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PASSION, PEOPLE, PRODUCT PRODUCT AND PRICE BEST AT FRESH
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The directors present their Annual Report on the affairs of the group together with the accounts and auditors' report for the year ended 1 April 2000.
Principal Activities and Business Review The principal activity of the group continues to be grocery retailing in the United Kingdom. During the year, the group extended its grocery retail interests through its new store opening programme. The Chairman's Statement and the Chief Executive's review of operations on pages 2 to 7, together with the financial review of the year on pages 28 to 33 describe fully the activities and future developments of the group and the trading results for the year.
Results and Dividends The profit of the group before taxation and net property losses amounted to £245.1 million. After deducting net property losses of £9.0 million and taxation of £76.0 million and adding back a minority interest credit of £7.1 million, the profit for the financial year amounted to £167.2 million. The directors propose the payment of dividends totalling £82.7 million. The final dividend recommended by the directors is 6.0p per ordinary share which, together with the interim dividend already paid of 2.64p per ordinary share, makes a total dividend for the year of 8.64p.
Directors The directors of the Company at the date of this Annual Report are shown on pages 26 and 27. During the year there were a number of changes in the Board's composition. Messrs C.D Smith and R.E Partington resigned from the Board on 3 November 1999 and 22 July 1999 respectively. Miss J.A Burdus and Dr. N.C Bain retired from the Board on 24 July 1999 and 4 January 2000 respectively. Mrs. L.M Gernon and Mr. P Foy were appointed to the Board on 1 August 1999, Mr. C Criado-Perez was appointed to the Board on 16 August 1999 and Messrs L.R Christensen and R.G Williams were appointedto the Board on 3 November 1999. In accordance with Article 97 of the Company's Articles of Association, Mr. S.T Laffin and Mr. H.R Collum retire by rotation at the forthcoming Annual General Meeting and, being eligible, offer themselves for re-election. In accordance with Article 102 of the Company's Articles of Association Mrs. L.M Gernon and Messrs C Criado-Perez, P Foy, L.R Christensen and R.G Williams, who have all been appointed to the Board since the last Annual General Meeting, will be proposed for re-election. Messrs S.T Laffin, C Criado-Perez, L.R Christensen and R.G Williamshave service agreements which may be terminated by the Company on giving two years' notice. After the completion of one years service on 16 August 2000, Mr C Criado-Perez's service contract may subsequently be terminated by the Company on giving one year's notice. Since the year end, Mr. G Wotherspoon resigned as a director of the Company on 8 May 2000. Details of the directors' interests are set out on pages 52 and 53.
Acquisition of the Company's Shares At last year's Annual General Meeting, shareholders renewed their consent to the Company purchasing up to 10% of the Company's issued share capital. Between 4 May 1999 and 9 June 1999, 62.4 million shares with a nominal value of £15.6 million, representing some 5.63% of the Company's called up share capital, were purchased through the market for a consideration of £160.9 million, excluding expenses. At the year end, the directors had authority to purchase through the market, a further 4.37% of the Company's ordinary shares. Renewal of this authority, which expires at the conclusion of the forthcoming Annual General Meeting of the Company, will be sought at that meeting. Purchases will only be made if and when the Board believes that they would result both in an increase in earnings per share and total shareholder value.
Share Capital Details of share capital issued during the year are set out in Note 18.2 on page 45.
Charitable and Political Contributions During the year, the group donated £88,000 to charities (1999 - £68,000). No political contributions were made during the year (1999 - £Nil).
Suppliers' Payment Policy A strategic objective of the group is to have mutually beneficial long-term relationships with our suppliers and we seek to settle, in advance, the terms of payment with suppliers and abide by those terms. The average number of days credit taken by the group for trade purchases at 1 April 2000 was 44 days (1999 - 44 days), whereas the average during the year was 38 days (1999 - 38 days).
