Annual Report 2004

TESCO PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2004
NUMBER O F S TO R E S
SALES AREA
N E W S TO R E S O P E N E D INC. ACQUISITIONS IN 2003/04
PLANNED OPENINGS IN 2004/05
UNITED KINGDOM
1,878
23.3m sq ft
64
82
CZECH REPUBLIC
22
2.0m sq ft
H U N G A RY
60
3.0m sq ft
10
POLAND
69
3.6m sq ft
10
REPUBLIC OF IRELAND
82
1.9m sq ft
S L OVA K I A
23
1.7m sq ft
1 2
Financial highlights Operating and financial review Directors report Corporate governance Report of the directors on remuneration Statement of directors responsibilities Independent auditors report Group profit and loss account Statement of total recognised gains and losses Reconciliation of movements in shareholders funds
TURKEY
0.4m sq ft
6 8 13
JA PA N
78
0.3m sq ft
78
24
M A L AYS I A
0.5m sq ft
25 26 27
SOUTH KO R E A
28
2.9m sq ft
28 29 30 32
Balance sheets Group cash flow statement Accounting policies Notes to the financial statements Five year record
TA I WA N
0.4m sq ft
THAILAND
64
5.4m sq ft
12
57
56
2,318
45.4m sq ft
199
184
AROUND THE WORLD

UNITED KINGDOM CZECH REPUBLIC HUNGARY POLAND REPUBLIC OF IRELAND SLOVAKIA TURKEY JAPAN MALAYSIA SOUTH KOREA TAIWAN THAILAND
FINANCIAL HIGHLIGHTS
GROUP SALES UNDERLYING GROUP PROFIT BEFORE TAX GROUP PROFIT BEFORE TAX UNDERLYING DILUTED EARNINGS PER SHARE DILUTED EARNINGS PER SHARE DIVIDEND PER SHARE + 18.7% + 21.9% + 17.6% + 16.7% + 11.3% + 10.3%
2004
53 weeks
2004
52 weeks pro forma
2003
.
Group sales
(m) (including value added tax)
33,557
(m)
32,989 1,684 1,576
28,280 1,401 1,361 13.98 13.42 6.20 16,896 10.2%
Underlying Group profit before tax Group profit before tax

(m)
1,708 1,600 16.31
Underlying diluted earnings per share (p) Diluted earnings per share Dividend per share
(p) (p)
14.93 6.84 23,866 10.5%
Group enterprise value (m) (market capitalisation plus net debt) Return on capital employed
Excluding net loss on disposal of fixed assets 9m (2003 13m), integration costs 45m (2003 4m) and goodwill amortisation 54m (2003 23m). Restated
TESCO PLC
OPERATING AND FINANCIAL REVIEW

This operating and financial review analyses the performance of the Tesco Group in the financial year ended 28 February 2004. It also explains other aspects of the Groups results and operations, including strategy and risk management.
33,557
GROUP SUMMARY
2004 2003 restated Change m m %
25,401
22,585
Group sales
(including value added tax)
GROUP STRATEGY We have a four-part strategy for long-term growth that we set out seven years ago: strong UK core business; non-food growth; retailing services and international.
28,280
20,189
33,557 28,280
18.7
Underlying profit on ordinary activities before tax Profit on ordinary activities before taxation
1,708 1,600 16.31 14.93 6.84
1,401 1,361 13.98 13.42 6.20
21.9 17.6 16.7 11.3 10.3
Our growth has been driven by delivering a great shopping experience for customers wherever we operate.
GROUP PERFORMANCE Group sales including VAT
Underlying diluted earnings per share (p) Diluted earnings per share (p) Dividend per share (p)
00
01
02
03
04
S A L E S P E R F OR M AN C E
m (r e s ta te d )
G R OU P S AL E S U K SA L E S
UK PERFORMANCE
2004
2,285
2003 restated Change m m %
increased by 18.7% to 33,557m (2003 28,280m as restated) On a 52-week basis, Group sales were up 16.7% to 32,989m. The Group has revised its accounting policy for turnover in line with FRS 5 Application Note G Revenue Recognition (issued November 2003). The principal adjustments are to report turnover net of vouchers and on a commission-only basis for mobile phone airtime sales. Group underlying profit on ordinary activities before tax (excluding net loss on disposal of xed assets, integration costs and goodwill amortisation) increased by 21.9% to 1,708m. On a 52-week basis, Group underlying profit on ordinary activities before tax (excluding net loss on disposal of fixed assets, integration costs and goodwill amortisation) increased by 20.2% to 1,684m. During the year we purchased Kipa, a small hypermarket business in Turkey and C Two-Network, a convenience store operator in Japan, for 96m and 176m respectively. The impact was to increase underlying operating prot by 10m. Profit on ordinary activities before taxation increased by 17.6% to 1,600m (2003 1,361m). Group capital expenditure was 2,285m (2003 2,134m). UK capital expenditure was 1,520m, including 735m on new stores and 272m on extensions and refits. Total international capital expenditure was 765m, 322m in Asia and 443m in Europe. In the year ahead, we forecast Group capital expenditure to be around 2.4bn.
18,181
19,711
21,454
23,101 2,134
26,876
1,944
2,027
Sales
26,876 23,101 1,526 1,297
16.3 17.7
Underlying operating prot

1,488
REST OF EUROPE PERFORMANCE

Sales
1,206 1,276 1,228 1,520
3,834 184
3,007 141
27.5 30.5
989
00
01
02
03
04
m
C A PI T A L E X P E N D I T U R E
ASIA PERFORMANCE
G R OU P UK
Sales
2,847 122
2,172 71
31.1 71.8
Excluding net loss on disposal of fixed assets, integration costs and goodwill amortisation.
TESCO PLC
The Group continued to generate strong operating cash flows. Net cash inflow from operating activities increased by 23.9% to 2,942m (2003 2,375m). Working capital improvements contributed 0.5bn to cash flow this year, and whilst 50m is due to the 53rd week, the rest is due to growth in the business and management focus. Group net debt in the year decreased by 647m to 4,090m (2003 4,737m). Gearing decreased to 51% (2003 73%). Post-tax return on capital employed increased to 10.5% from 10.2% last year.
GROUP INTEREST AND TAXATION Net interest payable was 223m (2003 180m). Interest cover is now 8.2 times compared to 8.6 times last year.
Over the last three years it has been 3.4%, compared to the FTSE 100 average of (17.1)%. In the last year, total shareholder return in Tesco was 58.6% compared to the FTSE 100 average of 25.2%.
UK Sales grew by 16.3% to 26,876m (2003
33.4
Underlying operating profit in the UK was 17.7% higher at 1,526m (2003 1,297m) and operating margin increased to 6.2%. The tesco.com operations achieved sales of 577m (2003 447m) and excluding USA and South Korea start-up losses, made a profit of 28m (2003 12m). As part of our store development programme we opened 64 new stores comprising eight Extras, 20 Superstores, four Metro, 30 Express and two T&S Stores. Including extensions and refits, we opened an additional 1.8m sq ft of new space and expect to open a further 1.4m sq ft in the coming year.
INTERNATIONAL Sales are up 29%, with strong
1 year
3 years
20.5
5 years
TOTA L S H A R E H O L D E R R E T U R N R E L AT I V E TO T H E F T S E 1 0 0
Tax has been charged at an effective rate of 31.1% (2003 30.5%). Prior to accounting for the net loss on disposal of fixed assets, integration costs and goodwill amortisation, our underlying tax rate was 29.5% (2003 29.6%).
SHAREHOLDER RETURNS AND DIVIDENDS Underlying
8.4
8.8
diluted earnings per share (excluding net loss on disposal of fixed assets, integration costs and goodwill amor tisation) increased by 16.7% to 16.31p (2003 13.98p). The Board has proposed a final dividend of 4.77p (2003 4.33p) giving a total dividend for the year of 6.84p (2003 6.20p).This represents an increase of 10.3% in line with our policy of strong dividend growth while continuing to build cover. Total recognised gains and losses in the year were 943m (2003 968m), comprising profit for the year of 1,100m and losses on foreign currency translation of 157m. Group shareholders funds, before minority interests, increased by 1,429m. This was due to retained profits of 584m, new shares issued less expenses of 1,002m and losses on foreign currency translation of 157m. As a result, return on shareholders funds was 23.6%. Total shareholder return, which is measured as the percentage change in the share price plus the dividend, has been 66.1% over the last five years, compared to the FTSE 100 average of (16.5)%.
4.1
7.3
4.7
6.0
4.0 03 1,433 03
7.7 01 02 04
TOTAL LIKE-FOR-LIKE 53rd WEEK
volume growth. Profits have grown strongly by 44%, and operating margins have increased from 4.5% last year to 5.1%.
REST OF EUROPE In the Rest of Europe sales rose
00
UK SALES GROWTH % (restated)
by 27.5% to 3,834m (2003 3,007m as restated) and contributed an underlying operating profit of 184m, up from 141m last year. Sales in the Republic of Ireland, at constant exchange rates, grew by 10%. We have 82 stores, giving us 1.9m sq ft and have plans for a further eight stores next year. In Central Europe we opened 22 hypermarkets in the year giving us 110 in total.
ASIA In the year, our Asian businesses had sales
1,216 1,298 1,296
of 2,847m (2003 2,172m as restated), up 31.1% on the previous year and made an underlying operating prot of 122m (2003 71m). In Asia, we opened 22 stores in the year, giving us 179 in total.
00
01
02
04
UK SALES AREA OPENED
000 sq ft
TESCO PLC
1,778
6.7
14.2
16.3
82.6
23,101m as restated). On a 52-week basis, UK sales grew by 14.2% to 26,381m. Of this, 6.7% came from existing stores and 7.5% from net new stores.
OPERATING AND FINANCIAL REVIEW CONTINUED

