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

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25 Analysis of net debt

	At 31 March 2002 Łm	Cash flow Łm	Other non-cash movements Łm	Exchange movements Łm	At 29 March 2003 Łm


Current asset investments	16	4	–	–	20
Cash at bank and in hand	370	279	–	(10)	639
Bank overdrafts	(14)	–	–	–	(14)

	372	283	–	(10)	645

Due within one year:
Borrowings	(327)	88	–	77	(162)
Finance leases	(4)	(33)	–	–	(37)
Due after one year:
Borrowings	(1,017)	(550)	–	3	(1,564)
Finance leases	(180)	(113)	(10)	17	(286)

	(1,528)	(608)	(10)	97	(2,049)

Total net debt	(1,156)	(325)	(10)	87	(1,404)

26 Provisions for liabilities and charges

	Group				Company

	Deferred tax Łm	Onerous leases Łm	Closure, disposal and business transformation costs Łm	Unfunded pension liabilities Łm	Total Łm	Disposal costs Łm	Onerous leases Łm	Total Łm


At 31 March 2002	172	19	36	4	231	29	–	29
Transfer to corporation tax	6	–	–	–	6	–	–	–
Utilised	–	(14)	(39)	–	(53)	(35)	(6)	(41)
Exchange adjustments	2	(1)	–	–	1	–	–	–
Charge to the profit and loss account	–	36	66	3	105	38	26	64
Deferred tax – UK	18	–	–	–	18	–	–	–
Deferred tax – US	(8)	–	–	–	(8)	–	–	–

At 29 March 2003	190	40	63	7	300	32	20	52

The provisions for onerous leases cover residual lease commitments of up to 80 years, after allowance for existing or anticipated sublet rental income. The provisions for closure and disposal costs (£34 million) relate to indemnities arising from the disposal of subsidiaries. The provisions for business transformation costs (£29 million) relate to retail and supply chain commitments (note 3). The provisions for closure, disposals and business transformation costs are expected to crystallise in the year ended 28 March 2004.

The provision for deferred tax comprises:

	2003 Łm	2002 Łm


Timing differences between depreciation and capital allowances	194	180
Other timing differences	(4)	(8)

	190	172

27 Called up share capital and share premium account

	Allotted fully paid shares million	Aggregate nominal value Łm	Share premium Łm	Consideration Łm


Shares authorised
Ordinary shares of 25 pence each – 2,200 million shares (2002: 2,200 million)		550

Shares allotted
At 31 March 2002	1,936.3	484	1,421
SAYE Share Option Scheme	0.6	–	1	1
Executive Share Option Plan	0.6	–	2	2

At 29 March 2003	1,937.5	484	1,424	3

Further details of these schemes at 29 March 2003 are set out below:

(a) Savings Related Share Option Scheme

The Company operates a Savings Related Share Option Scheme for all UK employees with more than one year’s service. This is an approved Inland Revenue Scheme and was established in 1980. At 29 March 2003, UK employees held 41,400 five year savings contracts in respect of options over 23.4 million shares and 33,700 three year savings contracts in respect of options over 12.8 million shares.

Details of these options at 29 March 2003 are set out below:

Date of grant		Date of expiry	Price pence	2003 million	2002 million
				Options outstanding



11 December	1996 (5 year period)	31 July 2002	292	–	0.5
10 December	1997 (5 year period)	31 July 2003	398	3.3	3.5
10 December	1998 (3 year period)	31 July 2002	416	–	1.7
10 December	1998 (5 year period)	31 July 2004	416	3.0	3.5
7 January	2000 (3 year period)	31 August 2003	253	2.0	2.6
7 January	2000 (5 year period)	31 August 2005	253	3.4	3.9
28 November	2000 (3 year period)	31 August 2004	299	3.0	3.7
28 November	2000 (5 year period)	31 August 2006	299	4.0	4.7
20 December	2001 (3 year period)	31 August 2005	302	3.5	4.4
20 December	2001 (5 year period)	31 August 2007	302	4.3	5.0
3 January	2003 (3 year period)	31 August 2006	239	4.4	–
3 January	2003 (5 year period)	31 August 2008	239	5.3	–

				36.2	33.5

The J Sainsbury plc Qualifying Employee Share Ownership Trust (the QUEST) was established under a deed of trust dated 11 December 1998. The purpose of the QUEST is to acquire shares for UK employees, including Directors, in satisfaction of their options under the Savings Related Share Option Scheme.