Employment Policies We are committed to promoting policies to ensure that employees and those who seek to work for us are treated equally regardless of sex, marital status, age, creed, colour, race or ethnic origin. It is the group's policy to give full and fair consideration to applications for employment by people who are disabled, to continue wherever possible the employment of staff who become disabled and to provide equal opportunities for the career development of disabled employees. The health and safety of the group's employees, customers and members of the general public who may be affected by the group's activities is a matter of primary concern. Accordingly, it is the group's policy to manage its activities so as to avoid causing any unnecessary or unacceptable risk to the health and safety of employees and members of the public. The number and wide geographic distribution of the group's operating locations make it essential to communicate effectively with employees. Communications and consultation within the group's retail activities are principally through the operational structure of store and area teams, with particular use being made of Company magazines. Copies of the Company's Annual Report are made available at the group's principal office and operating locations.
Substantial Interests At the date of this report, the following substantial interests (3% or more) in the Company's share capital had been notified to the Company:
Auditors Arthur Andersen have indicated their willingness to continue in office and a resolution to re-appoint them as auditors will be proposed at the forthcoming Annual General Meeting.
Pension Fund Full details of the group's pension schemes are set out in Note 23.3 on page 46. Pension scheme funds are administered by Trustees and are independent of group finances. There is no investment in the shares of the Company nor do the pension schemes own any property occupied by the group. The Safeway Pension Scheme is open to all permanent full-time and part-time employees of wholly owned subsidiary companies of the group. The Scheme provides benefits additional to those from the State Basic Pension Scheme, whilst enabling members to be contracted-out of the State Earnings Related Pension Scheme. In addition to the normal retirement pension based on pay and length of service at retirement, there are further benefits payable when members die in service.
General The directors have been advised that the Company is not a close company within the meaning of the provisions of the Income and Corporation Taxes Act 1988.
Combined Code on Corporate Governance The Financial Services Authority require listed companies to disclose how they comply with the Code Provisions set out in Section 1 of the Combined Code on Corporate Governance. The Company considers that it has complied, in the main, throughout the year with the Code Provisions. Specific matters to note regarding the Company's compliance with the Code are as follows: (i) With the exception of existing directors who already have Service Agreements subject to two years' notice, the Agreements with newly engaged directors will, after the first year of service as a director, be subject to one year's notice. (ii) Following the resignation of Mr C D Smith during the year and Mr G Wotherspoon subsequent to the year end, no director accrues a pension based on their annual incentive. (iii) As explained below, the Board feels that it is unnecessary to appoint a senior independent non-executive director. Arthur Andersen have reviewed the Company's statements as to compliance with the Combined Code to the extent required by the Listing Rules of the Financial Services Authority as stated in their Audit Report on page 54.
The Board
The directors have approved a schedule of matters which are reserved for the Board. They include, amongst other matters, approval of results announcements, material agreements, major capital expenditure, annual and medium term business plans, risk management strategy and treasury policies and are reviewed periodically. Directors are briefed on the issues that will arise at Board and Committee meetings. Board papers, including regular financial reports and other necessary papers, are normally circulated seven days prior to a meeting being held. The Board meets formally at least seven times a year and the executive directors meet regularly to monitor and guide the group's performance. The Board has not identified a senior independent non-executive director because it considers such an appointment is unnecessary at the present time but the matter will be kept under review. All directors have access to the advice and services of the Company Secretary, and the Board has established a procedure whereby directors may take independent professional advice at the expense of the Company. The Company Secretary ensures that Board procedures are followed and he may only be removed with the approval of the Board as a whole. All executive directors, except Mr. C Criado-Perez, have service agreements, which are terminable by the Company on not more than two years' notice and by the individual directors on one year's notice. It is now the policy of the Remuneration Committee that any newly engaged executive directors be granted a service contract providing for one year's notice by either party after the director's first full year of employment.
