Marks and Spencer Group PLC Annual Report 2005

Plain-text annual report

ANNUAL REPORT AND FINANCIAL STATEMENTS 2005 This publication includes the Chairman’s statement, the Chief Executive’s review, the Financial review, the Corporate governance statement, the Remuneration report, the Directors’ report, the Financial statements and the Auditors’ report for the year ended 2 April 2005. Reviews of ﬁnancial and operating performance are contained in a separate report entitled Annual review and summary ﬁnancial statement 2005. This publication, together with the Annual review and summary ﬁnancial statement 2005, comprise the full Annual Report and Accounts of Marks and Spencer Group plc for 2005, prepared in accordance with the Companies Act 1985. 1 CHAIRMAN’S STATEMENT 2 CHIEF EXECUTIVE’S REVIEW 3 FINANCIAL REVIEW 11 CORPORATE GOVERNANCE 16 REMUNERATION REPORT 26 DIRECTORS’ INTERESTS 26 DIRECTORS’ RESPONSIBILITIES 27 DIRECTORS’ REPORT 29 AUDITORS’ REPORT 30 CONSOLIDATED PROFIT AND LOSS ACCOUNT 30 NOTE OF GROUP HISTORICAL COST PROFITS AND LOSSES 30 CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 31 BALANCE SHEETS 32 CONSOLIDATED CASH FLOW INFORMATION 33 NOTES TO THE FINANCIAL STATEMENTS 58 GROUP FINANCIAL RECORD 61 INDEX The full Annual Report and Accounts with downloadable ﬁles are available online on the Marks & Spencer website at: www.marksandspencer.com/thecompany Chairman’s statement PAUL MYNERS MARKS AND SPENCER GROUP PLC 1 LAST YEAR WAS ONE OF THE MOST CHALLENGING MARKS & SPENCER HAS EVER FACED. BUT WE HAVE EMERGED AS A LEANER, BETTER RUN BUSINESS. At the start of the year the business was underperforming. There were additional Board changes during the course of This prompted an unsolicited approach on 27 May by the year. Brian Baldock and Dame Stella Rimington retired Revival Acquisitions. The Board was determined to make as non-executives in July, to be replaced by Anthony sure value was achieved for shareholders and that the Habgood and Steven Holliday. Vittorio Radice, Maurice business was not bought on the cheap. We took two Helfgott, Mark McKeon and Laurel Powers-Freeling stepped immediate decisions. down as executive directors as Stuart and his team set a new The ﬁrst was that Luc Vandevelde, who had already course for the Company with the Board’s full endorsement. indicated he wanted to leave the Company early, should step More recently, Alison Reed has stepped down as Finance down as Chairman and that I should take his place on an Director after 20 years with the Company. Ian Dyson has interim basis. The second was that we should employ new been appointed in her place. We thank our former colleagues executive leadership to accelerate the process of restoring for their contribution and welcome the new Board members. the Company’s fortunes. On 31 May, Stuart Rose succeeded Our relationship with Marks & Spencer investors – both Roger Holmes as Chief Executive. Charles Wilson was also individual and institutional – is high on the Board’s list of appointed to the Board as an executive director. priorities. Last year, we made sure a far greater proportion The new executive team was charged by the Board of shareholders had access to the Company’s management with drawing up plans to improve business performance. than ever before. We also launched a shareholder voucher Six weeks later, Stuart and his team laid these plans scheme in summer 2004, which proved very popular, offering before institutional shareholders and analysts. Individual discounts in-store during the autumn. We will be repeating shareholders were given the same presentation at the this in July 2005 and extending our offer to those who hold Annual General Meeting two days later. It was on the shares through nominee accounts. We are also improving strength of these plans that the Board rejected Revival virtual audiovisual access to the Annual General Meeting and Acquisitions’ indicative offer of 400p a share, which we we launched an improved version of the corporate website believe undervalued the Company. earlier this year. We are refocusing the business on its core values, In May 2005, we announced that Lord Burns will be Quality, Value, Service, Innovation and Trust. We are conﬁdent joining the Board as Deputy Chairman with effect from that progress is being made, albeit against a more challenging 1 October 2005 and will become Chairman from the Annual retail environment. General Meeting in July 2006, when I will step aside from We also said we would acquire per una, dispose of the Board. I am delighted that he is joining the Board and M&S Money and return £2.3bn to shareholders by way of that he will succeed me as Chairman. With the appointment a Tender Offer. Together with the return in 2002, we have of Terry, the Board can now work on completing the task of returned over £4bn to shareholders in the last four years. broadening the diversity and skills present around the table. The Tender Offer strike price of 362p emerged close to the The Board would like to thank shareholders for their market price of the shares, thereby avoiding a transfer of continued support and our employees and suppliers for their value to exiting shareholders. Our balance sheet remains hard work, commitment and passion, which has been and strong, underpinned by the property portfolio, which was remains crucial to the delivery of Marks & Spencer’s strategy. independently revalued at £3.6bn in July 2004. Paul Myners, Chairman 2 MARKS AND SPENCER GROUP PLC Chief Executive’s review STUART ROSE MARKS & SPENCER IS A FINE BUSINESS WITH SIGNIFICANT STRENGTHS. BUT IT NEEDS RADICAL CHANGE TO BECOME GREAT AGAIN. Last year, within a tough marketplace, we embarked on a maintained across the year, although sales dipped by 2.6% programme of change to return the business to growth and in like-for-like terms. Home had a year of transition as we to its traditional values, Quality, Value, Service, Innovation closed Lifestore and refocused on value and our traditional and Trust. We did so with a clear understanding that, while areas of bedroom, bathroom, kitchen and dining. Sales were we needed to move fast, we also needed to do the right 21.4% lower at £0.4bn. things for the medium to long term and that there were no Our international operations performed strongly with quick ﬁxes. operating proﬁts up 47.1% at £65m (up 51.2% at constant At the Operational Review on 12 July 2004, we stated exchange rates). that we would refocus the business in 2004/05, drive it in We have clear objectives: better product and real choice 2005/06 and, beyond that, broaden its horizons. We also in easy-to-shop ranges; sharper opening prices and real highlighted the actions that needed to be taken to refocus value across all ranges; and increased levels of new and and these have now been achieved. innovative product. In 2004/05, we reviewed all expenditure and put tight In Clothing, we have strengthened buying teams, controls in place. Unacceptably high stock commitments reduced stock commitments and developed consistent were reduced by over 35% on the year. We are on course working practices. We are establishing regional ofﬁces to deliver cost and margin savings and have a lower to better manage the supply chain. Prices are constantly customer-focused capital spend. We simpliﬁed processes to monitored. We have reduced the total number of products make us more product and service driven, and removed over by around 17% to create more real choice and increased 650 roles from head ofﬁce. We also focused on 10 strategic the level of new product in store. projects that will add most value. In Food, we have also focused on innovation, removed We renegotiated supplier terms to reduce the cost of slow lines, simpliﬁed ranges, continued to open more Simply goods by £140m by the end of 2006/07, compared to Food stores and begun to emphasise the quality and 2003/04. Overall, we are on course to achieve cost and uniqueness of our food. margin savings of £320m by the end of 2006/07. We have put our most experienced people in charge of Additionally, we closed Lifestore, acquired per una, improving standards and service in stores, and are putting returned £2.3bn to shareholders and sold M&S Money, our more customer assistants on the sales ﬂoor. In addition, we Financial Services business, to HSBC. simpliﬁed our return and refund policy, which remains the We reduced the Executive Board to a team of three. most generous on the High Street. The business unit directors all now report directly to the Last year, we de-cluttered stores and improved signage. Chief Executive and we have set up a stock planning function. We also reinforced the Marks & Spencer brand with the These actions have laid the foundations necessary to launch of the Your M&S campaign, reduced the number of drive the business in 2005/06. We are focusing on product, sub-brands and tested a new store concept. service and store environment. This has been a year of great change at Marks & Spencer, Group proﬁt before tax and exceptional items, although but it has also been a year of action and progress, thanks to the supported by strong cost control, ended the year 19% lower hard work and loyalty both of our staff and our suppliers. I would at £618.5m on a 52 week basis. UK retail sales at £7.8bn like to thank everyone for their support through a difﬁcult year. (inc VAT) were 1.9% lower than last year. Clothing sales fell 3.1% to £3.8bn, led by continued weakness in Womenswear, although per una performed strongly. All other product groups suffered. Food sales were £3.5bn, 2.4% higher in total and market share was broadly Stuart Rose, Chief Executive Financial review Group summary Summary of results Continuing operations before exceptional items Turnover (ex VAT) Operating proﬁt Net interest expense Other ﬁnance income/(charges) Proﬁt before tax from continuing operations before exceptional items Operating proﬁt from discontinued operations Proﬁt before tax and exceptional items Exceptional income/(charges) Group proﬁt before tax Earnings per share from continuing operations Basic earnings per share Adjusted earnings per share Earnings per share Basic earnings per share Adjusted earnings per share MARKS AND SPENCER GROUP PLC 3 2005 52 weeks £m 2004 52 weeks £m 2004 53 weeks £m 7,710.3 677.1 (102.3) 11.4 7,824.8 766.3 (44.5) (15.2) 7,971.5 809.4 (45.8) (15.2) 586.2 706.6 748.4 32.3 618.5 126.8 745.3 56.6 763.2 (23.4) 739.8 56.6 805.0 (23.4) 781.6 16.8p 20.4p 20.6p 21.1p 21.9p 22.4p 29.1p 21.9p 22.9p 23.4p 24.2p 24.7p Continuing operations include the results of the UK Retail and International Retail businesses. The results for Financial Services, which was sold during the year, have been disclosed as discontinued operations. Group turnover from continuing operations UK Retail International Retail Total Group operating proﬁt from continuing operations before exceptional items UK Retail International Retail Total 2005 52 weeks £m 7,034.7 675.6 2004 52 weeks £m 7,159.8 665.0 2004 53 weeks £m 7,293.7 677.8 7,710.3 7,824.8 7,971.5 2005 52 weeks £m 2004 52 weeks £m 2004 53 weeks £m 612.1 65.0 677.1 722.1 44.2 766.3 762.0 47.4 809.4 The reporting period for this ﬁnancial year covers the 52 weeks to 2 April 2005, whereas the prior period covered the 53 weeks to 3 April 2004. For comparative purposes, the commentary that follows, in so far as it relates to the proﬁt and loss account, is provided on a 52 week basis (to 2 April 2005 and 27 March 2004). 4 MARKS AND SPENCER GROUP PLC Financial review continued UK Retail Turnover (£m) Operating proﬁt (before exceptional items) (£m) Number of stores (at the end of the year) Selling space at the end of the year (m sq ft) 2005 52 weeks 2004 52 weeks 7,034.7 612.1 399 12.9 7,159.8 722.1 375 12.8 Turnover, including VAT, was down 1.9% on last year, down 5.1% on a like-for-like basis. The performance of Clothing for the year as a whole was disappointing, with total Clothing sales down 3.1% on last year. Footfall and clothing volumes were up on the year, but Clothing market share declined by 0.5 percentage points to 10.5%. Home had a year of transition, as we closed Lifestore and refocused on the traditional areas of bedroom, bathroom, kitchen and dining. Sales were 21.4% lower at £407.6m. In Food, we continue to beneﬁt from additional footage as we extend the reach of the Food offer. Food sales were up 2.4% on last year, down 2.6% on a like-for-like basis. We opened 31 Simply Food stores during the year, 13 in partnership with Compass. New Simply Food stores opening in 2005/06 will increase our food space by a further 3.3%. Like-for-like food deﬂation for the year was c.0.2%. During the year, we renegotiated terms with suppliers across the business as a whole with the aim of reducing the cost of goods sold by £140m by 2006/07 when compared to 2003/04. During the year, however, higher markdowns resulted in a 1.5 percentage points decline in the Clothing and Home gross margin. The Food gross margin was maintained. Logistics costs of £305.5m, which are included in cost of sales, were marginally below the same period last year beneﬁting from the full year effect of the changes to the general merchandise logistics operation introduced last year. UK Retail operating costs of £1,843.1m, excluding exceptional charges, were broadly level on last year: • • • • employee costs increased by 1.1% to £922.4m as a result of new stores and the annual salary review, offset by a reduction in headcount; property, repair and renewal costs of £350.4m increased by 8.3% due to the occupancy costs associated with new footage and the move to a new head ofﬁce; depreciation and amortisation was £242.9m, an increase of 6.9%, due to the effect on the charge of prior year additions, store modernisations, closures and amortisation of goodwill arising on the acquisition of per una; and other operating costs of £327.4m decreased by 13.2% as a result of actions taken during the year to reduce the cost of non- merchandise procurement together with savings in IT. Including logistics costs, operating costs have decreased by 0.1% on last year. International Retail Turnover (£m) – Marks & Spencer branded businesses – Kings Super Markets Operating proﬁt (£m) – Marks & Spencer branded 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 MARKS AND SPENCER GROUP PLC 5 2005 52 weeks 2004 52 weeks 455.8 219.8 675.6 60.7 4.3 65.0 45 191 426.2 238.8 665.0 41.8 2.4 44.2 43 155 1,024 1,317 908 1,068 Turnover for the year in the Marks & Spencer branded businesses (Republic of Ireland, franchises and Hong Kong) increased by 6.9% (9.1% at constant exchange rates). Operating proﬁt for the Marks & Spencer branded businesses increased by 45.2% to £60.7m. In the Republic of Ireland, sales were ahead of last year and the performance of the new stores in Blanchardstown and Dundrum has been encouraging. Our franchisees have seen good like-for-like sales increases and are investing in new footage. Hong Kong had a strong year, however, in 2005/06 some of our leases will be surrendered to the landlord for development. Sales at Kings Super Markets were broadly level over the period at constant exchange rates, compared with the same period last year. Operating proﬁt at Kings over the period was £4.3m as a result of actions taken last year to improve ﬁnancial performance. Financial Services The Financial Services business was sold to HSBC on 9 November 2004 for £768.6m and the results of the business up to the date of disposal have been included under the heading of discontinued operations. The Group has also entered into an agreement with HSBC, whereby the Group will continue to share in the success of the Financial Services business. Under this agreement, the Group will receive income in the form of fees representing an amount equivalent to costs incurred, 50% of the proﬁts of M&S Money (after a notional tax charge and after deducting agreed operating and capital costs) plus an amount relating to the growth in sales of ﬁnancial services products. Fees received under this agreement since the date of disposal have been included within other operating income in UK Retail. Exceptional items The Group has recorded exceptional income of £126.8m in the year, as follows: Exceptional items Operating exceptional items Head ofﬁce relocation Head ofﬁce restructuring programme Board restructure Closure of Lifestore Defence costs Non-operating exceptional items Loss/(proﬁt) on sale of property and other ﬁxed assets Proﬁt on disposal of Financial Services Release of European closure provision Total exceptional (income)/charges 2005 £m 8.8 6.3 8.4 29.3 38.6 91.4 0.4 (208.9) (9.7) (218.2) (126.8) 2004 £m 19.6 22.5 – – – 42.1 (18.7) – – (18.7) 23.4 During the year, £8.8m of revenue costs were incurred in connection with the relocation of the head ofﬁce and have been charged as exceptional operating costs. This relocation was completed at the end of October. 6 MARKS AND SPENCER GROUP PLC Financial review continued We have also incurred a further £6.3m of costs in the year in connection with the implementation of the head ofﬁce restructuring programme which was announced at the end of last year. Lifestore closure costs represent the anticipated cost of closing the Lifestore programme. These costs include stock provisions, asset write-offs and other property-related costs. Defence costs of £38.6m represent the costs incurred, primarily for professional advice, in developing and implementing the new business strategy as a consequence of the possible offer from Revival Acquisitions Limited. Costs of £8.4m have also been incurred in making the necessary changes to the Board. The Group successfully completed the sale of the Financial Services business to HSBC on 9 November 2004. This resulted in a proﬁt on disposal, after costs, of £208.9m. Following the disposal of two properties in Germany during the year, we have completed the majority of the actions required to close our European operations and we have released, unutilised, £9.7m of the closure provision which we now anticipate is no longer required. Interest Net interest expense was £102.3m compared to £44.5m (52 week basis) for last year. The average rate of interest on borrowings during the period was 5.7% (last year 5.3%). Taxation The tax charge reﬂects an effective tax rate for the full year of 28.5% before exceptional income, compared to 30.1% last year. The rate is lower than the standard UK tax rate of 30% due to the impact of prior year credits and relief in respect of the exercise of employee share options. The European Court of Justice heard the Group’s group relief claim on 1 February 2005 and their judgement is expected later this year. No asset has been recognised in respect of this claim. Shareholder returns and dividends Adjusted earnings per share, which excludes the effect of exceptional items, has decreased by 11.3% to 21.9p per share (on a 52 week basis, a decrease of 6.4%). Return on equity was 41.4% compared to 25.2% last year. A ﬁnal dividend of 7.5p per share (last year 7.1p per share) is proposed, making the total dividend for the year 12.1p per share (last year 11.5p per share), an increase of 5.2%. Capital expenditure Group capital additions for the year were £220m compared to £434m last year. The major components of the additions are analysed below: Capital expenditure New stores and extensions Head ofﬁce relocation Store renewal, refurbishment and new selling initiatives Refrigeration equipment IT equipment Logistics Other UK Retail capital expenditure International Retail M&S Money Total Group capital expenditure 2005 £m 88 – 25 10 18 16 29 186 33 1 220 2004 £m 118 40 44 39 40 95 32 408 20 6 434 The decrease in capital expenditure in part reﬂects the one-off costs last year relating to the acquisition of warehouses, as part of the restructuring of the general merchandise logistics operation, and the relocation of the head ofﬁce. It also reﬂects a reduction in capital expenditure on new and existing footage as we reviewed the performance of new formats to determine how to revitalise the portfolio in a cost effective way. Group capital expenditure for 2005/06 is expected to be £350m. Balance sheet Fixed assets Stocks Trade and other debtors Trade and other creditors Provisions Net debt Net assets before net post-retirement liability Net post-retirement liability Net assets Gearing % (including net post-retirement liability) MARKS AND SPENCER GROUP PLC 7 2005 Group £m 3,447.5 339.7 218.2 (830.4) (80.4) (2,099.0) 995.6 (474.2) 2004 Retail & Corporate £m 3,493.4 398.0 202.9 (895.7) (49.3) (823.7) 2,325.6 (469.5) 521.4 1,856.1 84.5% 44.7% The Group balance sheet has changed signiﬁcantly since the last year end following the disposal of the Financial Services business during the year. The commentary that follows, where relevant, compares the Group balance sheet at 2 April 2005 to the Retail and Corporate balance sheet at 3 April 2004, which excludes the balance sheet for the Financial Services businesses at that date. Fixed assets decreased by £45.9m to £3,447.5m. Included within this are properties owned by the Group with a net book value of £2.1bn, of which £1.7bn was unencumbered, and goodwill of £122.4m relating to the acquisition of per una. In July 2004, the Group commissioned DTZ Debenham Tie Leung, an External Valuer, to carry out a valuation of the Group’s property portfolio. This valuation was carried out on an existing use value basis for the Group’s operational stores and other properties and a market value basis for non-operational properties. This gave rise to a valuation for the Group’s properties of approximately £3.6bn. Adjusting this valuation for movements in the Group’s portfolio since that date gives rise to a surplus over net book value as at 2 April 2005 of approximately £1.3bn. Had this valuation been incorporated into the Group’s balance sheet as at 2 April 2005 then net assets would have increased by £1.3bn to £1.8bn. Stock at the end of the year was £339.7m, a decrease of £58.3m on the balance at the end of last year largely as a result of better controls over stock and commitment. Provisions for liabilities and charges increased by £31.1m largely as a result of a £30m reduction in the deferred tax asset attributable to the £400m pension contribution last year. The net post-retirement liability remained broadly level with the previous year. Shareholders’ funds amounted to £521.4m, equivalent to 31.4p per share (last year 108.3p per share), a decrease of £1,932.6m in the year primarily due to the £2.3bn Tender Offer. If the recent property valuation is included, Group gearing would have been 61.8% and return on equity 22.0%. Cash ﬂow Analysis of free cash ﬂow (operating cash ﬂow before acquisitions and disposals and transactions with shareholders) is as follows: Cash ﬂow analysis Operating cash ﬂow from continuing operations Operating cash ﬂow from discontinued operations Capital expenditure Proceeds from asset disposals Interest paid Tax paid Free cash ﬂow 2005 £m 857.5 717.9 (232.2) 117.8 (101.6) (166.7) 1,192.7 2004 £m 602.3 64.2 (428.8) 126.2 (49.8) (220.4) 93.7 The Group generated an operating cash inﬂow for the year of £1,575.4m (last year cash inﬂow £666.5m). Within this, the cash inﬂow from continuing operations was £857.5m (last year £602.3m). A major factor in the increase in operating cash ﬂow was the year-on-year net decrease in contributions paid to the UK deﬁned beneﬁt pension scheme, following the one-off injection of £400m in March 2004. During the period, the Group acquired tangible ﬁxed assets totalling £219.6m (last year £433.5m). After taking into account the timing of payments, the cash outﬂow for capital expenditure was £232.2m (last year £428.8m). During the year, the Group received £117.8m (last year £126.2m) from the sale of properties, including £115m from the sale of Michael House. 