Chairman’s statement www.marksandspencer.com 1 Luc Vandevelde Chairman and Chief Executive One of the most revealing things about my first full year at Marks & Spencer was that almost every action or announcement has received front page and prime time television news coverage. This is a powerful reminder to me of how important Marks & Spencer is to British people, how close to the nation’s heart we really are. When I joined I had to face up to the fact that, in recent years, Marks & Spencer had allowed itself to be distracted from its fundamental strengths and values. Many of the initiatives were peripheral, aimed at attracting new customers in the short term, rather than serving our loyal supporters. Meanwhile, we embarked upon an intense programme of change, much of it long overdue. It has been very disruptive but we have learnt from it. I’d like to tell you what we’ve been doing to build on this first attempt at change. I took over as Chief Executive in September 2000. My priority was to put in place a strong Executive team to take stock of where we were and create a proper platform to return the Company to growth. Four new Directors have joined the Board since May 2000. Kevin Lomax and Tony Ball joined as Non-Executive Directors and David Norgrove and Roger Holmes as Executive Directors. Together with Alison Reed, Finance Director designate, who has worked closely with Robert Colvill, they have already had a strong and positive influence. I would like to thank the seven Directors who left the Board, particularly Peter Salsbury, who preceded me as Chief Executive. Peter inherited a formidable task and, to his credit, had the courage to make many difficult but necessary decisions. We have also recently announced the retirement, at the forthcoming AGM on 11 July, of three of our Non-Executive Directors; Sir Michael Perry, Sir Ralph Robins and Sir David Sieff. I thank them for their considerable contributions over the years. With the new team in place, we have been able to conduct a thorough strategic review, resulting in the Group restructure and UK Retail operational plan announced on 29 March 2001. We are streamlining the Company in order to focus on our UK business, while providing a more appropriate capital structure by returning £2 billion to our shareholders. Although some of the decisions we’ve taken are painful, they are necessary if Marks & Spencer is to return to growth, and they will improve our ability to compete and respond more quickly to operational demands. Of course it was very hard to come to the decision to propose the closure of our Continental European and Direct catalogue businesses, and to sell our two US businesses. The American companies are trading well, but they do not represent a basis for developing Marks & Spencer in the USA. On the Continent, we could no longer afford to make losses and so jeopardise our main business. Our experience illustrates that to succeed internationally when entering mature 2 Marks and Spencer p.l.c. Chairman’s statement markets, you must adapt your store formats to the competitive realities of those markets. The success of our franchise businesses in 26 countries around the world demonstrates the value of local knowledge in adapting to the local market. We will also continue to operate our successful business in the Republic of Ireland. Our strategic review also reinforced the importance of the founding principles of this Company, and it is to a contemporary version of these that we are returning. We will sell 100% own brand merchandise so we can guarantee the quality for which we are known; we will work hard to develop further our strong, direct relationships with our suppliers; we will aim for market leadership in every category in which we trade; and concentrate on our principle of ‘assisted self-selection’. The appeal and availability of what is in our stores should speak for itself, and products should be easy to find and buy within attractive store environments. Roger Holmes, Managing Director of UK Retail, joined us in January 2001 and he and his team have translated these strategic principles, in a short space of time, into a solid operational plan for our UK Retail business. Roger has appointed new design talent to deliver the clothing our traditional customers demand, as well as to appeal to our younger customers. With strengthened new teams now in place, and a period of stability where they are learning from each new season, I have every confidence we will succeed, although there remains a lot of hard work to be done. So, what of the future? Stories in the news often claim the Marks & Spencer brand has lost its lustre, is no longer attractive, and that people don’t want to shop with us any more. Naturally I disagree with this view. This is still a unique Company, with unique fundamental strengths and the most dedicated staff of any retailer in the UK. We are a large general retailer with growing businesses in food, home furnishings, gifts, beauty and financial services. We are the country’s largest clothing retailer, attracting millions of shoppers every week to 300 stores in the best locations. We have a leading share in the fastest-growing food categories in the market, and unrivalled food development capabilities. We have the scale and authority to develop clothing innovations that other retailers just cannot match. What retailer in the world would not want these qualities? Our unique advantages offer a much broader prospect for the future, beyond the scope of the present Company and, once the recovery platform is fully established, I am determined to exploit this potential. In summary, we have made mistakes and have admitted them. We know that this year our most loyal customers haven’t always found the clothes they want in our stores. But, I stated when I joined that Marks & Spencer used to be the standard against which other retailers judged themselves, not just in the UK, but internationally. This year we have put a first class management team and operational plan in place to complement the inherent strengths and capabilities of our people and I am personally committed to leading the Company’s recovery. I am confident we have now prepared the ground to get on with doing what Marks & Spencer does best, and so restore our reputation to full strength. Luc Vandevelde Chairman and Chief Executive Financial review Group structure The Group reports the results of three operating divisions: UK Retail International Retail Financial Services A fourth division, Property, manages the internal financial dynamics between the Group’s interests as owner of property on the one hand, and as operator on the other hand. This is separately reported for internal purposes only. The UK Retail division, the largest of the operating divisions, is itself sub-divided into seven business units, each representing a defined area of merchandise: Womenswear Menswear Lingerie Childrenswear Beauty Home Foods The first six business units are reported as ‘General’, and footage is allocated between them depending on demand and seasonal factors. The space allocated to the largest single business unit, Foods, is relatively inflexible. Rent is charged internally to the UK Retail division based on the estimated rental value of the space occupied. The same occupancy costs are carried in the management accounts for the seven business units within UK Retail. Profit and loss accounts are also prepared for internal purposes at store level based on this market rent. Group summary Summary of results 2001 52 weeks £m 2000 53 weeks £m Turnover (ex VAT) Operating profit (before exceptional charges) 467.0 (26.5) Exceptional operating charges 440.5 Operating profit (after exceptional charges) (308.9) Non-operating exceptional charges 13.9 Interest 145.5 Profit on ordinary activities before tax 8,075.7 8,195.5 543.0 (72.0) 471.0 (67.7) 14.2 417.5 Basic earnings per share Adjusted earnings per share Dividend per share 0.0p 11.4p 9.0p 9.0p 13.2p 9.0p www.marksandspencer.com 3 Profit on ordinary activities before tax of £145.5m (last year £417.5m) is shown after charging £335.4m for exceptional items (last year £139.7m). This year’s financial reporting period covers 52 weeks. An estimate of operating profit (before exceptional items) for the 52-week comparative period last year is shown below. Operating profit UK Retail Financial Services1 International Retail: Europe North America Far East Total International Excess interest charged to cost of sales of Financial Services Total operating profit Interest Profit before tax and exceptionals 2001 2000 52 weeks £m 52 weeks £m 53 weeks £m 334.8 96.3 386.8 115.9 420.1 115.9 (11.4) 32.0 7.4 28.0 7.9 467.0 13.9 480.9 (9.4) 14.0 (4.3) 0.3 – 503.0 14.2 517.2 (6.1) 16.4 (3.3) 7.0 – 543.0 14.2 557.2 Adjusted earnings per share 11.4p 12.2p 13.2p 1Financial Services operating profit is stated after £16.2m of merchant fee income from UK Retail (last year £nil). Review of performance by operating division – UK Retail Sales and footage UK Retail sales for the period were £6,293.0m (last year, 52-week comparative period, £6,351.1m). A summary of the sales performance (including VAT) for the year is given below. Like-for-like sales, which are estimated by comparing total sales with new and developed stores excluded, are also given: Clothing, footwear & gifts Home General Foods Total Actual Like-for-like sales % on sales % on last year 52 weeks last year 52 weeks –5.5 +11.5 –4.2 +3.7 –1.0 – – –6.3 +2.6 –2.6 Group turnover UK Retail International Retail Financial Services Total 6,293.0 6,482.7 1,419.6 1,348.2 364.6 363.1 8,075.7 8,195.5 The average selling price of general merchandise was reduced by approximately 2.5%, which, coupled with a decline in the number of units sold of some 1.5%, contributed to the overall fall in general sales. Overall food inflation was in the region of 1%. 4 Marks and Spencer p.l.c. Financial review At the end of March 2001 we had 303 stores (including three outlet stores which opened during the year) with a selling space of 12.4m sq ft compared with 12.3m sq ft the previous year. The UK shape of the chain, based on closing footage, is (b) North America The Group operates two businesses in North America: Brooks Brothers and Kings Super Markets. An analysis of sales and operating profit is shown below. shown below: Departmental Stores 38.2% Regional Centres 27.8% Small Stores 15.7% High Street Stores 18.3% Net achieved margin Within clothing, results of better buying practices were seen in a substantially improved primary margin. The net achieved margin percentage improved over last year’s level, despite a significant increase in the cost of markdowns. Operating costs The increase in UK Retail operating costs was contained to 3.2% (on a 52-week comparative basis). The main components of the increase were: (i) higher property-related costs as a result of the concept store rollout (£13.0m); (ii) merchant service fees payable on third party credit card transactions (£9.0m) and inter-company fees payable to the Financial Services division for the acceptance of the Marks & Spencer Chargecard (£16.2m), this latter charge being treated as income in the results of the division. The charges date from the acceptance of third party credit cards in April 2000. International Retail The International Retail business consists of three broad geographic areas: Europe (including the Republic of Ireland), North America and the Far East. The results from our Franchise businesses which, at 31 March 2001, operated 125 franchise stores in 26 countries, are also incorporated in the reported performance of International Retail. Financial information given in paragraphs (a) to (c) below for financial year 2000 covers a 52-week trading period and has been calculated using constant exchange rates. (a) Europe (excluding UK) An analysis of sales and operating profit before exceptional charges is shown below. Continental Europe Republic of Ireland and franchises Total Europe Turnover Operating profit/(loss) 2001 £m 2000 £m 2001 £m 2000 £m 285.0 278.6 (34.0) (26.0) 263.3 548.3 251.3 529.9 22.6 (11.4) 17.2 (8.8) At 31 March 2001, the Group traded in 45 stores excluding franchises (last year 40 stores), covering 1,563k sq ft (last year 1,517k sq ft). Brooks Brothers Kings Super Markets Corporate costs Total North America Turnover Operating profit 2001 £m 448.1 313.1 – 761.2 2000 £m 427.3 294.6 – 721.9 2001 £m 20.2 11.9 (0.1) 32.0 2000 £m 6.4 11.8 (2.8) 15.4 At 31 March 2001, Brooks Brothers traded in 221 stores (last year 222 stores) and 1,011k sq ft (last year 991k sq ft); Kings Super Markets operated 27 stores (last year 25 stores) with 453k sq ft (last year 430k sq ft). (c) Far East Sales increased by approximately 4% to £110.1m (last year £105.9m), and operating profit to £7.4m (last year loss of £4.8m). At 31 March 2001 we traded in 10 stores in Hong Kong with aggregate footage of 202k sq ft (last year 223k sq ft). (d) International restructure On 29 March 2001, the Group announced the intention to: • close all European subsidiary operations, with the exception of the Republic of Ireland and the franchises. The closures would represent 41 stores and 1,264k sq ft; • convert our wholly owned subsidiary operation in Hong Kong to a franchise; and • sell Brooks Brothers and Kings Super Markets. Financial Services This operating division includes six profit centres: Store Cards Personal Lending Unit Trusts Life Assurance Personal Insurance MS Insurance The overall results are given in the segmental analysis (see note 2, page 24). The first five of the six profit centres are managed as a single operation (the results for the Life Assurance company being aggregated on an Embedded Value basis). MS Insurance derives the majority of its underwriting business from the other Financial Services activities. The scale of current business levels is indicated below: Account Cards Personal Lending Unit Life Trusts Assurance Number of accounts/ policy holders (000s) 2001 2000 5,009 5,101 548 567 174 186 Customer outstandings/funds under management (£m) 2001 2000 634 646 1,625 1,495 1,042 1,166 80 58 n/a n/a www.marksandspencer.com 5 The credit activities are carried out within Marks and Spencer Financial Services Limited, an institution authorised under the Banking Act 1987. The Unit Trust, Life Assurance and Corporate PEP/ISA businesses are carried out by companies regulated by IMRO, PIA and the FSA. Earnings per share An adjusted earnings per share figure of 11.4p (last year 52 weeks 12.2p; 53 weeks 13.2p) has been calculated excluding the effect of the exceptional items noted above. Details of the calculation are given in note 9, page 27. Exceptional charges Total exceptional charges of £335.4m have been provided for. Details are noted below. Dividend A final dividend of 5.3p (last year 5.3p) is proposed, making the total dividend for the year 9.0p (last year 9.0p). (a) Continental Europe The Group has announced its intention to close loss-making businesses in Continental Europe, subject to the full consultation which the Board recognised would need to take place. The decision to carry out any such plan would only be taken after this consultation had been completed with the competent employee representative bodies and if no other solution has been found during the consultation. Net closure costs of £224.0m have been provided, covering future trading losses, losses on disposal of assets and redundancy costs. (b) Direct A provision of £35.5m has been made, consisting of £16.5m closure costs charged against operating profit and a £19.0m loss on asset disposals. (c) Properties The closure of six satellite stores and footage reduction in a further two stores (totalling 170k sq ft) gave rise to a charge of £40.2m. In addition, further charges have been made to provide for the disposal of approximately half of the Manchester store, and the closure of stores in Salford, West Ealing and Torquay. The total provision for UK store closures and footage reductions, including the satellites, is £64.2m. (d) Other Exceptional charges have been made for the elimination of roles at the Group’s head office (£10.0m) and the loss incurred on the sale of the Group’s 65% interest in Splendour.com Ltd (£1.7m). Interest Net interest income decreased to £13.9m from £14.2m last year. Average sterling borrowings were at 6.5% (last year 6%) and although average sterling cash balances (including interest- bearing investments) were £544m (last year £422m), a greater proportion was used for internal Group funding. Interest payments on intra-group and external borrowings for the Financial Services business are charged to that business as cost of sales. The operating profit for Financial Services is shown in the segmental analysis (see note 2, page 24). The total interest cost incurred by Financial Services was £115.3m (last year £105.5m). In the consolidated accounts, the excess of intra- group interest over third-party interest payable, has been added back in the segmental analysis to arrive at total operating profit. Taxation The pre-exceptional tax charge for the year was £151.2m, giving an effective rate of 31.4% (last year 31.8%). After exceptional charges, the tax charge for the year was £142.7m, a rate of 98.1%. This is due to the value of exceptional items which will not attract tax relief. Cash flow The analysis of the increase in net debt, which follows, shows the operating cash flows within Retailing and Financial Services activities. The cash inflow from Financial Services operating activities is stated after a £117.8m increase in loans and advances to customers. Total net debt of £1,277.8m, is after higher borrowings (£1,647.2m) relating to Financial Services. Net cash in the other operating divisions totals £369.4m. (See balance sheet commentary that follows): Cash flow analysis Net debt at 31 March 2000 Cash inflow from Retail operating activities Cash inflow from Financial Services operating activities Capital expenditure (net of disposals) Dividends Tax Other Increase in net debt £m (1,251.4) 654.2 22.2 (258.2) (258.6) (164.6) (21.4) (26.4) Net debt at 31 March 2001 (1,277.8) Capital expenditure Capital expenditure (gross) during the year totalled £255.7m (last year £450.6m). Capital expenditure is expected to be broadly level in the financial year 2001/2002. Financing The £2.0bn Medium Term Note (‘MTN’) programme continues to be used as a flexible and cost effective source of funds. Nine MTNs were issued during the year in various currencies with a sterling equivalent of £391.6m. Maturities ranged from six months to 12 months and proceeds were swapped into operating currencies. The Group’s total outstandings within this programme at the end of the financial year were equivalent to £1,085.1m. During the year the Group established a global commercial paper programme with a maximum amount of £1bn which absorbed the existing US dollar commercial paper programme. This provides a flexible and cost effective source of short-term funds, to complement the MTN programme. The commercial paper programme will be used in conjunction with existing uncommitted bank facilities of £590.0m. To support the commercial paper programme, committed banking facilities have also been arranged totalling £425.0m with a small group of relationship banks. Details of the maturity profile of borrowings are given in note 21B, page 36. 