Annual report and financial statements 2002 things are looking up! 3 marks and spencer group plc This publication includes the Chairman’s message, the Financial Review, the Corporate Governance Statement, the Remuneration Report, the Directors’ Report, the Financial Statements and the Auditors’ Report for the year ended 30 March 2002. Reviews of financial and operating performance are contained in a separate report entitled Annual Review and Summary Financial Statement 2002. This publication, together with the Annual Review and Summary Financial Statement 2002, comprise the full Annual Report and Accounts of Marks and Spencer Group p.l.c. for 2002, prepared in accordance with the Companies Act 1985. 1 Chairman’s message 3 Financial review 11 Corporate governance 14 Remuneration report 21 Directors’ interests 21 Directors’ responsibilities 22 Directors’ report 25 Auditors’ report 26 Consolidated profit and loss account 26 Note of Group historical cost profits and losses 26 Consolidated statement of total recognised gains and losses 27 Balance sheets 28 Consolidated cash flow information 29 Notes to the financial statements 52 Group financial record The full Annual Report and Accounts with downloadable files are available online on the Marks & Spencer website at: www.marksandspencer.com www.marksandspencer.com 1 Luc Vandevelde Chairman and Chief Executive Chairman’s message In my report last year, I detailed our plan for restoring the fortunes of Marks & Spencer. It had three elements. The first was to focus on the heart of our business – our retail and financial services operations in the UK – and to get back to the fundamental strengths that had made Marks & Spencer great in the past. To succeed, we needed clarity of purpose and no distractions. The second element of the plan was therefore to stop all activities which were non-core or making a loss. Thirdly, we needed the right capital structure to make our balance sheet more efficient and to generate greater value for our shareholders. The plan was simple, radical and all-encompassing, with each element essential to the success of the whole. And it had to be accomplished rapidly: we were, after all, fighting to recover in a harsh, competitive marketplace. To generate a sense of urgency in the organisation, I deliberately imposed a tight deadline for starting to see real changes. A year on, the restructuring is complete and the changes to our capital structure – including the return of £2bn to our shareholders – have increased our potential earnings per share. Best of all, we’re seeing a marked improvement in our performance. In the 12 months to 30 March 2002, sales from continuing operations were up by 3.8% and corresponding Group operating profits by 30.8%. During the 2001 calendar year, Marks & Spencer was the best performing share in the FTSE 100. Customers are coming back, buying more and telling others. Now that we have turned the corner, our task is to secure the recovery and to keep building for our future. There is much to do and we are not complacent. Phase one may be complete, but the plan moves on as we set about growing the business and regaining our leadership in the UK market. Before we look forward, it is worth reflecting on why the turnaround has been so relatively swift. Yes we have changed our organisational and financial structures. But more importantly, we have tapped into the values and qualities that customers traditionally associated with our brand but which tended to be obscured in recent years. We have succeeded not by inventing a new Marks & Spencer, but by rediscovering the fundamental strengths of the past and making them relevant to the present. Let me outline what I believe these fundamentals to be. The first is to make sure we have the right team, without which no plan can succeed. Our Board, completely reconstituted over the past two years, is a powerful combination of people with past experience of Marks & Spencer and those who bring new skills and ideas to the organisation. We are grateful for the continuity provided by Robert Colvill who delayed his retirement from the Board until December 2001 to help restructure the business. We also welcome talented new members to the Board – Laurel Powers-Freeling, Chief Executive of Marks & Spencer Financial Services, and Jack Keenan and Paul Myners who join us as non-executive directors. It is gratifying to see how the experience and knowledge brought by each addition to the Board has enhanced our underlying culture and values. The Board of UK Retail benefits from the same combination of internal and external talent. And right down through the organisation, we are fortunate in the quality and dedication of our people. We are building a way of working based on teamwork, personal accountability and passion for our products and our 65,000 people have responded magnificently. My thanks go to all of them, as well as to the many suppliers who have worked so closely with us on our recovery plan. Along with having the right team, the next imperative is to listen to our customers. Marks & Spencer has a special place in the British way of life. I have always believed, and have often said publicly, that no other retailer in the world has such loyal customers. We may have let them down and they may have punished us by staying away, but the vast majority were waiting for the excuse to come back. They definitely – even desperately – wanted us to succeed. 2 Marks and Spencer Group p.l.c. Chairman’s message They were therefore quick to respond when they saw that Marks & Spencer was taking them seriously. As the business rediscovered its talent for innovation, quality, value and service, it also began restoring that all-important trust between retailer and customer. Shoppers started coming back through our doors, delighted to find that the Marks & Spencer they remembered was still there – and indeed even better. That is the reason why the recovery has been quicker than many people expected – not simply that we’ve got back to fundamentals, but that, in so doing, we’ve reconnected with a huge reservoir of goodwill that never ceased to exist. The vicious circle of decline became a virtuous circle of recovery when, once again, we were able to tap that capital of loyalty that represents the real value of the business. Looking ahead, our task is to keep building on our fundamental strengths, guided by our mission of making aspirational quality accessible to all. If phase one of the plan focused our efforts on the heart of our business, phase two addresses our future growth. It looks at how we deliver value, both for our shareholders and for the communities in which we operate. After much debate and refinement, it is summed up in the following statement. We will: • Regain our leadership in clothing and speciality food by translating our scale and authority into superior quality, value and appeal; • Build on our unique customer relationships through new products and services, particularly in Home and Financial Services; • Shape our store locations, formats and product offer to meet the changing needs of our customers; • Reassert our position as a leading socially responsible business. The past year has proved that returning to fundamentals and reconnecting with our customers really does make a difference. We knew the brand was strong – stronger, indeed, than its custodians – and have shown what can be achieved by releasing its inherent strength. On this basis we aim to become, once again, the standard by which all others will want to be measured and to generate increasing value for our shareholders. Thank you for standing by us as we turn the business around. Your support is much appreciated by all of us in the Group. As our fortunes now look up, we look forward to your continued support – and hope you enjoy the shopping. Luc Vandevelde Chairman and Chief Executive Financial review www.marksandspencer.com 3 Group summary The results for the year reflect the significant changes across the Group following the announcement made at the end of last financial year. We have focused on UK Retail, securing a turnaround in performance, closed loss making operations and disposed of non-core businesses, with the exception of Kings Super Markets where disposal negotiations are ongoing and Hong Kong which we have decided to retain and run as a franchise. We have also restructured our balance sheet, raising £794m from the property portfolio through sale and leaseback, securitisation and the disposal of other properties as well as £719m from two public Eurobonds. We completed the changes to our capital structure allowing £2bn to be returned to shareholders, leaving the Group with the right capital structure in place to generate greater value for our shareholders. We continue to report results from continuing operations for three main operating divisions: UK Retail, Financial Services and International Retail. During the year, we sold Brooks Brothers and closed the Continental European operation. The results of these businesses up until the dates of disposal or closure are reported under discontinued operations. Summary of results from continuing operations Turnover (ex VAT) Operating profit (before exceptional charges) Exceptional operating charges Operating profit (after exceptional charges) Non-operating exceptional income/(charges) Interest Profit on ordinary activities before tax Basic earnings per share Adjusted earnings per share Dividend per share 2002 £m 7,619.4 629.1 – 629.1 41.2 17.6 687.9 2001 £m 7,342.6 480.9 (26.5) 454.4 (84.7) 13.9 383.6 17.4p 15.9p 9.5p 8.3p 11.9p 9.0p Presented below are the highlights for the year for the Group’s continuing businesses. Commentaries are included covering the performance of UK Retail, Financial Services and International Retail. In addition, key features of the Group’s profit and loss account (including discontinued operations), balance sheet and cash flow are also discussed. Highlights • Turnover up 3.8%; • Operating profit before exceptional charges up 30.8%, largely driven by a turnaround in performance by UK Retail; • Profit on ordinary activities before tax and exceptional items up 30.7%; • Adjusted earnings per share from continuing operations up 33.6%; and • Dividend per share up 5.6%. Group turnover and operating profit before exceptionals from continuing operations UK Retail Financial Services International Retail Excess interest charged to cost of sales of Financial Services Total 2002 £m 6,575.2 350.8 693.4 – Turnover 2001 £m 6,293.0 363.1 686.5 – 7,619.4 7,342.6 Operating profit 2001 £m 2002 £m 505.2 84.2 33.3 6.4 629.1 334.8 96.3 41.9 7.9 480.9 4 Marks and Spencer Group p.l.c. Financial review 20 15 10 5 0 -5 -10 14 weeks to 7 July 12 weeks to 29 Sept 15 weeks to 12 Jan 11 weeks to 30 March 52 weeks to 30 March 2002 2001 UK Retail operating costs £m Employee costs Depreciation Property and equipment Other costs UK Retail sales performance per quarter against last year % Food Clothing Home UK Retail Turnover (£m) Operating profit (before exceptional charges) (£m) Number of stores (at the end of the year) Selling space at the end of the year (m sq ft) 2002 2001 6,575.2 505.2 312 12.2 6,293.0 334.8 303 12.4 Turnover was up 4.5% on last year at £6,575.2m. Reported sales performance (including VAT) per quarter improved in the second half of the year following the launch of the autumn ranges in early September. Like-for-like sales show a similar trend to actual sales. For the 52 weeks ended 30 March 2002, General Merchandise (which comprises clothing, footwear, gifts and home) like-for-like sales increased by 3.5% and Food like-for-like sales increased by 4.4%. The second half Clothing performance was significantly better than the first, as customers reacted positively to the improvements in product appeal, quality and fit. In Womenswear, this was helped by the changes made to product segmentation, ranging from the per una collection, targeting younger customers, through the Perfect ranges, to the Classic shops for the more traditional customer. The momentum was maintained with the ‘Magic & Sparkle’ Christmas campaign and the launch of the spring ranges in January, together with the Blue Harbour branding of the casual Menswear ranges. Customer response to the spring ranges in Womenswear and Menswear has been encouraging and has continued the progress made. The actions taken to consolidate the supply base and produce more merchandise overseas continue to deliver benefits in the Clothing buying margin, which is 3 percentage points higher than last year. Together with improvements in appeal, quality and fit, which resulted in a decrease in the proportion of merchandise sold at reduced prices, this has delivered a significant improvement in the Clothing gross profit. Going forward, we aim to exploit the opportunities that exist to improve the speed and flexibility of the supply chain. The performance of the Home business was adversely affected at the start of the year by the announcement to close the ‘Direct’ clothing catalogue business. This impact was short-lived and sales subsequently improved, further helped by two Chargecard events in October and February. In addition, we have created 27 Home concept stores within our larger stores. The performance of the Food business was relatively constant throughout the year, even against challenging comparatives for the second half of last year. Overall, we maintained our market share in a competitive environment. We have extended our reach in Food, having opened two stand-alone 10,000 sq. ft. food stores, two 3,000 sq. ft. Simply Food outlets and three outlets at railway stations in partnership with Compass Group. In the coming year we plan to open a further 20 Simply Food stores. Overall operating costs have increased by 3.6%. Employee costs includes an additional £52.8m of performance bonuses for management and store staff which was shared across 56,000 employees, and £26.0m of additional pension costs following an actuarial valuation of the pension scheme. Property and equipment costs have increased, which is in part attributable to the rental expense following the sale and leaseback transaction, but also the store renewal programme. These increases are offset by a decrease in other operating costs due to savings in consultancy fees, marketing, IT and cost savings arising out of the closure of the ‘Direct’ clothing catalogue operation. Excluding performance bonuses, UK Retail operating costs increased by 0.5%. www.marksandspencer.com 5 Financial Services Turnover Operating profit 2002 £m 350.8 84.2 2001 £m 363.1 96.3 Operating profit from Financial Services decreased by £12.1m to £84.2m. Within this, the operating profit from Financial Services retailing activities was £73.2m (last year £81.5m). The balance of the operating profit is attributable to the captive insurance company which was affected by negative investment returns for the year as a whole due to falls in the underlying markets. Scale of current business Number of accounts/policy holders (000s) 2002 2001 Customer outstandings/funds under management (£m) 2002 2001 Account Cards Personal Lending Savings Products Life and Pensions 5,089 5,009 515 548 223 174 653 634 1,530 1,625 1,140 1,042 89 80 n/a n/a The proportion of retail sales made on the Chargecard has stabilised at approximately 20%. The number of active Chargecard accounts decreased during the year, but the average outstanding balance per customer increased by 7%. Average customer borrowings have been broadly level year on year which, together with an improved net interest margin, has led to an increase in net income. In a very competitive environment personal loan advances have fallen. During the year, we reviewed the bad debt policy and amended our approach to providing for bad debts. This resulted in a revised write-off policy which, together with an increase on the proportion of balances in arrears and a strengthening of provisions in line with other providers, has led to an increase in bad debt charges of £11.9m (across all credit products) compared to last year. In other areas the number of new life and pension policies has fallen year-on-year in a competitive market and personal lines insurance and mortgage protection products have not grown to sufficient scale. During the year, we have looked at ways of more effectively leveraging the synergies between our retail and financial services businesses. We have held two discount days in stores for our Chargecard customers which were well received. Later this year we intend to pilot a combined credit and loyalty card in two regions of the UK, as part of a plan to strengthen and extend the relationship with our customers. It is expected that the impact of the pilot will add approximately £35m to Financial Services operating costs in the