8 MARKS AND SPENCER GROUP PLC Financial review continued The total movements in net debt comprise the amounts shown in the table below: Cash ﬂow analysis Opening net debt Free cash ﬂow Equity dividends Net sale of ﬁxed asset investments Acquisition of per una Sale of Financial Services Closure of Continental European operations Issue of new shares under employee share schemes Purchase of own shares Tender Offer expenses Net sale/(purchase) of own shares held by employee trusts Redemption of B shares Exchange movement Closing net debt Analysed between: Continuing operations Discontinued operations Closing net debt 2005 £m (1,994.7) 1,192.7 (236.9) 0.8 (125.9) 1,316.7 12.7 68.4 (2,300.0) (14.9) 0.6 (19.2) 0.7 2004 £m (1,831.4) 93.7 (247.1) 8.7 – – 51.3 24.8 (54.4) – (3.6) (33.4) (3.3) (2,099.0) (1,994.7) 2005 £m 2004 £m (2,099.0) – (823.7) (1,171.0) (2,099.0) (1,994.7) Transactions with shareholders (dividends paid, Tender Offer, redemption of B shares and the issue of new shares under employee share schemes) resulted in a net cash outﬂow of £2,502.6m (last year £310.1m). At the end of the period, net debt was £2,099.0m, an increase of £104.3m, giving rise to retail gearing of 84.5% (last year 44.7%) including the net post-retirement liability. Financing and capital structure In August 2004, we signed two new banking facilities totalling £2bn, being a £1.2bn ﬁve-year term facility and an £800m bridging loan pending completion of the sale of Financial Services. Part utilisation of these facilities, together with existing resources and the resultant proceeds from the sale of Financial Services, were used to fund the return of £2.3bn to shareholders. We currently have committed facilities of £1,260m available together with uncommitted bank facilities of £190m supporting our £1.5bn Commercial Paper programme. Average interest rates on borrowings were higher during the year at 5.7% (last year 5.3%). Interest cover was 8.2 times and ﬁxed charge cover was 4.1 times. On 28 October, we purchased 635,359,116 ordinary shares, representing 27.9% of the issued share capital, for cancellation at a price of 362p per share and a total cost of £2.3bn. On 27 September 2004 and 29 March 2005, 16,454,305 and 10,967,542 B shares respectively, were redeemed at par, at a total cost of £19.2m. Following this redemption, 93,822,916 B shares remain in issue. The next opportunity for redemption will be on 26 September 2005. Treasury policy and ﬁnancial risk management The Board approves treasury policies and senior management directly control day-to-day operations. The Board delegates certain responsibilities to the treasury committee, comprising one executive director, one non-executive director, the Director of Corporate Finance, the Group Treasurer and the Director, Financial Services. The treasury committee is empowered to take decisions, as necessary, within that delegated authority. 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. MARKS AND SPENCER GROUP PLC 9 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, except where ﬁnancial constraints necessitate the need to liquidate any outstanding investments. The main ﬁnancial risks faced by the Group relate to interest rates, foreign exchange rates, liquidity and counterparty risks. 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 two Public Bond issues in Sterling were at ﬁxed rates. (b) Foreign currency risk Currency exposure arising from exports from the UK to overseas subsidiaries is managed by using forward currency contracts, out to 15 months forward, to hedge between 80% and 100% of sales. Imports are primarily contracted in Sterling but, where relevant, imports arising in a currency other than Sterling are fully hedged using forward contracts. The Group is 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, medium-term note issuance and securitised loan notes. Commercial paper issuance and short-term borrowings are backed by committed bank facilities totalling £1,260m. (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. The details of derivatives and other ﬁnancial instruments required by FRS 13 – ‘Derivatives and Other Financial Instruments: Disclosures’, are shown in notes 19, 22 and 24 to the ﬁnancial statements. Pensions The Group provides pension arrangements for the beneﬁt of employees through the Marks and Spencer UK Pension Scheme together with some speciﬁc arrangements for our overseas operations. The deﬁned beneﬁt section of the UK scheme was closed to new entrants with effect from 31 March 2002. At the year end it had some 35,000 active members, 56,000 deferred members and 36,000 pensioners. The market value of the assets of the UK deﬁned beneﬁt scheme was £3.9bn at 2 April 2005. Full details of these assets, together with the FRS 17 liabilities and the valuation assumptions made, are included in note 11 to the ﬁnancial statements. Following the last full actuarial valuation (which showed an actuarial deﬁcit of £585m as at 31 March 2003), the Group paid additional contributions of £400m in March 2004 and agreed a Schedule of Contributions comprising annual service contributions at a level of 15.8% of pensionable salaries and nine annual payments of £33m, commencing 31 March 2007, to fund the remaining actuarial deﬁcit. During the year there have been ongoing discussions between the Group and the Trustees of the Marks and Spencer UK Pension Scheme with regard to the funding of the UK deﬁned beneﬁt scheme. These discussions have resulted in £115m of additional contributions being paid into the scheme during March and April 2005, of which £64m had been paid in before the year end and is reﬂected in the assets as at 2 April 2005. These amounts are in addition to the agreed Schedule of Contributions referred to above. They are designed to address the less favourable investment conditions experienced over the last couple of years and anticipate the next full actuarial valuation which is due as at 31 March 2006. The funding of the scheme will be reviewed again at that time and a new funding plan agreed. The new deﬁned contribution section of the UK scheme, the Marks and Spencer Retirement Plan, has been open to new members from 1 April 2003 and had some 4,000 active members at the year end. The contributions paid by the Group are charged in the accounting period to which they relate and details are set out in note 11 to the ﬁnancial statements. 10 MARKS AND SPENCER GROUP PLC Financial review continued International Financial Reporting Standards For the next ﬁnancial year, the Group will be required to adopt International Financial Reporting Standards. We have identiﬁed that the greatest impact on the Group arises from changes in the accounting treatment for property, share-based payments, ﬁnancial instruments and software. The Group has restated the results for the period ended 2 April 2005 to reﬂect these changes and a summary of the impact is set out below: Turnover (£m) Operating proﬁt before exceptional items (£m) Proﬁt before tax and exceptional items (£m) Adjusted earnings per share (p) Net assets at 2 April 2005 (£m) 2004/05 UK GAAP IFRS Change 7,942.3 709.4 618.5 21.9 521.4 7,942.3 689.2 596.0 21.0 938.6 – (20.2) (22.5) (0.9) 417.2 Change % – (2.8) (3.6) (4.1) 80.0 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 The Board is committed to high standards of corporate governance and supports the Combined Code on Corporate Governance (the ‘Code’), published in July 2003. The following statement is intended to explain our governance policies and practices and to provide insight into how the Board and management run the business for the beneﬁt of shareholders. A detailed account of how we comply with the Code provisions can be found on the Corporate Governance section of the Company’s website, together with the terms of reference of the audit, remuneration and nomination committees, at www.marksandspencer.com/investorrelations. The Board On 23 May 2005 the Board comprised the Chairman, Chief Executive, one executive director and four non-executive directors, who are collectively responsible for the success of the Company. On 27 June 2005 our new Finance Director will join the Board. A list of directors, with details of their biographies and committee membership, is given on page 17 of the Annual Review. Paul Myners is Chairman and he is responsible for the working of the Board, for the balance of its membership subject to Board and shareholder approval, and for ensuring that all directors are enabled to play their full part in its activities to deliver value to shareholders. He ensures effective communication with shareholders and makes sure that Board members develop an understanding of the views of major investors. Stuart Rose is Chief Executive and he is responsible for all aspects of the management of the Group and its business, which includes developing the appropriate business strategy for Board approval and securing its timely and effective implementation. He ensures that, within the strategies agreed by the Board, appropriate objectives and policies are adopted for each of the businesses of the Company, that appropriate budgets are set for them individually, that their performance is effectively monitored and that guidance or direction is given where appropriate. The Chairman ensures that the directors receive accurate, timely and clear information. Directors are encouraged to update their skills, knowledge and familiarity with the Group through their initial induction, ongoing participation at Board and committee meetings, and through meeting our people at store locations and elsewhere. Views of customers and shareholders are also shared through Board presentations and individual meetings. The Board is regularly updated on governance and regulatory matters. There is an established procedure whereby any director, wishing to do so in the furtherance of their duties, may take independent professional advice through the Group Secretary at the Company’s expense. This has been extended to the audit, remuneration and nomination committees to take their own independent advice. Kevin Lomax is Senior Independent Director and he provides a communication channel between the Chairman and the non- executive directors and to ensure that the views of each non- executive director are given due consideration. He is also an additional contact point for shareholders if they have reason for concern which contact through the normal channels of Chairman, Chief Executive or Finance Director has failed to resolve or for which contact is inappropriate. Brian Baldock was the Senior Independent Director until his retirement on 14 July 2004. MARKS AND SPENCER GROUP PLC 11 The non-executive directors provide a wide range of skills and experience to the Group. They bring an independent judgement on issues of strategy, performance, risk and people through their contribution at Board and committee meetings. The Board considers that throughout the year each non-executive director was independent in character and judgement and that they also met the independence criteria set out in the Code. The non- executive directors have ensured that they have sufﬁcient time to carry out their duties. They are expected to serve two three-year terms, although the Board may invite them to serve an additional period. As a consequence of changes to the Board described in the Directors’ report on page 27, less than half the Board were independent non-executive directors for the period from 31 May to 9 November 2004. Graham Oakley, Group Secretary, acts as a sounding board to the Chairman and individual directors. He plays a key role for the Chairman in ensuring the effective functioning of the Board. He is secretary of the audit, remuneration and nomination committees. He also heads the Corporate Governance Group, which supports the Board and its committees and commercial colleagues on a wide range of issues. The Board has a formal schedule of matters reserved for its decision. It determines the overall Group strategy; creation, acquisition or disposal of material corporate entities or assets; development and protection of the brand; matters of public interest that could affect the Group’s reputation; public announcements including statutory accounts; signiﬁcant changes in accounting policy; capital structure and dividend policy; operating plans and key performance indicators; prosecution, defence or settlement of material litigation; Group remuneration policy and Board structure, composition and succession. The Board receives regular updates on performance against the annual operating plan and investment decisions, together with business reports and presentations from senior management. During 2004/05 we reviewed all expenditure and put tight controls in place. Stock commitments were reduced by over 35% year on year. We are on course to deliver cost and margin savings and have a lower customer-focused capital spend. We simpliﬁed processes to make us more product and service driven, and removed 650 roles from head ofﬁce. We also focused on 10 strategic projects that will add most value. We renegotiated supplier terms to reduce the cost of goods by £140m by the end of 2006/07 compared to 2003/04. Overall, we expect to achieve cost and margin savings of £320m by the end of 2006/07. Additionally, we closed Lifestore, acquired per una, returned £2.3bn to shareholders and sold M&S Money to HSBC. We reduced the Executive Board to a team of three. The Business Unit Directors all now report directly to the Chief Executive and give regular presentations to the Board on strategies in their relevant areas of the business. The Board delegates to management, through the Chief Executive, the overall performance of the Group which is conducted principally through the setting of clear objectives and effective performance coaching, building long-term management capability and ensuring that the business is managed in a ﬁt and proper manner in keeping with its values and business principles. 12 MARKS AND SPENCER GROUP PLC Corporate governance continued Under the Company’s Articles of Association, all directors seek election at their ﬁrst Annual General Meeting following appointment and all directors are required to offer themselves for re-election at least every three years. In addition, any director who is aged 70 or more is required to retire and seek re-election annually. Committees of the Board The audit committee comprises Kevin Lomax (chairman), Anthony Habgood, Steven Holliday and Jack Keenan, all of whom are independent, non-executive directors. Paul Myners was a member until he was appointed Company Chairman on 31 May 2004. Brian Baldock and Dame Stella Rimington were members until they retired on 14 July 2004. Anthony Habgood and Steven Holliday joined the committee on their appointment on 15 July 2004. Its primary function is to maintain the integrity of the ﬁnancial statements and other information to shareholders, to review the systems of internal control and risk management; to maintain an appropriate relationship with the Company’s external and internal auditors and to review the effectiveness and objectivity of the audit process. Additional items reviewed during the year include: international accounting standards, clothing stock and commitment controls, store assurance, business change, information security and cash controls. Private meetings have also been held separately with the external auditors and the Chief Internal Auditor. From 1 May 2005 Stuart Rose and Charles Wilson, supported by the Finance Group, will assume the responsibilities normally performed by a Finance Director until the appointment of Ian Dyson on 27 June 2005. The audit committee keeps under review the independence and objectivity of the external auditors, PricewaterhouseCoopers LLP (‘PwC’), including the review of audit fee proposals and non-audit fees. An engagement and fee approvals process is in place which requires prior committee approval for some engagements and excludes others. In some cases, the nature of the non-audit 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, including competitive tender, to conﬁrm they are the best provider. PwC is also subject to professional standards which safeguard the integrity of the auditing role performed on behalf of shareholders. Details of this year’s fees are given in note 3 to the ﬁnancial statements. The Board is conﬁdent that the collective experience of the audit committee members enables them, as a group, to act as an effective audit committee. The committee also has access to the ﬁnancial expertise of the Group and its auditors and can seek further professional advice at the Company’s expense if required. Our search for a new non-executive director with recent and relevant ﬁnancial experience to refresh the skills and experience of the committee as a whole continues, having been interrupted by the signiﬁcant Board restructures in May and November 2004. The remuneration committee comprises Jack Keenan (chairman), Anthony Habgood, Steven Holliday and Kevin Lomax, all of whom are independent, non-executive directors. Dame Stella Rimington was chairman until her retirement on 14 July 2004. Barbara Cassani and Brian Baldock were members until their retirement on 30 April and 14 July 2004 respectively. Kevin Lomax became a member on 15 July 2004. Its primary role is to recommend to the Board the remuneration strategy and framework, giving due regard to the ﬁnancial and commercial health of the company and to ensure the executive directors and senior management are fairly rewarded for their individual contributions to the Company’s overall performance. The remuneration of the non-executive directors is determined by the Chairman and the executive directors. The Remuneration Report is set out on pages 16 to 25 as required by the Directors’ Remuneration Report Regulations 2002. The nomination committee comprises Paul Myners (chairman), Anthony Habgood, Steven Holliday, Jack Keenan and Kevin Lomax, all of whom are independent non-executive directors, with the exception of the Chairman. Brian Baldock and Dame Stella Rimington were members until their retirement on 14 July 2004. Its role is to ensure that appropriate procedures are in place for the nomination, selection, training and evaluation of directors and for successional plans. It reviews Board structure, size, composition and successional needs, thereby keeping under review the balance of membership and the required blend of skills, knowledge and experience of the Board. Paul Myners was appointed as Chairman in May 2004 on an interim basis until a permanent appointment is made, having been appointed to the Board in April 2002 as an independent non- executive director. He subsequently made more time available so that he could continue in the role while the search for a permanent Chairman continued. He is chairman of Aspen Insurance Holdings Ltd and of Guardian Media Group plc. He is a non-executive director of the Bank of New York and will join the Court of Directors of the Bank of England on 1 June 2005. In 2004 he retired as a non-executive director of mm02 and as a trustee of the Charities Aid Foundation. Also in May 2004, Stuart Rose was appointed as Chief Executive and Charles Wilson as executive director, both with considerable experience in retail and turnaround situations. During the year further candidate searches resulted in two non-executives being appointed to the Board in July 2004 and a Finance Director to be appointed in June 2005, all recruited externally. In all cases appointments were made on merit and against objective criteria to ensure that the Board maintains an appropriate balance of skills and experience. Kevin Lomax, an independent non-executive director, has led the search for a new Chairman on behalf of the nomination committee. The committee has also commissioned searches for new non- executive directors to address successional arrangements and broaden the skills, experience and diversity of the Board. In May 2005 we announced that Lord Burns will be joining the Board as Deputy Chairman with effect from 1 October 2005 and will become Chairman from the Annual General Meeting in July 2006. Paul Myners will then step aside from the Board as, under the Combined Code principles, the Board will not be able to consider him as an independent director. The corporate social responsibility (“CSR”) committee comprises Paul Myners (chairman), Jack Keenan, Graham Oakley and seven members of management. Mark McKeon and Alison Reed were members until their retirement on 9 November 2004 and 30 April 2005 respectively. It provides the Board with an overview of the social, environmental and ethical impacts of the Group’s activities. Key CSR risks and opportunities are identiﬁed in MARKS AND SPENCER GROUP PLC 13 areas such as product safety, sustainable raw materials, animal welfare, ethical trading, employment policy, health and safety and community programmes. We are pleased that we continue to gain recognition for our CSR performance, including being named as Business in the Community’s (BitC) 2004 Company of the Year. Further information is given on page 16 of the Annual Review and our CSR report is available on the Company’s website. The following table sets out the number of meetings of the Board and its committees during the year and individual attendance by Board members at those meetings: Group Board Audit Remuneration Committee Committee Nomination Committee CSR Committee Meetings held during the year1 Paul Myners, Chairman2 Stuart Rose, Chief Executive (appointed 31 May 2004) Executive directors Maurice Helfgott (retired 9 November 2004) Mark McKeon (appointed 5 April 2004; retired 9 November 2004) Laurel Powers-Freeling (retired 9 November 2004) Vittorio Radice (retired 11 June 2004) Alison Reed (retired 30 April 2005) Charles Wilson (appointed 31 May 2004) Non-executive directors Brian Baldock (retired 14 July 2004) Anthony Habgood (appointed 15 July 2004) Steven Holliday (appointed 15 July 2004) Jack Keenan Kevin Lomax3 Dame Stella Rimington (retired 14 July 2004) 15 15 12 10 10 10 4 15 12 8 5 5 15 13 8 4 2 – – – – – – – 2 1 1 4 4 2 9 – – – – – – – – 4 5 5 9 5 4 10 10 – – – – – – – 4 5 5 8 9 4 2 2 – – 1 – – 2 – – – – 2 – – 1These ﬁgures include a number of meetings held by the Board and its remuneration and nomination committees at short notice to deal with potential bid activity and senior management changes throughout the year. Members of the Board and respective committees attended the majority of these meetings in person or by telephone. Occasionally the short notice of such meetings prevented attendance when other ﬁxed commitments had been made. 2Paul Myners retired from the Audit Committee on his appointment as Chairman on 31 May 2004. 