6 Marks and Spencer p.l.c. Financial review During the year, both the leading credit agencies reduced the Group’s long-term credit ratings: Standard & Poor’s to AA- and Moody’s to A2. In April of this year, Standard & Poor’s further reduced the Group’s long-term rating to A and the short-term rating to A1. The short-term rating with Moody’s remains at P1. (a) Interest rate risk As the majority of debt currently finances the operation of Financial Services (see point (e) below), current Group policy is to maintain the majority of its debt as floating rate (currently 95%) and this is achieved with the help of interest rate swaps and forward rate agreements. (b) Foreign currency risk Currency exposure arising from exports from the UK to overseas subsidiaries has been managed by using forward currency contracts to hedge between 80% and 100% of sales for periods averaging 10 to 15 months forward. Following the announced possible sale or closure of the majority of the overseas subsidiaries during the next financial year, sales forecasts have been adjusted and an appropriate level of hedging put in place. Imports are primarily contracted in sterling and only economic exposures arise. In future, the Group will be increasing the proportion of imports contracted in local currencies and a policy is in place for the hedging of these exposures, principally using forward currency contracts. The Group does not use derivatives to hedge balance sheet and profit and loss account translation exposures. Where appropriate, borrowings are arranged in local currencies to provide a natural hedge against overseas assets. (c) Liquidity risk The objective is to ensure a mix of funding methods offering flexibility and cost effectiveness to match the needs of the Group. Operating subsidiaries are financed by a combination of retained profits, bank borrowings, commercial paper and medium term notes. Commercial paper issuance is backed by committed bank facilities totalling £425.0m. (d) Counterparty risk The objective is to reduce the risk of loss arising from default by counterparties. The risk is managed by using a number of banks and allocating each a credit limit according to credit rating criteria. These limits are reviewed regularly by senior management. Dealing mandates and derivative agreements are agreed with the banks prior to deals being arranged. (e) Financial Services division Interest rate exposures for the Financial Services division are managed, as far as practical, by matching the periods of borrowings and their interest basis with that of the customer debt. Interest rate swaps are used to convert fixed income from personal loan customers to short-term variable income to match short-term variable rate borrowings. The details of derivatives and other financial instruments required by FRS 13 ‘Derivatives and Other Financial Instruments: Disclosures’, are shown in notes 18, 21 and 23 to the accounts. Share buy-back Shareholder approval was given at the July 2000 AGM to buy back up to 10% of issued shares. During the financial year, 10,619,272 shares (representing 0.4% of issued share capital) were purchased in the market for a total consideration of £20.3m, at an average price of 190.8p. This was undertaken in order to generate shareholder value. Balance sheet The Group balance sheet consolidates Retailing and Financial Services businesses which have very different characteristics. The salient figures are disaggregated below: Retail & Financial Services balance sheets 1 April 2001 Retailing 2001 £m Financial Services 2001 £m Total Group 2001 £m Fixed assets Stocks Loans & advances to customers Other debtors Trade & other creditors Net cash/(debt) 4,162.4 472.5 14.8 4,177.2 472.5 – – 2,259.2 2,259.2 370.1 (201.7) (1,340.2) 369.4 (1,647.2) (1,277.8) 75.0 295.1 (1,138.5) Net assets 4,160.9 500.1 4,661.0 Loans and advances to customers have increased to £2.3bn (last year £2.1bn). Within this, £1.7bn relates to personal lending with the balance representing Chargecard debt. Treasury policy and financial risk management The Board approves treasury policies and senior management directly controls day-to-day operations. The Group’s financial instruments, other than derivatives, comprise borrowings, cash and liquid resources and various items, such as trade debtors and trade creditors, that arise directly from its operations. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group’s Treasury also enters into derivatives transactions, principally interest rate and currency swaps, forward foreign currency contracts and forward rate agreements. The purpose of such transactions is to manage the interest rate and currency risks arising from the Group’s operations and financing. It has been and remains the Group’s policy that no trading in financial instruments shall be undertaken. The main financial risks faced by the Group relate to interest rates, foreign exchange rates, liquidity, counterparty and the financial risks associated with the Financial Services operation. The policies and strategies for managing these risks are summarised as follows: www.marksandspencer.com 7 Euro The announcement of the intention to close all Marks & Spencer subsidiary stores in Continental Europe has led to a reassessment of our Euro Programme, but the Group’s presence in the Republic of Ireland (four stores) and stated intention to accept the Euro as a foreign currency in the UK, means changes to systems and training of staff will still be required. A cost of approximately £2m is expected in financial year 2001/2002 to complete the necessary work, giving an overall cost for the introduction of the Euro of approximately £8m. Accounting developments In November and December 2000, the Accounting Standards Board issued FRS 17 ‘Retirement Benefits‘, FRS 18 ‘Accounting Policies’ and FRS 19 ‘Deferred Tax’. FRS 18 will be implemented for the year ended 31 March 2002 and is not expected to have a material impact on the Group. FRS 19 will be effective for the year ended 31 March 2002 and will require deferred tax to be recognised on a full provision basis. Implementing the standard will require a change in accounting policy since the Group currently provides deferred tax on timing differences where it is considered probable that a liability will crystallise. The current level of unprovided deferred tax is given in note 22 on page 37. FRS 17 will be fully effective for the year ended 31 March 2004 when a change in accounting policy will be required to recognise an asset or liability on the Group balance sheet in respect of the surplus or deficit on the defined benefit pension schemes. It will also be necessary to recognise immediately actuarial gains and losses in the statement of total recognised gains and losses. Going concern statement After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they have adopted the going concern basis in preparing the financial statements. 8 Marks and Spencer p.l.c. Corporate governance The Group is committed to high standards of corporate governance and has applied the Combined Code principles as follows: Directors As at 31 March 2001 the Board comprises 12 directors, seven of whom are non-executive. Since September 2000 when Peter Salsbury resigned from the Board as Chief Executive, Luc Vandevelde has headed the Board as Chairman and Chief Executive. The Board recognises that this is to address current business needs and has balanced the power by: • appointing Roger Holmes to the Board (1 January 2001) as Managing Director of UK Retail; • appointing two new non-executive directors (1 September 2000), Tony Ball and Kevin Lomax; • having a majority of non-executive directors on the Board, with a wide range of experience and expertise, who bring an independent judgement on issues of strategy, performance and resources; • retaining 100% non-executive membership of the principal Corporate Governance Committees (Audit, Remuneration and Nomination). A full list of the directors, along with their biographies and the Board Committees on which they sit, is given on page 20 of the Annual Review. Following the retirement of Sir Martin Jacomb (17 July 2000) the non-executive directors nominated Brian Baldock as the Senior Independent Director. Sir David Sieff is not considered independent for the purposes of the Combined Code because of his previously held executive position in the Group. All directors have access to the advice and services of the Company Secretary, Graham Oakley, who ensures that the Board, which meets at least eight times per year, receives appropriate and timely information for its decision making, that Board procedures are followed and that statutory and regulatory requirements are met. He also assists the Chairman in ensuring that all directors are properly briefed on issues arising at Board meetings. Directors receive appropriate induction training when they join the Group and coaching to develop individual skills as required. There is an established procedure whereby any director, wishing to do so in the furtherance of his or her duties, may take independent professional advice at the Group’s expense. Under the Company’s Articles of Association, the nearest number to but not exceeding one third of the Board shall retire each year by rotation. The Board has resolved that all directors are required to offer themselves for re-election at least every three years and the Articles will be amended to reflect this practice when they are next revised. Principal Board committees The Board has a formal schedule of matters reserved to itself. The Board has delegated certain responsibilities to Board Committees, which operate within clearly defined terms of reference, reporting regularly to the Board and include: Audit Committee: assists the Board in fulfilling its overview responsibilities, primarily reviewing the reporting of financial and non-financial information to shareholders, the systems of internal control and risk management, and the audit process. It comprises all the non-executive directors, is chaired by Kevin Lomax and meets at least three times annually. The external auditors and the Chief Internal Auditor attend all meetings, which executive directors also have a right to attend. In November 2000, the Financial Services division established its own Audit Committee which meets three times a year, reports regularly to the Financial Services Board and annually to the Group Audit Committee. The Audit Committee also keeps under review the independence and objectivity of the external auditors. The Committee reviews the nature and amount of non-audit work undertaken by PricewaterhouseCoopers (‘PwC’) each year to satisfy itself that there is no effect on their independence. PwC are also subject to professional standards which safeguard the integrity of the auditing role they perform on behalf of our shareholders. Details of this year’s fees are given in note 3 on page 25. Remuneration Committee: ensures the executive directors and senior management are appropriately rewarded, giving due regard to the financial and commercial health of the Group. It comprises all the non-executive directors except for Sir David Sieff, is chaired by Dame Stella Rimington, and meets at least five times annually. The Committee does not retain remuneration consultants but seeks professional advice as required. Nomination Committee: keeps under review the Board structure, size and composition; selects and proposes to the Board suitable candidates for appointment as directors of the Group, and considers Board successional plans. It comprises all the non-executive directors, is chaired by Brian Baldock, and meets as required. Corporate Social Responsibility Committee: provides the Board with an overview of the social and ethical impact of the Group’s activities including community involvement, environmental management and ethical trading. It comprises two executive directors, one non-executive director and three divisional directors, is chaired by Robert Colvill and meets at least four times annually. Directors’ remuneration The Remuneration Report appears on pages 10 to 15 and contains a statement of remuneration policy and details of the remuneration of each director. The remuneration of non- executive directors is determined by the Chairman together with the other executive directors. The Board considers each year whether shareholders should be invited to consider separately the Remuneration Report at the AGM, and does not consider it necessary at the 2001 AGM. Relations with shareholders The Group is committed to ongoing communication across its entire shareholder base, whether institutional investors, private or employee shareholders. This is achieved principally through regular annual and interim reports, quarterly trading statements and the AGM. The Group’s website at www.marksandspencer.com contains corporate and customer information updated on a regular basis. Regular dialogue and presentations take place throughout the year with institutional investors. The AGM held in July in London is well attended by shareholders who receive a business presentation and have the opportunity to ask questions of the full Board including the chairs of the Audit, Remuneration and Nomination Committees. The results of the proxy voting are declared at the meeting and are published on the Group’s website together with a resumé of the Meeting. www.marksandspencer.com 9 At the Group level, treasury policies are regularly reviewed by the Treasury Committee and any changes are approved by the Board. The Corporate Social Responsibility (‘CSR’) Committee co-ordinates the Group’s CSR strategy including community involvement, environmental management, ethical trading, health and safety and employment policy. Assurance On behalf of the Board, the Audit Committee examines the effectiveness of the Group’s: • assessment of risk by reviewing evidence of risk assessment activity and a report from internal audit on the risk assessment process; • systems of internal control primarily through agreeing the scope of the internal audit programme and reviewing its findings, reviews of the annual and interim financial statements and a review of the nature and scope of the external audit. Any significant findings or identified risks are closely examined so that appropriate action can be taken. The work of the internal audit department is focused on areas of priority as identified by risk analysis and in accordance with an annual audit plan approved each year by the Audit Committee and by the Board. The Board receives a full report from the Chief Internal Auditor each year on the department’s work and findings and regular interim updates on specific issues. The external auditors are engaged to express an opinion on the financial statements. They review and test the systems of internal financial control and the data contained in the financial statements to the extent necessary to express their audit opinion. They discuss with management the reporting of operational results and the financial condition of the Group and present their findings to the Audit Committee. The directors through the Audit Committee have reviewed the effectiveness of the Group’s systems of internal control. Continuous improvement It is recognised that during a continuing period of significant change further steps can and will be taken to embed risk assessment and internal control further into the Group’s operations and to deal with areas for improvement which come to management’s and the Board’s attention. Compliance with the Combined Code The directors confirm that for the year ended 31 March 2001 the Group complied with all the Code provisions. Accountability and audit Responsibility for risk and internal control The Group’s overriding corporate objective is to maximise long-term shareholder value whilst exceeding the needs of our customers, employees and partners. In doing so, the directors recognise that creating value is the reward for taking and accepting risk. The Board has overall responsibility for the Group’s approach to assessing risk and the systems of internal control, and for monitoring their effectiveness in providing shareholders with a return that is consistent with a responsible assessment and mitigation of risks. This includes reviewing financial, operational and compliance controls and risk management procedures. The role of executive management is to implement the Board’s policies on risk and control and present assurance on compliance with these policies. Further independent assurance is provided by an internal audit function, which operates across the Group, and the external auditors. All employees are accountable for operating within these policies. Because of the limitations that are inherent in any system of internal control, this system is designed to manage, rather than eliminate, the risk of failure to achieve corporate objectives. Accordingly, it can only provide reasonable but not absolute assurance against material misstatement or loss. Risk assessment The Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Group. As an integral part of planning and review, management from each business area and major project identify their risks, the probability of those risks occurring, the impact if they do occur and the actions being taken to manage those risks to the desired level. This information is communicated upwards on a filter basis, culminating in a comparison with the Group’s risks and discussion of the Group Risk Profile by the Board. This process has operated during the year under review and up to the date of approval of the annual report and accounts. It has been reviewed by the Board and accords with the Internal Control Guidance for Directors on the Combined Code produced by the Turnbull Working Party. Internal control Whilst the Board maintains full control and direction over appropriate strategic, financial, organisational and compliance issues, it has delegated to executive management the implementation of the systems of internal control within an established framework. The Board has put in place an organisational structure with formally defined lines of responsibility and delegation of authority. There are also established procedures for planning, capital expenditure, information and reporting systems, and for monitoring the Group’s businesses and their performances. These include: • appointment of employees of the necessary calibre to fulfil their allotted responsibilities; • review by operating divisions of their annual and three year operating and capital plans with the relevant executive directors prior to submission to the Board for approval. This includes the identification and assessment of risks; • regular consideration by the Board of year end forecasts; • monthly comparison of operating divisions’ actual financial performance with budget; • clearly defined capital investment control guidelines; • operating policies and procedures; • regular reporting of accounting and legal developments to the Board. 