JOINT VENTURES AND ASSOCIATES Our total share
of profit, before goodwill amortisation, from joint ventures and associates was 99m compared to 72m last year. Our share of Tesco Personal Finance pre-tax profit, post minority interests has grown significantly to 80m (2003 48m).
FINANCIAL RISKS AND TREASURY MANAGEMENT The treasury function is mandated by the Board to manage the financial risks that arise in relation to underlying business needs. The Board establishes the functions policies and operating parameters and routinely reviews its activities, which are also subject to regular audit. The function does not operate as a profit centre and the undertaking of speculative transactions is not permitted.
Since the year end, we have conducted a property deal with our joint venture partner Topland Group. This provided 650m of competitive funding.
INTEREST RATE RISK MANAGEMENT The objective is to limit our exposure to increases in interest rates. Forward rate agreements, interest rate swaps, caps and collars are used to achieve the desired mix of fixed and floating rate debt. The policy is to fix or cap a minimum of 40% of actual and projected debt interest costs. Forward start interest rate swaps are used to manage projected debt interest costs where appropriate. At the year end 2.9bn, 71% of net debt, was in fixed rate form (2003 2.6bn, 55%) with a further 135m, 3% of net debt, collared as detailed in note 21. Fixed rate debt includes 441m of funding linked to the Retail Price Index (2003 427m). This debt reduces interest risk by diversifying our funding portfolio. The balance of our debt is in floating rate form.
102
152 03
38
00
68
01
02
N U M BE R O F I N T E R N AT I ON AL HYPERMARKETS
194 04
The main financial risks faced by the Group relate to the availability of funds to meet business needs, the risk of default by counterparties to financial transactions (credit risk), and fluctuations in interest and foreign exchange rates. These risks are managed as described below. The balance sheet positions at 28 February 2004 are representative of the positions throughout the year.
FUNDING AND LIQUIDITY The Group finances its
119
212
50
74
306
The average rate of interest paid during the year was 5.6% (2003 5.7%). A 1% movement in UK interest rates would change profit before tax by less than 1%. Changes in interest rates in other currencies would have no significant impact on Group profits.
FOREIGN CURRENCY RISK MANAGEMENT Our principal
00
01
02
03
04
I NT E R N AT I ON AL U N D E R L Y I N G OP E R A T I N G P R OF I T
operations by a combination of retained profits, long and medium-term debt capital market issues, commercial paper, bank borrowings and leases. The objective is to ensure continuity of funding. The policy is to smooth the debt maturity profile, to arrange funding ahead of requirements and to maintain sufficient undrawn committed bank facilities and a strong credit rating so that maturing debt may be refinanced as it falls due. The Groups long-term credit rating was confirmed as stable during the year. Tesco Group is rated A1 by Moodys and A+ by Standard & Poors. New funding of 621m was arranged during the year, including a medium-term note of 98m maturing in 2009 and crystallisation of interest swap profit of 235m. A further 773m net proceeds was raised through a share placing, which was used to pay down debt. At the year end, net debt was 4.1bn (2003 4.7bn) and the average debt maturity was nine years (2003 nine years).
objective is to reduce the risk to short-term profits of exchange rate volatility. Transactional currency exposures that could significantly impact the profit and loss account are hedged, typically using forward purchases or sales of foreign currencies and currency options. We hedge the balance sheet by borrowing (either directly or via foreign exchange transactions) in matching currencies where this is cost effective. Our objectives are to maintain a low cost of borrowing and retain some potential for currency-related appreciation while partially hedging against currency depreciation. During the year, currency movements had minimal impact on profits and decreased the net value of the Groups assets by 157m (2003 22m increase). At the year end, forward foreign currency purchases equivalent to 240m were outstanding (2003 240m). See note 21.
40
(8)
00
01
02
96
03
TESCO PERSONAL FINANCE P R E - T A X P R O F I T /( L O S S ) POST MINORITY INTEREST
TESCO PLC
160
04
CREDIT RISK The objective is to reduce the risk
PENSIONS Tesco policy is to base UK pension
of loss arising from default by parties to financial transactions. The risk is managed by spreading financial transactions across an approved list of counterparties of high credit quality. The Groups positions with these counterparties and their credit ratings are routinely monitored.
TESCO PERSONAL FINANCE (TPF) TPF lending is
funding decisions on a three-yearly actuarial valuation. The latest full actuarial valuation of the Tesco PLC Pension Scheme was carried out as at 31 March 2002. This formed the basis of our decision to increase funding levels. The results of the valuation can be seen in note 27(a). In line with accounting standards, a separate FRS 17 valuation has been performed as at the Group year end date. The FRS 17 disclosures can be found in note 27(b).
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) All European Union listed companies are required to prepare their consolidated financial statements in accordance with IFRS for accounting periods beginning on or after 1 January 2005. The Tesco Group will therefore adopt IFRS for the financial year ending February 2006.
predominantly to individuals through its credit card and unsecured personal loan products. TPF has also developed a significant insurance business, with motor insurance a major component part. TPF risk is managed by observing and adopting industry best practices and drawing upon the expertise and systems of the Royal Bank of Scotland Group, including its subsidiary, Direct Line. All policies pertaining to risk within TPF are subject to the governance procedures of The Royal Bank of Scotland Group and ratified by the TPF Board, which has representation from both Tesco and The Royal Bank of Scotland Group. This has delivered a portfolio of products with strong asset quality. This asset quality is maintained through proactive risk management both at the time of acquisition and ongoing account maintenance. The Tesco Group would support its 50% share of any further funding TPF may require to sustain liquidity ratios. However, we believe that provisions for bad debts and insurance losses (supported by the re-insurance of significant risks) are at prudent levels.
INSURANCE We have taken the decision to purchase
Tesco has set up a cross-functional team to achieve a smooth transition to IFRS. We have performed a high level review of the differences between IFRS and our current accounting policies, and we are now quantifying the financial impacts of convergence with IFRS. We are also looking at the wider implementation aspects, including how we will communicate the changes resulting from IFRS to the market. Based on our work to date, the major areas of impact on net prot and shareholders funds are expected to be due to differences in accounting for share-based payments, pensions, deferred tax, nancial instruments and hedging, goodwill and xed assets. The presentation of our nancial statements, along with the disclosures, will also be affected.
OTHER INFORMATION Additional financial and nonfinancial information, including press releases and year end presentations can be accessed on our website, www.tesco.com/corporateinfo
Assets, Earnings and Combined Liability protection from the open insurance market at a catastrophe level only. The risk not transferred to the insurance market is retained within the business up to various limits, with the balance self insured on a multinational basis by use of our captive insurance companies, Tesco Insurance Limited in Guernsey and Valiant Insurance Company Limited in the Republic of Ireland. Tesco Insurance Limited covers Assets, Earnings and historic Combined Liability. From 2003, Valiant Insurance Company Limited covered Combined Liability.
TESCO PLC
DIRECTORS REPORT
The Directors present their annual report to shareholders on the affairs of the Group, together with the audited consolidated financial statements of the Group for the 53 weeks ended 28 February 2004.
PRINCIPAL ACTIVITY AND BUSINESS REVIEW The principal activity COMPANYS SHAREHOLDERS The company is not aware of any ordinary shareholders with interests of 3% or more. DIRECTORS AND THEIR INTERESTS The names and biographical details of the present Directors are set out in the separately published Annual Review and Summary Financial Statement 2004.
of the Group is the operation of food stores and associated activities in the UK, Republic of Ireland, Hungary, Poland, Czech Republic, Slovakia, Thailand, South Korea, Taiwan and Malaysia. During the year, we entered the Turkish and Japanese markets. A review of the business is contained in the Annual Review and Summary Financial Statement 2004 which is published separately and, together with this document, comprises the full Tesco PLC Annual Report and Financial Statements.
GROUP RESULTS Group sales including VAT rose by 5,277m to 33,557m, representing an increase of 18.7%. Group underlying profit on ordinary activities before taxation, net loss on disposal of fixed assets, integration costs and goodwill amortisation was 1,708m, compared with 1,401m for the previous year, an increase of 21.9%. Including net loss on disposal of fixed assets, integration costs and goodwill amortisation, Group profit on ordinary activities before taxation was 1,600m. The amount allocated to the employee profit-sharing scheme this year was 57m as against 51m last year. After provision for tax of 498m, minority interests of 2m and dividends, paid and proposed, of 516m, profit retained for the financial year amounted to 584m. DIVIDENDS The Directors recommend the payment of a final
Mr R W P Brasher, Mr E M Davies, Mr K J Hydon and Mr D E Reid were appointed to the Board in the last twelve months and, as required by the Articles of Association, offer themselves for election. Mr C L Allen, Mr P A Clarke, Dr H Einsmann, Ms V Morali and Mr G F Pimlott retire from the Board by rotation and, being eligible, offer themselves for re-election. The interests of Directors and their immediate families in the shares of Tesco PLC, along with details of Directors share options, are contained in the Report of the Directors on Remuneration set out on pages 13 to 23. At no time during the year did any of the Directors have a material interest in any significant contract with the company or any of its subsidiaries.
EMPLOYMENT POLICIES The Group depends on the skills and commitment of its employees in order to achieve its objectives. Staff at every level are encouraged to make their fullest possible contribution to Tesco success.
A key business priority is to deliver an Every little helps shopping experience for customers. Ongoing training programmes seek to ensure that employees understand the Groups customer service objectives and strive to achieve them. The Groups selection, training, development and promotion policies ensure equal opportunities for all employees regardless of gender, marital status, race, age, sexual orientation or disability. All decisions are based on merit. Internal communications are designed to ensure that employees are well informed about the business of the Group. These include a UK staff magazine called one team and the equivalents in our overseas businesses, videos and staff brieng sessions. Staff opinions are frequently researched through surveys and store visits. We work to deliver Every little helps for all our people across the Group.
dividend of 4.77p per ordinary share to be paid on 25 June 2004 to members on the Register at the close of business on 30 April 2004. Together with the interim dividend of 2.07p per ordinary share paid in November 2003, the total for the year will be 6.84p compared with 6.20p for the previous year, an increase of 10.3%.
TANGIBLE FIXED ASSETS Capital expenditure amounted to 2,285m compared with 2,134m the previous year. In the Directors opinion, the properties of the Group have a market value in excess of the book value of 12,009m included in these financial statements. SHARE CAPITAL The authorised and called-up share capital of the company, together with details of the shares allotted during the period, are shown in note 24 to the financial statements. Details of investments held in Tesco PLC are shown in note 14 in the financial statements.
TESCO PLC
Employees are encouraged to become involved in the financial performance of the Group through a variety of schemes, principally the Tesco employee profit-sharing scheme, the savingsrelated share option scheme (Save-As-You-Earn) and the Partnership Share Plan (Buy-As-You-Earn).
POLITICAL AND CHARITABLE DONATIONS Contributions to community projects and to charities amounted to 3,953,582 (2003 3,509,398). Including gifts in kind total donations amounted to 11,048,435 (2003 10,496,651).
There were no political donations (2003 nil). During the year the Group made contributions of 44,713 (2003 - 31,282) in the form of sponsorship for political events: Labour Party 14,368; Conservative Party 5,502; Liberal Democrat Party 6,340; Plaid Cymru 1,300; Fianna Fil 1,203; Usdaw 16,000.
SUPPLIER PAYMENT POLICY Tesco PLC is a signatory to the CBI Code of Prompt Payment. Copies of the Code may be obtained from the CBI, Centre Point, 103 New Oxford Street, London WC1A 1DU. Payment terms and conditions are agreed with suppliers in advance.
Tesco PLC has no trade creditors in its balance sheet. The Group pays its creditors on a pay on time basis which varies according to the type of product and territory in which the suppliers operate.
GOING CONCERN The Directors consider that the Group and the company have adequate resources to remain in operation for the foreseeable future and have therefore continued to adopt the going concern basis in preparing the financial statements. As with all business forecasts, the Directors statement cannot guarantee that the going concern basis will remain appropriate given the inherent uncertainty about future events. AUDITORS A resolution to re-appoint PricewaterhouseCoopers LLP as auditors of the company will be proposed at the Annual General Meeting. ANNUAL GENERAL MEETING A separate circular accompanying the annual accounts explains the special business to be considered at the Annual General Meeting on 18 June 2004.
By Order of the Board Ms Lucy Neville-Rolfe Secretary 19 April 2004 Tesco PLC Registered Number: 445790
TESCO PLC
CORPORATE GOVERNANCE
STATEMENT OF APPLICATION OF PRINCIPLES OF THE COMBINED CODE The Group is committed to high standards of corporate
governance. This statement describes the manner in which the company has applied the principles set out in the 1998 Combined Code on Corporate Governance.
DIRECTORS AND THE BOARD For the year ended February 2004, the Board of Tesco PLC comprised eight Executive Directors and eight independent Non-executive Directors. During the last year, the Chairman, Mr J A Gardiner, had primary responsibility for running the Board. Mr D E Reid took up position as Chairman following Mr J A Gardiners retirement in April 2004. The Chief Executive, Sir Terry Leahy, has executive responsibilities for the operations, results and strategic development of the Group. Clear divisions of accountability and responsibility exist and operate effectively for these positions. Mr G F Pimlott was the senior Non-executive Director for the year ended February 2004. Mr R F Chase became Deputy Chairman and senior independent Non-executive Director in March 2004 and Mr G F Pimlott remains a Non-executive member of the Board and will retire in May 2005. The Board ensures that no one individual or group dominates the decision-making process.
members in advance of Board meetings. All Directors have access to the services of the Company Secretary and may take independent professional advice at the companys expense in the furtherance of their duties. New appointments receive appropriately tailored inductions and the need for Director training is regularly assessed by the company.
GOVERNANCE STRUCTURES The following paragraphs describe the key governance structures operating in the Group under the overall direction of the Board. The chief governance structures are underpinned by the attendance of Non-executive Directors who provide an independent insight to governance.
Executive Committee The Board delegates day-to-day and business management control to the Executive Committee, which comprises the Executive Directors and the Company Secretary. This meets formally almost every week and its decisions are communicated throughout the Group on a regular basis. The Executive Committee is responsible for implementing Group policy, the monitoring and performance of the business and reporting to the full Board thereon. Nominations Committee Appointments to the Board for both Executive and Non-executive Directors are the responsibility of the Nominations Committee. For the recruitment of a new Chairman the Committee employed the services of an external recruitment consultant to advise and oversee the process. The consultant interviewed all Board members individually and confidentially to understand their views on the role of the Chairman. Internal and external candidates were considered and finally a report was produced for the Nomination Committees consideration and decision. At the resulting meeting the Board gave full support to the appointment of Mr D E Reid as Chairman and this was discussed with major shareholders. For the year ended February 2004, the Committee was chaired by Mr J A Gardiner and the members are set out in the table on page 12. As from 2 April 2004, Mr D E Reid chairs the Nominations Committee (except in relation to his own position). As exemplified by the section on Directors and their interests within the Directors report on pages 6 and 7, the companys Articles of Association ensure that, on a rotational basis, Directors resign every three years and, if they so desire and are eligible, offer themselves for re-election. All new appointments will be submitted for election in their first year. The Board has been through a period of change, of both Non-executive and Executive Directors. Mr G F Pimlott, who has served ten years, has been
Further changes to the Board were announced during the reporting year as part of a process to ensure the balance of the Board reects the changing needs of the business. Mr E M Davies and Mr K J Hydon joined as independent Non-executive Directors in July 2003 and February 2004 respectively. Both Mr J Gildersleeve and Mr R S Ager retired as Executive Directors from the Board in February 2004. In March 2004, Mr R W P Brasher joined the Executive Board as Commercial Director and Ms L Neville-Rolfe took up the position of Group Company Secretary. The Board requires that all Non-executive Directors be free from any relationship with the executive management that could be considered to hinder their independent judgement. In the Boards view, all Non-executive Directors meet this requirement. The full Board meets at least ten times a year and annually devotes two days to a conference with senior executives on longer-term planning, giving consideration both to the opportunities and risks of future strategy. The Board manages overall control of the Groups affairs through a schedule of matters reserved for its decision. These include the approval of financial statements, major acquisitions and disposals, authority levels for expenditure, treasury policies, risk management, Group governance policies and succession plans for senior executives. To enable the Board to make considered decisions, a written protocol exists and has been communicated to senior managers ensuring that relevant information is made available to all Board
TESCO PLC
instrumental in facilitating that process and providing continuity throughout a period of transition. Mr G F Pimlott will retire from the Board in May 2005. It is the Boards view that he remains an independent member of the Board until then and will submit himself for re-election as required by the Articles of Association. Remuneration Committee The Remuneration Committee, composed entirely of independent Non-executive Directors, is chaired by Mr C L Allen. The members are set out in the table on page 12. The responsibilities of the Remuneration Committee, together with an explanation of how it applies the Directors remuneration principles of the Combined Code, are set out in the Report of the Directors on Remuneration on pages 13 to 23. Audit Committee The Board has an Audit Committee, chaired by Mr G F Pimlott and consisting entirely of independent Nonexecutive Directors, which meets a minimum of three times a year. Membership of the Audit Committee is set out in the table on page 12. In July 2004, the chairmanship of the Committee will pass to Mr K J Hydon who brings relevant and recent financial experience. The Committees terms of reference are reviewed annually and represent current best practice. Its primary responsibilities include monitoring the system of internal control throughout the Group, approving the Groups accounting policies and reviewing the interim and annual financial statements before submission to the Board. The Committee considers that the company complies substantially with the Revised Combined Code issued in 2003. The company is taking any necessary action in order to be fully compliant with the new code before it comes into effect next reporting year. The Audit Committee has satisfied itself that the company complies with the principles set out in the Smith Report.
INTERNAL CONTROL AND RISK MANAGEMENT The Board has overall
are designed to provide reasonable, but not absolute assurance, against material misstatement or loss. In addition to the Audit Committee, the company has in place two further committees designed to monitor standards and manage certain risks. These have been delegated to executive management and are described below. For certain joint ventures, the Board places reliance upon the systems of internal control operating within our partners infrastructure and the obligations upon partners Boards relating to the effectiveness of their own systems. Compliance Committee The Board delegates its responsibilities for compliance with all necessary laws and regulations to the Compliance Committee. This Committee has established a schedule for the regular review of the Groups operational activities to ensure compliance with accepted practices and policies. The Committee, comprising two Executive Directors, the Company Secretary and three members of senior management, normally meets four times a year. Corporate Social Responsibility (CSR) Committee The Group has an established cross-functional CSR Committee that meets a minimum of four times a year. The CSR Committee is chaired by the Group Company Secretary, and its membership is made up of senior managers from all parts of the business. One of its objectives is to identify threats and opportunities for the coming year and to highlight emerging issues. The CSR Committee uses CSR Key Performance Indicators (KPIs) to track performance quarterly. The KPIs feed directly into the Steering Wheel monitoring system explained below and thus contribute to the overall monitoring of Group performance and control evaluation by the Board. Regular reports are made to the Executive Committee on CSR matters. The risk management policies, procedures and monitoring methods described below equally apply to the companys CSR activities, including the management of social, ethical and environmental risks, as advised by the ABI guidelines on social responsibility. The Board recognises that many investors and other stakeholders take an interest in how companies are managing non-financial risks. The company endeavours to provide detailed information on its approach to corporate responsibility and its policies in the annual Tesco Corporate Social Responsibility Review, and on the website www.tesco.com/everylittlehelps Internal Control Environment The Group has a five-year rolling business plan. Every area and individual in the business is driven
responsibility for internal control, including risk management, and sets appropriate policies having regard to the objectives of the Group. Executive management has the responsibility for the identification, evaluation and management of financial and nonfinancial risks and for the implementation and maintenance of control systems across the Group in accordance with the Boards policies and in line with best practice identified in the Turnbull Report. The Board, through the Audit Committee, has reviewed the effectiveness of the systems of internal control for the accounting year and the period to the date of approval of the financial statements, although it should be understood that such systems
TESCO PLC
CORPORATE GOVERNANCE CONTINUED

by objectives that are derived from the business plan. The plan covers both revenue and capital expenditure and forms the basis of business plans for all our business entities. From this the Board, together with monitoring regimes based upon our Steering Wheel, agrees the annual revenue and capital budgets. The Steering Wheel is the term used to describe our balanced scorecard approach, which we believe is the best way to achieve results for our shareholders. It sets out a broad range of targets under quadrant headings of customers, operations, people and finance. This allows the business to be operated and monitored on a balanced basis with due regard for all stakeholders. The Executive Committee undertakes a formal review of progress on a quar terly basis and any resulting actions considered appropriate are communicated throughout the business. The capital investment programme is subject to formalised review procedures requiring key criteria to be met. All major initiatives require business cases to be prepared, normally covering a minimum period of five years. Post-investment appraisals are also carried out. Risk management process At the highest level, the Board considers strategic risk every time it meets. The two-day Board Conference, referred to earlier, considers where future opportunities and risks lie and helps shape our corporate strategy going forward. Accountabilities for managing operational risks are clearly assigned to line management. Internal controls have been developed over all risks in line with the risk appetite determined by the Board and are subject to review. Formal risk assessments are carried out routinely throughout the UK and international businesses. Procedures exist to ensure that significant risks and control failures are escalated to senior management and the Board, as necessary, on a daily, weekly and periodic basis. Monitoring The monitoring of strategic and operational risks is the responsibility of the Board and line managers respectively. The Board maintains the Key Risk Register and considers during formal risk assessments whether the actions being taken in mitigation are sufficient. The internal audit function also operates on a risk-based approach, helping managers with their risk responsibilities and advising on appropriate controls. Annual statements received from CEOs further support the monitoring of key subsidiary operations. These statements confirm that the Boards governance policies have been adopted in practice and spirit. Overall, the Audit Committee seeks to ensure that the whole management process provides adequate control over all major risks to the Group. This is achieved through consideration of regular reports from internal and external audit, alongside discussions with senior managers. Other specialist functions within the Group, notably Trading Law and Technical and Company Secretariat, provide assurance and advice on health and safety, regulatory and legal compliance and social, ethical and environmental issues (SEE).These functions report their findings on a regular basis to the Compliance Committee. PricewaterhouseCoopers LLP, the companys external auditors, contribute a further independent perspective on certain aspects of the internal financial control system arising from their work. Independence is strengthened by the requirement to rotate audit par tners every five years. The engagement and independence of auditors is considered annually by the Audit Committee which recommends their selection to the Board. Communication A programme of communication exists and is constantly being developed to ensure that all staff are aware of the parameters that constitute acceptable business performance and the expectations of the Board in managing risk. This provides clear definition of the Groups purpose and goals, accountabilities and the scope of permitted activities of companies, executive functions and individual staff. Risks and opportunities The company manages a broad range of nancial and non-nancial risks, including those relating to CSR responsibilities. The construction of the Key Risk Register takes into account matters raised in the CSR assessment. In the Boards view, there are sufcient controls in place to manage SEE risks. Customer focus is fundamental to delivering the overall strategy and the way risk is managed. Business practices centre on serving the customer and in meeting those challenges the company recognises its responsibility to deliver safe, quality products at the right price. All companies have to face ethical dilemmas in the normal course of business and the companys approach comes from the Tesco Values. The Values set out the standards that the Board wish to uphold in how it treats its people. These are supported by Codes of Ethics and govern the relationships between the company and employees, suppliers and contractors. The Compliance Committee regularly monitors adherence to these codes. The company is a signatory to the DTI Code of Conduct and has met fully its obligations for implementing the Code.
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TESCO PLC
Managing health and safety and supply chain standards Health and safety standards are very impor tant. The company is committed to providing a safe shopping and working environment for customers, staff and contractors. The company has established policies, procedures and training to identify and minimise the risks inherent in a retail and distribution business. The safety of our products is regarded as the highest priority. The company has established, over many years, a comprehensive due diligence process supported by technical and product development standards and procedures. This assurance covers staff training, providing guidance for and auditing of suppliers, to ensure they supply quality products for the Tesco brand. The company has conducted a comprehensive risk analysis of products, suppliers and factories upon which our audit programme is based. Auditing is carried out on both a routine and unannounced basis. Supply chain risks can include, for example, a failure of standards relating to product safety, quality, animal welfare and worker welfare. Technical, due diligence and crisis management procedures are regularly reviewed in the light of the latest scientic research and expert opinion, to ensure that these risks are managed effectively. In-house experts are used as well as external advisors to look for and analyse emerging issues, so that appropriate action can be taken.
RELATIONS WITH STAKEHOLDERS Tesco listens to customers, staff,
The Board regards the Annual General Meeting as an opportunity to communicate directly with all shareholders. The whole Board attends the meeting and is available to answer questions from shareholders present. Each year end, every shareholder may choose to receive a full Annual Report and Financial Statements or an abbreviated Annual Review and Summary Financial Statement. At the half-year, all shareholders receive an Interim Report. These reports, together with publicly-made trading statements, are available on the Groups website, www.tesco.com/corporateinfo
PENSION FUNDS The UK pension scheme is a defined benefit scheme which has over 127,000 members and over 10,000 pensioners. Note 27 in the Report and Accounts sets out the Groups pension arrangements in detail.
For the year ended February 2004, the Trustee Company Board comprised one Executive Director, Mr R S Ager, four senior managers and four members appointed from staff and pensioners. Following Mr R S Agers retirement, the new Group Company Secretary, Ms L Neville-Rolfe, will take up his role on the Trustee Company Board. Management of the assets is delegated to a number of independent fund managers. These fund managers have discretion to invest in shares of Tesco PLC, but only to the proportional weighting of the shares in the total market. Details of pension commitments are set out in note 27 to the financial statements on pages 49 to 51.
PROVISIONS IN THE COMBINED CODE Throughout the year ended
investors, Non-Governmental Organisations, suppliers and other key stakeholders. Understanding what customers want is vital to the business and the Board are committed to continuing this listening, and extending it to other important stakeholders. The Board recognises and attaches a high impor tance to maintaining a good dialogue with shareholders in order to understand shareholder views and communicate appropriately any signicant company developments.This shareholder communication is mainly co-ordinated by the Investor Relations department. During the year, Executive Directors have met with 97 of the companys leading shareholders representing over 54% of the issued shares of the company. While the focus of dialogue is with institutional shareholders, to whom regular presentations are made on company direction, care is exercised to ensure that any price-sensitive information is released to all shareholders, institutional and private, at the same time, in accordance with the Financial Services Authority requirements.
28 February 2004, the company has been in compliance with all of the Code Provisions set out in Section 1 of the 1998 Combined Code on Corporate Governance, except as with regard to provision B.1.7 on the length of Directors service agreements, details of which are set out in the Report of the Directors on Remuneration on page 16. The Remuneration Committee has reviewed these contracts and the Board is moving to one-year contracts in line with market practice.
TESCO PLC
11
CORPORATE GOVERNANCE CONTINUED