3Kevin Lomax was appointed to the Remuneration Committee on 15 July 2004. Luc Vandevelde attended the two Board meetings and one Nomination Committee, and Roger Holmes attended the two Board meetings, held before they both retired from the Board on 31 May 2004. Barbara Cassani retired on 30 April 2004 and did not attend any of the above meetings. Ian Dyson is being appointed to the Board on 27 June 2005. Lord Burns is being appointed to the Board on 1 October 2005. Performance evaluation Collective performance: Board and Committees The nomination committee, through the Chairman, agreed our approach to reviewing the collective performance of the Board and its committees, together with individual contributions, through a combination of questionnaire and individual feedback. The Chairman issued a detailed questionnaire to all directors in March 2005 with speciﬁc questions grouped into areas headed ‘processes’, ‘roles and responsibilities’ and ‘committee and individual contributions’. Appreciating that time together as a new Board was relatively short and that the reconstitution of the Board was not yet complete, it was still felt that a rigorous review would be valuable. Directors were invited to focus speciﬁcally on areas requiring priority action and to give honest and constructive suggestions/comments so that the Board could review its performance in a thorough and thoughtful manner. The process was extended further this year to include external advice and support together with individual discussions with the Head of Senior Succession and Board Performance allowing greater opportunity to explore issues on an individual basis. An executive summary focusing on the key themes that emerge will be distributed to directors. The Chairman will lead a Board discussion based on the results of the evaluation and use the process to improve constructively the effectiveness of the Board by maximising the strengths and tackling any issues of concern. Individual performance The executive directors continue to have their performance individually reviewed by the Chief Executive against set objectives. Remuneration and bonus is directly linked to these reviews and determined by the remuneration committee. Similarly, the Chief Executive and Group Secretary’s performance is reviewed by the Chairman. The performance of the non-executive directors is reviewed individually by the Chairman and that of the Chairman by the non-executive directors led by the Senior Independent Director. This year’s questionnaire also allowed each director to comment on the individual performance of themselves, other directors and the Chairman. 14 MARKS AND SPENCER GROUP PLC Corporate governance continued Accountability and audit The Group’s overriding corporate objective is to maximise long- term shareholder value whilst exceeding the expectations 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. Independent assurance is presented by internal audit, 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 Every six months the Board reviews the Group Risk Proﬁle – the tool that drives risk assessment and action planning. This is supported by an ongoing process for identifying, evaluating and managing the signiﬁcant risks faced by the Group. As an integral part of planning and review, managers from each business area and major projects identify the risks to their plans, the probability of those risks occurring, the impact if they do occur and the actions being taken to manage those risks to the agreed boundaries for risk taking. 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. 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 Code produced by the Turnbull working party. Internal control 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: Plans and policies • • • • • • communication of the Group’s strategy, objectives and targets; annual operating and capital plans and future projections; operating policies and procedures; clearly deﬁned capital investment control guidelines; review of treasury policies by the treasury committee; and review of social, environmental and ethical matters by the corporate social responsibility committee. Competent people • appointment of employees of the necessary calibre to fulﬁl their allotted responsibilities; and clear roles and accountabilities with regular performance reviews. • Monitor and control • review by operating divisions of their plans with the relevant executive directors prior to submission to the Board for approval, including identiﬁcation and assessment of risks; • monthly comparison of operating divisions’ actual ﬁnancial performance against budget; and regular consideration by the Board of year-end forecasts. • Regulatory update • • reporting of accounting and legal developments; and regular brieﬁngs on latest best practice corporate governance to the Board. 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 process undertaken; and systems of internal control, primarily through approving the internal audit plan and reviewing its ﬁndings, reviews of the annual and interim ﬁnancial statements and a review of the nature, scope and reports of the external audit. • Any signiﬁcant ﬁndings or identiﬁed risks are closely examined so that appropriate action can be taken. Management is called upon to present action plans and give representation. The audit committee has completed its review of the effectiveness of the Group’s systems of internal control during the year. Internal audit’s work is focused on areas of priority as identiﬁed by the Group Risk Proﬁle 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 position of the Group and present their ﬁndings to the audit committee. Relations with shareholders We are committed to ongoing engagement with shareholders and have a well established cycle of communication based on the Group’s ﬁnancial reporting calendar. At times of rapid change it is even more important to keep all investors properly informed. We promote the use of electronic communication and relaunched our corporate website in May 2005. All Company announcements and presentations are made available simultaneously on our website, which also contains corporate and customer information updated on a regular basis. There is a corporate governance section which includes our full response to the Code and terms of reference for the principal Board committees. Our registrars have also developed www.shareview.co.uk – an electronic service where MARKS AND SPENCER GROUP PLC 15 At last year’s Annual General Meeting, the Chairman made a commitment to explore how we could best reward our loyal shareholders who are also customers. In August 2004 we sent Café Revive and Spend and Save vouchers to shareholders offering Autumn discounts in stores, which proved very popular. We will be repeating this in July 2005, extending our offer to those who hold shares through nominee accounts. We encourage shareholders to make their views known to us by e-mail at chairman@marks-and-spencer.com, by telephone on 0845 302 1234 for customer queries and 0845 609 0810 for shareholder queries as we continue to develop our products and services. Compliance with the combined code For the year ended 2 April 2005 the Company complied with all the provisions of the Combined Code on Corporate Governance, except as follows: Board Balance A.3.2 At least half the Board, excluding the Chairman, should comprise non-executive directors determined by the Board to be independent. The Company’s position is explained on page 11. Audit Committee Membership C.3.1 The Board should satisfy itself that at least one member of the Audit Committee has recent and relevant ﬁnancial experience. The Company’s position is explained on page 11. shareholders can check their shareholding, update their personal details and elect to receive communications electronically, rather than through the post. Our Investor Relations department is the focal point for contact with institutional investors and maintains regular dialogue throughout the year. The Chairman ensures that the Board is regularly updated on the views of our major shareholders, following meetings they have with him, the Chief Executive, the Finance Director or Investor Relations. In June the Board receives a presentation from external advisers summarising the opinions of our principal shareholders following an extensive survey on their views after the release of our fourth quarter trading statement in April. We regard the Annual General Meeting as an important forum for us to engage with shareholders, particularly our private shareholders, and it is very well attended. The business presentations from the Chairman and Chief Executive are made available on our website, together with the questions and answers raised at the meeting. The Board has taken the following steps to encourage increased shareholder voting and improve the integrity and effectiveness of the voting process: • campaigned ‘your vote counts’ and encouraged the greater use of electronic voting; invited three-way voting on Annual General Meeting resolutions: ‘for’, ‘against’ and ‘vote withheld’; and conducted the vote at the Annual General Meeting by poll rather than by show of hands. • • The results of our voting are declared at the meeting, announced to the London Stock Exchange and published on our website. In July 2004 all Annual General Meeting resolutions were passed on a poll conducted electronically. Approximately 40% of the ordinary share capital was voted with ‘for’ resolutions ranging from 89.23% to 99.98%. At this year’s Annual General Meeting, in addition to routine resolutions, shareholders will be asked to vote on: • separate resolutions relating to the Company’s auditors, PricewaterhouseCoopers LLP. The ﬁrst relates to their re- appointment and the second seeks authority for the audit committee to determine the remuneration of the auditors on behalf of the Board; amendments to the Company’s Articles of Association to authorise the Company to indemnify directors and fund legal defence costs as now permitted by the Companies (Audit, Investigations and Community Enterprise) Act 2004; the introduction of a new Performance Share Plan and Executive Share Option Plan following a review by the remuneration committee to put in place an effective incentive structure to focus senior executives on driving the Company’s recovery whilst taking account of investor views and market practice; and the appointment of Lord Burns as a director with effect from 1 October 2005. • • • 16 MARKS AND SPENCER GROUP PLC Remuneration report Compliance The Remuneration Committee has adopted the principles of good governance relating to directors’ remuneration as set out in the new Combined Code. This report complies with the Companies Act 1985, as amended by the Directors’ Remuneration Report Regulations 2002 and the Listing Rules of the Financial Services Authority. Part 1: Unaudited Information Remuneration Committee With effect from 15 July 2004, the Committee comprises Jack Keenan (Chairman), Anthony Habgood, Steven Holliday and Kevin Lomax, all of whom are independent, non-executive directors. Dame Stella Rimington and Brian Baldock were members of the Committee until they left the Company on 14 July 2004 and Barbara Cassani, until she left the Company on 30 April 2004. There were six meetings of the Remuneration Committee during the period under review and all individuals who were a member of the Committee at that time attended the meetings, with the exception of Barbara Cassani, who did not attend the meeting on 21 April 2004. The Committee recommends to the Board the remuneration 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. In addition, the Committee is responsible for setting the remuneration for the Chairman. The Committee’s approach reﬂects the Company’s overall philosophy that all employees should be appropriately and competitively rewarded, in particular to recognise that the highest standards of performance deliver 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. New Bridge Street Consultants LLP have provided material advice to the Committee and the Company on directors’ remuneration and share schemes in the past year, in particular the role and shape of the incentive schemes. The Company Chairman, Chief Executive, Group Secretary and Head of Senior Remuneration also materially assisted the Committee in its deliberations, except in relation to their own remuneration. Remuneration policy Marks & Spencer depends upon the skill and experience of motivated employees throughout all levels of the business. It is part of our strategy to have a range of schemes to attract, motivate and retain high calibre individuals to drive the Company’s recovery and deliver improved performance. The Board considers the principles of good governance when deciding the remuneration strategy, and recognises that the level of remuneration and beneﬁts we offer is key to supporting this objective and maintaining our market position as an employer of choice. Total remuneration for executive directors comprises base pay, variable pay, pension and beneﬁts. Base pay and beneﬁts are set having regard to market practice and levels paid by similar companies. Variable pay provides the opportunity to earn greater amounts for the highest standards of performance. The performance-related element forms a signiﬁcant proportion of the total potential package. During the year, the Remuneration Committee has undertaken a comprehensive review of the remuneration policy, and in particular the role of variable pay. Following this review, the Company is proposing to make changes to the bonus and share incentive arrangements. Shareholder approval will be sought for a new Performance Share Plan and a new Executive Share Option Plan. Full details of both these Plans are contained in the Notice of Meeting. In summary, the proposals are: • • • • To enhance annual bonus potential for approximately 400 of the more senior executives. Payment will require the satisfaction of stretching targets and a signiﬁcant proportion of the bonus payable will be deferred into shares for three years; To adopt a new Performance Share Plan as the Company’s primary long-term incentive arrangement. It is intended to make awards under this Plan to approximately 100 of the most senior executives. Vesting of these awards will be based on demanding earnings per share growth targets; To adopt a new Executive Share Option Scheme to be used by the Remuneration Committee upon recruitment or in exceptional circumstances, if it considers it appropriate to do so; and To make no further awards under the Company’s Share Matching Plan. The proposals have been designed to rebalance the remuneration package by weighting variable pay more towards annual performance. To receive awards, executives will be required to achieve demanding targets under the annual and long-term arrangements, with the focus on targets that are most relevant to them. The proposals will use substantially fewer shares than the current arrangements, resulting in a lower cost to the Company at target performance than is currently the case, and only results in additional cost at high levels of performance. Expected proportions of future annual remuneration package for executive directors Fixed Performance-related Salary 43% Pension 9% On-target annual cash bonus 13% Long-term incentives 35% The value placed on long-term incentives assumes ‘on-target’ performance and comprises the expected cash value to executives after three years, discounted back to its present value, of i) bonus compulsorily deferred into shares and ii) performance shares awarded under the Performance Share Plan. Chairman’s and non-executive directors’ remuneration The remuneration for the non-executive directors is determined by the Chairman and executive directors and is designed to recognise both the responsibilities of non-executive directors and to attract individuals with the necessary skills and experience to contribute to the future growth of the Company. The non-executives are paid a basic fee with additional fees payable for committee membership and to the chair of the committees. These fees are neither MARKS AND SPENCER GROUP PLC 17 No director has been invited to invest any element of their bonus in the Share Matching Plan for 2005. The Company is proposing to make changes to the bonus scheme with effect from the 2005/06 ﬁnancial year to focus senior executives on the speciﬁc operational improvements which need to be made over the next year in order to drive the Company’s recovery. The key measure for executive directors will be Group proﬁt before tax, with demanding targets that require a signiﬁcant recovery in the Company’s Performance. In particular, the Group proﬁt before tax has been set taking into account market expectations for 2005/06. 60% of salary is payable for achieving target performance, and no bonus payable if this target is not achieved. The target will need to be substantially exceeded in order for a bonus of 100% of salary to be earned. All targets will represent marked improvements on the reported proﬁt of 2004/05. The maximum bonus for an executive director in 2005/06 is 150% of salary. The executive directors will be required to defer 50% of any bonus paid into shares which will be held for three years. There will be no match paid against these deferred shares, although the value of any dividends earned during the deferral will be paid at the end of the period. The deferred shares will normally not be receivable in the event that the executive leaves employment during the deferral period. Long-term Incentive Schemes (a) Executive Share Matching Plan An Executive Share Matching Plan for senior management was approved by shareholders at the Annual General Meeting in 2002 and was introduced in July 2002. The Plan operated in 2002, 2003 and 2004 for up to 25 selected senior management. The Company does not intend to operate this plan for executive directors in 2005 or future years. Participants were required to invest one-third of any annual bonus earned in shares of the Company. Any part of the balance may have been invested voluntarily. The pre-tax value of the invested bonus would be matched by an award of shares, with the extent of the match determined by performance conditions. The current performance conditions are: • • 50% of the invested bonus receives a matching award based on the Company’s Total Shareholder Return (‘TSR’)1 compared to the constituents of the FTSE 100 at the start of the performance period; and 50% of the invested bonus receives a matching award based on the Company’s TSR compared to a selected comparator group of UK retailers, which for 2004 is as follows: Big Food Group Boots Dixons GUS House of Fraser Kingﬁsher Matalan MFI William Morrison Next Sainsbury Somerﬁeld Tesco WH Smith Woolworths performance related nor pensionable. They do not participate in any of the Company’s incentive plans or share schemes. The fees for non-executive directors are reviewed regularly and the last change was effective from 1 April 2003. The Chairman’s fee for his initial period in ofﬁce from 31 May 2004 (when he stepped in at short notice to respond to a possible offer for the Company) to 5 August 2004 was, at his request, the same rate of £50,000 per annum as he had received as a non-executive director. For the period from 5 August 2004 for continuing in the role of Chairman, the Remuneration Committee was in the process of considering appropriate market benchmarks for remuneration when the Chairman signalled that he did not wish his remuneration to exceed £200,000 per annum. The Committee was content to agree to this level, which has applied since 10 August 2004 in the knowledge that it is below the market rate for the role. On appointment as Deputy Chairman on 1 October 2005, Lord Burns will receive a fee of £175,000 per annum. His remuneration on appointment to Chairman from July 2006 will be £400,000 per annum. Salaries and beneﬁts Salaries and beneﬁts for executive directors are reviewed annually and any change to salary is normally effective from 1 January. The Remuneration Committee takes into consideration a range of factors when reviewing salaries such as the Company performance, level of salaries for large retailers and for other major FTSE 100 companies, market conditions, the level of increase awarded to employees throughout the business, and the wish to recognise the responsibilities of individual directors. Current annual salaries for executive directors are set out in the Directors’ emoluments table (see page 21). Stuart Rose and Charles Wilson receive a payment of 20% of total salary in respect of pension. A payment was also made in respect of pension in the form of a supplement of 10% of the difference between the pension earnings cap and their base salary to Roger Holmes, Mark McKeon and Laurel Powers-Freeling up until their respective leaving dates. These amounts are included in the emoluments table as part of beneﬁts. Laurel Powers-Freeling was provided with accommodation in Chester to accommodate her working pattern (two days in London, three days in Chester – the location of M&S Money). A taxable beneﬁt arose, which was met by the Company. For executive directors, the provision of a car and fuel is included in the emoluments table as part of beneﬁts, where relevant. Annual Bonus Scheme The Annual Bonus Scheme is designed to reinforce the relationship between team and corporate performance and reward. The targets are determined annually by the Committee and for 2004/05 incorporated a mixture of ﬁnancial measures and personal business targets. The Committee assesses the achievement of targets for all executive directors, with advice from the Chairman and Chief Executive. The 2004/05 bonus for directors starts at 40% of base salary for on-target performance rising to a maximum of 100% for exceeding targets. This year, the ﬁnancial targets have not been met and no award has been made to any executive director under this element of the scheme. Two directors received an award for delivery of revised objectives relating to corporate activities following the possible offer for the Company in May 2004, as shown in the emoluments table. 