10 Marks and Spencer p.l.c. Remuneration report Strategy Marks & Spencer operates in a competitive trading environment and it is an essential part of our strategy to attract, motivate and retain the highest achievers who are able to deliver the business objectives. The level of remuneration and benefits we offer is key to supporting this objective and maintaining our market position as an employer of choice. The Company sets out to provide competitive salaries and benefits for all its employees, consistent with business strategy and performance. The Board has adopted the principles of good governance relating to directors’ remuneration as set out in the Combined Code. The Remuneration Report follows the provisions in Schedule B to the Code. Remuneration Committee The Remuneration Committee comprises Dame Stella Rimington (Chairman), Brian Baldock, Tony Ball (appointed 1 September 2000), Kevin Lomax (appointed 1 September 2000), Sir Michael Perry and Sir Ralph Robins. Sir Martin Jacomb retired as a non-executive director on 19 July 2000. It recommends to the Board the reward framework to allow the Company to attract and retain its executive directors and senior management, giving due regard to the financial and commercial health of the Company. The Committee’s approach reflects the Company’s overall philosophy that all employees should be appropriately rewarded. The Committee keeps itself fully informed of all relevant developments and best practice in the field of remuneration. Remuneration policy The Company aims to align the interests of all employees as closely as possible with the interests of shareholders in promoting the Company’s recovery. Total remuneration comprises fixed pay, variable pay and benefits. The performance-related element forms a significant proportion of the total package and, consistent with the focus on delivering results, is set against agreed targets to deliver improved business performance. There are two components to variable pay: annual bonus and long-term incentives in the form of share schemes. Profit sharing and SAYE schemes, encouraging employees at all levels to acquire and hold shares in the Company, are key elements of the policy. Employees have maintained their strong commitment to share ownership in recent years, and currently over 43,000 employees hold approximately 33 million shares in their own right and 32,000 employees hold options on 80 million shares under the SAYE scheme. Salary and benefits Salary and benefits are competitive and are reviewed annually. In making recommendations on the framework for retaining and rewarding senior management, the Remuneration Committee reviews the total reward package, making use of internally and externally published surveys of retailers and other comparable companies. Where necessary, specific work is commissioned to supplement published information. The salaries of the Chairman and other senior management are set by the Remuneration Committee annually after consideration of the Company performance, market conditions, the level of increase awarded to employees throughout the business and the need to reward individual performance. With the exception of his personal remuneration, the Chairman assists the Committee in this review. In order to deliver the reward strategy, the Company underwent a major benchmarking exercise for all management, including a specific review of executive directors. Alan McWalter was the only current executive director to be awarded an increase in the year under review. Annual Bonus Scheme The Annual Bonus Scheme for executive directors and divisional directors, introduced in 1988, was extended in 1995 to executives. Last year, bonus schemes were introduced for all levels of management. These are designed to reinforce the relationship between individual and corporate performance and reward. Bonus payments are based on measurable achievement of challenging financial and business targets, set in the annual operating plan approved by the Board. For executive directors and divisional directors, potential awards can be made up to a maximum of 60% of a participant’s salary and for executives, up to a maximum of 40%. Upper levels of bonus awards can only be made where targets have been significantly exceeded. Bonus payments for other management levels operate on a variable scale, based on the level of influence and accountability the employee has on the Company’s performance. Potential awards range up to a maximum of 20% when targets are exceeded. Bonus payments do not form part of pensionable salary and are not eligible for profit sharing. No bonus was earned by management under the schemes in the year under review due to Company performance being below set targets. The Company does not have a long-term bonus scheme. Chairman’s bonus Under the terms of Luc Vandevelde’s service contract, on recruitment, the Company set strategic and qualitative targets for the award of his first annual bonus. However, in advance of the Remuneration Committee meeting to determine any bonus award, he informed the Committee that he wished to: • waive any entitlement to a bonus for the year under review. This included 100% of 13 months’ salary totalling £704,000 and an opportunity to enhance this, over time, by a further £112,000; • reduce his notice period entitlement from 12 months to nine months. The Committee has since confirmed that the 2000/2001 bonus targets were achieved. The Remuneration Committee has now met and agreed the following in relation to Luc Vandevelde’s bonus for the year ending March 2002: • add to his bonus potential a sum equal to half of this year’s waived bonus (£352,000), set against the same financial performance targets as those for other senior management; • issue shares to him in May 2002, equal to the value of the other half of the waived bonus (£352,000). Executive Share Option Scheme Executive Share Option Schemes, open to all senior management, have operated for over 20 years. In order to provide more flexibility and a closer link with Company performance, the ‘2000 Scheme’ was approved by shareholders at the AGM in July 2000. Details of the Scheme are given in section 6 of this report. Senior management restructure As part of the process of restructure, directors Clara Freeman, Guy McCracken, Peter Salsbury, Roger Aldridge and Joe Rowe left the business and Barry Morris stepped down from the Board. With the introduction of service contracts and the withdrawal of the Early Retirement Plan from April 2000, individuals leaving the Company did so under the terms of their 12 months’ service contract. www.marksandspencer.com 11 New directors During the year, Roger Holmes was recruited to the Company as Managing Director, UK Retail. Further details of the terms of his appointment are given in section 2 of this report. David Norgrove, an existing member of senior management, was appointed to the Board as an executive director. Service contracts All members of senior management have service contracts. These contracts can be terminated with 12 months’ notice from the Company. Exceptions may exist where new recruits have been granted longer notice periods for the initial period of their employment. Luc Vandevelde, Roger Holmes and Alan McWalter were initially appointed with service contracts entitling them to two years’ notice, reducing proportionately to one year during the first 12 months of their appointment. Luc Vandevelde’s contract now entitles him to nine months’ notice. Non-executive directors do not have service contracts. Non-executive directors The Chairman, together with the executive directors, determines the remuneration of non-executive directors. Non-executive directors do not participate in the Company’s profit sharing, SAYE, Executive Share Option or annual bonus schemes. No increase in fees was made in the year under review. Non-executive directors’ fees were reinstated to Brian Baldock when responsibilities following his tenure as Chairman were fully relinquished (see section 1, footnote 4). 1 Directors’ emoluments Chairman and Chief Executive Luc Vandevelde1,10 Executive directors (appointed from) Robert Colvill Roger Holmes2,9 (1 January 2001) Alan McWalter9 (1 January 2000) David Norgrove3 (18 September 2000) Non-executive directors (appointed from) Brian Baldock4 Tony Ball5 (1 September 2000) Kevin Lomax5 (1 September 2000) Sir Michael Perry Dame Stella Rimington Sir Ralph Robins Sir David Sieff Retired directors (with effect from) Clara Freeman6 (18 September 2000) Guy McCracken6 (18 September 2000) Peter Salsbury6 (18 September 2000) Roger Aldridge6 (19 July 2000) Sir Martin Jacomb (19 July 2000) Barry Morris7 (19 July 2000) Joe Rowe6 (19 July 2000) Former directors Total former directors Total Salary £000 650 385 124 289 129 81 20 20 34 50 34 34 155 254 372 133 11 79 142 n/a 2,996 Profit share8 £000 Benefits9 £000 Total 2001 £000 Total 2000 £000 n/a 7 n/a n/a 2 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1 n/a n/a 10 184 23 672 41 12 – – – – – – 5 10 11 12 10 – 6 6 834 2,070 415 796 330 143 81 20 20 34 50 34 39 165 265 384 143 11 86 148 402 n/a 154 n/a 178 n/a n/a 34 46 34 45 270 419 593 313 34 242 318 n/a 992 n/a 3,998 1,382 6,534 1Luc Vandevelde was the highest paid director both this year and last. His emoluments this year are £834,000. He was appointed to the Board on 28 February 2000 and his emoluments last year of £2,070,000 included compensation for loss of future benefits from his previous employer in the form of ‘restricted shares’ at a cost of £1,997,000. 2Roger Holmes was appointed to the Board on 1 January 2001. Included within his benefits is compensation for loss of future benefits and bonus from his previous employer in the form of ‘restricted shares’ at a cost of £554,000 and a payment of £100,000 (see section 2 – Recruitment of directors). 3David Norgrove was appointed to the Board on 18 September 2000 on a salary of £240,000 p.a. 4Brian Baldock relinquished the role of Non-Executive Chairman on 28 February 2000 but continued to assist the Chairman in the transition period to the AGM in July 2000 after which his fee was reduced to £34,000 p.a. 5Tony Ball and Kevin Lomax were appointed as non-executive directors on a fee of £34,000 p.a. 6As a consequence of leaving the Company, Clara Freeman, Guy McCracken, Peter Salsbury, Roger Aldridge and Joe Rowe received payments in accordance with the terms of their service contracts, which are shown separately in section 3 of this report. Included in their salaries in the above table are contractual non-pensionable payments in lieu of holiday entitlement. 7Barry Morris relinquished responsibility as Executive Director, Womenswear on 19 July 2000 and his emoluments to that date are shown in the table. On stepping down from the Board, he remained as Business Unit Director, Womenswear on a salary of £250,000 p.a. His salary and benefits are in accordance with the remuneration policy for senior management. His retirement from the Company has subsequently been announced with effect from 30 June 2001. 8In line with all other employees, executive directors are allocated a profit share based on a percentage of their earnings following the qualifying period. Further information on profit share is given in note 10c of the financial statements. 9Benefits for UK directors relate mainly to the provision of cars, fuel and travel. In addition, a payment is made to both Alan McWalter and Roger Holmes in respect of pension in the form of a supplement of 10% of the difference between the pension earnings cap and their base salary (see section 4 – Pensions). 10Included in the benefits for Luc Vandevelde is a supplement of 16% of base salary to compensate for the fact that he is not a member of the Company Pension Scheme. In addition, under the terms of his service contact, the Company has agreed to provide accommodation on which he is assessed for tax. 12 Marks and Spencer p.l.c. Remuneration report 2 Recruitment of directors During the year, Roger Holmes was recruited and appointed to the Board as Managing Director, UK Retail. In order to secure early release from his previous employer, he was recruited as an employee from 15 December to 31 December 2000, with salary and benefits totalling £22,000 for this period (included within section 1). He was appointed as a director on 1 January 2001 on the following terms: • salary of £425,000 p.a.; • payment of £100,000 as compensation for loss of bonus from his previous employer (included within benefits in section 1); • compensation for loss of future benefits from his previous employer in the form of 282,326 ‘restricted shares’ purchased on his behalf at a cost of £554,000. He is the beneficial owner of the shares but they will not be transferred to him until the 3rd anniversary of employment (included within benefits in section 1); • interest free loan of £501,000 for a period of 17 days to facilitate the exercise of share options from his previous employer and avoid further compensation payments under the terms of his engagement. This was repaid in full prior to taking up his appointment to the Board on 1 January 2001 (see note 11 – Transactions with directors); • supplement of 10% of the difference between the pension earnings cap and his base salary (see section 4 – Pensions) (included within benefits in section 1); • award of shares under 2000 Executive Share Option Scheme with a market value at the date of employment of four times base salary (see section 6 – Long-term benefits). 3 Termination payments Compensation for termination under directors’ service contracts includes 12 months’ salary and benefits and loss of pensionable service as shown below. Should a senior management bonus be payable for the financial year ending 31 March 2002, a pro-rata payment will be made and shown in next year’s Annual Report. Retired directors (with effect from) Clara Freeman1 (18 September 2000) Guy McCracken3 (18 September 2000) Peter Salsbury2 (18 September 2000) Roger Aldridge (19 July 2000) Barry Morris (19 July 2000) Joe Rowe3 (19 July 2000) Total Salary £000 Benefits £000 Cost of pension entitlement4 £000 260 390 560 290 n/a 290 30 30 49 30 3 27 47 287 n/a 230 n/a 219 Total 2001 £000 337 707 609 550 3 536 1,790 169 783 2,742 1Clara Freeman is not of pensionable age and does not currently draw a pension. As a result of legislative restrictions, the value of her pension contribution does not reflect a full additional year. 2Peter Salsbury received no additional pension contribution as maximum pension entitlement had been reached. 3Guy McCracken chose not to receive his termination payment in cash, but requested the Company to pay an identical sum into the Pension Scheme, in order to enhance his pension. Similarly, Joe Rowe chose to have £200,000 paid into the Pension Scheme and received the balance in cash. These enhancements have not been included within the pension table in section 4 of this report as they have been funded by the individuals. 4The pension entitlement was paid directly into the Pension Scheme and is reflected in the pension table (see section 4, footnote 5). 4 Directors’ pension information The executive directors, management and employees (except for staff employed by Marks & Spencer Outlet Ltd) all participate in the Company’s defined benefit Pension Scheme. The Scheme is non-contributory, fully funded and the subject of an Independent Trust. The normal retirement age under the Pension Scheme for senior management is 60 to harmonise with the Company contractual retirement age. For all other employees the normal retirement age is 65 (previously 60) but for those employees who joined the Scheme prior to 1 January 1996 their accrued rights were not affected by this change. The Pension Scheme enables members to achieve the maximum pension of two-thirds of their salary in the twelve months ending at normal retirement date after 30 years’ service. For employees (including senior management) who joined the Scheme prior to 1 January 1996 no actuarial reduction is applied to pensions payable from the age of 58. Employees who joined the Scheme on or after 1 January 1996 are subject to an actuarial reduction in their pension if payment starts prior to their normal retirement date. In the case of earnings over £100,000 pa, the pensionable salary is usually based on an average of the earnings over the last three years to retirement. Pension commutation to enable participants to receive a lump sum on retirement is permitted within Inland Revenue limits. For death before retirement, a capital sum equal to four times salary is payable, together with a spouse’s pension of two-thirds of the member’s prospective pension at the age of 65 (60 for senior management). For death in retirement, a spouse’s pension is paid equal to two-thirds of the member’s current pension. In the event of death after leaving service but prior to commencement of pension, a spouse’s pension of two-thirds of the accrued preserved pension is payable. In all circumstances, children’s allowances are also payable, usually up to the age of 16. Substantial protection is also offered in the event of serious ill health. www.marksandspencer.com 13 4 Directors’ pension information (continued) Post-retirement increases for pension earned from 6 April 1997 are awarded on a statutory basis. For pension earned prior to 6 April 1997 it was the Company’s practice to award discretionary increases, usually in line with inflation. With effect from 26 July 2000, it was agreed that, in future, all pension earned for service prior to 6 April 1997 would be guaranteed to increase by the rise in inflation, up to a maximum of 3% per annum. Increases beyond this figure will continue to be reviewed on a discretionary basis. Luc Vandevelde3 Robert Colvill Roger Holmes4 Alan McWalter4 David Norgrove7 Retired directors Clara Freeman Guy McCracken5 Peter Salsbury5,6 Roger Aldridge5,6 Barry Morris8 Joe Rowe5 Age at 31 March 2001 50 60 41 47 53 48 52 51 54 53 53 Increase in Increase in transfer value pension earned Years of in excess of in excess of service at inflation1 inflation1 31 March during the during the 2001 or date of year ended year ended retirement 31 March 2001 31 March 2001 £000 £000 Accrued entitlement at 31 March 20012 £000 Accrued entitlement at 31 March 2000 £000 – 16 n/a 1 13 25 25 30 27 30 25 – 480 8 23 360 (3) 2,047 2,519 1,129 36 1,398 – 25 1 2 25 – 3 (27) (2) 2 10 – 140 1 3 71 122 213 270 162 85 160 – 109 n/a 1 n/a 120 207 292 162 82 148 1Inflation has been assumed to be equivalent to the actual rate of price inflation which was 3.3% for the year to 30 September 2000. This measurement date accords with the Listing Rules. 