coming year. This includes the cost of the pilot, together with necessary infrastructure costs. However, we expect to reduce our ongoing operating costs by some £10m. International Retail Turnover (£m) Retained businesses Kings Super Markets Operating profit (£m) Retained businesses Kings Super Markets Number of stores (at the end of the year) Owned Franchise Selling space at the end of the year (000 sq ft) Owned Franchise 2002 2001 364.7 328.7 693.4 20.7 12.6 33.3 42 132 373.4 313.1 686.5 30.0 11.9 41.9 41 125 955 1,095 954 1,018 6 Marks and Spencer Group p.l.c. Financial review The results from continuing operations include sales and operating profits from Kings Super Markets as the intended disposal has not been completed. During the year, Kings Super Markets contributed £328.7m to turnover (last year £313.1m) and £12.6m to operating profits (last year £11.9m). Turnover for the retained International Retail business (Republic of Ireland, franchises and Hong Kong) decreased by 2.3% to £364.7m. Operating profits for the retained businesses were down 31.0% at £20.7m. Within this, there was an encouraging performance in the Republic of Ireland but some of our franchises partners experienced difficult trading conditions, although franchise sales improved in the final quarter. Our business in Hong Kong, which we have decided to retain and run as if it were a franchise, also traded below last year’s level in a weak economy and incurred approximately £5m in restructuring and abortive sale costs. Discontinued operations The Group announced in March 2001 that it intended to divest or close non-core or loss making activities including Marks and Spencer Direct, stores in Continental Europe, Brooks Brothers and Kings Super Markets in the US and to sell the Hong Kong subsidiary to a franchise partner. All of these have been achieved with the exception of the sale of Kings Super Markets which is currently under negotiation and Hong Kong which has been retained as a subsidiary, but is run as a franchise. The results of Brooks Brothers and the Continental European operation up until the dates of disposal or closure are reported under discontinued operations. The cost to date of exiting Continental European operations is £136.8m, including trading losses of £42.5m. The provision we set up at 31 March 2001 has been utilised against these costs and we have released £10.0m as we now expect the total cost of closure to be less than originally anticipated. Brooks Brothers was sold for £157.1m. The disposal gave rise to a book loss of £376.7m after a charge of £368.2m for goodwill which was previously written off to reserves when Brooks Brothers was acquired. Excluding goodwill, the net loss on disposal was £8.5m subject to finalisation of the sale process. Asset disposals The sale and leaseback of 78 smaller stores raised £344.1m (net of costs) and generated a profit of £50.0m which is included in the overall profit on disposal of fixed assets of £41.2m. The disposal of other properties has raised £111.8m (net of costs). Interest Net interest income increased to £17.6m from £13.9m last year, as a result of higher average retail cash balances, which benefited from the proceeds of the disposal of businesses and properties, pending the repayment to shareholders. 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 3). The total interest cost incurred by Financial Services was £103.7m (last year £115.3m). In the consolidated financial statements, 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. The intra-group interest added back this year of £6.4m arose in the first half of the year when the interest charged to cost of sales of Financial Services was greater than the interest payable for that period. Taxation The pre-exceptional tax charge for the year was £195.7m, giving an effective tax rate of 29.6% (excluding the effect of exceptional items) compared to 32.9% last year. The decrease in the rate is attributable to losses in the prior year in respect of Continental European businesses for which no tax credit was available (trading losses for this year were provided for at the previous year end). These rates also reflect the adoption of the new accounting standard on deferred tax which has reduced profit after tax by £3.3m (last year £6.8m) from £156.7m to £153.4m and increased the effective rate of tax by 0.5 percentage points (last year 1.4 percentage points). www.marksandspencer.com 7 J 03 O 03 N 03 J 04 F 04 A 04 D 05 J 06 J 06 J 06 A 06 N 06 D 06 J 07 N 11 S 15 D 26 USD GBP EUR 3,000 2,500 2,000 1,500 1,000 500 A 02 M 03 Cumulative UK Debt Maturity £m J 02 M 02 J 02 A 02 S 02 N 02 D 02 J 03 F 03 Earnings per share Earnings per share for the period was 5.4p (last year a loss per share of 0.2p). An adjusted earnings per share figure of 16.3p (last year 11.2p) has been calculated excluding the effect of exceptional items. Details of the calculation are given in note 10. Dividend A final dividend of 5.8p (last year 5.3p) is proposed, making the total dividend for the year 9.5p (last year 9.0p). Cash flow Analysis of free cash flow (operating cash flow before acquisitions and disposals and transactions with shareholders) is as follows: Cash flow analysis Cash inflow from Retail operating activities Cash inflow from Financial Services operating activities Capital expenditure Proceeds from asset disposals Net interest received Tax paid Free cash flow 2002 £m 853.5 240.2 (285.7) 455.6 36.8 (179.4) 1,121.0 2001 £m 654.2 22.2 (269.8) 18.9 13.1 (164.6) 274.0 The cash inflow from Financial Services operating activities is stated after a £76.2m decrease this year (last year a £117.8m increase) in loans and advances to customers. During the year, the Group acquired tangible fixed assets totalling £290.5m (last year £255.7m). After taking into account the timing of payments the cash outflow for capital expenditure was £285.7m (last year £269.8m). Of this, £61.7m was spent on new space and £122.0m on store modernisation. Capital expenditure is expected to be broadly level in the coming financial year. Net proceeds from asset disposals include £344.1m from the sale and leaseback of properties, together with the proceeds from other asset disposals. The sale and leaseback transaction has a committed rental liability in the first year of approximately £25m rising by 1.95% per annum. Capital structure The total movements in net debt comprise the amounts shown in the table below: Opening net debt Free cash flow Dividends Net sale of fixed asset investments Sale/closure of businesses Issue of new shares under employee share schemes Repurchase of own shares Redemption of ‘B’ shares Issue/redemption expenses Exchange movement Closing net debt £m (1,277.8) 1,121.0 (256.7) 6.1 261.6 17.3 (52.0) (1,717.9) (9.3) 0.7 (1,907.0) Purchase of own shares During the financial year, 21,446,162 shares (representing 0.75% of issued share capital of Marks and Spencer p.l.c.) were purchased in the market for a total cost of £52.0m, at an average price of 241.9p. Financing Bonds were issued in a total amount of £321.5m (net of costs) securitising the rental income from a portfolio of 45 retail properties. After interest rate swaps this debt is at an average fixed rate of 6.32% with maturities ranging until 2026. 8 Marks and Spencer Group p.l.c. Financial review The Group issued two public Eurobonds during the year, £368.2m (net of costs) at a fixed rate of 6.38% maturing in 2011 and EUR550m, swapped into rates linked to £LIBOR resulting in £344.0m (net of costs) maturing in 2006. The Medium Term Note (MTN) programme was increased to £3bn and Marks and Spencer p.l.c. was added as an Issuer during the year. Twenty five new MTNs were issued during the year (excluding the two public Eurobonds) with a sterling equivalent of £822.0m and maturities ranging from one to six years. The Group’s total outstandings within this programme at the end of the financial year were equivalent to £2,062.6m (last year £1,085.1m). We currently have uncommitted bank facilities of £498.6m available together with committed facilities of £425.0m supporting our £1bn Commercial Paper programme. Average interest rates on borrowings were lower during the year at 5.9% (last year 6.5%). Capital restructuring The Group announced on 29 March 2001 that in order to create a more efficient capital structure and improve the potential for a faster rate of earnings growth, it intended to return £2bn to shareholders. This was effected by a Scheme of Arrangement, details of which are set out in notes 1 and 24 to the financial statements. Of the 2,848,387,227 redeemable B shares that were issued under the Scheme of Arrangement, 86.2% were redeemed prior to 30 March representing 54.1% of shareholdings. The remainder have the opportunity to be redeemed next in September 2002 and at six-monthly intervals thereafter. Historically, the retail business has been debt free. Part of the intention behind the return of capital was to ‘gear up’ the retail balance sheet to a more optimum capital structure. Retail gearing at 30 March 2002 was approximately 27.0%, broadly in line with our expectations. Retail and Financial Services balance sheets at 30 March 2002 Fixed assets Stocks Loans and advances to customers Other debtors Trade and other creditors Provisions Net debt Net assets Gearing Retailing £m 3,419.0 325.3 – 358.1 (904.8) (205.6) (475.0) 2,517.0 Financial Services £m 12.5 – 2,183.0 78.2 (279.2) 1.8 (1,432.0) Total Group £m 3,431.5 325.3 2,183.0 436.3 (1,184.0) (203.8) (1,907.0) 564.3 3,081.3 27.0% 76.1% 46.9% Retail fixed charge cover is an indicator of a business’ ability to meet its fixed charges, those being rent and interest. We will target a fixed charge cover of between five and seven times. In future we will focus on retail gearing and fixed charge cover to enable targeting the optimum gearing of the retail business, thereby maximising shareholder value. 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 and forward currency contracts. 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. www.marksandspencer.com 9 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: (a) Interest rate risk Interest rate risk in respect of debt on the retail balance sheet is reviewed on a regular basis. At the balance sheet date interest obligations in respect of the property securitisation and the Eurobond issued in sterling were at fixed rates. As approximately two thirds of the debt currently finances the operation of Financial Services (see point (e) below), current Group policy is to maintain this portion of debt as floating rate 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 is managed by using forward currency contracts to hedge between 80% and 100% of sales for periods averaging 10 to 15 months forward. Imports are primarily contracted in sterling and only economic exposures arise. 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 Interest rate exposures for Financial Services 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 financial statements. Euro Approximately £2.6m was charged during the period to complete the necessary work for the introduction of the Euro, giving an overall cost of approximately £7.8m. Pro-forma profit and loss account The sale and leaseback transaction, return of capital to shareholders and the proposed disposal of Kings Super Markets will have a significant effect on earnings in the coming year. If these transactions had occurred at the beginning of the year, then we estimate that our earnings from continuing operations, but before exceptional items, would have been as follows: 2002 Pro-forma £m Turnover Operating profit Interest Profit before tax Retail fixed charge cover Earnings per share 7,291 602 (49) 553 6.0x 16.7p 10 Marks and Spencer Group p.l.c. Financial review Accounting for pensions Financial Reporting Standard (FRS) 17 ‘Retirement Benefits’ was issued in November 2000 to replace SSAP 24 ‘Accounting for Pension Costs’ and is fully effective for the accounting periods ending on or after 22 June 2003. This year the Group has continued to account for pension costs under SSAP 24 although in accordance with the FRS 17 transitional arrangements, certain additional disclosures are included in the notes to the financial statements. The actuary of the Group’s UK defined benefit pension scheme carried out a formal valuation of the scheme as at 1 April 2001. This valuation revealed a shortfall of £134m in the market value of the assets of £3,102m compared to the actuarial liability for pension benefits (a funding level of 96%). In accordance with FRS 17, the actuary has updated the valuation of the UK scheme as at 30 March 2002. The results of the update show that the deficit has increased to £400m (£280m after deferred tax). Details of the assumptions used in the formal and updated valuations are given in note 11A to the financial statements. The increase in the deficit over the year is attributable to the actuarial loss that would have been recognised through the Statement of Total Recognised Gains and Losses if FRS 17 had been fully implemented. Approximately £60m of the increase in the deficit over the year results from a reduction in the corporate bond rate (used to discount the liabilities) from 6.0% to 5.9% with the balance due largely to a lower than expected value of assets in the fund. The FRS 17 net pension liability has no impact on pension funding and as a consequence has no impact on the Group’s current or future cash flow or reported earnings. Had the Group charged pension costs to the profit and loss account under FRS 17, the charge would have been in the region of £100m compared to the current charge of £148m under SSAP 24. Outlook for 2002/03 Clothing margins should continue to improve as we anticipate an improvement of approximately 1 percentage point in the Clothing buying margin and lower markdowns following improved performance in the second half of 2001/02. Food sales will be adversely affected by no Easter trading periods in 2002/03 compared to two in 2001/02 and this will impact sales by approximately 0.7% for the full year. Underlying UK Retail operating costs for 2002/03 are budgeted to increase marginally ahead of inflation. In addition, there will be: • the full year impact, approximately £25m, of the sale and leaseback transaction; • one-off costs of approximately £10m, which will be incurred principally for IT and infrastructure in preparation for the relocation of the Corporate Head Office; and • additional costs of approximately £15m relating to the Zip project offset by a corresponding benefit in the Childrenswear gross margin. Taking these into account, UK Retail operating costs will increase by approximately 5%. In addition, the pilot of a combined credit and loyalty card will add approximately £35m to Financial Services operating costs in the coming year. This includes both the cost of the pilot together with necessary infrastructure costs. However, we expect our ongoing operating costs to decrease by some £10m and bad debts to return to the level experienced in the previous year. 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. Corporate governance www.marksandspencer.com 11 The Group is committed to high standards of corporate governance and has applied the Combined Code principles as follows: Directors As at 30 March 2002 the Board comprises 11 directors, five of whom are non-executive. In addition, from 2 April 2002 Paul Myners joined the Board as a non-executive director. 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 as Managing Director of UK Retail, and Laurel Powers-Freeling as Chief Executive of Financial Services; • the Board comprising 50% non-executive directors, with a wide range of experience and expertise, who bring an independent judgement on issues of strategy, performance and resources; and • 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. Brian Baldock is the Senior Independent Director. All non-executive directors are considered independent. 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 and all directors are required to offer themselves for re-election at least every three years. 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 fulfiling 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 five 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. The Financial Services division has its own Audit and Compliance Committee which meets three times a year, reports regularly to the Financial Services Board and 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. In some cases the nature of the advice may make it more timely and cost-effective to select PwC who already have a good understanding of the Group. PwC may also be appointed for consultancy work but only after rigorous checks to confirm they are the best provider, including competitive tender. 