18 MARKS AND SPENCER GROUP PLC Remuneration report continued At the end of the three-year performance period2, the Company’s TSR performance is ranked against the two comparator groups and the following matching ratios applied: TSR Performance Ranking in Group Top Decile Between Median and Top Decile Median Below Median Ratio of Matching Award to relevant portion of invested bonus 2.5:1 Pro rata between 1:1 and 2.5:1 1:1 Zero3 1TSR – The return to shareholders comprising the increase or decrease in share price plus the value of dividends received assuming that they are reinvested. 2The performance period for the ﬁrst year of awards consists of the three consecutive years following the most recent announcement of results prior to the date of award. For subsequent awards, the performance period will consist of three consecutive ﬁnancial years. 3With the exception of the 2002 Plan, any element of bonus that is compulsorily invested in the Plan receives a minimum matching ratio of 0.25:1 irrespective of performance. (b) Executive Share Option Scheme Executive Share Option Schemes have operated for over 20 years and in recent years have been open to approximately 400 senior management. Under the 2002 scheme, annual awards of up to 150% of basic salary may be offered based on performance and potential and, for exceptional performance and potential, grants of up to 250% of basic salary may be awarded. Recruitment grants can be made up to 400% of salary. The performance targets for the current Scheme are adjusted earnings per share (EPS) growth measured from the most recent ﬁnancial year ending prior to grant of at least: • • inﬂation plus an average of 3% per annum for 50% of each grant; and inﬂation plus an average of 4% per annum for the other 50% of each grant. Performance targets are assessed over an initial three-year period from the date of grant. From the year 2004/05 there is no ability to retest any grants. The Remuneration Committee will ensure that during the transition to International Financial Reporting Standards, a consistent basis is used in the measurement of EPS. As part of the review undertaken by the Remuneration Committee, the Company intends to adopt, subject to shareholder approval, a new Executive Share Option Scheme. Whilst it does not intend to use this Scheme on a regular basis, the Company wishes to have the ﬂexibility to make grants from time to time in the future, upon recruitment or in exceptional circumstances, if it considers it appropriate to do so. Full details of the proposal are shown in the Notice of Meeting. 2000 and 2002 Schemes For options granted in 2001-03, the performance target is: • EPS 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 the EPS ﬁgure for the year ending prior to grant if higher; and • EPS 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 the EPS ﬁgure for the year ending prior to grant if higher. For options granted since 2004, the measurement is from the EPS ﬁgure at the end of the ﬁnancial year prior to the grant date as published in Company’s Report and Accounts. 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: EPS growth over three years of at least inﬂation plus an average of 3% per annum; and Tier 2 Options: EPS growth over ﬁve years, placing the Company in the upper quartile of the FTSE 100 companies. 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 require EPS growth of at least inﬂation plus an average of 2% per annum. (c) Performance Share Plan The Remuneration Committee intends to propose to shareholders the introduction of a Performance Share Plan. Subject to approval, this plan will be used as the primary form of long-term incentive for the 100 most senior management. Under the plan, annual awards of up to 200% of salary may be offered based on performance and potential, with a 300% limit in the case of recruitment. It is intended that the performance targets will be based on adjusted EPS growth. For the initial awards made in 2005 the targets will be as follows: Average Annual EPS Growth in excess of Inﬂation (RPI) 8% 15% Between 8% and 15% % of Award Vesting 20% 100% Pro rata The Committee considers that EPS within the Performance Share Plan is the most appropriate measure because it is the key indicator of management performance and will reward signiﬁcant increases in proﬁts which then ﬂow through to increased shareholder value. (d) All-Employee Share Schemes Executive directors can also participate in the share schemes open to all employees of the Company. The Save As You Earn (SAYE) Scheme is currently offered annually. Details of grants and awards made to executive directors under all schemes are given in part 2 of this report. An SAYE Option Scheme was approved by shareholders in 1981 and renewed by shareholders in 1987 and 1997. Inland Revenue rules limit the maximum amount 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 contract matures. Options cannot normally be exercised until a minimum of three years has elapsed. MARKS AND SPENCER GROUP PLC 19 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 pensions earned from 6 April 1997 are awarded on a statutory basis. Pension earned prior to 6 April 1997 is guaranteed to increase by the rise in inﬂation, up to a maximum of 3% per annum. The Marks & Spencer Deﬁned Beneﬁt Pension Scheme was closed to new members with effect from 31 March 2002. The Marks & Spencer Retirement Plan Executive directors, along with other employees joining the Company on or after 1 April 2002 are, on completion of one year’s service, invited to join the contributory Retirement Plan. The Plan is a deﬁned contribution arrangement, where employees may choose to contribute between 3-15% of their salary. Member contributions of 3-6% are matched by Company contributions of 6-12%. The employee is free to choose from a range of investment vehicles, where the total contribution will be invested. During the ﬁrst year of membership, employees can contribute 3-15% of their salary and receive 6-24% from the Company to enable the employee to be compensated for the waiting period. During the one-year waiting period before joining the Plan, 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, subject to the statutory earnings cap. No current executive director is a member of the Retirement Plan. The Company is considering its response to the impact of the change in pensions legislation which will take effect in April 2006. In making our ﬁnal decision, we will take account of our remuneration principles and market practice in addition to investors’ views that companies should not compensate individuals for changes in personal taxation. External appointments The Company recognises that executive directors may be invited to become non-executive directors of other companies and that such appointments can broaden their knowledge and experience, to the beneﬁt of the Company. The individual director retains the fees. The following current executive directors served as non- executive directors elsewhere during the year and received fees as follows: Stuart Rose (Land Securities plc – £39,500, NSB Retail Systems plc – £14,850) and Alison Reed (British Airways plc – £36,800, HSBC Bank plc – £10,800). Service contracts All members of senior management have service contracts. These contracts can be terminated by the Company providing 12 months’ notice. Exceptions may exist where new recruits have been granted longer notice periods for the initial period of their employment. Senior management restructure A restructure of the Board was undertaken at the end of May 2004 which resulted in the appointment of Stuart Rose as Chief Executive and Charles Wilson as executive director on 31 May 2004. Luc Vandevelde and Roger Holmes left the Company at that time. There has been further restructuring which has resulted in Vittorio Radice, Mark McKeon, Maurice Helfgott and Laurel Powers-Freeling leaving the Company. Alison Reed left the Company at the end of April 2005. Ian Dyson has been appointed Group Finance Director with effect from 27 June 2005 with a 12-month rolling contract. His annual salary will be £420,000 and no remuneration was received in the year 2004/05. Dame Stella Rimington and Brian Baldock left the Company on 14 July 2004 and Barbara Cassani left on 30 April 2004. Anthony Habgood and Steven Holliday were appointed as non-executive directors with effect from 15 July 2004. Shareholding policy A requirement was introduced in 2002 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. It is intended to increase this holding for the Chief Executive to shares whose market value at that time is equivalent to or greater than twice his then current gross annual base salary. The Remuneration Committee is satisﬁed that under these rules, all current executive directors will have sufﬁcient holdings in the Company to be able to comply with this requirement in the appropriate timescale. The Marks & Spencer Pension Scheme Executive directors and all employees with a permanent appointment date prior to 1 April 2002 are eligible to participate in the Company’s Deﬁned Beneﬁt Pension Scheme. The Scheme is non-contributory and the subject of an Independent Trust. Final pension is based on basic salary. The normal retirement age under the Pension Scheme for senior management is 60 to harmonise with the Company contractual retirement age. Alison Reed was the only executive director who was a member of this Scheme at 2 April 2005. The Pension Scheme enables members to achieve the maximum pension of two-thirds of their pensionable salary in the 12 months ending at normal retirement date after 30 years’ service. For employees 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 per annum, 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, 20 MARKS AND SPENCER GROUP PLC Remuneration report continued The Company retains the right to terminate the contract of any director summarily in accordance with the terms of their service agreement, on payment of a sum equivalent to the contractual notice entitlement of 12 months’ salary and beneﬁts. In the case of service agreements concluded from 1 April 2004, any such payments will be subject to mitigation and paid in monthly instalments. However, entitlement to participate in future awards under the Company’s share schemes ceases on summary termination. Executive directors All executive directors have rolling service contracts, which can be terminated by the Company giving 12 months’ notice and by the director giving six months’ notice. Non-executive directors The Chairman has a service agreement with the Company which, at his request, requires no notice of termination from the Company, but requires him to give six months’ notice should he wish to terminate the agreement. The non-executive directors have service agreements with the Company for an initial three-year term, which are terminable on three months’ notice. Name Anthony Habgood Steven Holliday Jack Keenan Kevin Lomax Date of appointment Notice period/unexpired term 15 July 2004 15 July 2004 1 September 2001 1 September 2000 3 mths/3 mths 3 mths/3 mths 3 mths/3 mths 3 mths/3 mths Performance graph This graph illustrates the performance of the Company against the FTSE 100 over the past ﬁve years. The FTSE 100 has been chosen as it is a recognised broad equity market index of which the Company has been a member throughout the period. Performance, as required by the legislation, is measured by TSR (share price growth plus dividends paid). Total Shareholder Return 180 160 140 120 100 80 60 40 20 0 1 Apr 00 31 Mar 01 30 Mar 02 29 Mar 03 3 Apr 04 2 Apr 05 The above graph looks at the value, at 2 April 2005, of £100 invested in Marks & Spencer Group on 1 April 2000 compared with the value of £100 invested in the FTSE 100 Index over the same period. The other points plotted are the values at the intervening financial period-ends. Marks & Spencer Group FTSE 100 Index Source: Datastream MARKS AND SPENCER GROUP PLC 21 Part 2: Audited Information 1 Directors’ emoluments Chairman Paul Myners1 Chief Executive (appointed from) Stuart Rose (31 May 2004)2 Executive directors Alison Reed3 Charles Wilson (31 May 2004)2 Non-executive directors Steven Holliday (15 July 2004) Anthony Habgood (15 July 2004) Jack Keenan4 Kevin Lomax Directors retiring from the Board during the year Brian Baldock (14 July 2004)5 Barbara Cassani (30 April 2004) Maurice Helfgott (9 November 2004)7 Roger Holmes (31 May 2004)8 Mark McKeon (9 November 2004)9 Laurel Powers-Freeling (9 November 2004)10 Vittorio Radice (11 June 2004)11 Dame Stella Rimington (14 July 2004)5 Luc Vandevelde (31 May 2004)12 Former directors Total Current annual salary/fee £000 Salary/fee £000 Beneﬁts £000 Bonus £000 Termination payments6 £000 200 850 400 500 50 50 60 60 – – – – – – – – – – 147 708 389 417 36 36 56 60 30 4 213 103 211 262 97 30 76 – 2 1,411 35 997 – – – – – – 20 15 24 52 30 – 5 – 2,875 2,591 – – 200 – – – – – – – – – – 350 – – – – 550 Total 2005 £000 149 2,119 624 1,414 36 36 56 60 30 4 742 965 699 1,166 858 30 679 – – – – – – – – – – – 509 847 464 502 731 – 598 – 3,651 9,667 Total 2004 £000 50 – 388 – – – 50 60 60 25 126 693 – 447 556 60 547 1,461 4,523 The elements included in the beneﬁts column of the emoluments table are described in detail in the Salaries and beneﬁts section on page 17 and have been audited. 1Paul Myners received a salary increase from £50,000 to £200,000 per annum effective from 10 August 2004, relating to his continuing in the role of Chairman as announced on 5 August 2004. 2Stuart Rose and Charles Wilson received a signing on fee of £1,250,000 and £900,000 respectively, which is included in the beneﬁts ﬁgure. 3Alison Reed received a salary increase from £360,000 to £400,000 effective from 14 July 2004. 4Jack Keenan received a fee increase from £50,000 to £60,000 per annum effective from 1 September 2004 related to his appointment as chair of the Remuneration Committee. 5The fees for Brian Baldock and Dame Stella Rimington include payment in lieu of notice for the period 15 July to 30 September 2004. 6Termination payments comprise one year’s salary and loss of beneﬁts which include bonus, car beneﬁts and loss of pensionable service. 7Maurice Helfgott retired from the Board on 9 November 2004, but remained in employment with the Company until 30 November 2004. During this period, the following payments were received, which are included in the table above: Salary, £18,000, beneﬁts, £2,000. His termination payment was made up of salary, £320,000, beneﬁts £189,000. 8Roger Holmes’ termination payment was made up of salary £600,000, beneﬁts £247,000. 9Mark McKeon was appointed to the Board on 5 April 2004 on a salary of £320,000 per annum. He retired from the Board on 9 November 2004, but remained in employment with the Company until 30 November 2004. During this period, the following payments were received, which are included in the table above: Salary, £19,000, beneﬁts, £2,000. His termination payment was made up of salary, £320,000, beneﬁts £144,000. 10Laurel Powers-Freeling retired from the Board on 9 November 2004, but remained in employment with the Company until 31 December 2004. During this period, the following payments were received, which are included in the table above: Salary, £49,000, beneﬁts, £10,000. Her termination payment was made up of salary, £350,000, beneﬁts £152,000. 11Vittorio Radice received a salary increase from £435,000 to £485,000 effective from 5 April 2004, reﬂecting his increased responsibilities. His termination payment was made up of salary £485,000, beneﬁts £246,000. 12Luc Vandevelde’s salary was paid in the form of shares bought on the 10th of each month at the market price of shares on that day. His termination payment, was made up of salary £593,000, beneﬁts £5,000. 22 MARKS AND SPENCER GROUP PLC Remuneration report continued 2 Directors’ interests in long-term incentive schemes a) Executive Share Matching Plan Executive directors Alison Reed Directors leaving during the year Maurice Helfgott5 Roger Holmes6 Laurel Powers-Freeling7 Vittorio Radice8 Luc Vandevelde9 Maximum receivable at 3 April 2004 or date of appointment1 Awarded in year Vested in year Lapsed in year Maximum receivable at 2 April 2005 or date of leaving1 Performance period for matching award Date of award 76,841 246,983 323,824 35,064 108,188 143,252 113,525 396,279 509,804 26,324 244,860 – 271,184 234,181 178,788 – – – – – – – – – – – 8,236 8,236 – – – – – – – – 76,841 246,983 323,824 30 July 20022 23 June 20033 2002 – 2005 2003 – 2006 – 1,702 1,702 – 3,302 3,302 5,686 8,162 8,236 22,084 35,064 106,486 141,550 113,525 392,977 506,502 20,638 236,698 – 257,336 2,384 231,797 – 178,788 – – – – – – – – – – – – 30 July 20022 23 June 20033 2002 – 2005 2003 – 2006 30 July 20022 23 June 20033 2002 – 2005 2003 – 2006 30 July 20022 23 June 20033 28 June 20044 2002 – 2005 2003 – 2006 2004 – 2007 23 June 20033 2003 – 2006 30 July 20022 2002 – 2005 1The number of matching shares are the maximum (a match of 2.5:1) that could be receivable by the executive if the TSR performance conditions are fully met as outlined in pages 17 and 18. These calculations have been independently performed by New Bridge Street Consultants using data from Datastream (an independent data services provider). 2Market price on date of award was 339.0p. As at the end of March 2005, Marks & Spencer’s TSR was ranked 53rd out of 96 in the FTSE 100 Comparator Group and 13th out of 19 in the Retailers Comparators Group. No match would be receivable if these positions are maintained. The ﬁnal measure for this scheme will be 21 May 2005. 3Market price on date of award was 304.5p. After two years of the 2003-06 performance period, Marks & Spencer’s TSR was ranked 87th out of 98 in the FTSE 100 Comparator Group and 14th out of 17 in the Retailers Comparators Group. No matching shares would be receivable on shares purchased voluntarily with bonus if these positions were to be maintained for the full three-year performance period. A minimum match of 0.25:1 is receivable on shares purchased compulsorily with bonus. 4Market price on date of award was 362.25p. Laurel Powers-Freeling was the only executive director who was a member of this scheme until she left the Group. 5All outstanding shares lapsed when Maurice Helfgott left the Group’s employment, apart from the 1,702 matching shares which represented a 0.25:1 match on shares purchased with compulsorily invested bonus. These matching shares vested on 30 November 2004 when the share price was 328.25p, giving an equivalent gain of £6,000. 6All outstanding shares lapsed when Roger Holmes left the Group’s employment, apart from the 3,302 matching shares which represented a 0.25:1 match on shares purchased with compulsorily invested bonus. These matching shares vested on 31 May 2004 when the share price was 359.5p, giving an equivalent gain of £12,000. 7All outstanding matching shares lapsed when Laurel Powers-Freeling left the Group’s employment, apart from 5,686 and 8,236 shares which represented a 0.54:1 and 2.5:1 match respectively on shares purchased with invested bonus, and 8,162 matching shares which represented a 0.25:1 match on shares purchased with compulsorily invested bonus. These matching shares vested on 31 December 2004 when the share price was 343.0p, and when the TSR performance was calculated, giving an equivalent gain of £76,000. 8All outstanding shares lapsed when Vittorio Radice left the Group’s employment, apart from the 2,384 matching shares which represented a 0.25:1 match on shares purchased with compulsorily invested bonus. These matching shares vested on 11 June 2004 when the share price was 366.0p, giving an equivalent gain of £9,000. 9All outstanding matching shares lapsed when Luc Vandevelde left the Group’s employment. MARKS AND SPENCER GROUP PLC 23 b) Directors’ Share Option Schemes The options detailed in the table below may not be exercisable for either of the following reasons: (i) (ii) The options have not met the appropriate performance criteria. The options have not been held for three years and therefore cannot be exercised under scheme rules; or At 3 April 2004 or date of appointment Granted during the year Exercised/ lapsed during the year At 2 April 2005 or date of leaving Option price (p) Exercise price (p) Option period Chief Executive Stuart Rose Not Exercisable (A) Granted Executive directors Alison Reed Exercisable (B) Exercisable (A) Not Exercisable (B) Not Exercisable (A) Granted Lapsed3 SAYE Charles Wilson Not Exercisable (A) Granted Directors leaving during the year Maurice Helfgott Exercisable (B) Exercisable (A) Not Exercisable (B) Not Exercisable (A) Granted Exercised2 Lapsed3 Roger Holmes Exercisable (B) Not Exercisable (B) Not Exercisable (A) Lapsed3 SAYE SAYE Lapsed Mark McKeon Granted Lapsed3 Laurel Powers-Freeling Exercisable (B) Exercisable (A) Not Exercisable (B) Not Exercisable (A) Granted Lapsed3 SAYE 148,836 70,661 140,624 677,691 10,166 139,534 41,899 173,682 334,683 871,794 249,022 893,828 6,951 979,825 155,618 37,942 979,825 289,460 286,150 235,690 344,188 347.0 347.0 234.91 388.01 297.01 348.61 347.0 Jul 2007 – Jul 2014 Jul 2007 – Jul 2014 Sept 2003 – Jun 2011 Jun 1998 – Dec 2011 Jun 2006 – Jul 2013 Jun 2005 – Jul 2014 Jul 2007 – Jul 2014 10,166 166.01 Jan 2005 – Jun 2006 576,367 576,367 347.0 347.0 Jul 2007 – Jul 2014 Jul 2007 – Jul 2014 75,251 250,067 288.11 352.71 Nov 2004 – Nov 2005 Jun 2002 – Nov 2005 138,328 239,142 263,666 347.0 232.11 352.5 Jul 2007 – Jul 2014 1,449,243 240.61 Dec 2003 – May 2005 565,401 6,951 276,655 276,655 347.0 Jul 2007 – Jul 2014 235,690 548,569 297.0 350.0 Dec 2004 – Dec 2005 Dec 2004 – Dec 2005 784,259 4,046 201,728 201,728 347.0 Jul 2007 – Jul 2014 4,046 228.0 Jan 2005 – Jun 2005 24 MARKS AND SPENCER GROUP PLC Remuneration report continued b) Directors’ Share Option Schemes continued Vittorio Radice Exercisable (B) Not Exercisable (B) Not Exercisable (A) Lapsed3 Luc Vandevelde Exercisable (B) Not Exercisable (B) Not Exercisable (A) Lapsed3 At 3 April 2004 or date of appointment Granted during the year Exercised/ lapsed during the year At 2 April 2005 or date of leaving Option price (p) Exercise price (p) Option period 216,048 306.0 Jun 2004 – Jun 2005 555,553 1,992,337 2,373,195 500,000 339,505 180,556 4,684,976 266.71 Mar 2003 – May 2005 1Weighted average price. 