2The pension entitlement shown above is that which would be paid on retirement based on service to 31 March 2001 or date of retirement if earlier. 3Luc Vandevelde does not participate in the Company Pension Scheme (see section 1, footnote 10). 4Roger Holmes and Alan McWalter joined the scheme on 1 January 2001 and 1 January 2000 respectively. They are both, therefore, subject to the pension earnings ‘cap’ (£91,800 at 31 March 2001) which is reviewed annually by the Government. Their pensions are based on a uniform accrual of two-thirds of that ‘cap’ less the pension which they have accrued from membership of previous employers’ pension schemes (see section 1, footnote 9). 5The greater part of the actuarial increase in transfer value in respect of these directors relates to the effect, on the year, of their full pension being paid immediately (following retirement) and/or the contractual requirement for their pension to be calculated as though their service had ceased one year later than their actual retirement date. 6The accrued entitlement for Roger Aldridge has not increased and for Peter Salsbury has fallen during the year. This reflects the fact that the reduction factor due to their early retirement offsets any increase in pension for service completed during the year. 7Pension figures are from 18 September 2000 when David Norgrove was appointed director. 8Pension figures are to 19 July 2000 when Barry Morris ceased to be a director. 9The pension entitlement shown excludes any additional pension purchased by the member’s Additional Voluntary Contributions and also the enhancements made by Guy McCracken and Joe Rowe detailed in section 3, footnote 3 of this report. 5 Payments to former directors Details of payments made under the Early Retirement Plan and other payments made to former directors during the year are: Early retirement pensions1 James Benfield Lord Stone of Blackheath Derek Hayes Chris Littmoden Paul Smith Keith Oates2 Unfunded pensions3 Lord Sieff of Brimpton4 Clinton Silver Date of retirement Payable until Paid in year £000 Paid in 2000 £000 31 December 1999 31 December 1999 31 May 1999 31 May 1999 31 March 1999 31 January 1999 22 April 2009 7 September 2002 19 November 2008 28 September 2003 20 December 2000 3 July 2002 30 September 1985 31 July 1994 Death Death 68 91 63 85 49 170 61 86 17 23 52 70 65 197 65 84 1Under the Early Retirement Plan the Remuneration Committee could, at its discretion, offer an unfunded Early Retirement Pension, separate from the Company pension, which was payable from the date of retirement to age 60. With effect from 31 March 2000, the Early Retirement Plan was withdrawn but payments continue for awards made before this date. 2The payment to Keith Oates for the year 2000 covered 14 months from the date of his retirement to 31 March 2000. 3The pension scheme entitlement for Lord Sieff and Clinton Silver is supplemented by an additional, unfunded pension paid by the Company. 4Payments to Lord Sieff ceased following his death on 23 February 2001. 14 Marks and Spencer p.l.c. Remuneration report 6 Long-term benefits The Company operates two types of share option schemes: (i) a Save As You Earn (SAYE) Share Option Scheme approved by shareholders in 1981 and renewed by shareholders in 1987 and 1997. The Scheme is open to all UK employees, including executive directors, who have completed one year’s service and who open an approved savings contract. Inland Revenue rules limit the maximum amount which can be saved to £250 per month. When the savings contract is started, options are granted to acquire the number of shares that the total savings will buy when the savings contract matures; options cannot normally be exercised until a minimum of three years has elapsed. (ii) an Executive Share Option Scheme, approved by shareholders in 2000, which is open to all senior management. The Company has operated this type of scheme for over 20 years, following shareholder approval for the first scheme in 1977 and subsequent schemes in 1984, 1987 and 1997. The 2000 Scheme is an annual grant scheme, with a maximum annual award of 150% of base salary, except for grants made in 2000 when, to launch the scheme, the limit was 200% of base salary. The Remuneration Committee has imposed performance criteria for the exercise of all options granted since 1996. The performance targets for the 2000 Scheme are: • earnings per share growth of at least inflation plus an average of 3% per annum for 50% of each grant, measured from a fixed base of 14.5p; and • earnings per share growth of inflation plus an average of 4% per annum for the other 50% of each grant, measured from a fixed base of 16.5p. Participants who hold options under the 1984 and 1987 Schemes will continue to be bound by their Maximum Option Value (MOV) of four times earnings, and may only exercise options up to this value, after which any outstanding options lapse. Following the introduction of the 2000 Scheme, the Remuneration Committee has decided that MOV will no longer increase with earnings. Since the 1996 Finance Act, grants of Inland Revenue Approved Options have been limited to £30,000. Grants in excess of this limit, under the 2000 Scheme, will be unapproved options, which confer no tax advantage on the participants. At the discretion of the Remuneration Committee, retiring directors can take their options for all schemes into retirement. Options held under the 1984 and 1987 Schemes continue to be bound by their MOV and can be exercised subject to the option period. For options held under the 1997 and 2000 Schemes, options lapse if not exercised within 12 months of retirement. Directors’ long-term benefits The options detailed in the table below may not be exercisable for any one of the following reasons: (i) (ii) the options have not been held for three years and therefore cannot be exercised under scheme rules (iii)the options have not met the appropriate performance criteria. their value is in excess of the MOV No director exercised Executive Share Options or SAYE contracts in the year under review. The market price of the shares at the end of the financial year was 266.0p; the highest and lowest share prices during the financial year were 280.5p and 170.0p respectively. Luc Vandevelde Not exercisable Robert Colvill Exercisable Not exercisable Lapsed SAYE SAYE lapsed Roger Holmes Not exercisable Alan McWalter Not exercisable David Norgrove Exercisable Not exercisable Granted SAYE SAYE granted At 1 April 2000 or date of appointment 3,984,674 213,751 128,333 – 2,087 – Granted Exercised/ during lapsed during the year the year At 31 March 2001 or date of retirement Option price (pence) Exercise price (pence) Option period – – – – – – – 3,984,674 261.0 Mar 2003 – Mar 2010 – – 16,422 – 2,087 – – – – – – – 211,158 114,504 325.01 457.01 May 1994 – May 2005 May 1998 – May 2005 – 871,794 195.0 Dec 2003 – Dec 2010 721,310 305.0 Jan 2003 – Jan 2010 80,480 402,819 – 11,085 – 420.01 337.01 215.0 263.01 156.0 May 1994 – June 2005 May 1999 – Sept 2010 Sept 2003 – Sept 2010 Jan 2002 – June 2004 – 871,794 721,310 – 80,480 179,565 – 8,602 – – – 223,254 – 2,483 www.marksandspencer.com 15 At 31 March 2001 or date of retirement Option price (pence) Exercise price (pence) Option period Granted Exercised/ during lapsed during the year the year – – – – – – – – – – – – – – – – – – – – – – – – – – – – 7,038 – – – 12,903 – – – 12,903 – – – 19,941 – 1,653 – – 14,076 – – – 32,844 – 1,071 106,051 226,203 377.01 491.01 May 1995 – May 2005 May 1998 – May 2005 4,728 374.01 Sept 2000 – Mar 2001 44,603 507,839 353.01 476.01 May 1995 – May 2004 May 1997 – May 2005 6,815 336.01 Sept 2000 – Mar 2001 349,620 716,911 360.01 420.01 May 1994 – May 2005 May 1998 – May 2005 5,550 351.01 Sept 2000 – Mar 2001 165,369 349,267 304.01 486.01 May 1994 – May 2004 May 1997 – May 2005 5,262 371.01 July 2000 – Jan 2001 77,976 261,569 367.01 427.01 May 1995 – May 2004 May 1997 – June 2009 4,601 375.01 Jan 2001 – June 2003 107,637 334,869 349.01 473.01 May 1995 – May 2004 May 1997 – May 2005 3,705 372.01 July 2000 – Jan 2001 6 Long-term benefits (continued) Retired directors Clara Freeman2 Exercisable Not exercisable Lapsed SAYE Guy McCracken2 Exercisable Not exercisable Lapsed SAYE Peter Salsbury2 Exercisable Not exercisable Lapsed SAYE Roger Aldridge2 Exercisable Not exercisable Lapsed SAYE SAYE lapsed Barry Morris3 Exercisable Not exercisable Lapsed SAYE Joe Rowe2 Exercisable Not exercisable Lapsed SAYE SAYE lapsed At 1 April 2000 or date of appointment 107,292 232,000 – 4,728 46,386 518,959 – 6,815 351,895 727,539 – 5,550 168,478 366,099 – 6,915 – 49,736 303,885 – 4,601 111,524 363,826 – 4,776 – 1Weighted average price. 2Options are carried into retirement under the terms of the various schemes (see page 14). All SAYE options lapsed six months after date of retirement. 3Options are to 19 July 2000 when Barry Morris ceased to be a director. 16 Marks and Spencer p.l.c. Directors’ interests Directors’ interests in shares The beneficial interests of the directors and their families in the shares of the Company, together with their interests as trustees of both charitable and other trusts, are shown below in sections (i) and (ii). These include shares held under the Delayed Profit Sharing Scheme. Options granted under the Save As You Earn (SAYE) Share Option and Executive Share Option Schemes are shown on page 30. Further information regarding employee share option schemes is given in note 10D. There has been no change in the directors’ interests in shares or options granted by the Company and its subsidiaries between the end of the financial year and one month prior to the notice of the Annual General Meeting. The Register of Directors’ Interests (which is open to shareholders’ inspection) contains full details of directors’ shareholdings and options to subscribe for shares. No director had any interest in any subsidiary at the beginning or end of the year. (i) Ordinary shares in the Company – beneficial and family interests Luc Vandevelde Robert Colvill Roger Holmes Alan McWalter David Norgrove Brian Baldock At 31 March 2001 808,080 59,010 285,456 12,000 18,098 70,000 At 1 April 2000 or date of appointment 808,080 Tony Ball 53,228 Kevin Lomax 285,456 Sir Michael Perry 12,000 Dame Stella Rimington 18,098 Sir Ralph Robins 70,000 Sir David Sieff At 31 March 2001 2,000 20,000 8,357 3,344 2,724 At 1 April 2000 or date of appointment – – 8,357 3,209 2,613 304,444 306,381 (ii) Ordinary shares in the Company – trustee interests Sir David Sieff Directors’ responsibilities At 31 March 2001 Other trusts’ shares Charitable trusts’ shares Charitable trusts’ shares At 1 April 2000 Other trusts’ shares 22,000 48,214 22,000 45,951 Directors’ responsibilities for preparing the financial statements The directors are obliged under company law to prepare financial statements for each financial year and to present them annually to the Company’s members in Annual General Meeting. accounting policies and their consistent use in the financial statements, supported where necessary by reasonable and prudent judgements. The directors confirm that the above requirements have The financial statements, of which the form and content been complied with in the financial statements. is prescribed by the Companies Act 1985 and applicable accounting standards, must give a true and fair view of the state of affairs of the Company and the Group at the end of the financial year, and of the profit for that period. The directors are also responsible for the adoption of suitable In addition, the directors are responsible for maintaining adequate accounting records and sufficient internal controls to safeguard the assets of the Group and to prevent and detect fraud or any other irregularities, as described more fully on pages 8 and 9. Auditors’ report Auditors’ report to the members of Marks and Spencer p.l.c. We have audited the financial statements on pages 20 to 42. Respective responsibilities of directors and auditors The directors are responsible for preparing the Annual Report. As described on page 16, this includes responsibility for preparing the financial statements, in accordance with applicable United Kingdom accounting standards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board, the Listing Rules of the Financial Services Authority and our profession’s ethical guidance. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the United Kingdom Companies Act. We also report to you if, in our opinion, the directors’ report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors’ remuneration and transactions is not disclosed. We read the other information contained in the Annual Report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. We review whether the statement on pages 8 and 9 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by 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. www.marksandspencer.com 17 Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group at 31 March 2001 and of the result and cash flows of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985. PricewaterhouseCoopers Chartered Accountants and Registered Auditors London 21 May 2001 18 Marks and Spencer p.l.c. Directors’ report Principal activities The principal activities of the Group are Retailing and Financial Services. Retailing consists of the Group’s retail activities under the Marks & Spencer, Brooks Brothers and Kings Super Markets brand names. Financial Services consists of the operations of the Group’s retail Financial Services companies, which provide account cards, personal loans, unit trust management, life assurance, personal insurance and pensions. The Group’s captive insurance company is also included in this segment as the major part of its business is generated from the provision of related insurance services. Review of activities and future performance A review of the Group’s activities and of the future development of the Group is contained within the Annual Review and Summary Financial Statement. Profit and dividends The profit for the financial year, after taxation and minority interests, amounts to £1.3m. The directors have declared dividends as follows: Ordinary shares Interim paid, 3.7p per share (last year 3.7p) Proposed final, 5.3p per share (last year 5.3p) £m 106.3 152.0 Total ordinary dividends, 9.0p per share (last year 9.0p) 258.3 The final dividend will be paid on 20 July 2001 to shareholders whose names are on the Register of Members at the close of business on 1 June 2001. Share capital (i) Issue of new shares During the year ended 31 March 2001, 3,415,705 ordinary shares in the Company were issued as follows: • 8,464 under the terms of the 1984 Executive Share Option Scheme at a price of 206p; • 141,393 under the terms of the 2000 Executive Share Option Scheme at a price of 215p; and • 3,265,848 issued into the Qualifying Employee Share Ownership Trust at prices between 188.75p and 208p of which 208,913 were issued under the terms of the United Kingdom Employees’ Save As You Earn Share Option Scheme. (ii) Purchase of own shares The Company is authorised by the shareholders to purchase, in the market, the Company’s own shares, as permitted under the Company’s Articles of Association. During the year the Company purchased a total of 10,619,272 of its shares for cancellation at a cost of £20.3m, representing 0.4% of its issued share capital. This authority is renewable annually and approval will be sought from shareholders at the AGM in 2001 to renew the authority for a further year. Major shareholders As at 6 May 2001, the Company’s share register of substantial shareholdings showed the following interests in 3% or more of the Company’s shares: Brandes Investment Partners, L.P. 280,099,575 Franklin Resources, Inc. 149,551,189 Ordinary shares % share capital 9.76% 5.21% In addition, JP Morgan has notified us that it is holding 146,907,108 ordinary shares (5.12%) as American Depositary Receipts, 138,786,084 of which are included in the above figures for Brandes Investment Partners and Franklin Resources. Directors and their interests The current directors are listed on page 20 of the Annual Review and Summary Financial Statement. David Norgrove and Roger Holmes were appointed executive directors on 18 September 2000 and 1 January 2001 respectively. Tony Ball and Kevin Lomax were appointed non-executive directors on 1 September 2000. Roger Aldridge, Sir Martin Jacomb, Barry Morris and Joe Rowe resigned from the Board on 19 July 2000. Clara Freeman, Guy McCracken and Peter Salsbury resigned from the Board on 18 September 2000. Alison Reed will be appointed to the Board as Finance Director and Sir Michael Perry, Sir Ralph Robins and Sir David Sieff will be retiring from the Board on 11 July 2001. The beneficial interests of the directors and their families in the shares of the Company and its subsidiaries, together with their interests as trustees of both charitable and other trusts, are given on page 16. Employee involvement We have maintained our commitment to employee involvement throughout the business. Employees are kept well informed of the performance and objectives of the Group through personal briefings, regular meetings and e-mail. These are supplemented by our employee publication, On Your Marks, and video presentations. ‘Focus teams’ in stores, distribution centres and head office provide opportunities for employee representatives to contribute to the everyday running of the