) 675 (11) 664 (68) – (68) – – – (68) – 18 (1) (3) – (54) – (54) Profit on ordinary activities before tax Restated Turnover1, 2 £m Before exceptional items £m Exceptional items £m 13,924 180 14,104 2,830 145 2,975 17,079 572 22 594 139 19 158 752 3 (60) 695 (13) 682 (55) – (55) (10) – (10) (65) – (7) (4) 61 – (15) – (15) Group total £m 496 26 522 138 7 145 667 – 18 (1) (3) (60) 621 (11) 610 Group total £m 517 22 539 129 19 148 687 3 (7) (4) 61 (60) 680 (13) 667 Net assets3 £m 6,542 221 6,763 931 – 931 7,694 9 7,703 7,703 (430) (2,088) 5,185 Net assets3 £m 5,582 171 5,753 923 195 1,118 6,871 9 6,880 6,880 (404) (1,404) 5,072 1 Excludes VAT at Sainsbury’s Supermarkets and sales tax at Shaw’s Supermarkets. 2 Prior year comparative sales have been restated in order to comply with FRS 5 (ANG) and are now shown net of Nectar reward points issued and redeemed, staff discounts, vouchers, returns and sales made on an agency basis. The effect of these changes in accounting policy is to reduce turnover in 2004 by £280 million (2003: £351 million) and to reduce cost of sales correspondingly. 3 Excludes borrowings and intercompany assets and liabilities. 4 Non-operating assets and liabilities (not allocated) comprise proposed dividends, current and deferred taxation, own shares at cost and unallocated unlisted investments. 5 Net borrowings include cash and current asset investments, excluding those of financial services. Turnover is disclosed by origin. There is no material difference between turnover by origin and by destination. Sales between the Group’s business segments are not material. Due to the increase in significance of the contribution from financial services, this activity is now separately disclosed. 28 J Sainsbury plc Annual Report and Financial Statements 2004 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 2004 Continuing operations £m Discontinued operations £m Total £m 14,440 (13,147) (52) 2,701 (2,459) – 17,141 (15,606) (52) Restated1 Continuing operations £m 14,104 (12,920) (51) 2003 Restated1 Discontinued operations £m 2,975 (2,717) – 1,241 242 1,483 1,133 (703) (16) – (719) 522 (97) – (11) (108) 134 (800) (16) (11) (827) 656 (590) (4) – (594) 539 1 Restated for change in accounting policy for turnover in accordance with FRS 5 (ANG) (see notes 1 and 2 on pages 26 and 28). The exceptional operating costs comprise the following: Exceptional cost of sales – Sainsbury’s Supermarkets Sainsbury’s Supermarkets Safeway bid costs Shaw’s Supermarkets Exceptional administrative expenses Total exceptional operating costs Restated1 Total £m 17,079 (15,637) (51) 1,391 (690) (14) (13) (717) 674 2003 £m 51 4 – 10 14 65 258 (100) (10) (13) (123) 135 2004 £m 52 7 9 – 16 68 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 depot and store closure costs and reorganisation costs. At Shaw’s Supermarkets, the exceptional costs in 2003 relate to costs associated with the acquisition of stores from the liquidator of Ames. 4 Profit/(loss) on sale of properties Profit/(loss) on disposal of Sainsbury’s Supermarkets’ properties Loss on disposal of Shaw’s Supermarkets’ properties 2004 £m 18 (1) 17 2003 £m (7) (4) (11) 5 Disposal of operations – discontinued During the year the Group sold JSD and associated properties held within Sainsbury’s Supermarkets Ltd (‘associated SSL properties’) for a consideration of £191 million (net of expenses) and made a loss of £3 million on the sale (see note 31 on page 45). Loss on disposal of JSD and associated properties Profit on disposal of investment in Homebase 2004 £m (3) – (3) 2003 £m – 61 61 J Sainsbury plc Annual Report and Financial Statements 2004 29 Notes to the financial statements continued 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 2004 £m 25 1 81 29 111 (24) (2) 85 60 2003 £m 45 2 97 28 127 (20) (2) 105 60 Total interest receivable amounted to £173 million (2003: £171 million), including interest receivable attributable to Sainsbury’s Bank of £148 million (2003: £126 million) included in sales. Total interest payable amounted to £184 million (2003: £199 million) including interest payable attributable to Sainsbury’s Bank of £73 million (2003: £72 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 (note 13) Employee costs Pension costs (note 34) Operating lease rentals – properties – fixtures, equipment and vehicles – receivable 2004 £m 2003 £m 383 40 13 2,000 89 298 17 (30) 348 45 18 1,913 73 275 6 (29) The Auditors’ remuneration for audit services amounted to £0.6 million (2003: £0.6 million) for the Group including £0.1 million (2003: £0.1 million) for the Company. The Auditors also received £2.8 million (2003: £1.4 million) for non-audit services relating to consultancy fees for strategic (£1.7 million; 2003: £0.6 million), regulatory (£0.3 million; 2003: £0.1 million) and taxation (£0.8 million; 2003: £0.7 million) advice. 