2Maurice Helfgott exercised 139,534 options at an option price of 215.0p and 99,608 options at an option price of 256.0p. All were exercised at 352.5p, giving a gain of £288,000. 3Options may have lapsed under one of the following scheme rules: (i) The options have not been held for 12 months as at date of leaving. (ii) The options vesting period has expired. (iii) The options exercisable on leaving have been pro-rated with the balance lapsing. The market price of the shares at the end of the ﬁnancial year was 344.75p; the highest and lowest share price during the ﬁnancial year were 374.0p and 264.0p respectively. Within the table, the breakdown of options is as follows: Exercisable (A) – option price is above the market value on 2 April 2005, or date of leaving, options have vested. Exercisable (B) – option price is below the market value on 2 April 2005, or date of leaving, options have vested. Not Exercisable (A) – option price is above the market value on 2 April 2005, options have not matured. Not Exercisable (B) – option price is below the market value on 2 April 2005, options have not matured. In addition, the performance criteria attached to the Executive Share Matching Plan and the Executive Share Option Schemes as described in long-term incentive schemes (section (a) and (b) on pages 17 and 18) have been audited. 3 Directors’ pension information a) Pension beneﬁts The Directors’ Remuneration Report Regulations 2002 require disclosure of deﬁned beneﬁt pension arrangements on a different basis to that speciﬁed in the Listing Rules. Details of pension beneﬁts earned by the executive directors during the year ended 2 April 2005 are shown below on both bases. Accrued entitlement at 3 April 2004 £000 Additional pension earned in the year £000 Roger Holmes1,2 Maurice Helfgott2 Laurel Powers-Freeling1,2 Alison Reed 10 89 5 157 2 20 4 25 Transfer value of additional pension Accrued in excess entitlement at 2 April of inﬂation 2005 (net of or date director’s of leaving contribution) £000 £000 18 96 32 186 12 109 9 182 Additional pension earned in the year in excess of inﬂation £000 2 18 4 20 Age at 2 April 2005 or date of leaving 44 37 47 48 Transfer value of pension at 3 April 2004 £000 71 455 46 1,369 Transfer value of pension at 2 April Increase in transfer 2005 value (net of director’s of leaving contribution) £000 or date £000 91 573 81 1,697 20 118 35 328 1Roger Holmes and Laurel Powers-Freeling were subject to the pensions earnings ‘cap’ (£102,000 at 6 April 2004) which is reviewed annually by the Government. As a result, they also received a pension-related salary supplement of 10% of the difference between the pensions earnings ‘cap’ and their base salary. 2The pensions for Roger Holmes, Maurice Helfgott and Laurel Powers-Freeling are based on their deferred pension on respective leaving dates of 31 May 2004, 30 November 2004 and 31 December 2004. MARKS AND SPENCER GROUP PLC 25 a) Pension beneﬁts continued The accrued entitlement represents the deferred pension at age 60 to which the director would have been entitled had they left the Company on 3 April 2004 and 2 April 2005 respectively. The additional pension relates to the increase in the deferred pension during the year gross and net of inﬂation under the Directors’ Remuneration Report Regulations 2002, and the Listing Rules respectively. The transfer value of the deferred pension calculated as at 2 April 2005 is calculated by the actuary of the relevant Company Pension Scheme in accordance with actuarial guidance note GN11. The equivalent transfer value calculated as at 3 April 2004 is on the assumption that the director had left service at that date. Inﬂation has been assumed to be equivalent to the actual rate of price inﬂation which was 3.1% for the year to 30 September 2004. The measurement date accords with the Listing Rules. The transfer values are the lump sums which could have been paid to another pension scheme for the beneﬁt of the director. It is not possible for a transfer value to be paid directly to the director personally. Luc Vandevelde, Vittorio Radice and Mark McKeon left the Company on 31 May 2004, 11 June 2004 and 30 November 2004 respectively. None of them participated in the Company Pension Scheme. Stuart Rose and Charles Wilson do not participate in the Company Pension Scheme. b) Payments to former directors Details of payments made to former directors during the year are: Early retirement pensions1 (payable until) James Benﬁeld (22 April 2009) Derek Hayes (19 November 2008) Chris Littmoden (28 September 2003) Unfunded pensions Clinton Silver2 2005 £000 75 70 – 94 2004 £000 74 69 44 93 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. Approved by the Board Jack Keenan, Chairman of the Remuneration Committee London 23 May 2005 26 MARKS AND SPENCER GROUP PLC Directors’ interests The beneﬁcial interests of the directors and connected persons 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 pages 40 to 41. Further information regarding employee share option schemes is given in note 10 to the ﬁnancial statements. 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. Paul Myners Stuart Rose (appointed 31 May 2004) Alison Reed (retired 30 April 2005) Charles Wilson (appointed 31 May 2004) Anthony Habgood (appointed 15 July 2004) Steven Holliday (appointed 15 July 2004) Jack Keenan Kevin Lomax Ordinary shares as at 2 April 2005 B shares as at 2 April 2005 Ordinary shares as at 3 April 2004 or date of appointment B shares as at 3 April 2004 or date of appointment 50,660 350,416 147,153 100,000 2,500 2,500 3,238 16,190 – – – – – – – – 50,000 135,416 144,861 – – – 3,238 16,190 – – 1,069 – – – – – 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 the 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 page 14. MARKS AND SPENCER GROUP PLC 27 Directors’ report Principal activities During the year, the principal activities of the Group were Retailing and Financial Services. Financial Services activities were discontinued during the period. Retailing consists of the Group’s retail activities under the Marks & Spencer and Kings Super Markets brand names. 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, minority interests and non-equity dividends, amounts to £584.2m (last year £549.3m). The directors have declared dividends as follows: Ordinary shares Paid interim dividend of 4.6p per share (last year 4.4p per share) Proposed ﬁnal dividend of 7.5p per share (last year 7.1p per share) Total ordinary dividend, 12.1p per share (last year 11.5p per share) £m 76.3 124.2 200.5 During the year, dividends of £2.8m (last year £3.0m) have been paid on non-equity shares. The ﬁnal ordinary dividend will be paid on 15 July 2005 to shareholders whose names are on the Register of Members at the close of business on 3 June 2005. Issue of new ordinary shares Changes in share capital (i) During the period, 28,309,324 ordinary shares in the Company were issued as follows: • • • • 4,102,080 shares under the terms of the 1997 Executive Share Option Scheme at prices between 261p and 358p; 11,072,116 shares under the terms of the 2000 Executive Share Option Scheme at prices between 195p and 350p; 1,805,439 shares under the terms of the 2002 Executive Share Option Scheme at prices between 270p and 353p; and 11,329,689 shares under the terms of the United Kingdom Employees’ Save As You Earn Share Option Scheme at prices between 156p and 324p. (ii) Purchase of ordinary 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. The Company engages in share buy-backs to create value for the shareholders, when cash ﬂow permits and there is not an immediate alternative investment use for the funds. During the year, no shares were bought back under this authority. This authority is renewable annually and approval will be sought from shareholders at the Annual General Meeting in 2005 to renew the authority for a further year. (iii) Tender Offer Under authority granted to the Company by the shareholders at the Extraordinary General Meeting held on 22 October 2004, the Company purchased, and subsequently cancelled, by way of Tender Offer, 635,359,116 ordinary shares at a cost of £2.3bn, with a nominal value of £158.8m, at a price of 362p, representing 27.9% of the issued share capital. (iv) Redemption of B shares During the year, the Company redeemed 27,421,847 B shares, with a nominal value of £19.2m. Major shareholders As at 10 May 2005, the Company’s register of substantial shareholdings showed the following interests in 3% or more of the Company’s shares: Brandes Investment Partners, LLC Legal & General Investment Management Ordinary shares 251,969,136 55,510,977 % share capital 15.30 3.37 Directors and their interests On 23 May 2005, the directors were Paul Myners, Stuart Rose, Charles Wilson, Anthony Habgood, Steven Holliday, Jack Keenan and Kevin Lomax. Their biographical details, together with those of Ian Dyson who joins the Board on 27 June 2005 and Lord Burns who joins the Board on 1 October 2005, are given on page 17 of the Annual review and summary ﬁnancial statement. Paul Myners was appointed as Chairman in May 2004, having been appointed to the Board in April 2002 as non-executive director. Stuart Rose was appointed as Chief Executive and Charles Wilson was appointed as executive director of the Company on 31 May 2004. On 15 July 2004, Anthony Habgood and Steven Holliday were appointed non-executive directors. Ian Dyson will join as Finance Director on 27 June 2005. Lord Burns will join as Deputy Chairman on 1 October 2005 and will become Chairman from the Annual General Meeting in July 2006. Luc Vandevelde retired as Chairman and Roger Holmes retired as Chief Executive on 31 May 2004. Alison Reed retired as Group Finance Director on 30 April 2005. Vittorio Radice retired as an executive director on 11 June 2004. Laurel Powers-Freeling and Maurice Helfgott 28 MARKS AND SPENCER GROUP PLC Directors’ report continued retired as executive directors on 9 November 2004. Mark McKeon was appointed as executive director on 5 April 2004 and later retired from that position on 9 November 2004. Brian Baldock and Dame Stella Rimington retired as non-executive directors on 14 July 2004 and Barbara Cassani retired as non-executive director on 30 April 2004. The beneﬁcial interests of the directors and connected persons in the shares of the Company and its subsidiaries are given on page 26. 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 tenth meeting of the European Council took place last September. 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 continue to support employee share ownership through long-established employee share schemes, membership of which is service-related, details of which are given on pages 40 to 41. 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 endeavours to use 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 workplace opportunities on the ‘Workstep Programme’. • • ensure that suppliers are aware of the terms of payment; and pay in accordance with its contractual and other legal obligations. The main trading company, Marks and Spencer plc, has a policy concerning the payment of trade creditors as follows: • general merchandise is automatically paid for 11 working days from the end of the week of delivery; food is 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 plc for the year ended 2 April 2005 were 12.0 days, or 8.0 working days (last year 12.3 days, or 8.3 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. Market value of properties The directors are of the opinion that market value of the Group’s properties at 2 April 2005 exceeded the net book value by approximately £1.3bn. Charitable and political donations During the year, the Group made charitable donations to support the community of £9.8m (last year £7.2m). These principally consisted of cash donations of £3.0m (last year £5.1m) which includes the cost of our ﬂagship community programme Marks & Start, Breakthrough Breast Cancer and other charitable donations, £2.0m (last year £1.2m) of employee time principally for the Marks & Start programme and local community projects, and stock donations of £4.3m (last year £0.4m) to a variety of charities including Shelter, Fareshare, Birth Defects Foundation as well as to the local community. At the Annual General Meeting in July 2002, shareholders authorised the Company, Marks and Spencer plc and Marks and Spencer Financial Services plc to make donations to EU political organisations and to incur EU political expenditure, under the provisions of the Political Parties, Elections and Referendums Act 2000, of up to £100,000 in aggregate for each company in each year until 10 July 2006. It is our policy not to make donations to political parties and accordingly no political payments were made. However, we have a long tradition of supporting the community and the Group may support individuals in a number of ways for civic duties, which we shall continue to do. Auditors Resolutions to reappoint PricewaterhouseCoopers LLP as auditors of the Company and to authorise the Audit Committee to determine their remuneration will be proposed at the Annual General Meeting. Annual General Meeting The Notice of the Annual General Meeting to be held on 13 July 2005 is given, together with explanatory notes, in the booklet which accompanies this report. 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; By order of the Board Graham Oakley, Group Secretary London 23 May 2005 Auditors’ report Independent auditors’ report to the members of Marks and Spencer Group plc We have audited the ﬁnancial statements which comprise the Consolidated proﬁt and loss account, the Balance sheets, the Consolidated cash ﬂow statement, the reconciliation of net cash ﬂow to movement in net debt, the note of group historical cost proﬁts and losses, the consolidated statement of total recognised gains and losses and the related notes. We have also audited the disclosures required by Part 3 of Schedule 7A to the Companies Act 1985 contained in the Remuneration report (‘the auditable part’). Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual report and the ﬁnancial statements in accordance with applicable United Kingdom law and accounting standards are set out in the statement of directors’ responsibilities. The directors are also responsible for preparing the Remuneration report. Our responsibility is to audit the ﬁnancial statements and the auditable part of the Remuneration report in accordance with relevant legal and regulatory requirements and United Kingdom Auditing Standards issued by the Auditing Practices Board. This report, including the opinion, has been prepared for and only for the Company’s members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the ﬁnancial statements give a true and fair view and whether the ﬁnancial statements and the auditable part of the directors’ Remuneration report have been properly prepared in accordance with the Companies Act 1985. 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 regarding directors’ remuneration and transactions is not disclosed. We read the other information contained in the Annual Report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the ﬁnancial statements. The other information comprises only the Chairman’s statement, Chief Executive’s and Financial review, the Corporate governance statement, the unaudited part of the Remuneration report, Directors’ interests and the statement of Directors’ responsibilities, the Directors’ report, the Group ﬁnancial record and the Annual review and summary ﬁnancial statement. MARKS AND SPENCER GROUP PLC 29 We review whether the Corporate governance statement reﬂects the Company’s compliance with the nine provisions of the 2003 FRC Combined Code speciﬁed for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the Company’s or Group’s corporate governance procedures or its risk and control procedures. Basis of audit opinion We conducted our audit in accordance with auditing standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the ﬁnancial statements and the auditable part of the Remuneration report. It also includes an assessment of the signiﬁcant estimates and judgements made by the directors in the preparation of the ﬁnancial statements, and of whether the accounting policies are appropriate to the Company’s and Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufﬁcient evidence to give reasonable assurance that the ﬁnancial statements and the auditable part of the remuneration report are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the ﬁnancial statements. Opinion In our opinion: • the ﬁnancial statements give a true and fair view of the state of affairs of the Company and the Group at 2 April 2005 and of the proﬁt and cash ﬂows of the Group for the period then ended; the ﬁnancial statements have been properly prepared in accordance with the Companies Act 1985; and those parts of the remuneration report required by Part 3 of Schedule 7A to the Companies Act 1985 have been properly prepared in accordance with the Companies Act 1985. • • PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors London 23 May 2005 30 MARKS AND SPENCER GROUP PLC Consolidated proﬁt and loss account Turnover Continuing operations Discontinued operations Total turnover Operating proﬁt Continuing operations Acquired operations Discontinued operations Total operating proﬁt (Loss)/proﬁt on sale of property and other ﬁxed assets Proﬁt on sale/closure of operations: Proﬁt/(loss) arising on sale/closure Release/utilisation of prior year provision Net proﬁt on sale/closure of operations Net interest expense Other ﬁnance income/(charges) Proﬁt/(loss) on ordinary activities before taxation Analysed between: Continuing operations (including acquired operations) Discontinued operations Taxation on ordinary activities Proﬁt/(loss) attributable to shareholders Dividends (including dividends in respect of non-equity shares) Retained proﬁt/(loss) Earnings per share Diluted earnings per share Adjusted earnings per share Diluted adjusted earnings per share Dividend per share Before Exceptional 52 weeks ended 2 April 2005 After items exceptional items £m (note 4) £m exceptional items £m Before exceptional items £m 53 weeks ended 3 April 2004 After exceptional items £m Exceptional items (note 4) £m Notes 7,710.3 232.0 2, 3 7,942.3 – – – 7,710.3 232.0 7,971.5 330.0 7,942.3 8,301.5 – – – 7,971.5 330.0 8,301.5 667.6 9.5 677.1 32.3 709.4 – – – – (102.3) 11.4 618.5 586.2 32.3 (176.5) 442.0 (203.3) 238.7 2, 3 4B 4C 5 11C 6 8 9 9 9 9 8 (91.4) – (91.4) – (91.4) (0.4) 208.9 9.7 218.6 – – 126.8 (91.8) 218.6 18.2 145.0 576.2 9.5 585.7 32.3 618.0 (0.4) 208.9 9.7 218.6 (102.3) 11.4 745.3 494.4 250.9 (158.3) 587.0 809.4 – 809.4 56.6 866.0 – – – – (45.8) (15.2) (42.1) – (42.1) – (42.1) 18.7 (26.8) 26.8 – – – 767.3 – 767.3 56.6 823.9 18.7 (26.8) 26.8 – (45.8) (15.2) 805.0 (23.4) 781.6 748.4 56.6 (242.0) 563.0 (23.4) – 12.7 (10.7) – (203.3) (263.2) – 145.0 383.7 299.8 (10.7) 29.1p 28.9p 21.9p 21.7p 12.1p 725.0 56.6 (229.3) 552.3 (263.2) 289.1 24.2p 24.1p 24.7p 24.6p 11.5p NOTE OF GROUP HISTORICAL COST PROFITS AND LOSSES Proﬁt on ordinary activities before taxation Revaluation surplus realised on disposals Revaluation element of depreciation charge Historical cost proﬁt on ordinary activities before taxation Historical cost retained proﬁt for the period Notes 26 26 52 weeks ended 2 April 2005 £m 53 weeks ended 3 April 2004 £m 745.3 28.6 1.0 774.9 413.3 781.6 0.5 1.0 783.1 290.6 CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES 52 weeks ended 2 April 2005 £m Notes 53 weeks ended 3 April 2004 £m Proﬁt attributable to shareholders Exchange differences on foreign currency translation Unrealised surplus on revaluation of investment properties Impairment of previously revalued properties Actuarial (losses)/gains net of taxation Total recognised gains and losses relating to the period 26 26 26 587.0 0.2 4.0 – (55.1) 536.1 552.3 (15.9) 7.3 (20.0) 150.4 674.1 Balance sheets Fixed assets Intangible assets Tangible assets 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 (liabilities)/assets MARKS AND SPENCER GROUP PLC 31 2 April 2005 £m Notes Group 3 April 2004 £m 2 April 2005 £m Company 3 April 2004 £m 13 14 15 122.4 3,316.1 9.0 – 3,497.6 10.0 – – 7,648.7 – – 7,643.2 3,447.5 3,507.6 7,648.7 7,643.2 339.7 398.0 – – 16A 16B 17 18 212.0 6.2 67.0 212.6 837.5 971.6 1,779.3 325.9 394.7 3,869.5 205.3 – – – 205.3 262.7 – – – 262.7 20 (1,289.3) (1,884.7) (2,225.2) (2,325.9) (451.8) 1,984.8 (2,019.9) (2,063.2) Total assets less current liabilities 2,995.7 5,492.4 5,628.8 5,580.0 Creditors: amounts falling due after more than one year Provisions for liabilities and charges Net assets before net post-retirement liability Net post-retirement liability 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) Equity shareholders’ funds Non-equity shareholders’ funds Total shareholders’ funds Approved by the Board 23 May 2005 Stuart Rose, Chief Executive Charles Wilson, Executive Director 21 23 11 (1,919.7) (80.4) 995.6 (474.2) (2,519.6) (49.3) 2,923.5 (469.5) – – – – 5,628.8 – 5,580.0 – 521.4 2,454.0 5,628.8 5,580.0 25,26 26 26 26 26 26 26,27 27 480.2 106.6 2,102.8 330.8 (6,542.2) 4,043.2 651.2 45.2 1,924.8 356.4 (6,542.2) 6,018.6 480.2 106.6 2,102.8 – – 2,939.2 651.2 45.2 1,924.8 – – 2,958.8 521.4 2,454.0 5,628.8 5,580.0 455.7 65.7 521.4 2,369.1 84.9 5,563.1 65.7 5,495.1 84.9 2,454.0 5,628.8 5,580.0 32 MARKS AND SPENCER GROUP PLC Consolidated cash ﬂow information CASH FLOW STATEMENT Cash inﬂow from continuing operating activities before contribution to the pension fund Contribution to the pension fund following 2003 actuarial valuation Cash inﬂow from continuing operating activities Cash inﬂow from discontinued operating activities Cash inﬂow from operating activities Returns on investments and servicing of ﬁnance Interest received Interest paid Non-equity dividends paid Net cash outﬂow 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 outﬂow for capital expenditure and ﬁnancial investment Acquisitions and disposals Closure of operations Sale of subsidiaries Purchase of subsidiaries Net cash inﬂow from acquisitions and disposals Equity dividends paid Notes 52 weeks ended 2 April 2005 £m 857.5 – 857.5 717.9 28 1,575.4 53 weeks ended 3 April 2004 £m 1,002.3 (400.0) 602.3 64.2 666.5 15.4 (114.2) (2.8) (101.6) 14.4 (61.2) (3.0) (49.8) (161.3) (5.4) (166.7) (216.3) (4.1) (220.4) (232.2) 117.8 – 0.8 (113.6) 12.7 477.0 (125.9) 363.8 (428.8) 126.2 (0.6) 9.3 (293.9) 51.3 – – 51.3 (236.9) (247.1) 30B 30A Cash inﬂow/(outﬂow) before management of liquid resources and ﬁnancing 1,320.4 (93.4) Management of liquid resources and ﬁnancing Management of liquid resources Financing (Decrease)/increase in cash RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT (Decrease)/increase in cash Cash (inﬂow)/outﬂow from (decrease)/increase in liquid resources Cash inﬂow from increase in debt ﬁnancing Debt ﬁnancing net of liquid resources disposed with subsidiary Exchange and other movements Movement in net debt Opening net debt Closing net debt 29B 29C 66.7 (1,507.5) (1,440.8) (89.0) 347.0 258.0 (120.4) 164.6 52 weeks ended 2 April 2005 £m 53 weeks ended 3 April 2004 £m (120.4) (66.7) (757.6) 839.7 0.7 164.6 89.0 (413.6) – (3.3) (104.3) (1,994.7) (163.3) (1,831.4) (2,099.0) (1,994.7) Notes 29B 29C 31 31 31 Notes to the ﬁnancial statements MARKS AND SPENCER GROUP PLC 33 1 ACCOUNTING POLICIES Basis of preparation 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, which have been consistently applied, is given below. Accounting convention and basis of consolidation The Group ﬁnancial statements incorporate the ﬁnancial statements of Marks and Spencer Group plc and all its subsidiaries for the 52 weeks ended 2 April 2005. 