Nominations Committee Remuneration Committee (c) Audit Committee (d)
BOARD COMMITTEE MEMBERSHIP AS AT 28 FEBRUARY 2004
Independent Directors Mr J A Gardiner Mr G F Pimlott Mr C L Allen Mr R F Chase Ms V Morali Dr H Einsmann Mr E M Davies (a) Mr K J Hydon (b) Executive Directors Sir Terry Leahy
(a) (b) (c) (d) Mr Mr Mr Mr E M Davies was appointed to the Board and the Nominations Committee and Audit Committee on 7 July 2003. K J Hydon was appointed to the Board and the Nominations Committee and Audit Committee on 23 February 2004. J A Gardiner and Sir Terry Leahy attended the Remuneration Committee meetings by invitation. J A Gardiner and Mr A T Higginson attended the Audit Committee meetings by invitation.
* * * * * * * * * * * * * * * * * *
From 2 April 2004, Mr D E Reid became Chairman of the Nominations Committee.
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TESCO PLC
REPORT OF THE DIRECTORS ON REMUNERATION

THE REMUNERATION COMMITTEE The Remuneration Committee
is governed by formal Terms of Reference agreed by the Board and is composed entirely of independent Non-executive Directors. No member of the Remuneration Committee has any personal nancial interest, other than as a shareholder, in the matters to be decided, and no day-to-day involvement in running the business of Tesco. The remuneration packages, including contract periods, of Executive Directors, are determined by the Remuneration Committee (the Committee). The Committee comprised Mr C L Allen (Chairman of the Committee), Dr H Einsmann, Mr G F Pimlott and Mr R F Chase who are all independent Non-executive Directors. The Committee met on nine occasions during the year. For the year ended 28 February 2004, Mr R S Ager was Secretary to the Committee and attended the meetings. From March 2004, this role was undertaken by the new Company Secretary, Ms L Neville-Rolfe. Mr J A Gardiner, Non-executive Chairman of the Group until 2 April 2004, and Sir Terry Leahy, Chief Executive of the Group, both attended the meetings at the invitation of the Committee. However, Directors do not attend the meetings when their own remuneration is being discussed. The Committee is supported by Mrs C M Chapman, Human Resources Director of Tesco Stores Ltd, and has appointed Deloitte & Touche LLP as an external, independent advisor. Deloitte & Touche LLP also provided advisory services in respect of Corporate tax planning, share schemes, pensions and international taxation to the Group during the year.
DIRECTORS REMUNERATION POLICY The Committee applies the following remuneration policy to all Executive Directors.
No changes have been made to basic pay policy. A summary of the policy is set out below. Further details of the current arrangements and proposed changes are provided in the following sections. Our executive remuneration policy will then combine the following key elements: Basic salaries based on the responsibilities, skills and experience of the individual against a benchmark determined by reference to other major FTSE 100 companies and other large retailers. Annual bonuses based on achieving stretching Earnings Per Share (EPS) growth targets and specic corporate objectives. Annual bonuses are paid part in cash and par t in shares with a compulsory deferral of the share-based bonus for three years. The share element is also subject to a measure of relative performance using an assessment of value delivered to shareholders compared to other global food retailers. This combination will replace the existing annual bonus plan. Further details are provided below. Awards of performance shares based on stretching threeyear Return On Capital Employed (ROCE) targets. The award is over shares which must be held for four years in total. This will replace the existing longer-term bonus based on EPS. Further details are provided below. In normal practice, Executive Directors would be expected to build and hold a shareholding with a value at least equal to their basic salary; full participation in the Performance Share Plan is conditional upon meeting this target. Par ticipation in the share option schemes requiring sustained growth in EPS. All Executive Directors will have 12 month notice periods.
Business success in a retail environment depends on the talents of the key team, but outstanding success comes from teamwork. Building and retaining that team at senior levels within Tesco is vital to success.The remuneration strategy for Executive Directors and other key executives has been tailored to emphasise the delivery of strong year-on-year earnings growth whilst at the same time ensuring efcient use of capital over the long-term, by providing executives with a signicant propor tion of performance-related remuneration delivered in Tesco shares over extended timescales. The Remuneration Committee has conducted a review of Executive Directors remuneration to ensure that this continues to support the business objectives of strong nancial progression and improvements in shareholder returns. As a result of this years review, a number of changes have been proposed to the short and long-term incentives which, subject to shareholder approval, will take effect in the year ending February 2005.
In line with the Combined Code on Corporate Governance, the Committee also ensures that the remuneration relationship between the Main Board and Senior Executives of the company below this level is appropriate. In particular, any exceptional salary arrangements or award of share options for Senior Executives are to be advised to the Committee.
TOTAL REMUNERATION The total remuneration levels of Executive
Directors are normally reviewed annually by the Committee, having regard to competitive market practice in the retail sector and in the context of the FTSE 100 companies, which are of a comparable size to Tesco. As part of the review process, the Committee has access to, and makes use of, external independent remuneration surveys.
TESCO PLC
13
REPORT OF THE DIRECTORS ON REMUNERATION CONTINUED

In the current year, the total remuneration package of Executive Directors comprised the following elements: base salary; short and long-term performance-related share awards via the Executive Incentive Scheme; performance-related share option awards via the Executive Share Option Scheme; benets (which comprise car benets, life assurance, disability and health insurance); pensions; and prot share (on the same terms as other UK employees). accept Non-executive appointments and retain the fees received, provided that these appointments are not likely to lead to conicts of interest.
COMPLIANCE The Committee is constituted and operated
In addition to the above elements of remuneration, Executive Directors who have completed one years service are also eligible to participate in the companys all-employee savings related share option scheme (SAYE), and Buy As You Earn (BAYE) on the same terms as all other UK employees. Subject to shareholder approval being received at the Annual General Meeting (AGM), changes will be made to the short and long-term incentive arrangements as set out in the following sections. The Committee considers that a signicant proportion of total remuneration should be performance-related and at risk of forfeiture. In addition, performance-related rewards should be delivered partly in shares to closely align the interests of shareholders and executives. In all cases, base salary currently constitutes approximately one-third of the total annual cash and share incentive oppor tunity for Executive Directors. In determining the balance between the xed and variable elements of the Executive Directors remuneration packages, the Committee has regard to market practice. All awards made to Executive Directors under the Executive Incentive Scheme and all options granted under the Executive Share Option Scheme are subject to the satisfaction of performance conditions, which are explained below. The Committee regularly reviews these performance conditions and considers that the proposed mix of performance conditions best supports the Groups business strategy and provides a set of broad-based and robust measures of managements effort and success in creating shareholder value. Tesco recognises that its Executive Directors are likely to be invited to become Non-executive directors of other companies and that such Non-executive duties can broaden experience and knowledge, which will benet Tesco. Therefore, Executive Directors are, subject to approval by the Board, allowed to
throughout the period in accordance with the principles outlined in the Listing Rules of the Financial Services Authority derived from Schedule A of the Combined Code. Following an assessment of the principles of Schedule B of the Revised Combined Code, the Committee has taken steps to ensure compliance. These steps, most notably changes to service contracts, are detailed on page 16. In framing the remuneration policy, full consideration has been given to the best practice provisions set out in Schedule B, annexed to the Listing Rules. The auditors report set out on page 25, covers the disclosures referred to in this report that are specied for audit by the Financial Services Authority. This report also complies with disclosures required by the Director Remuneration Report Regulations 2002. Details of Directors emoluments and interests, including executive and savings-related share options, are set out on pages 17 to 23. The following summarises the remuneration packages for Executive Directors. Copies of the Executive Directors contracts of employment are available for inspection by shareholders at the AGM or as required.
EXECUTIVE INCENTIVE SCHEME The company operates a performance-related incentive scheme designed to provide a competitive level of reward. Awards under the scheme are delivered in shares to further align the interests of Executive Directors and shareholders.
The Committee sets performance targets annually for the incentive scheme for each of the criteria noted below, conrms achievement of performance and awards to be made under the scheme and directs the general administration of the scheme. The Executive Committee has adopted a policy of extending executive incentive schemes to a wider body of senior executives within the Group using similar measures. Under the current system, long-term share bonuses are awarded annually for each of the Executive Directors, the maximum longterm share bonus is equivalent to 75% of salary. The long-term bonus is based on a combination of the following performance conditions:
1
The achievement of targets set each year for growth in EPS over that nancial year is the basis for 77% of the award. EPS has been chosen to reect the core focus of the Group on continuous and sustainable earnings growth.
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TESCO PLC
An assessment of total shareholder return is the basis for 15% of the award. The total shareholder return (share price growth and dividend performance) of the company at the end of the year, taking into account performance over the previous three and ve years, is compared to the total shareholder return of a selected peer group of UK and International companies, comprising Ahold, Carrefour, Metro, Safeway plc (UK), Safeway Inc. (US), J Sainsbury and Target (US). Total shareholder return has been chosen as it is a clear indicator of the value created for shareholders. The Committee considers a comparator group comprising large international food retailers as the most appropriate basis for assessing relative performance. An assessment of the progress towards the achievement of specic strategic corporate goals is the basis for 8% of the award.
In respect of the current year, the awards were long-term 75% and short-term 75% of salary for each Executive Director. Mr D E Reid was awarded 430,000, as part of a special bonus in respect of the development of the Groups international business. This amount has been sacriced in return for pension augmentation. Mr J Gildersleeve and Mr R S Ager were awarded bonuses of 150,000 each, which have been sacriced for pension augmentation. In addition to providing the opportunity to earn greater rewards for superior performance, the Executive Incentive Scheme further aligns the interests of shareholders and Executive Directors by helping them to build up a shareholding in Tesco. As outlined in the Directors Remuneration Policy section on page 13, the executive incentive arrangements will be restructured during the nancial year ending February 2005 to increase the link between rewards received and Tescos longerterm nancial goals. Annual performance will remain a key driver of the rebalanced arrangements, with the annual bonus structure being retained. The bonus will be delivered part in cash (which cannot be deferred) and part in Tesco shares, receipt of which will be deferred and conditional upon continuous employment with the company. The deferral period will now be compulsory and will be extended from two to three years. The maximum awards that can be made will be 100% of salary under the cash bonus and 75% of salary under the deferred shares element. The deferred share award will no longer be increased by any matching awards during the deferral period. The bonus will continue to be subject to stretching performance targets based on earnings per share growth and strategic objectives and in the case of the deferred share element, a measure of TSR as well, on a similar basis as the existing incentives. Participants will also be eligible to receive an award under the proposed Performance Share Plan (PSP), the level of which will be determined in relation to the achievement of ROCE objectives. This plan will replace the existing long-term incentive arrangements. Awards will be made over shares equal to 75% of salary. Awards will vest on a sliding scale according to the achievement of the ROCE targets measured over three years. The deferred shares must then be retained for a further 12 months. The proposed vesting schedule for PSP awards has been based on the companys targets for the next ve years regarding the efcient use of capital. Awards will vest on a straight-line basis;
Shares awarded have to be held for a period of four years, conditional upon continuous service with the company. The share equivalent of dividends, which would have been paid on the shares, is added to the award during the deferral period. Short-term share bonuses are awarded annually to each of the Executive Directors, the maximum short-term bonus payable is equivalent to 75% of salary. The bonus is based on a combination of the following performance conditions:
1
The achievement of targets set each year for growth in EPS over the relevant nancial year is the basis for 77% of the award. An assessment of achievement against specic strategic corporate goals is the basis for 23% of the award.
The bonus can be augmented by 50% if the participants elect for the trustees of the scheme to retain the shares awarded for a minimum period of two years, conditional upon continuous service with the company. The share equivalent of dividends, which would have been paid on the shares, is added to the award during the deferral period. The Executive Directors may choose to further extend the holding period for both the short and long-term shares by a further three years in each case. During this holding period, the shares held are increased by 12.5% at the beginning of each year, based on the scheme shares held and are conditional upon continuous employment with the company. This holding period may be extended subject to personal shareholding targets set by the Committee, equivalent to shares to the value of one times salary, being met by the Executive Directors.
TESCO PLC
15

only 25% of the award will vest for baseline performance. The maximum 100% of the award will vest for outstanding performance (ROCE improving to 11.5% over the next three years). The Remuneration Committee believes that this combination of robust annual EPS and ROCE targets, that are both challenging and appropriate, provide a sound framework for aligning executive interests with those of shareholders. The rebalanced executive incentive arrangements will ensure continued emphasis on strong annual performance combined with long-term executive share ownership, with a better link between the incentives received and shareholder value delivered.
SHARE OPTIONS Executive Directors are included in Executive Share Option Schemes (ESOS). Executive options granted since 2000 may only be exercised subject to the achievement of EPS growth of at least RPI plus 9% over three years. BAYE Since January 2002, the Group has operated the partnership shares element of an Inland Revenue approved share investment plan for the benet of employees, including Executive Directors. Under this scheme, employees save four-weekly to buy shares at market value in Tesco PLC. PENSIONS Executive Directors are members of the Tesco PLC Pension Scheme which provides a pension of up to two-thirds of base salary on retirement, normally at the age of 60, dependent upon service. The scheme also provides for dependants pensions and lump sums on death in service. The scheme is a dened benet pension scheme, which is approved by the Inland Revenue. SERVICE AGREEMENTS In response to shareholder feedback and in line with best practice, the Committee has reviewed Executive Director Service Agreements.
The 1994 Executive Share Option Scheme and the 1994 International Executive Share Option Scheme are due to expire during 2004. It is proposed that the two existing schemes and the 1996 Tesco Unapproved Executive Share Option Scheme be replaced with one new discretionary share option scheme. The key features of the current share option schemes will be retained and there will be no retesting of performance. Share options are an important part of the incentive framework for senior management of Tesco, and forthcoming accounting changes are being fully evaluated. In the meantime, the Committee considers the continuation of share option plans to be in the best interests of shareholders.
SAYE Since 1981, the Group has operated an Inland Revenue approved savings-related share option scheme for the benet of employees including Executive Directors.
It is proposed that Sir Terry Leahy, Mr P A Clarke, Mr A T Higginson, Mr T J R Mason and Mr D T Potts will have new service agreements with entitlement to notice of 12 months by the company and six months notice by the Executive. Mr R W P Brasher, who was appointed on 15 March 2004 has the same service agreement. If an Executive Directors employment is terminated (other than pursuant to the notice provisions in the service agreement or by reason of resignation or unacceptable performance or conduct) the company will pay, by way of liquidated damages, a sum equal to one years salary and one years average annual bonus (calculated as the average of the two most recent nancial years). The termination payment is subject to the Executive Director entering into restrictive covenants, to apply for a sixmonth period after such termination, so as to protect the goodwill of the business. The company will apply mitigation to termination payments, whilst reecting its policy of rewarding loyalty and recognising long service. Payments will cease on the date the Executive Director starts alternative employment. If the termination occurs within one year of retirement, the termination payment would be reduced accordingly. The Committee has agreed that, in future, new appointments of Executive Directors will normally be on a notice period of 12 months. The Committee reserves the right to vary this period to 24 months for the initial period of appointment and for the notice period to then revert to 12 months.
Under this scheme, employees save on a four-weekly basis via a bank/building society, with an option to buy shares in Tesco PLC at the end of a three or ve-year period, at a discount of up to 20% of the market value. There are no performance conditions attached to SAYE options.
SHARES IN SUCCESS Since March 2002 the Group has operated
a UK prot-sharing scheme (Shares in Success) for the benet of employees, including Executive Directors.The scheme is available to employees with at least one years service at the Groups year end. Shares in the company are allocated to participants in the scheme on a pro-rata basis to base salary earned, up to Inland Revenue approved limits (currently 3,000 per annum). The amount of prot allocated to the scheme is determined by the Board, taking account of company performance.
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TESCO PLC
NON-EXECUTIVE DIRECTORS The remuneration of the Non-
PERFORMANCE GRAPH The graph highlights the Groups total
executive Directors is determined by the Board as a whole, on the recommendation of the Executive Committee, after considering external market research. Non-executive Directors have letters of appointment, and their appointment can be terminated by either party without notice. Each appointment is subject to review every three years. Nonexecutive Directors receive a basic fee plus an additional sum in respect of committee membership. To reect their additional responsibilities, supplementary fees are also paid to Nonexecutives who chair committees and to the senior Nonexecutive Director. Mr D E Reid has the benet of the use of a company car.
shareholder return performance (i.e. share price movements plus dividends reinvested) over the last ve nancial years, relative to the FTSE 100 index of companies. This index has been selected to provide an established and broad-based comparator group of retail and non-retail companies of similar scale to Tesco, against which the Groups TSR performance can be measured.
Tesco
150
100
FTSE
50 Feb 99 Feb 00 Feb 01 Feb 02 Feb 03 Feb 04

TOTAL S HAREHOLDER RETU RN (TS R)
Tables 1 to 6 are audited information.

