J Sainsbury plc: Annual Review 2003: Full financials - Notes to the financial statements

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14 Tangible fixed assets

	Group			Company

	Land and buildings Łm	Fixtures, equipment and vehicles Łm	Total Łm	Land and buildings Łm


Cost or valuation
At 31 March 2002	6,305	3,577	9,882	484
Additions (see below)	851	391	1,242	–
Disposals	(176)	(192)	(368)	(101)
Exchange adjustments	(71)	(37)	(108)	–

At 29 March 2003	6,909	3,739	10,648	383

Accumulated depreciation
At 31 March 2002	948	2,028	2,976	13
Charge for the year	92	301	393	4
Disposals	(65)	(151)	(216)	(2)
Exchange adjustments	(23)	(22)	(45)	–

At 29 March 2003	952	2,156	3,108	15

Net book value
At 29 March 2003	5,957	1,583	7,540	368
At 30 March 2002	5,357	1,549	6,906	471

Capital work-in-progress included above
At 29 March 2003	607	121	728	–
At 30 March 2002	306	73	379	–

Interest capitalised included in additions amounted to £20 million (2002: £12 million) for the Group and nil (2002: nil) for the Company. Accumulated interest capitalised included in the cost or valuation total above amounts to £279 million (2002: £263 million) for the Group and nil (2002: nil) for the Company.

	Group		Company

	2003 Łm	2002 Łm	2003 Łm	2002 Łm


The net book value of properties comprised:
Freehold	4,399	4,024	150	248
Long leasehold	767	704	218	223
Short leasehold	791	629	–	–


	2003			2002

Analysis of finance leases – Group	Properties Łm	Fixtures, equipment and vehicles Łm	Total Łm	Properties Łm	Fixtures, equipment and vehicles Łm	Total Łm


Cost	187	372	559	196	–	196
Depreciation	67	233	300	65	–	65

Net book value	120	139	259	131	–	131

For details of the increase in fixtures, equipment and vehicles see note 23.

	Group		Company

Analysis of properties	Cost Łm	Valuation Łm	Cost Łm	Valuation Łm


At 29 March 2003
Freehold
Cost	4,874		154
1973 valuation		2		–
1992 valuation		49		–
Long leasehold
Cost	896		229
1973 valuation		3		–
1992 valuation		22		–
Short leasehold
Cost	1,063

	6,833	76	383	–

The Group has followed the transitional provisions in FRS 15, Tangible Fixed Assets, to retain the book value of land and buildings, certain of which were revalued in 1973 and 1992, without updating the valuations. The 1973 valuation, covering substantially the whole of the Group’s properties at that time, was made on the basis of open market values by Healey & Baker and G.L. Hearn and Partners. The 1992 valuation, covering a number of non-retail properties, was made on the basis of open market values by J. Trevor & Sons.

The Directors believe that the aggregate open market value of Group properties exceeds the net book value of Ł6 billion by a considerable margin.

If the properties included at valuation had been included at cost, the cost and accumulated depreciation figures at 29 March 2003 would have been:

	Group		Company

	Cost Łm	Depreciation Łm	Cost Łm	Depreciation Łm


Freehold	4,892	520	154	4
Long leasehold	912	153	229	11
Short leasehold	1,063	272	–	–

15 Fixed asset investments

Group

Company

2003
Łm

2002
Łm

2003
Łm

2002
Łm

Shares in group undertakings (note 16)

–

7,661

6,227

Joint ventures (note 17)

Own shares at cost¹

–

Other unlisted investments at cost

–

112

174

7,667

6,285

¹	The Group owned 24,857,152 (2002: 25,140,223) shares at 29 March 2003 with a nominal value of £6.2 million (2002: £6.3 million).

•	520,294 shares (2002: 802,640) are held by an ESOT on behalf of certain Directors and senior employees under the Group’s Long Term Performance Share Plan (note 27). All participants remaining in the Company’s employment or leaving for certain reasons, are entitled to receive a grant of options after a period of three years to purchase the shares awarded to them for the sum of £1, at any time during the 10 years following the date of grant. The participant’s entitlement to receive the grant depends on the Company’s total shareholder return (‘TSR’), compared with a peer group of companies, over the three year performance period. If the appropriate level of TSR is not achieved, the entitlement to receive the grant of options will lapse. A charge is taken to the profit and loss account when it becomes clear that a grant will be made.