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 SSAP 19 – ‘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. On 19 March 2002, the Company acquired 100% of the issued share capital of Marks and Spencer plc following the implementation of a Scheme of Arrangement under Section 425 of the Companies Act 1985. This Scheme of Arrangement was accounted for using merger accounting principles, although it did not satisfy all of the conditions required by Schedule 4 of the Act. In the opinion of the directors, the Scheme of Arrangement was a Group reconstruction rather than an acquisition since the shareholders in the Company were the same as the former shareholders of Marks and Spencer plc and the rights of each shareholder, relative to the others, were unchanged. Therefore, the directors considered 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 the 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 ﬁnancial statements to give a true and fair view of the Group’s results and ﬁnancial position, the directors adopted merger accounting principles in drawing up the ﬁnancial statements. The directors consider that it is not practicable to quantify the effect of this departure from the Companies Act 1985 requirements. Turnover Retail turnover comprises sales of goods to customers outside the Group less an appropriate deduction for actual and expected returns, discounts and loyalty scheme voucher costs, and is stated net of Value Added Tax and other sales taxes. Sales of furniture are recorded on delivery. Financial Services turnover comprises interest receivable from customers together with other income attributable to the Financial Services operation. Operating leases Costs in respect of operating leases are charged on a straight line basis over the lease term. 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. Following the full adoption of FRS 17, the regular service cost of providing retirement beneﬁts to employees during the year, together with the cost of any beneﬁts relating to past service, is charged to operating proﬁt in the year. A credit representing the expected return on the assets of the retirement beneﬁt schemes during the year is included within other ﬁnance income. This is based on the market value of the assets of the schemes at the start of the ﬁnancial year. A charge within other ﬁnance charges, representing the expected increase in the liabilities of the retirement beneﬁt schemes during the year, is included within net interest. This arises from the liabilities of the schemes being one year closer to payment. The difference between the market value of assets and the present value of accrued pension liabilities is shown as an asset or liability in the balance sheet net of deferred tax. Differences between actual and expected returns on assets during the year are recognised in the statement of total recognised gains and losses in the year, together with differences arising from changes in assumptions. 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. 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; 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; and 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 except where, in certain circumstances, it relates to a previously revalued asset, in which case it is charged through the statement of total recognised gains and losses. 34 MARKS AND SPENCER GROUP PLC Notes to the ﬁnancial statements continued Transactions denominated in foreign currencies are translated at the exchange rate at the date of the transaction, or the forward exchange contract rate where appropriate. 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. 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. Policies relating to discontinued operations 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. 1 ACCOUNTING POLICIES continued c d Land and buildings 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. Investment properties Investment properties are revalued annually and included in the balance sheet at their open market value. In accordance with SSAP 19, 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. 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. This represents a departure from the Companies Act 1985 requirements concerning the valuation of current asset investments. These assets are held as investments in the insurance and the long-term assurance businesses and the directors consider that the adoption of this policy is necessary to give a true and fair view. Stocks Stocks are valued at the lower of cost and net realisable value using the retail method. All stocks are ﬁnished goods. 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 entered into 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. MARKS AND SPENCER GROUP PLC 35 2 SEGMENTAL INFORMATION A Classes of business During the year, the Group had two classes of business: Retailing and Financial Services. Financial Services activities were discontinued during the period. 2005 £m Turnover 2004 £m Operating proﬁt 2004 £m 2005 £m Operating assets 2004 £m 2005 £m Retailing activities Continuing operations: Before exceptional operating charges Exceptional operating charges Acquired operation Discontinued operations1 Total (Loss)/proﬁt on sale of property and other ﬁxed assets Proﬁt on sale/closure of operations Net interest expense Other ﬁnance income/(charges) Proﬁt on ordinary activities before taxation Net operating assets Non-operating net liabilities Net assets 7,710.3 7,971.5 – – 232.0 330.0 7,942.3 8,301.5 576.2 667.6 (91.4) 9.5 32.3 618.0 (0.4) 218.6 (102.3) 11.4 745.3 767.3 809.4 (42.1) – 56.6 823.9 18.7 – (45.8) (15.2) 781.6 3,066.6 3,071.5 (2.8) – – 601.2 3,063.8 3,672.7 3,063.8 (2,542.4) 3,672.7 (1,218.7) 521.4 2,454.0 B Geographical split The geographical segments disclose turnover and operating proﬁt by destination and reﬂect management responsibility. United Kingdom Continuing operations: Before exceptional operating charges Exceptional operating charges Acquired operation Discontinued operations1 International Retail 2005 £m Turnover 2004 £m Operating proﬁt 2004 £m 2005 £m Operating assets 2004 £m 2005 £m 7,034.7 7,293.7 – – 232.0 330.0 7,266.7 675.6 7,623.7 677.8 7,942.3 8,301.5 511.2 602.6 (91.4) 9.5 32.3 553.0 65.0 618.0 719.9 762.0 (42.1) – 56.6 776.5 47.4 2,869.2 2,954.2 (2.8) – – 601.2 2,866.4 197.4 3,555.4 117.3 823.9 3,063.8 3,672.7 1Discontinued operations relate entirely to Financial Services activities. Operating proﬁt for Financial Services includes £1.6m (last year £9.3m) arising on Marks & Spencer Chargecard transactions. This fee is payable by UK Retail and has been deducted in arriving at UK Retail operating proﬁt. Operating proﬁt for the comparative period has been restated to reﬂect the results of the Bureau de Change being reclassiﬁed from UK Retail to be included within the Financial Services results. 2UK Retail turnover including VAT comprises Clothing £3,837.3m (last year £4,032.6m); Home £407.6m (last year £526.6m) and Foods £3,509.7m (last year £3,490.2m). VAT on UK Retail turnover was £719.9m (last year £755.7m). 3Turnover from continuing operations originates in the following geographical segments: United Kingdom £7,208.9m (last year £7,453.4m) and International £501.4m (last year £518.1m). 4The value of goods exported from the UK, including shipments to international subsidiaries, amounted to £319.9m (last year £293.0m). 36 MARKS AND SPENCER GROUP PLC Notes to the ﬁnancial statements continued 3 OPERATING PROFIT Turnover Cost of sales Gross proﬁt Employee costs (see note 10) Occupancy costs Repairs, renewals and maintenance of ﬁxed assets Depreciation Goodwill amortisation Other costs2 Total net operating expenses3 Operating proﬁt Continuing operations1 £m Discontinued operations £m Continuing operations1 £m Discontinued operations £m 2005 Total £m 7,942.3 (5,123.5) 2,818.8 (1,050.8) (323.3) (75.8) (267.3) (3.1) (480.5) 232.0 (94.0) 138.0 (36.5) (2.9) (0.9) (1.8) – (63.6) 7,971.5 (5,153.9) 2,817.6 (1,023.5) (280.0) (91.3) (243.1) – (412.4) (105.7) (2,200.8) (2,050.3) 32.3 618.0 767.3 2004 Total £m 8,301.5 (5,259.9) 3,041.6 (1,091.5) (285.6) (93.2) (246.1) – (501.3) (2,217.7) 823.9 330.0 (106.0) 224.0 (68.0) (5.6) (1.9) (3.0) – (88.9) (167.4) 56.6 7,710.3 (5,029.5) 2,680.8 (1,014.3) (320.4) (74.9) (265.5) (3.1) (416.9) (2,095.1) 585.7 The directors consider that the nature of the business is such that the analysis of expenses shown above is more informative than that set out in the formats of the Companies Act 1985. 1Included within continuing operations is operating proﬁt derived from acquisitions and exceptional charges as analysed below: Turnover Cost of sales Gross proﬁt Employee costs (see note 10) Occupancy costs Repairs, renewals and maintenance of ﬁxed assets Depreciation Goodwill amortisation Other costs Total net operating expenses Operating proﬁt 2005 Acquired operations £m Exceptional charges £m Acquired operations £m 2004 Exceptional charges £m – 17.3 17.3 (4.0) (0.2) – (0.1) (3.1) (0.4) (7.8) 9.5 – (3.3) (3.3) (7.2) (10.6) (0.3) (15.1) – (54.9) (88.1) (91.4) – – – – – – – – – – – – – – (24.5) (5.2) – (4.2) – (8.2) (42.1) (42.1) All turnover from acquired operations is to another group company. The reduction in cost of sales of £17.3m is attributable to the lower cost of purchases in the post-acquisition period. 2Included in ‘Other costs’ is the auditors’ remuneration including expenses for audit and non-audit services as follows: Statutory audit services Annual audit Non-audit related services Further assurance services Tax advisory services Other services 2005 £m 1.2 1.9 0.4 0.2 2.5 Group 2004 £m 1.2 0.1 0.9 0.4 1.4 2005 £m 0.2 – – – – Company 2004 £m 0.2 – – – – Included in the above are fees paid to the Group’s auditors in the UK in relation to the Tender Offer of £0.4m, the sale of Financial Services of £0.5m, the acquisition of per una of £0.1m and Defence of £0.8m. Of these costs, £1.6m is included within further assurance services and £0.2m within tax advisory services. 3Included in ‘Total net operating expenses’ are rentals under operating leases, comprising £3.9m for hire of plant and machinery (last year £4.1m) and £139.6m of other rental costs (last year £108.9m). 4 EXCEPTIONAL ITEMS A Exceptional operating charges Head ofﬁce relocation Head ofﬁce restructuring programme Board restructure Closure of Lifestore Defence costs B (Loss)/proﬁt on sale of property and other ﬁxed assets (Loss)/proﬁt on sale of property and other ﬁxed assets C Proﬁt on sale/closure of operations Proﬁt/(loss) arising on sale/closure Release/utilisation of prior year provision Net sale proceeds less net assets Release of prior year provision Net proﬁt on sale/closure of operations MARKS AND SPENCER GROUP PLC 37 2005 £m 8.8 6.3 8.4 29.3 38.6 91.4 2005 £m (0.4) 2005 £m 208.9 9.7 218.6 Financial Services £m Continental Europe £m 208.9 – 208.9 – 9.7 9.7 2004 £m 19.6 22.5 – – – 42.1 2004 £m 18.7 2004 £m (26.8) 26.8 – Total £m 208.9 9.7 218.6 The loss on sale/closure of operations in the prior year relates to the closure of the Continental European operations. On 9 November 2004, the Group completed the sale of Marks and Spencer Retail Financial Services Holdings Limited to HSBC Holdings plc. The net sale proceeds were £533.6m (see note 30B) after accounting for a pre-sale dividend of £235.0m together with associated disposal costs. At the same time, the Group and HSBC entered into a relationship under which the Group will continue to share in the success of the business. Under this relationship, the Group will receive income in the form of fees representing an amount equivalent to costs incurred, 50% of the proﬁts of M&S Money (after a notional tax charge and after deducting agreed operating and capital costs) together with an amount relating to sales growth. In the period since 9 November 2004, the fees received were £16.4m. In addition, the Group has also received £15.1m for costs incurred as part of the transition of M&S Money to HSBC and £1.1m for rent. The Group also conducts settlement transactions with M&S Money in the normal course of business. At 2 April 2005, the amount owed by M&S Money was £16.2m. 5 NET INTEREST EXPENSE Bank and other interest income Less: amounts included in turnover of Financial Services Interest expenditure Less: interest charged to cost of sales of Financial Services Net interest expense Interest expenditure comprises: Amounts repayable within ﬁve years: Bank loans, overdrafts and other borrowings Syndicated bank facility Medium term notes Securitised loan notes Amounts repayable after ﬁve years: Medium term notes Securitised loan notes £m 169.9 (153.2) (183.6) 64.6 (43.5) (7.8) (64.6) (1.4) (47.2) (19.1) 2005 £m 16.7 (119.0) (102.3) (117.3) (66.3) (183.6) £m 248.5 (235.2) (136.1) 77.0 (22.2) – (68.1) (1.2) (24.8) (19.8) 2004 £m 13.3 (59.1) (45.8) (91.5) (44.6) (136.1) 38 MARKS AND SPENCER GROUP PLC Notes to the ﬁnancial statements continued 6 TAXATION ON PROFIT ON ORDINARY ACTIVITIES A Taxation charge for the period £m 2005 £m £m 2004 £m Current taxation UK corporation tax at 30% (last year 30%): Current year Prior years Overseas taxation Total current taxation Deferred taxation (see note 23) Current year Prior years Total deferred taxation 115.4 (17.5) 205.7 (3.6) 97.9 6.0 103.9 54.4 158.3 44.0 10.4 26.0 (2.5) Included in the tax charge for the year is a credit of £18.2m (last year £12.7m credit) which is attributable to exceptional charges. B Taxation reconciliation Proﬁt before taxation Taxation at the standard UK corporation tax rate of 30% (last year 30%) Permanent differences Capital allowances less than/(in excess of) depreciation Other timing differences Net effect of restructuring charges Net effect of different rates of tax in overseas businesses Adjustments to tax charge in respect of prior periods Proﬁt on sale of Financial Services Other exceptional charges Total current taxation 2005 £m 745.3 223.6 6.2 3.1 (47.1) – (8.1) (17.5) (61.8) 5.5 103.9 202.1 3.7 205.8 23.5 229.3 2004 £m 781.6 234.5 6.0 (1.8) (24.2) 1.9 (7.0) (3.6) – – 205.8 7 PROFIT FOR THE FINANCIAL YEAR As permitted by Section 230 of the Companies Act 1985, the proﬁt and loss account of the Company is not presented as part of these ﬁnancial statements. A proﬁt before tax of £2,518.3m (last year £262.1m) is dealt with in the ﬁnancial statements of the Company. Proﬁt before tax includes dividends received from a subsidiary of £2,516.6m (last year £262.1m). 8 DIVIDENDS Dividends on equity shares Paid interim ordinary dividend of 4.6p per share (last year 4.4p per share) Proposed ﬁnal ordinary dividend of 7.5p per share (last year 7.1p per share) Total ordinary dividend of 12.1p per share (last year 11.5p per share) Dividends on non-equity shares Interim B share dividend paid at 3.36% (last year 2.73%) Final B share dividend paid at 3.78% (last year 2.86%) 2005 £m 76.3 124.2 200.5 1.4 1.4 2.8 2004 £m 99.5 160.7 260.2 1.6 1.4 3.0 203.3 263.2 MARKS AND SPENCER GROUP PLC 39 9 EARNINGS PER SHARE The calculation of earnings per ordinary share is based on earnings after tax, minority interests and non-equity dividends, 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 FRS 14 – ‘Earnings per Share’ and is based on earnings excluding the effect of the exceptional items on an after tax basis. It has been calculated to allow shareholders to gain a clearer understanding of the underlying trading performance of the Group. Details of the adjusted earnings per share are set out below: Basic earnings Exceptional operating charges Loss/(proﬁt) on sale of property and other ﬁxed assets Proﬁt on sale/closure of operations Adjusted earnings Earnings from discontinued operations Adjusted earnings from continuing operations Basic pence per share 2005 Diluted pence per share 29.1 3.6 – (10.8) 21.9 (1.5) 20.4 28.9 3.6 – (10.8) 21.7 (1.5) 20.2 £m 584.2 72.2 0.4 (217.6) 439.2 (30.0) 409.2 £m 549.3 29.4 (18.7) – 560.0 (52.7) 507.3 The weighted average number of ordinary shares used in the calculation of earnings per share are as follows: Basic pence per share 2004 Diluted pence per share 24.2 1.3 (0.8) – 24.7 (2.3) 22.4 24.1 1.3 (0.8) – 24.6 (2.3) 22.3 2005 m 2004 m 2,006.2 17.3 2,266.7 15.4 2,023.5 2,282.1 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 10 EMPLOYEES A Aggregate remuneration The aggregate remuneration and associated costs of Group employees were: Continuing operations1 £m Discontinued operations £m Wages and salaries Social security costs Pension costs (see note 11) Employee welfare and other personnel costs Employee costs 821.9 56.2 100.7 35.5 1,014.3 27.3 2.0 2.5 4.7 36.5 2005 Total £m 849.2 58.2 103.2 40.2 Continuing operations1 £m Discontinued operations £m 815.6 52.9 118.4 36.6 52.7 2.9 5.4 7.0 68.0 1,050.8 1,023.5 2004 Total £m 868.3 55.8 123.8 43.6 1,091.5 1Included within continuing operations is operating proﬁt derived from acquisitions and exceptional items as analysed below: Wages and salaries Social security costs Pension costs (see note 11) Employee welfare and other personnel costs Employee costs 2005 Exceptional charges/ (income) £m Acquired operations £m 2004 Exceptional charges/ (income) £m Acquired operations £m 3.2 0.3 0.1 0.4 4.0 15.0 0.9 (11.0) 2.3 7.2 – – – – – 23.0 0.1 – 1.4 24.5 40 MARKS AND SPENCER GROUP PLC Notes to the ﬁnancial statements continued 10 EMPLOYEES continued B Average number of 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 Acquired operations Overseas Discontinued operations 2005 2004 4,863 56,269 2,525 807 173 4,399 1,514 70,550 4,901 55,526 2,755 919 – 4,381 1,619 70,101 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 46,962 (last year 45,222) and for discontinued operations 1,340 (last year 1,432). Comparatives for UK store stafﬁng have been recategorised to reﬂect the reclassiﬁcation of divisional staff. C United Kingdom Share Incentive Plan The Company adopted the free share element of the new all-employee Share Incentive Plan, which is approved by the Inland Revenue. This is a discretionary plan and the Company decides each year whether an award is to be made, depending upon the year-end proﬁts. No award will be made in July 2005 in respect of the ﬁnancial year ended 2 April 2005. The last award under this scheme was made in July 2003. 