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 4 on page 33. 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 four non-executive directors, is chaired by Dame Stella Rimington, and meets at least five times annually. The Remuneration Report appears on pages 14 to 20 and contains a statement of remuneration policy and details of the remuneration of each director. 12 Marks and Spencer Group plc Corporate governance 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 is proposing a separate resolution to shareholders at the 2002 AGM. 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 (‘CSR’) Committee: provides the Board with an overview of the social, environmental and ethical impacts of the Group’s activities. It is chaired by Luc Vandevelde, is comprised of main Board members and senior management and meets at least three times annually. The Committee reviews the Group’s CSR strategy, policies and performance on behalf of the Board. The Group’s risk assessment process is applied to identify the key risks in the areas of employment policy, ethical trading, environmental management, animal welfare, health and safety and community involvement. Our first full CSR Report will accompany our next annual report in June 2003 following consultation with our principal stakeholders and will be externally audited and verified. 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 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. 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 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 presented 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 executive directors’ assessment of the Group’s risks and discussion by the Board of the Group Risk Profile. www.marksandspencer.com 13 This process has been in place for the year under review and up to the date of approval of the annual report and accounts. It has been regularly 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 performance. These include: • communication of the Group’s strategy, objectives and targets; • 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; • reporting of accounting and legal developments to the Board; • review of treasury policies by the Treasury Committee with changes approved by the Board; and • review of social, environmental and ethical matters by the Corporate Social Responsibility Committee – see page 12. 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. Compliance with the Combined Code The directors confirm that for the year ended 30 March 2002 the Company complied with all the Code provisions. 14 Marks and Spencer Group p.l.c. Remuneration report Strategy The success of Marks & Spencer is dependent upon the skill and experience of motivated employees throughout all levels of the business, and it is part of our strategy to attract, motivate and retain high calibre individuals who are able to secure the recovery of the business and continuously build for the future. 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 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 Committee) The Committee comprises Dame Stella Rimington (Chairman), Brian Baldock, Tony Ball and Jack Keenan (appointed September 2001). 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, in particular for delivering superior performance which contributes to improved business results. The Committee keeps itself fully informed of all relevant developments and best practice in the field of remuneration and seeks advice where appropriate from external advisors. Remuneration policy The Company aims to align the interests of all employees closely with the interests of shareholders in securing the Group’s recovery. Total remuneration comprises fixed pay, variable pay and benefits. The performance-related element now forms a more significant proportion of the total potential 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 42,700 employees hold approximately 31 million shares in their own right and 31,000 employees hold options on 78 million shares under the SAYE scheme. Salaries and benefits Salaries and benefits for executive directors are reviewed annually. Salaries are benchmarked against equivalent market salaries for companies with a similar turnover and market capitalisation and are currently set around the median point of the comparator group. The salaries are set by the Committee 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. Annual Bonus Scheme The Annual Bonus Scheme is designed to reinforce the relationship between individual and corporate performance and reward. The targets are determined annually by the Committee and incorporate a mixture of financial measures and business targets. The achievement of targets for all executive directors is assessed by the Committee. The current maximum bonus for directors is 50% of base salary for on-target performance and up to 100% for exceeding targets. All staff are now eligible to participate in the Annual Bonus Scheme. Bonus payments are based on measurable achievement of challenging financial and business targets, set in the corporate operating plan each year and approved by the Board. www.marksandspencer.com 15 Chairman’s bonus Under the terms of Luc Vandevelde’s service contract, on recruitment in February 2000, the Company set strategic and qualitative targets for the award of his first annual bonus in 2001, which were subsequently met. However, in advance of the Committee meeting (in May 2001) to determine his 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. Last year the Committee agreed the following in relation to the Chairman’s bonus for the year to 30 March 2002: • Award bonus of 100% of annual salary if financial targets set by the Committee were met; • Add to this bonus potential a sum equal to half of last year’s waived bonus (£352,000) if those same financial targets were met; • Issue shares to him in May 2002, equal to the value of the other half of the waived bonus (£352,000). Long Term Incentive Plan To align directors’ remuneration more closely with shareholders’ longer term interests, the Company has an Executive Share Option Scheme with stretching earnings per share targets and will propose at this year’s AGM to introduce a Long Term Incentive Plan in the form of an Executive Share Matching Plan with total shareholder return measured against comparator groups of companies (see AGM Notice of Meeting booklet for further details). Shorter term shareholder interests are aligned through the cash bonus scheme which is linked to financial performance on an annual basis. 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 latest Scheme was approved by shareholders at the AGM in July 2000. Details of the Scheme are given in section 6 of this report. Shareholding policy A requirement has been introduced this year that the executive directors within five years of 1 June 2002 or within five years of appointment (whichever is the later) should hold shares whose market value at that time is equivalent to or greater than their then current gross annual base salary. New directors Alison Reed, an existing member of senior management, was appointed to the Board as Finance Director on 11 July 2001. Laurel Powers-Freeling was recruited and appointed to the Board on 6 November 2001 as Chief Executive of Marks & Spencer Financial Services. Further details of the terms of her appointment can be found in section 2 of this report. Jack Keenan was appointed as a non-executive director with effect from 1 September 2001. Paul Myners was appointed as a non-executive director with effect from 2 April 2002. 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. No directors currently have a Service Contract entitling them to more than 12 months’ notice. Luc Vandevelde’s contract entitles him to nine months’ notice. Non-executive directors The non-executive directors have service agreements with the Company for an initial three-year term which is terminable on three months’ notice. They do not participate in any of the Company’s Share Schemes nor the Annual Bonus Scheme. The Chairman and the executive directors determine the remuneration of non-executive directors. 16 Marks and Spencer Group p.l.c. Remuneration report 1 Directors’ emoluments Chairman and Chief Executive Luc Vandevelde1 Executive directors (appointed from) Roger Holmes2 (1 January 2001) Alan McWalter David Norgrove (18 September 2000) Laurel Powers-Freeling3 (6 November 2001) Alison Reed4 (11 July 2001) Non-executive directors (appointed from) Brian Baldock5 Tony Ball (1 September 2000) Jack Keenan6 (1 September 2001) Kevin Lomax (1 September 2000) Dame Stella Rimington Retired directors (retirement date) Robert Colvill7 (31 December 2001) Sir Michael Perry (11 July 2001) Sir Ralph Robins (11 July 2001) Sir David Sieff (11 July 2001) Former directors Total Salary £000 Profit share8 £000 Benefits9 £000 Bonus10 £000 Total 2002 £000 654 431 300 272 114 239 34 34 20 34 50 289 11 11 11 n/a 2,504 16 n/a 8 7 n/a 6 n/a n/a n/a n/a n/a 7 n/a n/a n/a n/a 44 206 1,358 2,234 52 43 19 119 20 – – – – – 104 – – 3 n/a 566 431 300 272 100 239 n/a n/a n/a n/a n/a 173 n/a n/a n/a n/a 914 651 570 333 504 34 34 20 34 50 573 11 11 14 n/a 2,873 5,987 Total 2001 £000 834 796 330 143 n/a n/a 81 20 n/a 20 50 415 34 34 39 1,202 3,998 1Luc Vandevelde was the highest paid director both this year and last. His annual salary was increased from £650,000 to £700,000 with effect from 1 March 2002. 2With effect from 1 January 2002, Roger Holmes’ annual salary was increased from £425,000 to £450,000. His emoluments for 2001 include compensation for loss of earnings from his previous employer of £654,000, awarded on his recruitment. 3Laurel Powers-Freeling was appointed to the Board on 6 November 2001 on an annual salary of £320,000. In compensation for loss of future earnings from her previous employer she has received: a payment of £100,000 (included under benefits) and a further £100,000 (included under bonus). (See section 2 – Recruitment of executive directors.) 4Alison Reed was appointed to the Board on 11 July 2001 on an annual salary of £330,000. 5Brian 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 annual fee was reduced to £34,000. 6Jack Keenan was appointed as a non-executive director on an annual fee of £34,000. 7Robert Colvill retired from the Board on 31 December 2001 but remained as a full-time employee until 31 March 2002 to oversee the transactional elements of the business restructure as well as continuing to manage Financial Services whilst succession was secured. His annual cash bonus was therefore set against transaction targets relating to the business restructure. The Committee decided that as he agreed to remain with the Company beyond his normal retirement date, a compensatory payment should be made of 15% of his salary for the period from 1 July 2000 to 31 March 2002 for the self-funding of his pension arrangements (included under benefits). (Emoluments for the 3 months to 31 March 2002 are shown under section 5 – Former Directors.) 8In line with all other employees, executive directors are allocated profit sharing based on a percentage of their earnings following the qualifying period. Further information on profit sharing is given in note 11c of the financial statements. 9Benefits include the provision of cars, fuel and travel. Included 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 contract, the Company provides accommodation in London on which he is assessed for tax. A payment is also made to Roger Holmes, Alan McWalter and Laurel Powers-Freeling 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). Laurel Powers-Freeling is also provided with accommodation in Chester, to accommodate her working pattern (two days in London, three days in Chester – the location of our Financial Services operation). A taxable benefit arises which is met by the Company. 10This year’s annual bonus for executive directors has been awarded at a level of 100% of base salary as financial targets have been significantly exceeded. An explanation of the bonus awarded to Luc Vandevelde is given on page 15. No bonus was awarded last year. (See footnote 3 above in relation to Laurel Powers-Freeling and footnote 7 in relation to Robert Colvill.) 11Paul Myners was appointed as a non-executive director on 2 April 2002 on an annual fee of £34,000. www.marksandspencer.com 17 2 Recruitment of executive directors During the year, Laurel Powers-Freeling was recruited and appointed to the Board as Chief Executive of Marks & Spencer Financial Services. She was appointed as a director on 6 November 2001 on the following terms: • salary of £320,000 p.a.; • payment of £100,000 as compensation for loss of future benefits from her previous employer (included within benefits in section 1); • a guaranteed bonus of £100,000 as compensation for loss of bonus from her previous employer and in lieu of joining the 2001/02 annual cash bonus scheme (included under bonus in section 1); • supplement of 10% of the difference between the pension earnings cap and her base salary (see section 4 – Pensions) (included within benefits in section 1); and • 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 As disclosed in last year’s Annual Report, a total of £2,742,000 was paid to directors who retired during last year as compensation for termination of their service contracts (12 months’ salary and benefits and loss of pensionable service). In addition to last year’s payments the directors listed below are entitled to compensation for the senior management bonus payable for this financial year on a pro-rata basis as shown: Retired directors (retirement date) Clara Freeman (18 September 2000) Guy McCracken (18 September 2000) Peter Salsbury (18 September 2000) Roger Aldridge (19 July 2000) Joe Rowe (19 July 2000) Total Bonus compensation 2002 £000 65 97 140 48 48 398 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 provided their date of permanent appointment was prior to 1 April 2002. The Scheme is non-contributory 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 12 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 p.a., 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. 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. 18 Marks and Spencer Group p.l.c. Remuneration report 4 Directors’ pension information (continued) Luc Vandevelde3 Roger Holmes4,5 Alan McWalter4,5 David Norgrove Laurel Powers-Freeling4 Alison Reed6 Retired director Robert Colvill7 Increase in transfer value in excess of inflation1 during the year ended 30 March 2002 £000 Increase in pension earned in excess of inflation1 Accrued during the entitlement at year ended 30 March 30 March 20022 2002 £000 £000 Accrued entitlement at 31 March 2001 £000 Years of service at 30 March 2002 or date of retirement Age at 30 March 2002 51 42 48 54 44 45 61 – 1 2 14 n/a 19 16 – 22 25 198 7 176 – – 3 2 14 1 19 – – 4 5 86 1 75 – 1 3 71 n/a n/a 152 140 1Inflation has been assumed to be equivalent to the actual rate of price inflation which was 1.7% for the year to 30 September 2001. 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 30 March 2002 or date of retirement from the Board if earlier. 3Luc Vandevelde does not participate in the Company Pension Scheme (see section 1, footnote 9). 4Roger Holmes, Alan McWalter and Laurel Powers-Freeling are subject to the pension earnings ‘cap’ (£95,400 at 30 March 2002) which is reviewed annually by the Government. 5The pensions for Roger Holmes and Alan McWalter are based on a uniform accrual of two-thirds of the pension earnings ‘cap’ less the pension which they have accrued from membership of previous employers’ pension schemes (see section 1, footnote 9). 6Pension figures are from 11 July 2001 when Alison Reed was appointed director. 7Pension figures are to 31 December 2001 when Robert Colvill ceased to be a director. Having reached the normal retirement age for senior management, his accrued entitlement has increased over last year because (i) the pension, having been deferred has, in line with normal practice, been increased by a late retirement factor and (ii) an increase has been applied in line with the pension increase for all pensioners (see also section 1, footnote 7). 