TABLE 1 Directors emoluments
Fixed emoluments Salary 000 Benets 000
TSR is the notional return from a stock or index based on share price movements and declared dividends
Performance-related emoluments Prot-sharing 000 Short-term 000 Long-term 000
Total 2004 000
Total 2003 000
Mr J A Gardiner Sir Terry Leahy Mr D E Reid (c) Mr R S Ager (b) Mr C L Allen Mr R F Chase Mr P A Clarke Mr E M Davies (a) Dr H Einsmann Mr J Gildersleeve (b) Mr A T Higginson Mr K J Hydon (a) Mr T J R Mason Mrs V Morali Mr G F Pimlott Mr D T Potts
396 955 691 463 47 49 531 28 44 614 538 1 538 44 72 531 5,542
35 36 89 37 65 96 37 12 34 441
3 3 3 3 3 3 3 3 24
1,091 821 679 619 851 619 619 619 5,918
892 1,120 452 439 597 462 509 474 4,945
431 2,977 2,724 1,634 47 49 1,657 28 44 2,161 1,659 1 1,681 44 72 1,661 16,870
427 2,838 2,610 1,425 41 28 1,431 36 1,928 1,513 1,561 36 59 1,442 15,375
(a) Appointed during the year. (b) Retired from the Tesco Group in March 2004. Mr R S Ager and Mr J Gildersleeve were awarded bonuses of 150,000 each, which have been sacriced in return for pension augmentation. (c) Mr D E Reid has sacriced an amount of 430,000 from his long-term bonus relating to overseas business growth in return for pension augmentation. Mr D E Reid resigned as an Executive Director in December 2003 and was appointed Non-executive Chairman in April 2004. The performance criteria set out on pages 14 to 16 is audited information.
TESCO PLC
17

TABLE 2 Gains made on share options
Number of shares at exercise price (pence) Price at exercise (pence) Value realisable 2004 000 2003 000
70.0
98.3
151.7
176.7
178.0
205.0
Total
Sir Terry Leahy Mr D E Reid Mr R S Ager Mr P A Clarke Mr J Gildersleeve Mr A T Higginson Mr T J R Mason* Mr D T Potts
Date of grant
11,427
10.06.1997
523,728 223,728 122,034

3..07.1999
601,305 198,669
07.10.2000
18,000
21.05.2001
15,000
28.01.2002
9,888
26.06.2003
523,728 836,460 122,034 241,557
214.75 241.30 214.75 244.00
610 879 142 209
2,422
* Includes Mrs F M Mason
The value realisable from shares acquired on exercise is the difference between the fair market value at exercise and the exercise price of the options, although the shares may have been retained. Where individual Directors exercised options on different dates, the price at exercise shown represents an average of the prices on these dates weighted to the number of options exercised. In the case of Mr D E Reid, all of the options at 70.0p were exercised at 59.7p as targets related to growth in earnings per share in accordance with ABI guidelines, have been achieved. The share price at 28 February 2004 was 257.5p. The share price during the 53 weeks to 28 February 2004 ranged from 159.0p to 262.0p. The performance criteria for share options set out on page 16 is audited information.
TABLE 3 Pension details of the Directors

Increase in accrued pension during the year (net of ination) 000 Transfer value of previous column at 28 February 2004 000 Transfer value of total accrued pension at 22 February 2003 000 Transfer value of total accrued pension at 28 February 2004 000
Age at 28 February 2004
Years of company service
Total accrued pension at 28 February 2004 (a) 000
Increase in accrued pension during the year 000
Increase in transfer value less Directors contributions 000
Sir Terry Leahy (b) Mr D E Reid (c) Mr R S Ager (e) Mr P A Clarke Mr J Gildersleeve (e) Mr A T Higginson (d) Mr T J R Mason Mr D T Potts
48 57 58 43 59 46 46 46
25 19 18 29 39 6 22 31
433 409 287 200 404 112 223 222
50 38 30 31 34 25 26 34
39 27 23 26 23 22 20 29
471 1,531 390 191 423 181 163 238
2,554 5,273 3,910 941 6,113 545 1,204 1,197
3,801 8,010 4,844 1,447 7,273 908 1,802 1,833
1,247 2,737 934 506 1,160 363 598 636
(a) The accrued pension is that which would be paid annually on retirement at 60, based on service to 28 February 2004. (b) Sir Terry Leahy is entitled to retire at any age from 57 to 60 inclusive, with an immediate pension of two-thirds of base salary. Part of his pension may be provided on an unfunded basis within a separate unapproved arrangement. (c) Mr D E Reid retired early on 31 December 2003. The accrued total pension shown is his pension immediately after retirement. In addition, Mr D E Reid sacriced 430,000 of a bonus payment in return for pension augmentation. This pension augmentation has been taken into account for the accrued pension and transfer values at 28 February 2004. (d) Part of Mr A T Higginsons benets, in respect of pensionable earnings in excess of the earnings limit imposed by the Finance Act 1989, are provided on an unfunded basis within a separate unapproved arrangement. (e) As disclosed in Table 1, Mr R S Ager and Mr J Gildersleeve each sacriced 150,000 of bonus for pension augmentation. The actual augmentations took place after 28 February 2004 and are therefore not included in the table above. All transfer values have been calculated in accordance with Actuarial Guidance Note GN11.
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TESCO PLC
TABLE 4 Share options held by Directors and not exercised at 28 February 2004
Executive share option schemes (1984), (1994) and (1996) 104.0 151.7 (a) 176.7 164.0 Number of shares at exercise price (pence) 178.0 179.4 173.0 Sub-total
Sir Terry Leahy Mr D E Reid Mr R S Ager Mr P A Clarke Mr J Gildersleeve Mr A T Higginson Mr T J R Mason Mr D T Potts
Date exercisable
248,256
13.10.1998
120,660 299,904 504,999

07.10.2000
89,433 150,564 373,584 149,076

21.05.2001
126,832 90,245 26,831 29,946 56,100 63,415 63,415 38,756

30.09.2001
149,171 146,991 364,092 255,796 288,730

28.01.2002
425,827
24.05.2002
228,901 117,920 36,994 277,170 73,988 76,301 87,861 199,827

30.11.2002
724,649 633,992 602,333 454,107 1,149,743 513,300 556,148 527,313
Number of shares at exercise price (pence) Sub-total b/f 209.5 205.0 247.0 259.0 197.5(b) Total
Date exercisable
724,649 633,992 602,333 454,107 1,149,743 513,300 556,148 527,313
17,673 182,528 77,683

20.04.2003
780,487 604,878 390,243 360,975 517,073 419,512 419,512 360,975

26.06.2003
647,773 502,024 323,886 299,595 429,149 348,178 359,678 299,595

26.04.2004
642,471 498,069 321,236 328,185 425,483 358,301 373,451 328,185

15.04.2005
939,747 707,848 455,696 501,266 604,557 523,544 540,494 501,266

14.04.2006
3,752,800 2,946,811 2,275,922 2,021,811 3,126,005 2,162,835 2,249,283 2,017,334
(a) Date of expiry is seven years from date exercisable, with the exception of the 151.7p options which expire four years from date exercisable. (b) Options granted in the year (Mid-market price on date of grant 202.75p).
The performance criteria for share options set out on page 16 is audited information.
TABLE 5 Share options held by Directors and not exercised at 28 February 2004
Savings-related share option scheme (1981) As at 23 Feb 2003 Granted(a) Exercised Number of shares As at 28 Feb 2004 Exercise price pence 2004 000 Value realisable 2003 000
7,676 5,260 10,573 9,164 5,127 7,676 10,745 5,441
1,625 946 1,625 1,625 1,625 1,625
4,963 1,488
9,301 5,260 6,556 9,301 5,127 9,301 12,370 7,066
151.0-198.0 151.0-198.0 151.0-198.0 151.0-198.0 151.0-198.0 151.0-198.0 151.0-198.0 159.0-198.0
5 2
3 2 4 23
(a) Options granted include new family interests that fall to be reported during the year.
The subscription price for options granted during the year under the savings-related share option scheme was 195.0p and the options mature in either 2007 (three-year scheme) or 2009 (ve-year scheme). The mid-market price at the date of the grant was 238.5p. The shares relating to options exercised in the year were all retained.
TESCO PLC
19

TABLE 6 Directors interests in the long-term incentive plan
No of shares at 22 Feb 2003 No of shares at 28 Feb 2004 Value vested 000 MMP on vesting (p)
Name
Cycle ending
Award date
Shares awarded
Shares vested
Vesting date
Sir Terry Leahy
2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006 2007
13.05.97 16.04.99 08.05.00 10.04.02 11.05.98 08.05.00 11.04.01 09.04.03 16.04.99 11.04.01 10.04.02 09.04.03 13.05.97 16.04.99 08.05.00 10.04.02 11.05.98 08.05.00 11.04.01 09.04.03 16.04.99 11.04.01 10.04.02 09.04.03 13.05.97 16.04.99 08.05.00 10.04.02 11.05.98 08.05.00 11.04.01 09.04.03 16.04.99 11.04.01 10.04.02 09.04.03
103,576 150,180 88,975 338,137 68,554 156,712 145,189 82,922 101,628 223,707 95,284 135,157 75,010 262,137 62,995 132,113 112,523 74,629 78,762 173,427 70,425 95,636 50,404 169,067 46,581 88,775 72,593 52,807 50,812 111,853
16,577 24,035 2,772 10,534 10,971 25,080 4,523 523,938 13,271 16,263 6,970 329,887 15,249 21,630 2,336 8,165 10,082 21,142 3,506 394,647 11,943 12,602 5,403 248,480 11,270 15,303 1,570 5,266 7,453 14,207 2,261 254,064 8,450 8,130 3,485 159,966
120,153 174,215 110,533 156,787 77,346 270,302 73,077 153,255 116,029 394,647 86,572 91,364 178,830 248,480 81,695 110,939
91,747 348,671 79,525 181,792 149,712 523,938 96,193 117,891 230,677 329,887 51,974 174,333 54,034 102,982 74,854 254,064 61,257 58,942 115,338 159,966
303 440 283 402 198 693 187 393 297 1,012 222 234 458 637 206 280
24.02.04 24.02.04 08.05.04 10.04.04 11.05.05 08.05.05 11.04.05 09.04.05 16.04.06 11.04.06 10.04.06 09.04.07 05.01.04 05.01.04 05.01.04 05.01.04 05.01.04 05.01.04 05.01.04 05.01.04 05.01.04 05.01.04 05.01.04 05.01.04 24.02.04 24.02.04 08.05.04 10.04.04 11.05.05 08.05.05 11.04.05 09.04.05 16.04.06 11.04.06 10.04.06 09.04.07
252.38 252.38 256.38 256.38 256.38 256.38 256.38 256.38 256.38 256.38 256.38 256.38 256.38 256.38 252.38 252.38
Mr D E Reid
2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006 2007
Mr R S Ager
2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006 2007
Date of award Award price (p)
13.05.97 126.83
11.05.98 186.66
16.04.99 168.83
08.05.00 174.00
11.04.01 259.25
10.04.02 248.00
09.04.03 197.25
20
TESCO PLC
TABLE 6 Directors interests in the long-term incentive plan continued

Name
Cycle ending
Award date
Shares awarded
Shares vested
Vesting date
Mr P A Clarke
2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2007
13.05.97 08.05.00 11.04.01 10.04.02 11.05.98 08.05.00 11.04.01 09.04.03 16.04.99 10.04.02 09.04.03 13.05.97 16.04.99 08.05.00 10.04.02 11.05.98 08.05.00 11.04.01 09.04.03 16.04.99 11.04.01 10.04.02 09.04.03 16.04.99 08.05.00 10.04.02 11.04.01 09.04.03 16.04.99 11.04.01 10.04.02 09.04.03
30,028 36,573 47,001 172,727 20,443 57,352 67,149 18,570 114,274 90,104 124,618 67,162 223,934 59,551 118,293 96,189 68,810 67,327 148,152 93,791 51,734 188,576 78,039 51,789 54,626 124,759
4,805 1,139 5,380 3,271 9,176 2,092 279,469 3,560 175,962 14,421 19,943 2,092 6,975 9,529 18,929 2,996 337,058 11,012 10,774 4,615 212,222 15,009 1,611 5,874 2,431 291,891 8,287 8,740 3,887 183,784
34,833 47,001 18,570 104,525 144,561 108,800
37,712 178,107 23,714 66,528 69,241 279,469 117,834 175,962 69,254 230,909 69,080 137,222 99,185 337,058 79,822 78,101 152,767 212,222 53,345 194,450 80,470 291,891 60,076 63,366 128,646 183,784
88 94 37 264 365 275
24.02.04 08.05.04 09.04.03 10.04.04 11.05.05 08.05.05 11.04.05 09.04.05 09.04.03 10.04.06 09.04.07 24.02.04 24.02.04 08.05.04 10.04.04 11.05.05 08.05.05 11.04.05 09.04.05 16.04.06 11.04.06 10.04.06 09.04.07 24.02.04 08.05.04 10.04.04 11.04.05 09.04.05 16.04.06 11.04.06 10.04.06 09.04.07
252.38 199.50 199.50 252.38 252.38 252.38
Mr J Gildersleeve
2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006 2007
Mr A T Higginson
2004 2004 2004 2005 2005 2006 2006 2006 2007
TESCO PLC
21

TABLE 6 Directors interests in the long-term incentive plan continued
Name
Cycle ending
Award date
Shares awarded
Shares vested
Vesting date
Mr T J R Mason
2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006 2007
13.05.97 16.04.99 08.05.00 10.04.02 11.05.98 08.05.00 11.04.01 09.04.03 16.04.99 11.04.01 10.04.02 09.04.03 13.05.97 16.04.99 08.05.00 10.04.02 11.05.98 08.05.00 11.04.01 09.04.03 16.04.99 11.04.01 10.04.02 09.04.03
57,994 92,479 51,734 188,576 43,009 91,118 78,039 51,063 54,626 124,759 33,136 48,325 39,897 172,727 28,200 70,272 67,149 25,497 47,001 114,274
9,281 14,799 1,611 5,874 6,883 14,580 2,431 291,891 8,171 8,730 3,887 183,784 5,303 7,733 1,242 5,380 4,513 11,244 2,092 279,469 4,080 7,519 3,560 175,962
67,275 107,278 38,439 56,058
53,345 194,450 49,892 105,698 80,470 291,891 59,234 63,356 128,646 183,784 41,139 178,107 32,713 81,516 69,241 279,469 29,577 54,520 117,834 175,962
170 271 97 141
24.02.04 24.02.04 08.05.04 10.04.04 11.05.05 08.05.05 11.04.05 09.04.05 16.04.06 11.04.06 10.04.06 09.04.07 24.02.04 24.02.04 08.05.04 10.04.04 11.05.05 08.05.05 11.04.05 09.04.05 16.04.06 11.04.06 10.04.06 09.04.07
252.38 252.38 252.38 252.38
Mr D T Potts
2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006 2007
The Mid-Market Price (MMP) on the date of award (09.04.03) was 199.50p. Long-Term awards from 2001 are classed as four year cycles as no election for enhancement is possible yet. Short-Term matching award for 2002 is classed as a two year cycle as no election for enhancement is possible yet. Long-Term awards can be enhanced from the 4th year, extending the cycle to seven years. Short-Term matching awards can be enhanced from the 2nd year, extending the cycle to ve years.
22
TESCO PLC
TABLE 7 Disclosable interests of the Directors, including family interests

28 Feb 2004 Options to acquire ordinary shares 22 Feb 2003 Options to acquire ordinary shares
Ordinary shares
Ordinary shares
Mr J A Gardiner Sir Terry Leahy Mr D E Reid Mr R S Ager Mr R F Chase Mr P A Clarke Mr E M Davies Dr H Einsmann Mr J Gildersleeve Mr A T Higginson Mr K J Hydon Mr T J R Mason Mr G F Pimlott Mr D T Potts
669,111 4,915,893 189,682 1,971,071 50,000 983,778 2,400 92,150 1,829,760 1,160,023 30,093 1,519,084 33,418 1,250,463
3,762,101 2,952,071 2,282,478 2,031,112 3,131,132 2,172,136 2,261,653 2,024,400
627,805 3,754,973 2,450,973 1,448,706 631,795 1,272,629 679,897 1,087,172 32,529 774,912
3,344,457 3,080,683 1,830,799 1,529,709 2,648,609 1,646,967 1,961,091 1,521,509
Options to acquire ordinary shares shown above comprise options under the executive share option schemes (1984), (1994), (1996) and the savings-related share option scheme (1981) (note 26). Between 28 February 2004 and 19 April 2004, 586 shares were purchased by Executive Directors as part of the Partnership Share Plan (BAYE) operated by the Group. The ordinary shares include shares held as part of incentive plans shown in table 6.
TESCO PLC
23
DIRECTORS RESPONSIBILITIES FOR THE PREPARATION OF THE FINANCIAL STATEMENTS

The Directors are required by the Companies Act 1985 to prepare nancial statements for each nancial year which give a true and fair view of the state of affairs of the company and the Group as at the end of the nancial year and of the prot or loss for the nancial year. The Directors consider that in preparing the nancial statements on pages 26 to 55 the company and Group have used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates, and that all accounting standards which they consider to be applicable have been followed. The Directors have responsibility for ensuring that the company and Group keep accounting records which disclose, with reasonable accuracy at any time, the nancial position of the company and Group and which enable them to ensure that the nancial statements comply with the Companies Act 1985. The Directors are responsible for the maintenance and integrity of the Annual Review and Summary Financial Statement and Annual Report and Financial Statements published on the Groups Corporate website. Legislation in the UK concerning the preparation and dissemination of nancial statements may differ from legislation in other jurisdictions. The Directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
24
TESCO PLC
INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF TESCO PLC