Of the 591,396 ordinary shares allotted in relation to the Savings Related Share Option Scheme, 146,444 ordinary shares were subscribed for by the QUEST at a market value of £0.6 million. These shares were allocated to employees, including Directors, in satisfaction of options exercised under the Scheme. The Company provided £0.2 million to the QUEST for this purpose. The cost of this contribution has been transferred by the Company directly to the profit and loss account.

(b) Executive Share Option Plan

Date of grant	Date of expiry	Price pence	2003 million	2002 million
			Options outstanding



28 August 1992	27 August 2002	447	–	3.3
12 March 1994	11 March 2004	359	1.9	2.4
8 September 1995	7 September 2005	475	3.4	5.0
1 December 1995	30 November 2005	386	–	0.1
20 May 1997	19 May 2007	367	4.3	6.1
11 November 1997	10 November 2007	489	0.3	0.4
10 November 1998	9 November 2008	545	5.5	7.5
2 August 1999	1 August 2009	378	8.2	10.1
24 November 1999	23 November 2009	320	0.1	0.1
17 January 2000	16 January 2010	320	0.1	0.2
1 March 2000	28 February 2010	261	3.0	3.0
2 June 2000	1 June 2010	272	14.9	16.6
27 July 2000	26 July 2010	315	0.1	0.1
2 June 2001	1 June 2011	427	7.5	8.9
26 July 2001	25 July 2011	407	8.2	9.7
25 July 2002	24 July 2012	287	24.0	–

			81.5	73.5

These options were held by 2,215 executives (2002: 2,644).

The Colleague Share Option Plan operates under the rules of the Inland Revenue Approved Discretionary Share Option Scheme. A total of 83,000 (2002: 92,900) UK employees participated in the Plan and hold options over 27.8 million shares (2002: 31.3 million). There have been a total of 2 options exercised in respect of 725 ordinary shares during the year by executors of deceased participants. Options will normally be exercisable between three and ten years from the date of the grant of option. It is intended that there will be no further options granted under this plan.

(d) Performance Share Plan

			Options outstanding

Date of grant	Date of expiry	Price pence	2003	2002


29 May 2002	28 May 2012	100	86,223*	–


*These options were held by a total number of six executives.

There have been a total of 33 options exercised in respect of 283,346 ordinary shares during the year by executive participants.

28 Revaluation reserve

	Group Łm	Company Łm


At 31 March 2002	39	–
Transfer to profit and loss account	(17)	–

At 29 March 2003	22	–

The transfer to profit and loss account represents amounts previously charged to the profit and loss account and disposals of revalued assets.

29 Profit and loss account

	Group Łm	Company Łm


At 31 March 2002	2,904	2,377
Profit retained for the period	156	50
Currency translation differences	(4)	(33)
Transfer from revaluation reserve	17	–

At 29 March 2003	3,073	2,394

The cumulative goodwill deducted from the reserves of the Group at 29 March 2003 amounted to £140 million (2002: £140 million).

This goodwill will be charged to the profit and loss account on disposal of the businesses to which it relates.

The profit for the financial year of the Company was £348 million (2002: £131 million).

30 Reconciliation of operating profit to net cash inflow from operating activities

	2003 Łm	2002 Łm


Group operating profit	674	625
Depreciation	393	358
Amortisation of intangible assets	18	18
Loss on sale of equipment, fixtures and vehicles	9	3
(Increase)/decrease in stocks	(62)	23
Increase in debtors	(20)	(2)
Increase in creditors and provisions	85	57
Increase in Sainsbury’s Bank current assets	(204)	(279)
Increase in Sainsbury’s Bank current liabilities	177	264

Net cash inflow from operating activities	1,070	1,067

31 Contingent liabilities and financial commitments

Group commitments to make operating lease payments during the next financial year are as follows:

	Land and buildings		Other leases

	2003 Łm	2002 Łm	2003 Łm	2002 Łm


Leases which expire within one year	4	1	–	–
Leases which expire between one and five years	5	5	5	7
Leases which expire after five years	271	270	–	–

Operating lease commitments include payments in respect of 16 supermarket properties which were sold in March 2000 for £325 million and leased back by Sainsbury’s Supermarkets for a period of 23 years at a market rental, which increases by 1 per cent per annum over the lease period. Under the arrangement, the Company has provided a residual value guarantee that the properties will realise at least £170 million at the end of the lease period. In view of the relatively low amount of this guarantee when compared to the present market value of the freehold interests, the likelihood of this guarantee being invoked is regarded by the Directors as remote, therefore, no contingency is recognised in the accounts.