Board Committees The Board maintains three Standing Committees, all of which operate within written terms of reference. These Committees report back to the Board on decisions made and issues raised at meetings to ensure that all directors are kept informed of their activities. The Committees are: 1 Audit Committee. Consists wholly of non-executive directors and is chaired by Mr. H.R Collum. It meets at least three times a year and assists the Board in meeting its responsibilities for ensuring that accounting, financial reporting, internal financial controls and compliance procedures are in place. 2 Remuneration Committee. Consists wholly of non-executive directors and is chaired by Mr. M.J Allen. It meets at least three times a year and its terms of reference include the review and recommendation of remuneration policy for executive directors, the terms of service agreements for executive directors, their pay and bonus arrangements, determination of participation in the Company's long-term incentive plan and grants of options under the Company's Executive Share Option Scheme. Details of individual directors' remuneration are contained on page 52. 3 Nomination Committee. Comprising the four non-executive directors together with Mr. D.G.C Webster who chairs the Committee. It reviews and makes proposals to the Board on each occasion when consideration is given to the appointment of a replacement or additional director. The members of each Committee are listed below. Their biographies are shown on pages 26 and 27. 1 Audit Committee - 2 Remuneration Committee - 3 Nomination Committee -
Investor Relations and Annual General Meeting
The separate notice convening the Annual General Meeting to be held at The Hotel Inter-Continental London, One Hamilton Place, Hyde Park Corner, London W1V 0QY on Tuesday 11 July 2000 at 11 a.m. is sent to shareholders with this Annual Report and includes an explanation of the items of Special Business. As required by the Combined Code, the Notice has been circulated more than 20 working days before the meeting and the Board will announce the proxy votes following voting on each resolution.
Internal Financial Control In applying the principle that the Board should maintain a sound system of financial control to safeguard shareholders' investment and the Company's assets, the Board, through the Audit Committee, recognise that they have overall responsibility for ensuring that the group maintains a system of internal control to provide them with reasonable assurance regarding effective and efficient operations, internal financial control and compliance with laws and regulations. It recognises that such a system can provide only reasonable and not absolute assurance against material misstatement or loss. The Company has established the procedures necessary to implement the guidance on internal control issued by the Turnbull Committee. In the meantime, the Company has adopted the transitional approach permitted by the Financial Services Authority and reviewed the effectiveness of the system of internal control in accordance with the previous guidance. Accordingly, the disclosures below are restricted to internal financial controls. The Company will report in accordance with the Turnbull guidance in the next annual report. The key features of the internal financial control system operated throughout the year are: 1 Performance Reporting. There is a comprehensive planning system with quarterly plans approved by the Board. Activities and results are reported against quarterly plan daily, weekly and every four weeks in sufficient detail to allow the directors and senior management to monitor the financial and non-financial key performance indicators, business activities, risks and progress towards objectives. 2 Investment Appraisal. The group has a clearly defined strategy and also authorisation procedures for all investment expenditure. These include detailed plans, frequent formal appraisal and review procedures, well communicated levels of authority and regular re-forecasts. In addition, post expenditure reviews are conducted regularly. 3 Business Risks. The Board reviews all significant business risks. They are reviewed with the Audit Committee and form a key part of both external audit and Business Controls department work plans. 4 Business Controls. This department is responsible for ensuring that effective control systems have been designed and are implemented throughout the business that balance the need for control with efficiency. 5 Audit Committee. Reviews the operation and effectiveness of the overall control framework. It receives regular reports from both the Business Controls department and the external auditors. The directors confirm that a review of the effectiveness of the system of internal financial control was carried out during the year.
Going Concern The directors have reviewed the group's plans for 2000/2001 and for the following two years. After taking into account the cash flow implications of the plans and after comparing these with the group's borrowing facilities and reviewing projected gearing ratios, the directors are satisfied that it is appropriate to produce the accounts on a going concern basis.