We have audited the nancial statements which comprise the Group prot and loss account, the balance sheets, the cash ow statement, the statement of total recognised gains and losses and the related notes which have been prepared under the historical cost convention and the accounting policies set out in the statement of accounting policies. We have also audited the disclosures required by Part 3 of Schedule 7A to the Companies Act 1985 contained in the Directors remuneration report (the auditable part).
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
We review whether the corporate governance statement reects the companys compliance with the seven provisions of the Combined Code (issued in June 1998) specied 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 Boards statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the companys or Groups 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 nancial statements and the auditable part of the Directors remuneration report. It also includes an assessment of the signicant estimates and judgements made by the Directors in the preparation of the nancial statements, and of whether the accounting policies are appropriate to the companys circumstances, consistently applied and adequately disclosed.
The Directors responsibilities for preparing the annual report, the Directors remuneration report and the nancial statements in accordance with applicable United Kingdom law and accounting standards are set out in the statement of Directors responsibilities. Our responsibility is to audit the nancial statements and the auditable par t of the Directors remuneration repor t 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 companys 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 in to 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 nancial statements give a true and fair view and whether the nancial 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 repor t is not consistent with the nancial 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 specied 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 nancial statements. The other information comprises only the Directors report, the unaudited part of the Directors remuneration report, the Chairmans statement, the operating and nancial review and the corporate governance statement.
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 sufcient evidence to give reasonable assurance that the nancial statements and the auditable part of the Directors 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 nancial statements.
OPINION In our opinion:
the nancial statements give a true and fair view of the state of affairs of the company and the Group at 28 February 2004 and of the prot and cash ows of the Group for the year then ended; the nancial statements have been properly prepared in accordance with the Companies Act 1985; and those parts of the Directors 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 19 April 2004
TESCO PLC
25
GROUP PROFIT AND LOSS ACCOUNT

53 weeks ended 28 February 2004
Continuing operations 2004 m Acquisitions 2004 m 2004 m 2003 restated m
note
Sales at net selling prices Turnover including share of joint ventures Less: share of joint ventures turnover Group turnover excluding value added tax Operating expenses Normal operating expenses Employee prot-sharing Integration costs Goodwill amortisation Operating prot Share of operating prot of joint ventures and associates Net loss on disposal of xed assets Prot on ordinary activities before interest and taxation Net interest payable Prot on ordinary activities before taxation Underlying prot before net loss on disposal of xed assets, integration costs and goodwill amortisation Net loss on disposal of xed assets Integration costs Goodwill amortisation Goodwill amortisation in joint ventures and associates Tax on prot on ordinary activities Prot on ordinary activities after taxation Minority interests Prot for the nancial year Dividends Retained prot for the nancial year
33,418 30,919 (236)
139 131 131 (121) (4) 6 6
33,557 31,050 (236) 30,814 (28,925) (57) (45) (52) 1,735 97 (9) 1,823 (223) 1,600 1,708 (9) (45) (52) (2)
28,280 26,197 (193) 26,004 (24,444) (51) (4) (21) 1,484 70 (13) 1,541 (180) 1,361 1,401 (13) (4) (21) (2) (415) 946 946 (443) 503
Pence
2/3
30,683 (28,804)
(57) (45) (48) 1,729 97 (9) 1,817
12 2/3
8 5
(498) 1,102 (2) 1,100
10 25
(516) 584
Pence
Earnings per share Adjusted for net loss on disposal of xed assets after taxation Adjusted for integration costs after taxation Adjusted for goodwill amortisation Underlying earnings per share Diluted earnings per share Adjusted for net loss on disposal of xed assets after taxation Adjusted for integration costs after taxation Adjusted for goodwill amortisation Underlying diluted earnings per share Dividend per share Dividend cover (times)
11
15.05 0.11 0.55 0.74
13.54 0.18 0.06 0.32 14.10 13.42 0.18 0.06 0.32 13.98 6.20 2.25
11 11
16.45 14.93 0.11 0.54 0.73
11 10
16.31 6.84 2.38
Accounting policies and notes forming part of these nancial statements are on pages 30 to 55. Excluding net loss on disposal of xed assets, integration costs and goodwill amortisation.
26 TESCO PLC
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES

Group 2004 m 2003 m 2004 m
Company 2003 m
Prot for the nancial year (Loss)/gain on foreign currency net investments Total recognised gains and losses relating to the nancial year
1,100 (157) 943
946 22 968
771 (2) 769
618 618
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS FUNDS

Group 2004 m 2003 m 2004 m
Company 2003 m
Prot for the nancial year Dividends (Loss)/gain on foreign currency net investments New share capital subscribed less expenses Payment of dividends by shares in lieu of cash Net addition to shareholders funds Opening shareholders funds Closing shareholders funds
Accounting policies and notes forming part of these nancial statements are on pages 30 to 55.
1,100 (516) 584 (157) 844 158 1,429 6,516 7,945
946 (443) 503 22 421 40 986 5,530 6,516
771 (516) 255 (2) 869 158 1,280 3,257 4,537
618 (443) 175 433 40 648 2,609 3,257
TESCO PLC
27
BALANCE SHEETS
28 February 2004
Group note m 2004 m m 2003 m 2004 m
Company 2003 m
Fixed assets Intangible assets Tangible assets Investments Investments in joint ventures Share of gross assets Less: share of gross liabilities Goodwill Investments in associates Current assets Stocks Debtors Investments Cash at bank and in hand
15 16 17 14 12 13 14 14
965 14,094 34 2,006 (1,712) 15 309 21 15,423 1,199 840 430 670 3,139 1,708 (1,459) 17
890 12,828 59
9,077
7,820 158 7,978 1,012 1,012 (1,961) (949) 7,029 (3,772) 3,257
266 18 14,061 1,140 662 239 399 2,440 (5,372) (2,932) 11,129 (4,049) (521) 6,559
143 9,220 1,624 99 1,723 (2,456) (733) 8,487 (3,950) 4,537
Creditors: falling due within one year Net current liabilities Total assets less current liabilities Creditors: falling due after more than one year Provisions for liabilities and charges Net assets Capital and reserves Called up share capital Share premium account Other reserves Prot and loss account Equity shareholders funds Minority interests Total capital employed
18
(5,618) (2,479) 12,944 (4,368) (586) 7,990
19 22
24 25 25 25
384 3,470 40 4,051 7,945 45 7,990
362 2,465 40 3,649 6,516 43 6,559
384 3,470 683 4,537 4,537
362 2,465 430 3,257 3,257
Terry Leahy Andrew Higginson Directors Financial statements approved by the Board on 19 April 2004.
28
TESCO PLC
GROUP CASH FLOW STATEMENT

note
2004 m
2003 m
Net cash inow from operating activities Dividends from joint ventures and associates Income received from joint ventures and associates Returns on investments and servicing of nance Interest received Interest paid Interest element of nance lease rental payments Cash received on sale of nancial instruments Net cash outow from returns on investments and servicing of nance Taxation Corporation tax paid Capital expenditure and nancial investment Payments to acquire tangible xed assets Receipts from sale of tangible xed assets Purchase of own shares Net cash outow from capital expenditure and nancial investment Acquisitions and disposals Purchase of subsidiary undertakings Net cash at bank and in hand acquired with subsidiaries Invested in joint ventures Invested in associates and other investments Net cash outow from acquisitions and disposals Equity dividends paid Cash outow before management of liquid resources and nancing Management of liquid resources Increase in short-term deposits Financing Ordinary shares issued for cash (Decrease)/increase in other loans New nance leases Capital element of nance leases repaid Net cash inow from nancing Increase/(decrease) in cash Reconciliation of net cash ow to movement in net debt Increase/(decrease) in cash Cash outow/(inow) from decrease/(increase) in debt and lease nancing Increase in liquid resources Loans and nance leases acquired with subsidiaries Amortisation of 4% unsecured deep discount loan stock, RPI and LPI bonds Other non-cash movements Foreign exchange differences Decrease/(increase) in net debt Opening net debt Closing net debt
32
2,942 60 41 (320) (17) 235 (61) (326) (2,239) 62 (51) (2,228) (269) 53 (48) (8) (272) (303) (188) (220) 868 (180) 75 (73) 690 282 282 178 220 (5) (20) (2) (6) 647
2,375 11 37 (253) (2) (218) (366) (2,032) 32 (52) (2,052) (419) 33 (43) (7) (436) (368) (1,054) (14) 73 774 249 (73) 1,023 (45) (45) (950) 14 (172) (8) (19) 3 (1,177) (3,560) (4,737)
TESCO PLC 29
33 33
(4,737) (4,090)
ACCOUNTING POLICIES
BASIS OF PREPARATION OF FINANCIAL STATEMENTS These nancial statements have been prepared under the historical cost convention, in accordance with applicable accounting standards and the Companies Act 1985. FIXED ASSETS AND DEPRECIATION Fixed assets are carried at cost
and include amounts in respect of interest paid on funds specically related to the nancing of assets in the course of construction. Interest is capitalised on a gross basis. Depreciation is provided on a straight-line basis over the anticipated useful economic lives of the assets. The following rates applied for the Group and are consistent with the prior year: Land premia paid in excess of the alternative use value at 2.5% of cost. Freehold and leasehold buildings with greater than 40 years unexpired at 2.5% of cost. Leasehold properties with less than 40 years unexpired are amortised by equal annual instalments over the unexpired period of the lease. Plant, equipment, xtures and ttings and motor vehicles at rates varying from 10% to 33%.
GOODWILL Goodwill arising on acquisitions is capitalised and
As in the prior year, the Group has continued to account for pensions and other post-employment benets in accordance with SSAP 24 but has complied with the transitional disclosure requirements of FRS 17. These transitional disclosures are presented in note 27.
BASIS OF CONSOLIDATION The Group nancial statements consist of the nancial statements of the parent company, its subsidiary under takings and the Groups share of interests in joint ventures and associates. The accounts of the parent companys subsidiary under takings are prepared to dates around 28 February 2004 apart from Global T.H., Tesco Polska Sp. z o.o., Tesco Stores C R a.s., Tesco Stores SR a.s., Tesco Kipa A.S., , Samsung Tesco Co. Limited, Tesco Malaysia Sdn Bhd, Tesco Taiwan Co. Limited, Ek-Chai Distribution System Co. Ltd and C Two-Network Co. Ltd which prepared accounts to 31 December 2003. In the opinion of the Directors, it is necessary for the above named subsidiaries to prepare accounts to a date earlier than the rest of the Group to enable the timely publication of the Group nancial statements.
amortised on a straight-line basis over its useful economic life, up to a maximum of 20 years.
IMPAIRMENT OF FIXED ASSETS AND GOODWILL Fixed assets and
The Groups interests in joint ventures are accounted for using the gross equity method. The Groups interests in associates are accounted for using the equity method.
TURNOVER Turnover consists of sales through retail outlets and sales of development properties, excluding value added tax. The policy was revised this year in accordance with FRS 5 Application Note G Revenue Recognition (issued November 2003). Turnover is now reported net of vouchers and on a commission-only basis for mobile phone airtime sales. Turnover is stated net of returns. STOCKS Stocks comprise goods held for resale and properties
goodwill are subject to review for impairment in accordance with FRS 11, Impairment of Fixed Assets and Goodwill. Any impairment is recognised in the prot and loss account in the year in which it occurs.
LEASING Plant, equipment and xtures and ttings which are the subject of nance leases are dealt with in the nancial statements as tangible xed assets and equivalent liabilities at what would otherwise have been the cost of outright purchase.
held for, or in the course of, development and are valued at the lower of cost and net realisable value. Stocks in stores are calculated at retail prices and reduced by appropriate margins to take into account factors such as obsolescence, seasonality and damage.
MONEY MARKET DEPOSITS Money market deposits are stated at
Rentals are apportioned between reductions of the respective liabilities and nance charges, the latter being calculated by reference to the rates of interest implicit in the leases. The nance charges are dealt with under interest payable in the prot and loss account. Leased assets are depreciated in accordance with the depreciation accounting policy over the anticipated working lives of the assets which generally correspond to the primary rental periods. The cost of operating leases in respect of land and buildings and other assets is expensed as incurred.
cost. All income from these investments is included in the prot and loss account as interest receivable and similar income.
30
TESCO PLC
TAXATION The amount included in the prot and loss account is based on pre-tax reported income and is calculated at current local tax rates, taking into account timing differences and the likelihood of realisation of deferred tax assets and liabilities. DEFERRED TAX Deferred tax is recognised in respect of all timing
FINANCIAL INSTRUMENTS Derivative instruments utilised by the
differences that have originated but not reversed by the balance sheet date and which could give rise to an obligation to pay more or less taxation in the future. Deferred tax assets are recognised to the extent that they are regarded as recoverable. They are regarded as recoverable to the extent that on the basis of all available evidence, it is regarded as more likely than not that there will be suitable taxable prots from which the future reversal of the underlying timing differences can be deducted. Deferred tax is measured on a non-discounted basis at the tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws substantively enacted at the balance sheet date.
PENSIONS The expected cost of pensions in respect of the
Group are interest rate swaps, oors and caps, forward start interest rate swaps, cross currency swaps, forward rate agreements and forward exchange contracts and options. Termination payments made or received in respect of derivatives are spread over the life of the underlying exposure in cases where the underlying exposure continues to exist. Where the underlying exposure ceases to exist, any termination payments are taken to the prot and loss account. Interest differentials on derivative instruments are recognised by adjusting net interest payable. Premia or discounts on derivative instruments are amortised over the shorter of the life of the instrument or the underlying exposure. Currency swap agreements are valued at closing rates of exchange. Forward exchange contracts are valued at discounted closing forward rates of exchange. Resulting gains or losses are offset against foreign exchange gains or losses on the related borrowings or, where the instrument is used to hedge a committed future transaction, are deferred until the transaction occurs or is extinguished.
Groups dened benet pension schemes is charged to the prot and loss account over the working lifetimes of employees in the schemes. Actuarial surpluses and decits are spread over the expected remaining working lifetimes of employees. Note 27 in the nancial statements provides further detail in respect of pension costs and commitments.
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS The cost of
providing other post-retirement benets, which comprise private healthcare, is charged to the prot and loss account so as to spread the cost over the service lives of relevant employees in accordance with the advice of qualied actuaries. Actuarial surpluses and decits are spread over the expected remaining working lifetimes of relevant employees.
FOREIGN CURRENCIES Assets and liabilities in foreign currencies
are translated into sterling at the nancial year end exchange rates. Prots and losses of overseas subsidiaries are translated into sterling at average rates of exchange. Gains and losses arising on the translation of the net assets of overseas subsidiaries, less exchange differences arising on matched foreign currency borrowings, are taken to reserves and disclosed in the statement of total recognised gains and losses. Gains and losses on instruments used for hedging are recognised in the prot and loss account when the exposure that is being hedged is itself recognised.
TESCO PLC
31
NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 Prior year adjustment
The Group has revised its accounting policy for turnover in accordance with FRS 5 Application Note G Revenue Recognition (issued November 2003). The principal adjustments are to report turnover net of vouchers and on a commission-only basis for mobile phone airtime sales. The impact of the change in policy is to restate 2003 turnover and cost of sales by 333m. There is no impact on reported prot or cash ow.
NOTE 2 Segmental analysis of sales, turnover, prot and net assets
The Groups operations of retailing and associated activities and property development are carried out in the UK, Republic of Ireland, Hungary, Poland, Czech Republic, Slovakia, Turkey, Thailand, South Korea, Taiwan, Malaysia and Japan. The results for Asia and the rest of Europe, excluding the Republic of Ireland, are for the year ended 31 December 2003.
2004 Sales including VAT m Turnover excluding VAT m Operating prot m Net operating assets m Sales including VAT restated m Turnover excluding VAT restated m Operating prot m 2003 Net operating assets m
Continuing operations UK Rest of Europe Asia Integration Goodwill amortisation Operating prot Share of operating prot from joint ventures and associates Net loss on disposal of xed assets Net interest payable Prot on ordinary activities before taxation Operating margin (prior to goodwill amortisation and integration costs) Net debt (note 20) Net assets 26,876 3,834 2,847 33,557 24,760 3,385 2,669 30,814 1,526 184 122 1,832 (45) (52) 1,735 97 (9) (223) 1,600 5.9% 12,080 (4,090) 7,990 8,990 1,856 1,234 23,101 3,007 2,172 28,280 21,309 2,664 2,031 26,004 1,297 141 71 1,509 (4) (21) 1,484 70 (13) (180) 1,361 5.8% 11,296 (4,737) 6,559 8,445 1,658 1,193
Inter-segmental turnover between the geographical areas of business is not material. Turnover is disclosed by origin. There is no material difference in turnover by destination. The Groups share of turnover in the joint ventures, which is not included in the numbers above, is 236m (2003 193m). Group sales including VAT were 33,557m (2003 28,280m). The gross transaction value, which includes the non-commission element of mobile phone airtime and lottery sales, was 34,360m (2003 28,819m).
32
TESCO PLC
NOTE 3 Analysis of operating prot

2004 m 2003 restated m
Turnover excluding VAT Cost of sales Gross prot Administration expenses Integration costs Goodwill amortisation Operating prot
30,814 (28,405) 2,409 (577) (45) (52) 1,735
26,004 (24,007) 1,997 (488) (4) (21) 1,484
Cost of sales includes distribution costs and store operating costs. Employee prot-sharing is included within administration expenses.
NOTE 4 Employee prot-sharing
This represents the amount allocated to the trustees of the prot-sharing scheme and is based on the UK prot after interest, before net loss on disposal of xed assets and taxation.
NOTE 5 Prot on ordinary activities before taxation
2004 m 2003 m
Prot on ordinary activities is stated after charging the following: Depreciation of tangible xed assets: owned assets under nance leases Goodwill amortisation Operating lease costs (a) Employment costs (note 6)
(a) Operating lease costs include 55m for hire of plant and machinery (2003 39m).
631 69 54 221 3,234
542 39 23 172 2,653
Amounts payable to auditors:

2004 m 2003 m
Assurance audit (i) other assurance services Tax services Other services (i) Includes 0.1m (2003 0.1m) for the company.
1.2 1.0 2.2 0.5 0.1
0.9 1.1 2.0 0.5 0.2
NOTE 6 Employment costs

2004 m 2003 m
Employment costs during the year Wages and salaries Social security costs Other pension costs (note 27) 2,891 183 160 3,234 2,385 146 122 2,653
Number of persons employed The average number of employees during the year was: UK 230,680 (2003 203,766), Rest of Europe 49,362 (2003 42,280), Asia 30,369 (2003 24,754) and the average number of full-time equivalents was: UK 152,408 (2003 133,051), Rest of Europe 42,399 (2003 35,372) and Asia 28,528 (2003 19,759).
TESCO PLC 33
NOTES TO THE FINANCIAL STATEMENTS CONTINUED

NOTE 7 Directors emoluments and interests
Details of Directors emoluments and interests are given in the Report of the Directors on Remuneration on pages 13 to 23.
NOTE 8 Net interest payable

2004 m m m 2003 m
Interest receivable and similar income on money market investments and deposits Less interest payable on: Short-term bank loans and overdrafts repayable within ve years Finance charges payable on nance leases 4% unsecured deep discount loan stock 2006 (a) 4% RPI bonds 2016 (b) 3.322% LPI bonds 2025 (c) 834% bonds 2003 6% bonds 2006 71 2% bonds 2007 6% bonds 2008 518% bonds 2009 658% bonds 2010 6% bonds 2029 514% Euro bonds 2008 434% Euro bonds 2010 51 2% bonds 2033 51 2% bonds 2019 Other bonds Interest capitalised Share of interest of joint ventures and associates (85) (19) (11) (18) (15) (9) (25) (15) (18) (10) (12) (18) (26) (11) (20) (8) 62 (14)
49 (104) (5) (10) (12) (10) (17) (9) (24) (15) (18) (10) (12) (13) (4) (2) (4) (20) 62 (18) (272) (223)
65
(245) (180)
(a) Interest payable on the 4% unsecured deep discount loan stock 2006 includes 6m (2003 5m) of discount amortisation. (b) Interest payable on the RPI bond 2016 includes 8m (2003 2m) of RPI related amortisation. (c) Interest payable on the LPI bond 2025 includes 6m (2003 1m) of RPI related amortisation.
NOTE 9 Taxation
(a) Analysis of charge in year Current tax: UK corporation tax at 30.0% (2003 30.0%) Prior year items Overseas taxation Share of joint ventures and associates Deferred tax: (note 22) Origination and reversal of timing differences (i) Prior year items Share of joint ventures and associates Tax on prot on ordinary activities
(i) The total charge for the year of 29m includes a 2m (2003 2m) debit to xed assets.
34 TESCO PLC
2004 m
2003 m
433 (64) 33 27 429 29 41 (1) 69 498
382 (56) 8 19 353 54 10 (2) 62 415
NOTE 9 Taxation continued
(b) Factors affecting the tax charge for the year The effective rate of corporation tax for the year of 26.8% (2003 25.9%) is lower than the standard rate of corporation tax in the UK of 30.0%. The differences are explained below:
2004 % 2003 %
Standard rate of corporation tax Effects of: Expenses not deductible for tax purposes (primarily goodwill amortisation and non-qualifying depreciation) Capital allowances for the year in excess of depreciation on qualifying assets Differences in overseas taxation rates Timing of tax relief of share-based payments Prior year items Other items Effective rate of corporation tax for the year
30.0 4.1 (3.9) (0.9) 1.4 (4.0) 0.1 26.8
30.0 3.9 (3.3) (0.8) (4.4) 0.5 25.9
(c) Factors that may affect future tax charges The Group has not recognised deferred tax assets of 12m (2003 16m) in respect of certain tax losses which are available to carry forward and offset, should future taxable prots arise.
NOTE 10 Dividends
2004 Pence/share 2003 Pence/share 2004 m 2003 m
Declared interim Proposed nal
2.07 4.77 6.84
1.87 4.33 6.20
151 365 516
131 312 443
NOTE 11 Earnings per share and diluted earnings per share
Earnings per share and diluted earnings per share have been calculated in accordance with FRS 14, Earnings per Share. The standard requires that earnings should be based on the net prot attributable to ordinary shareholders. The calculation for earnings, including and excluding net loss on disposal of xed assets, integration costs and goodwill amor tisation, is based on the prot for the nancial year of 1,100m (2003 946m). For the purposes of calculating earnings per share, the number of shares is the weighted average number of ordinary shares in issue during the year of 7,307 million (2003 6,989 million). The calculation for diluted earnings per share uses the weighted average number of ordinary shares in issue adjusted by the effects of all dilutive potential ordinary shares. The dilution effect is calculated on the full exercise of all ordinary share options granted by the Group, including performance-based options which the Group considers to have been earned. The calculation compares the difference between the exercise price of exercisable ordinary share options, weighted for the period over which they were outstanding, with the average daily mid-market closing price over the period. The alternative measure of earnings per share is provided because it reects the Groups underlying trading performance excluding the effect of the loss on disposal of xed assets, integration costs and amortisation of goodwill.
2004 million 2003 million
Weighted average number of dilutive share options Weighted average number of shares in issue in the period Total number of shares for calculating diluted earnings per share
61 7,307 7,368
62 6,989 7,051
TESCO PLC 35

NOTE 12 Intangible xed assets
Goodwill m
Cost At 22 February 2003 Currency translation Additions at cost (a) At 28 February 2004 Amortisation At 22 February 2003 Currency translation Charge for the period At 28 February 2004 Net carrying value At 28 February 2004 At 22 February 2003
(a) Goodwill arising from investments in subsidiaries in the year has been capitalised and amortised over 20 years in accordance with the provisions of FRS 10, Goodwill and Intangible Assets. 20 years is the period over which the Directors estimate that the values of the underlying businesses acquired are expected to exceed the value of the underlying assets.
941 (70) 187 1,058 51 (10) 52 93 965 890
Goodwill is recorded in local currency. Currency translation in prior years is immaterial. Goodwill arising from investments in joint ventures and associates has been capitalised and amortised over 20 years in accordance with the provisions of FRS 9, Associates and Joint Ventures and FRS 10, Goodwill and Intangible Assets and is included in xed asset investment (note 14).
NOTE 13 Tangible xed assets
Land and buildings m Plant, equipment, xtures and ttings and motor vehicles m
Total m
Cost At 22 February 2003 Currency translation Additions at cost (a) Acquisitions Disposals At 28 February 2004 Depreciation At 22 February 2003 Currency translation Charge for period Disposals At 28 February 2004 Net book value (b) (c) At 28 February 2004 At 22 February 2003 Capital work in progress included above (d) At 28 February 2004 At 22 February 2003
36 TESCO PLC
12,493 (277) 1,556 13,772 60 (114) 13,718 1,538 (10) 251 1,779 (70) 1,709 12,009 10,955 353 553
4,132 (65) 729 4,796 3 (320) 4,479 2,259 (21) 449 2,687 (293) 2,394 2,085 1,873 100 128
16,625 (342) 2,285 18,568 63 (434) 18,197 3,797 (31) 700 4,466 (363) 4,103 14,094 12,828 453 681
NOTE 13 Tangible xed assets continued

(a) Includes 62m in respect of interest capitalised principally relating to land and building assets. The capitalisation rate used to determine the amount of nance costs capitalised during the period was 6.0%. (b) Net book value includes capitalised interest at 28 February 2004 of 518m (2003 463m). Plant, equipment, xtures and ttings and motor vehicles subject to nance leases included in net book value are:
Cost m Depreciation m Net book value m
At 22 February 2003 Movement in the period At 28 February 2004
740 102 842
469 103 572
271 (1) 270
(c) The net book value of land and buildings comprises:

2004 m 2003 m
Freehold Long leasehold 50 years or more Short leasehold less than 50 years At 28 February 2004 (d) Capital work in progress does not include land.
11,023 501 485 12,009
9,992 493 470 10,955
NOTE 14 Fixed asset investments

Group Joint ventures (b) m Own shares (d) m Other investments m Shares in Group undertakings(a) m Loans to Group undertakings m Company Joint ventures (b) m
Associates (c) m
At 22 February 2003 Additions Share of prot/(loss) of joint ventures and associates Goodwill amortisation Income received from joint ventures and associates Disposals At 28 February 2004
266 11 63 (1) (24) (6) 309
18 8 (4) (1) 21
53 46 (71) 28
6 6
4,505 1,019 5,524
3,315 238 3,553
158 6 (21) 143
TESCO PLC
37

NOTE 14 Fixed asset investments continued
(a) The Groups principal operating subsidiary undertakings are:

Business Share of equity capital and voting rights Country of incorporation
Tesco Stores Limited Tesco Property Holdings Limited Tesco Insurance Limited Valiant Insurance Company Limited Tesco Distribution Limited Tesco Card Services Limited T&S Stores Limited Tesco Ireland Limited Global T.H. Tesco Polska Sp. z o.o. Tesco Stores C R a.s. Tesco Stores SR a.s. Samsung Tesco Co. Limited Ek-Chai Distribution System Co. Ltd Tesco Taiwan Co. Limited Tesco Stores Malaysia Sdn Bhd Tesco Stores Hong Kong Limited C Two-Network Co. Ltd Tesco Kipa A.S. ,
Retail Property Investment Insurance Insurance Distribution Card Handling Services Retail Retail Retail Retail Retail Retail Retail Retail Retail Retail Purchasing Retail Retail
100% 100% 100% 100% 100% 100% 100% 100% 99% 100% 100% 100% 89% 99% 100% 70% 100% 99% 90%
Registered in England Registered in England Guernsey Republic of Ireland Registered in England Registered in England Registered in England Republic of Ireland Hungary Poland Czech Republic Slovakia South Korea Thailand Taiwan, Republic of China Malaysia Hong Kong Japan Turkey
All principal operating subsidiary undertakings operate in their country of incorporation. (b) The Groups principal joint ventures are:
Business Share of issued share capital, loan capital and debt securities Country of incorporation and principal country of operation
Shopping Centres Limited BLT Properties Limited Tesco BL Holdings Limited Tesco British Land Property Partnership Tesco Personal Finance Group Limited Tesco Home Shopping Limited Tesco Mobile Limited dunnhumby Limited Nutri Centres Limited Taiwan Charn Yang Developments Limited Retail Property Company Limited Tesco Card Services Limited
Property Investment Property Investment Property Investment Property Investment Personal Finance Mail Order Retail Telecommunications Data Analysts Complementary Medicines Property Investment Property Investment Personal Finance
50% 50% 50% 50% 50% 60% 50% 53% 50% 50% 50% 50%
Registered in England Registered in England Registered in England Registered in England Registered in Scotland Registered in England Registered in England Registered in England Registered in England Taiwan, Republic of China Thailand Thailand
The accounting periods of the joint ventures consolidated in these nancial statements, range from 31 December 2003 to 28 February 2004. 2004 m 2003 m
The net borrowings of the joint ventures, as at 28 February 2004, were as follows: Cash and deposits Borrowings falling due within one year Other loans 462 (22) (775) (335) 372 (142) (588) (358)
There is no recourse to Group companies in respect of the borrowings of the joint ventures.
38 TESCO PLC
NOTE 14 Fixed asset investments continued
(c) The Groups principal associate is:

Business Share of issued share capital, loan capital and debt securities Country of incorporation and principal country of operation
GroceryWorks Holdings Inc.
Internet Retailer
37%
United States of America
The net assets and goodwill of associates are:

2004 m 2003 m
Net assets Goodwill
6 15 21
3 15 18
(d) The investment in own shares represents 16 million 5p ordinary shares in Tesco PLC (0.2% of called up share capital at 28 February 2004) with a weighted average value of 1.73 each. These shares are held by a qualifying employee share ownership trust (QUEST) in order to satisfy options under savings-related share option schemes which become exercisable over the next few years. The carrying value of 28m (market value 41m) represents the exercise amount receivable in respect of these shares subscribed for by the QUEST at market value. Funding is provided to the QUEST by Tesco Stores Limited, the companys principal operating subsidiary. The QUEST has waived its right to dividends on these shares.
NOTE 15 Stocks
Group 2004 m 2003 m 2004 m Company 2003 m
Goods held for resale Development property
1,196 3 1,199
1,122 18 1,140
Property disposed of included 5m (2003 nil) of capitalised interest. Accumulated capitalised interest at 28 February 2004 was nil (2003 5m).
NOTE 16 Debtors
Amounts owed by Group undertakings Prepayments and accrued income Other debtors Amounts owed by undertakings in which Group companies have a participating interest
49 671 120 840
48 507 107 662
1,260 258 106 1,624
776 5 128 103 1,012
Of the amounts owed by undertakings in which Group companies have a participating interest, 109m (2003 107m) is due after more than one year. Included in other debtors are amounts of 38m (2003 17m) due after more than one year.
NOTE 17 Investments
Money market deposits
430
239
99
TESCO PLC 39

NOTE 18 Creditors falling due within one year
Bank loans and overdrafts (a) (b) Trade creditors Amounts owed to Group undertakings Corporation tax Other taxation and social security Other creditors Loans from joint ventures Accruals and deferred income (c) Finance leases (note 23) (d) Dividends
775 2,434 308 190 1,142 10 320 69 370 5,618
1,286 2,196 230 170 851 2 263 55 319 5,372
552 1,189 6 3 323 13 370 2,456
1,162 351 5 20 105 318 1,961
(a) Bank deposits in subsidiary undertakings of 217m (2003 299m) have been offset against borrowings in the parent company under a legal right of set-off. (b) Floating rate liabilities bear interest at rates based on relevant national LIBOR equivalents. The weighted average rate of interest payable on these amounts at the year end is approximately 4%. (c) A gain of 235m, realised this year on terminated interest rate swaps, is being spread over the life of replacement swaps entered into at the same time, for similar periods. Accruals and deferred income includes 211m (2003 nil) attributable to these realised gains. (d) Finance leases bear interest at a weighted average rate of approximately 7.5%.
NOTE 19 Creditors falling due after more than one year

4% unsecured deep discount loan stock 2006 (a) Finance leases (note 23) 6% bonds 2006 (b) 0.7% 50bn Yen bonds 2006 (l) 712% bonds 2007 (c) 6% bonds 2008 (d) 514% 500m Euro bonds 2008 (l) 518% bonds 2009 (e) 658% bonds 2010 (f) 434% 750m Euro bonds 2010 (l) 4% RPI bonds 2016 (g) 512% bonds 2019 (h) 3.322% LPI bonds 2025 (i) 6% bonds 2029 (j) 512% bonds 2033 (k) Other bonds (l) Other loans (m) Other creditors
110 166 150 285 325 250 345 350 150 528 220 350 221 200 200 266 230 4,346 22 4,368
104 171 150 285 325 250 308 350 150 477 212 350 215 200 200 197 90 4,034 15 4,049
110 150 285 325 250 345 350 150 528 220 350 221 200 200 266 3,950 3,950
104 150 285 325 250 308 350 150 477 212 350 215 200 200 196 3,772 3,772
40
TESCO PLC
NOTE 19 Creditors falling due after more than one year continued
(a) (b) (c) (d) (e) (f) (g) The 4% unsecured deep discount loan stock is redeemable at a par value of 125m in 2006. The 6% bonds are redeemable at par value of 150m in 2006. The 712% bonds are redeemable at a par value of 325m in 2007. The 6% bonds are redeemable at a par value of 250m in 2008. The 518% bonds are redeemable at a par value of 350m in 2009. The 658% bonds are redeemable at a par value of 150m in 2010. The 4% RPI bonds are redeemable at a par value of 220m, indexed for increases in the RPI over the life of the bond, in 2016. (h) The 512% medium term notes are redeemable at a par value of 350m in 2019. (i) The 3.322% LPI bonds are redeemable at a par value of 221m, indexed for increases in the RPI over the life of the bond, in 2025. The maximum indexation of the principal in any one year is 5%, with a minimum of 0%. (j) The 6% bonds are redeemable at a par value of 200m in 2029. (k) The 512% medium term notes are redeemable at a par value of 200m in 2033. (l) The medium term notes are of various maturities and include foreign currency and sterling denominated notes swapped into oating rate sterling. Swaps to sterling were disposed of during the year and new GBP swaps relating to the 500m Euro medium term notes 2008 and 750m Euro medium term notes 2010 were transacted. A new 20bn Yen medium term note valued at 98m was issued during the year. (m) Various bank loans maturing in 2005 and 2008.
NOTE 20 Net debt

Due within one year:
Bank and other loans Finance leases
775 69 126 69 1,730 94 2,324 3 5,190 670 430 4,090
1,286 55 30 55 1,115 116 2,718 5,375 399 239 4,737
552 25 1,601 2,324 4,502 99 4,403
1,162 30 1,024 2,718 4,934 4,934
Due within one to two years: Bank and other loans Finance leases Due within two to ve years: Bank and other loans Finance leases Due otherwise than by instalments after ve years: Due wholly or in part by instalments after ve years: Gross debt Less: Cash at bank and in hand Money market investments and deposits Net debt Bank and other loans Finance leases
TESCO PLC
41