30 J Sainsbury plc Annual Report and Financial Statements 2004 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 The average number of employees (full-time equivalent) during the year were employed in the following countries: United Kingdom United States of America 2004 £m 2003 £m 1,793 118 89 2,000 2004 Number 000’s 56.7 123.5 180.2 113.6 2004 Number 000’s 94.0 19.6 113.6 1,739 101 73 1,913 2003 Number 000’s 54.2 120.3 174.5 108.7 2003 Number 000’s 88.1 20.6 108.7 9 Advances to Directors and connected persons As at 27 March 2004, 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 (2003: £30,000), number of persons: 5 (2003: 5). The details of Directors’ emoluments and interests are set out in the Remuneration report on pages 12 to 20. 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 (2003: 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 2004 £m 165 (9) 156 24 33 6 (15) 2 206 2003 £m 173 (9) 164 23 43 (4) (11) (9) 206 The taxation credit on exceptional items comprises £15 million (2003: £20 million) on exceptional operating costs, less £2 million (2003: £nil) on sale of properties. J Sainsbury plc Annual Report and Financial Statements 2004 31 Notes to the financial statements continued 10 Tax on profit on ordinary activities continued 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 (2003: 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 Disposal of JSD Prior year items Other items 2004 % 30.0 1.7 3.3 0.6 (5.7) – 0.2 (1.4) (0.1) 2003 % 30.0 0.8 2.4 0.6 (1.3) (2.8) – (1.4) 0.9 Current tax charge 28.6 29.2 The rate of tax payable in future periods will be affected by disallowed depreciation on UK properties. 11 Dividends Interim Final proposed 2004 pence per share 4.33 11.36 15.69 2003 pence per share 4.22 11.36 15.58 2004 £m 83 218 301 2003 £m 81 217 298 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 potential dilutive 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 2004 million 1,913.8 4.4 2003 million 1,911.9 7.4 1,918.2 1,919.3 The alternative measure of earnings per share is provided by excluding the effect of exceptional items and amortisation of goodwill to reflect the Group’s underlying trading performance. Basic earnings Exceptional items net of tax: Included in operating profit (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 2004 2003 Earnings £m Per share amount pence Earnings £m Per share amount pence 396 20.7 454 23.7 53 (15) 3 11 448 396 2.8 (0.8) 0.1 0.6 23.4 20.6 448 23.3 45 11 (61) 13 462 454 462 2.4 0.6 (3.2) 0.7 24.2 23.7 24.1 32 J Sainsbury plc Annual Report and Financial Statements 2004 13 Intangible fixed assets – Group Cost At 30 March 2003 Additions Disposals Exchange adjustments At 27 March 2004 Amortisation At 30 March 2003 Charge for the year Disposals Exchange adjustments At 27 March 2004 Net book value At 27 March 2004 At 29 March 2003 Additions include goodwill in Shaw’s and on the acquisition of Bells Stores Ltd. 14 Tangible fixed assets Cost or valuation At 30 March 2003 Additions and reclassifications (see below) Purchase of IT assets New subsidiaries Disposals Exchange adjustments At 27 March 2004 Accumulated depreciation At 30 March 2003 Charge for the year Disposals Exchange adjustments At 27 March 2004 Net book value At 27 March 2004 At 29 March 2003 Capital work-in-progress included above At 27 March 2004 At 29 March 2003 Goodwill £m Pharmacy and other licences £m 248 24 – (34) 238 48 11 – (7) 52 186 200 38 – (7) – 31 12 2 (5) – 9 22 26 Total £m 286 24 (7) (34) 269 60 13 (5) (7) 61 208 226 Group Fixtures, equipment and vehicles £m Company Total £m Land and buildings £m Land and buildings £m 6,909 274 – 2 (238) (105) 3,739 564 554 4 (341) (48) 10,648 838 554 6 (579) (153) 6,842 4,472 11,314 952 114 (36) (33) 2,156 309 (333) (29) 3,108 423 (369) (62) 997 2,103 3,100 5,845 5,957 2,369 1,583 8,214 7,540 410 607 108 121 518 728 383 – – – (4) – 379 15 3 – – 18 361 368 – – Interest capitalised included in additions amounted to £24 million (2003: £20 million) for the Group and £nil (2003: £nil) for the Company. Accumulated interest capitalised included in the cost or valuation total above amounts to £294 million (2003: £279 million) for the Group and £nil (2003: £nil) for the Company. The net book value of properties comprised: Freehold Long leasehold Short leasehold Group 2004 £m 4,291 726 828 5,845 2003 £m 4,399 767 791 5,957 Company 2004 £m 145 216 – 361 2003 £m 150 218 – 368 J Sainsbury plc Annual Report and Financial Statements 2004 33 Notes to the financial statements continued 14 Tangible fixed assets continued Analysis of finance leases – Group Cost Depreciation Net book value 2004 Fixtures, equipment and vehicles £m 338 237 101 Properties £m 228 67 161 2003 Fixtures, equipment and vehicles £m 372 233 139 Total £m 566 304 262 Properties £m 187 67 120 Total £m 559 300 259 Analysis of properties At 27 March 2004 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 4,802 849 1,115 6,766 150 229 2 49 3 22 76 379 – – – – – 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 27 March 2004 would have been: Freehold Long leasehold Short leasehold Group Company Cost £m Depreciation £m 4,821 866 1,115 6,802 556 147 287 990 Cost £m 150 229 – 379 Depreciation £m 5 13 – 18 Purchase of IT assets On 19 February 2004 the Group acquired the entire equity share capital of Swan from Barclays UK Infrastructure Fund. Sainsbury’s Supermarkets has an executory contract with Swan for the provision of IT services which Swan subcontracts to Accenture. Swan’s principal business was the purchase and ownership of the IT assets