business. In addition, we have recently completed a Company-wide survey to gather employee views on improving the forums through which we consult with our staff on business and local issues. The sixth meeting of the European Council took place last July. This council provides an additional forum for communicating with employee representatives from the countries in which we trade in the European Community. Directors and senior management regularly visit stores and discuss, with employees, matters of current interest and concern to the business. We have long-established Employees’ Profit Sharing and Save As You Earn Share Option Schemes, membership of which is service-related, details of which are given on page 29. Equal opportunities The Group is committed to an active Equal Opportunities Policy from recruitment and selection, through training and development, appraisal and promotion to retirement. It is our policy to promote an environment free from discrimination, harassment and victimisation, where everyone will receive equal treatment regardless of gender, colour, ethnic or national origin, disability, age, marital status, sexual orientation or religion. All decisions relating to employment practices will be objective, free from bias and based solely upon work criteria and individual merit. The Group is responsive to the needs of its employees, customers and the community at large and we are an organisation that uses everyone’s talents and abilities to the full. www.marksandspencer.com 19 Employees with disabilities It is our policy that people with disabilities should have full and fair consideration for all vacancies. During the year we continued to use the Government’s ‘two tick’ disability symbol to demonstrate our commitment to interviewing those people with disabilities who fulfil the minimum criteria, and endeavouring to retain employees in the workforce if they become disabled during employment. We will actively retrain and adjust their environment where possible to allow them to maximise their potential. We continue to work with external organisations to provide work place opportunities on our ‘Workstep Programme’. Creditor payment policy The Company’s policy concerning the payment of its trade creditors is as follows: • General merchandise is automatically paid for 11 working days from the end of the week of delivery; • Foods are paid for 13 working days from the end of the week of delivery (based on the timely receipt of an accurate invoice); and • Distribution suppliers are paid monthly, for costs incurred in that month, based on estimates, and payments are adjusted quarterly to reflect any variations to estimate. Trade creditor days of the Company for the year ended 31 March 2001 were 14.6 days (10.4 working days), based on the ratio of Company trade creditors at the end of the year to the amounts invoiced during the year by trade creditors. For all trade creditors, it is the Company’s policy to: • agree the terms of payment at the start of business with that supplier; • ensure that suppliers are aware of the terms of payment; and • pay in accordance with its contractual and other legal obligations. Charitable and political contributions During the year, we spent £7.1m in the UK in support of the community. Within this figure, direct donations to charitable organisations amounted to £3.2m. These figures include £1.8m representing our final sponsorship payment to the Millennium Experience for our programme of Millennium events and activities. No contributions were made to any political party. Annual General Meeting The Notice of the Annual General Meeting to be held on 11 July 2001 (together with explanatory notes) is given in the booklet which accompanies this report. The Special Business of the Meeting includes resolutions to amend existing employee share schemes. By order of the Board Luc Vandevelde, Chairman and Chief Executive London 21 May 2001 20 Marks and Spencer p.l.c. Consolidated profit and loss account Turnover Cost of sales Gross profit Net operating expenses Operating profit Loss on sale of property and other fixed assets Loss on sale/termination of operations Provision for loss on operations to be discontinued Net interest income Profit on ordinary activities before taxation Taxation on ordinary activities Profit on ordinary activities after taxation Minority interests (all equity) Profit attributable to shareholders Dividends Retained profit/(loss) for the period Basic earnings per share Diluted basic earnings per share Adjusted earnings per share Diluted adjusted earnings per share Dividend per share 52 weeks ended 31 March 2001 53 weeks ended 1 April 2000 Before exceptional items £m Exceptional items £m Notes – – – (26.5) (26.5) (83.2) (1.7) (224.0) – (335.4) 8.5 (326.9) – (326.9) – (326.9) 2 8,075.7 (5,237.2) 2,838.5 (2,371.5) 467.0 – – – 13.9 480.9 (151.2) 329.7 (1.5) 328.2 (258.3) 69.9 3,4A 2 4B 4C 4D 5 6 7 8 9 9 9 9 8 Exceptional items £m – – – (72.0) (72.0) (22.3) (45.4) – – (139.7) 19.0 (120.7) – (120.7) – (120.7) After exceptional items £m Before exceptional items £m 8,075.7 8,195.5 (5,237.2) (5,402.8) 2,792.7 (2,249.7) 543.0 – – – 14.2 557.2 (177.2) 380.0 (0.6) 379.4 (258.6) 120.8 2,838.5 (2,398.0) 440.5 (83.2) (1.7) (224.0) 13.9 145.5 (142.7) 2.8 (1.5) 1.3 (258.3) (257.0) 0.0p 0.0p 11.4p 11.4p 9.0p After exceptional items £m 8,195.5 (5,402.8) 2,792.7 (2,321.7) 471.0 (22.3) (45.4) – 14.2 417.5 (158.2) 259.3 (0.6) 258.7 (258.6) 0.1 9.0p 9.0p 13.2p 13.2p 9.0p All results in both the current and preceding financial year are derived from continuing operations. Note of historical cost profits and losses Profit on ordinary activities before taxation Realisation of property revaluation (deficit)/surplus Revaluation element of depreciation charge Historical cost profit on ordinary activities before taxation Historical cost retained (loss)/profit for the period Notes 25 25 52 weeks ended 31 March 2001 £m 145.5 (1.3) 1.9 146.1 (256.4) Consolidated statement of total recognised gains and losses Profit attributable to shareholders Exchange differences on foreign currency translation Unrealised (deficit)/surplus on revaluation of investment properties Notes 25 25 Total recognised gains and losses relating to the period 52 weeks ended 31 March 2001 £m 1.3 13.3 (1.7) 12.9 53 weeks ended 1 April 2000 £m 417.5 74.2 1.9 493.6 76.2 53 weeks ended 1 April 2000 £m 258.7 (16.8) 3.0 244.9 Balance sheets AT 31 MARCH 2001 Fixed assets Goodwill Tangible assets: Land and buildings Fit out, fixtures, fittings and equipment Assets in the course of construction Investments Current assets Stocks Debtors: Receivable within one year Receivable after more than one year Investments Cash at bank and in hand Current liabilities Creditors: amounts falling due within one year Net current assets www.marksandspencer.com 21 The Group The Company Notes 12 13 14 2001 £m – 2,735.2 1,291.9 91.8 4,118.9 58.3 2000 £m 1.3 2001 £m – 2,774.1 1,386.7 81.3 4,242.1 55.0 2,430.4 1,056.2 51.2 3,537.8 445.8 4,177.2 4,298.4 3,983.6 2000 £m – 2,458.5 1,145.3 44.8 3,648.6 450.4 4,099.0 472.5 474.4 299.7 315.1 15A 15B 16 17 917.2 1,712.1 260.0 154.4 988.3 1,566.9 386.4 301.1 642.7 72.9 – 82.0 795.2 80.3 – 89.8 3,516.2 3,717.1 1,097.3 1,280.4 19 (1,981.6) (2,162.8) (729.1) 1,534.6 1,554.3 368.2 (736.0) 544.4 Total assets less current liabilities 5,711.8 5,852.7 4,351.8 4,643.4 Creditors: amounts falling due after more than one year Provisions for liabilities and charges Net assets 20 22 (735.1) (315.7) (804.3) (126.6) – (119.2) – (113.0) 4,661.0 4,921.8 4,232.6 4,530.4 Capital and reserves Called up share capital Share premium account Revaluation reserve Capital redemption reserve Profit and loss account Shareholders’ funds (all equity) Minority interests (all equity) Total capital employed Approved by the Board 21 May 2001 Luc Vandevelde, Chairman and Chief Executive Robert Colvill, Group Finance Director 24,25 25 25 25 25 25 716.9 375.6 455.6 2.6 3,094.7 4,645.4 15.6 718.6 369.4 457.9 – 3,359.4 4,905.3 16.5 716.9 375.6 454.0 2.6 2,683.5 4,232.6 – 4,661.0 4,921.8 4,232.6 718.6 369.4 458.9 – 2,983.5 4,530.4 – 4,530.4 22 Marks and Spencer p.l.c. Consolidated cash flow information FOR THE YEAR ENDED 31 MARCH 2001 Cash flow statement Operating activities Received from customers Payments to suppliers Payments to and on behalf of employees Other payments Cash inflow from operating activities before exceptional items Exceptional operating cash outflow Cash inflow from operating activities Returns on investments and servicing of finance Taxation Capital expenditure and financial investment Acquisitions and disposals Equity dividends paid Cash inflow/(outflow) before management of liquid resources and financing Notes £m 2001 £m £m 2000 £m 7,967.8 (5,240.7) (1,089.8) (930.6) 7,989.9 (5,357.1) (1,138.3) (803.8) 28A 27 28B 28C 28D 28E 706.7 (30.3) 676.4 12.6 (164.6) (258.2) 5.9 (258.6) 13.5 Management of liquid resources and financing Management of liquid resources Financing Increase in cash 28F 28G 263.7 (265.4) (162.5) 260.3 (1.7) 11.8 690.7 (49.2) 641.5 15.2 (145.7) (167.0) (21.1) (413.5) (90.6) 97.8 7.2 2000 £m 7.2 162.5 (250.9) 11.4 2001 £m 11.8 (263.7) 245.9 (20.4) (26.4) (1,251.4) (69.8) (1,181.6) (1,277.8) (1,251.4) Reconciliation of net cash flow to movement in net debt (see note 29) Increase in cash Cash (inflow)/outflow from (decrease)/increase in liquid resources Cash outflow/(inflow) from decrease/(increase) in debt financing Exchange movements Movement in net debt Net debt at 1 April Net debt at 31 March Accounting policies The financial statements are prepared in accordance with applicable accounting standards in the United Kingdom. A summary of the more important Group accounting policies, applied consistently, is given below. Basis of accounting The financial statements are drawn up on the historical cost basis of accounting, modified to include the valuation of certain United Kingdom properties at 31 March 1988 and the valuation of investment properties. Compliance with SSAP19, ‘Accounting for Investment Properties’ requires a departure from the requirements of the Companies Act 1985 relating to the depreciation of investment properties as explained below. Basis of consolidation The Group financial statements incorporate the financial statements of Marks and Spencer p.l.c. and all its subsidiaries for the year ended 31 March 2001. Current asset investments Current asset investments are stated at market value. All profits and losses from such investments are included in net interest income or in Financial Services turnover as appropriate. Deferred taxation Deferred taxation is accounted for at expected tax rates on differences arising from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the financial statements. A deferred tax asset or provision is established to the extent that it is likely that an asset or liability will crystallise in the foreseeable future. Fixed assets a Capitalised interest Interest is not capitalised. b Depreciation Depreciation is provided to write off the cost or valuation of tangible fixed assets, less residual value, by equal annual instalments as follows: Land: not depreciated. Freehold and leasehold buildings over 50 years: depreciated to their estimated residual value over their estimated remaining economic lives (see also c below). Leasehold land and buildings under 50 years: over the remaining period of the lease. Fit out: 10-25 years according to the estimated life of the asset. Fixtures, fittings and equipment: 3-15 years according to the estimated life of the asset. Depreciation is charged on all additions to or disposals of depreciating assets in the year of purchase or disposal. Any impairment in value is charged to the revaluation reserve or the profit and loss account as appropriate. c Land and buildings The Company’s freehold and leasehold properties in the United Kingdom were valued on the basis of open market value for existing use in 1982. At 31 March 1988, those same properties (excluding subsequent additions and adjusted for disposals) were revalued. On adoption of FRS15, the Group followed the transitional provisions to retain the book value of land and buildings which were revalued in 1988, but not to adopt a policy of revaluation in the future. These values are retained subject to the requirement to test assets for impairment in accordance with FRS11. d Investment properties Investment properties are revalued annually and included in the balance sheet at their open market value. In accordance with SSAP19, no depreciation is provided in respect of investment properties. This represents a departure from the Companies Act 1985 requirements concerning the www.marksandspencer.com 23 depreciation of fixed assets. These properties are held for investment and the directors consider that the adoption of this policy is necessary to give a true and fair view. Long-term assurance business The value of the long-term assurance business consists of the present value of surpluses expected to emerge in the future from business currently in force, and this value is included in prepayments and accrued income. In determining their value, these surpluses are discounted at a risk-adjusted, post-tax rate. Changes in the value are included in the profit and loss account grossed up at the standard rate of corporation tax applicable to insurance companies. Operating leases Costs in respect of operating leases are charged on a straight line basis over the lease term. Derivative financial instruments The Group uses derivative financial instruments to manage its exposures to fluctuations in foreign currency exchange rates and interest rates. Derivative instruments utilised by the Group include interest rate and currency swaps, forward rate agreements and forward currency contracts. Amounts payable or receivable in respect of interest rate swaps are recognised as adjustments to net interest income over the period of the contract. Forward currency contracts are accounted for as hedges, with the instrument’s impact on profit deferred until the underlying transaction is recognised in the profit and loss account. Foreign currencies The results of international subsidiaries are translated at the weighted average of monthly exchange rates for sales and profits. The balance sheets of overseas subsidiaries are translated at year-end exchange rates. The resulting exchange differences are dealt with through reserves and reported in the consolidated statement of total recognised gains and losses. Transactions denominated in foreign currencies are translated at the exchange rate at the date of the transaction. Foreign currency assets and liabilities held at the year-end are translated at year-end exchange rates or the exchange rate of a related forward exchange contract where appropriate. The resulting exchange gain or loss is dealt with in the profit and loss account. Goodwill Prior to 31 March 1998, goodwill arising on consolidation was written off to reserves in the year of acquisition. As permitted by FRS10, this goodwill has not been reinstated in the balance sheet and remains written off to reserves. Goodwill arising on subsequent acquisitions is capitalised and amortised over its useful economic life. The profit or loss arising on the sale of a previously acquired business includes the attributable goodwill. Pension contributions Funded pension plans are in place for the Group’s UK employees and the majority of employees overseas. The assets of these pension plans are managed by third party investment managers and are held separately in trust. Regular valuations are prepared by independent professionally qualified actuaries. These determine the level of contributions required to fund the benefits set out in the rules of the plans and allow for the periodic increase of pensions in payment. The contributions and any variations from regular cost arising from the actuarial valuations are charged or credited to profits on a systematic basis over the estimated remaining service lives of the employees. Stocks Stocks are valued at the lower of cost and net realisable value using the retail method. 24 Marks and Spencer p.l.c. 24 Marks and Spencer p.l.c. 24 Marks and Spencer p.l.c. Notes to the financial statements 1. Trading period The results for the year comprise store sales and related costs for the 52 weeks to 31 March 2001 (last year 53 weeks to 1 April 2000). All other activities are for the year to 31 March 2001. All results are derived from continuing operations. 2. Segmental information A Classes of business The Group has two classes of business: Retailing and Financial Services. Retailing: Turnover represents goods sold to customers outside the Group, less returns and sales taxes. Financial Services: Turnover represents the interest and other income attributable to the Financial Services companies and the captive insurance company and arises within the United Kingdom and the Channel Islands. Retailing activities Before exceptional operating charges Exceptional operating charges (see note 4A) Financial Services1,2 Total operating activities Add: excess interest charged to cost of sales of Financial Services2 Total operating profit Loss on sale of property and other fixed assets Loss on sale/termination of operations Provision for loss on operations to be discontinued Net interest income Profit on ordinary activities before taxation Unallocated net liabilities Net assets B Geographical split United Kingdom Retail Before exceptional operating charges Exceptional operating charges Financial Services1,2 International Retail Europe (excluding UK) Before exceptional operating charges Exceptional operating charges North America Far East Total operating activities Add: excess interest charged to cost of sales of Financial Services2 Total operating profit 2001 £m Turnover 2000 £m 7,712.6 7,830.9 363.1 364.6 8,075.7 8,195.5 Operating profit Operating assets 2001 £m 336.3 362.8 (26.5) 96.3 432.6 7.9 440.5 (83.2) (1.7) (224.0) 13.9 145.5 2000 £m 355.1 427.1 (72.0) 115.9 2001 £m 2000 £m 4,389.4 4,494.5 518.0 448.7 471.0 4,907.4 4,943.2 – 471.0 (22.3) (45.4) – 14.2 417.5 (246.4) (21.4) 4,661.0 4,921.8 2001 £m Turnover 2000 £m Operating profit Operating assets 2001 £m 2000 £m 2001 £m 2000 £m 6,293.0 6,482.7 363.1 364.6 6,656.1 6,847.3 548.3 555.6 761.2 110.1 691.4 101.2 1,419.6 1,348.2 308.3 334.8 (26.5) 96.3 404.6 (11.4) (11.4) – 32.0 7.4 28.0 356.8 420.1 (63.3) 115.9 3,757.1 3,905.2 518.0 448.7 472.7 4,275.1 4,353.9 (14.8) (6.1) (8.7) 16.4 (3.3) (1.7) 394.5 387.8 232.8 5.0 632.3 201.2 0.3 589.3 8,075.7 8,195.5 432.6 471.0 4,907.4 4,943.2 7.9 440.5 – 471.0 1Operating profit for Financial Services includes £16.2m of merchant fee income (last year £nil) arising on Marks & Spencer Chargecard transactions. This fee is payable by UK Retail and has been deducted in arriving at UK Retail operating profit. 