NOTE 21 Financial instruments
An explanation of the objectives and policies for holding and issuing nancial instruments is set out in the Operating and Financial Review on pages 2 to 5. Other than where these items have been included in the currency risk disclosures, short-term debtors and creditors have been excluded from the following analysis. Analysis of interest rate exposure and currency of nancial liabilities The interest rate exposure and currency prole of the nancial liabilities of the Group at 28 February 2004, after taking into account the effect of interest rate and currency swaps, were:
2004 Floating rate liabilities m Fixed rate liabilities m Total m Floating rate liabilities m Fixed rate liabilities m 2003 Total m
Currency Sterling Euro Thai Baht Czech Krona Korean Won Other Gross Liabilities 360 508 561 317 272 265 2,283 2,702 23 77 105 2,907 3,062 531 561 394 272 370 5,190 1,145 361 447 227 404 205 2,789 2,476 23 80 7 2,586 3,621 384 447 307 404 212 5,375
Fixed rate nancial liabilities 2004 Weighted average interest rate 28 Feb 2004 % Weighted average time for which rate is xed Years Weighted average interest rate 22 Feb 2003 % 2003 Weighted average time for which rate is xed Years
Currency Sterling Euro Japanese Yen Czech Krona Taiwanese Dollar Weighted average 5.3 5.4 1.0 4.0 4.5 5.3 6 1 5 4 2 6 5.8 5.4 3.7 4.5 5.8 7 3 5 2 7
Floating rate liabilities bear interest at rates based on relevant national LIBOR equivalents. During the year, protable swaps-tooating rate were monetised for a consideration of 235m and replaced with swaps-to-oating at market value. The interest rate prole of the Group has been further managed by the purchase of Euro interest rate collars with an aggregate notional principal of 135m (2003 135m). The average strike price of the interest rate caps purchased is 6.76%, while the average strike price of the interest rate oors sold is 2.98%. The average maturity of the collars is three and a half years. The current value of these contracts, if realised, is a loss of 2.6m (2003 2.3m). Retail Price Index funding of 220m (2003 212m), maturing 2016, is outstanding and has been classied as xed rate debt. The interest rate payable on this debt is 4% and the principal is linked to the Retail Price Index. Limited Price Index funding, of 221m (2003 215m), maturing 2025, is outstanding and has been classied as xed rate debt. The interest rate payable on this debt is 3.322% and the principal is linked to the Retail Price Index. The maximum indexation of the principal in any one year is 5.0% and the minimum is 0.0%.
42
TESCO PLC
NOTE 21 Financial instruments continued
Analysis of interest rate exposure and currency of nancial assets The interest rate exposure and currency prole of the nancial assets of the Group at 28 February 2004 were:
2004 Cash at bank and in hand m Short-term deposits m Cash at bank and in hand m Short-term deposits m 2003
Other m
Total m
Other m
Total m
Sterling Other currencies Total nancial assets
517 153 670
161 269 430
112 4 116
790 426 1,216
213 186 399
55 184 239
109 109
377 370 747
Other nancial assets, in respect of amounts owed by undertakings in which the company has a participating interest, attract a rate of interest based on LIBOR plus a margin (2003 5%). Surplus funds are invested in accordance with approved limits on security and liquidity and bear rates of interest based on relevant LIBOR equivalents. Cash at bank and in hand includes noninterest bearing cash and cash in transit. Borrowing facilities The Group has the following undrawn committed facilities available at 28 February 2004 in respect of which all conditions precedent had been met at that date:
2004 m 2003 m
Expiring within one year Expiring between one and two years Expiring in more than two years
133 920 305 1,358
75 756 552 1,383
The facilities expiring within one year are annual facilities subject to review at various dates during the year ending 26 February 2005. All facilities incur commitment fees at market rates and would provide funding at oating rates. Currency exposures Within the Group, the principal differences on exchange arising, which are taken to the prot and loss account, relate to purchases made by Group companies in currencies other than their reporting currencies. After taking account of forward currency purchases used to hedge these transactions, there were no signicant balances on these exposures at year end. Also, rolling hedges of up to 18 months duration are maintained against the value of investments in, and long-term intercompany loans to, overseas subsidiaries and, to the extent permitted in SSAP 20, differences on exchange are taken to the statement of total recognised gains and losses. Fair values of nancial assets and nancial liabilities
2004 Book value m Fair value m Book value m 2003 Fair value m
Primary nancial instruments held or issued to nance the Groups operations: Short-term borrowings Long-term borrowings Short-term deposits Cash at bank and in hand Derivative nancial instruments held to manage the interest rate and currency prole: Interest rate swaps and similar instruments Forward foreign currency contracts (4,090) (195) (13) (4,367) (4,737) 94 1 (4,887)
TESCO PLC 43
(844) (4,346) 430 670
(852) (4,407) 430 670
(1,341) (4,034) 239 399
(1,341) (4,279) 239 399

NOTE 21 Financial instruments continued
Other signicant nancial instruments outstanding at the year end are 240m (2003 240m) nominal value forward foreign exchange contracts hedging the cost of foreign currency denominated purchases. On a mark-to-market basis, these contracts show a loss of 13m (2003 1m gain). Prot of 235m on interest rate swaps was realised, of which 24m was recognised in the year. On a mark-to-market basis, current swaps show a loss of 195m (2003 95m gain). The fair values of interest rate swaps, forward foreign exchange contracts and long-term xed rate debt have been determined by reference to prices available from the markets on which the instruments are traded. The fair values of all other items have been calculated by discounting expected future cash ows at prevailing interest rates. Hedges As explained in the Operating and Financial Review on pages 2 to 5, the Group hedges exposures to interest rate and currency risk. The table below shows the amount of such gains and losses which have been included in the prot and loss account for the year and those gains and losses, which are expected to be included in next years or later prot and loss accounts. All the gains and losses on the hedging instruments are expected to be matched by losses and gains on the hedged transactions or positions. Unrecognised gains and losses on instruments used for hedging and those recognised in the year ended 28 February 2004 are as follows:
Unrecognised Gains m Losses m Total m Gains m Losses m Deferred Total m
At 22 February 2003 Arising in previous years and recognised in the year ended 28 February 2004 Swap prot deferred to future years Arising in the period to be recognised in future years At 28 February 2004 Expected to be recognised in the year ending 26 February 2005
222 (33) (211) 28 6 1
(127) 18 (105) (214) (44)
95 (15) (211) (77) (208) (43)
211 211 30
211 211 30
NOTE 22 Provisions for liabilities and charges

Property provisions m Deferred taxation m Total m
At 22 February 2003 Currency translation Acquisition of Group companies Amount (credited)/charged in year At 28 February 2004
16 (1) (1) 14
505 (5) 72 572
521 (1) (5) 71 586
Property provisions comprise future rents payable net of rents receivable on onerous and vacant property leases, provisions for terminal dilapidations and provisions for future rents above market value on unprotable stores. The majority of the provision is expected to be utilised over the period to 2017.
Amount provided 2003 m 2004 m
Deferred taxation Excess capital allowances over depreciation Other timing differences Losses carried forward 629 (52) (5) 572
44 TESCO PLC
526 (14) (7) 505
NOTE 23 Leasing commitments
Finance leases
m
The future minimum nance lease payments to which the Group was committed at 28 February 2004 and which have been guaranteed by Tesco PLC are: Gross rental obligations Less: nance charges allocated to future periods 272 (37) 235
2004 m 2003 m
Net amounts payable are: Within one year Between two and ve years After ve years 69 163 3 235 55 171 226
Operating leases
Land and buildings 2004 m 2003 m 2004 m Other 2003 m
As at 28 February 2004, the Group has lease agreements for which payments extend over a number of years. Annual commitments under operating leases expiring: Within one year Between two and ve years After ve years 5 21 144 170 3 10 143 156 2 28 9 39 1 31 8 40
NOTE 24 Called up share capital

Ordinary shares of 5p each Number m
Authorised at 22 February 2003 Authorised during the year Authorised at 28 February 2004 Allotted, called up and fully paid: At 22 February 2003 Share placing Scrip dividend election Share options At 28 February 2004
9,632,000,000 9,632,000,000
482 482
7,237,609,183 315,000,000 80,201,756 47,347,116 7,680,158,055
362 16 4 2 384
During the nancial year, 315 million shares were issued as an equity share placing, for net proceeds of 773m. In addition, 127.5 million shares were issued during the year for an aggregate consideration of 254m, which comprised 158m for scrip dividend and 96m for share options. Between 28 February 2004 and 19 April 2004, options on 19,107 ordinary shares and 2,213,652 ordinary shares have been exercised under the terms of the savings-related share option scheme (1981) and the executive share option schemes (1984, 1994 and 1996) respectively. As at 28 February 2004, the Directors were authorised to purchase up to a maximum in aggregate of 723 million ordinary shares.
TESCO PLC 45

NOTE 25 Reserves
Share premium account At start of period Premium on issue of shares less costs Scrip dividend election At end of period Other reserves At 28 February 2004 and 22 February 2003 Prot and loss account At start of period (Loss)/gain on foreign currency net investments Issue of shares Retained prot for the nancial year At end of period 3,649 (157) (25) 584 4,051 3,136 22 (12) 503 3,649 430 (2) 255 683 255 175 430 40 40 2,465 851 154 3,470 2,004 422 39 2,465 2,465 851 154 3,470 2,004 422 39 2,465
Other reserves comprise a merger reserve arising on the acquisition of Hillards plc in 1987. In accordance with section 230 of the Companies Act 1985 a prot and loss account for Tesco PLC, whose result for the year is shown above, has not been presented in these nancial statements. The cumulative goodwill written-off against the reserves of the Group as at 28 February 2004 amounted to 718m (2003 718m). During the year, the qualifying employee share ownership trust (QUEST) subscribed for 30 million, 0.4% of called-up share capital at 28 February 2004 (2003 41 million, 0.6%), shares from the company. The amount of 25m (2003 12m) shown above represents contributions to the QUEST from subsidiary undertakings.
NOTE 26 Share options
Company schemes The company had six principal share option schemes in operation during the year: (i) The savings-related share option scheme (1981) permits the grant to employees of options in respect of ordinary shares linked to a building society/bank save-as-you-earn contract for a term of three or ve years with contributions from employees of an amount between 5 and 250 per four-weekly period. Options are capable of being exercised at the end of the three and ve-year period at a subscription price not less than 80% of the middle-market quotation of an ordinary share immediately prior to the date of grant. (ii) The Irish savings-related share option scheme (2000) permits the grant to Irish employees of options in respect of ordinary shares linked to a building society/bank save-as-you-earn contract for a term of three or ve years with contributions from employees of an amount between 12 and 320 per four-weekly period. Options are capable of being exercised at the end of the three and ve-year period at a subscription price not less than 75% of the middle-market quotation of an ordinary share immediately prior to the date of grant. (iii) The executive share option scheme (1984) permitted the grant of options in respect of ordinary shares to selected executives. The scheme expired after ten years on 9 November 1994. Options were generally exercisable between three and ten years from the date of grant at a subscription price determined by the Board but not less than the middle-market quotation within the period of 30 days prior to the date of grant. Some options have been granted at a discount of 15% of the standard option price but the option holder may take advantage of that discount only if, in accordance with investor protection ABI guidelines, certain targets related to earnings per share are achieved.
46
TESCO PLC
NOTE 26 Share options continued
(iv) The executive share option scheme (1994) was adopted on 17 October 1994. The principal difference between this scheme and the previous scheme is that the exercise of options will normally be conditional upon the achievement of a specied performance target related to the annual percentage growth in earnings per share over any three-year period. There will be no discounted options granted under this scheme. (v) The unapproved executive share option scheme (1996) was adopted on 7 June 1996. This scheme was introduced following legislative changes which limited the number of options which could be granted under the previous scheme. As with the previous scheme, the exercise of options will normally be conditional upon the achievement of a specied performance target related to the annual percentage growth in earnings per share over any three-year period. There will be no discounted options granted under this scheme. (vi) The international executive share option scheme (1994) was adopted on 20 May 1994. This scheme permits the grant to selected non-UK executives of options to acquire ordinary shares on substantially the same basis as their UK counterparts. Options are normally exercisable between three and ten years from their grant at a price of not less than the average of the middle-market quotations for the ordinary shares for the three dealing days immediately preceding their grant and will normally be conditional on the achievement of a specied performance target determined by the Remuneration Committee when the options are granted. There will be no discounted options granted under this scheme. Tesco PLC has taken advantage of the exemptions applicable to Inland Revenue-approved SAYE share option schemes and equivalent overseas schemes under Urgent Issues Task Force Abstract 17 (revised 2000), Employee Share Schemes. In schemes where options are granted at nil discount, there is no charge to the prot and loss account. The company has granted outstanding options in connection with the six schemes as follows: Savings-related share option scheme (1981)
Date of grant
Number of executives and employees
Shares under option 28 Feb 2004
Subscription price (pence)
29 October 1998 28 October 1999 26 October 2000 8 November 2001 8 November 2002 6 November 2003
1,643 13,293 21,708 51,255 57,377 63,725

Number of executives and employees
3,079,095 17,808,770 21,024,493 38,875,339 56,171,997 50,090,878

136.0 151.0 198.0 198.0 159.0 195.0

Irish savings-related share option scheme (2000)

Date of grant
2 June 2000 26 October 2000 8 November 2001 8 November 2002 6 November 2003
777 364 627 1,125 1,489
1,078,129 371,529 533,875 1,147,898 1,313,408
163.0 198.0 198.0 159.0 195.0
TESCO PLC
47

NOTE 26 Share options continued
Executive share option scheme (1984)

Date of grant
Number of executives
10 June 1994 29 September 1994
18 1
392,000 21,000
70.0 77.3

Date of grant
27 April 1995 13 October 1995 26 June 2000 26 April 2001 15 April 2002 14 April 2003
2 60 1,013 1,174 664 802

210,102 1,560,601 8,655,131 7,430,650 3,929,270 4,069,237

90.3 104.0 205.0 247.0 259.0 197.5


Date of grant
17 April 1997 7 October 1997 21 May 1998 30 September 1998 28 January 1999 24 May 1999 9 November 1999 30 November 1999 20 April 2000 26 June 2000 26 April 2001 15 April 2002 14 April 2003
92 6 484 21 600 5 27 8 25 250 1,110 1,425 1,595

1,732,990 1,139,631 8,712,620 1,044,739 10,618,466 772,950 1,647,402 1,098,962 1,780,760 8,455,073 15,631,511 21,760,209 33,168,411
117.7 151.7 176.7 164.0 178.0 179.4 184.0 173.0 209.5 205.0 247.0 259.0 197.5
International executive share option scheme (1994)

Date of grant
7 October 1997 21 May 1998 28 January 1999 24 May 1999 26 June 2000 26 April 2001 25 April 2002 14 April 2003
43 102 156 11 371 625 566 641
430,500 997,000 1,676,000 355,746 3,673,409 3,971,448 4,072,660 6,324,617
151.7 176.7 178.0 179.4 205.0 247.0 259.0 197.5
48
TESCO PLC
NOTE 27 Pensions
The Group has continued to account for pensions and other post-employment benets in accordance with SSAP 24 and the disclosures in note (a) below are those required by that standard. FRS 17, Retirement Benets was issued in November 2000, and the transitional disclosures required by that standard, to the extent they are not given in note (a), are set out in note (b). For the year ending February 2006 the Group is expected to adopt International Accounting Standard 19. The full actuarial valuation of the main UK scheme carried out as at 31 March 2002 continues to form the basis for funding the scheme. The company has reviewed the results of the subsequent FRS 17 valuation and does not consider that any changes to the level of funding are necessary at this time. (a) Pension commitments United Kingdom The principal plan within the Group is the Tesco PLC Pension Scheme, which is a funded dened benet pension scheme in the UK, the assets of which are held as a segregated fund and administered by trustees. The total prot and loss charge of UK schemes to the Group during the year was 152m (2003 114m). A SSAP 24 pension prepayment of 12m (2003 6m) is present in the Group balance sheet. An independent actuary, using the projected unit method, carried out the latest actuarial assessment of the scheme at 31 March 2002. The assumptions that have the most signicant effect on the results of the valuation are those relating to the rate of return on investments and the rate of increase in salaries and pensions. The key assumptions made were a rate of return on investments of 6.75%, a rate of increase in salaries of 4% and a rate of increase in pensions of 2.5%. At the date of the last actuarial valuation, the market value of the schemes assets was 1,576m and the actuarial value of these assets represented 91% of the benets that had accrued to members, after allowing for expected future increases in earnings and pensions in payment. The actuarial shortfall of 159m will be met via increased contributions over a period of ten years, being the expected average remaining service lifetime of employed members. The next actuarial valuation is due at 31 March 2005. The T&S Stores PLC Senior Executive Pension Scheme is a funded dened benet scheme open to senior executives and certain other employees at the invitation of the company. An independent actuary, using the projected unit method, carried out the latest actuarial assessment of the scheme at 6 April 2001. At that time, the market value of the schemes assets was 5.8m and the actuarial value of these assets represented 110% of the benets that had accrued to members, after allowing for expected future increases in earnings. Overseas The Group operates a number of schemes worldwide, which include dened benet and dened contribution schemes. The contributions payable for non-UK schemes of 8m (2003 8m) have been fully expensed against prots in the current year. A funded dened benet scheme operates in the Republic of Ireland. An independent actuary, using the projected unit method, carried out the latest actuarial assessment of the scheme at 1 April 2001. At that time the market value of the schemes assets was 55m and the actuarial value of these assets represented 123% of the benets that had accrued to members, after allowing for expected future increases in earnings. (b) FRS 17, Retirement Benets The valuations used for FRS 17 have been based on the most recent actuarial valuations and updated by Watson Wyatt LLP to take account of the requirements of FRS 17 in order to assess the liabilities of the schemes at 28 February 2004. Schemes assets are stated at their market values at 28 February 2004. Buck Consultants (Ireland) Limited have updated the most recent Republic of Ireland valuation. The liabilities relating to post-retirement healthcare benets (note 28) have also been determined in accordance with FRS 17, and are incorporated in the following tables.
TESCO PLC
49