•	24,336,858 shares (2002: 24,337,583) are held by an ESOT for the Colleague Share Option Plan (note 27) and Executive Share Option Plan (note 27). There is no charge to the profit and loss account because the options are granted at market value.

The market value of the shares held by the ESOTs at 29 March 2003 was £56.2 million (2002: £100.4 million).

The ESOTs waive the rights to the dividends receivable in respect of the shareholder under the above schemes.

The 17.8 per cent equity investment in the Homebase business, which cost £1 million, was sold on 20 December 2002 and the 10 per cent loan notes of £25 million due from Homebase were redeemed during the year.

16 Shares in Group undertakings

The Company’s principal operating subsidiaries are:

Share of
ordinary
allotted
capital and
voting rights

Country of
registration or
incorporation

Sainsbury’s Supermarkets Ltd (food retailing)

100%

England

J Sainsbury Developments Ltd (property development)

100%

England

J Sainsbury Distribution Ltd (logistical services)

100%

England

JS Insurance Ltd¹(insurance services)

100%

Isle of Man

Shaw’s Supermarkets Inc.¹ (food retailing)

100%

USA

Sainsbury’s Card Services Ltd¹ (card handling services)

100%

England

Sainsbury’s Bank plc (financial services)

55%

England

¹	Not directly owned by J Sainsbury plc.

All principal operating subsidiaries operate in the countries of their registration or incorporation.

Shaw’s Supermarkets Inc.’s audited financial statements are drawn up to 1 March 2003. Management accounts have been used to include the Shaw’s Supermarkets Inc. results up to 29 March 2003. All other principal operating subsidiaries have been included up to 29 March 2003.

Summary of movements – Company	Shares at cost Łm	Long-term capital advances Łm	Total net investment Łm


At 31 March 2002	4,858	1,369	6,227
Investment in subsidiary	122	–	122
Long-term capital advances	–	1,434	1,434
Exchange adjustments	(122)	–	(122)

At 29 March 2003	4,858	2,803	7,661

17 Investment in joint ventures

The Group’s principal joint ventures, owned by J Sainsbury plc, were:

	Year-end	Share of ordinary allotted capital	Country of registration or incorporation


Hedge End Park Limited (property investment – UK)	29 March	50%	England

Hedge End Park Limited

For the year ended 29 March 2003, the Group’s share of turnover amounted to £1 million (2002: £1 million) and its share of profit before tax amounted to £2 million (2002: £1 million). At 29 March 2003, the Group’s share of gross assets amounted to £10 million (2002: £21 million) and its share of gross liabilities amounted to £2 million (2002: £3 million). The investment in Hedge End Park Limited is held directly by the Company.

HSPUT – Homebase Limited Partnership

The Group sold its 50 per cent share investment in HSPUT in July 2002 for a consideration of £25 million, realising a profit on sale of £1 million. For the year ended 29 March 2003 the Group’s share of turnover amounted to £1 million (2002: £1 million) and its share of profit before tax amounted to £1 million (2002: £1 million).

Summary of movements	Shares at cost Łm	Group share of post acquisition reserves Łm	Long-term capital advances Łm	Total Łm


Group
At 31 March 2002	6	11	27	44
Repayments	–	–	(27)	(27)
Share of profit for the financial year	–	3	–	3
Dividends	–	(8)	–	(8)
Other reserve movements	–	(3)	–	(3)

At 29 March 2003	6	3	–	9

Company
At 31 March 2002	6		27	33
Repayments	–		(27)	(27)

At 29 March 2003	6		–	6

18 Stock

	2003 Łm	2002 Łm


Goods for resale	660	586
Land held for and in the course of development	107	135
Property held for resale	33	30

	800	751

19 Debtors

	Group		Company

	2003 Łm	2002 Łm	2003 Łm	2002 Łm



Trade debtors	116	82	–	–
Other debtors due in less than one year	101	116	105	125
Other debtors due in more than one year	10	104	–	83
Prepayments and accrued income	70	96	6	–

	297	398	111	208

Loan notes received on the sale of Homebase amounting to £83 million, included in other debtors due in more than one year in 2002, were redeemed during the year ended 29 March 2003.