Operating lease commitments include payments in respect of 10 supermarket properties which were sold in July 2000 for £226 million and leased back by Sainsbury’s Supermarkets for a period of 23 years at a market rental, which increases by 1 per cent per annum over the lease period. A residual value guarantee of £39 million has been given by the Company in respect of this transaction. In view of the relatively low amount of this guarantee when compared to the present market value of the relevant freehold interests, the Directors believe that the likelihood of this guarantee being invoked is remote, therefore, no contingency is recognised in the accounts.

Sainsbury’s Supermarkets has an executory contract with Swan Infrastructure plc (‘Swan’, a wholly owned subsidiary of Barclays UK Infrastructure Fund) for the provision of IT services, which expires on 12 November 2007. Swan subcontracts to Accenture. In the very unlikely event of a credit rating downgrade of the Company below investment grade, Sainsbury’s Supermarkets would be liable to lodge, with Swan, an advance against future service charges equivalent to Swan’s prevailing net borrowings, which are capped at a maximum of £540 million. The likelihood of this event materialising is regarded by the Directors as remote, therefore no contingency is recognised in the accounts.

There are a number of contingent liabilities relating to disposals and other contractual liabilities under which it is not considered any liability will arise.

32 Future capital expenditure

	2003 Łm	2002 Łm


Contracted but not provided for	545	380

33 Pension costs

The pension costs for the UK mainly relate to two funded defined benefit pension schemes, the J Sainsbury Pension and Death Benefit Scheme (JSPDBS) and the J Sainsbury Executive Pension Scheme (JSEPS). These schemes were closed to new employees on 31 January 2002. The assets of these schemes are held separately from the Group’s assets.

The Group Personal Pension Plan was closed on 31 January 2002. Two new Stakeholder Pension Schemes were launched in April 2002.

The pension cost for the year ended 29 March 2003 is based on the results of a triennial valuation carried out by Watson Wyatt, the schemes’ independent actuaries, as at 1 April 2000, on the projected unit basis. The assumptions underlying this valuation were subsequently updated in April 2001 to take account of the change in economic circumstances. The principal actuarial assumptions used in the revised actuarial valuations are:

		%


Long-term rate of return on investments	– before retirement	6.75
	– after retirement	5.00
Average annual increase in total pensionable salary (excluding promotional increments)		3.75
Average annual increase in present and future payments		2.25
Average rate of inflation		2.25

As at 1 April 2001, the market value of the assets of the UK schemes were £2,687 million (2000: £2,943 million). The market value was sufficient to cover 106 per cent (2000: 113 per cent) of the total liabilities of the schemes, a surplus of £145 million (2000: £346 million).

Total pension contribution costs for the Group were £73 million for the year ended 29 March 2003 (2002: £71 million) of which the pension contribution costs of the UK defined benefit schemes and UK defined contribution schemes amounted to £55 million and £9 million respectively (2002: £59 million and £4 million respectively). There is a variation from the regular cost because of scheme surpluses. These surpluses are being amortised over a period using a method which reduces the amount of variation from the regular cost until 2010 for the JSPDBS and 2006 for the JSEPS. Total costs for 2003 are after taking account of an amortisation of scheme surpluses of £17 million (2002: £19 million). The Group’s UK pension cost is not expected to change until the results of the recent triennial valuation are known.

The Group also operates defined benefit pension schemes in the US. The pension costs relating to the US benefit schemes have been determined with the advice of independent actuaries. The charge to the profit and loss account of £9 million (2002: £8 million) has been calculated in accordance with US accounting principles but would not have been materially different had UK accounting principles been applied.

FRS 17 disclosures

Actuarial valuations at 29 March 2003 were carried out by Watson Wyatt for the UK schemes and Fidelity Employer Services Company LLC doing business as Fidelity Investments Actuarial and Consulting Services for the US schemes using the following assumptions:

	UK schemes		US schemes

	2003 %	2002 %	2003 %	2002 %


Average annual increase in total pensionable salary	2.25	3.75–4.00	4.25	4.25
Average annual increase in pensions	2.25	2.50	3.25	3.25
Discount rate	5.50	6.00	6.28	7.28
Average rate of inflation	2.25	2.50	3.25	3.25


The assets in the schemes and their expected returns at 29 March 2003 were:

		UK schemes		US schemes

		Expected long-term rate of return %	Value Łm		Expected long-term rate of return %	Value Łm


Equities	– UK	8.25	758		–	–
	– overseas	8.25	579		9.20	82
Bonds		5.36	864		7.25	46
Other		3.50	51		–	–

		7.03	2,252		8.50	128

The assets in the schemes and their expected returns at 30 March 2002 were:

		UK schemes		US schemes

		Expected long-term rate of return %	Value Łm		Expected long-term rate of return %	Value Łm