8The pension entitlement shown excludes any additional pension purchased by the member’s Additional Voluntary Contributions. Employees joining the Company after 1 April 2002 will, on completion of one year’s service, be invited to join the new, contributory Retirement Plan. The Plan is a defined contribution arrangement, where employees may choose to contribute between 3-6% of their salary, and the Company will contribute between 6-12%. The employee will be free to choose, from a range of investment vehicles, where the total contribution will be invested. The Company’s defined benefit pension scheme was therefore closed to new members on 31 March 2002. During the one year waiting period before joining the Plan, the employees will be covered for death in service by a capital payment of twice salary, increasing to four times salary from the date of joining the Plan. www.marksandspencer.com 19 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: Paid in year £000 Paid in 2001 £000 Early retirement pensions1 (payable until) James Benfield (22 April 2009) Lord Stone of Blackheath (7 September 2002) Derek Hayes (19 November 2008) Chris Littmoden (28 September 2003) Keith Oates (3 July 2002) Unfunded pensions Clinton Silver2 Lord Sieff of Brimpton Other Robert Colvill3 Chris Littmoden4 Sir David Sieff 5 70 93 65 88 174 88 n/a 177 87 13 68 91 63 85 170 86 61 n/a – n/a 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 pension scheme entitlement for Clinton Silver is supplemented by an additional, unfunded pension paid by the Company. 3Robert Colvill retired from the Board on 31 December 2001 but remained as an employee until 31 March 2002 to complete the restructuring announced in March 2001. The above payment comprises salary, profit share, benefits and bonus for that three-month period (see section 1, footnote 7). He continues as non-executive Chairman of Marks & Spencer Financial Services as long as is necessary to facilitate a smooth management transition on an annual fee of £45,000. 4As an ex-patriate director Chris Littmoden was entitled to have local tax obligations paid for by the Company. Since he left the Company, the local tax authorities have informed us that an additional settlement was due in relation to the period 1995 to 1997 inclusive. The amount shown above includes an element of interest due and was settled by the Company during the year. 5Sir David Sieff continued to use his company car throughout the financial year. 6 Long-term benefits All the share schemes of Marks and Spencer p.l.c. were adopted by Marks and Spencer Group p.l.c. as part of the capital reorganisation in 2002. The Company operates two types of share option schemes: (i) SAYE Scheme A Save As You Earn (SAYE) Option Scheme approved by shareholders in 1981 and renewed by shareholders in 1987 and 1997. The Scheme is open to all 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) Executive Share Option Scheme, approved by shareholders in 2000 The current Executive Share Option Scheme is open to all senior management. Annual awards of up to 150% of basic salary may be offered based on performance and, for exceptional performance, grants of up to 300% of basic salary may be awarded. The performance targets for the current 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 or current EPS if higher; • 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 or current EPS if higher. Since the 1996 Finance Act, grants of Inland Revenue Approved options have been limited to £30,000. Grants in excess of this limit, will be unapproved options, which confer no tax advantage on the participants. Earlier Schemes The Company has operated Executive Option Schemes for over 20 years following shareholder approval for the first scheme in 1977. The Remuneration Committee has imposed performance criteria for the exercise of all options granted since 1996 and the performance targets for earlier schemes are described below: 1997 Scheme The first grants under this scheme were in June 1998 and no options have been granted since June 2000. Options are subject to the following performance targets on exercise: • Tier 1 Options: earnings per share growth over three years of at least inflation plus an average of 3% per annum; • Tier 2 Options: earnings per share growth over five years which would place the Company in the upper quartile of the FTSE 100 companies. 20 Marks and Spencer Group p.l.c. Remuneration report 6 Long-term benefits (continued) 1984 and 1987 Schemes The last grants under these schemes were awarded in June 1997. The performance targets for the exercise of options granted in 1996 and 1997 are: • Earnings per share growth of at least inflation plus an average of 2% per annum. 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 current Scheme the Remuneration Committee decided that MOV will no longer increase with earnings. At the discretion of the Remuneration Committee, directors can take their options for all schemes into retirement. Options held under the 1984 and 1987 Schemes continue to be bound by MOV and can be exercised subject to the option period. For options held under the 1997, and current Schemes, options lapse if they are 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; or (iii) the options have not met the appropriate performance criteria. their value is in excess of the MOV; During the year, David Norgrove exercised an Executive Share Option and an SAYE contract making a total gain of £4,000. No other 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 385.25p; the highest and lowest share prices during the financial year (for either Marks and Spencer p.l.c. or Marks and Spencer Group p.l.c.) were 395.5p and 235.3p respectively. Luc Vandevelde Not exercisable Granted Roger Holmes Not exercisable Granted Alan McWalter Not exercisable Granted David Norgrove Exercisable Not exercisable Granted Lapsed Exercised SAYE SAYE exercised Laurel Powers-Freeling Not exercisable Alison Reed Exercisable Not exercisable Granted SAYE Retired directors Robert Colvill2 Exercisable Not exercisable Lapsed At 1 April 2001 or date of appointment Granted during the year Exercised/ At 30 March 2002 or date of retirement lapsed during the year Option price (pence) Exercise price (pence) Option period 3,984,674 – – 380,858 – 4,365,532 – 261.01 256.0 Mar 2003 – Jun 2011 Jun 2004 – Jun 2011 871,794 – – 431,164 – 1,302,958 – 228.01 296.01 Dec 2003 – Dec 2011 Jun 2004 – Dec 2011 721,310 – – 175,780 897,090 – – 80,480 402,819 – – – 11,085 – – – 278,988 – – – – – – – 5,940 19,291 – 3,633 55,249 681,807 7,452 295.01 256.0 368.01 330.01 296.01 254.0 235.01 322.0 Jan 2003 – Jun 2011 Jun 2004 – Jun 2011 May 1995 – Jun 2005 May 1999 – Dec 2011 Jun 2004 – Dec 2011 260.5 392.3 Jan 2002 – Jun 2004 – 365,713 85,053 424,961 – 10,166 – – 141,428 – – – – – – 365,713 350.0 Dec 2004 – Dec 2011 85,053 566,389 10,166 409.01 313.01 350.0 166.01 May 1996 – Jun 2005 May 1999 – Dec 2011 Dec 2004 – Dec 2011 Jan 2005 – Jun 2006 211,158 114,504 – – – – – – 75,581 186,253 63,828 369.01 491.01 May 1995 – May 2005 May 1998 – May 2004 1Weighted average price. 2Options are carried into retirement under the terms of the various schemes (see above). Directors’ interests www.marksandspencer.com 21 The beneficial interests of the directors and their families in the shares of the Company are shown below. 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 39. Further information regarding employee share option schemes is given in note 11D. Since the end of the financial year, Jack Keenan has sold 4,000 B shares. Paul Myners also held 30,000 shares at the date of his appointment on 2 April 2002. There have been no other changes 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. Shares in the Company – beneficial and family interests Ordinary shares1 at 30 March 2002 B shares At 30 March 2002 Ordinary shares at 1 April 2001 or date of appointment Luc Vandevelde Roger Holmes2 Alan McWalter David Norgrove Laurel Powers-Freeling Alison Reed2 Brian Baldock Tony Ball Jack Keenan Kevin Lomax Dame Stella Rimington 654,160 173,588 9,714 19,697 2,639 61,974 56,584 1,619 3,238 16,190 2,791 808,080 3,130 – 19,849 – 4,425 – 2,000 4,000 20,000 – 808,080 285,456 12,000 18,098 – 93,841 70,000 2,000 2,000 20,000 3,344 1The ordinary shares held at 1 April 2001, or date of appointment, are shares in Marks and Spencer p.l.c. Effective from 19 March 2002, the Company acquired 100% of the issued share capital of Marks and Spencer p.l.c. following implementation of a Scheme of Arrangement under section 425 of the Companies Act 1985. This scheme involved the issue of 17 ordinary shares and 21 redeemable B shares by the Company for every 21 ordinary shares held by the shareholders of Marks and Spencer p.l.c. The effect of this scheme is reflected in the directors’ interests shown above. 2In accordance with the Scheme of Arrangement described above, ordinary shares held in Restricted Share Plans were replaced by new ordinary shares and B shares. The Remuneration Committee decided that, upon the Scheme becoming effective, the restrictions applicable to the B shares and the new ordinary shares would cease to apply. As a result, Roger Holmes and Alison Reed have incurred an income tax liability on these shares. In order to meet this tax liability they sold 57,494 and 14,704 ordinary shares respectively, at a price of 389p and redeemed 282,326 and 80,000 B shares respectively at a price of 70p each. The participants in the Restricted Share Plans have entered into an agreement with the Company that, in the event that they cease to be employed in circumstances where, but for the Scheme, their shares would have been forfeited, they will pay the Company an amount equal to the market value of the shares on the date of release (less the tax payable on release). Directors’ responsibilities 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. The financial statements, of which the form and content 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 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 been complied with in the financial statements. 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 11 to 13. 22 Marks and Spencer Group p.l.c. Directors’ report Capital reorganisation Effective from 19 March 2002 the Company acquired 100% of the issued share capital of Marks and Spencer p.l.c. following implementation of a Scheme of Arrangement under Section 425 of the Companies Act 1985. References throughout the Annual Report and Financial Statements to the ‘Company’ refer to Marks and Spencer Group p.l.c. from 19 March 2002 onwards and prior to that to Marks and Spencer p.l.c. 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 (until 28 December 2001) 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 £153.0m (last year £5.5m loss). The directors have declared dividends as follows: Ordinary shares Interim paid, 3.7p per share (last year 3.7p) Proposed final, 5.8p per share (last year 5.3p) Total ordinary dividends, 9.5p per share (last year 9.0p) £m 105.2 133.7 238.9 The final dividend will be paid on 19 July 2002 to shareholders whose names are on the Register of Members at the close of business on 31 May 2002. Issue of new shares Share capital Changes in the period to the issued share capital of Marks and Spencer p.l.c. (i) During the period to 18 March 2002, 2,449,658 ordinary shares in the Company were issued as follows: • 2,414,644 under the terms of the Executive Share Option Schemes at prices between 215p and 358p; • 35,000 issued into the Qualifying Employee Share Ownership Trust at a price of 268.25p; and • 14 as part of the capital reorganisation. (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 21,446,162 ordinary shares for cancellation at a cost of £52.0m, representing 0.8% of its issued share capital. This authority is renewable annually and approval will be sought from shareholders at the AGM in 2002 to renew the authority for a further year. On 18 March 2002, Marks and Spencer p.l.c. had 2,848,387,227 shares in issue. Scheme of Arrangement Effective from 19 March 2002, the Company acquired 100% of the issued share capital of Marks and Spencer p.l.c. following implementation of a Scheme of Arrangement under section 425 of the Companies Act 1985. This scheme involved the issue of 17 ordinary shares and 21 redeemable B shares by the Company for every 21 ordinary shares held by the shareholders of Marks and Spencer p.l.c. (Further details of this are given in note 24 to the financial statements.) Changes in the period to the issued share capital of Marks and Spencer Group p.l.c. In the period from 19 March 2002 to 30 March 2002, 1,114,664 ordinary shares in the Company were issued under the terms of the Group’s employee share schemes at prices between 156p and 389p. Major shareholders As at 7 May 2002, the Company’s share register of substantial shareholdings showed the following interests in 3% or more of the Company’s shares: Ordinary shares % share capital Brandes Investment Partners, L.P. The Capital Group Companies, Inc. Legal and General Investment Management 135,324,632 95,850,531 77,783,788 5.87 4.15 3.37 www.marksandspencer.com 23 In addition, JP Morgan has notified us that it is holding 73,888,799 ordinary shares (3.2%) as American Depositary Receipts, 9,289,105 of which are included in the above figures for Brandes Investment Partners. Directors and their interests The current directors are listed on page 20 of the Annual Review and Summary Financial Statement. Alison Reed and Laurel Powers-Freeling were appointed executive directors of Marks and Spencer p.l.c. on 11 July 2001 and 6 November 2001 respectively. Jack Keenan was appointed non-executive director of Marks and Spencer p.l.c. on 1 September 2001. Robert Colvill retired from the Board on 31 December 2001. As part of the capital reorganisation a new company, Marks and Spencer Group p.l.c., was incorporated on 23 July 2001 – details of the Share Capital are set out in note 24 to the Accounts. The original directors were Andy Ryde and Melissa Andrews (from Slaughter and May) who resigned on 22 January 2002 when the directors of Marks and Spencer p.l.c. were appointed as directors of Marks and Spencer Group p.l.c. On 2 April 2002, Paul Myners was appointed non-executive director of Marks and Spencer Group p.l.c. The beneficial interests of the directors and their families in the shares of the Company and its subsidiaries are given on page 21. 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. Business Involvement Groups in stores, distribution centres and head office represent employees in two way communication and are involved in the delivery of change and driving business improvement. The seventh meeting of the European Council took place last July. This council provides an additional forum for communicating with employee representatives from the countries 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 38. 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. 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 the ‘Workstep Programme’. Creditor payment policy For all trade creditors, it is the Group’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. 24 Marks and Spencer Group p.l.c. Directors’ report The main trading company’s (Marks and Spencer p.l.c.) 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 for Marks and Spencer p.l.c. for the year ended 30 March 2002 were 14.3 days (10.2 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. Charitable and political contributions During the year, we spent £4.9m (last year £7.1m) in the UK in support of the community. Within this figure, direct donations to charitable organisations amounted to £2.8m (last year £3.2m). No contributions were made to any political party. Annual General Meeting The Notice of the Annual General Meeting to be held on 10 July 2002 (together with explanatory notes) is given in the booklet which accompanies this report. Since this is the first AGM of Marks and Spencer Group p.l.c. all directors are seeking election this year. The Business of the Meeting includes resolutions to receive the Remuneration Report, for the Company and relevant subsidiaries to make political donations within the wide definition of the new legislation, and to approve a new Long Term Incentive Plan in the form of an Executive Share Matching Plan. By order of the Board Luc Vandevelde, Chairman and Chief Executive London, 20 May 2002 Auditors’ report www.marksandspencer.com 25 Auditors’ report to the members of Marks and Spencer Group p.l.c. We have audited the financial statements on pages 26 to 51. Respective responsibilities of directors and auditors The directors are responsible for preparing the Annual Report. As described on page 21, 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. 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 11 to 13 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. Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group at 30 March 2002 and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985. PricewaterhouseCoopers Chartered Accountants and Registered Auditors London 20 May 2002 26 Marks and Spencer Group p.l.c. Consolidated profit and loss account 52 weeks ended 30 March 2002 52 weeks ended 31 March 2001 Continuing Discontinued operations operations £m £m Notes Continuing Discontinued operations operations Total Total As restated As restated As restated† £m £m £m £m 3 7,619.4 516.0 8,135.4 7,342.6 733.1 8,075.7 Turnover Operating profit: Continuing operations: Before exceptional charges Exceptional operating charges Continental European operations Less provision made last year Other discontinued operations Total operating profit Profit/(loss) on sale of property and other fixed assets Provision for loss on operations to be discontinued Loss on sale/termination of operations: Loss arising on sale/closure Less provision made last year Goodwill previously written off Net loss on sale/termination of operations Net interest income 5A 3,4 5B 5C 5D 629.1 – – – – 629.1 41.2 – – – – – – 17.6 6 Profit/(loss) on ordinary activities before taxation Taxation on ordinary activities 7 687.9 (195.1) Profit/(loss) on ordinary activities after taxation Minority interests (all equity) Profit/(loss) attributable to shareholders Dividends Retained profit/(loss) for the period Earnings per share Diluted earnings per share Adjusted earnings per share Diluted adjusted earnings per share Dividend per share 9 10 10 10 10 9 492.8 1.1 493.9 (238.9) 255.0 17.4p 17.3p 15.9p 15.8p Note of group historical cost profits and losses Profit on ordinary activities before taxation Realisation of property revaluation surplus/(deficit) Revaluation element of depreciation charge Historical cost profit on ordinary activities before taxation Historical cost retained loss for the period – – (42.5) 42.5 14.7 14.7 – – (102.8) 104.3 1.5 (368.2) (366.7) – (352.0) 12.6 (339.4) (1.5) (340.9) – (340.9) Notes 25 25 629.1 – (42.5) 42.5 14.7 643.8 480.9 (26.5) – – – 454.4 – – (34.0) – 20.1 (13.9) 480.9 (26.5) (34.0) – 20.1 440.5 41.2 (83.0) (0.2) (83.2) – – (224.0) (224.0) – – – – – – (238.1) (3.2) (241.3) (2.0) (243.3) – (243.3) (102.8) 104.3 1.5 (368.2) (366.7) 17.6 335.9 (182.5) 153.4 (0.4) 153.0 (238.9) (85.9) 5.4p 5.4p 16.3p 16.2p 9.5p (1.7) – (1.7) – (1.7) 13.9 383.6 (146.3) 237.3 0.5 237.8 (258.3) (20.5) 8.3p 8.3p 11.9p 11.9p (1.7) – (1.7) – (1.7) 13.9 145.5 (149.5) (4.0) (1.5) (5.5) (258.3) (263.8) (0.2)p (0.2)p 11.2p 11.2p 9.0p 52 weeks ended 30 March 2002 £m 52 weeks ended 31 March 2001 As restated† £m 335.9 67.2 1.6 404.7 (17.1) 145.5 (1.3) 1.9 146.1 (263.2) 52 weeks ended 31 March 2001 As restated† £m (5.5) 13.3 (1.7) 6.1 Consolidated statement of total recognised gains and losses Profit/(loss) attributable to shareholders Exchange differences on foreign currency translation Unrealised surplus/(deficit) on revaluation of investment properties Total recognised gains and losses relating to the period Prior year adjustment Total recognised gains and losses since last annual report Notes 25 25 7, 25 52 weeks ended 30 March 2002 £m 153.0 0.1 0.5 153.6 (79.6) 74.0 †Prior year comparatives have been restated due to the adoption of Financial Reporting Standard (FRS) 19, ‘Deferred Tax’. See note 7. Balance sheets www.marksandspencer.com 27 30 March Group 31 March 2001 2002 As restated† £m £m Company 30 March 2002 £m Notes Fixed assets 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/(liabilities) 2,166.9 1,187.3 27.0 3,381.2 50.3 2,735.2 1,291.9 91.8 4,118.9 58.3 – – – – 7,643.2 3,431.5 4,177.2 7,643.2 13 14 325.3 472.5 – 15A 15B 16 17 952.1 1,667.2 272.7 543.4 917.2 1,712.1 260.0 154.4 3,760.7 3,516.2 134.2 – – – 134.2 19 (1,750.8) (1,981.6) (1,858.1) 2,009.9 1,534.6 (1,723.9) Total assets less current liabilities 5,441.4 5,711.8 5,919.3 Creditors: amounts falling due after more than one year Provisions for liabilities and charges Net assets Capital and reserves Called up share capital Share premium account Capital redemption reserve Revaluation reserve Other reserve Profit and loss account Shareholders’ funds (including non-equity interests) Minority interests (all equity) Total capital employed Equity shareholders’ funds Non-equity shareholders’ funds Total shareholders’ funds 20 22 (2,156.3) (203.8) (735.1) (395.3) – – 3,081.3 4,581.4 5,919.3 24,25 25 25 25 25 25 25 852.7 2.8 1,717.9 387.3 (6,542.2) 6,662.4 3,080.9 0.4 716.9 – – 455.6 378.2 3,015.1 4,565.8 15.6 852.7 2.8 1,717.9 – – 3,345.9 5,919.3 – 3,081.3 4,581.4 5,919.3 2,804.9 276.0 4,565.8 – 5,643.3 276.0 3,080.9 4,565.8 5,919.3 †Prior year comparatives have been restated due to the adoption of Financial Reporting Standard (FRS) 19, ‘Deferred Tax’. See note 7. Approved by the Board 20 May 2002 Luc Vandevelde, Chairman and Chief Executive Alison Reed, Group Finance Director 28 Marks and Spencer Group p.l.c. Consolidated cash flow information FOR THE PERIOD ENDED 30 MARCH 2002 Cash flow statement Cash inflow from operating activities 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 Taxation UK corporation tax paid Overseas tax paid Cash outflow for taxation 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 inflow/(outflow) for capital expenditure and financial investment Acquisitions and disposals Closure of operations Sale of subsidiaries Repayment of loan by joint venture Cash inflow from acquisitions and disposals Equity dividends paid 52 weeks ended 30 March 2002 £m 52 weeks ended 31 March 2001 £m Notes 27 1,093.7 676.4 38.8 (2.0) – 36.8 13.1 – (0.5) 12.6 (172.0) (7.4) (179.4) (164.5) (0.1) (164.6) (285.7) 455.6 (2.9) 9.0 176.0 122.2 139.4 – 261.6 (269.8) 18.9 (18.0) 10.7 (258.2) (0.9) (0.8) 7.6 5.9 (256.7) (258.6) 29 Cash inflow before management of liquid resources and financing 1,132.0 13.5 Management of liquid resources and financing Management of liquid resources Financing Increase in cash Reconciliation of net cash flow to movement in net debt Increase in cash Cash outflow/(inflow) from increase/(decrease) in liquid resources Cash (inflow)/outflow from (increase)/decrease in debt financing Exchange movements Movement in net debt Opening net debt Closing net debt 28B 28C (29.1) (730.2) (759.3) 263.7 (265.4) (1.7) 372.7 11.8 30 28B 28C 2002 £m 372.7 29.1 (1,031.7) 0.7 (629.2) (1,277.8) 2001 £m 11.8 (263.7) 245.9 (20.4) (26.4) (1,251.4) (1,907.0) (1,277.8) Notes to the financial statements www.marksandspencer.com 29 1. Basis of accounting Marks and Spencer Group p.l.c. (the Company) was incorporated on 23 July 2001. On 19 March 2002, the Company acquired 100% of the issued share capital of Marks and Spencer p.l.c. following implementation of a Scheme of Arrangement under section 425 of the Companies Act 1985. The Scheme of Arrangement involved the issue of 17 ordinary shares and 21 redeemable B shares by the Company for every 21 ordinary shares held by the shareholders of Marks and Spencer p.l.c. The Scheme of Arrangement has been accounted for using merger accounting principles, although it does not satisfy all the conditions required (see below). Schedule 4A to the Companies Act 1985 and FRS 6 ‘Acquisition and Mergers’ require acquisition accounting to be adopted where all the conditions laid down for merger accounting are not satisfied. Under the Scheme of Arrangement, not all of the conditions were satisfied because the fair value of the non-equity share element of the consideration (the redeemable B shares) given by the Company for the shares in Marks and Spencer p.l.c. exceeded 10% of the nominal value of the share element of the consideration. However, in the opinion of the directors, the Scheme of Arrangement is a group reconstruction rather than an acquisition, since the shareholders of the Company are the same as the former shareholders in Marks and Spencer p.l.c. and the rights of each shareholder, relative to the others, are unchanged and no minority interest in the net assets of the Group is altered. Therefore, the directors consider that to record the Scheme of Arrangement as an acquisition by the Company, attributing fair values to the assets and liabilities of the Group and reflecting only the post Scheme of Arrangement results within these financial statements would fail to give a true and fair view of the Group’s results and financial position. Accordingly, having regard to the overriding requirement under section 227(6) of the Companies Act 1985 for the financial statements to give a true and fair view of the Group’s results and financial position, the directors have adopted merger accounting principles in drawing up these financial statements. The directors consider that it is not practicable to quantify the effect of this departure from the Companies Act 1985 requirements. The consolidated financial statements are presented as if the Scheme of Arrangement had been effective on 1 April 2001 except for the effect of the capital restructure and subsequent reduction of capital which took place on 22 March 2002. The consolidated profit and loss account combines the results of Marks and Spencer p.l.c. for the 52 week period ended 30 March 2002 with those of the Company for the period since its incorporation to 30 March 2002. The comparative figures relate to Marks and Spencer p.l.c. as restated for the effect of the Scheme of Arrangement. Further detail relating to the Scheme of Arrangement can be found in note 24. 2. Accounting policies The financial statements have been prepared in accordance with applicable accounting standards in the United Kingdom. A summary of the more important Group accounting policies is given below. These policies have been applied consistently with the exception of the Group’s policy on deferred tax which has been amended following the adoption of the new accounting standard on deferred tax. Details of the effect of this change in accounting policy are set out in note 7. In addition, the Group has adopted the following financial reporting standards in these financial statements for the first time: i) FRS 17 ‘Retirement Benefits’. The Group is not required to adopt this standard in full until the period ending March 2004, however the transitional disclosure requirements are set out in note 11A. ii) FRS 18 ‘Accounting Policies’ has been complied with, but has not resulted in any amendments to the Group’s accounting policies. Accounting convention and basis of consolidation 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. The Group financial statements incorporate the financial statements of Marks and Spencer Group p.l.c. and all its subsidiaries for the 52 weeks ended 30 March 2002, or to the date of disposal. Turnover Turnover comprises sales of goods to customers outside the Group less returns, VAT and sales taxes, together with interest and other income attributable to the Financial Services operations. 30 Marks and Spencer Group p.l.c. Notes to the financial statements 2. Accounting policies continued 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 on an undiscounted basis at expected tax rates on all 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 is only recognised when it is more likely than not that the asset will be recoverable in the foreseeable future out of suitable taxable profits from which the underlying timing differences can be deducted. 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 profit and loss account. Land and buildings c The Group’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 FRS 15, 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 FRS 11. 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 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. Loans and advances to customers Loans and advances are classified as impaired when an instalment is in excess of 30 days overdue. Specific provisions are made against all advances identified as impaired at the balance sheet date to the extent that, in the opinion of the directors, recovery is doubtful. Specific provisions against such exposures are calculated using a bad debt provision model, which uses the last two years credit history to produce estimates of the likely level of asset impairment. General provisions relate to latent bad and doubtful debts which are present in any lending portfolio but have not been specifically identified. General provisions are calculated using the same bad debt provision model and an evaluation of current economic and political factors. Loans and advances are written off when there is no realistic prospect of recovery, based on a predetermined set of criteria. Account balances written off include those where no payment has been received for a period of 12 months since the account was identified as doubtful, and in other situations such as bankruptcy, insolvency or fraud. 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. www.marksandspencer.com 31 2. Accounting policies continued 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, 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 FRS 10, 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. Pensions 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. All stocks are finished goods. 3. Segmental information A Classes of business The Group has two classes of business: Retailing and Financial Services. Turnover 2001 £m 2002 £m Continuing operations: Retailing activities Before exceptional operating charges Exceptional operating charges Financial Services1,2 Total continuing operations Discontinued operations – retailing activities Total operating activities Add: excess interest charged to cost of sales of Financial Services2 7,268.6 6,979.5 350.8 363.1 7,619.4 516.0 7,342.6 733.1 8,135.4 8,075.7 Total operating profit Profit/(loss) on sale of property and other fixed assets Provision for loss on operations to be discontinued Net loss on sale/termination of operations Net interest income Profit on ordinary activities before taxation Unallocated net liabilities Net assets Operating profit 2001 £m 2002 £m Operating assets 2001 £m 2002 £m 538.5 538.5 – 84.2 622.7 14.7 637.4 6.4 643.8 41.2 – (366.7) 17.6 335.9 350.2 376.7 (26.5) 96.3 446.5 (13.9) 3,565.0 3,862.4 576.7 518.0 4,141.7 (60.4) 4,380.4 329.3 432.6 4,081.3 4,709.7 7.9 440.5 (83.2) (224.0) (1.7) 13.9 145.5 4,081.3 4,709.7 4,081.3 (1,000.0) 4,709.7 (128.3) 3,081.3 4,581.4 32 Marks and Spencer Group p.l.c. Notes to the financial statements 3. Segmental information continued B Geographical split The geographical segments disclose turnover and operating profit by destination and reflect management responsibility. 2002 £m Turnover 2001 £m Operating profit 2001 £m 2002 £m Operating assets 2001 £m 2002 £m United Kingdom Retail Before exceptional operating charges Exceptional operating charges Financial Services1,2 International Continuing operations Discontinued operations Total operating activities Add: excess interest charged to cost of sales of Financial Services2 Total operating profit 6,575.2 6,293.0 350.8 363.1 6,926.0 6,656.1 693.4 516.0 686.5 733.1 1,209.4 1,419.6 505.2 505.2 – 84.2 589.4 33.3 14.7 48.0 308.3 334.8 (26.5) 96.3 3,445.6 3,757.1 576.7 518.0 404.6 4,022.3 4,275.1 41.9 (13.9) 28.0 119.4 (60.4) 59.0 105.3 329.3 434.6 8,135.4 8,075.7 637.4 432.6 4,081.3 4,709.7 6.4 643.8 7.9 440.5 1Operating profit for Financial Services includes £15.0m of merchant fee income (last year £16.2m) 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 £103.7m (last year £115.3m) of interest 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 £116.9m (last year £107.4m) (see note 6). Intra-group interest of £6.4m (last year £7.9m), being the excess over third party interest payable, has been added back in the segmental analysis to arrive at total operating profit. The intra-group interest added back this year arose in the first half of the year when the interest charged to cost of sales of Financial Services was greater than the interest payable for that period. 3UK Retail turnover including VAT comprises clothing, footwear and gifts £3,773.4m (last year £3,649.5m); home £373.3m (last year £355.8m) and foods £3,093.5m (last year £2,925.9m). VAT on UK Retail turnover was £665.0m (last year £638.2m). 4Turnover from continuing operations originates in the following geographical segments: United Kingdom £7,055.9m (last year £6,797.6m) and International £563.5m (last year £545.0m). 5The value of goods exported from the UK, including shipments to international subsidiaries, amounted to £329.8m (last year £436.0m). Turnover and operating profit for discontinued operations comprise: North America Brooks Brothers (including Japan) Corporate expenses Continental Europe6 Total discontinued operations 2002 £m 345.8 – 345.8 170.2 516.0 Turnover 2001 £m Operating profit 2001 £m 2002 £m 448.1 – 448.1 285.0 733.1 14.9 (0.2) 14.7 – 14.7 20.2 (0.1) 20.1 (34.0) (13.9) 6Operating profit for Continental Europe in 2002 is stated after utilising £42.5m of provisions, established last year as a provision for trading losses. www.marksandspencer.com 33 4. Operating profit Turnover Cost of sales Gross profit Employee costs (see note 11) Occupancy costs Repairs, renewals and maintenance of fixed assets Depreciation Other costs2 Total net operating expenses3 Less provision made last year Operating profit Continuing Discontinued operations operations £m £m 2002 Total £m Continuing Discontinued operations1 operations £m £m 2001 Total £m 7,619.4 (4,888.6) 516.0 (302.8) 8,135.4 (5,191.4) 7,342.6 (4,822.6) 733.1 (414.5) 8,075.7 (5,237.1) 2,730.8 1,093.6 249.4 111.8 225.9 421.0 213.2 2,944.0 2,520.0 99.8 60.1 4.6 23.7 52.8 1,193.4 309.5 116.4 249.6 473.8 987.1 231.2 84.5 243.4 519.4 318.6 130.7 80.3 6.7 32.5 82.3 2,838.6 1,117.8 311.5 91.2 275.9 601.7 (2,101.7) (241.0) (2,342.7) (2,065.6) (332.5) (2,398.1) – 629.1 42.5 14.7 42.5 643.8 – – – 454.4 (13.9) 440.5 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. 