20 Current assets and creditors of Sainsbury’s Bank

2003
Łm

2002
Łm

Current assets

Cash

Treasury bills and other eligible bills

Loans and advances to banks

298

602

Loans and advances to customers¹

1,528

959

Debt securities

448

500

Prepayments and accrued income

2,397

2,193

Creditors: due within one year

Loan from minority shareholder (note 34)

–

Deposits by banks

–

Customer accounts

2,166

2,023

Accruals and deferred income

2,237

2,060

¹	Loans and advances to customers include £867 million (2002: £547 million) of loans and advances repayable in more than one year.

In addition to the above assets and liabilities, Sainsbury’s Bank had fixed assets of £12 million at 29 March 2003 (2002: £7 million) included in tangible fixed assets (note 14) and inter company liabilities of £18 million (2002: £2 million).

21 Current asset investments

	2003 Łm	2002 Łm


Investments listed on a recognised stock exchange at cost (equivalent to market value)	20	16

22 Creditors

	Group		Company

	2003 Łm	2002 Łm	2003 Łm	2002 Łm


Due within one year
Bank loans and overdrafts	127	65	28	65
Ł200m 7.25% Notes – June 2002	–	200	–	200
Short-term notes	49	76	49	76
Obligations under finance leases	37	4	–	–

Total short-term borrowings	213	345	77	341
Trade creditors	1,237	1,139	–	–
Amounts due to Group undertakings			77	98
Corporation tax	98	140	46	49
Social security and other taxes	60	76	–	–
Other creditors	443	535	6	4
Accruals	269	206	44	48
Proposed dividend	217	207	217	207

	2,537	2,648	467	747

Due after more than one year
Medium-term notes	174	227	174	227
€800m 5.625% Notes – July 2008	487	487	487	487
Ł300m 6.5% Notes – July 2012	300	300	300	300
Ł250m 6.125% Notes – April 2017	250	–	250	–
Ł350m 6.0% Notes – April 2032	350	–	350	–
8% Irredeemable unsecured loan stock	3	3	3	3
Obligations under finance leases	286	180	–	–

Total borrowings due after one year:	1,850	1,197	1,564	1,017
Amounts due to Group undertakings			2,003	890
Other creditors	35	26	–	–

	1,885	1,223	3,567	1,907

23 Summary of borrowings

	Group		Company

	2003 Łm	2002 Łm	2003 Łm	2002 Łm


Due within one year
Bank and other loans	176	341	77	341
Obligations under finance leases	37	4	–	–
Due after one and within two years
Bank and other loans	6	50	6	50
Obligations under finance leases	43	6	–	–
Due after two and within five years
Bank and other loans	168	177	168	177
Obligations under finance leases	107	20	–	–
Due after five years
Bank and other loans	1,390	790	1,390	790
Obligations under finance leases	136	154	–	–

	2,063	1,542	1,641	1,358

Obligations under finance leases due after five years at 29 March 2003 are repayable by instalments. Bank and other loans due after five years are not repayable by instalments.

During the year Sainsbury’s Supermarkets Ltd entered into a £200 million sale and finance leaseback transaction in respect of various store equipment, for a period of five years at a market rental. Repayment of £49 million was made in the year.

The Company has no finance leases (2002: nil).

The Group holds a portfolio of 11 committed revolving credit facilities totalling £635 million as at 29 March 2003. The facilities all expire within one year, although facilities of £460 million contain term out options under which the Company has the option to draw funds for terms up to 12 months prior to the maturity date. As at 29 March 2003 there was no drawings under these facilities (2002: nil).

24 Financial instruments

Within the financial assets and financial liabilities analysed below, fixed rate financial assets of £7 million (2002: £115 million), financial assets on which no interest is paid of £3 million (2002: £14 million), financial liabilities on which no interest is paid of £35 million (2002: £26 million) and floating rate financial liabilities of £40 million (2002: £19 million) are not included in net debt, as analysed in note 25. Debtors receivable and creditors payable in less than one year, and the current assets and current liabilities of Sainsbury’s Bank are excluded from the analysis. The Group’s policies and procedures in relation to treasury management, including the management of interest and currency risk, are set out in the operating and financial review.