Equities	– UK	8.25	1,232		–	–
	– overseas	8.25	812		9.20	101
Bonds		5.00	581		7.25	56
Other		5.00	32		–	–

		7.50	2,657		8.50	157


The net pension schemes liabilities were:


	UK schemes		US schemes

	2003 Łm	2002 Łm		2003 Łm	2002 Łm
	2003 Łm	2002 Łm		2003 Łm	2002 Łm


Total market value of assets	2,252	2,657		128	157
Present value of schemes’ liabilities	(3,072)	(3,023)		(184)	(159)

Deficit in schemes	(820)	(366)		(56)	(2)
Related deferred tax asset	246	110		23	1

Net pension schemes’ liabilities	(574)	(256)		(33)	(1)


If the above net pension assets/(liabilities) had been recognised in the financial statements, the Equity shareholders’ funds and the profit and loss reserve at 29 March 2003 would be as follows:

	2003 Łm	2002 Łm


Equity shareholders’ funds excluding pension liability	5,003	4,848
Net pension schemes’ liabilities	(607)	(257)

Equity shareholders’ funds including pension asset liability	4,396	4,591

Profit and loss reserve excluding pension liability	3,073	2,904
Net pension schemes’ liabilities	(607)	(257)

Profit and loss reserve	2,466	2,647


The following amounts would have been recognised in the performance statements had FRS 17 been adopted:

			2003 Łm


Operating charge
Current service cost			(99)
Gain due to settlements			1
Gain due to curtailments			13

Total operating charge			(85)

Other finance income/(charge)
Expected return on pension schemes’ assets			211
Interest on pension schemes’ liabilities			(189)

Net return included in other financial income			22

Net profit and loss impact			(63)

Statement of recognised gains and losses
Actual return less expected return on pension schemes’ assets			(620)
Experience gains and losses arising on schemes’ liabilities			35
Changes in assumptions underlying the present value of the schemes’ liabilities			94

Actuarial loss included in the Group statement of total recognised gains and losses			(491)

Because of the high number of expected leavers, the current service costs is not expected to rise significantly despite the fact the scheme is now closed.

The movement in the deficit during the year arose as follows:

	UK Łm	US Łm


Deficit in the schemes at the beginning of year	(366)	(2)
Current service cost	(88)	(11)
Contributions	42	4
Gain due to settlements	1	–
Gain due to curtailments	13	–
Other finance income	20	2
Actuarial loss	(442)	(49)

Deficit in schemes at the end of the year	(820)	(56)
Related deferred tax asset	246	23

Net pension deficit	(574)	(33)

The experience gains and losses were as follows:

		2003 Łm


Difference between the expected and actual return on schemes assets:
	Amount (Ł million)	(620)
	Percentage of schemes’ assets	26.0%
Experience gains and losses on schemes’ liabilities:
	Amount (Ł million)	35
	Percentage of the present value of the schemes’ liabilities	1.1%
Total amount included in Group statement of total recognised gains and losses:
	Amount (Ł million)	(491)
	Percentage of the present value of the schemes’ liabilities	15.1%

34 Related party transactions

The following transactions fall to be disclosed under the terms of FRS 8.

Sainsbury’s Bank is a subsidiary of the Company and has as joint shareholders the Company and HBoS, which hold 55 per cent and 45 per cent respectively of the issued share capital. In the year ended 29 March 2003, HBoS provided both management and banking services to Sainsbury’s Bank. In the same period the Group provided management services and reward points (relating to customer loyalty cards) to Sainsbury’s Bank.

The amounts in respect of management, banking services and reward points payable during the year were:

	2003 Łm	2002 Łm


Payable to HBoS	18	27
Payable to the Group	18	10

In addition Sainsbury’s Bank made loans and advances to, and entered into interest rate swaps with Bank of Scotland Treasury Services plc and operated a current account at Bank of Scotland during the year, all under normal commercial terms. Included in loans and advances to banks at 29 March 2003 of £298 million (2002: £602 million) are loans and advances to HBoS Group of £298 million (2002: £437 million).

On 12 December 2002 Sainsbury’s Bank received £14 million from J Sainsbury plc and £11 million from Bank of Scotland in respect of an interest bearing loan, which, in the event of a winding up of the company is subordinated to ordinary unsecured liabilities. This loan remained outstanding at the year-end. Interest of £196,000 and £160,000 was paid to J Sainsbury plc and Bank of Scotland respectively.

Included in deposits by banks at 29 March 2003 is £12 million advanced by Bank of Scotland, under normal commercial terms.

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