required under the contract with Sainsbury’s Supermarkets and, accordingly, the transaction has been treated as, in substance, the purchase of IT fixed assets, for which the total consideration of £554 million was the fair value of the cash consideration paid and the net liabilities assumed. The net assets purchased of £554 million consist of tangible fixed assets of £554 million, cash balances of £53 million and current liabilities of £53 million. The net cash paid in respect of the assets purchased from Swan was £187 million, which comprised £10 million for the acquisition of the share capital, £230 million to discharge Swan’s external borrowings, less cash balances of £53 million acquired with Swan. The remaining consideration of £314 million was satisfied by the assumption of the loan notes held in Swan, which is a non-cash movement for the purposes of the Group cash flow statement. The cash flows of Swan have had no material impact in the period since 19 February 2004. As part of the transaction, on 19 February 2004, the Swan noteholders exchanged their notes for £314.5 million 5.25% Notes due May 2007, issued by the Company. 34 J Sainsbury plc Annual Report and Financial Statements 2004 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 2004 £m – 9 86 21 116 2003 £m – 9 86 17 112 2004 £m 8,103 6 – – 8,109 2003 £m 7,661 6 – – 7,667 1 The Group owned 24,838,878 (2003: 24,857,152) shares at 27 March 2004 with a nominal value of £6.2 million (2003: £6.2 million). Employee Share Ownership Trust (ESOT) • 502,020 shares (2003: 520,294) are held by 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 (2003: 24,336,858) are held by an ESOT for the 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 27 March 2004 was £65.0 million (2003: £56.2 million). The ESOTs waive the rights to the dividends receivable in respect of the shareholder under the above schemes. 16 Shares in Group undertakings The Company’s principal operating subsidiaries are: Bells Stores Ltd (food retailing) J Sainsbury Distribution Ltd (logistical services) JS Insurance Ltd (insurance services) Sainsbury’s Bank plc (financial services) Sainsbury’s Card Services Ltd1 (card handling services) Sainsbury’s Supermarkets Ltd (food retailing) Shaw’s Supermarkets Inc.1 (food retailing) Swan Infrastructure Holdings Ltd (IT assets) 1 Not directly owned by J Sainsbury plc. Share of ordinary allotted capital and voting rights Country of registration or incorporation 100% England England 100% 100% Isle of Man England England England USA England 55% 100% 100% 100% 100% All principal operating subsidiaries operate in the countries of their registration or incorporation. Audited financial statements are drawn up to 31 October 2003 for Bells Stores Ltd, 28 February 2004 for Shaw’s Supermarkets Inc. and 31 December 2003 for Swan Infrastructure Holdings Ltd. Management accounts have been used to include the results for the aforementioned subsidiaries up to 27 March 2004. All other principal operating subsidiaries have been included up to 27 March 2004. Summary of movements – Company At 30 March 2003 Investment in subsidiaries Disposal of subsidiaries – Third party – Group Long-term capital advances Long-term capital repayments Provisions Exchange adjustments At 27 March 2004 Shares at cost £m 4,858 860 (10) (567) – – (9) (220) Long-term capital advances £m Total net investment £m 2,803 – – – 898 (502) (8) – 7,661 860 (10) (567) 898 (502) (17) (220) 4,912 3,191 8,103 J Sainsbury plc Annual Report and Financial Statements 2004 35 Notes to the financial statements continued 17 Investment in joint ventures The Group’s principal joint venture, directly owned by the Company, was: Hedge End Park Limited (property investment – UK) 27 March 50% England For the year ended 27 March 2004, the Group’s share of turnover of Hedge End Park Limited amounted to £nil (2003: £1 million) and its share of profit before tax amounted to £nil (2003: £2 million). At 27 March 2004, the Group’s share of gross assets amounted to £8 million (2003: £10 million) and its share of gross liabilities amounted to £nil (2003: £2 million). Share of ordinary allotted capital Country of registration or incorporation Year-end Summary of Investment Group At 27 March 2004 and 30 March 2003 Company At 27 March 2004 and 30 March 2003 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 Group share of post acquisition reserves £m Shares at cost £m 6 6 3 2004 £m 746 7 – 753 Group Company 2004 £m 71 95 4 149 319 2003 £m 116 101 10 70 297 2004 £m – 100 – – 100 Total £m 9 6 2003 £m 660 107 33 800 2003 £m – 105 – 6 111 36 J Sainsbury plc Annual Report and Financial Statements 2004 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 customers Debt securities Prepayments and accrued income Loans and advances to customers due in more than one year Creditors: due within one year Loan from minority shareholder (note 35) Deposits by banks Customer accounts Accruals and deferred income 2004 £m 78 61 33 934 148 75 1,329 1,170 2,499 27 – 2,200 79 2,306 2003 £m 40 70 298 661 448 13 1,530 867 2,397 11 12 2,166 48 2,237 In addition to the above assets and liabilities, Sainsbury’s Bank had fixed assets of £27 million at 27 March 2004 (2003: £12 million) included in tangible fixed assets (note 14) and intercompany liabilities of £38 million (2003: £18 million). 