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 1997 January 1998 January 1999 January 2000 January 2001 January 2002 January 2003 January 2004 January 2005 Number of shares 2004 2005 Option price Expired 1,038,090 1,594,114 4,398,817 13,572,339 4,702,766 7,988,919 10,812,290 8,080,928 1,499,213 1,160,288 3,832,848 11,292,814 15,825,503 8,720,985 9,729,981 12,811,587 – 389p 467p 324p 223p 156p 250p 283p 228p 280p E Executive Share Option Schemes Under the terms of the current Scheme, approved by shareholders in 2002, 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 (further details are set out in the Remuneration report on page 18). Outstanding options granted under all executive share option schemes are as follows: Options granted (1984 Scheme) May 1994 October 1994 May 1995 May 1996 November 1996 June 1997 (1987 Scheme) June 1997 Number of shares 2004 2005 Option price – – 1,025,065 39,376 6,172 11,384 1,071,186 21,541 1,060,075 45,850 6,172 17,076 404p 402p 414p 458p 486p 527p Option dates May 1997 – May 2004 Oct 1997 – Oct 2004 May 1998 – May 2005 May 1999 – May 2006 Nov 1999 – Nov 2006 Jun 2000 – Jun 2007 – 1,269,006 527p Jun 2000 – Jun 2004 MARKS AND SPENCER GROUP PLC 41 Number of shares 2004 2005 Option price 141,720 20,544 411,922 – – 705,973 20,544 603,984 21,583 – 194,906 – – 1,129,506 – 997,463 134,436 – – 744,388 – 796,167 3,078,332 439,463 111,111 – 56,306 3,995,346 370,651 53,632 48,148 5,028,335 472,188 2,525,361 264,685 101,010 – 56,306 3,398,786 229,641 43,252 37,037 3,957,495 418,698 172,429 179,008 449,913 59,352 1,992,337 884,667 20,544 648,081 59,352 1,992,337 1,792,689 451,281 105,504 5,403,205 168,674 1,204,236 1,839,642 435,897 105,504 2,734,313 156,626 985,798 4,170,578 567,519 242,424 282,678 111,486 5,838,559 564,256 – – – – 3,515,049 330,546 222,222 272,875 101,351 5,082,684 349,173 – – – – 557p 404p 358p 278p 261p 557p 404p 358p 278p 261p 215p 195p 218p 256p 249p 350p 215p 195p 218p 256p 249p 350p 350p 353p 297p 306p 296p 297p 270p 289p 270p 347p 337p 350p 353p 297p 306p 296p 297p 270p 289p 270p 347p 337p Option dates Jun 2001 – Jun 2008 Nov 2001 – Nov 2008 Jun 2002 – Jun 2009 Nov 2002 – Nov 2009 Mar 2003 – Mar 2010 Jun 2003 – Jun 2008 Nov 2003 – Nov 2008 Jun 2004 – Jun 2009 Nov 2004 – Nov 2009 Mar 2005 – Mar 2010 Sep 2003 – Sep 2010 Dec 2003 – Dec 2010 Mar 2004 – Mar 2011 Jun 2004 – Jun 2011 Jul 2004 – Jul 2011 Dec 2004 – Dec 2011 Sep 2003 – Sep 2010 Dec 2003 – Dec 2010 Mar 2004 – Mar 2011 Jun 2004 – Jun 2011 Jul 2004 – Jul 2011 Dec 2004 – Dec 2011 Jun 2005 – Jun 2012 Nov 2005 – Nov 2012 Jan 2006 – Jan 2013 Mar 2006 – Mar 2013 Mar 2006 – Mar 2013 Jun 2006 – Jun 2013 Nov 2006 – Nov 2013 Jan 2007 – Jan 2014 Feb 2007 – Feb 2014 Jul 2007 – Jul 2014 Nov 2007 – Nov 2014 Jun 2005 – Jun 2012 Nov 2005 – Nov 2012 Jan 2006 – Jan 2013 Mar 2006 – Mar 2013 Mar 2006 – Mar 2013 Jun 2006 – Jun 2013 Nov 2006 – Nov 2013 Jan 2007 – Jan 2014 Feb 2007 – Feb 2014 Jul 2007 – Jul 2014 Nov 2007 – Nov 2014 10 EMPLOYEES continued Options granted (1997 Scheme – Tier 1) June 1998 November 1998 June 1999 November 1999 March 2000 (1997 Scheme – Tier 2) June 1998 November 1998 June 1999 November 1999 March 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 (2002 Scheme +3%) June 2002 November 2002 January 2003 March 2003 March 2003 June 2003 November 2003 January 2004 February 2004 July 2004 November 2004 (2002 Scheme +4%) June 2002 November 2002 January 2003 March 2003 March 2003 June 2003 November 2003 January 2004 February 2004 July 2004 November 2004 F Executive Share Matching Plan An Executive Share Matching Plan for senior management was approved by shareholders at the Annual General Meeting in 2002 and was introduced for the ﬁrst time in July 2002. The plan currently operates for nine members of senior management. Participants are required to invest one-third of any annual bonus earned in shares in the Company. The balance of the annual bonus may be invested voluntarily. The pre-tax value of the invested bonus will be matched by an award of shares, with the extent of the match determined by performance conditions over a three-year period. Further details of the plan are given in the Remuneration report on page 17. £0.3m (last year £0.5m charge) has been credited to proﬁts for this year. 42 MARKS AND SPENCER GROUP PLC Notes to the ﬁnancial statements continued 10 EMPLOYEES continued G Fair value of share awards As part of the Group’s preparation for the transition to International Financial Reporting Standards (IFRS), the Group intends to apply IFRS 2 - ‘Share Based Payments’, to share scheme awards granted before 7 November 2002. IFRS 2 requires the disclosure of the fair values of share based awards granted prior to 7 November 2002 before the formal adoption of IFRS. Details are given below of the fair values of all grants prior to 7 November 2002 that will impact the consolidated proﬁt and loss account, prepared under IFRS, for the period ended 2 April 2005, the comparative period for IFRS implementation. Date of award 25 November 1997 25 November 1998 24 November 1999 24 November 1999 22 November 2000 22 November 2000 29 June 2001 12 July 2001 21 November 2001 21 November 2001 06 December 2001 25 June 2002 12 July 2002 30 July 2002 Scheme Save As You Earn Save As You Earn Save As You Earn Save As You Earn Save As You Earn Save As You Earn Executive Share Option Executive Share Option Save As You Earn Save As You Earn Executive Share Option Executive Share Option Restricted Share Plan Executive Share Matching Plan Vesting period (years) Fair Value of individual award at grant date (pence) 7 7 7 5 7 5 3 3 5 3 3 3 3 3 221.8 120.8 62.7 64.3 55.8 59.7 76.5 72.4 120.9 117.0 114.8 116.0 308.0 452.7 11 RETIREMENT BENEFITS The Group adopted FRS 17 – ‘Retirement Beneﬁts’ in full in 2004. The total cost of retirement beneﬁts for the Group was £84.8m (last year £139.0m) of which £103.2m (last year £123.8m) has been charged against operating proﬁt, £7.0m (last year £nil) has been credited within proﬁt on sale of operations and £11.4m (last year a charge of £15.2m) has been credited within other ﬁnance charges. The charge against operating proﬁt this year includes a £14.0m credit (of which £11.0m has been included within exceptional items) in respect of curtailment gains in the UK deﬁned beneﬁt pension scheme. Excluding these curtailment gains, the charge against operating proﬁt would have been £117.2m. Within the total Group retirement beneﬁt cost of £84.8m, £74.0m relates to the UK deﬁned beneﬁt pension scheme. The Group also operates small deﬁned beneﬁt pension schemes in the Republic of Ireland and at Kings Super Markets in the USA. Retirement beneﬁts also include a UK post-retirement healthcare scheme and unfunded pension plans. Contributions to non-deﬁned beneﬁt pension schemes in the year were £6.5m (last year £2.3m). A Financial assumptions A full actuarial valuation of the UK deﬁned beneﬁt pension scheme was carried out at 31 March 2003 and showed a deﬁcit of £585m. The demographic assumptions were reviewed and updated at that time. The ﬁnancial assumptions for the UK scheme and the most recent actuarial valuations of the other post-retirement schemes have been updated by independent qualiﬁed actuaries to take account of the requirements of FRS 17 in order to assess the liabilities of the schemes at 2 April 2005: Rate of increase in salaries Rate of increase in pensions in payment1 Discount rate Inﬂation rate Long-term healthcare cost increases 1For 2005 it has been assumed that pension increases will not be above the increases guaranteed in the scheme rules. 2005 % 3.7 2.6 5.5 2.9 7.9 2004 % 3.5 2.7 5.6 2.7 7.7 2003 % 3.5 2.5 5.5 2.5 7.5 MARKS AND SPENCER GROUP PLC 43 11 RETIREMENT BENEFITS continued B Market value of assets and expected rates of return The market value of the assets in the Group deﬁned beneﬁt pension schemes and the expected long-term rates of return as at year end were: Expected long-term rate of return p.a. 2003 % 2004 % 2005 % UK equities Overseas equities Government bonds Corporate bonds (Triple B or above) Other Total market value of assets1 Present value of scheme liabilities Pension scheme deﬁcit Unfunded pension plans Post-retirement healthcare Total post-retirement liabilities Less: related deferred tax asset Net post-retirement liability 8.1 8.4 4.8 5.5 3.8 6.7 8.1 8.6 4.8 5.6 3.7 6.8 8.7 9.0 4.6 5.5 4.0 7.3 2005 £m 1,025.1 1,065.1 1,249.0 503.3 114.3 2004 £m 974.7 1,011.4 833.4 483.3 331.4 3,956.8 (4,611.0) 3,634.2 (4,280.1) (654.2) (2.5) (19.3) (676.0) 201.8 (474.2) (645.9) (3.2) (20.4) (669.5) 200.0 (469.5) Value 2003 £m 757.0 777.2 500.2 561.1 43.0 2,638.5 (3,888.1) (1,249.6) (3.9) (24.7) (1,278.2) 382.4 (895.8) 1The expected return on assets of 6.8% for 2004 was based on the assumption that cash of £306m (included under ‘other’) was invested in government bonds immediately following the year end. C Analysis of the amount charged against proﬁts Operating cost Current service costs Curtailment gain Proﬁt on sale/closure of operations Curtailment gain on disposal of Financial Services Finance cost Expected return on scheme assets Interest on scheme liabilities Net ﬁnance (income)/charges Total cost of retirement beneﬁts D Analysis of the amount recognised in the consolidated statement of total recognised gains and losses Actual return less expected return on scheme assets Experience losses arising on scheme liabilities Changes in assumptions underlying the present value of scheme liabilities Actuarial (loss)/gain recognised in the consolidated statement of total recognised gains and losses 2005 £m 117.2 (14.0) 103.2 2004 £m 123.8 – 123.8 (7.0) – (248.9) 237.5 (11.4) 84.8 2005 £m 77.4 (24.0) (131.5) (78.1) (196.9) 212.1 15.2 139.0 2004 £m 401.9 (30.3) (157.8) 213.8 44 MARKS AND SPENCER GROUP PLC Notes to the ﬁnancial statements continued 11 RETIREMENT BENEFITS continued E Movements in liability during year Post-retirement liability at beginning of year Current service cost1 Curtailment gain Cash contribution2, 3 Net ﬁnance income/(charges) Actuarial (loss)/gain Exchange movement Post-retirement liability at end of year 2005 £m (669.5) (117.2) 21.0 156.4 11.4 (78.1) – (676.0) 2004 £m (1,278.2) (123.8) – 533.7 (15.2) 213.8 0.2 (669.5) 1The UK deﬁned beneﬁt pension scheme is closed to new members and so under the projected unit method the service cost rate would be expected to increase over time due to the expected increase in the average age of employed members subject to actual experience. 2The cash contribution for 2005 includes an additional contribution of £64.0m paid into the UK deﬁned beneﬁt pension scheme in March 2005. The cash contribution for 2004 of £533.7m includes £400.0m paid to the UK deﬁned beneﬁt pension scheme in respect of the deﬁcit identiﬁed at the time of the full actuarial valuation of the scheme at 31 March 2003. 3Future contributions to the UK scheme will be made at the rate of 15.8% of pensionable salaries up to the next full actuarial valuation. F History of experience gains and losses Actual return less expected return on scheme assets: Amount % of scheme assets at end of year Experience (losses)/gains arising on scheme liabilities: Amount % of scheme liabilities at end of year Total amount recognised in statement of total recognised gains and losses: Amount % of scheme liabilities at end of year 2005 £m 77.4 2.0% (24.0) (0.5%) (78.1) (1.7%) 2004 £m 2003 £m 401.9 11.1% (713.3) (27.0%) (30.3) (0.7%) 213.8 5.0% 16.0 0.4% (893.4) (23.0%) 12 DIRECTORS A Emoluments Emoluments of directors of the Company are summarised below. Further details are given in the Remuneration report on pages 16 to 25. Aggregate emoluments Termination payments 2005 £000 6,016 3,651 2004 £000 3,769 754 B Transactions with directors During the year, transactions entered into by Marks and Spencer Financial Services plc with directors and connected persons resulted in the following outstanding balances on their combined credit and loyalty cards as at 2 April 2005: 2005 Total balances £ 2004 Total balances £ No. of persons – 10 41,236 No. of persons – Following the disposal during the year of Marks and Spencer Financial Services plc, the directors and connected persons had no balances with any subsidiary of the Group at 2 April 2005. Except as noted above, there was no contract of signiﬁcance to which the Company, or any of its subsidiaries, was a party and in which a director of the Company was materially interested during the year. 13 INTANGIBLE FIXED ASSETS Cost Additions At 2 April 2005 Accumulated amortisation Charge for the period At 2 April 2005 Net book value at 2 April 2005 MARKS AND SPENCER GROUP PLC 45 Group Goodwill £m 125.5 125.5 3.1 3.1 122.4 On 4 October 2004, the Group acquired Per Una Group Limited for a consideration of £125.9m (see note 30A). The goodwill arising on the acquisition of Per Una Group Limited is being amortised on a straight-line basis over a period of 20 years. 14 TANGIBLE FIXED ASSETS A Tangible ﬁxed assets Cost or valuation At 4 April 2004 Additions Transfers Revaluation surplus Disposals Disposal of subsidiaries Differences on exchange At 2 April 2005 Accumulated depreciation At 4 April 2004 Depreciation for the year Disposals Disposal of subsidiaries Differences on exchange At 2 April 2005 Net book value at 2 April 2005 At 3 April 2004 Analysis of land and buildings At valuation At cost Accumulated depreciation Net book value at 2 April 2005 At 3 April 2004 Land & buildings £m 2,269.2 26.6 14.3 4.0 (129.7) – 1.7 Fixtures, Assets in the course of ﬁttings & equipment construction £m £m 3,156.8 177.8 29.9 – (152.5) (50.0) 0.1 50.4 15.2 (44.2) – – – 0.2 Group Total £m 5,476.4 219.6 – 4.0 (282.2) (50.0) 2.0 2,186.1 3,162.1 21.6 5,369.8 117.3 14.0 (4.1) – – 1,861.5 253.3 (150.6) (37.5) (0.2) 127.2 1,926.5 2,058.9 1,235.6 2,151.9 1,295.3 – – – – – – 21.6 50.4 Freehold £m 607.6 719.3 1,326.9 (62.5) 1,264.4 1,349.7 Long leasehold £m Short leasehold £m 379.1 392.2 771.3 (12.9) 758.4 779.8 12.2 75.7 87.9 (51.8) 36.1 22.4 1,978.8 267.3 (154.7) (37.5) (0.2) 2,053.7 3,316.1 3,497.6 Group Total £m 998.9 1,187.2 2,186.1 (127.2) 2,058.9 2,151.9 46 MARKS AND SPENCER GROUP PLC Notes to the ﬁnancial statements continued 14 TANGIBLE FIXED ASSETS continued B Investment properties Freehold land and buildings include investment properties as follows: Cost or valuation At 4 April 2004 Additions Revaluation surplus At 2 April 2005 Group £m 37.8 0.8 4.0 42.6 The freehold properties were valued as at 2 April 2005 by qualiﬁed professional valuers working for 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 (RICS). The properties were valued on the basis of Market Value at an aggregate value of £42.6m. All valuations were carried out in accordance with the RICS Appraisal and Valuation Standards. DTZ Debenham Tie Leung have been carrying out valuations for the Group for a continuous period since 2002. They provide and have provided valuations of the Group’s occupational properties and, in addition, have provided ad hoc property advice in connection with various aspects of the Group’s property portfolio. DTZ Debenham Tie Leung is a wholly-owned subsidiary of DTZ Holdings Plc (the ‘DTZ Group’). In the DTZ Group’s ﬁnancial year to 30 April 2004, the proportion of total fees payable by Marks & Spencer to the total fee income of the DTZ Group was less than 5%. C Tangible ﬁxed assets at cost Gerald Eve, a ﬁrm of independent 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 2005 £m 225.6 1,330.6 1,556.2 (153.6) 2004 £m 227.1 1,402.0 1,629.1 (146.3) 1,402.6 1,482.8 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. 15 FIXED ASSET INVESTMENTS A Investments Cost At 4 April 2004 Disposals Share of joint venture’s proﬁts At 2 April 2005 Accumulated provision and amortisation At 4 April 2004 Provision for impairment At 2 April 2005 Net book value at 2 April 2005 At 3 April 2004 Joint venture1 £m Other investments2 £m 8.5 – 0.2 8.7 – – – 8.7 8.5 15.9 (0.8) – 15.1 14.4 0.4 14.8 0.3 1.5 Group Total £m 24.4 (0.8) 0.2 23.8 14.4 0.4 14.8 9.0 10.0 1The joint venture represents a 50% equity interest in Hedge End Park Limited, a property investment company incorporated in Great Britain. The partner in the joint venture is J Sainsbury plc. The Group’s investment in the joint venture includes accumulated reserves of £2.6m (last year £2.4m). 2Other investments include listed securities held by a subsidiary. The difference between their net book value and market value is negligible. MARKS AND SPENCER GROUP PLC 47 15 FIXED ASSET INVESTMENTS continued At 2 April 2005 At 3 April 2004 Company Shares in group undertakings £m 7,648.7 7,643.2 Shares in Group undertakings represents the Company’s investment in Marks and Spencer plc. 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 plc Marks and Spencer International Holdings Limited Marks and Spencer (Nederland) BV Marks & Spencer Finance Inc Marks and Spencer (Ireland) Limited Kings Super Markets Inc Marks and Spencer (Asia Paciﬁc) Limited M&S Card Services Limited M.S. Insurance L.P. M.S. II Insurance L.P. Marks and Spencer Investments Limited St Michael Finance plc Marks and Spencer Finance plc Amethyst Leasing (Properties) Limited Amethyst Finance plc Marks and Spencer Chester Limited Marks and Spencer SCM Limited Per Una Group Limited The Zip Project Limited Principal activity Retailing Holding Company Holding Company Holding Company Retailing Retailing Retailing Credit Card Handling Financial Services Financial Services Finance Finance Finance Finance Finance Property Investment Procurement Procurement Procurement Country of incorporation and operation Great Britain Great Britain The Netherlands United States Republic of Ireland United States Hong Kong Great Britain Guernsey Guernsey Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain Proportion of voting rights and shares held by: Company A subsidiary 100% – – – – – – – – – – – – – – – – – – – 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% –1 100% 100% 100% 100% The Company has taken advantage of the exemption under Section 231(5) of the Companies Act 1985 by providing information only in relation to subsidiary undertakings whose results or ﬁnancial position, in the opinion of the directors, principally affected the ﬁnancial statements. 1Amethyst Finance plc 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 £0.1m (last year £nil), the material balances being securitised loan notes of £322.9m (last year £325.6m) offset by a receivable from a group company. 16 DEBTORS A Amounts receivable within one year Trade debtors Customer advances Amounts owed by Group undertakings Other debtors1 Deferred tax asset (see note 23) Prepayments and accrued income2 B Amounts receivable after more than one year3 Customer advances Other debtors1 Prepayments and accrued income2 2005 £m 27.8 – – 44.8 – 139.4 212.0 Group 2004 £m 30.5 740.8 – 44.0 3.5 152.8 971.6 – 6.1 0.1 6.2 1,711.6 8.8 58.9 1,779.3 2005 £m – – 205.2 0.1 – – 205.3 – – – – Company 2004 £m – – 262.1 0.6 – – 262.7 – – – – 1Other debtors include interest-free loans to a director and ofﬁcer of the Company of £nil (last year £45,586). 2Prepayments and accrued income include £65.6m (last year £76.0m) in respect of the UK pension scheme. In addition, prepayments include £nil (last year £61.3m) relating to the long-term assurance business. 3Amounts receivable after more than one year include £2.0m (last year £61.1m) of non-ﬁnancial assets which have been excluded from the analysis in note 19. 48 MARKS AND SPENCER GROUP PLC Notes to the ﬁnancial statements continued 17 CURRENT ASSET INVESTMENTS Listed investments: Government securities Listed in the United Kingdom Listed overseas Unlisted investments 2005 £m – 51.0 11.4 4.6 67.0 Group 2004 £m 86.9 191.8 42.6 4.6 325.9 Listed investments include £nil (last year £175.5m) in relation to the long-term assurance business. 18 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. 19 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 38.8 – – – 38.8 118.5 12.9 5.2 9.3 145.9 74.5 7.2 12.3 5.4 99.4 2005 Total £m 231.8 20.1 17.5 14.7 284.1 Fixed rate Floating rate £m £m Non-interest bearing £m 624.2 – – – 624.2 1,633.9 15.0 19.6 18.5 1,687.0 110.5 3.7 6.3 8.6 129.1 Group 2004 Total £m 2,368.6 18.7 25.9 27.1 2,440.3 The ﬂoating rate sterling, US dollar and euro assets are at interest rates linked to LIBID. The non-interest bearing ﬁnancial assets are predominantly cash in tills and uncleared deposits. B Analysis of ﬁxed interest rate assets Currency Sterling C Analysis of ﬁnancial assets 2005 Weighted average interest rate % 4.8 2004 Weighted average interest rate % 5.6 2005 Weighted average period for which rate is ﬁxed Years 0.3 Current asset investments Cash at bank and in hand 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 Group 2004 Weighted average period for which rate is ﬁxed Years 2.5 Group 2004 £m 325.9 394.7 1,711.6 1.5 6.6 2,440.3 2005 £m 67.0 212.6 – 0.3 4.2 284.1 – 740.8 284.1 3,181.1 20 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR Bank loans, overdrafts and commercial paper1 Syndicated bank facility Medium term notes (see note 22B) Securitised loan notes (see note 22B) Trade creditors Amounts owed to Group undertakings Taxation Social security and other taxes Other creditors2 Customer deposits Accruals and deferred income Proposed ﬁnal dividend (see note 8) MARKS AND SPENCER GROUP PLC 49 2005 £m 212.9 200.0 58.3 3.2 195.3 – 15.5 40.4 178.7 – 260.8 124.2 Group 2004 £m 126.0 – 216.5 2.7 210.2 – 79.8 43.1 297.7 439.3 308.7 160.7 2005 £m – – – – – 2,100.1 0.5 – – – 0.4 124.2 Company 2004 £m – – – – – 2,165.0 – – – – 0.2 160.7 1,289.3 1,884.7 2,225.2 2,325.9 1Bank loans, overdrafts and commercial paper includes a £5.0m (last year £5.0m) loan from the Hedge End Park Limited joint venture. 2Other creditors include £2.3m (last year £32.6m) which is shown in the calculation of the Group’s net debt and is treated as ﬁnancing within the cash ﬂow statement. 21 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR Medium term notes (see note 22B) Securitised loan notes (see note 22B) Other creditors1,2 2005 £m 1,588.6 310.4 20.7 Group 2004 £m 1,980.0 313.3 226.3 1,919.7 2,519.6 Company 2004 £m 2005 £m – – – – – – – – 1Other creditors includes £2.9m (last year £44.2m) which is shown in the calculation of the Group’s net debt and is treated as ﬁnancing within the cash ﬂow statement, and £17.8m (last year £182.1m) of non-ﬁnancial liabilities which have been excluded from the analysis in note 22B. 2Other creditors include £nil (last year £179.5m) in relation to the long-term assurance business. 22 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 Sterling1 US dollar Euro Other Fixed rate Floating rate £m £m 1,086.7 – – – 1,349.1 8.3 0.2 – 2005 Total £m 2,435.8 8.3 0.2 – Fixed rate Floating rate £m £m 1,731.6 – – – 1,056.6 8.3 3.6 0.1 Group 2004 Total £m 2,788.2 8.3 3.6 0.1 1,086.7 1,357.6 2,444.3 1,731.6 1,068.6 2,800.2 1Included within ﬂoating rate liabilities are £65.7m (last year £84.9m) of unredeemed B Shares. The ﬂoating rate sterling, US dollar and euro 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 6.1% (last year 5.5%) and the weighted average time for which the rate is ﬁxed is 11.4 years (last year 8.6 years). 50 MARKS AND SPENCER GROUP PLC Notes to the ﬁnancial statements continued 22 ANALYSIS OF FINANCIAL LIABILITIES continued B Maturity of ﬁnancial liabilities Repayable within one year or on demand: Bank loans, overdrafts and commercial paper Syndicated bank facility Medium term notes Securitised loan notes B shares (see note 25) 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 notes1 Securitised loan notes2 2005 £m 212.9 200.0 58.3 3.2 65.7 2.3 542.4 820.7 3.5 2.2 826.4 – 12.5 0.7 13.2 767.9 294.4 Group 2004 £m 126.0 – 216.5 2.7 84.9 32.6 462.7 309.8 3.2 22.3 335.3 903.4 11.4 21.9 936.7 766.8 298.7 1,062.3 1,065.5 2,444.3 2,800.2 1Relates to two ﬁxed rate bonds at rates of 6.375% repayable on 7 November 2011 and 5.625% repayable on 24 March 2014. 2Relates to three separate bonds securitised against 45 of the Group’s properties. Two are repayable in instalments. The gross amounts before ﬁnance costs are £54.6m and £131.0m 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 £140.0m 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. C Borrowing facilities At 2 April 2005, the Group had a ﬁve-year syndicated bank facility of £1.2bn, of which £200m had been drawn, and an undrawn committed facility of £60m (last year £405m) linked to its commercial paper programme, which is subject to annual review. The Group also has a number of undrawn uncommitted facilities available to it. At 2 April 2005, these amounted to £190m (last year £415m), all of which are due to be reviewed within a year. 23 PROVISIONS FOR LIABILITIES AND CHARGES At 4 April 2004 Transfer from deferred tax asset (see note 16A) Provided in the period Net closure proﬁt in Continental Europe Utilised during the period Movement in net post-retirement liability Disposal of subsidiaries Released Exchange differences At 2 April 2005 MARKS AND SPENCER GROUP PLC 51 UK restructuring1 £m Overseas restructuring2 £m Deferred tax3 £m 32.2 – 30.4 – (26.0) – – (1.4) – 35.2 17.1 – – 1.2 – – – (9.7) 1.1 9.7 – (3.5) 54.4 – – (21.2) 5.8 – – 35.5 Group Total £m 49.3 (3.5) 84.8 1.2 (26.0) (21.2) 5.8 (11.1) 1.1 80.4 1The 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. 2The provision for Overseas restructuring costs primarily relates to further closure costs in respect of the Group’s discontinued operations in Continental Europe. 