	2003		2002

Fair values of financial assets and financial liabilities	Book value Łm	Fair value Łm	Book value Łm	Fair value Łm


Primary financial instruments held or issued to finance Group operations
Borrowings due within one year	(213)	(208)	(345)	(346)
Borrowings due after one year	(1,850)	(1,955)	(1,197)	(1,207)
Other creditors	(75)	(75)	(45)	(45)
Deposits maturing in one year	659	659	386	386
Deposits maturing after one year	7	8	115	115
Debtors	3	3	14	14
Derivative financial instruments held to manage the interest and currency profile
Interest rate and currency swaps	–	141	–	14
Forward foreign exchange contracts	–	2	–	(1)

The fair value of financial assets and financial liabilities are calculated by reference to market prices wherever these are available and otherwise by discounting future cash flows at prevailing interest and exchange rates.

The above analysis includes store finance leases held in the Group’s US operations with a capitalised value of £172 million (2002: £184 million). It is not considered practicable to estimate the fair value of these financial liabilities as no appropriate external benchmark is available. They are therefore included in the above analysis at book value.

Financial assets

After taking into account various interest rate and currency swaps the interest rate profile of the Group’s financial assets was:

	Total Łm	Floating rate financial assets Łm	Fixed rate financial assets Łm	Financial assets on which no interest is paid Łm


Sterling	1,360	1,353	7	–
US Dollar	123	120	–	3
Other	9	9	–	–

At 29 March 2003	1,492	1,482	7	3

Sterling	1,140	1,014	115	11
US Dollar	108	105	–	3

At 30 March 2002	1,248	1,119	115	14

Floating rate financial assets comprise bank balances linked to bank base rates and money market fund balances, money market deposits, commercial paper investments and currency swaps bearing interest rates linked to LIBOR. The fixed rate financial assets have a weighted average interest rate of 7.75 per cent (2002: 9.86 per cent) fixed for an average period of 2.2 years (2002: 10.5 years). The financial assets on which no interest is paid have a weighted average period until maturity of 5 years.

Financial liabilities

After taking into account various interest rate and currency swaps the interest rate profile of the Group’s financial liabilities was:

					Fixed rate debt

	Total Łm	Floating rate financial liabilities Łm	Fixed rate financial liabilities Łm	Financial liabilities on which no interest is paid Łm	Weighted average interest rate %	Average time for which rate is fixed years


Sterling	1,889	1,636	253	–	6.05	11.3
US Dollar	1,072	738	299	35	8.10	7.9

At 29 March 2003	2,961	2,374	552	35	7.20	9.5

Sterling	1,328	975	353	–	6.91	3.3
US Dollar	992	676	290	26	9.35	10.0

At 30 March 2002	2,320	1,651	643	26	8.01	6.3

Floating rate financial liabilities comprise bank overdrafts linked to bank base rates and money market loans, bank borrowings, currency swaps and interest rate swaps bearing interest rates linked to LIBOR. The financial liabilities on which no interest is paid do not have predetermined dates of payment and therefore a weighted average period of maturity cannot be calculated.

Onerous leases are considered to be a floating rate financial liability as, in establishing the provision, the cash flows have been discounted. The discount rate is re-appraised at each half yearly reporting date to ensure that it reflects current market assessments of the time value of money and the risks specific to the liability.

The above analysis excludes a cancellable swap in a notional principal amount of £150 million under which the Company pays a fixed rate of 4.09 per cent and receives floating rate LIBOR. The counterparty may exercise an option to cancel the swap on quarterly dates through to August 2030.

Currency exposures

After taking into account forward contracts the Group had net euro denominated monetary assets of £42 million (2002: £40 million), US dollar denominated monetary assets of £29 million (2002: £4 million) and Australian dollar monetary assets of £1 million (2002: £1 million). Excluded from these figures are non-sterling borrowings undertaken by the Company to hedge investments in overseas operations.