21 Current asset investments Investments listed on a recognised stock exchange at cost (equivalent to market value) 2004 £m 19 22 Creditors Group Company Due within one year Bank loans and overdrafts 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 Bank and other loans Medium-term notes £314.5m 5.25% Notes – May 2007 €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 2004 £m 340 22 41 403 1,229 85 30 355 280 218 2003 £m 127 49 37 213 1,237 98 60 443 269 217 2004 £m 184 22 – 206 – 547 27 – 11 34 218 2,600 2,537 1,043 11 164 314 487 300 250 350 3 290 2,169 – 25 2,194 – 174 – 487 300 250 350 3 286 1,850 – 35 1,885 – 164 314 487 300 250 350 3 – 1,868 1,509 – 3,377 2003 £m 20 2003 £m 28 49 – 77 – 77 46 – 6 44 217 467 – 174 – 487 300 250 350 3 – 1,564 2,003 – 3,567 J Sainsbury plc Annual Report and Financial Statements 2004 37 Notes to the financial statements continued 23 Summary of borrowings Due within one year Bank and other loans Obligations under finance leases Due after one and within two years Bank and other loans Obligations under finance leases Due after two and within five years Bank and other loans Obligations under finance leases Due after five years Bank and other loans Obligations under finance leases Group Company 2004 £m 362 41 – 46 965 69 914 175 2,572 2003 £m 176 37 6 43 168 107 1,390 136 2,063 2004 £m 206 – – – 965 – 903 – 2,074 2003 £m 77 – 6 – 168 – 1,390 – 1,641 Obligations under finance leases due after five years at 27 March 2004 are repayable by instalments. Bank and other loans due after five years are not repayable by instalments. The Company has no finance leases (2003: £nil). The Group holds a portfolio of 11 committed revolving credit facilities totalling £635 million as at 27 March 2004 (2003: £635 million). The facilities all expire within one year, although facilities of £460 million (2003: £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 27 March 2004 there were no drawings under these facilities (2003: £nil). As described in note 14, the Group acquired the entire share capital and assets of Swan Infrastructure Holdings Limited (Swan) for £554 million, being the fair value of the purchase consideration which comprised £10 million in cash, £230 million to discharge Swan’s external borrowings and £314 million assumption of the loan notes held in Swan, issued by a member of the Swan group, Store Finance plc. On 19 February 2004, the Group exchanged the loan notes issued by Store Finance plc, for similar term loan notes issued by J Sainsbury plc. These new loan notes are included in the summary of borrowings in the table above. 24 Financial instruments Within the financial assets and financial liabilities analysed below, fixed rate financial assets of £7 million (2003: £7 million), financial assets on which no interest is paid of £2 million (2003: £3 million), financial liabilities on which no interest is paid of £25 million (2003: £35 million), and floating rate financial liabilities of £43 million (2003: £40 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 7. 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 2004 2003 Book value £m Fair value £m Book value £m Fair value £m (403) (2,169) (68) 487 4 2 (404) (2,279) (68) 488 4 2 (213) (1,850) (75) 659 7 3 (208) (1,955) (75) 659 8 3 – – 114 – – – 141 2 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 £212 million (2003: £172 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. 38 J Sainsbury plc Annual Report and Financial Statements 2004 Financial assets After taking into account various interest rate and currency swaps the interest rate profile of the Group’s financial assets was: Sterling US Dollar At 27 March 2004 Sterling US Dollar Other At 29 March 2003 Floating rate financial assets £m 1,116 56 1,172 1,353 120 9 1,482 Fixed rate financial assets £m Financial assets on which no interest is paid £m 7 – 7 7 – – 7 – 2 2 – 3 – 3 Total £m 1,123 58 1,181 1,360 123 9 1,492 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 (2003: 7.75 per cent) fixed for an average period of 1.2 years (2003: 2.2 years). The financial assets on which no interest is paid have a weighted average period until maturity of 1 year (2003: 5 years). Financial liabilities After taking into account various interest rate and currency swaps the interest rate profile of the Group’s financial liabilities was: Sterling US Dollar At 27 March 2004 Sterling US Dollar At 29 March 2003 Floating rate financial liabilities £m Fixed rate financial liabilities £m Financial liabilities on which no interest is paid £m Fixed rate debt Weighted average interest rate % Average time for which rate is fixed years 1,963 640 2,603 1,636 738 2,374 368 332 700 253 299 552 2 23 25 – 35 35 5.44 9.05 7.16 6.05 8.10 7.20 3.4 9.2 6.1 11.3 7.9 9.5 Total £m 2,333 995 3,328 1,889 1,072 2,961 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 reappraised 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 £25 million (2003: £42 million), US dollar denominated monetary assets of £25 million (2003: £29 million) and Australian dollar monetary assets of £2 million (2003: £1 million). Excluded from these figures are non-sterling borrowings undertaken by the Company to hedge investments in overseas operations. J Sainsbury plc Annual Report and Financial Statements 2004 39 Notes to the financial statements continued 24 Financial instruments continued 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 Gains and losses on hedges at 29 March 2003 Arising in previous years included in 2003/04 income Gains and losses not included in 2003/04 income Arising in previous years Arising in 2003/04 Gains and losses on hedges at 27 March 2004 Of which: Gains and losses expected to be included in 2005 income Gains and losses expected to be included in 2006 income or later Gain £m 191 (2) 189 (25) 164 9 155 Loss £m (48) 9 (39) (11) (50) (15) (35) Total gain/(loss) £m Gain £m 143 7 150 (36) 114 (6) 120 – – – – – – – Loss £m (4) 4 – (10) (10) Total gain/(loss) £m (4) 4 – (10) (10) (10) (10) – – 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 in the operating and financial review on page 6. Sainsbury’s Bank’s exposure to movements in interest rates is shown in the following table which discloses the interest rate repricing profile of assets and liabilities as at 27 March 2004. Any asset (or positive) gap position reflects the fact that the Bank’s financial assets reprice 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 reprice more quickly or in greater proportion than assets during a given period and tends to benefit net interest income in a declining rate environment. Items are allocated to time bands by reference to the earlier of the next contractual interest rate repricing date and the maturity date. Interest rate sensitivity table of Sainsbury’s Bank at 27 March 2004 Not more than 3 mths £m Over 3 mths but not over 6 mths £m Over 6 mths but not over 1 year £m Over 1 year but not over 5 years £m Over 5 years £m Non- interest bearing £m 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 61 33 903 148 – 1,145 2,045 – 60 – 2,105 (960) 927 (33) (33) – – 115 – – 115 3 – – – 3 112 (139) (27) (60) – – 175 – – 175 152 – – – 152 23 (313) (290) (350) – – 863 – – 863 – – – – – 863 (468) 395 45 – – 48 – – 48 – – – – – 48 (7) 41 86 – – – – 180 180 – 84 – 182 266 (86) – (86) – Total £m 61 33 2,104 148 180 2,526 2,200 84 60 182 2,526 – – – – 40 J Sainsbury plc Annual Report and Financial Statements 2004 Interest rate sensitivity table of Sainsbury’s Bank at 29 March 2003 Not more than 3 mths £m Over 3 mths but not over 6 mths £m Over 6 mths but not over 1 year £m Over 1 year but not over 5 years £m Over 5 years £m Non- interest bearing £m 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 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 – – 24 – – 24 – – – – – 24 (3) 21 153 – – – – 65 65 – 64 – 154 218 (153) – (153) – Total £m 70 298 1,528 448 65 2,409 2,166 64 25 154 2,409 – – – – As set out above, the Bank has entered into interest rate swaps on a notional principal amount of £1,076 million (2003: £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 £2 million; 2003: £1 million) and their fair value represented by replacement cost (total of £4 million; 2003: £1 million). 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 30 March 2003 £m Cash flow £m Acquisition of subsidiaries £m Other non-cash movements £m Exchange movements £m At 27 March 2004 £m 20 639 (14) 645 (162) (37) (1,564) (286) (2,049) (1,404) (1) (158) 14 (145) (305) (4) (2) 45 (266) (411) – – – – – – (4) – (4) (4) – – – – – – (314) (72) (386) (386) – (16) – (16) 105 – 5 23 133 117 19 465 – 484 (362) (41) (1,879) (290) (2,572) (2,088) J Sainsbury plc Annual Report and Financial Statements 2004 41 Notes to the financial statements continued 26 Provisions for liabilities and charges Group Closure, disposal and business transformation costs £m Unfunded pension liabilities £m Deferred tax £m Onerous leases £m At 30 March 2003 Transfer to corporation tax Utilised Exchange adjustments Charge to the profit and loss account Deferred tax – UK Deferred tax – US At 27 March 2004 190 9 – 3 – 26 6 234 40 – (6) – 9 – – 43 63 – (43) – 4 – – 24 7 – – – – – – 7 Company Disposal costs £m Onerous leases £m 32 – (21) – 4 – – 15 20 – (6) – – – – 14 Total £m 300 9 (49) 3 13 26 6 308 Total £m 52 – (27) – 4 – – 29 The provisions for onerous leases cover residual lease commitments of up to 70 years, after allowance for existing or anticipated sublet rental income. The provisions for closure and disposal costs (£17 million) relate to indemnities arising from the disposal of subsidiaries. The provisions for business transformation costs (£7 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 26 March 2005. The provision for deferred tax comprises: Timing differences between depreciation and capital allowances Other timing differences 27 Called up share capital and share premium account Shares authorised Ordinary shares of 25 pence each – 2,200 million shares (2003: 2,200 million) Shares allotted At 29 March 2003 SAYE Share Option Scheme Executive Share Option Plan Colleague Share Option Plan At 27 March 2004 Further details of these schemes at 27 March 2004 are set out on page 43. 