1After exceptional charges of £26.5m comprising employee costs of £17.0m and other costs of £9.5m. 2Included in ‘Other costs’ is the remuneration to the auditors for audit and non-audit services as follows: Audit fees Non-audit services 2002 £m 1.0 2.5 Group 2001 £m 1.1 2.1 Company 2002 £m 0.1 0.8 Included in non-audit fees above are amounts paid to PricewaterhouseCoopers for audit related services, principally relating to the corporate restructuring, of £1.9m (last year £0.5m), taxation advice £0.3m (last year £0.4m) and general consulting of £0.3m (last year £1.2m). 3Included in ‘Total net operating expenses’ are rentals under operating leases, comprising £7.1m for hire of plant and machinery (last year £4.5m) and £124.6m of other rental costs (last year £124.1m). 5. Exceptional items A Exceptional operating charges UK restructuring costs 2002 £m – 2001 £m (26.5) The £26.5m charge last year was 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). B Profit/(loss) on sale of property and other fixed assets Provision for loss on ‘Direct’ assets1 Other asset disposals2 Profit/(loss) on sale of property and other fixed assets 2002 £m – 41.2 41.2 2001 £m (19.0) (64.2) (83.2) 1Including the restructuring cost of £16.5m disclosed in note 5A above, this gave rise to total closure costs for the ‘Direct’ catalogue business of £35.5m. 2Other asset disposals mainly relate to the disposal of UK stores. C Provision for loss on operations to be discontinued Net closure costs Goodwill previously credited to reserves Provision for loss on operations to be discontinued 2002 £m – – – 2001 £m (225.3) 1.3 (224.0) The provision for loss on operations to be discontinued represented the expected cost of the closure of the Group’s Continental European subsidiaries. Net closure costs included provisions for future trading losses, losses on disposal of fixed assets, property exit costs and redundancy costs. 34 Marks and Spencer Group p.l.c. Notes to the financial statements 5. Exceptional items continued D Loss on sale/termination of operations The loss on sale/termination of operations in the current year is analysed as follows: Net closure costs Less provision made last year Net sale proceeds less net assets Goodwill previously written off to reserves Continental Europe £m Brooks Brothers £m (94.3) 104.3 – – 10.0 – – (8.5) (368.2) (376.7) Total £m (94.3) 104.3 (8.5) (368.2) (366.7) The loss on disposal last year of £1.7m relates to the sale of the Group’s interest in Splendour.com and is stated after a charge of £1.0m for goodwill. 6. Net interest income Bank and other interest income Less: amounts included in turnover of Financial Services £m 321.1 (283.9) 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 3) (116.9) 103.7 (6.4) 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 7. Taxation on ordinary activities A Taxation charge for the period Current taxation UK corporation tax at 30% (last year 30%): Current year Prior years Double taxation relief Overseas taxation Total current taxation Deferred taxation (see note 22) Current year Prior years Total deferred taxation £m 302.6 (288.7) (107.4) 115.3 (7.9) 2002 £m 37.2 (19.6) 17.6 (38.0) (63.1) (101.1) (15.8) (116.9) 2001 £m 13.9 – 13.9 (33.2) (73.0) (106.2) (1.2) (107.4) £m 190.1 4.4 (4.4) (13.8) 2002 £m 2001 As restated As restated £m £m 151.0 (6.3) 2.5 (0.7) 144.7 (4.7) 140.0 7.7 147.7 1.8 149.5 194.5 (0.1) 194.4 6.3 200.7 (18.2) 182.5 Of the current year deferred tax credit, a credit of £13.2m relates to the closure of French operations offset by a charge of £8.8m arising from short-term timing differences. Included in the tax charge for the year is a credit of £13.2m (last year £8.5m) which is attributable to exceptional charges. 7. Taxation on ordinary activities continued B Taxation reconciliation Profit before taxation Taxation at the standard UK corporation tax rate of 30% (last year 30%) Permanent differences Capital allowances (in excess of)/less than depreciation Other timing differences Utilisation of tax losses Net effect of restructuring charges Write-off of goodwill for which no tax relief available Net effect of different rates of tax in overseas businesses Adjustments to tax charge in respect of prior periods Other differences Total current taxation www.marksandspencer.com 35 2002 £m 335.9 100.8 18.4 (3.3) (5.6) – (24.2) 110.5 (2.0) 4.4 1.7 200.7 2001 £m 145.5 43.7 24.5 0.8 5.0 (0.7) 85.9 – (6.7) (6.3) 1.5 147.7 C Implementation of Financial Reporting Standard 19 The adoption of Financial Reporting Standard (FRS) 19 ‘Accounting for deferred tax’ has resulted in changes in the method of accounting for deferred tax. FRS 19 requires, subject to certain exemptions, that deferred tax be recognised in respect of all timing differences that have originated but not reversed by the balance sheet date. The Group’s previous accounting policy was to recognise a liability or asset in respect of deferred tax to the extent that it was likely to be payable or recoverable. As a result of this change in accounting policy, comparatives have been restated as follows: Profit and loss account Period to 31 March 2001 – as reported Implementation of FRS 19 Period to 31 March 2001 – as restated Tax charge Profit/(loss) for the attributable to period shareholders £m £m Earnings per share pence Adjusted earnings per share pence (142.7) (6.8) (149.5) 1.3 (6.8) (5.5) 0.0p (0.2)p (0.2)p 11.4p (0.2)p 11.2p In the current year, the effect of this change in accounting policy has been to increase the total tax charge for the period by £3.3m. Balance sheet 31 March 2001 – as reported Implementation of FRS 19 31 March 2001 – as restated Deferred tax Shareholders’ funds £m provision £m (43.5) (79.6) 4,645.4 (79.6) (123.1) 4,565.8 8. 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 £153.0m (last year £5.5m loss) includes a £134.0m profit which is dealt with in the financial statements of the Company. 9. Dividends Ordinary shares Interim paid of 3.7p per share (last year 3.7p) Proposed final of 5.8p per share (last year 5.3p) Total ordinary dividend of 9.5p per share (last year 9.0p) 2002 £m 2001 £m 105.2 133.7 238.9 106.3 152.0 258.3 36 Marks and Spencer Group p.l.c. Notes to the financial statements 10. 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 items. 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 (Profit)/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 Operating (profit)/loss from discontinued operations Adjusted earnings from continuing operations Basic pence per share 5.4 – (1.5) 12.4 – 16.3 (0.4) 15.9 £m 153.0 – (41.2) 353.5 – 465.3 (12.6) 452.7 2002 2001 Diluted pence per share per share As restated As restated As restated Basic pence per share Diluted pence £m 5.4 – (1.5) 12.3 – 16.2 (0.4) 15.8 (5.5) 19.3 83.2 1.7 222.7 321.4 20.4 341.8 (0.2) 0.7 2.9 0.1 7.7 11.2 0.7 11.9 (0.2) 0.7 2.9 0.1 7.7 11.2 0.7 11.9 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 Potentially dilutive share options under the Group’s share option schemes Weighted average ordinary shares for diluted earnings per share 2002 m 2,841.7 23.7 2,865.4 2001 m 2,872.4 9.8 2,882.2 In accordance with the provisions of FRS 14, earnings per share for prior periods have not been restated as a result of the Scheme of Arrangement. 11. Employees The average number of employees of the Group during the year was: UK stores UK head office Management and supervisory categories Other Management and supervisory categories Other Financial Services Management and supervisory categories Overseas Other Continuing operations Discontinued operations 2002 3,939 50,583 2,369 1,038 208 1,370 4,988 5,404 69,899 If the number of hours worked was converted on the basis of a normal working week, the equivalent average number of full-time employees for continuing operations would have been 45,979 (last year 46,466) and for discontinued operations 4,197 (last year 5,747). The aggregate remuneration and associated costs of Group employees were: Wages and salaries UK profit sharing (see note 11C) Social security costs Pension costs (see note 11A) Employee welfare and other personnel costs Employee costs2 Classified as: Employee costs (see note 4) Manufacturing cost of sales Continuing Discontinued operations operations £m £m 799.7 12.6 48.8 142.7 89.8 87.0 – 11.5 5.2 9.7 2002 Total £m 886.7 12.6 60.3 147.9 99.5 1,093.6 113.4 1,207.0 1,093.6 – 1,093.6 99.8 13.6 1,193.4 13.6 113.4 1,207.0 Continuing Discontinued operations1 operations £m £m 734.9 8.5 45.3 114.1 84.3 987.1 987.1 – 987.1 115.1 – 14.7 6.0 15.0 150.8 130.7 20.1 150.8 1After exceptional charges of £17.0m. 2Total employee costs include salary and benefits paid to a former director who was an employee of the Group for the period to 30 June 2001. 2001 3,880 55,511 2,242 1,299 189 1,355 4,514 7,501 76,491 2001 Total £m 850.0 8.5 60.0 120.1 99.3 1,137.9 1,117.8 20.1 1,137.9 www.marksandspencer.com 37 11. Employees continued A Pension costs The total pension cost for the Group was £147.9m (last year £120.1m) of which £138.5m relates to the UK scheme (last year £110.6m), and £9.4m relates to overseas schemes (last year £9.5m). The Group operates a number of funded defined benefit pension schemes of which the UK scheme is by far the most significant. The latest full actuarial valuation of the UK scheme was carried out at 1 April 2001 by an independent actuary using the projected unit method. The key assumptions adopted were: % Inflation rate Rate of increase in pensions in payment Rate of increase in salaries Discount rate and rate of return on investments 2.5 2.5 4.0 6.0 This actuarial valuation revealed a shortfall of £134m in the market value of the assets of the UK Scheme of £3,102m compared to the actuarial liability for pension benefits. This represents a funding level of 96%. The shortfall of £134m together with the unamortised accounting deficit relating to prior periods gives a total unamortised deficit of £177m. This is being amortised in accordance with SSAP 24 over a period of 12 years from 1 April 2001, being the remaining estimated service lives of the current Scheme members. The total UK pension cost is analysed as follows: Normal pension cost1 Amortisation of deficit Net interest elements Total 2002 £m 116.1 14.8 7.6 138.5 2001 £m 92.6 14.1 3.9 110.6 1At standard contribution rate of 19.7% (last year 15.9%). As shown in note 15, the Group has prepaid pension costs of £169.4m in relation to the UK scheme. This includes the partial funding of the deficit, offset by the amortisation and interest elements shown above, with the balance being prepaid contributions to the UK scheme. Financial Reporting Standard 17 (FRS 17) ‘Retirement benefits’ was issued in November 2000 to replace SSAP 24 ‘Accounting for pension costs’ and is fully effective for accounting periods ending on or after 22 June 2003. This year the Group has continued to account for pension costs under SSAP 24 as shown above, although in accordance with the FRS 17 transitional arrangements, certain additional disclosures are required as shown below. The major assumptions used by the independent qualified actuaries in updating the most recent valuations of the UK and Republic of Ireland defined benefit pension schemes to 30 March 2002 for FRS 17 purposes were: Rate of increase in salaries Rate of increase in pensions in payment Discount rate Inflation rate Long-term healthcare cost increases % 4.0 2.5 5.9 2.5 7.5 The assets in the UK and Republic of Ireland defined benefit pension schemes and the expected rates of return as at 30 March 2002 were: Long-term rate of return p.a. % Value £m UK equities Overseas equities Bonds Total market value of assets Present value of scheme liabilities Pension scheme deficit before adjustment for prepayment Prepaid pension costs included in assets noted above Pension scheme deficit Unfunded pension plans Post-retirement healthcare Total post-retirement liabilities Less: Related deferred tax asset Net post-retirement liability 7.9 8.3 5.7 7.3 1,156 992 1,080 3,228 (3,498) (270) (119) (389) (5) (25) (419) 126 (293) 38 Marks and Spencer Group p.l.c. Notes to the financial statements 11. Employees continued The Group financial statements already reflect a number of liabilities and assets relating to the retirement benefit schemes which give rise to the net post-retirement liabilities of £293m. If FRS 17 had been adopted in the financial statements, the net effect of this change on shareholders’ funds would be as follows: £m Net post-retirement liability Amounts currently recognised in: Debtors – prepayments and accrued income Provisions for liabilities and charges – unfunded pension plans – post-retirement healthcare – deferred tax Effect on shareholders’ funds The Group’s net assets at 30 March 2002 would be as follows: Net assets, excluding post-retirement liability Effect on shareholders’ funds (above) Net assets, including post-retirement liability (293) (50) 5 25 6 (307) £m 3,081 (307) 2,774 B Post-retirement health benefits The Group 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 30 March 2002, the Group reassessed this liability in accordance with the advice of an independent qualified actuary. The discounted present value of £25.3m (see note 22) has been fully provided. The valuation assumed a premium inflation of 7.5% and an after-tax discount rate of 5.9%. There is a matching deferred taxation asset of £7.6m. The next actuarial valuation will be carried out as at 31 March 2005. 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 £12.6m (last year £8.5m), representing 2.5% (last year 1.75%) of the earnings of 44,197 (last year 43,741) eligible employees. These shares are purchased in the market: 3,066,891 ordinary shares were purchased by the Profit Sharing Trustees in respect of the 2000/2001 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. Outstanding options granted under the United Kingdom Employees’ Save As You Earn Share Option Scheme are as follows: Options granted January 1994 January 1995 January 1996 January 1997 January 1998 January 1999 January 2000 January 2001 January 2002 Number of shares 2001 2002 Expired 518,636 1,564,963 2,793,633 2,240,437 3,536,269 3,542,787 5,384,139 3,234,005 3,877,749 6,350,030 7,896,779 20,736,825 23,856,114 29,106,220 32,355,154 – 11,706,883 Option price 319p 322p 330p 389p 467p 324p 223p 156p 250p www.marksandspencer.com 39 11. Employees continued E Executive Share Option Schemes Under the terms of the current Scheme, approved by shareholders in 2000, 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 19). Outstanding options granted under all executive share option schemes are as follows: Options granted (1984 Scheme) May 1992 May 1993 October 1993 May 1994 October 1994 May 1995 May 1996 November 1996 June 1997 (1987 Scheme) 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 June 2001 July 2001 December 2001 (2000 Scheme +4%) September 2000 December 2000 March 2001 June 2001 July 2001 December 2001 Number of shares 2002 20 01 Option price Option dates 19,576 755,171 1,650,583 995,806 1,213,976 19,576 1,440,145 1,859,827 21,541 1,275,778 1,545,062 58,950 6,172 39,844 45,850 6,172 28,460 21,541 1,245,474 1,426,796 1,248,170 1,625,742 39,507 1,509,228 2,003,084 14,546 309,093 247,221 681,181 95,323 360,655 379,338 247,221 929,298 95,323 360,655 1,992,337 1,992,337 184,615 184,615 99,261 1,738,920 3,023,780 99,261 1,280,047 2,305,306 59,352 360,655 1,992,337 1,992,337 184,615 59,352 360,655 184,615 3,191,827 4,209,681 574,358 323,393 – – – 574,358 270,641 6,490,703 168,674 1,286,778 3,341,639 4,265,494 574,358 323,393 – – – 574,358 270,641 3,454,239 156,626 1,034,056 329p 341p 399p 404p 402p 414p 458p 486p 527p 414p 458p 486p 527p 557p 404p 358p 278p 305p 261p 260p 557p 404p 358p 278p 305p 261p 260p 215p 195p 218p 256p 249p 350p 215p 195p 218p 256p 249p 350p May 1995 – May 2002 May 1996 – May 2003 Oct 1996 – Oct 2003 May 1997 – May 2004 Oct 1997 – Oct 2004 May 1998 – May 2005 May 1999 – May 2006 Nov 1999 – Nov 2006 June 2000 – June 2007 May 1998 – May 2002 May 1999 – May 2003 Nov 1999 – Nov 2003 June 2000 – June 2004 June 2001 – June 2008 Nov 2001 – Nov 2008 June 2002 – June 2009 Nov 2002 – Nov 2009 Jan 2003 – Jan 2010 Mar 2003 – Mar 2010 June 2003 – June 2010 June 2003 – June 2008 Nov 2003 – Nov 2008 June 2004 – June 2009 Nov 2004 – Nov 2009 Jan 2005 – Jan 2010 Mar 2005 – Mar 2010 June 2005 – June 2010 Sept 2003 – Sept 2010 Jan 2004 – Jan 2011 Mar 2004 – Mar 2011 June 2004 – June 2011 July 2004 – July 2011 Dec 2004 – Dec 2011 Sept 2003 – Sept 2010 Jan 2004 – Jan 2011 Mar 2004 – Mar 2011 June 2004 – June 2011 July 2004 – July 2011 Dec 2004 – Dec 2011 40 Marks and Spencer Group p.l.c. Notes to the financial statements 12. Directors A Emoluments Emoluments of directors of the Company are summarised below. Further details are given in the Remuneration Report on pages 14 to 20. 