Remuneration The Board seeks to establish remuneration policies which reflect the need to provide a competitive compensation package designed to attract, retain and motivate members of the senior management team, having regard to the best interests of the Company and the shareholders. The Remuneration Committee reviews and recommends overall policy together with all aspects of remuneration and terms and conditions of service of individual executive directors. The remuneration of the Company's non-executive directors is determined by the Board as a whole, with non-executive directors exempting themselves from voting as appropriate. The key policy objectives of the Remuneration Committee in respect of the Company's executive directors are: (a) to ensure that the Company attracts and retains high quality executives who are fairly rewarded for their personal contribution to the Company's overall performance; and (b) to act as an independent Committee ensuring that due regard, in respect of remuneration matters, is given to the interests of the Company's shareholders and to the financial and commercial health of the Company. Remuneration of executive directors is, by design, a mixture of salary and incentives which together form an appropriate total package. As such it comprises (i) basic salar y, (ii) an annual incentive award based on the performance of the group and on the attainment of pre-set key objectives, (iii) participation in the Company's Executive Share Option Scheme and (iv) participation in a long-term incentive plan as described more fully below.
Basic salary and taxable benefits The level of basic salary and taxable benefits is established drawing upon annual market comparison surveys, conducted by external remuneration consultants, with positions of similar responsibility and scope in the retail sector. Individual salaries of directors are reviewed annually by the Remuneration Committee and adjusted by reference to performance and market factors. Taxable benefits comprise, in the main, a fully expensed company car and medical benefits insurance.
Annual incentive awards The Company operates an annual incentive award scheme in which all executive directors (except the Chairman) and senior executives of the group participate. The scheme provides for payments based on the achievement of pre-set targets. The maximum bonus opportunity for executive directors, for significant outperformance of the pre-set objectives, is 50% of basic salary. Bonus payments over the last few years have ranged from Nil up to 26%. Annual incentive awards are paid in cash within three months of the Company's year end but are included in directors' emoluments in the year to which they relate. An incentive award is proposed to be paid in respect of the year ended 1 April 2000 and is fully disclosed on page 52.
Share option schemes Executive directors are eligible for grants of options to acquire shares under both the Safeway 1993 Executive Share Option Scheme ("Executive Scheme") and the Safeway Sharesave Scheme ("Sharesave"). Approximately 300 senior executives (including executive directors) participate in the Executive Scheme, under which options are granted at the market price on the day of grant. In August and November 1999, options totalling 7,536,950 shares were granted, of which, executive directors were granted 951,200 options over new issue shares and 345,000 options over market purchased shares. Grants under the Executive Scheme for executive directors are phased, usually over four or more years, and all grants are controlled by the Remuneration Committee. Executive Scheme options granted on and since 19 December 1995 will become exercisable normally only when the earnings per share growth of the Company, over a three year period, has exceeded the increase in the Retail Prices Index over that same three year period by an average of at least 2% per annum. Executive Scheme options granted prior to 19 December 1995 are all available for exercise as all relevant performance criteria have been met. Executive Scheme options granted in December 1995, 1996 and November 1997 will not normally be exercisable on their third (or subsequent) anniversary in November 2000 as the performance criterion has not been achieved. The number of options held by executive directors in the Company is set out on page 53.
Long-term incentive plan
The plan is a performance share plan. Under the terms of the plan, executives receive a conditional award of shares at the beginning of a three year cycle. The actual number of shares to which executives obtain vested rights depends on the Company's performance over that same period. Executives have no rights or entitlements to an award of shares and no awards are made if a participant has left the Company's employment prior to the end of the performance period. Shares for use in the plan are ordinary shares in the Company which are transferred out of the Safeway plc Employee Share Ownership Plan ("ESOP"), a discretionary trust, set up to administer the plan (Note 12.2 on page 42). In order to hedge the Company's liability to payments under the plan, the Company funds the anticipated payout over each three year cycle by ensuring that the Trustee has sufficient funds to purchase the Company's ordinary shares through the ESOP. Cycles (a) the Company's Total Shareholder Return compared to that of a basket of competitor companies; and (b) the increase in Earnings per Share of the Company. Both measures are determined independently and each may provide up to 50% of an individual's personal maximum award. The performance objectives under the 1997 cycle, which covered the three financial years ended 1 April 2000, were not achieved and accordingly, no awards will vest. The maximum award that any executive director could receive under these cycles is:
*Following the resignation of Mr. G Wotherspoon as a director of the Company on 8 May 2000 he ceased to be a participant in the plan and none of the maximum award of shares will vest. The actual award in respect of the 1998 and subsequent cycles will not be known until the end of the relevant three year period and could, dependent upon performance, be a nil award or up to a maximum of the number of shares shown in the table above. Details of the actual awards will be reported in future Annual Reports.