2004 £m 223 11 234 2003 £m 194 (4) 190 Allotted fully paid shares million Aggregate nominal value £m Share premium £m Consideration £m 550 484 – 2 – 486 1,937.5 0.4 5.0 0.2 1,943.1 1,424 1 12 1 1,438 1 14 1 16 42 J Sainsbury plc Annual Report and Financial Statements 2004 (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 27 March 2004, UK employees held 34,700 five year savings contracts in respect of options over 22.0 million shares and 29,400 three year savings contracts in respect of options over 12.7 million shares. Details of these options at 27 March 2004 are set out below: Date of grant 7 January 7 January 10 December 1997 (5 year period) 10 December 1998 (5 year period) 2000 (3 year period) 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) 17 December 2003 (3 year period) 17 December 2003 (5 year period) Date of expiry 31 July 2003 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 31 August 2007 31 August 2009 During the year 384,415 shares were allotted under this scheme. Price pence 398 416 253 253 299 299 302 302 239 239 241 241 Options outstanding 2004 million 2003 million – 2.8 – 2.9 2.3 3.4 2.8 3.6 3.6 4.6 4.0 4.7 3.3 3.0 2.0 3.4 3.0 4.0 3.5 4.3 4.4 5.3 – – 34.7 36.2 In 2003, the J Sainsbury plc Qualifying Employee Share Ownership Trust (the QUEST) existed to acquire shares for UK employees, including Directors, in satisfaction of their options under the Savings Related Share Option Scheme. The QUEST was liquidated in the current financial year as the Company now issues shares directly to UK employees under the terms of the Savings Related Share Option Scheme. (b) Executive Share Option Plan Options outstanding Date of grant 12 March 1994 8 September 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 22 May 2003 27 March 2004 Date of expiry 11 March 2004 7 September 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 21 May 2013 26 March 2014 These options were held by 1,646 executives (2003: 2,215). Price pence 359 475 367 489 545 378 320 320 261 272 315 427 407 287 257 262 2004 million – 2.7 3.2 0.1 4.0 5.9 0.1 0.1 3.0 8.8 0.1 7.3 8.0 23.0 26.0 0.5 92.8 2003 million 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 J Sainsbury plc Annual Report and Financial Statements 2004 43 Notes to the financial statements continued 27 Called up share capital and share premium account continued (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 66,886 (2003: 83,000) UK employees participated in the Plan and hold options over 23.3 million shares (2003: 27.8 million). Options have been exercised in respect of 274,873 ordinary shares during the year. 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 four executives. Options outstanding Price pence 100 2004 2003 67,749* 86,223 There have been a total of two options exercised in respect of 18,474 ordinary shares during the year by executive participants. 28 Revaluation reserve At 27 March 2004 and 29 March 2003 29 Profit and loss account At 30 March 2003 Profit retained for the financial year Currency translation differences At 27 March 2004 Group £m 22 Company £m – Group £m 3,073 95 (10) Company £m 2,394 7 (45) 3,158 2,356 The cumulative goodwill deducted from the reserves of the Group at 27 March 2004 amounted to £140 million (2003: £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 £308 million (2003: £348 million). 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 in stocks Increase in debtors (Decrease)/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 2004 £m 656 423 13 9 (116) (6) (99) (102) 69 847 2003 £m 674 393 18 9 (62) (20) 85 (204) 177 1,070 44 J Sainsbury plc Annual Report and Financial Statements 2004 31 Disposals Disposal of JS Developments (JSD) and associated Sainsbury’s Supermarkets properties (‘associated SSL properties’) The Group sold JSD and associated SSL properties to Blue Investment Fund LP on 27 November 2003 for a total consideration of £167 million and the sale broke even. However, certain development properties owned by JSD were retained by the Group and were sold on 26 March 2004, together with further associated SSL properties, for a total consideration of £32 million. There was a loss on this sale of £3 million. Summary of disposal of business Fixed assets Stock – land held for redevelopment Creditors Net assets disposed Net cash received Net deferred consideration Total proceeds (net of expenses) (Loss)/profit on disposal of business and associated properties JSD contributed £42 million to the net operating cash flows prior to sale. JSD £m – 119 (1) 118 101 6 107 (11) Associated properties £m 50 26 – 76 84 – 84 8 32 Contingent liabilities and financial commitments Group commitments to make operating lease payments during the next financial year are as follows: Leases which expire within one year Leases which expire between one and five years Leases which expire after five years Land and buildings Other leases 2004 £m 1 2 262 2003 £m 4 5 271 2004 £m 2 14 3 2004 Total £m 50 145 (1) 194 185 6 191 (3) 2003 £m – 5 – 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. There are a number of contingent liabilities relating to disposals and other contractual liabilities under which it is not considered any liability will arise. J Sainsbury plc Annual Report and Financial Statements 2004 45 Notes