2002 £000 Aggregate emoluments Termination payments 5,987 398 2001 £000 3,998 2,742 B Transactions with directors 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. 13. Tangible fixed assets A Tangible fixed assets Cost or valuation At 1 April 2001 Additions Transfers Revaluation surplus Disposals Disposal of subsidiaries Differences on exchange At 30 March 2002 Accumulated depreciation At 1 April 2001 Depreciation for the year Disposals Disposal of subsidiaries Differences on exchange At 30 March 2002 Net book value At 30 March 2002 At 1 April 2001 Analysis of land & buildings At valuation At cost Accumulated depreciation Net book value At 30 March 2002 At 1 April 2001 B Investment properties Freehold land and buildings include investment properties as follows: Cost or valuation At 1 April 2001 Disposals Revaluation surplus At 30 March 2002 Land & buildings £m Fixtures, Assets in the course of fittings & equipment construction £m £m Group Total £m 2,896.0 9.6 30.2 0.4 (650.4) (3.1) (2.1) 2,975.0 243.5 28.5 – (330.5) (168.1) (2.3) 91.8 37.4 (58.7) – (42.6) (0.6) (0.3) 5,962.8 290.5 – 0.4 (1,023.5) (171.8) (4.7) 2,280.6 2,746.1 27.0 5,053.7 160.8 13.6 (59.3) (1.3) (0.1) 1,683.1 236.0 (264.7) (94.1) (1.5) 113.7 1,558.8 – – – – – – 1,843.9 249.6 (324.0) (95.4) (1.6) 1,672.5 2,166.9 1,187.3 27.0 3,381.2 2,735.2 1,291.9 91.8 4,118.9 Freehold £m 599.3 714.2 1,313.5 (21.6) Long leasehold £m Short leasehold £m 406.1 470.7 876.8 (28.1) 12.2 78.1 90.3 (64.0) Group Total £m 1,017.6 1,263.0 2,280.6 (113.7) 1,291.9 1,832.5 848.7 834.6 26.3 2,166.9 68.1 2,735.2 Group £m 51.5 (20.6) 0.4 31.3 www.marksandspencer.com 41 13. Tangible fixed assets continued The properties were valued as at 30 March 2002, by qualified professional valuers working for the company of DTZ Debenham Tie Leung, Chartered Surveyors, acting in the capacity of External Valuers. All such valuers are Chartered Surveyors, being members of the Royal Institution of Chartered Surveyors. The properties were valued on the basis of open market value at an aggregate value of £31.3m. All valuations were carried out in accordance with the RICS Appraisal and Valuation Manual. C Tangible fixed assets at cost Gerald Eve, Chartered Surveyors, valued the Group’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 Group’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. If the Group’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 Accumulated depreciation Closing net book value 2002 £m 228.7 1,333.4 1,562.1 (133.7) 2001 £m 333.6 1,833.1 2,166.7 (171.9) 1,428.4 1,994.8 1The Group 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 At 1 April 2001 Additions Disposals Write down of investments Share of joint venture’s property revaluation At 30 March 2002 Joint venture1,2 Investments3 £m £m 19.8 0.8 – – 0.1 20.7 31.2 2.8 (2.8) (3.0) – 28.2 Own shares4 £m 7.3 0.1 (6.0) – – 1.4 Group Total £m 58.3 3.7 (8.8) (3.0) 0.1 50.3 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 £2.2m) of loans and accumulated reserves of £12.4m (last year £11.5m). 3Investments include listed securities held by a subsidiary. The difference between their book value and market value is negligible. 4Own shares include 810,835 ordinary shares (last year 3,525,198) in the Company held by the Marks and Spencer p.l.c. Qualifying Employee Share Ownership Trust (see note 24). Additions At 30 March 2002 Shares in group undertakings represents the Company’s investment in Marks and Spencer p.l.c. Company Shares in group undertakings £m 7,643.2 7,643.2 42 Marks and Spencer Group p.l.c. Notes to the financial statements 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. Marks and Spencer p.l.c. Marks and Spencer International Holdings Limited Marks and Spencer (Nederland) BV Marks & Spencer Finance Inc Marks and Spencer Ventures Limited Marks and Spencer (Ireland) Limited Kings Super Markets Inc Marks and Spencer (Asia Pacific) Limited M&S Card Services Limited Marks and Spencer Retail Financial Services Country of incorporation Principal and operation activity Great Britain Retailing Great Britain Holding Company The Netherlands Holding Company United States Holding Company Great Britain Holding Company Republic of Ireland Retailing United States Retailing Retailing Hong Kong Credit Card Handling Great Britain Proportion of voting rights and shares held by: A subsidiary – 100% 100% 100% 100% 100% 100% 100% 100% Company 100% – – – – – – – – Holdings Limited Great Britain Holding Company Great Britain Financial Services Marks and Spencer Financial Services Limited Great Britain Marks and Spencer Unit Trust Management Limited Financial Services Great Britain Marks and Spencer Savings and Investments Limited Financial Services Great Britain Financial Services Marks and Spencer Life Assurance Limited Guernsey Financial Services MS Insurance Limited Great Britain Finance St Michael Finance p.l.c. Finance Marks and Spencer Finance p.l.c. Great Britain Property Investment Great Britain Marks and Spencer Property Holdings Limited Great Britain Finance Amethyst Leasing (Properties) Limited Great Britain Finance Amethyst Finance p.l.c. Great Britain Procurement The Zip Project Limited – – – – – – – – – – – – 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% –1 75% 1Amethyst Finance p.l.c. is a wholly owned subsidiary of a non-group company but has been consolidated in these accounts as a quasi-subsidiary in accordance with FRS 5. The quasi-subsidiary has net assets of £nil, the material balances being securitised loan notes of £331.0m offset by an inter-company group receivable. 15. Debtors 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 Group 2001 £m Company 2002 £m 2002 £m 21.9 579.9 – 118.1 232.2 952.1 34.9 629.1 – 29.4 223.8 917.2 1,603.1 23.2 40.9 1,630.1 16.3 65.7 1,667.2 1,712.1 – – 133.9 0.3 – 134.2 – – – – 1Other debtors include an interest-free loan to an officer of the Company of £28,279 (last year £41,443). 2Prepayments and accrued income includes £169.4m (last year £162.7m) in respect of the UK pension scheme. Of this, £40.1m (last year £58.6m) is included in amounts receivable after more than one year. 3Amounts receivable after more than one year include £52.8m (last year £70.4m) of non-financial assets which have been excluded from the analysis in note 18. 16. Current asset investments Listed investments: Government securities Listed in the United Kingdom Listed overseas Unlisted investments 2002 £m 121.9 87.7 57.0 6.1 272.7 Group 2001 £m 141.5 57.6 50.4 10.5 260.0 www.marksandspencer.com 43 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 Total £m Fixed rate Floating rate £m £m Non-interest bearing £m 2002 115.4 7.5 27.1 14.4 2,016.2 29.7 12.1 92.1 130.6 2.0 12.3 0.7 2,262.2 39.2 51.5 107.2 164.4 2,150.1 145.6 2,460.1 141.2 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 1.5 102.4 2,094.6 Group 2001 Total £m 1,969.5 43.6 46.9 34.6 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 Currency Sterling US dollar Euro Other 2002 Weighted average interest rate % 2001 Weighted average interest rate % 2002 Weighted average period for which rate is fixed Years Fixed rate financial assets 2001 Weighted average period for which rate is fixed Years 6.0 6.0 5.1 3.8 6.7 6.5 5.1 2.3 9.0 11.1 13.6 11.3 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 FRS 13 Customer advances falling due in less than one year Financial assets including short-term customer advances 19. Creditors: amounts falling due within one year Bank loans, overdrafts and commercial paper Medium term notes (see note 21B) Securitised loan notes Trade creditors Amounts owed to Group undertakings Taxation Social security and other taxes Other creditors1 Accruals and deferred income Proposed final dividend 2002 £m 265.4 382.7 2.3 199.6 – 115.9 31.7 340.9 278.6 133.7 9.0 11.1 6.0 8.2 Group 2001 £m 154.4 260.0 1,630.1 38.5 11.6 2002 £m 543.4 272.7 1,603.1 29.6 11.3 2,460.1 2,094.6 579.9 629.1 3,040.0 2,723.7 Group 2001 £m 534.8 486.8 – 207.5 – 95.6 33.7 247.4 223.8 152.0 Company 2002 £m – – – – 1,724.4 – – – – 133.7 1Other creditors include £27.3m (last year £22.5m) which is shown in the calculation of the Group’s net debt and is treated as financing within the cash flow statement. 1,750.8 1,981.6 1,858.1 44 Marks and Spencer Group p.l.c. Notes to the financial statements 20. Creditors: amounts falling due after more than one year Medium term notes (see note 21B) Securitised loan notes Other creditors1,2 2002 £m 1,679.9 317.1 159.3 2,156.3 Group 2001 £m 598.3 – 136.8 735.1 Company 2002 £m – – – – 1Other creditors include £48.4m (last year £49.8m) 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 £109.6m (last year £84.8m) 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 2002 Total £m Fixed rate Floating rate £m £m 729.6 – 0.3 0.7 730.6 2,070.51 199.2 – – 2,800.1 199.2 0.3 0.7 2,269.7 3,000.3 100.0 – – – 100.0 1,236.2 193.9 145.0 19.3 1,594.4 1,336.2 193.9 145.0 19.3 1,694.4 Group 2001 Total £m 1This figure includes £276.0m of unredeemed B shares. 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 6.4% (last year 6.8%) and the weighted average time for which the rate is fixed is 15.2 years (last year 2.3 years). B Maturity of financial liabilities Repayable within one year: Bank loans, overdrafts and commercial paper Medium term notes Securitised loan notes B shares Other creditors Repayable between one and two years: Medium term notes Securitised loan notes Other creditors Repayable between two and five years: Medium term notes Securitised loan notes Other creditors Repayable in five years or more: Medium term notes2 Securitised loan notes3 Other creditors 2002 £m 265.4 382.7 2.3 276.0 27.3 953.7 393.7 2.5 18.6 414.8 917.8 9.4 28.0 955.2 368.4 305.2 3.0 676.6 Group 2001 £m 534.8 486.8 – – 22.5 1,044.1 175.1 – 20.5 195.6 403.3 – 27.0 430.3 19.9 – 4.5 24.4 3,000.3 1,694.4 1Financial liabilities include £2.0m (last year £2.2m) of other creditors which is excluded from the reconciliation of net debt in note 30. 2Relates to a fixed rate bond at a rate of 6.375% and is repayable in full on 7 November 2011. 3Relates to three separate bonds. Two are repayable in instalments. The gross amounts before finance costs are £60m and £131m respectively. The first is a floating rate bond which has been swapped into a fixed rate of 6.34%, amortised on a quarterly basis from 12 March 2002, with final payment due on 12 September 2015. The second is a floating rate bond which has been swapped into a fixed rate of 6.344%, amortised on a quarterly basis from 12 September 2015, with final payment due on 12 December 2026. The gross amount of the remaining bond is £140m before finance costs. It relates to a fixed rate bond at a rate of 6.282% and is repayable in full on 12 December 2026. www.marksandspencer.com 45 21. Analysis of financial liabilities continued C Borrowing facilities At 30 March 2002, the Group had an undrawn committed facility of £425.0m (last year £425.0m) 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 30 March 2002 these amounted to £376.8m (last year £547.5m). 22. Provisions for liabilities and charges At 1 April 2001 Prior year adjustment (see note 7) At 1 April 2001 as restated Provided in the period Utilised during the period Credited to the profit and loss account Disposal of subsidiaries Increase due to unwinding of discount Released in the period Exchange differences At 30 March 2002 Post-retirement Overseas health benefits1 restructuring2 restructuring3 £m £m £m UK 27.7 – 27.7 – (1.7) – – 1.7 (2.4) – 25.3 43.2 – 43.2 7.0 (30.1) – – – – – 20.1 201.3 – 201.3 – (137.6) – – – (10.0) (1.7) 52.0 Deferred tax4 £m 43.5 79.6 123.1 – – (18.2) 1.5 – – – 106.4 Group Total £m 315.7 79.6 395.3 7.0 (169.4) (18.2) 1.5 1.7 (12.4) (1.7) 203.8 1The £25.3m provision for post-retirement health benefits represents the estimated value of the Group’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 Group meets the whole, or part, of the cost (see note 11B for further details). 2The provision for UK restructuring costs relates to the costs of restructuring the Group’s UK operations. The majority of these costs are expected to be incurred during the next financial year with the exception of costs associated with the Early Retirement Plan which are anticipated to be incurred over the next eight years. 3The provision for Overseas restructuring costs primarily relates to further closure costs in respect of the discontinuation of the Group’s operations in Continental Europe. The majority of which are expected to be incurred during the next financial year. 4The provision for deferred tax has been restated as at 1 April 2001 following the adoption of Financial Reporting Standard 19 ‘Accounting for deferred tax’. The deferred tax balance comprises the following: Accelerated capital allowances Pension prepayment Other short-term timing differences 2002 £m 69.0 50.8 (13.4) 2001 £m 79.6 48.8 (5.3) 106.4 123.1 Deferred tax is not provided in respect of liabilities which might arise on the distribution of unappropriated profits of international subsidiaries. 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 B Shares Financial liabilities due after more than one year1 Interest rate swaps3 Forward foreign currency contracts3 FTSE 100 put options4 Book value £m 1,603.1 272.7 29.6 543.4 (677.7) (276.0) (2,046.6) – – 0.4 2002 Fair value £m 1,610.9 272.7 29.6 543.4 (675.6) (276.0) (2,081.1) 16.9 2.1 1.3 Book value £m 1,630.1 260.0 38.5 154.4 (1,044.1) – (650.3) – – 1.3 Group 2001 Fair value £m 1,646.2 255.5 38.5 154.4 (1,039.6) – (694.7) 22.6 (1.4) 2.8 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 which are stated at market value. 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. 46 Marks and Spencer Group p.l.c. Notes to the financial statements 23. Financial instruments and risk management continued B Hedges of future transactions Unrecognised gains and losses on instruments used for hedging and those recognised in the period ended 30 March 2002 are as follows: Gains £m Losses £m 2002 Net total £m Gains £m Losses £m 2001 Net total £m Unrecognised gains/(losses) on hedges at beginning of the period 55.9 (33.2) 22.7 57.7 (39.2) 18.5 (Gains)/losses arising in previous years recognised in the period (6.2) 13.3 7.1 (46.7) 20.2 (26.5) Gains/(losses) in previous years not recognised in the period Gains/(losses) arising in the period Unrecognised gains/(losses) on hedges 49.7 16.8 (19.9) (26.7) 29.8 (9.9) 11.0 44.9 (19.0) (14.2) (8.0) 30.7 at end of the period 66.5 (46.6) 19.9 55.9 (33.2) 22.7 Of which: Gains/(losses) expected to be recognised within one year 13.7 (15.6) (1.9) 6.2 (13.2) (7.0) Gains/(losses) expected to be recognised after one year 52.8 (31.0) 21.8 49.7 (20.0) 29.7 C Currency risk The effect of currency exposures arising from the translation of overseas investments is mitigated by Group borrowings in local currencies as appropriate. 