2Financial Services operating profit is stated after charging £115.3m (last year £105.5m) to cost of sales. This interest represents the cost of funding the Financial Services business as a separate segment, including both intra group interest and third party funding. The amount of third party interest payable by the Group amounted to £107.4m (last year £107.4m) (see note 5). Intra group interest of £7.9m (last year £nil), being the excess over third party interest payable, has been added back in the segmental analysis to arrive at total operating profit. 3The geographical segments disclose turnover and operating profit by destination and reflect management responsibility. 4UK Retail turnover including VAT comprises clothing, footwear and gifts £3,649.5m (last year £3,939.0m); home £355.8m (last year £328.8m) and foods £2,925.9m (last year £2,880.4m). VAT on UK Retail turnover was £638.2m (last year £665.5m). Since the last financial year, sales of certain lines have been transferred from clothing, footwear and gifts to home. Comparatives for the last financial year have been restated accordingly. 5Operating profit includes pre-opening costs of £1.0m (last year £2.0m) for Europe. 6Turnover originates in the following geographical segments: United Kingdom £6,798.6m (last year £6,990.4m); Europe £435.5m (last year £436.0m); North America £761.2m (last year £691.4m) and Far East £81.4m (last year £77.7m). 7The value of goods exported from the UK, including shipments to international subsidiaries, amounted to £436.0m (last year £460.2m). 2. Segmental information (continued) Turnover and operating profit for North America and Europe comprise: North America Brooks Brothers (including Japan) Kings Super Markets Corporate expenses M&S Canada Europe Continental Europe Other European operations1 www.marksandspencer.com 25 2001 £m 448.1 313.1 – 761.2 – 761.2 285.0 263.3 548.3 Turnover 2000 £m 395.5 273.7 – 669.2 22.2 691.4 294.3 261.3 555.6 Operating profit 2001 £m 20.2 11.9 (0.1) 32.0 – 32.0 (34.0) 22.6 (11.4) 2000 £m 7.9 11.1 (2.6) 16.4 – 16.4 (33.5) 18.7 (14.8) 1Other European operations include the Republic of Ireland and franchises. The results of international subsidiaries have been translated using weighted average rates of exchange ruling during the year. The movements in exchange rates used for translation, compared to the same period last year, have increased international sales (excluding Canada) by £57.4m. The effect on international operating profit is not significant. 3. Operating profit Turnover Cost of sales Gross profit Employee costs (see note 10) Occupancy costs Repairs, renewals and maintenance of fixed assets Depreciation Other costs1 Before exceptional charges £m 8,075.7 (5,237.2) 2,838.5 1,100.8 311.5 91.2 275.9 592.1 Exceptional charges £m 2001 Total £m Before exceptional charges £m Exceptional charges £m – – – 17.0 – – – 9.5 8,075.7 (5,237.2) 8,195.5 (5,402.8) 2,838.5 1,117.8 311.5 91.2 275.9 601.6 2,792.7 1,096.2 287.8 89.5 261.6 514.6 – – – 68.2 – – – 3.8 2000 Total £m 8,195.5 (5,402.8) 2,792.7 1,164.4 287.8 89.5 261.6 518.4 Total net operating expenses2 (2,371.5) (26.5) (2,398.0) (2,249.7) Operating profit 467.0 (26.5) 440.5 543.0 (72.0) (72.0) (2,321.7) 471.0 The directors consider that the nature of the business is such that the analysis of expenses shown above is more informative than that set out in the formats of the Companies Act 1985. 1Included in ‘Other costs’ is the remuneration to the auditors for audit and non-audit services as follows: Audit fees Non-audit services The Group The Company 2001 £m 1.1 2.1 2000 £m 1.1 2.8 2001 £m 0.5 1.5 2000 £m 0.4 2.2 Fees paid for non-audit services are for taxation advice, corporate finance and consulting services. 2Included in ‘Total net operating expenses’ are rentals under operating leases, comprising £4.5m for hire of plant and machinery (last year £2.3m) and £124.1m of other rental costs (last year £123.4m). 26 Marks and Spencer p.l.c. Notes to the financial statements 4. Exceptional items A Exceptional operating charges UK restructuring costs1 European restructuring costs2 Total exceptional operating charges 2001 £m (26.5) – (26.5) 2000 £m (63.3) (8.7) (72.0) 1The £26.5m is in respect of the closure of the ‘Direct‘ catalogue business (£16.5m) and the reduction of roles at the Group’s head office (£10.0m). The £63.3m charge last year was in respect of the restructuring of UK Retail into customer business units, the rationalisation of store management and the refocusing of existing store roles to customer facing activities, and the closure of two distribution centres. 2The European restructuring costs last year were in respect of store closures in France and Germany. B Loss on sale of property and other fixed assets Disposal of European stores1 Provision for loss on ‘Direct’ assets2 Loss on sale of investment properties3 Other asset disposals4 Loss on sale of property and other fixed assets 2001 £m – (19.0) – (64.2) (83.2) 2000 £m (8.3) – (16.1) 2.1 (22.3) 1The loss of £8.3m last year relates to European store closures. Including the restructuring cost of £8.7m disclosed in note 4A above, this gave rise to total closure costs of £17.0m. 2Including the restructuring cost of £16.5m disclosed in note 4A above, this gives rise to total closure costs for the ‘Direct’ catalogue business of £35.5m. 3The loss on sale of investment properties last year was in respect of the disposal of The Gyle shopping centre and a property in Newcastle. 4Other asset disposals mainly relates to the closure of UK Stores, £40.2m of which relates to satellite stores and was announced at the half year. C Loss on sale/termination of operations Loss on sale of Splendour.com Ltd Loss on termination of Canadian operations Loss on sale/termination of operations The loss on sale/termination of operations is stated after charging £1.0m of goodwill (last year £24.4m). D Provision for loss on operations to be discontinued Net closure costs Goodwill previously credited to reserves Provision for loss on operations to be discontinued 2001 £m (1.7) – (1.7) 2001 £m (225.3) 1.3 (224.0) The provision for loss on operations to be discontinued represents the expected cost of the intended closure of the Group’s Continental European subsidiaries. Net closure costs include provision for future trading losses, losses on disposal of fixed assets, property exit costs and redundancy costs. 5. Net interest income Bank and other interest income Less: amounts included in turnover of Financial Services Interest expenditure Less: interest charged to cost of sales of Financial Services Intra group interest charged to cost of sales of Financial Services (see note 2) £m 302.6 (288.7) (107.4) 115.3 (7.9) Net interest income Interest expenditure comprises: Amounts repayable within five years: Bank loans, overdrafts and other borrowings Medium term notes Amounts repayable after five years: Medium term notes £m 309.3 (293.2) (107.4) 105.5 – 2001 £m 13.9 – 13.9 (33.2) (73.0) (106.2) (1.2) (107.4) 2000 £m – (45.4) (45.4) 2000 £m – – – 2000 £m 16.1 (1.9) 14.2 (33.2) (73.8) (107.0) (0.4) (107.4) 6. Taxation on ordinary activities The taxation charge comprises: Current taxation UK corporation tax at 30% (last year 30%): Current year Prior years Double taxation relief Overseas taxation Deferred taxation (see note 22) Current year Prior years www.marksandspencer.com 27 £m 2001 £m £m 2000 £m 151.0 (6.3) 151.1 2.7 144.7 (4.7) 140.0 7.7 147.7 (5.0) 142.7 (4.3) (0.7) 153.8 – 153.8 6.4 160.2 (2.0) 158.2 (1.9) (0.1) Included in the tax charge for the year is a credit of £8.5m (last year £19.0m) which is attributable to exceptional charges. 7. Profit for the financial year As permitted by Section 230 of the Companies Act 1985, the profit and loss account of the Company is not presented as part of these financial statements. The consolidated profit for the financial year of £1.3m (last year £258.7m) includes a £23.3m loss (last year £280.6m profit) which is dealt within the financial statements of the Company. 8. Dividends Ordinary shares Interim paid of 3.7p per share (last year 3.7p) Proposed final of 5.3p per share (last year 5.3p) Total ordinary dividend of 9.0p per share (last year 9.0p) 2001 £m 106.3 152.0 258.3 2000 £m 106.3 152.3 258.6 9. Earnings per share The calculation of earnings per ordinary share is based on earnings after tax and minority interests and the weighted average number of ordinary shares in issue during the year. An adjusted earnings per share figure has been calculated in addition to the earnings per share required by FRS14, ‘Earnings per Share’ and is based on earnings excluding the effect of the exceptional charges. It has been calculated to allow shareholders to gain a clearer understanding of the trading performance of the Group. Details of the adjusted earnings per share are set out below: Basic earnings Exceptional operating charges Loss on sale of property and other fixed assets Loss on sale/termination of operations Provision for loss on operations to be discontinued Adjusted earnings Basic pence per share 2001 Diluted pence per share 0.0 0.7 2.9 0.1 7.7 0.0 0.7 2.9 0.1 7.7 11.4 11.4 £m 1.3 19.3 83.2 1.7 222.7 328.2 Basic pence per share 2000 Diluted pence per share 9.0 1.8 0.8 1.6 – 9.0 1.8 0.8 1.6 – 13.2 13.2 £m 258.7 53.0 22.3 45.4 – 379.4 28 Marks and Spencer p.l.c. Notes to the financial statements 9. Earnings per share (continued) The IIMR earnings per share has also been calculated in addition to the basic earnings per share and is based on earnings adjusted to eliminate certain capital items as follows: Basic earnings Loss on sale of property and other fixed assets Loss on sale/termination of operations Provision for loss on operations to be discontinued IIMR earnings Basic pence per share 2001 Diluted pence per share 0.0 2.9 0.1 7.7 0.0 2.9 0.1 7.7 10.7 10.7 £m 1.3 83.2 1.7 222.7 308.9 Basic pence per share 2000 Diluted pence per share 9.0 0.8 1.6 – 9.0 0.8 1.6 – 11.4 11.4 £m 258.7 22.3 45.4 – 326.4 The weighted average number of ordinary shares used in the calculation of earnings per share are as follows: Weighted average ordinary shares in issue during the year ended 31 March Potentially dilutive share options under the Group’s share option schemes Weighted average ordinary shares for diluted earnings per share 10. Employees The average number of employees of the Group during the year was: UK stores UK head office Financial Services Overseas Management and supervisory categories Other Management and supervisory categories Other Management and supervisory categories Other 2001 m 2,872.4 9.8 2,882.2 2000 m 2,872.1 13.6 2,885.7 2001 2000 3,880 55,511 2,242 1,299 314 1,230 12,015 76,491 3,885 54,545 2,379 1,441 320 1,127 11,960 75,657 If the number of hours worked was converted on the basis of a normal working week, the equivalent average number of full-time employees would have been 52,213 (last year 52,156). The aggregate remuneration and associated costs of Group employees were: Wages and salaries UK profit sharing (see note 10C) Social security costs Pension costs (see note 10A) Employee welfare and other personnel costs Classified as: Employee costs (see note 3) Manufacturing cost of sales Before exceptional charges £m Exceptional charges £m 835.2 8.3 59.6 119.3 98.5 1,120.9 1,100.8 20.1 1,120.9 14.8 0.2 0.4 0.8 0.8 17.0 17.0 – 17.0 Before exceptional charges £m Exceptional charges £m 2001 Total £m 850.0 8.5 60.0 120.1 99.3 834.4 11.8 59.3 120.5 89.1 1,137.9 1,115.1 1,117.8 20.1 1,137.9 1,096.2 18.9 1,115.1 2000 Total £m 886.8 12.4 60.3 124.5 99.3 1,183.3 1,164.4 18.9 1,183.3 52.4 0.6 1.0 4.0 10.2 68.2 68.2 – 68.2 www.marksandspencer.com 29 10. Employees (continued) A Pension costs The total pension cost for the Group was £120.1m (last year £124.5m) of which £110.6m relates to the UK Scheme (last year £112.1m), £nil relates to the Early Retirement Plan (last year £2.6m) and £9.5m relates to overseas schemes (last year £9.8m). The Group operates a number of funded defined benefit pension schemes throughout the world. The latest actuarial valuation of the UK Scheme was carried out at 1 April 1998 by an independent actuary using the projected unit method. The key assumptions adopted were: Price inflation Rate of increase in salaries Rate of increase in pensions in payment Rate of return on investments Rate of increase in dividend income Rate of interest applied to discount liabilities 3.5% 5.25% 3.5% 8.25% 4.5% 8.25% The latest actuarial valuation revealed a shortfall of £74m in the actuarial value of the assets of the UK Scheme of £2,047m compared to the actuarial liability for pension benefits. (The market value of assets at 1 April 1998 was £2,709m.) This represents a funding level of 97%. The shortfall of £74m together with the unamortised accounting deficit relating to prior periods gives a total unamortised deficit of £169.4m. This is being amortised over a period of 12 years from 1 April 1998, being the remaining estimated service lives of the current Scheme members. The next actuarial valuation of the UK Pension Scheme is being carried out as at 1 April 2001 and the results will be reflected in the financial statements for the year ending 31 March 2002. The total UK pension cost is analysed as follows: Normal pension cost1 Amortisation of deficit Net interest elements Total 1At standard contribution rate of 15.9% (last year 15.9%). 2001 £m 92.6 14.1 3.9 2000 £m 93.9 14.1 4.1 110.6 112.1 As shown in note 15, the Company has pre-paid pension costs of £162.7m. This includes the partial funding of the deficit, offset by the amortisation and interest elements shown above, with the balance being pre-paid contributions to the UK Scheme. The pension costs relating to overseas schemes have been determined in accordance with the advice of independent qualified actuaries. B Post-retirement health benefits The Company has a commitment to pay all or a proportion of the health insurance premiums for a number of its retired employees and their spouses, the last of whom retired in 1988. There is no commitment in respect of current employees or those who have retired since 1988. At 31 March 1999, the Company reassessed this liability in accordance with the advice of an independent qualified actuary. The discounted present value of £27.7m (see note 22) has been fully provided. The valuation assumed a premium inflation of 7.5% and an after-tax discount rate of 7.0%. There is a matching deferred taxation asset of £8.3m. The next actuarial valuation will be carried out as at 31 March 2002. C United Kingdom and Republic of Ireland profit sharing schemes The amount of profit which will be allocated this year, in the form of ordinary shares in the Company, has been fixed at £8.5m (last year £12.4m), representing 1.75% (last year 2.5%) of the earnings of 43,741 (last year 44,145) eligible employees. These shares are now purchased in the market: 4,459,905 ordinary shares were purchased by the Profit Sharing Trustees in respect of the 1999/2000 allocation. D United Kingdom Employees’ Save As You Earn Share Option Scheme Under the terms of the Scheme, the Board may offer options to purchase ordinary shares in the Company once in each financial year to those employees who enter into an Inland Revenue approved Save As You Earn (SAYE) savings contract. The price at which options may be offered is 80% of the market price for three consecutive dealing days preceding the date of offer. The options may normally be exercised during the period of six months after the completion of the SAYE contract, either three, five or seven years after entering the Scheme. 30 Marks and Spencer p.l.c. Notes to the financial statements 10. Employees (continued) Outstanding options granted under the United Kingdom Employees’ Save As You Earn Share Option Scheme are as follows: Options granted January 1993 January 1994 January 1995 January 1996 January 1997 January 1998 January 1999 January 2000 January 2001 Number of shares 2001 2000 Option price expired 1,390,015 518,636 2,559,142 2,793,633 7,146,133 3,536,269 7,189,225 5,384,139 7,209,963 3,877,749 5,901,130 7,896,779 11,282,225 23,856,114 36,500,221 – 32,355,154 257p 319p 322p 330p 389p 467p 324p 223p 156p E Executive Share Option Schemes Under the terms of the 2000 Scheme, the Board may offer options to purchase ordinary shares in the Company to executive directors and senior employees at the market price on a date to be determined prior to the date of the offer. No further options may be granted under the 1984, 1987 and 1997 Schemes. Outstanding options under each of the 1984 and 1987 Schemes continue to be bound by the Maximum Option Value which is limited to four times remuneration on exercise (further details are set out in the Remuneration Report on page 14). Outstanding options granted under all executive share option schemes are as follows: Number of shares 2001 2000 Option price Option dates Options granted (1984 Scheme) May 1991 May 1992 May 1993 October 1993 May 1994 October 1994 May 1995 May 1996 November 1996 June 1997 (1987 Scheme) May 1994 October 1994 May 1995 May 1996 November 1996 June 1997 (1997 Scheme – Tier 1) June 1998 November 1998 June 1999 November 1999 January 2000 March 2000 June 2000 (1997 Scheme – Tier 2) June 1998 November 1998 June 1999 November 1999 January 2000 March 2000 June 2000 (2000 Scheme +3%) September 2000 December 2000 March 2001 (2000 Scheme +4%) September 2000 December 2000 March 2001 19,576 732,802 748,546 1,650,583 1,652,102 1,213,976 1,233,053 19,576 1,859,827 1,878,391 21,541 1,545,062 1,566,969 58,950 6,172 39,844 58,950 6,172 39,844 21,541 9,288 1,119,504 1,138,068 9,288 1,426,796 1,426,796 1,625,742 1,654,620 39,507 2,003,084 2,032,282 39,507 379,338 247,221 929,298 95,323 360,655 385,355 265,785 985,394 95,323 360,655 1,992,337 1,992,337 – 184,615 99,261 3,023,780 4,979,790 117,825 2,305,306 2,491,935 59,352 360,655 1,992,337 1,992,337 – 59,352 360,655 184,615 4,209,681 574,358 323,393 4,265,494 574,358 323,393 – – – – – – 254p May 1994 – May 2001 329p May 1995 – May 2002 341p May 1996 – May 2003 399p Oct 1996 – Oct 2003 404p May 1997 – May 2004 402p Oct 1997 – Oct 2004 414p May 1998 – May 2005 458p May 1999 – May 2006 486p Nov 1999 – Nov 2006 527p June 2000 – June 2007 404p May 1997 – May 2001 402p Oct 1997 – Oct 2001 414p May 1998 – May 2002 458p May 1999 – May 2003 486p Nov 1999 – Nov 2003 527p June 2000 – June 2004 557p June 2001 – June 2008 404p Nov 2001 – Nov 2008 358p June 2002 – June 2009 278p Nov 2002 – Nov 2009 305p Jan 2003 – Jan 2010 261p Mar 2003 – Mar 2010 260p June 2003 – June 2010 557p June 2003 – June 2008 404p Nov 2003 – Nov 2008 358p June 2004 – June 2009 278p Nov 2004 – Nov 2009 305p Jan 2005 – Jan 2010 261p Mar 2005 – Mar 2010 260p June 2005 – June 2010 215p Sept 2003 – Sept 2010 195p Jan 2004 – Jan 2011 218p Mar 2004 – Mar 2011 215p Sept 2003 – Sept 2010 195p Jan 2004 – Jan 2011 218p Mar 2004 – Mar 2011 www.marksandspencer.com 31 11. Directors A Emoluments Emoluments of directors of the Company are summarised below. Further details are given in the Remuneration Report on pages 10 to 15. Aggregate emoluments Termination payments 2001 £‘000 3,998 2,742 2000 £’000 6,534 – B Transactions with directors Interest-free loans were made, during the financial year, under the employees’ loan scheme by the Company as follows: • £501,000 to Roger Holmes which was repaid in full prior to his appointment as a director on 1 January 2001 (see Remuneration Report, page 12); and • £80,018 to David Norgrove which was made prior to his appointment as a director and repaid in full before the end of the financial year. During the year there was no contract of significance to which the Company, or one of its subsidiaries, was a party and in which a director of the Company was materially interested. 