to the financial statements continued 33 Future capital expenditure Contracted but not provided for 2004 £m 406 2003 £m 545 34 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 27 March 2004 is based on the results of a triennial valuation carried out by Watson Wyatt, the schemes’ independent actuaries, as at 29 March 2003, on the projected unit basis. The principal actuarial assumptions used in the actuarial valuations are: Long-term rate of return on investments – before retirement – after retirement Average annual increase in total pensionable salary (excluding promotional increments) Average annual increase in present and future payments Average rate of inflation JSPDBS % JSEPS % 6.5 6.5 2.5 2.5 2.5 6.3 6.3 2.5 2.5 2.5 As at 29 March 2003, the market value of the assets of the UK schemes were £2,258 million (2001: £2,687 million). The market value was sufficient to cover 93 per cent (2001: 106 per cent) of the total liabilities of the schemes, a deficit of £161 million (2001: surplus £145 million). Total pension contribution costs for the Group were £89 million for the year ended 27 March 2004 (2003: £73 million) of which the pension contribution costs of the UK defined benefit schemes and UK defined contribution schemes amounted to £67 million and £12 million respectively (2003: £55 million and £9 million respectively). There is a variation from the regular cost because of scheme deficits. These deficits are being amortised over a 14 year period using a method which increases the amount of variation from the regular cost. Total costs for 2004 are after taking account of an amortisation of scheme deficits of £20 million (2003: amortisation of the surplus £17 million). 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 £10 million (2003: £9 million) has been calculated in accordance with US accounting principles but would not have been materially different had UK accounting principles been applied. 46 J Sainsbury plc Annual Report and Financial Statements 2004 FRS 17 disclosures Actuarial valuations at 27 March 2004 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 Average annual increase in total pensionable salary Average annual increase in pensions Discount rate Average rate of inflation 2004 % 2.75 2.75 5.50 2.75 2003 % 2.25 2.25 5.50 2.25 2002 % 3.75–4.00 2.50 6.00 2.50 2004 % 4.25 – 5.74 3.25 2003 % 4.25 – 6.28 3.25 The assets in the schemes and their expected returns at 27 March 2004 were: 2002 % 4.25 – 7.28 3.25 Value £m – 91 52 – 143 Value £m – 82 46 – 128 Value £m – 101 56 – 157 UK schemes US schemes Expected long-term rate of return % 8.25 8.25 5.17 5.58 7.24 Expected long-term rate of return % – 9.25 7.25 – 8.52 Value £m 765 1,016 802 84 2,667 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 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 2004 £m 2,667 (3,297) (630) 189 (441) 2003 £m 2,252 (3,072) (820) 246 (574) 2004 £m 143 (193) (50) 20 (30) 2003 £m 128 (184) (56) 23 (33) J Sainsbury plc Annual Report and Financial Statements 2004 47 Equities – UK – overseas Bonds Other The assets in the schemes and their expected returns at 29 March 2003 were: Equities – UK – overseas Bonds Other 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 Notes to the financial statements continued 34 Pension costs continued If the above net pension assets/(liabilities) had been recognised in the financial statements, the Equity shareholders’ funds and profit and loss reserve at 27 March 2004 would be as follows: Equity shareholders’ funds excluding pension liability Net pension schemes’ liabilities Equity shareholders’ funds including pension liability Profit and loss reserve excluding pension liability Net pension schemes’ liabilities Profit and loss reserve 2004 £m 5,104 (471) 4,633 3,158 (471) 2,687 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 profit/(loss) included in the Group statement of total recognised gains and losses 2004 £m (77) – – (77) 167 (176) (9) (86) 309 116 (200) 225 2003 £m 5,003 (607) 4,396 3,073 (607) 2,466 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 cost is not expected to rise significantly despite the fact that the UK schemes are now closed. The movement in the deficit during the year arose as follows: UK schemes US schemes Deficit in the schemes at the beginning of year Exchange adjustment Current service cost Contributions Gain due to settlements Gain due to curtailments Other finance (charge)/income Actuarial profit/(loss) Deficit in schemes at the end of the year Related deferred tax asset Net pension deficit 2004 £m (820) – (68) 42 – – (9) 225 (630) 189 (441) 2003 £m (366) – (88) 42 1 13 20 (442) (820) 246 (574) 2004 £m (56) 8 (9) 7 – – – – (50) 20 (30) 2003 £m (2) – (11) 4 – – 2 (49) (56) 23 (33) 48 J Sainsbury plc Annual Report and Financial Statements 2004 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 35 Related party transactions The following transactions fall to be disclosed under the terms of FRS 8. 