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 The share capital of the Company and predecessor company is shown below: Authorised: 3,200,000,000 ordinary shares of 25p each 3,200,000,000 non-equity B shares of 70p each (last year nil) Allotted, called up and fully paid: 2,306,951,943 ordinary shares of 25p each (last year 2,867,383,731) 394,203,429 non-equity B shares of 70p each (last year nil) 2002 £m 2001 £m 800.0 2,240.0 576.7 276.0 852.7 800.0 – 716.9 – 716.9 The predecessor company was Marks and Spencer p.l.c. As explained in note 1, the Scheme of Arrangement whereby Marks and Spencer Group p.l.c. became the holding company of Marks and Spencer p.l.c. has been accounted for as a merger. The comparative figures for called up share capital are those of Marks and Spencer p.l.c. www.marksandspencer.com 47 24. Called up share capital continued Changes in the period to authorised share capital The Company was incorporated on 23 July 2001 with an authorised share capital of 100 ordinary shares of £1 each. On 22 January 2002 the authorised share capital was increased to £10,080,050,000 by the creation of 50,000 redeemable preference shares of £1 each, 7,839,999,900 ordinary shares of £1 each and 3,200,000,000 B shares of 70p each. The authorised ordinary shares were then subdivided into ordinary shares of 1p each and the total issued and authorised ordinary share capital was consolidated into 3,200,000,000 ordinary shares of £2.45 each. On 22 March 2002 the nominal value of ordinary shares was reduced from £2.45 each to 25p each in a Court approved capital reduction. The redeemable preference shares were removed from the authorised share capital of the Company following their redemption on 24 March 2002. The holders of B shares are not entitled to receive notification of any general meeting of Marks and Spencer Group p.l.c., or to attend, speak or vote at any such meeting. B shares carry the right to a sub-LIBOR dividend paid on a semi-annual basis in priority to any dividend paid to the holders of ordinary shares. In the event of the winding up of Marks and Spencer Group p.l.c., the holders of B shares will be entitled to 70p in respect of each B share held, together with the relevant proportion of the dividend payable. The B shares may be redeemed at six monthly intervals, the first redemption date having been 25 March 2002. At any time after 19 March 2005, or earlier, when the total number of B shares remaining in issue becomes less than 25% of the total number of B shares originally issued, Marks and Spencer Group p.l.c. may, on giving notice in writing to the holders of the B shares, redeem all, but not some, of the B shares in issue on that date. The redemption shall be on the basis of 70p per share. Changes in the period to the issued share capital of Marks and Spencer p.l.c. In the period from 1 April 2001 to 18 March 2002 2,449,658 ordinary shares having an aggregate nominal value of £0.6m were issued under the terms of the Group’s share schemes which are described in note 11. The aggregate consideration received was £5.9m. Of the 2,449,658 ordinary shares referred to above, 35,000 ordinary shares were subscribed for by the Marks and Spencer p.l.c. Qualifying Employee Share Ownership Trust (the ‘QUEST’) at a market value of £0.1m. Of the shares held by the QUEST, 2,558,578 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 Group received £2.5m (last year £nil) from the QUEST for this purpose. The income from this contribution was transferred by the Group directly to the profit and loss account reserve (see note 25). At 30 March 2002, 810,835 shares were held by the QUEST. During the period, 21,446,162 ordinary shares having a nominal value of £5.4m were purchased by the Group for an aggregate consideration of £52.0m. These shares were then cancelled and the nominal value of the shares transferred to other reserves (see note 25). On 18 March 2002, Marks and Spencer p.l.c. had 2,848,387,227 shares in issue, with an aggregate nominal value of £712.1m, which were transferred to Marks and Spencer Group p.l.c. as part of the Scheme of Arrangement. Changes in the period to the issued share capital of Marks and Spencer Group p.l.c. Two ordinary shares of £1 each were issued by the Company on incorporation on 23 July 2001. On 22 January 2002 the existing issued ordinary shares were subdivided into ordinary shares of 1p each, a further 290 ordinary shares of 1p each were issued and then the total issued ordinary share capital was consolidated into 2 ordinary shares of £2.45 each. On the same day, 50,000 redeemable preference shares were issued at par. On 19 March 2002, 2,305,837,279 ordinary shares of £2.45 each and 2,848,387,227 B Shares of 70p each, worth a total nominal value of £7,643,172,392 were issued in consideration for 100% of the issued ordinary share capital of Marks and Spencer p.l.c. On 24 March 2002, all of the issued redeemable preference shares and the two ordinary shares issued on incorporation were redeemed at par and on 27 March 2002, 2,454,183,798 of the B shares were redeemed at par. The nominal value of the cancelled shares has been transferred to the capital redemption reserve (see note 25). In the period from 19 March 2002 to 30 March 2002, 1,114,664 ordinary shares having an aggregate nominal value of £0.2m were issued under the terms of the Group’s share schemes. The aggregate consideration received was £3.0m. 48 Marks and Spencer Group p.l.c. Notes to the financial statements 25. Shareholders’ funds 0111150 Share capital Ordinary Non-equity B shares £m shares £m Share Capital premium redemption Revaluation reserve reserve account £m £m £m At 1 April 2001 as previously reported Prior year adjustment Restatement on a proforma basis At 1 April 2001 as restated Shares issued prior to the capital restructure Shares repurchased prior to the capital restructure Capital restructure Issue/redemption expenses Reduction of capital Redemption of B shares Shares issued after the capital restructure Revaluation of investment properties Share of joint venture’s movement in revaluation reserve Revaluation surplus realised on disposals Revaluation element of depreciation charge Goodwill reinstated in respect of sale of businesses Amounts deducted in respect of shares issued to the QUEST Exchange differences on foreign currency translation Loss for the period At 30 March 2002 716.9 – – 716.9 0.6 (5.4) 4,937.2 – 5,649.3 (5,072.8) – 0.2 – – – – – – – – – – – – – – 1,993.9 – 1,993.9 – (1,717.9) – – – – – – – – – 375.6 – (375.6) 2.6 – (2.6) 455.6 – – 455.6 – – – – – – – – – – – 1,717.9 455.6 – – – – – – – – – – – – 0.4 0.1 (67.2) (1.6) – – – – – – – – – – – – 2.8 – – – – – – – – Profit and loss account £m Group Total £m 3,094.7 (79.6) – 4,645.4 (79.6) – 3,015.1 4,565.8 Other reserve £m – – 378.2 378.2 5.3 – 5.9 5.4 (6,931.1) – (6,542.2) – – (52.0) – (9.3) (52.0) – (9.3) 2,953.8 5,072.8 (1,717.9) 4,510.4 – (1,717.9) – – – – – – – – – – – – 67.2 1.6 3.0 0.4 0.1 – – 368.2 368.2 2.5 2.5 0.1 (85.9) 0.1 (85.9) 576.7 276.0 2.8 1,717.9 387.3 (6,542.2) 6,662.4 3,080.9 Cumulative goodwill of £62.0m (last year £430.2m) arising on the acquisition of subsidiaries has been written off against the profit and loss account reserve. As permitted by FRS 10, this goodwill has not been reinstated in the balance sheet and remains written off to reserves. 0111150 Share capital Ordinary Non-equity B shares £m shares £m Shares issued on incorporation Shares issued on acquisition of Marks and Spencer p.l.c. Reduction of capital Redemption of B shares Issue/redemption expenses Shares issued on exercise of share options Profit for the period – – 5,649.3 (5,072.8) – – 0.2 – 1,993.9 – (1,717.9) – – – Share Capital premium redemption reserve account £m £m – – – – – 2.8 – – – – 1,717.9 – – – Profit and loss account £m – – 5,072.8 (1,717.9) (9.3) – 0.3 Company Total £m – 7,643.2 – (1,717.9) (9.3) 3.0 0.3 At 30 March 2002 576.7 276.0 2.8 1,717.9 3,345.9 5,919.3 26. Reconciliation of movements in Group shareholders’ funds Profit/(loss) attributable to shareholders Dividends Other recognised gains and losses relating to the year New share capital subscribed Issue/redemption expenses Amounts added to profit and loss account reserve in respect of shares issued to the QUEST Redemption of B shares Purchase of own shares Goodwill transferred to profit and loss account on sale/closure of businesses Net reduction in shareholders’ funds Opening shareholders’ funds as previously stated Prior year adjustment (see note 7) Opening shareholders’ funds as restated Closing shareholders’ funds 27. Reconciliation of operating profit to net cash inflow from operating activities Operating profit Exceptional operating charges (see note 5A) Operating profit before exceptional charges Utilisation of provision against European trading losses Depreciation Decrease in stocks Decrease/(increase) in customer advances (Increase)/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 www.marksandspencer.com 49 Group 2001 2002 As restated £m £m 153.0 (238.9) (85.9) 0.6 8.9 (9.3) 2.5 (1,717.9) (52.0) 368.2 (1,484.9) 4,645.4 (79.6) (5.5) (258.3) (263.8) 11.6 7.1 – – – (20.3) (1.3) (266.7) 4,905.3 (72.8) 4,565.8 4,832.5 3,080.9 4,565.8 2002 £m 643.8 – 643.8 (42.5) 249.6 66.2 76.2 (44.5) 174.9 1,123.7 (30.0) 1,093.7 Group 2001 £m 440.5 26.5 467.0 – 275.9 14.7 (117.8) 43.8 23.1 706.7 (30.3) 676.4 50 Marks and Spencer Group p.l.c. Notes to the financial statements 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 Management of liquid resources (Increase)/decrease in cash deposits treated as liquid resources Net sale/(purchase) of government securities Net purchase of listed investments Net (purchase)/sale of unlisted investments Net sale of unlisted investments on sale of business Net decrease in short-term deposits Cash (outflow)/inflow from (increase)/decrease in liquid resources C Financing (Decrease)/increase in bank loans, overdrafts and commercial paper treated as financing Issue/(redemption) of medium term notes Issue of securitised loan notes Increase/(decrease) in other creditors treated as financing Debt financing as shown in analysis of net debt (see note 30) Purchase of own shares Redemption of B shares Issue/redemption expenses Shares issued under employees’ share schemes Net cash outflow from decrease in financing 2002 £m (30.0) – (30.0) (16.3) 19.6 (36.8) (0.3) 4.7 – (29.1) (268.6) 977.5 319.4 3.4 1,031.7 (52.0) (1,717.9) (9.3) 17.3 (730.2) Group 2001 £m (29.5) (0.8) (30.3) 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) 29. Sale/closure of operations A Sale of Brooks Brothers As described in note 5D, the disposal of Brooks Brothers was completed on 29 December 2001 for a consideration of £153.7m net of costs. £m Net assets disposed of Goodwill written back Loss on disposal Disposal proceeds (net of costs) Less net cash included in net assets sold Net cash flow from disposal 162.2 368.2 (376.7) 153.7 (14.3) 139.4 The business sold during the year contributed £71.6m to the Group’s net operating cash flows. B Closure of Continental European operations The closure of Continental European operations resulted in a net cash inflow for the period of £122.2m, after taking into account proceeds from the sale of property and the costs of redundancy and other payments. £70.2m of proceeds relating to the sale of stores in France to Galeries Lafayette is in the form of deferred consideration and is not due to be received until March 2003. The operations closed during the year generated a net operating cash outflow of £3.5m. www.marksandspencer.com 51 Cash flow movement £m Exchange At 30 March 2002 £m £m 30. 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 At 1 April 2001 £m 154.4 (25.0) 129.4 (534.8) 471.7 (63.1) 66.3 25.0 260.0 285.0 Debt financing: Bank loans, overdrafts and commercial paper treated as financing (see above) Medium term notes (see note 21B) Securitised loan notes (see note 21B) Other creditors (see note 21B) (471.7) (1,085.1) – (72.3) 388.6 (16.3) 372.3 269.0 (268.6) 0.4 372.7 16.3 12.8 29.1 268.6 (977.5) (319.4) (3.4) Debt financing (see note 28C) Net debt (1,629.1) (1,031.7) (1,277.8) (629.9) 31. Commitments and contingent liabilities A Commitments in respect of properties in the course of development 0.4 – 0.4 0.4 (0.1) 0.3 0.7 – (0.1) (0.1) 0.1 – – – 0.1 0.7 543.4 (41.3) 502.1 (265.4) 203.0 (62.4) 439.7 41.3 272.7 314.0 (203.0) (2,062.6) (319.4) (75.7) (2,660.7) (1,907.0) 2002 £m 19.3 Group 2001 £m 54.6 B 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. C Other material contracts: In the event of a material change in the trading arrangements with certain warehouse operators, the Group 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 Group’s behalf. D Commitments under operating leases: At 30 March 2002 the Group had annual commitments under operating leases as follows: Expiring within one year Expiring in the second to fifth years inclusive Expiring in more than five years Land & buildings £m 5.2 11.0 75.9 92.1 2002 Other £m 0.6 2.4 – 3.0 Land & buildings £m 4.5 29.2 87.4 121.1 2001 Other £m 1.4 1.8 – 3.2 32. Foreign exchange rates The principal foreign exchange rates used in the financial statements are as follows (local currency equivalent of £1): Euro US dollar Hong Kong dollar Japanese yen Sales average rate 2001 2002 Profit average rate 2001 2002 Balance sheet rate 2001 2002 1.62 1.43 11.17 175.88 1.63 1.48 11.54 163.67 1.63 1.43 11.11 175.71 1.62 1.47 11.59 163.54 1.63 1.42 11.10 188.41 1.62 1.43 11.11 178.50 33. Related party transactions There were no material transactions with related parties as defined by FRS 8, ‘Related Party Transactions’. 52 Marks and Spencer Group p.l.c. Group financial record Profit and loss account1,2 Turnover: Continuing operations General Foods Retailing Financial Services Total continuing operations Discontinued operations 2002 £m 52 weeks 2001 £m 52 weeks 2000 £m 53 weeks 1999 £m 52 weeks 1998 £m 52 weeks 3,848.1 3,420.5 7,268.6 350.8 7,619.4 516.0 3,740.7 3,238.8 6,979.5 363.1 7,342.6 733.1 3,985.4 3,133.6 7,119.0 364.6 7,483.6 711.9 4,151.8 3,030.5 7,182.3 348.6 7,530.9 693.1 4,286.6 3,001.8 7,288.4 274.8 7,563.2 680.1 Total turnover (excluding sales taxes) 8,135.4 8,075.7 8,195.5 8,224.0 8,243.3 Operating profit Continuing operations United Kingdom Overseas Excess interest charged to cost of sales of Financial Services Discontinued operations Total operating profit Analysed as: 589.4 33.3 6.4 629.1 14.7 643.8 404.6 41.9 7.9 454.4 (13.9) 440.5 472.7 24.0 – 496.7 (25.7) 471.0 565.1 14.5 1,014.1 54.5 25.5 605.1 (93.1) 22.7 1,091.3 12.4 512.0 1,103.7 Before exceptional operating (charges)/income Exceptional operating (charges)/income 643.8 – 467.0 (26.5) 543.0 (72.0) 600.5 (88.5) 1,050.5 53.2 Retailing Continuing Discontinued Financial Services Excess interest charged to cost of sales of Financial Services Provision for loss on operations to be discontinued Loss on closure of businesses Profit/(loss) 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 period Balance sheet1,2 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 – (366.7) 41.2 17.6 335.9 (182.5) (0.4) 153.0 (238.9) (85.9) – 3,381.2 50.3 3,760.7 7,192.2 (1,750.8) 5,441.4 (2,156.3) (203.8) 538.5 14.7 84.2 350.2 (13.9) 96.3 380.8 (25.7) 115.9 468.9 (93.1) 110.7 979.3 12.3 89.4 6.4 7.9 – (224.0) (1.7) (83.2) 13.9 145.5 (149.5) (1.5) (5.5) (258.3) (263.8) – (45.4) (22.3) 14.2 417.5 (140.4) (0.6) 276.5 (258.6) 17.9 25.5 – – 6.2 27.9 546.1 (175.7) 2.1 372.5 (413.3) (40.8) 22.7 – – (2.8) 54.1 1,155.0 (333.3) (0.4) 821.3 (409.1) 412.2 – 3,964.8 69.7 3,401.5 – 4,118.9 58.3 3,516.2 1.3 4,242.1 55.0 3,717.1 – 4,387.5 61.2 3,355.9 7,693.4 (1,981.6) 8,015.5 (2,162.8) 7,804.6 (2,029.8) 7,436.0 (2,345.0) 5,711.8 (735.1) (395.3) 5,852.7 (804.3) (199.4) 5,774.8 (772.6) (195.6) 5,091.0 (187.2) (122.0) Net assets 3,081.3 4,581.4 4,849.0 4,806.6 4,781.8 1Restated for 1998 for the change in accounting policy relating to the depreciation of fit out. 2Restated for 2001 and prior years for the change in accounting policy for deferred taxation. www.marksandspencer.com 53 2002 £m 52 weeks 2001 £m 52 weeks 2000 £m 53 weeks 1999 £m 52 weeks 1998 £m 52 weeks 1,093.7 36.8 (179.4) 176.0 261.6 (256.7) 1,132.0 (29.1) (730.2) 372.7 629.2 676.4 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) 260.3 472.3 29.0 (345.9) (628.1) 1.0 (412.6) (884.3) 180.6 505.0 7.2 (198.7) 69.8 862.3 967.7 56.1 (342.3) (788.3) 2.6 (325.8) (430.0) 226.6 307.4 104.0 380.8 35.8% 34.3% 31.8% 31.1% 33.3% 8.3% 6.2% 6.6% 8.0% 14.4% Cash flow 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 FRS 1 Key performance measures2 Gross margin1,3 Net margin1,3 Gross profit Turnover Operating profit Turnover Net margin excluding exceptional items1,3 8.3% 6.5% 7.5% 8.4% 13.7% Profitability1 Profit before tax Turnover 9.0% 5.2% 6.3% 8.6% 15.4% Profitability excluding exceptional items1 8.5% 6.7% 7.3% 8.8% 14.7% Earnings per share4 (Defined by FRS 14) Standard earnings Weighted average ordinary shares in issue 5.4p (0.2)p 9.6p 13.0p 28.8p Earnings per share adjusted for exceptional items 16.3p 11.2p 13.8p 15.6p 27.6p Dividend per share Dividend cover4,5 Profit attributable to shareholders Dividends 9.5p 9.0p 9.0p 14.4p 14.3p 2.2x n/a 1.1x 0.9x 2.0x Return on equity4,5 Profit after tax and minority interests Average shareholders’ funds Retail gearing Retail debt Retail debt+retail shareholders funds 11.1% (0.1)% 5.7% 7.8% 18.3% 27.0% n/a n/a n/a n/a Capital expenditure £290.5m £255.7m £450.6m £683.1m £750.2m 1Based on results from continuing operations only. 2Restated for 1998 for the change in accounting policy relating to the depreciation of fit out. 3Based on segmental results. 4Restated for 2001 and prior years for the change in accounting policy for deferred taxation. 5Stated before goodwill written off of £368.2m in 2002. Dividend cover and return on equity are 0.6 times and 3.3% respectively after writing off of goodwill. THE QUEEN’S AWARD FOR ENTERPRISE INNOVATION 2000 Design and production: Pauffley Printing: St Ives, Westerham Press Cover printed on Revive Silk paper made from 75% post-consumer recycled fibre and 25% chlorine-free bleached pulp. Text printed on Sequel Offset paper made from ele- mental chlorine-free bleached pulp sourced from sustainable managed forests.