Pensions All executive directors are members of the Safeway Pension Scheme which is a funded, Inland Revenue approved, final salary, occupational pension scheme (Note 23.3 on page 46). The Finance Act 1989 introduced a restriction ("Cap") for employees joining the Company after 31 May 1989, on earnings that could be pensioned through an Inland Revenue approved pension scheme. The limit is based on a maximum annual pensionable salary (currently £91,800). Accordingly, the Company has established a Funded Unapproved Retirement Benefits Plan ("FURB") for executive directors (currently three) subject to the Cap and pays a defined annual contribution to this Plan which is based on a percentage of their basic salary over the Cap. The Company also makes a discretionary annual pension related payment to executive directors subject to the Cap. This payment is sufficient to meet the income tax liability that executive directors suffer on the Company's contributions to the FURB, and is fixed such that the combination of the FURB contributions and this payment is 25% of pensionable salary over the Cap. Executive directors, who joined the Company before 31 May 1989, conditional upon commencement date and length of service, are entitled to a maximum pension from the Safeway Pension Scheme of up to two thirds of pensionable salary on retirement at normal retirement age (age 60). An actuarially reduced pension is payable on early retirement after age 50. Executive directors' spouses are eligible for a pension of two-thirds of the directors pension on death before or after retirement. The pensions of executive directors and their spouses are eligible for regular increases each year after retirement in line either with inflation or 8.5% per annum, whichever is the lower. Additional increases may be payable at the discretion of the Pension Scheme Trustees subject to the approval of the Company. Following the resignations of Messrs C .D Smith and G Wotherspoon, no director accrued a pension based on their annual incentive. For the directors who held office during the year, the pension benefits earned in the Safeway Pension Scheme and the Company's contributions to the FURB (and related payments) were as follows:
Notes:
External appointments policy
Non-executive directors Non-executive directors are appointed initially for a three year term after which their appointment may be extended upon mutual agreement. Non-executive directors' fees comprise a basic amount and additional fees for Chairmanship and membership of Board Committees. Non-executive directors do not have contracts of service, are not eligible for pension scheme membership and do not participate in any of the group's bonus, share option or other incentive schemes.
The table below analyses the emoluments of individual directors who held office during the year:
* Representing the value of the tranche of shares vested under the 1994 cycle in May 1998. As provided in the rules of the long-term incentive plan, this includes £115,200 and £57,600 paid in cash in respect of the value vested in May 1998 for Mr. C.D Smith and Mr. G Wotherspoon respectively. Pension contributions paid by the Company in respect of the Chairman amounted to £50,906 (1999 - £50,470). Mr. C.D Smith received a total of £1.16 million during the year ended 1 April 2000 as compensation on the termination of his employment. Mr. R.E Partington received a total of £0.37 million during the year ended 1 April 2000 as compensation on the termination of his employment. The aggregate profit made by directors on their exercise of share options during the year was £1,786 (1999 - £1,000).
Directors' interests The interests of the directors including family interests (all beneficial) in the share capital of the Company are set out below:
* At date of appointment.
The directors have no other interest in group securities. Since 1 April 2000, Mr. S.T Laffin's interests in the Company's ordinary share capital has increased by 36 shares as a result of a Personal Equity Plan re-investment. At no time during the year or subsequently has any director had a material interest in any contract or arrangement with the Company or any of its subsidiaries which was significant in relation to the group's business. The movement in share options held by directors during the year together with their exercise price and the middle market price and gain on date of exercise, if applicable, is set out on page 53. Share options issued under the Executive Scheme normally expire ten years after date of grant and those issued under the Sharesave scheme normally expire six years after date of grant.
The middle market price of the Company's ordinary shares at 1 April 2000 was 190.25p and the range during the year ended 1 April 2000 was 155p to 279p. By Order of the Board |
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