2004 £m 2003 £m 309 11.0% 116 3.3% 225 6.4% (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 27 March 2004, 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 2004 £m 30 22 2003 £m 18 18 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. Loans and advances to banks at 27 March 2004 of £33 million (2003: £298 million) consisted wholly of loans and advances to HBoS Group. On 12 December 2002 Sainsbury’s Bank received £14 million from the Company 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. Two further advances of £11 million and £8 million by the Company and £9 million and £7 million by Bank of Scotland were made on 1 April 2003 and 13 October 2003 respectively, on the same terms. These loans remain outstanding at the year-end. Interest of £1,299,000 (2003: £196,000) and £1,062,000 (2003: £160,000) was paid to the Company and Bank of Scotland respectively. Included in deposits by banks at 27 March 2004 is £nil (2003: £12 million) advanced by Bank of Scotland, under normal commercial terms. J Sainsbury plc Annual Report and Financial Statements 2004 49 Notes to the financial statements continued 36 Post balance sheet event Sale of Shaw’s Supermarkets Inc. On 26 March 2004 the Group signed a conditional contract to sell its US supermarkets business (Shaw’s) to Albertson’s Inc. for a consideration of $2,475 million, including $368 million in assumed lease liabilities. The sale, which was subject to a price adjustment mechanism and competition clearance, completed on 30 April 2004, when proceeds of £1,177 million (net of expenses) were received by the Group. The profit on disposal is estimated to be in excess of £250 million and will be recognised in the 2004/05 accounts. Of the total proceeds, the Company proposes to return 35 pence per share to shareholders, representing approximately £680 million. The trading results of Shaw’s have been included within discontinued operations (note 3 on page 29), as under FRS 3, the sale of Shaw’s represents a material reduction in the Group's operating facilities in the US market. A proforma statement of net assets of the Group as at 27 March 2004, reflecting the sale of Shaw’s and the share buy-back is as follows: Deduct Shaw’s £m 781 160 10 156 74 51 (221) (170) (242) Sales proceeds £m Share buy-back £m Remaining Group £m 7,433 48 106 597 2,744 930 (2,351) (1,421) (4,594) 4,913 (81) 1,177 (680) 1,177 (680) 769 1,177 (680) 769 1,177 (680) 4,832 Tangible fixed assets Intangible fixed assets Fixed asset investments Stock Debtors and other assets Cash and current asset investments Debt Net debt Other creditors and provisions Net assets Equity minority interest Equity shareholders’ funds Existing Group £m 8,214 208 116 753 2,818 484 (2,572) (2,088) (4,836) 5,185 (81) 5,104 50 J Sainsbury plc Annual Report and Financial Statements 2004 Five year financial record Financial results (£m) Group turnover2 Turnover – continuing operations Operating profit Sainsbury’s Supermarkets Sainsbury’s Bank Discontinued operations Interest payable Joint ventures Group underlying profit before tax3 2004 Restated1 2003 2002 20014 2000 18,239 15,517 18,144 15,147 18,206 15,025 18,441 14,048 17,414 13,403 564 26 145 735 (60) – 675 572 22 158 752 (60) 3 695 505 22 150 677 (49) (1) 627 462 13 153 628 (76) (3) 549 509 3 139 651 (72) 1 580 (Decrease)/increase on previous year (2.9)% 10.8% 14.2% (5.3)% (23.2)% Earnings per share4 Basic (Decrease)/increase on previous year Underlying3 (Decrease)/increase on previous year Dividend per share Retail statistics for UK 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 Supermarkets5 Sales area (000 sq ft) Sainsbury’s Supermarkets5 Net increase on previous year: Sainsbury’s Supermarkets New Sainsbury’s Supermarkets store openings 20.7p (12.7)% 23.4p (3.3)% 15.69p 23.7p 24.1% 24.2p 12.6% 15.58p 19.1p 31.7% 21.5p 14.4% 14.84p 14.5p (20.8)% 18.8p (8.3)% 14.32p 18.3p (37.3)% 20.5p (23.5)% 14.32p 157 163 77 186 583 152 162 79 105 498 121 184 84 74 463 86 209 93 65 453 61 225 99 47 432 15,570 15,199 14,349 13,746 13,055 2.4% 35 5.9% 39 4.4% 25 5.3% 27 3.9% 20 Sainsbury’s Supermarkets’ sales intensity (including VAT)6 Per square foot (£ per week) 17.04 17.56 17.54 16.79 16.98 1 Group turnover in 2003 has been restated for the change in accounting policy in accordance with FRS 5 (ANG) (see notes 1 and 2 on pages 26 and 28). 2 Includes VAT at Sainsbury’s Supermarkets and Homebase and sales tax at Shaw’s Supermarkets. 3 Underlying profit before tax and underlying earnings per share are stated before exceptional items of £60 million in 2000, £96 million in 2001, £42 million in 2002, £15 million in 2003 and £54 million in 2004 and before amortisation of goodwill of £11 million in 2000, £16 million in 2001, £14 million in 2002, £13 million in 2003 and £11 million in 2004. 4 Earnings per share in 2001 has been restated in accordance with FRS 19. Published basic earnings per share was 13.8 pence and published underlying earnings per share was 19.2 pence. 5 Including 54 Bells stores. 6 Including Savacentre, excluding petrol. J Sainsbury plc Annual Report and Financial Statements 2004 51 52 J Sainsbury plc Annual Report and Financial Statements 2004 Visit our website Information about Sainsbury’s: www.sainsburys.co.uk Electronic communications 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. Designed and produced by CGI BrandSense. Photography by Matt Stuart. 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.sainsburys.co.uk