12. Goodwill Goodwill brought forward at the beginning of the year of £1.3m has been dealt with in these financial statements as follows: Amortised against operating profit Eliminated on disposal of Splendour.com Ltd 13. Tangible fixed assets A Tangible fixed assets Cost or valuation At 1 April 2000 Additions Transfers Revaluation deficit Disposals Differences on exchange Land & buildings £m 2,868.7 17.0 17.9 (3.0) (16.1) 11.5 At 31 March 2001 2,896.0 2,975.0 £m 0.3 1.0 1.3 The Group The Company Fixtures, fittings & equipment £m Assets in the course of construction £m Total £m Land & buildings £m Fixtures, fittings & equipment £m Assets in the course of construction £m 2,756.9 186.8 24.8 – (27.5) 34.0 81.3 51.9 (42.7) – (0.4) 1.7 91.8 5,706.9 255.7 – (3.0) (44.0) 47.2 2,537.7 13.4 17.4 (3.0) (11.9) – 2,237.2 167.9 6.7 – (21.3) – 5,962.8 2,553.6 2,390.5 94.6 22.4 47.0 (4.1) 0.9 1,370.2 253.5 64.2 (22.5) 17.7 160.8 1,683.1 – – – – – – 1,464.8 275.9 111.2 (26.6) 18.6 79.2 18.3 25.8 (0.1) – 1,091.9 205.3 54.4 (17.3) – 1,843.9 123.2 1,334.3 Total £m 4,819.7 211.8 – (3.0) (33.2) – 4,995.3 1,171.1 223.6 80.2 (17.4) – 1,457.5 44.8 30.5 (24.1) – – – 51.2 – – – – – – 2,735.2 1,291.9 91.8 4,118.9 2,430.4 1,056.2 51.2 3,537.8 2,774.1 1,386.7 81.3 4,242.1 2,458.5 1,145.3 44.8 3,648.6 Long leasehold £m Short leasehold £m Freehold £m 865.4 1,006.1 1,871.5 (39.0) Long leasehold £m Short leasehold £m 437.9 445.5 883.4 (48.8) 13.5 127.6 141.1 (73.0) The Group Total £m 1,316.8 1,579.2 2,896.0 (160.8) Freehold £m 865.4 723.8 1,589.2 (29.4) 1,832.5 1,850.3 834.6 850.8 68.1 2,735.2 1,559.8 73.0 2,774.1 1,583.1 437.9 433.2 871.1 (30.8) 840.3 839.4 The Company Total £m 1,316.8 1,236.8 2,553.6 (123.2) 13.5 79.8 93.3 (63.0) 30.3 2,430.4 36.0 2,458.5 Accumulated depreciation At 1 April 2000 Depreciation for the year Provision for loss on disposal Disposals Differences on exchange At 31 March 2001 Net book value At 31 March 2001 At 1 April 2000 Analysis of land & buildings At valuation At cost Accumulated depreciation Net book value At 31 March 2001 At 1 April 2000 32 Marks and Spencer p.l.c. Notes to the financial statements 13. Tangible fixed assets (continued) B Investment properties Freehold land and buildings include investment properties as follows: Cost or valuation At 1 April 2000 Revaluation deficit At 31 March 2001 The Group The Company £m £m 54.5 (3.0) 51.5 54.5 (3.0) 51.5 C Tangible fixed assets at cost Gerald Eve, Chartered Surveyors, valued the Company’s freehold and leasehold properties in the United Kingdom as at 31 March 1982. This valuation was on the basis of open market value for existing use. At 31 March 1988, the directors, after consultation with Gerald Eve, revalued those of the Company’s properties which had been valued as at 31 March 1982 (excluding subsequent additions and adjusted for disposals). The directors’ valuation was incorporated into the financial statements at 31 March 1988. The Company’s freehold interests in three investment properties have been valued at open market value in accordance with the RICS Appraisal and Valuation Manual as at 31 March 2001 by external valuers, Gerald Eve, Chartered Surveyors. The valuations of these investment properties are based on the apportionment of larger valuations to exclude an owner occupied Marks & Spencer store in each case. They exclude any income or outgoings attributable to the owner occupied Marks & Spencer stores which have been assumed to continue trading. If the Company’s land and buildings had not been valued as set out above, their net book value would have been: At valuation at 31 March 19751 At cost At 31 March Accumulated depreciation Net book value at 31 March 2001 £m 333.6 1,497.8 1,831.4 (159.2) 2000 £m 333.6 1,478.9 1,812.5 (117.1) 1,672.2 1,695.4 1The Company also valued its land and buildings in 1955 and in 1964. In the opinion of the directors, unreasonable expense would be incurred in obtaining the original costs of the assets valued in those years and in 1975. 14. Fixed asset investments A Investments Joint venture1,2 £m Other investments3 £m At 1 April 2000 Additions Disposals Share of joint venture’s property revaluation Repayment of loan At 31 March 2001 25.4 0.7 – 1.3 (7.6) 19.8 29.6 21.0 (12.1) – – Total £m 55.0 21.7 (12.1) 1.3 (7.6) The Group The Company Shares in Group Loans to Group undertakings4 undertakings £m £m Joint venture1 £m Other investments3 £m 363.1 10.0 (0.4) – – 69.5 – (12.0) – – 15.9 – – – (7.6) 8.3 Total £m 450.4 16.7 (13.7) – (7.6) 1.9 6.7 (1.3) – – 38.5 58.3 372.7 57.5 7.3 445.8 1The joint venture represents a 50% interest in Hedge End Park Ltd, a property investment company. The partner in the joint venture is J Sainsbury plc. 2The Group’s investment in the joint venture includes £2.2m (last year £9.8m) of loans and accumulated reserves of £11.5m (last year £9.5m). 3Other investments include listed securities held by a subsidiary. The difference between their book value and market value is negligible. Other investments also include 3,525,198 shares in the Company held by employee share trusts (‘the Trusts’). Of these shares, 3,525,198 (last year 468,263) were held by the Marks and Spencer p.l.c. Qualifying Employee Share Ownership Trust (see note 24) and no shares (last year 240,000) were held by other trusts. At 31 March 2001, shares held by the Trusts had a book value of £7.3m (last year £1.9m). 4Shares in Group undertakings of £372.7m (last year £363.1m) are stated after cumulative amounts written off of £543.6m (last year £543.6m). www.marksandspencer.com 33 14. Fixed asset investments (continued) B Principal subsidiary undertakings The Company’s principal subsidiary undertakings are set out below. A schedule of interests in all undertakings is filed with the Annual Return. Principal activity Country of incorporation and operation Proportion of voting rights and shares held by: The Company A subsidiary Marks and Spencer International Holdings Limited Marks and Spencer (Nederland) BV Marks & Spencer Finance Inc Marks and Spencer Ventures Limited Marks & Spencer (France) SA SA Marks and Spencer (Belgium) NV Marks and Spencer (España) SA Marks and Spencer (Portugal) Lda Marks and Spencer Stores BV Marks and Spencer (Deutschland) GmbH Marks and Spencer (Ireland) Limited Brooks Brothers Inc Brooks Brothers (Japan) Limited Kings Super Markets Inc Marks and Spencer (Asia Pacific) Limited M&S Card Services Limited Marks and Spencer Retail Financial Services Holdings Limited Marks and Spencer Financial Services Limited Marks and Spencer Unit Trust Management Limited Marks and Spencer Savings and Investments Limited Marks and Spencer Life Assurance Limited MS Insurance Limited St Michael Finance p.l.c. Marks & Spencer Finance p.l.c. Marks and Spencer Property Holdings Limited Great Britain Holding Company The Netherlands Holding Company United States Holding Company Great Britain Holding Company France Retailing Belgium Retailing Spain Retailing Portugal Retailing The Netherlands Retailing Germany Retailing Republic of Ireland Retailing United States Retailing Japan Retailing United States Retailing Retailing Hong Kong Credit Card Handling Great Britain Great Britain Holding Company Great Britain Financial Services Great Britain Financial Services Great Britain Financial Services Great Britain Financial Services Guernsey Financial Services Great Britain Finance Great Britain Finance Great Britain Property Investment 100% – 100% 100% – – – – – – – – – – – 100% 100% – – – – – 100% 100% 100% – 100% – – 100% 100% 100% 100% 100% 100% 100% 100% 51% 100% 100% – – 100% 100% 100% 100% 100% – – – 15. Debtors The Group The Company A Amounts receivable within one year Trade debtors Customer advances Amounts owed by Group undertakings Other debtors1 Prepayments and accrued income2 B Amounts receivable after more than one year3 Customer advances Other debtors1 Prepayments and accrued income2 2001 £m 2000 £m 2001 £m 34.9 629.1 – 29.4 223.8 917.2 44.4 663.3 – 61.9 218.7 988.3 1,630.1 16.3 65.7 1,712.1 1,478.1 17.1 71.7 1,566.9 14.6 – 476.9 16.8 134.4 642.7 – 11.3 61.6 72.9 2000 £m 26.5 – 599.1 21.9 147.7 795.2 – 12.5 67.8 80.3 1Other debtors include an interest-free loan to an officer of the Company of £87,000 (last year £55,735). 2Prepayments and accrued income includes £162.7m (last year £175.0m) in respect of the UK Pension Scheme. Of this, £58.6m (last year £67.8m) is included in amounts receivable after more than one year. 3Amounts receivable after more than one year include £70.4m (last year £76.0m) of non-financial assets which have been excluded from the analysis in note 18. 34 Marks and Spencer p.l.c. Notes to the financial statements 16. Current asset investments Listed investments: Government securities Listed in the United Kingdom Listed overseas Unlisted investments Short-term deposits1 The Group The Company 2001 £m 2000 £m 2001 £m 2000 £m 141.5 57.6 50.4 10.5 – 260.0 74.0 47.0 59.8 11.6 194.0 386.4 – – – – – – – – – – – – 1Short-term deposits comprise deposits with banks and other financial institutions with initial maturity of more than three months. 17. Cash at bank and in hand Cash at bank includes commercial paper and short-term deposits with banks and other financial institutions with initial maturity of three months or less. 18. Analysis of financial assets After taking into account the various interest rate swaps entered into by the Group, the currency and interest rate exposure of the Group’s financial assets is set out below. There are no financial assets other than short-term debtors excluded from this analysis. A Interest rate and currency analysis Currency Sterling US dollar Euro Other Fixed rate Floating rate £m £m Non-interest bearing £m 2001 Total £m Fixed rate £m Floating rate £m Non-interest bearing £m 141.2 11.5 14.1 10.7 177.5 1,740.5 30.1 21.7 22.4 1,814.7 87.8 2.0 11.1 1.5 1,969.5 43.6 46.9 34.6 96.7 17.0 16.5 4.7 102.4 2,094.6 134.9 1,912.0 29.4 20.8 18.9 1,981.1 77.1 4.0 9.2 1.7 92.0 The Group 2000 Total £m 2,085.8 50.4 46.5 25.3 2,208.0 The floating rate sterling and US dollar assets are at interest rates linked to LIBID. The non-interest bearing cash is predominantly cash in tills and uncleared deposits. B Analysis of fixed interest rate Fixed rate financial assets 2001 Weighted 2000 average Weighted average interest rate % interest rate % 2001 2000 Weighted average Weighted average period for which rate is fixed Years period for which rate is fixed Years Currency Sterling US dollar Euro Other 6.7 6.5 5.1 2.3 7.0 6.0 4.6 2.6 9.0 11.1 6.0 8.2 C Analysis of financial assets Cash at bank and in hand Current asset investments Customer advances falling due in more than one year Fixed asset investments Other amounts receivable after more than one year Financial assets as defined by FRS13 Customer advances falling due in less than one year Financial assets including short-term customer advances 7.5 7.3 7.3 3.6 The Group 2000 £m 301.1 386.4 1,478.1 29.6 12.8 2,208.0 663.3 2001 £m 154.4 260.0 1,630.1 38.5 11.6 2,094.6 629.1 2,723.7 2,871.3 www.marksandspencer.com 35 19. Creditors: amounts falling due within one year The Group The Company Bank loans and overdrafts Medium term notes (see note 21B) Trade creditors Amounts owed to Group undertakings Taxation Social security and other taxes Other creditors1 Accruals and deferred income Proposed final dividend 2001 £m 534.8 486.8 207.5 – 95.6 33.7 247.4 223.8 152.0 2000 £m 469.0 700.4 219.3 – 112.8 30.1 254.3 224.5 152.4 1,981.6 2,162.8 2001 £m 35.8 – 173.6 20.9 68.1 24.0 131.0 123.7 152.0 729.1 2000 £m 29.3 – 180.8 9.3 82.9 21.6 138.3 121.4 152.4 736.0 1Other creditors include £22.5m (last year £27.1m) which is shown in the calculation of the Group’s net debt and is treated as financing within the cash flow statement. 20. Creditors: amounts falling due after more than one year Medium term notes (see note 21B) Other creditors1,2 The Group The Company 2001 £m 598.3 136.8 735.1 2000 £m 686.1 118.2 804.3 2001 £m – – – 2000 £m – – – 1Other creditors include £49.8m (last year £56.3m) which is shown in the calculation of the Group’s net debt and is treated as financing within the cash flow statement. 2Other creditors include £84.8m (last year £58.2m) of non-financial liabilities which have been excluded from the analysis in note 21. 21. Analysis of financial liabilities A Interest rate and currency analysis After taking into account the various interest rate and currency swaps entered into by the Group, the currency and interest rate exposure of the Group’s financial liabilities are set out below. There are no financial liabilities other than short-term creditors excluded from this analysis. Currency Sterling US dollar Euro Other Fixed rate Floating rate £m £m 2001 Total £m Fixed rate £m Floating rate £m 100.0 – – – 100.0 1,236.2 193.9 145.0 19.3 1,336.2 193.9 145.0 19.3 1,594.4 1,694.4 100.0 – – – 100.0 1,408.3 183.8 184.9 65.6 1,842.6 The Group 2000 Total £m 1,508.3 183.8 184.9 65.6 1,942.6 The floating rate sterling and US dollar borrowings are linked to interest rates related to LIBOR. These rates are for periods ranging from one month to six months. The fixed rate sterling borrowings are at a weighted average rate of 6.8% (last year 6.8%) and the weighted average time for which the rate is fixed is 2.3 years (last year 3.3 years). 36 Marks and Spencer p.l.c. Notes to the financial statements 21. Analysis of financial liabilities (continued) B Maturity of financial liabilities Repayable within one year: Bank loans, overdrafts and commercial paper Medium term notes Other creditors Repayable between one and two years: Medium term notes Other creditors Repayable between two and five years: Medium term notes Other creditors Repayable in five years or more: Medium term notes Other creditors 2001 £m 534.8 486.8 22.5 The Group 2000 £m 469.0 700.4 27.1 1,044.1 1,196.5 175.1 20.5 195.6 403.3 27.0 430.3 19.9 4.5 24.4 95.2 23.3 118.5 571.0 31.5 602.5 19.9 5.2 25.1 1,694.4 1,942.6 1Financial liabilities include £2.2m (last year £3.7m) of other creditors which is excluded from the reconciliation of net debt in note 29. C Borrowing facilities At 31 March 2001, the Group had an undrawn committed facility of £425.0m (last year $50.0m) linked to its commercial paper programme and subject to annual review. The Group also has a number of undrawn uncommitted facilities available to it. At 31 March 2001 these amounted to £547.5m (last year £533.3m). 22. Provisions for liabilities and charges Post-retirement health benefits1 At 1 April 2000 Utilised during the year Interest charged At 31 March 2001 UK restructuring2,5 At 1 April 2000 Additions during the year Utilised during the year At 31 March 2001 Overseas restructuring3,5 At 1 April 2000 Additions during the year Utilised during the year Exchange differences At 31 March 2001 Deferred tax4 At 1 April 2000 Credited to the profit and loss account (see note 6) Exchange differences At 31 March 2001 Total at 31 March 2001 Total at 31 March 2000 www.marksandspencer.com 37 The Group The Company £m £m 27.7 (1.8) 1.8 27.7 42.6 30.1 (29.5) 43.2 8.1 194.5 (1.7) 0.4 201.3 48.2 (5.0) 0.3 43.5 315.7 126.6 27.7 (1.8) 1.8 27.7 42.6 30.1 (29.5) 43.2 – 8.6 – – 8.6 42.7 (3.0) – 39.7 119.2 113.0 1The £27.7m provision for post-retirement health benefits represents the estimated value of the Company’s subsidy of the Marks & Spencer Health Insurance Scheme, in so far as it relates to private medical benefits for retired employees and their dependants, for whom the Company meets the whole, or part, of the cost (see note 10B for further details). 2The provision for UK restructuring costs relates to the ongoing costs of restructuring the Group’s UK operations. The balance at 31 March 2001 primarily relates to the ongoing restructuring of the Group’s head office functions and ‘Direct’ operations. The majority of these costs are expected to be incurred during the next financial year. 3The provision for Overseas restructuring costs primarily relates to the costs expected to be incurred in respect of the intended closure of the Group’s operations in Continental Europe. The balance at 31 March 2001 primarily relates to redundancy costs and future trading losses, the majority of which are expected to be incurred during the next financial year. 4The deferred tax provision consists of £51.8m (last year £56.5m) arising on short-term timing differences offset by £8.3m (last year £8.3m) arising on post- retirement health benefits. 5Since last year, the analysis of provisions has been revised to show UK and Overseas restructuring costs separately. The brought-forward provision for Overseas restructuring consists of £4.1m and £4.0m in respect of Europe and Canada respectively. Unprovided deferred tax Excess of capital allowances over depreciation on tangible fixed assets The Group The Company 2001 £m 79.6 2000 £m1 72.8 2001 £m 66.4 2000 £m1 58.5 1The comparatives for 2000 for the Group and the Company have been restated following a reassessment of the quantum of the book value of fit out on which capital allowances have been claimed. In December 2000 the Accounting Standards Board issued FRS 19 ‘Deferred Tax’. This FRS requires deferred tax to be provided for on a ‘full provision’ basis. The Group will adopt this standard for the year ended 31 March 2002. In the opinion of the directors, any taxable gains arising on the disposal of revalued properties will be covered by brought forward tax losses and rollover relief. Accordingly, the potential deferred tax in respect of these properties has not been quantified in the above analysis. Deferred tax is not provided in respect of liabilities which might arise on the distribution of unappropriated profits of international subsidiaries. 