NOTE 27 Pensions continued
Major assumptions The major assumptions, on a weighted average basis, used by the actuaries were as follows:
2004 % 2003 % 2002 %
Rate of increase in salaries Rate of increase in pensions in payment Rate of increase in deferred pensions Rate of increase in career average benets Discount rate Price ination
3.8 2.5 2.5 2.5 5.7 2.5
3.6 2.3 2.3 2.3 5.5 2.3
3.6 2.3 2.3 2.8 5.8 2.3
The assets in the schemes and the expected rates of return were:
2004 Long-term rate of expected return % Market value m Long-term rate of expected return % 2003 Market value m Long-term rate of expected return % 2002 Market value m
Equities Bonds Property Other Total market value of assets Present value of schemes liabilities Decit in the schemes Related deferred tax asset Net pension liability
8.1 5.7 6.9 3.8
1,399 445 92 43 1,979 (2,653) (674) 202 (472)
8.6 5.5 7.1 3.8
945 386 88 87 1,506 (2,275) (769) 229 (540)
7.7 5.8 6.4 4.4
1,002 433 91 48 1,574 (1,758) (184) 57 (127)
2004 m
2003 m
Group net assets Net assets prior to pension adjustments FRS 17 pension liability SSAP 24 pension asset Net assets after pension adjustments Group reserves Prot and loss reserve prior to pension adjustments FRS 17 pension liability SSAP 24 pension asset Prot and loss reserve after pension adjustments 4,051 (472) 3,579 (12) 3,567 3,649 (540) 3,109 (6) 3,103 7,990 (472) 7,518 (12) 7,506 6,559 (540) 6,019 (6) 6,013
50
TESCO PLC
NOTE 27 Pensions continued
On full compliance with FRS 17, and on the basis of the assumptions noted above, the amounts that would have been charged to the consolidated prot and loss account and consolidated statement of total recognised gains and losses for the year ended 28 February 2004 are set out below:
2004 m 2003 m
Analysis of the amount charged to operating prot Current service cost Past service cost Total operating charge Analysis of the amount credited/(charged) to other nance income Expected return on pension schemes assets Interest on pension schemes liabilities Net return Analysis of the amount recognised in the statement of total recognised gains and losses Actual return less expected return on pension schemes assets Experience gains and losses arising on the schemes liabilities Changes in assumptions underlying the present value of the schemes liabilities Total actuarial gain/(loss) recognised in the statement of total recognised gains and losses Movement in decit during the year Decit in schemes at beginning of the year Movement in year: Current service cost Contributions Past service costs Acquisition cost Other nance (charge)/income Actuarial gain/(loss) Decit in schemes at end of the year History of experience gains and losses for the year to 28 February 2004 Difference between the expected and actual return on schemes assets: Amount (m) Percentage of schemes assets (%) Experience gains and losses on schemes liabilities: Amount (m) Percentage of schemes liabilities (%) Total actuarial gain/(loss) recognised in the statement of total recognised gains and losses: Amount (m) Percentage of schemes liabilities (%) 140 5.3% (569) (25.0%) (48) (1.8%) (53) (2.3%) 192 9.7% (323) (21.4%) (201) 162 (6) 140 (674) (149) 121 (2) 14 (569) (769) (769) (184) 192 (48) (4) 140 (323) (53) (193) (569) 120 (126) (6) 115 (101) 14 201 201 149 149
TESCO PLC
51

NOTE 28 Post-retirement benets other than pensions
The company operates a scheme offering post-retirement healthcare benets. The cost of providing these benets has been accounted for on a similar basis to that used for dened benet pension schemes. The liability as at 28 February 2004 of 6.5m, which was determined in accordance with the advice of qualied actuaries, is being spread forward over the service lives of relevant employees. 0.5m has been charged to the prot and loss account and 0.4m of benets were paid. An accrual of 5.4m (2003 5.3m) is being carried in the balance sheet. It is expected that payments will be tax deductible, at the companys tax rate, when made.
NOTE 29 Capital commitments
At 28 February 2004 there were commitments for capital expenditure contracted for, but not provided of 501m (2003 458m), principally relating to the store development programme.
NOTE 30 Contingent liabilities
The company has irrevocably guaranteed the liabilities as dened in section 5(c) of the Republic of Ireland (Amendment Act) 1986, of various subsidiary undertakings incorporated in the Republic of Ireland. There are a number of contingent liabilities that arise in the normal course of business which if realised are not expected to result in a material liability to the Group.
NOTE 31 Related party transactions
During the year, there were no material transactions or amounts owed or owing with any of the Groups key management or members of their close family. During the year, the Group traded with its joint ventures: Shopping Centres Limited, BLT Properties Limited, Tesco BL Holdings Limited, Tesco British Land Property Partnership, Tesco Personal Finance Group Limited, Tesco Home Shopping Limited, iVillage UK Limited (iVillage became a subsidiary in March 2003), dunnhumby Limited, Tesco Mobile Limited, Nutri Centres Limited, Taiwan Charn Yang Developments Limited, Retail Property Company Limited and Tesco Card Services Limited. During the year, the Group also traded with its ve associates: Broadelds Management Limited, Clarepharm Limited, GroceryWorks Holdings Inc., Hussmann (Hungary) Kft and Greenergy Fuels Limited. The main transactions during the year were: (i) Equity funding of 20m (2003 4m) in joint ventures and 8m (2003 7m) in associates. (ii) The Group made loans to joint ventures of 29m (2003 43m), and has been repaid loans by joint ventures of 15m (2003 5m). New loans of 9m (2003 nil) were made to the Group by joint ventures and the Group repaid 1m (2003 nil) of loans from joint ventures. The Group has outstanding loan balances due from joint ventures of 120m (2003 107m) and outstanding loan balances due to joint ventures of 10m (2003 2m) at 28 February 2004. (iii) The Group made purchases of 72m (2003 81m) from joint ventures and associates, of which 2m (2003 nil) was still payable as at 28 February 2004. (iv) The Group has charged joint ventures an amount totalling 63m (2003 42m) in respect of services, loan interest and assets transferred, of which nil (2003 8m) was outstanding at 28 February 2004. (v) Tesco Stores Limited is a member of one or more partnerships to whom the provisions of the Partnerships and Unlimited Companies (Accounts) Regulations 1993 apply (Regulations). The accounts for those partnerships have been consolidated into these accounts pursuant to regulation 7 of the Regulations.
52
TESCO PLC
NOTE 32 Reconciliation of operating prot to net cash inow from operating activities
2004 m 2003 m
Operating prot Depreciation and goodwill amortisation Increase in goods held for resale Decrease in development property Decrease/(increase) in debtors Increase in trade creditors Increase in other creditors Decrease in working capital (a) Net cash inow from operating activities (b)
(a) The decrease in working capital includes the impact of translating foreign currency working capital movements at average exchange rates rather than year end exchange rates. (b) The subsidiaries acquired during the year have not had a signicant impact on Group operating cash ows.
1,735 752 (92) 15 17 261 254 455 2,942
1,484 602 (129) 3 (28) 238 205 289 2,375
NOTE 33 Analysis of changes in net debt

At 22 Feb 2003 m Cash ow m Acquisitions m Other noncash changes m Exchange movements m At 28 Feb 2004 m
Cash at bank and in hand Liquid resources (a) Bank and other loans Finance leases Debt due within one year Bank and other loans Finance leases Debt due after one year
399 239 (1,286) (55) (1,341) (3,863) (171) (4,034) (4,737)
282 220 496 (12) 484 (316) 10 (306) 680
(1) (1) (4) (4) (5)
(1) (1) (20) (1) (21) (22)
(11) (29) 15 15 19 19 (6)
670 430 (775) (69) (844) (4,180) (166) (4,346) (4,090)
(a) Liquid resources comprises short-term deposits with banks and money-market investments which mature within 12 months of the date of inception.
TESCO PLC
53

NOTE 34 Acquisitions
The net assets and results of acquired businesses are included in the consolidated accounts from their respective dates of acquisition. The following tables set out the effect of the material acquisitions by the Group in the year to 28 February 2004 on the consolidated balance sheet. Acquisition accounting has been applied in all cases. The fair values currently established for all acquisitions made in the year to 28 February 2004 are provisional. Fair values will be reviewed based on additional information up to 26 February 2005. The Directors do not believe that any net adjustments resulting from such a review would have a material effect on the Group. The goodwill arising on these acquisitions has been capitalised and is being amortised over 20 years. C Two-Network C Two-Network was acquired on 17 July 2003 and included in the consolidated balance sheet at 28 February 2004. The purchase consideration was 176m. The net assets of C Two-Network on acquisition and the provisional fair values were as follows:
Adjustments to align accounting policies m
Book values of acquired business m
Revaluations m
Fair values at date of acquisition m
Fixed assets Stock Debtors Cash Creditors Net assets acquired Consideration Cash Goodwill
13 8 24 31 (30) 46
2 (2)
(3) (3)
12 8 24 31 (32) 43
176 133
The principal fair value adjustment made to the net book values of the assets and liabilities of C Two-Network was the revaluation of xed assets. For the year ended 31 March 2003, C Two-Network reported an audited prot after tax and minority interest of 11m, and for the period 1 April 2003 to 16 July 2003 an unaudited post-tax prot of 5m based on its then accounting policies.
54
TESCO PLC
NOTE 34 Acquisitions continued
Kipa Kipa was acquired on 11 November 2003 and included in the consolidated balance sheet at 28 February 2004. The purchase consideration was 96m. The net assets of Kipa on acquisition and the provisional fair values were as follows:
Adjustments to align accounting policies m
Book values of acquired business m
Revaluations m
Fair values at date of acquisition m
Fixed assets Stock Debtors Cash Creditors Provisions for liabilities and charges Minority interest Net assets acquired Consideration Cash Other Goodwill
40 6 1 24 (19) (1) 51
3 4 (2) (7) 1 (1)
7 7
50 6 5 22 (26) 57 (5) 52
93 3 44
The principal fair value adjustments made to the net book values of the assets and liabilities of Kipa comprise the revaluation of freehold property to market value, based on valuations obtained from independent experts. Adjustments have also been made to align accounting policies for tangible xed assets, debtors, cash, creditors and provisions. The Turkish economy is subject to hyper-ination and therefore hyper-ination accounting under international accounting standards, is required. The Directors do not consider that it is meaningful to provide details of the results of Kipa for the year ended 31 December 2002 as these accounts were not prepared using hyper-ination accounting. For the period 1 January 2003 to 10 November 2003, Kipa reported an unaudited provisional prot after tax of nil, based on its then accounting policies.
TESCO PLC
55
FIVE YEAR RECORD
Year ended February Financial statistics (m) Group sales (restated) UK Rest of Europe Asia Underlying operating prot UK Rest of Europe Asia Operating margin UK Rest of Europe Asia Total Group Share of operating prot before goodwill amortisation from joint ventures and associates Net interest payable Underlying pre-tax prot Integration costs Goodwill amortisation Net loss on disposal of xed assets Prot on ordinary activities before taxation Taxation
4 3 2 2 1 1
2000
2001
2002
2003
2004 53 weeks
20,189 16,808 1,355 464 18,627 993 51 (1) 1,043 5.9% 3.8% (0.2)% 5.6% 11 (99) 955 (6) (7) (9) 933 (259)
4
22,585 18,203 1,737 860 20,800 1,100 70 4 1,174 6.0% 4.0% 0.5% 5.6% 21 (125) 1,070 (8) (8) 1,054 (333) 1 722
25,401 19,821 2,181 1,398 23,400 1,213 90 29 1,332 6.1% 4.1% 2.1% 5.7% 42 (153) 1,221 (10) (10) 1,201 (371) 830
28,280 21,309 2,664 2,031 26,004 1,297 141 71 1,509 6.1% 5.3% 3.5% 5.8% 72 (180) 1,401 (4) (23) (13) 1,361 (415) 946
33,557 24,760 3,385 2,669 30,814 1,526 184 122 1,832 6.2% 5.4% 4.6% 5.9% 99 (223) 1,708 (45) (54) (9) 1,600 (498) (2) 1,100
Turnover excluding VAT (restated)
Minority interests Prot for the nancial year
674
56
TESCO PLC
Year ended February Group enterprise value

5 3/4
2000
2001
2002
2003
2004 53 weeks
13,591 10.18p 10.36p 4.48p

4/6 3/4
21,590 10.66p 10.87p 4.98p 22.7% 11.0% 907 28,362 152,210 692 17,965 27,636 113,998 159,678 9,649 16,087 21.75
21,290 12.14p 12.33p 5.60p 23.2% 10.8% 979 32,491 171,794 729 18,822 28,576 121,272 163,443 10,002 16,821 22.43
16,896 13.98p 14.10p 6.20p 23.3% 10.2% 2,291 39,944 188,182 1,982 21,829 29,455 133,051 160,157 9,748 17,020 22.86
23,866 16.31p 16.45p 6.84p 23.6% 10.5% 2,318 45,402 223,335 1,878 23,291 30,890 152,408 162,459 10,013 17,615 22.48
Underlying diluted earnings per share Underlying earnings per share Dividend per share Return on shareholders funds Return on capital employed Group statistics Number of stores Total sales area 000 sq ft Full-time equivalent employees UK retail statistics Number of stores Total sales area 000 sq ft
8 4/7
20.9% 11.3% 845 24,039 134,896 659 16,895

9
Average store size (sales area sq ft) Full-time equivalent employees UK retail productivity Turnover per employee (restated) Profit per employee
11 11 8/12 11 10
26,641 108,409 155,042 9,160 15,600 21.27

7
Wages per employee

1
Weekly sales per sq ft (restated)
5 6
Sales and turnover have been restated in accordance with FRS 5, Application Note G Revenue Recognition (issued November 2003) to report sales and turnover net of vouchers and on a commission-only basis for mobile phone airtime sales. Excludes integration costs and goodwill amortisation. Operating margin is based upon turnover exclusive of VAT. Underlying profit, underlying earnings per share and underlying diluted earnings per share exclude net loss on disposal of fixed assets, integration costs and goodwill amortisation. 2004, 2003, 2002 and 2001 statistics have been calculated based on the adoption of FRS 19 Deferred Tax. Market capitalisation plus net debt. Underlying profit divided by average shareholders funds.
8 9 10 11
12
Revised post-tax ROCE measure. The numerator is profit before interest, less tax. The denominator is the calculated average of net intangibles plus net tangible fixed assets plus net investments in joint ventures and associates plus net working capital and long-term provisions. Store sizes exclude lobby and restaurant areas. Average store size excludes Express and T&S stores. Based on average number of fulltime equivalent employees in the UK. Based on turnover exclusive of VAT, underlying operating profit and total staff cost per full-time equivalent employee. Based on weighted average sales area and sales excluding property development.
This material is recyclable, bio-degradable and is approved recycled grade. This product complies with ISO 9002 and ISO 14001 Accreditation. Designed and produced by Corporate Edge 020 7855 5888 Photography by Arnhel de Serra Printed by CTD Printers Ltd D
TESCO PLC 57
COVER: BARRY AUSTIN, SANDHURST EXTRA
Tesco PLC, Tesco House, Delamare Road, Cheshunt, Hertfordshire EN8 9SL

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TESCO PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2004

N E W S TO R E S O P E N E D INC. ACQUISITIONS IN 2003/04

PLANNED OPENINGS IN 2004/05

AROUND THE WORLD

(m) (including value added tax)

32,989 1,684 1,576

28,280 1,401 1,361 13.98 13.42 6.20 16,896 10.2%

Underlying Group profit before tax Group profit before tax

1,708 1,600 16.31

14.93 6.84 23,866 10.5%

OPERATING AND FINANCIAL REVIEW

1,708 1,600 16.31 14.93 6.84

1,401 1,361 13.98 13.42 6.20

21.9 17.6 16.7 11.3 10.3

2003 restated Change m m %

26,876 23,101 1,526 1,297

Underlying operating prot

REST OF EUROPE PERFORMANCE

(including value added tax)

Underlying operating prot

Underlying operating prot

UK SALES GROWTH % (restated)

UK SALES AREA OPENED

OPERATING AND FINANCIAL REVIEW CONTINUED

TESCO PERSONAL FINANCE P R E - T A X P R O F I T /( L O S S ) POST MINORITY INTEREST

CREDIT RISK The objective is to reduce the risk

PENSIONS Tesco policy is to base UK pension

CORPORATE GOVERNANCE CONTINUED

CORPORATE GOVERNANCE CONTINUED

BOARD COMMITTEE MEMBERSHIP AS AT 28 FEBRUARY 2004

From 2 April 2004, Mr D E Reid became Chairman of the Nominations Committee.

REPORT OF THE DIRECTORS ON REMUNERATION

REPORT OF THE DIRECTORS ON REMUNERATION CONTINUED

REPORT OF THE DIRECTORS ON REMUNERATION CONTINUED

NON-EXECUTIVE DIRECTORS The remuneration of the Non-

PERFORMANCE GRAPH The graph highlights the Groups total

50 Feb 99 Feb 00 Feb 01 Feb 02 Feb 03 Feb 04

Tables 1 to 6 are audited information.

Performance-related emoluments Prot-sharing 000 Short-term 000 Long-term 000

Total 2004 000

Total 2003 000

1,091 821 679 619 851 619 619 619 5,918

892 1,120 452 439 597 462 509 474 4,945

REPORT OF THE DIRECTORS ON REMUNERATION CONTINUED

523,728 223,728 122,034

523,728 836,460 122,034 241,557

214.75 241.30 214.75 244.00

610 879 142 209

* Includes Mrs F M Mason

TABLE 3 Pension details of the Directors

Age at 28 February 2004

Years of company service

Total accrued pension at 28 February 2004 (a) 000

Increase in accrued pension during the year 000

Increase in transfer value less Directors contributions 000

433 409 287 200 404 112 223 222

471 1,531 390 191 423 181 163 238

2,554 5,273 3,910 941 6,113 545 1,204 1,197

3,801 8,010 4,844 1,447 7,273 908 1,802 1,833

1,247 2,737 934 506 1,160 363 598 636