3The deferred tax balance comprises the following: Accelerated capital allowances Pension prepayment Other short-term timing differences Deferred tax liability/(asset) 2005 £m 76.4 (40.2) (0.7) 35.5 2004 £m 72.3 (67.2) (8.6) (3.5) Deferred tax is not provided in respect of liabilities which might arise on the distribution of unappropriated proﬁts of international subsidiaries. The Group is claiming UK tax relief for losses incurred by some of its current and former European subsidiaries. The case was heard by the European Court of Justice (ECJ) on 1 February 2005 and the judgement of the ECJ should be received later this year. No asset has been recognised in respect of this claim. 24 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT A Fair values of ﬁnancial instruments Set out below is a comparison of fair 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 investments Cash at bank and in hand1 Other ﬁnancial assets due after more than one year Borrowings due within one year2 B shares Financial liabilities due after more than one year2 Cross currency swaps2 Interest rate swaps2 Forward foreign currency contracts2 Book value £m 2005 Fair value £m Book value £m – 67.0 0.3 212.6 4.2 (476.7) (65.7) (1,901.9) – – – – 67.0 0.3 212.6 4.2 (476.4) (65.7) (1,935.8) 56.3 3.7 (0.4) 1,711.6 325.9 1.5 394.7 6.6 (377.8) (84.9) (2,337.5) – – – Group 2004 Fair value £m 1,712.3 325.9 1.5 394.7 6.6 (372.0) (84.9) (2,392.6) 24.5 11.9 3.8 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. Therefore, these fair values closely approximate book values. 2Interest rate, cross currency swaps and forward foreign currency contracts have been marked to market to produce a fair value ﬁgure. 52 MARKS AND SPENCER GROUP PLC Notes to the ﬁnancial statements continued 24 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 2 April 2005 are as follows: Unrecognised gains/(losses) on hedges at beginning of the period (Gains)/losses arising in previous years recognised in the period Gains/(losses) in previous years not recognised in the period Gains/(losses) arising in the period Unrecognised gains/(losses) on hedges at end of the period Of which: Gains/(losses) expected to be recognised within one year Gains/(losses) expected to be recognised after one year Gains £m Losses £m 2005 Net total £m Gains £m Losses £m 2004 Net total £m 74.3 (34.1) (12.7) 25.8 61.6 12.8 (8.3) (6.5) 40.2 13.1 53.3 6.3 114.8 (57.6) 57.2 (26.1) 12.5 (13.6) 88.7 (14.4) (45.1) 11.0 43.6 (3.4) 74.4 (14.8) 59.6 74.3 (34.1) 40.2 2.9 (3.6) (0.7) 71.5 (11.2) 60.3 10.4 63.9 (12.1) (1.7) (22.0) 41.9 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. 25 CALLED UP SHARE CAPITAL Authorised: 3,200,000,000 ordinary shares of 25p each (last year 3,200,000,000) 3,200,000,000 non-equity B shares of 70p each (last year 3,200,000,000) Allotted, called up and fully paid: 1,658,095,142 ordinary shares of 25p each (last year 2,265,144,934) 93,822,916 non-equity B shares of 70p each (last year 121,244,763) 2005 £m 2004 £m 800.0 2,240.0 800.0 2,240.0 414.5 65.7 480.2 566.3 84.9 651.2 Issue of new shares: 28,309,324 ordinary shares having a nominal value of £7.0m were allotted during the year under the terms of the Company’s share schemes which are described in note 10. The aggregate consideration received was £68.4m. Purchase of own shares: On 28 October 2004, 635,359,116 ordinary shares with a nominal value of £158.8m were purchased by the Group by way of a Tender Offer for an aggregate consideration of £2.3bn. These shares were then cancelled and the nominal value transferred to the capital redemption reserve (see note 26). Redemption of B shares: During the period, 27,421,847 B shares were redeemed at par at a total cost of £19.2m. The nominal value of £19.2m has been transferred to the capital redemption reserve (see note 26). MARKS AND SPENCER GROUP PLC 53 25 CALLED UP SHARE CAPITAL continued The holders of B shares are not entitled to receive notiﬁcation of any general meeting of Marks and Spencer Group plc, 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 plc, 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 next redemption date will be 26 September 2005. Marks and Spencer Group plc has the option, on giving notice in writing to the holders of the B shares, to 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. 26 SHAREHOLDERS’ FUNDS At 4 April 2004 Purchase of own shares Tender Offer expenses Redemption of B shares Sale of own shares held by employee trusts3 Shares issued on exercise of share options Revaluation of investment properties Revaluation surplus realised on disposals Revaluation element of depreciation charge Actuarial loss on post-retirement liability Exchange differences on foreign currency translation Proﬁt for the period At 2 April 2005 Share capital Ordinary Non-equity B shares £m shares £m 566.3 (158.8) – – 84.9 – – (19.2) – 7.0 – – – – – – – – – – – – – – 45.2 – – – – 61.4 – – – – – – Share Capital premium redemption Revaluation reserve reserve account £m £m £m Other reserve £m Proﬁt1,2 and loss account £m 1,924.8 158.8 – 19.2 356.4 (6,542.2) 6,018.6 (2,300.0) (14.9) (19.2) – – – – – – Group Total £m 2,454.0 (2,300.0) (14.9) (19.2) 68.4 4.0 – – (55.1) 0.2 383.7 521.4 0.3 0.3 – – – – – – – – – – 4.0 (28.6) (1.0) – – – – – – – – – – – – – 28.6 1.0 (55.1) 0.2 383.7 414.5 65.7 106.6 2,102.8 330.8 (6,542.2) 4,043.2 1Included in the proﬁt and loss account reserve is a pension reserve of £474.2m (last year £469.5m) which equates to the net post-retirement liability under FRS 17 (see note 11). 2Cumulative goodwill of £62.0m (last year £62.0m) 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. 3The Marks and Spencer ESOP Trust (‘the Trust’) holds 1,526,270 (last year 1,796,970) shares with a net book value of £3.7m (last year £4.0m) and a market value of £5.3m (last year £5.1m). These shares were acquired by the Trust in the market. The Trust used funds provided by Marks and Spencer plc to meet the Group’s obligations. Awards are granted to employees at the discretion of Marks and Spencer plc and shares are awarded to employees by the Trust in accordance with the wishes of Marks and Spencer plc under senior executive share schemes, the Share Matching Plan and Restricted Share Plan. At 4 April 2004 Purchase of own shares Tender Offer expenses Redemption of B shares Shares issued on exercise of share options Proﬁt for the period At 2 April 2005 Ordinary shares £m 566.3 (158.8) – – 7.0 – 414.5 Share capital Non-equity B shares £m Share Capital premium redemption reserve account £m £m 84.9 – – (19.2) – – 65.7 45.2 – – – 61.4 – 1,924.8 158.8 – 19.2 – – Proﬁt and loss account £m 2,958.8 (2,300.0) (14.9) (19.2) – 2,314.5 Company Total £m 5,580.0 (2,300.0) (14.9) (19.2) 68.4 2,314.5 106.6 2,102.8 2,939.2 5,628.8 54 MARKS AND SPENCER GROUP PLC Notes to the ﬁnancial statements continued 27 RECONCILIATION OF MOVEMENTS IN GROUP SHAREHOLDERS’ FUNDS Proﬁt attributable to shareholders Dividends Other recognised gains/(losses) relating to the year Actuarial (losses)/gains net of taxation Sale/(purchase) of shares held by employee trusts New share capital subscribed Redemption of B shares Purchase of own shares Tender Offer expenses Net (decrease)/increase in shareholders’ funds Opening shareholders’ funds Closing shareholders’ funds 2005 £m 587.0 (203.3) 383.7 4.2 (55.1) 0.3 68.4 (19.2) (2,300.0) (14.9) (1,932.6) 2,454.0 Group 2004 £m 552.3 (263.2) 289.1 (28.6) 150.4 (2.2) 24.8 (33.4) (54.4) – 345.7 2,108.3 521.4 2,454.0 28 RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING ACTIVITIES Continuing operations Operating proﬁt Exceptional operating charges (see note 4A) Operating proﬁt before exceptional operating charges Depreciation Amortisation of goodwill Decrease/(increase) in stocks (Increase)/decrease in debtors (Decrease)/increase in creditors Net cash inﬂow before exceptional operating cash outﬂow Exceptional operating cash outﬂow (see note 29A) Cash inﬂow from continuing operating activities before contribution to the pension fund Contribution to the pension fund following 2003 actuarial valuation Cash inﬂow from continuing operating activities1 Discontinued operations Operating proﬁt Depreciation Increase in customer advances Increase in customer deposits Decrease/(increase) in debtors (Decrease)/increase in creditors Cash inﬂow from discontinued operating activities2 Cash inﬂow from operating activities 2005 £m 585.7 91.4 677.1 250.4 3.1 55.7 (3.5) (38.0) 944.8 (87.3) 857.5 – 857.5 32.3 1.8 (19.6) 697.3 6.7 (0.6) 717.9 1,575.4 Group 2004 £m 767.3 42.1 809.4 238.9 – (38.9) 38.8 2.3 1,050.5 (48.2) 1,002.3 (400.0) 602.3 56.6 3.0 (436.5) 360.7 (17.6) 98.0 64.2 666.5 1Included within cash inﬂow from continuing operating activities is a cash inﬂow attributable to acquired operations of £15.7m. 2In relation to discontinued operating activities, cash outﬂows of £nil (last year £24.4m ) and £0.5m (last year £5.8m) were incurred in respect of corporation tax and ﬁxed assets purchases respectively. MARKS AND SPENCER GROUP PLC 55 29 ANALYSIS OF CASH FLOWS GIVEN IN THE CASH FLOW STATEMENT A Exceptional operating cash ﬂows UK restructuring costs Closure of Lifestore Defence costs Board restructure Head ofﬁce relocation Restructuring of general merchandise logistics operations Exceptional operating cash outﬂow B Management of liquid resources Decrease/(increase) in cash deposits treated as liquid resources Net sale of government securities Net sale/(purchase) of listed investments Net purchase of unlisted investments Cash inﬂow/(outﬂow) from decrease/(increase) in liquid resources C Financing Increase/(decrease) in bank loans, overdrafts and commercial paper treated as ﬁnancing Drawdown of syndicated bank facility (Redemption)/issue of medium term notes Redemption of securitised loan notes Increase/(decrease) in other creditors treated as ﬁnancing Debt ﬁnancing as shown in analysis of net debt (see note 31) Purchase of own shares Tender Offer expenses Net sale/(purchase) of own shares held by employee trusts Redemption of B shares Shares issued under employees’ share schemes Net cash (outﬂow)/inﬂow from (decrease)/increase in ﬁnancing 2005 £m (27.0) (3.1) (36.2) (7.7) (12.6) (0.7) (87.3) 55.7 7.8 3.3 (0.1) 66.7 649.0 200.0 (95.2) (2.8) 6.6 757.6 (2,300.0) (14.9) 0.6 (19.2) 68.4 (1,507.5) Group 2004 £m (8.0) – – – (10.5) (29.7) (48.2) (65.5) 44.6 (67.9) (0.2) (89.0) (22.3) – 441.7 (2.5) (3.3) 413.6 (54.4) – (3.6) (33.4) 24.8 347.0 30 ACQUISITION AND DISPOSALS A Acquisition of per una As described in note 13, on 4 October 2004 the Group acquired the per una group of companies for a total consideration of £125.9m. Net assets acquired1 Goodwill Consideration Consideration satisﬁed by: Cash £m 0.4 125.5 125.9 125.9 1Net assets acquired include £1.4m of assets offset by £1.0m of liabilities. There were no fair value adjustments. The Group has adopted acquisition accounting for the acquisition of the per una group of companies. Per Una Group Limited was a newly formed entity into which the net assets and liabilities acquired were transferred immediately prior to the acquisition date. As separate accounts were not maintained for this entity in the period prior to the acquisition date, separate ﬁgures for proﬁt after tax are not available. Based on the available information, the proﬁt before tax attributable to the acquired business in the year to 31 March 2004 and in the six months prior to acquisition was approximately £17m and £15m respectively. These pre-acquisition ﬁgures for the acquired business have been adjusted to reﬂect the post acquisition structure for the per una group. In the six months prior to acquisition, the value of goods purchased from the acquired business was £85.2m. 56 MARKS AND SPENCER GROUP PLC Notes to the ﬁnancial statements continued 30 ACQUISITION AND DISPOSALS continued B Disposal of Marks and Spencer Retail Financial Services Holdings Limited As described in note 4C, on 9 November 2004 the Group disposed of its interest in Marks and Spencer Retail Financial Services Holdings Limited to HSBC Holdings plc. Tangible ﬁxed assets Debtors Prepayments Cash and current asset investments Bank loans and overdrafts Creditors: amounts falling due within one year Creditors: amounts falling due after more than one year Net assets disposed1 Proﬁt on disposal (see note 4C) Disposal proceeds (net of costs)1 Less net cash disposed in net assets sold Net cash ﬂow from disposal 1Proﬁt on disposal is analysed as follows: Agreed sale proceeds (net of costs) Less: pre-sale dividend Net proceeds Net assets (before pre-sale dividend) Less: pre-sale dividend Net assets disposed Proﬁt on disposal 31 ANALYSIS OF NET DEBT Net cash: Cash at bank and in hand (see note 19C) Less: deposits treated as liquid resources (see below) Bank loans, overdrafts and commercial paper (see note 22B) 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 17) Liquid resources per cash ﬂow statement Debt ﬁnancing: Bank loans, overdrafts and commercial paper treated as ﬁnancing (see above) Syndicated bank facility (see note 22B) Medium term notes (see note 22B) Securitised loan notes (see note 22B) Other creditors (see note 22B) Debt ﬁnancing (see note 29C) Net debt £m 12.5 2,517.3 71.6 225.4 (5.6) (1,995.1) (501.4) 324.7 208.9 533.6 (56.6) 477.0 £m 533.6 324.7 208.9 £m 768.6 (235.0) 559.7 (235.0) At 4 April 2004 £m Cash ﬂow £m Exchange and other Disposal movements £m £m At 2 April 2005 £m 394.7 (120.6) 274.1 (126.0) 55.6 (70.4) 203.7 120.6 325.9 446.5 (55.6) – (2,196.5) (316.0) (76.8) (121.0) 55.7 (65.3) (92.5) 94.0 1.5 (63.8) (55.7) (11.0) (66.7) (649.0) (200.0) 95.2 2.8 (6.6) (62.2) – (62.2) 5.6 – 5.6 1.1 0.1 1.2 – – – (56.6) 1.2 – (247.9) (247.9) 555.0 – 454.4 – 78.2 212.6 (64.8) 147.8 (212.9) 149.6 (63.3) 84.5 64.8 67.0 131.8 (149.6) (200.0) (1,646.9) (313.6) (5.2) (2,315.3) (2,099.0) (0.1) – (0.1) – – – (0.4) – (0.4) 0.7 (2,644.9) (757.6) 1,087.6 (1,994.7) (888.1) 783.1 MARKS AND SPENCER GROUP PLC 57 32 COMMITMENTS AND CONTINGENT LIABILITIES A Commitments in respect of properties in the course of development 2005 £m 34.5 Group 2004 £m 74.9 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 2 April 2005, 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 1.7 8.6 114.3 124.6 2005 Other £m 0.5 3.0 – 3.5 Land & buildings £m 1.2 14.6 99.7 115.5 2004 Other £m 0.4 3.1 – 3.5 33 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 Weighted average sales rate 2004 2005 1.46 1.85 14.41 1.44 1.69 13.23 Weighted average proﬁt rate 2004 2005 1.46 1.86 14.47 1.43 1.71 13.44 Balance sheet rate 2005 2004 1.46 1.89 14.73 1.50 1.85 14.39 34 RELATED PARTY TRANSACTIONS There were no material transactions with related parties as deﬁned by FRS 8 – ‘Related Party Transactions’, with the exception of transactions with M&S Money (see note 4), the Hedge End joint venture (see notes 15A and 20) and per una (see note 30A). 58 MARKS AND SPENCER GROUP PLC Group ﬁnancial record Proﬁt and loss account Turnover Continuing operations Discontinued operations 2005 52 weeks £m 2004 53 weeks £m 2003 52 weeks £m 2002 52 weeks £m 2001 52 weeks £m 7,710.3 232.0 7,971.5 330.0 7,689.2 329.9 7,268.6 866.8 6,979.5 1,096.2 Total turnover (excluding sales taxes) 7,942.3 8,301.5 8,019.1 8,135.4 8,075.7 Operating proﬁt Continuing operations United Kingdom Overseas Excess interest charged to cost of sales of Financial Services Discontinued operations Total operating proﬁt Analysed as: Before exceptional operating charges Exceptional operating charges Provision for loss on operations to be discontinued Proﬁt/(loss) on sale/closure of businesses (Loss)/proﬁt on disposal of property and other ﬁxed assets Net interest (expense)/income Other ﬁnance income/(charge) Proﬁt before taxation Taxation on ordinary activities Minority interests Proﬁt/(loss) attributable to shareholders Dividends Proﬁt/(loss) for the period 520.7 65.0 – 585.7 32.3 618.0 709.4 (91.4) – 218.6 (0.4) (102.3) 11.4 745.3 (158.3) – 587.0 (203.3) 383.7 719.9 47.4 – 767.3 56.6 823.9 866.0 (42.1) – – 18.7 (45.8) (15.2) 781.6 (229.3) – 552.3 (263.2) 289.1 599.9 42.8 – 642.7 86.4 729.1 773.0 (43.9) – (1.5) 1.6 (40.5) 27.0 715.7 (208.8) 0.4 507.3 (246.0) 261.3 505.2 33.3 6.4 544.9 98.9 643.8 643.8 – – (366.7) 41.2 17.6 – 335.9 (182.5) (0.4) 153.0 (238.9) (85.9) 308.3 41.9 7.9 358.1 82.4 440.5 467.0 (26.5) (224.0) (1.7) (83.2) 13.9 – 145.5 (149.5) (1.5) (5.5) (258.3) (263.8) Comparatives for 2002 and 2001 were not restated following the adoption of FRS 17 – ‘Retirement Beneﬁts’, Application Note G of FRS 5 – ‘Revenue Recognition’ and UITF 38 – ‘Accounting for ESOP Trusts’ in 2004. Comparatives for 2001 were restated following the adoption of FRS 19 – ‘Deferred Taxation’ in 2002. Balance sheet Intangible ﬁxed assets Tangible ﬁxed assets Fixed asset investments Current assets Total assets Creditors: amounts falling due within one year Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges Net post-retirement liability Net assets Cash ﬂow Net cash inﬂow from operating activities Dividends received from joint venture 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 (Decrease)/increase in cash MARKS AND SPENCER GROUP PLC 59 2005 52 weeks £m 2004 53 weeks £m 2003 52 weeks £m 2002 52 weeks £m 2001 52 weeks £m 122.4 3,316.1 9.0 837.5 4,285.0 (1,289.3) 2,995.7 (1,919.7) (80.4) (474.2) – 3,497.6 10.0 3,869.5 7,377.1 (1,884.7) 5,492.4 (2,519.6) (49.3) (469.5) – 3,435.1 29.7 3,246.3 6,711.1 (1,710.9) 5,000.2 (1,810.0) (186.1) (895.8) – 3,381.2 50.3 3,760.7 7,192.2 (1,750.8) 5,441.4 (2,156.3) (203.8) – – 4,118.9 58.3 3,516.2 7,693.4 (1,981.6) 5,711.8 (735.1) (395.3) – 521.4 2,454.0 2,108.3 3,081.3 4,581.4 2005 52 weeks £m 2004 53 weeks £m 2003 52 weeks £m 2002 52 weeks £m 2001 52 weeks £m 1,575.4 – (101.6) (166.7) (113.6) 363.8 (236.9) 1,320.4 66.7 (1,507.5) (120.4) 666.5 – (49.8) (220.4) (293.9) 51.3 (247.1) (93.4) (89.0) 347.0 164.6 1,168.7 8.0 (46.2) (216.9) (294.4) (38.8) (225.4) 355.0 (46.9) (712.3) (404.2) 1,093.7 – 36.8 (179.4) 176.0 261.6 (256.7) 1,132.0 (29.1) (730.2) 372.7 676.4 – 12.6 (164.6) (258.2) 5.9 (258.6) 13.5 263.7 (265.4) 11.8 26.4 Increase/(decrease) in net debt deﬁned by FRS 1 104.3 163.3 (75.6) 629.2 60 MARKS AND SPENCER GROUP PLC Group ﬁnancial record continued Key performance measures Gross margin1 Net margin1 Gross proﬁt Turnover Operating proﬁt Turnover 2005 52 weeks 2004 53 weeks 2003 52 weeks 2002 52 weeks 2001 52 weeks 34.8% 35.3% 34.8% 34.4% 32.6% 7.6% 9.6% 8.4% 7.5% 5.1% Net margin excluding exceptional items1 8.8% 10.2% 8.9% 7.5% 5.5% Proﬁtability1 Proﬁt before tax Turnover 6.4% 9.1% 8.2% 8.3% 4.1% Proﬁtability excluding exceptional items1 7.6% 9.4% 8.8% 7.7% 5.7% Earnings per share (Deﬁned by FRS 14) Standard earnings Weighted average ordinary shares in issue 29.1p 24.2p 21.8p 5.4p (0.2)p Earnings per share adjusted for exceptional items 21.9p 24.7p 23.3p 16.3p 11.2p Dividend per share Dividend cover2 Proﬁt attributable to shareholders Dividends 12.1p 11.5p 10.5p 9.5p 9.0p 2.9x 2.1x 2.1x 2.2x n/a Return on equity2 Proﬁt attributable to equity shareholders Average equity shareholders’ funds 41.4% 25.2% 22.4% 11.5% (0.1)% Retail debt + net post-retirement liability Retail debt + net post-retirement liability + retail shareholders’ funds Operating proﬁt before depreciation and operating lease charges Fixed charges3 Retail gearing Retail ﬁxed charge cover Net debt Capital expenditure 84.5% 44.7% 53.0% 27.0% n/a 4.1x 7.3x 6.9x 12.6x 10.2x £2,099.0m £1,994.7m £1,831.4m £1,907.0m £1,277.8m £219.6m £433.5m £311.0m £290.5m £255.7m 1Based on results from continuing operations only. 2Stated before goodwill written off of £368.2m in 2002, dividend cover and return on equity are 0.6 times and 3.4% respectively after writing off of goodwill. 3Fixed charges are deﬁned as interest and operating lease charges. MARKS AND SPENCER GROUP PLC 61 Index A Page F Page P Accounting policies Acquisition and disposals Assets in the course of construction Audit committee Auditors’ remuneration Auditors’ report Authorised share capital 33 55 45 12 36 29 52 B B shares Balance sheets Borrowing facilities C Capital commitments Capital expenditure Cash ﬂow statement Chairman’s statement Charitable donations Chief Executive’s review Contingent liabilities Corporate governance Cost of sales Creditors Currency risk Customer advances D Debtors Deferred taxation Depreciation Diluted earnings per share Directors’ emoluments Directors’ interests Directors’ report Directors’ responsibilities Dividend cover Dividend per share E Earnings per share Employee emoluments Employee numbers Equity shareholders’ funds Exceptional items 52, 53 7, 31 8, 50 57 6, 45, 60 32 1 28 2 57 11 36 49 9, 52 47 47 38, 51 36, 45 30, 39 21 26 27 26 60 30, 38, 60 30, 39, 60 39 40 31 5, 37, 55 Financial assets Financial instruments Financial liabilities Financial record Financial review Financial Services Fixed charge cover Foreign exchange Free cash ﬂow G Gearing (retail) Geographical analysis Going concern Goodwill Gross proﬁt I Intangible ﬁxed assets Interest International Retail Investment properties Investments Issued share capital International Financial Reporting Standards J Joint venture L Liquid resources M 48 51 49 58 3 5, 37, 56 8, 60 57 7 7, 8, 60 35 10 45, 53 36 45 37 5 46 46, 48 52, 53 10 46, 49 55 Margin (gross and net) 36, 60 N Net debt Non-equity shareholders’ funds Notes to the ﬁnancial statements 8, 32, 56, 60 31 33 O Operating assets Operating costs Operating leases Operating proﬁt Ordinary shares Occupancy costs 35 4, 36 36, 57 30, 35, 36 52, 53 36 Pensions Proﬁt and loss account Proﬁt and loss reserve Proﬁtability Property valuation Provisions Q Quasi-subsidiary R Related party transactions Remuneration report Reserves Retained proﬁt Return on equity Risk management S Segmental information Share buy back Share capital Share Incentive Plan Share issues Share options Shareholders’ funds Social security Stock Subsidiary undertakings Substantial shareholdings Swaps T Tangible ﬁxed assets Taxation Tender Offer Treasury management Turnover U UK Retail Page 9, 42 30 53 60 7, 45 51 47 57 16 53 30 60 14 35 27, 52 52, 53 40 27, 52 22, 23, 40, 42 31, 53, 54 39 31 47 27 9, 49, 51 45 38 27, 54 8 30, 35, 36 4 At least 30% of the ﬁbre used in making Revive Special Silk comes from well-managed forests independently certiﬁed according to the rules of the Forest Stewardship Council, and 30% is from post-consumer recycled waste paper. FSC Trademark © 1996 Forest Stewardship Council A.C. SGS-COC-1722 Design: Corporate Edge www.corporateedge.com Print: Butler & Tanner, an ISO 14001 registered company. Produced under FSC chain of custody. Additional copies of this document and the Annual review and summary ﬁnancial statements 2005 or an audio tape or CD, giving highlights can be obtained by calling 0800 591 697. Further information for shareholders can be found in the Annual review and summary ﬁnancial statement 2005 on pages 28 and 29. www.marksandspencer.com

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