38 Marks and Spencer p.l.c. Notes to the financial statements 23. Financial instruments and risk management A Fair values of financial instruments Set out below is a comparison of current and book values of all the Group’s financial instruments by category. Where market prices are not available for a particular instrument, fair values have been calculated by discounting cash flows at prevailing interest rates and exchange rates. Assets/(liabilities) Customer advances falling due in more than one year Current asset investments1 Fixed asset investments2 Cash at bank and in hand1 Borrowings due within one year1 Financial liabilities due after more than one year1 Interest rate swaps3 Forward foreign currency contracts3 FTSE 100 put options4 Book value £m 2001 Fair value £m Book value £m 1,630.1 260.0 38.5 154.4 (1,044.1) (650.3) – – 1.3 1,646.2 255.5 38.5 154.4 (1,039.6) (694.7) 22.6 (1.4) 2.8 1,478.1 386.4 29.6 301.1 (1,196.1) (746.1) – – 2.2 The Group 2000 Fair value £m 1,474.2 386.4 29.6 301.1 (1,199.6) (737.4) (2.6) 20.2 3.1 1Current asset investments and cash at bank are predominantly short-term deposits placed with banks, financial institutions and on money markets, and investments in short-term securities. Borrowings are at floating rates. Therefore, fair values closely approximate book values. 2Fixed asset investments comprise listed securities held by a subsidiary. 3Interest rate swaps and forward foreign currency contracts have been marked to market to produce a fair value figure. 4FTSE 100 put options provide no loss guarantees on certain Unit Trust offers. The options are on a fully matched basis and are not traded. They have been marked to market to produce a fair value figure. B Hedges of future transactions Unrecognised gains and losses on instruments used for hedging and those recognised in the year ended 31 March 2001 are as follows: Unrecognised gains/(losses) on hedges at 1 April 2000 (Gains)/losses arising in previous years recognised in the year Gains/(losses) in previous years not recognised in the year Gains/(losses) arising in the year Unrecognised gains/(losses) on hedges at 31 March 2001 Of which: Gains/(losses) expected to be recognised within one year Gains/(losses) expected to be recognised after one year Gains £m 57.7 (46.7) 11.0 44.9 55.9 Losses £m (39.2) 20.2 (19.0) (14.2) (33.2) Net total £m 18.5 (26.5) (8.0) 30.7 22.7 6.2 49.7 (13.2) (20.0) (7.0) 29.7 C Currency risk The effect of currency exposures arising from the translation of overseas investments is mitigated by Group borrowings in the local currencies of its main operating subsidiaries. Gains and losses arising on net investments in overseas subsidiaries are recognised in the consolidated statement of total recognised gains and losses. After taking into account the effect of any hedging transactions that manage transactional currency exposures, no Group company had any material monetary assets or liabilities in currencies other than their functional currencies at the balance sheet date. 24. Called up share capital Authorised: 3,200,000,000 ordinary shares of 25p each Allotted, called up and fully paid: 2,867,383,731 ordinary shares of 25p each (last year 2,874,587,298) www.marksandspencer.com 39 The Company 2001 £m 2000 £m 800.0 800.0 716.9 718.6 3,415,705 ordinary shares having a nominal value of £0.9m were allotted during the year under the terms of the Company’s share schemes which are described in note 10. The aggregate consideration received was £7.1m. Contingent rights to the allotment of shares are also described in note 10. Of the 3,415,705 ordinary shares referred to above, 3,265,848 ordinary shares were subscribed for by the Marks and Spencer p.l.c. Qualifying Employee Share Ownership Trust (the ‘QUEST’) at market value of £6.8m. Of these shares, 208,913 were allocated to employees, including executive directors, in satisfaction of options exercised under the Marks and Spencer United Kingdom Employees’ Save As You Earn Share Option Scheme. The Company provided £nil (last year £1.1m) to the QUEST for this purpose. The cost of this contribution was transferred by the Company directly to the profit and loss account reserve (see note 25). At 31 March 2001, 3,525,198 shares were held by the QUEST (see note 14). 10,619,272 ordinary shares having a nominal value of £2.6m were purchased by the Company for an aggregate consideration of £20.3m. The nominal value of the cancelled shares has been transferred to the capital redemption reserve (see below). 25. Shareholders’ funds The Group The Company Called up share capital (see note 24) Share premium account: At 1 April Shares issued under the Company’s share schemes At 31 March Revaluation reserve: At 1 April (Deficit)/surplus on revaluation of investment properties Share of joint venture’s movement in revaluation reserve Revaluation deficit/(surplus) realised on disposals Revaluation element of depreciation charge At 31 March Capital redemption reserve: At 1 April Purchase of own shares At 31 March Profit and loss account reserve: 2001 £m 2000 £m 2001 £m 716.9 718.6 716.9 369.4 6.2 375.6 457.9 (3.0) 1.3 1.3 (1.9) 455.6 – 2.6 2.6 358.5 10.9 369.4 531.0 1.8 1.2 (74.2) (1.9) 457.9 – – – 369.4 6.2 375.6 458.9 (3.0) – – (1.9) 454.0 – 2.6 2.6 2000 £m 718.6 358.5 10.9 369.4 533.2 1.8 – (74.2) (1.9) 458.9 – – – At 1 April Revaluation element of depreciation charge Revaluation (deficit)/surplus realised on disposals Purchase of own shares Goodwill reinstated in respect of closure of businesses Amounts deducted in respect of shares issued to the QUEST (see note 24) Retained (loss)/profit for the year Exchange differences on foreign currency translation At 31 March 3,359.4 1.9 (1.3) (20.3) (1.3) – (257.0) 13.3 3,276.7 1.9 74.2 – 24.4 (1.1) 0.1 (16.8) 2,983.5 1.9 – (20.3) – – (281.6) – 2,886.5 1.9 74.2 – – (1.1) 22.0 – 3,094.7 3,359.4 2,683.5 2,983.5 Shareholders’ funds at 31 March – all equity 4,645.4 4,905.3 4,232.6 4,530.4 Cumulative goodwill of £430.2m (last year £428.9m) arising on the acquisition of US (last year US and Spanish) subsidiaries has been written off against the profit and loss account reserve. As permitted by FRS10, this goodwill has not been reinstated in the balance sheet and remains written off to reserves. 40 Marks and Spencer p.l.c. Notes to the financial statements 26. Reconciliation of movements in Group shareholders’ funds Profit attributable to shareholders Dividends Other recognised gains and losses relating to the year New share capital subscribed Amounts deducted from profit and loss account reserve in respect of shares issued to the QUEST Purchase of own shares Goodwill transferred to profit and loss account on closure of businesses Net (reduction)/addition to shareholders’ funds Shareholders’ funds at 1 April Shareholders’ funds at 31 March 27. Reconciliation of operating profit to net cash inflow from operating activities Operating profit Exceptional operating charges (see note 4A) Operating profit before exceptional charges Depreciation Decrease in stocks Increase in customer advances Decrease in other debtors Increase in creditors Net cash inflow before exceptional items Exceptional operating cash outflow (see note 28A) Net cash inflow from operating activities 28. Analysis of cash flows given in the cash flow statement A Exceptional operating cash flows UK redundancy costs paid European restructuring costs paid Exceptional operating cash outflow B Returns on investments and servicing of finance Interest received Interest paid Dividends paid to minorities Net cash inflow from returns on investments and servicing of finance C Taxation UK corporation tax paid Overseas tax paid Cash outflow for taxation D Capital expenditure and financial investment Purchase of tangible fixed assets Sale of tangible fixed assets Purchase of fixed asset investments Sale of fixed asset investments Net cash outflow for capital expenditure and financial investment 2001 £m 1.3 (258.3) (257.0) 11.6 7.1 – (20.3) (1.3) The Group 2000 £m 258.7 (258.6) 0.1 (13.8) 11.8 (1.1) – 24.4 (259.9) 4,905.3 4,645.4 21.4 4,883.9 4,905.3 2001 £m 440.5 26.5 467.0 275.9 14.7 (117.8) 43.8 23.1 706.7 (30.3) 676.4 2001 £m (29.5) (0.8) (30.3) 13.1 – (0.5) 12.6 The Group 2000 £m 471.0 72.0 543.0 261.6 40.3 (206.2) 0.9 51.1 690.7 (49.2) 641.5 The Group 2000 £m (44.7) (4.5) (49.2) 17.8 (2.0) (0.6) 15.2 (164.5) (0.1) (164.6) (143.5) (2.2) (145.7) (269.8) 18.9 (18.0) 10.7 (258.2) (447.5) 266.0 (1.9) 16.4 (167.0) 28. Analysis of cash flows given in the cash flow statement (continued) E Acquisitions and disposals Closure of Canadian operations Sale of Splendour.com Ltd Repayment of loan by joint venture Acquisition of minority interest Cash inflow/(outflow) for acquisitions and disposals F Management of liquid resources Decrease in cash deposits treated as liquid resources Net purchase of government securities Net purchase of listed investments Net sale of unlisted investments Net decrease/(increase) in short-term deposits Cash inflow/(outflow) from decrease/(increase) in liquid resources G Financing Increase in bank loans, overdrafts and commercial paper treated as financing (Redemption)/issue of medium term notes Decrease in other creditors treated as financing Debt financing as shown in analysis of net debt (see note 29) Purchase of own shares Shares issued under employees’ share schemes Net cash (outflow)/inflow from (decrease)/increase in financing 29. Analysis of net debt Net cash: Cash at bank and in hand (see note 18C) Less: deposits treated as liquid resources (see below) Bank loans, overdrafts and commercial paper (see note 21B) Less: amounts treated as financing (see below) Net cash per cash flow statement Liquid resources: Deposits included in cash (see above) Current asset investments (see note 16) Liquid resources per cash flow statement and note 28F Debt financing: Bank loans, overdrafts and commercial paper treated as financing (see above) Medium term notes (see note 21B) Other creditors (see note 21B) Debt financing (see note 28G) Net debt www.marksandspencer.com 41 2001 £m (0.9) (0.8) 7.6 – 5.9 135.5 (67.5) (0.3) 2.0 194.0 263.7 76.0 (310.8) (11.1) (245.9) (20.3) 0.8 (265.4) The Group 2000 £m (15.4) – 0.5 (6.2) (21.1) 18.4 (5.0) (12.9) 31.0 (194.0) (162.5) 2.3 254.3 (5.7) 250.9 – 9.4 260.3 At 1 April 2000 £m Cash flow £m Exchange At 31 March 2001 movement £m £m 301.1 (160.1) 141.0 (469.0) 382.0 (87.0) 54.0 160.1 386.4 546.5 (382.0) (1,386.5) (83.4) (1,851.9) (149.2) 135.5 (13.7) (50.5) 76.0 25.5 11.8 (135.5) (128.2) (263.7) (76.0) 310.8 11.1 245.9 2.5 (0.4) 2.1 (15.3) 13.7 (1.6) 0.5 0.4 1.8 2.2 154.4 (25.0) 129.4 (534.8) 471.7 (63.1) 66.3 25.0 260.0 285.0 (13.7) (9.4) – (471.7) (1,085.1) (72.3) (23.1) (1,629.1) (1,251.4) (6.0) (20.4) (1,277.8) 42 Marks and Spencer p.l.c. Notes to the financial statements 30. Commitments and contingent liabilities A Commitments in respect of properties in the course of development B Guarantees by the Company in respect of debt instruments issued by subsidiaries C Guarantees made in the ordinary course of business on behalf of overseas subsidiaries 2001 £m 54.6 – – The Group The Company 2000 £m 103.9 – – 2001 £m 44.8 2000 £m 101.1 1,716.6 1,780.8 121.3 129.2 D Marks and Spencer (Ireland) Limited and its subsidiary Aprell Limited have availed themselves of the exemption provided for in S17 of the Companies (Amendment) Act 1986 (Ireland) in respect of the documents required to be annexed to their annual returns. E Other material contracts: In the event of a material change in the trading arrangements with certain warehouse operators, the Company has a commitment to purchase fixed assets, at values ranging from historical net book value to market value, which are currently owned and operated by them on the Company’s behalf. F Commitments under operating leases: At 31 March 2001 annual commitments under operating leases were as follows: Expiring within one year Expiring in the second to fifth years inclusive Expiring in more than five years The Group The Company Land & buildings £m 4.5 29.2 87.4 121.1 Other £m 1.4 1.8 – 3.2 Land & buildings £m 0.7 2.1 44.5 47.3 Other £m 1.2 1.2 – 2.4 31. Foreign exchange rates The principal foreign exchange rates used in the financial statements are as follows (local currency equivalent of £1): Euro1 US dollar Hong Kong dollar Japanese yen Sales Average Rate Profit Average Rate Balance Sheet Rate 2001 2000 2001 2000 2001 2000 1.63 1.48 11.54 163.67 – 1.62 12.57 177.16 1.62 1.47 11.59 163.54 – 1.61 12.51 175.88 1.62 1.43 11.11 178.50 1.67 1.60 12.43 163.91 1Prior year sales and profits were translated using exchange rates for legacy currencies and a weighted average exchange rate for the Euro has therefore not been calculated. 32. Related party transactions There were no material transactions with related parties as defined by FRS8, ‘Related Party Transactions’. Group financial record FOR THE YEAR ENDED 31 MARCH Profit and loss account1,2 Turnover: General Foods Financial Services Total turnover (excluding sales taxes) Retailing Financial Services Operating profit United Kingdom Europe (excluding UK)3 North America Far East Excess interest charged to cost of sales of Financial Services Total operating profit Analysed as: Before exceptional operating (charges)/income Exceptional operating (charges)/income Retailing Financial Services Excess interest charged to cost of sales of Financial Services Loss on operations to be discontinued Loss on closure of businesses (Loss)/profit on disposal of property and other fixed assets Net interest income Profit before taxation Taxation on ordinary activities Minority interests Profit attributable to shareholders Dividends (Loss)/profit for the year Balance sheet1 Intangible fixed assets Tangible fixed assets Fixed asset investments Current assets Total assets Creditors due within one year Total assets less current liabilities Creditors due after more than one year Provisions for liabilities and charges Net assets www.marksandspencer.com 43 2001 £m 52 weeks 2000 £m 53 weeks 1999 £m 52 weeks 1998 £m 52 weeks 1997 £m 52 weeks 4,413.5 3,299.1 363.1 8,075.7 7,712.6 363.1 4,629.6 3,201.3 364.6 8,195.5 7,830.9 364.6 404.6 (11.4) 32.0 7.4 7.9 440.5 467.0 (26.5) 336.3 96.3 7.9 (224.0) (1.7) (83.2) 13.9 145.5 (142.7) (1.5) 1.3 (258.3) (257.0) 472.7 (14.8) 16.4 (3.3) – 471.0 543.0 (72.0) 355.1 115.9 – – (45.4) (22.3) 14.2 417.5 (158.2) (0.6) 258.7 (258.6) 0.1 4,765.1 3,110.3 348.6 8,224.0 7,875.4 348.6 565.1 (90.8) 15.7 (3.5) 25.5 512.0 4,811.4 3,157.1 274.8 8,243.3 7,968.5 274.8 1,014.1 31.9 16.7 18.3 22.7 1,103.7 4,601.7 3,024.1 216.1 7,841.9 7,625.8 216.1 931.3 37.3 20.7 32.7 – 1,022.0 600.5 (88.5) 1,050.5 53.2 1,022.0 – 375.8 110.7 25.5 – – 6.2 27.9 546.1 (176.1) 2.1 372.1 (413.3) (41.2) 991.6 89.4 22.7 – – (2.8) 54.1 1,155.0 (338.7) (0.4) 815.9 (409.1) 406.8 – 3,964.8 69.7 3,401.5 7,436.0 (2,345.0) 5,091.0 (187.2) (31.0) 946.3 75.7 – – – (1.8) 65.9 1,086.1 (346.1) (1.3) 738.7 (368.6) 370.1 – 3,412.0 36.6 3,203.0 6,651.6 (1,775.1) 4,876.5 (495.8) (31.8) – 4,118.9 58.3 3,516.2 7,693.4 (1,981.6) 5,711.8 (735.1) (315.7) 1.3 4,242.1 55.0 3,717.1 8,015.5 (2,162.8) 5,852.7 (804.3) (126.6) – 4,387.5 61.2 3,355.9 7,804.6 (2,029.8) 5,774.8 (772.6) (105.0) 1Restated for 1998 and prior years for the change in accounting policy relating to the depreciation of fit out. 2Restated for 1997 to include turnover and operating profit by destination, the results of the captive insurance company within turnover and cost of sales and the results of the treasury company within net interest income. 31999 reflects £64.0m provision for impairment of fixed assets. 4,661.0 4,921.8 4,897.2 4,872.8 4,348.9 44 Marks and Spencer p.l.c. 44 Marks and Spencer p.l.c. Group financial record FOR THE YEAR ENDED 31 MARCH Cash flow1 Net cash inflow from operating activities Returns on investments and servicing of finance Taxation Capital expenditure and financial investment Acquisitions and disposals Equity dividends paid Cash inflow/(outflow) before management of liquid resources and financing Management of liquid resources Financing Increase/(decrease) in cash Increase in net debt defined by FRS1 Key performance measures1 Gross margin2,3 Net margin2,3 Gross profit Turnover Operating profit Turnover Net margin excluding exceptional items4 Profitability2 Profit before tax Turnover Profitability excluding exceptional items5 Earnings per share (Defined by FRS14) Standard earnings6 Weighted average ordinary shares in issue 2001 £m 52 weeks 2000 £m 53 weeks 1999 £m 52 weeks 1998 £m 52 weeks 1997 £m 52 weeks 676.4 12.6 (164.6) (258.2) 5.9 (258.6) 13.5 263.7 (265.4) 11.8 26.4 641.5 15.2 (145.7) (167.0) (21.1) (413.5) (90.6) (162.5) 260.3 7.2 69.8 472.3 29.0 (345.9) (628.1) 1.0 (412.6) (884.3) 180.6 505.0 (198.7) 967.7 56.1 (342.3) (788.3) 2.6 (325.8) (430.0) 226.6 307.4 104.0 862.3 380.8 903.1 65.4 (318.6) (419.1) (0.2) (305.6) (75.0) 91.3 64.7 81.0 35.5 35.1% 34.1% 33.4% 35.2% 34.9% 5.4% 5.7% 1.8% 6.0% 5.7% 6.6% 5.1% 6.8% 5.9% 13.1% 13.0% 7.0% 12.5% 13.0% 6.6% 14.0% 13.8% 7.6% 13.4% 13.9% 0.0p 9.0p 13.0p 28.6p 26.1p Earnings per share adjusted for exceptional items 11.4p 13.2p 15.6p 27.4p 26.2p Earnings per share (Defined by IIMR) Dividend per share Dividend cover Return on equity2 Headline earnings7 Weighted average ordinary shares in issue Profit attributable to shareholders Dividends Profit after tax and minority interests Average shareholders’ funds 10.7p 11.4p 15.0p 28.7p 26.2p 9.0p 9.0p 14.4p 14.3p 13.0p 0.0 1.0 0.9 2.0 2.0 0.0% 5.3% 7.6% 17.8% 17.9% Capital expenditure1 £255.7m £450.6m £683.1m £750.2m £431.6m 1Restated for 1998 and prior years for the change in accounting policy relating to the depreciation of fit out. 2Based on results reported as continuing operations. 3Based on segmental results. 4Figures for 2001 exclude exceptional operating charges of £26.5m. Figures for 2000 exclude exceptional operating charges of £72.0m. Figures for 1999 exclude exceptional operating charges of £88.5m. 1998 excludes exceptional operating income of £53.2m. 5Excludes operating exceptional items referred to in (4) above together with non-operating exceptional items. 6Standard earnings are defined as profit after tax and minority interests. 7Headline earnings are standard earnings adjusted for certain capital items.