Gains and losses on hedges

The Group’s unrecognised and deferred gains and losses in respect of hedges, excluding Sainsbury’s Bank (see below) were:

	Unrecognised			Recognised

	Gain Łm	Loss Łm	Total gain/(loss) Łm	Gain Łm	Loss Łm	Total gain/(loss) Łm


Gains and losses on hedges at 30 March 2002	21	(8)	13	–	(4)	(4)
Arising in previous years included in 2002/03 income	(3)	4	1	–	4	4

Gains and losses not included in 2002/03 income
Arising in previous years	18	(4)	14	–	–	–
Arising in 2002/03	173	(44)	129	–	(4)	(4)

Gains and losses on hedges at 29 March 2003	191	(48)	143	–	(4)	(4)

Of which:
Losses expected to be included in 2004 income	–	(7)	(7)	–	(4)	(4)
Gains and losses expected to be included in 2005 income or later	191	(41)	150	–	–	–

Financial instruments – Sainsbury’s Bank

The financial assets and financial liabilities of Sainsbury’s Bank are shown separately as current assets and current liabilities in the Group balance sheet (note 20). The management of the Bank’s treasury operations is separate from that of the Group, as described in the operating and financial review.

Sainsbury’s Bank’s exposure to movements in interest rates is shown in the following table which discloses the interest rate re-pricing profile of assets and liabilities as at 29 March 2003. Any asset (or positive) gap position reflects the fact that the Bank’s financial assets re-price more quickly, or in greater proportion than liabilities in a given time period and will tend to benefit net interest rate income in a rising interest rate environment. A liability (or negative) gap exists when liabilities re-price more quickly or in greater proportion than assets during a given period and tends to benefit net interest income in a declining rate environment. Items are allocated to time bands by reference to the earlier of the next contractual interest rate re-pricing date and the maturity date.

Interest rate sensitivity table of Sainsbury’s Bank at 29 March 2003	Not more than 3 mths Łm	Over 3 mths but not over 6 mths Łm	Over 6 mths but not over 1 year Łm	Over 1 year but not over 5 years Łm	Over 5 years Łm	Non- interest bearing Łm	Total Łm



Assets:
Eligible bank bills	70	–	–	–	–	–	70
Loans and advances to banks	298	–	–	–	–	–	298
Loans and advances to customers	713	64	111	616	24	–	1,528
Debt securities	448	–	–	–	–	–	448
Other assets	–	–	–	–	–	65	65

Total assets	1,529	64	111	616	24	65	2,409

Liabilities:
Customer accounts	2,107	8	28	23	–	–	2,166
Other liabilities	–	–	–	–	–	64	64
Subordinated liabilities	25	–	–	–	–	–	25
Shareholders’ funds	–	–	–	–	–	154	154

Total liabilities	2,132	8	28	23	–	218	2,409

On-balance sheet gap	(603)	56	83	593	24	(153)	–
Derivative instruments	619	(79)	(133)	(404)	(3)	–	–

Net interest rate sensitivity gap	16	(23)	(50)	189	21	(153)	–

Cumulative gap	16	(7)	(57)	132	153	–	–


Interest rate sensitivity table of Sainsbury’s Bank at 30 March 2002	Not more than 3 mths Łm	Over 3 mths but not over 6 mths Łm	Over 6 mths but not over 1 year Łm	Over 1 year but not over 5 years Łm	Over 5 years Łm	Non- interest bearing Łm	Total Łm

Assets:
Eligible bank bills	56	–	–	–	–	–	56
Loans and advances to banks	530	–	72	–	–	–	602
Loans and advances to customers	433	46	64	411	5	–	959
Debt securities	500	–	–	–	–	–	500
Other assets	–	–	–	–	–	83	83

Total assets	1,519	46	136	411	5	83	2,200

Liabilities:
Customer accounts	1,961	7	32	23	–	–	2,023
Other liabilities	–	–	–	–	–	39	39
Shareholders’ funds	–	–	–	–	–	138	138

Total liabilities	1,961	7	32	23	–	177	2,200

On-balance sheet gap	(442)	39	104	388	5	(94)	–
Derivative instruments	322	(53)	(20)	(249)	–	–	–

Net interest rate sensitivity gap	(120)	(14)	84	139	5	(94)	–

Cumulative gap	(120)	(134)	(50)	89	94	–	–

As set out above, the Bank has entered into interest rate swaps on a notional principal amount of £772 million. The underlying risks involved are significantly lower than the contract or notional principal amounts, as shown by the risk weighted amounts calculated using the Financial Services Authority’s capital adequacy rules (total of £1 million) and their fair value represented by replacement cost (total of £1 million).

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